Feature Article

January 10, 2013

Nokia Shares Surge on Surprise Early Earnings Info - Finally Some Good Nokia News

When there’s good news to be had, especially after a long (and we mean loooooong) string of bad news, it makes sense sometimes to get it out the door as soon as possible. That’s exactly what Nokia did this morning, jumping the gun on its next earnings report - which is due out on January 24, 2013, to let us in on some of that good news early.

The company focused on both its recently ended fiscal Q4 2012 (where most of the good news is to be found) and also took it far enough to provide some interesting preliminary details on its outlook for its fiscal Q1 2013 (which looks to us to be attempting to lower analyst expectations). Nokia shares jumped on the overall news earlier in the day, from a closing price of about $3.75 to about $4.50, and are currently settled as we write in mid-afternoon at $4.39.

Investors who are short the stock are undoubtedly very unhappy today!

The financial news involves all of Nokia's key lines of business - the Devices & Services side (where the real business is), Location & Commerce and the company's almost forgotten Nokia Siemens Networks side. Note: Mention of IFRS below refers to International Financial Reporting Standards (akin to Generally Accepted Accounting Principles or GAAP in the United States); IPR refers to Intellectual Property Rights (patent licensing fees).

Preliminary Fiscal Q4 2012

Focusing first on Devices & Services, Nokia estimates that Devices & Services net sales will come in at approximately $5.17 billion, with total device volumes hitting 86.3 million units. The anticipated breakdown is as follows:

  • Mobile Phone net sales were approximately $3.35 billion, with total volumes of 79.6 million units, of which 9.3 million units were Asha full touch smartphones.
  • Smart Devices net sales were approximately $1.59 billion, with total volumes of 6.6 million units, of which 4.4 million units were Nokia Lumia smartphones.
  • Total smartphone volumes were 15.9 million units, composed of 9.3 million Asha full touch smartphones, 4.4 million Lumia smartphones and 2.2 million Symbian smartphones.
  • Devices & Services Other net sales were approximately $265.1 million, including about $66.7 million in non-recurring IPR.

Nokia currently estimates that Devices & Services non-IFRS operating margin - a critical measure for overall success - for fiscal Q4 2012 was between break even and positive 2 percent, a significant improvement. Those numbers compare to previously provided outlook of between negative 6 percent plus or minus four percentage points. Devices & Services non-IFRS operating margin includes a positive impact from the noted non-recurring IPR income.

During fiscal Q4 2012 Nokia found a number of key factors that led to positively affecting Nokia's Devices & Services businesses financials. These key factors include:

Within the Devices & Services business, better than expected financial performance in the Mobile Phones business unit and Lumia smartphones. In addition, Devices & Services recognized non-recurring IPR income (we assume this was a result of Nokia's recent settlement with Research in Motion over a patent dispute that was settled very much in Nokia's favor).

Lower than expected Devices & Services' operating expenses, partially due to greater than expected cost reductions under Nokia's ongoing restructuring program.

Nokia currently estimates that Location & Commerce net sales for Q4 2012 were approximately EUR 0.3 billion ($397.6 million) and the non-IFRS operating margin was between 13 and 15 percent. As (or if) Nokia manages to sell may more advanced smartphones revenue here should go up substantially as well - a key indication of the importance to Nokia of Lumia sales.

Finally, Nokia estimates that Nokia Siemens Networks net sales in the fourth quarter 2012 were approximately EUR 4.0 billion ($5.3 billion), with non-IFRS operating margin between 13 and 15 percent. This compares to previous stated outlook of approximately positive 8 percent plus or minus four percentage points. Nokia Siemens Networks non-IFRS operating margin also includes a positive impact from non-recurring IPR income of approximately EUR 30 million ($ 39.8 million).

For fiscal Q4 2012, key factors that positively affected Nokia Siemens Networks' businesses to a greater extent than previously expected include:

  • More favorable product and regional mix in Nokia Siemens Networks. In addition, Nokia Siemens Networks recognized the non-recurring IPR income noted above.
  • Better than expected improvement under Nokia Siemens Networks' restructuring program to reduce operating expenses and production overhead.

Focusing on the preliminary Q4 financial details, Nokia CEO Stephen Elop - clearly thrilled to finally be able to break a bit of cheery news - noted that, "We are pleased that Q4 2012 was a solid quarter where we exceeded expectations and delivered underlying profitability in Devices & Services and record underlying profitability in Nokia Siemens Networks. We focused on our priorities and as a result we sold a total of 14 million Asha smartphones and Lumia smartphones while managing our costs efficiently, and Nokia Siemens Networks delivered yet another very good quarter."

A Preliminary Outlook for Fiscal Q1 2013

Nokia expects its non-IFRS Devices & Services operating margin in the first quarter 2013 to be approximately negative 2 percent, plus or minus four percentage points. This outlook is based on Nokia's expectations regarding a number of factors, including:

  • Competitive industry dynamics possibly negatively affecting the Smart Devices and Mobile Phones business units.
  • The first quarter is almost always a seasonally weak quarter.
  • Consumer demand, particularly for the Lumia and Asha smartphones.
  • Continued ramp up for new Lumia smartphones.
  • Expected ongoing cost reductions under Devices & Services' restructuring program.
  • The macroeconomic environment (which doesn't say much but more or less suggests that, obviously, as the world economy goes, so too does Nokia).

Nokia anticipates Location & Commerce non-IFRS operating margin for Q1 2013 to be negative due to lower recognized revenue from internal sales, which carry higher gross margin, and to a lesser extent by a negative mix shift within external sales. Without a doubt, financial analysts aren't going to be very happy with this - it will be interesting to get more details in two weeks.

Nokia expects Nokia Siemens Networks non-IFRS operating margin for Q1 2013 to be approximately positive 3 percent plus or minus four percentage points. This outlook is based on Nokia Siemens Networks' expectations regarding several key factors, among them:

  • Competitive industry dynamics.
  • The first quarter being a seasonally weak quarter.
  • Product and regional mix.
  • Expected continued improvement under Nokia Siemens Networks' restructuring program.
  • The macroeconomic environment.

The preliminary outlook has a good deal of "generic" information in it. As we've noted, Nokia will provide more details when it officially reports its fiscal Q4 and full year 2012 results on January 24, 2013.

For now, however, Nokia can relish a bit of good news, especially regarding the Windows Phone 8 Lumia smartphones. Elop did note during Nokia's call that the company has experienced supply problems, with certain mobile components in short supply, though this is the case for other phone manufacturers a well. This suggests that Nokia could have sold more Lumias than it did. "Demand for our products has been greater than the available supply," Elop claimed. "If you went into a store to buy a new Nokia, there were times when our devices weren't available, so indeed we could have sold more Lumias."

Nokia is now done with cutting its workforce, which in Europe is a hugely expensive proposition. It's something Nokia had to do, but the good news is that it's done. Ongoing restructuring should continue to lead to overall healthy expense management, which will continue to show up in Nokia's results - for Nokia cutting costs is nearly as important as generating strategic new revenue.

Speaking of strategic new revenue, we anticipate Nokia delivering on a new and lighter aluminum-based Lumia phone that will likely become its flagship product. Perhaps we'll hear more on this front in two weeks.

For now, let's let Nokia enjoy its bit of good news.

Edited by Braden Becker

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