Nokia’s Turnaround Isn't Here Yet People!

Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It seems as though the fallen angel of the mobile world is taking flight once again. Yup, I’m talking about the one and only Nokia (NYSE: NOK). Not only is this company “connecting people” to its latest line of stylish Lumia smartphones, but it's also hinting at a probable turnaround, which has been elusive for a long time. So is Nokia really going to rise from the ashes? Let’s take a closer Foolish look.

The Numbers

Quoting directly from the press release by the company:

“Nokia currently estimates that Devices & Services non-IFRS operating margin for the fourth quarter 2012 was between break even and positive 2 percent…Devices & Services non-IFRS operating margin includes a positive impact from non-recurring IPR income of approximately EUR 50 million.”

This means that Nokia’s so-called profitability was aided by a one-time income of €50 million. Not very encouraging.

The company also estimated fourth quarter net sales in its Devices & Services division at approximately €3.9 billion, with total device volumes of about 86.3 million units. Mobile phones sales were worth €2.5 billion, with Nokia’s low priced Asha clocking volumes of 9.3 million units.

While these numbers might be great, I don’t think this segment will be very relevant to Nokia’s success because it largely relates to obsolete non-smartphone devices that are fast being replaced by really cheap ones running Google’s Android operating system.  

Coming to the real deal, Smart Devices saw net sales of about €1.2 billion, with 6.6 million units sold, of which 4.4 million were Nokia’s Lumia smartphones.

Now while this might be a nice start, I still don’t think these sales figures are very impressive. Last year, Nokia had to drastically slash the prices of its older Lumia devices to shore up sales volumes. So a large chunk of this figure might have been stimulated out of the sheer brute force of massive price cuts.

Cash Crunch

Another thing I am particularly concerned about is Nokia’s ability to stay afloat, especially due to the low cash reserves the company last showed on its third quarter balance sheet. Nokia’s net cash position at the time stood at about €3.6 billion (or $4.8 billion), which essentially translated into being able to survive for less than a year.

The company was on a desperate run for cash; it even resorted to selling some of its intellectual property, and more notably, it sold its Helsinki-based headquarters for €170 billion.

The Silver Lining

But all’s not lost. I feel that Nokia can accelerate from here. It just needs to stay aggressive and deliver great products that wireless carriers would be more than willing to subsidize.

Citigroup analyst Glen Yeung recently made a prediction that Apple’s (NASDAQ: AAPL) market share (which stood at 14.9% in the third quarter of 2012) is set to decline as the company cuts back on production of the iPhone 5 due to slackening demand. This might be terrible for Apple, but it is potentially great news for Nokia, as this could give it the opportunity to aggressively expand market share.

Another factor playing in the favor of Nokia is that it is backed by big brother Microsoft (NASDAQ: MSFT), which is also desperate to get a larger piece of the smartphone pie. So far we’ve seen Windows-based devices capture only 2% of the worldwide smartphone OS market share. So given the huge room for improvement, Nokia should continue to enjoy Microsoft's strong backing.

The same can be said for carriers such as AT&T (NYSE: T) and Verizon, who are sick and tired of Apple’s dominating influence and crippling effects on their profit margins. For every iPhone sold, these wireless carriers have to shell out a large dollop of cash to subsidize the product ,which inevitably eats into their profits.  So favoring a competing product, especially Nokia’s Lumia smartphones, in lieu of Apple’s iPhone makes perfect sense for AT&T, since Lumias are a lot cheaper to subsidize. Moreover, a boost to Nokia would give carriers more bargaining power, thus effectively bringing down subsidy costs.

So, should we start celebrating Nokia’s possible turnaround as yet? I don’t think so.

The Foolish Bottomline

The Finnish company isn’t out of the woods just yet. We need to see if the company can sustain profitability for the coming quarters. Nokia cannot just be a one-hit-wonder. It needs to sustain an upward trajectory in order to effect a successful turnaround. Nokia’s overall profitability and Lumia smartphone sales performance are the key indicators to watch out for in the coming months. 

It will be interesting to see Nokia’s full year results and guidance in its upcoming earnings release. But as of now, it would be better to just wait and watch.

So what do you readers think about Nokia’s future? Feel free to express yourself in the comments section below. 

kekidf has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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