Nokia Q1 2013 Earnings Results: Slow but Steady Work

When last we checked in with Nokia on its Q4 2012 earnings report, the company had demonstrated real improvement in all facets of its business - from acceptable sales numbers for its new Lumia devices to effectively reduced internal operating costs. Those same statements cover today's Nokia Q1 2013 earnings report.

Essentially it is more of the same - though year over year numbers reflect fully anticipated drops in revenue and total devices sold, sales have stabilized and Nokia's cost-cutting measures have certainly helped Nokia maintain a sustainable financial balance.

In fact, the company has managed to improve its cash position - which has been an ongoing source of analyst concern - this quarter.

The number that matters the most this time around is Nokia's net loss. A loss was widely anticipated, with consensus analyst estimates claiming Nokia would lose about $556.1 million - but the good news is that Nokia beat these estimates handily, delivering a net loss of "only" $354.8 million. Compared to Q1 2012, this is a major improvement over last year's $1.2-billion loss.

Nokia's net cash position, as noted above, has improved marginally from $5.69 billion at the end of Q4 2012 to $5.84 billion for Q1 2013.

Overall revenue fell 20 percent from $9.6 billion in Q1 2012 to $7.6 billion in Q1 2013. This is due entirely to shipments of lower-end mobile phones - which include Nokia's Asha device - continuing to remain under enormous pressure from the abundance of cheap Android devices in all global regions.

Nokia's total mobile device shipments fell to 61.9 million in Q1 2013 from 82.7 million in Q1 2012.

Still, we need to keep in mind that the excellent new low end phones that Nokia announced in late February at Mobile World Congress (the Lumia 720 and 520 and the very low end 105 and 301 - they are shown below) are only now finding their way into Nokia's sales pipelines and have no bearing on Nokia's Q1 numbers. The decline in overall device sales was certainly expected, and won't be reversed until Nokia's new lower end devices are fully in the sales pipeline.

There is very good news - Nokia's higher margin high end smartphones, which include the Lumia 920 flagship, increased non-trivially, with 5.6 million Lumia smartphones sold in the first three months of 2013.

We can add some final good news here as well. Nokia's long-stalled (financially speaking) network equipment business, Nokia Siemens Networks, posted an operating profit of $3.91 million in Q1 2013, compared to a significant operating loss of $1.3 billion year over year in Q1 2012.

The expectation is that Nokia Siemens will begin to regularly generate cash and profits going forward, and should begin to add to Nokia's cash position ongoing.

Overall Nokia may now claim to have achieved an underlying operating profitability for the third consecutive quarter, with a Q1 2013 non-IFRS operating margin of 3.1 percent. IFRS refers to International Financial Reporting Standards - akin to Generally Accepted Accounting Principles (GAAP) in the United States, so Nokia had the equivalent of non-GAAP operating profitability. Non-IFRS earnings per share for Q1 2013 were -$0.03 compared to the IFRS EPS of -$0.09 we noted earlier. This and the improved net cash on hand position are very minor victories financially speaking, but they are certainly a major win from a company morale, self-esteem and confidence perspective.

CEO Stephen Elop clearly and rightly doubles down on this: “At the highest level, we are pleased that Nokia Group achieved underlying operating profitability for the third quarter in a row. While operating in a highly competitive environment, Nokia is executing our strategy with urgency and managing our costs very well. We have areas where we are making progress, and areas where we are further increasing the focus. For example, people are responding positively to the Lumia portfolio, and our volumes are increasing quarter over quarter."

Back in November 2012, Nokia introduced "HERE" as the new brand for its location and mapping services. And as of January 1, 2013 the company's Location & Commerce business and reportable segment was also added to HERE's collection of services. It is worth noting that collectively, HERE delivered $281.8 million in revenue, compared to $361.3 million in Q1 2012 and $362.6 million in Q4 2012 – overall a 22-percent decline.

It’s generally a minor blip but still a contributing factor to overall earnings.

Looking Ahead

Nokia projects the following financial scenario for its fiscal Q2 2013:

• The company expects its Devices & Services non-IFRS operating margin in the second quarter 2013 to be approximately - two percent, +/- four percentage points. This outlook a continued ramp up for Nokia's Lumia smartphones and much wider availability of the recently announced Lumia and low end products noted earlier.
• It is expected that Nokia Siemens Networks will deliver a non-IFRS operating margin in fiscal Q2 2013 to of approximately 5 percent, +/- four percentage points.
• Finally, Nokia expects HERE’s non-IFRS operating margin in the second quarter 2013 to be negative overall, primarily due to lower recognized revenue from internal sales.

"Moving forward, we're focusing on inventory management, price competitiveness, marketing and continuing to renew our portfolio," Elop said on a conference call. “The company is seeing an onslaught of competition from handset makers using rival operating systems."

All in all, it’s fair to say Nokia appears to be stabilizing its operations and finally move toward effectively managing and controlling its sales pipeline on both the device and Nokia Siemens fronts. We can leave HERE out of the mix generally, though Nokia will need to eventually ramp it up.

For the immediate future, though, we'll grant HERE a pass.

The last thing worth noting is that we are anticipating a new flagship product from Nokia over the next six months, and there are rumors of a Nokia large screen Windows Phone 8 competitor to Samsung's Note II possibly in the works. The caveat here is that Nokia must deliver on these products before the 2013 holiday buying season kicks in. We’ll consider it a major senior management failure if the company doesn’t follow through.

The ball is now entirely in Nokia's court. We believe Microsoft has delivered on the mobile operating system side of things. Nokia needs to keep the momentum going on the hardware end to succeed and eventually recover in full.

As Nokia always does, it has provided a very detailed 45-page financial statement available for direct download for those interested in its rich details. Additional earnings call details, such as the presentation used on today's call, are also available for viewing and for listening to.