Nokia will Fly Even Higher

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

The other day Nokia (NYSE: NOK) cut its dividend for the first time in over 20 years. Does it matter? Not even a little bit. The company had a dividend yield of almost 3.8%, which is very high compared to the rest of the industry. The stock fell approximately 6% after the results were announced. I believe this dip is an aberration and a misinterpretation of the quarterly results. Nokia has traded in the range of $1.63 - $5.87 throughout the last year. This high volatility shows that no one is buying the stock for its dividend yield, and the management has taken the correct decision by cutting the dividend entirely.

The company cannot afford to raise cash from the debt market due to its bad credit rating, and this move will ensure more liquidity for its turnaround bid. I believe the valuations should significantly improve once the market really understands the significance of these results. Therefore I reiterate a strong buy rating on the stock.

Quarter at a Glance

Nokia had been under investor pressure to report solid Lumia sales and improved operating margins. A couple of weeks ago the company preannounced its 4th quarter results and pleasantly surprised investors with profitability in the devices segment. Yesterday the company announced its detailed earnings for the quarter.

Nokia reported revenues of $10.61 billion and EPS of $0.05, marginally missing the Street’s EPS estimates of $0.06. There was a 33% increase yoy in operating profit, which was reported at $838 million. Nokia ended the fiscal year with $5.76 billion in cash and equivalents, down approximately 58% yoy. This is one of the key takeaways from the report and shows that the giant has been able to successfully implement its cost cutting measures.

The NSN (Nokia Siemens Network) and Location & Commerce segment continue to generate profits. The revenues from NSN were up 5% with $5.26 for the quarter and profit from the segment was reported at $1.11 billion, a decline of 11%. The company is aiming to increase the margins from the segment and aims to save approximately $1.3 billion in cost by the end of 2013. Location segment contributed $0.37 billion to revenues a yoy decline of 9%.

Devices & Services Segment

The biggest surprise has been the good performance of the devices segment. The market was expecting total devices sold to be 86 million and smartphones to be 7.8 million.  The company met the overall device sales target but missed the smartphone sales target by 18%. This is excellent considering that the Lumia was available only for the last half of the quarter and was still not fully available in South East Asia, China and India. Once the devices, especially Lumia 920, are made available globally, smartphone sales should improve significantly. The company also disclosed that there have been supply constraints which have resulted in a slow global rollout of the Lumia devices.

Outlook

Nokia expects the devices and services segment to contract in the next quarter and operating margins to be approximately -2%. According to company disclosures this is partially due to seasonality issues and weakness in the macroeconomic environment. This slow down can also be blamed on the slow growth of the Lumia, which is not compensating enough for the decline in Symbian sales. The company also expects NSN margins to be positive 3% and Location margins to be negative.

Competition

The tough competition in the smartphone industry has increased the importance of the Nokia results for the entire industry. According to management, Nokia is trying to be the 3rd alternative in the highly competitive smartphone market. The carriers are backing the Microsoft’s (NASDAQ: MSFT) WP8 boarded on Lumia devices to give competition to the current domination of Google and Apple (NASDAQ: AAPL). The smartphone giant Apple forces carriers to pay high subsides on its devices, which has adversely affected profit margins for some major telecoms.

The recent weak quarter for Apple, especially its iPhone units sales miss and shrinking margins, suggest that the entire industry is on the brink of yet another dynamic shift. The good performance of Lumia despite limited availability shows that there is still room for entry in this highly competitive market and WP8 can become the balancing factor that carriers are looking for. 

The software giant Microsoft is pushing hard in its efforts to enter the handheld market. It has for the first time in the Windows history launched a touch-based version of the world’s most popular operating system. The Windows 8 will be loaded on to PCs, ultrabooks, and tablets, giving users an entire ecosystem experience. This is one the main draw of WP8 boarded Lumia phones and Windows 8 tablets: they aim to ensure a uniform experience across different devices. While Apple can provide this experience in the iOS universe, Google is still unable to do this due to Android's limitations in handhelds.


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