Feature Article

January 24, 2013

Nokia's Earnings Report - Unlike Apple, No Great Expectations, but Good News Emerges

Several weeks ago, Nokia was feeling so good about its underlying positively shifting financials that it decided to release some news ahead of its formal earnings call. We did indeed hear good things then as our analysis of that information noted, and this morning's formal call added no surprises and essentially only provided additional support for the good cheer. True, Nokia's board decided not to declare (more accurately, the board is "proposing" not to pay) a dividend for the first time in 143 years (that number came to us via Bloomberg, not Nokia), but taking financial responsibility seriously and having extra cash on hand to provide financial leverage is a far better thing for Nokia to do with its cash than to dole out dividends simply to keep even a 143 year old streak alive. In 2011, the company declared a dividend of $0.27 per share.

A very detailed financial report running 57 pages is available for download as a PDF, with all reported numbers provided in Euros only. The details underlying the numbers that we provided in our earlier analysis noted above remain the same, and we won't restate those details here. Rather, we will simply follow up on the few formally announced numbers that really matter.

Nokia's revenue came in at $10.7 billion, with reported EPS of $0.08 per share. The most important thing about these numbers, at this point in Nokia's recovery, is that they actually managed to beat consensus analyst expectations, even though those expectations have long been tempered by previously negative results. Analysts were expecting EPS of $0.06 per share on total revenue of $10.55 billion. That Nokia managed to beat EPS estimates by $0.02 per share is not trivial. The company also reported a net operating profit of $585 million.

As we were anticipating, Nokia noted that it now has net cash and cash equivalents in hand of $5.9 billion. Nokia’s net cash over the last year has been an issue, especially relative to Nokia's credit rating.

Nokia’s smartphone sales were in line with the numbers two weeks ago. To recap, Windows Phone-based Lumia and Symbian handsets accounted for sales of $1.6 billion. Lumia devices sold totaled 4.4 million units - a relatively good showing and a good indicator of Lumia's future.

Q4 net sales for its devices and services division totaled $5.1 billion. Total device volume across Nokia's entire current device lineup totaled 86.3 million units. These lower-end devices delivered more than half of total revenue, while presenting 92 percent of total volume. Clearly, it is the high- end smartphones running Windows Phone that represent Nokia's future. CEO Stephen Elop was asked if he had plans to expand beyond Windows Phone during an interview with Bloomberg TV, and Elop made clear his near term commitment to Nokia's close partner Microsoft and to Microsoft's mobile OS.

Finally, as we noted in detail in our earlier analysis, Nokia Siemens Networks came through as projected, with a fourth-quarter operating profit of 14.4 percent of sales. This end of Nokia - which continues to strike us as an almost unclaimed adopted child, held up its own relative to contributing, however slightly, to Nokia's recovery.

Great Expectations?

It is certainly the case that Nokia has fallen precipitously over the last three years, and it is also true that this fall from grace was completely predictable as soon as the original iPhone hit five years ago. It is now certainly the case as well that Nokia finally found the bottom on its fall, and we believe that its fiscal Q4 2012 results also signal a real turn-around.

Be that as it may, it does not create any great expectations from Nokia whatsoever - which in and of itself should come as a relief to Nokia. It now has some breathing room, and as long as those financial analysts who need to follow the company can keep their expectations and estimates in check, Nokia should continue to improve incrementally. In turn, investors should not see any major stock swings in either direction. If Nokia can continue to show improvement quarter over quarter the stock will reflect it.

We do need to note here that the numbers do not lead us to have any great expectations in terms of what Nokia will be able to accomplish in North America. Market penetration remains exceedingly low, and Nokia said nothing to suggest otherwise. The theme and strategy now looks to be to under-promise and incrementally over-deliver.

We are looking forward to Nokia's next greatest device. The next generation Lumia is anticipated to be delivered with a well-engineered aluminum body that will be much lighter in weight than the current flagship Lumia 920, and it may be delivered with the full 41 megapixel camera sensor from Nokia's 808 PureView camera. These are features that can have a real impact in North American sales - and we are looking forward to seeing it released. And we look forward to seeing the Nokia tablet rumors turn into reality - another device that can have a non-trivial impact on North American sales.

Nokia's financials are important to the financial analysts that cover Nokia and to those among us who own Nokia shares. But the financials do not really mean anything at this point in time from a larger industry perspective, other than showing Nokia may be stabilizing. Unlike the Google and Apple earnings numbers we've covered over the last two days - which will actually move entire markets - Nokia's are now merely noted for Nokia's sake only. They are certainly no longer a barometer for the mobile market. Such is the exact case for Research in Motion, which next week will reveal its own new toys…finally.

The ball is now in Nokia's court to show us the new toys.

Edited by Brooke Neuman

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