On Thursday, Nokia Corporation (NOK) announced its highly anticipated quarterly earnings. There was good, bad and ugly stuff in the announcement. Here is my take on Nokia's earnings report.
The Good
The company achieved positive margins for the first time in several quarters, largely thanks to its Nokia Siemens Networks and its mapping business. The company's operating margin was as thin as 1.1%, which is very slim, but still better than the negative values we have been seeing for a while. The company's Nokia Siemens Networks achieved an operating margin of 9.2%. This is the largest business segment of Nokia and it is going through a major restructuring just like the company's mostly watched mobile devices business.
Excluding the 390 million euros ($487 million) spent on restructuring efforts, the company's cash flow was negative $49 million. The company's total cash flow including one-time charges was negative $536 million. Both figures are much better than expectations.
At the end of the second quarter, a lot of analysts expected the company to burn $1 billion per quarter, but the company's cash burn seems to be in control, excluding one-time costs and dividend payments (which I don't think should exist when a company is struggling so much at the moment).
In the mobile devices business, the company's low-end Asha models continue to sell really well. In the earnings meeting, Steve Elop mentioned that these phones were profitable. These phones will continue to help the company's turnaround.
The company's mapping business reported non-IFRS operating margin of 14%. This was helped greatly by the company's recent partnerships with a large variety of companies such as Ford (F) and BMW. The company didn't even start collecting revenues from its partnerships with Amazon (AMZN) and several other companies. The business segment's quarterly revenue of $328 million and operating profit of $46 million are likely to increase in the next quarter.
The company is also performing well in its cost-cutting measures. In the Devices and Services business segment, operating expenses were down 19% compared to the same quarter a year ago and down 16% compared to the last quarter. The company's operating expenses related to smart phones fell sharply by 33% compared to a year ago and they fell by 18% compared to the last quarter. The Devices and Services segment currently has a headcount of 38,000 employees, which is significantly down from the 53,000 employees it had exactly a year ago.
In Nokia's mapping business, operating expenses fell by 13% compared to last year, whereas Nokia Siemens Networks was able to cut operating expenses by 14% in the last year. As long as the company cuts costs at a faster rate than its revenues fall, it will be in good shape in terms of returning to profitability. The company expects positive operating margins in its Nokia Siemens Networks, as well as its mapping business for the fourth quarter.
Everything I mentioned above can be good news for the company, but the earnings report also had some bad and ugly news for the investors.
The Bad
While Nokia's mapping business stayed profitable, its overall revenue fell compared to both last quarter and the last year. This is despite a number of profitable partnerships signed by the company. Compared to $352 million of revenue in the quarter and $351 million in the same quarter last year, the company posted revenue of $328 million in this quarter. This is probably due to the decreased sales of GPS devices and fewer high-end cars sold globally due to the slowing economy. Most consumers don't bother buying a separate GPS device anymore, as their smart phones usually come with a GPS application.
The company sold far less Lumias in this quarter than the last quarter even though the phones were introduced to new markets such as Russia and India, as well as decreased prices during the last quarter. This is mostly because many people are waiting on the introduction of the Lumia 920. While Lumia 920 and Lumia 820 are only weeks away, many people don't seem to be inclined to buy Lumia 900 and Lumia 800.
The average sale price for the smart phones dropped from $232 to $200 in the last quarter. This is partly due to price decreases by the company in order to clean its inventory before the next generation of phones hit the market. Also, the company was able to sell more of its cheaper phones and less of its expensive phones compared to the last quarter, which helped bring the average price down.
The Ugly
The company's mobile devices segment is not expected to return to positive margins in the next quarter, despite introducing new generation of phones to the market and the holiday season. In the fourth quarter, the company expects a negative margin for its mobile devices business, which should be around 6%, plus or minus 4%. As an investor of Nokia, this was something I truly didn't like to hear.
One thing I truly hated about Nokia's report was the decline in phone sales in particular geographical locations. Compared to the same quarter last year, the company's sales volume declined by 64% and net sales declined by 78% in China. In North America, sales volume declined by 57% and net sales declined by 54%. In the Middle East and Africa, the decline was 27% on volume and 29% on net revenue.
Most of the decline is attributable to the Symbian phones; however, the company didn't sell enough Windows phones to offset these huge decline rates. The company seriously needs to get its new generation phones to as many markets as possible, as fast as possible, and stop wasting time with the whole "select markets" and "exclusivity" games.
Conclusion
Nokia has beat analyst estimates and its figures weren't that bad given the huge restructuring the company is going through in addition to the upcoming release of new phones. On the other hand, the company didn't sound very hopeful about its mobile phones division in the short term either. This is probably the main reason the stock price was very volatile, despite beating the estimates.
The company is still not done with its restructuring efforts, but it is nearing the end of this effort. According to the company's earnings call, the company spent $1.75 billion in the mobile devices business and $1.25 billion in Nokia Siemens Networks so far for the restructuring efforts, which include laying off individuals, cancelling projects, starting new projects, closing down plants and opening new plants.
The company expects to spend an additional $500 million in its mobile devices business and $250 million in its Nokia Siemens Networks to conclude the restructuring efforts. When these efforts are complete, we will see the full effects on Nokia, which will actually tell us whether Nokia will stay in business or not.
I am long Nokia and I will continue to be long for this year and the next; however, I am undecided about whether I should increase my position in the company at the moment.
Note: All the figures and statistics in this article are directly from Nokia's quarterly report in the company's website.
Disclosure: I am long NOK.
