Nokia Earnings: Don’t Talk, Just Sell

By Ashish Sharma - July 24, 2012 | Tickers: AAPL, GOOG | 0 Comments

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Nokia (NYSE: NOK) reported its 2Q12 earnings with consolidated revenue and EPS of €7.54 billion and € (0.08) vs. consensus estimates of €7.3 billion and € (0.09), respectively. Although the revenues and EPS were better than consensus estimates, Nokia took a blow in its gross margins as it posted 24.3% GM vs. consensus estimates of 26.6%.

Key Takeaways:

1)      Nokia Lumia smartphone unit sales increased from 2 million to 4 million Q/Q, driven by the Lumia 900 at AT&T. Symbian smartphone units declined 62.9% Y/Y. Smartphone gross margins were a measly 1.7% as compared to 15.6% last quarter, attributed to low ASP’s for Lumia devices.

2)      There was an unexpected upside in the sales of feature phones, as the units increased 2.4% Y/Y. The ASP of the feature phones was reported at a low 31 EUR which suggests that the growth was mainly driven by sales of devices below 50 EUR, while the high cost feature phones continue to face competition from iPhone and Android.

3)      Total device operating margins plunged to -9.1% vs. -3.0% in 1Q12 and 6.1% in 2Q11

4)      Although NSN revenues dropped 8.2 % Y/Y, NSN posted positive results as it returned to operating profitability with operating margins of 0.8%, up from -5% a quarter ago .

Analysis:

We were a little concerned about device sales remaining flat in North America sequentially at 600,000, despite the introduction the Lumia 900 at AT&T and the overall growth in total Lumia sales volume. Although the high end Lumia has performed significantly well, its sales were mainly driven by the low ASP’s, which resulted in low operating margins of 1.7 % in the smartphone segment. NSN coming to profitability may be taken as a positive but we are skeptical about how much it can contribute to Nokia’s future. Nokia management suggested that it is trying to restructure NSN to make it a self-sustained division, which may help Nokia in minimizing operating expenses and generating profits in the long term. But restructuring NSN may take in around EUR 1 billion from the cash holdings, further worsening Nokia’s condition. Apart from that, Nokia also needs to revamp its smartphone business, which may require further investment on its part. There were not too many positives for Nokia in 2Q12, and the only positive now for Nokia remains the launch of Microsoft (NASDAQ: MSFT) Windows 8 based Lumia smartphones.

What to expect going forward:

Nokia’s future now is riding on the success of Microsoft’s Windows 8 based Lumia smartphones, and while we are bullish about the success of the Windows 8 platform (See: Microsoft's Outperformance: You Ain't Seen Nothing Yet and Microsoft: Better Than Expected Q4 Earnings -Buy ), we cannot say the same for Nokia. Microsoft might work with multiple OEM’s to drive the windows 8 platform to success, which will erode Nokia’s chance of gaining market share. Apart from that, Nokia faces a lot of pressure from the other smartphone giants like Samsung, Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) (See: Google Is Cheap After Underperformance and Google: Solid Q2 Earnings -Keeping A Bullish View). We expect competition to be fiercer in the smartphone market with the launch of the Apple iPhone 5 and new Android smartphones. There is an added speculation that Nokia may be acquired by Microsoft, but given Microsoft’s focus on software and building a multi-OEM ecosystem for the Windows Phone we think that it is increasingly unlikely. We believe that Nokia mighty lose all its smartphone and feature phone business over the next few years, and therefore we rate this stock as a sell.

Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.

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