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July 18, 2013

Nokia's Q2 2013 Financials - Despite Revenue Drop, Nokia Shows Modest Improvements

We'll give Nokia CEO Steven Elop credit for retaining an upbeat perspective - during his earnings call early this morning he managed to convey a sense of moving forward with all cylinders firing, certain areas of the business coming in ahead of projections, and - of course - encouraging words about Nokia's flagship Lumia devices continuing to sell well. And although Elop didn't note it, we can note that at the very least Nokia is now selling more Lumia devices than BlackBerry is selling total numbers of smartphones. That isn't saying much, but it says something.

In the meantime, as has been the case nearly every quarter since last October, Elop had to fall back on saying yet again that a certain new key device (whether the Lumia 900, 920, 928 or the just-released 1020) had not yet had a chance to impact Nokia's overall sales and revenue. This time around of course it is the Lumia 1020 - Nokia's latest smartphone that touts the newly 41 megapixel Pureview technology camera. It won't begin shipping until the end of July or early August and we likely won't know any more about how well it will do until the 2013 holiday buying season is over.

Nokia has been hacking away at its turnaround for the better part of almost three years now and for the company to have had a revenue drop is something that will rightfully cause significant concern in the financial community. In this situation it isn't a case of over the top analyst fretting (something we constantly complain about) but very legitimate concern about whether or not Nokia has a fighting chance left to become something other than a perpetual also-ran.

So what are we currently left with? Great words of encouragement from Elop but alas little else. Elop noted that, “Our mobile phones business unit started to demonstrate some signs of recovery in the latter part of the second quarter following a difficult start to the year. While we are very encouraged by the consumer response to our innovations in this price category, our mobile phone business unit is planning to take actions to focus its product offering and improve product competitiveness.”

In fact, regardless of some parts of the overall business doing well, overall the company had a revenue drop. At this point in time even a small drop in revenue is not a good thing. While we would not characterize the revenue drop as drastic rest assured that there are others who clearly label it a "sharp" fall.

The Basic Numbers

Nokia's revenue for the three months that ended on June 30, 2013 dropped 24 percent, to €5.7 billion ($7.45 billion) for the period. That is a significant drop from the already poor €7.54 billion ($9.86 billion) it earned in Q2 2012. It was also a fairly significant miss relative to consensus analyst forecast of €6.27 billion ($8.2 billion) for the quarter.

Smartphone shipments in the second quarter rose compared with Q1 2013, but as did revenue, overall mobile device shipments and smartphones both fell 27 percent year over year from Q2 2012. This is not a desirable situation for Nokia - by now the company needed to have begun holding its own and increasing numbers overall. The drop year over year is, for lack of better words, a bad omen. Nokia shipped 53.7 million mobile phones and 7.4 Lumia smartphones in Q2 2013 - but neither of these numbers is impressive. In fact, they are significantly below already conservative analyst consensus estimates of 56.2 million total phones and 8.1 million Lumia devices.

Although the revenue and unit shipment drops did not help Nokia's profitability, the company still managed to trim its ongoing losses. This was expected but as has been the case over the last year the improvement is the result more of ongoing cost cutting than of significant improvements in revenue. But Nokia did manage to trim its Q2 2013 net loss, reporting a net drop of €227 million ($296.83 million) for Q2 2013. We should note that the company will be cutting another 400+ employees going forward.

We need to keep in perspective that the reported loss represents a huge step in the right direction - compare the number reported today to last year's net loss of €1.41 billion ($1.49 billion) for Q2 2012. Even better, consensus analyst estimates had a net loss pegged at €276 million ($360.9 million). Beating any analyst estimates is always a good thing.

Nokia’s net cash reserves fell to €4.1 billion ($5.36 billion) from €4.5 billion ($5.88 billion) in Q1 2013. Cash on hand is never the less adequate at this point in time.

Finally, Nokia recently opened its purse to acquire the half of Nokia Siemens it didn't already own for $2.2 billion. Nokia Siemens Networks reported an operating profit of €8 million ($10.46 million) for Q2 2013. Year over year, the company had reported an operating loss of €226 million ($295.52 million) in Q2 2012. Yes, the profitability is perhaps nominal and merely a moral victory at this point, but the future looks extremely bright for this side of the business. We were pleased to note that Nokia had made the acquisition - looking ahead we can expect to see substantial ongoing growth.

Nokia's stock price certainly hasn't had a wild swing as a result the earnings miss. Year over year the stock price has gone from approximately $1.75 to its current $4.03. As late as May 2013 it dipped to just over $3 - clearly analysts and larger stockholders aren't panicked (as we noted earlier).

We are of course now back to needing to speculate about how Nokia is likely to fare as we begin to slowly turn our sights toward the 2013 holiday buying season. This time around there will be no product excuses. The Lumia phones are now all current with Windows Phone 8, there won't be any operating system issues (recall that last year the original Lumia 900 could not be upgraded from WP7 to WP8.) And the company will have its flagship 1020 device in the field for a substantial period of time before Q1 2014 earnings come around.

What this means is that Nokia is out of excuses. It must deliver on the promise and demonstrate some real growth - well beyond today's Lumia numbers.

As always, we wish Nokia good luck.

Readers interested in sifting through Nokia's extensive 44 page financial report can download it directly through Nokia's investor website.

Edited by Rachel Ramsey

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