Nokia (NYSE:NOK) announced a mixed set of Q3 FY 2012 results Thursday. While the company managed to sequentially increase its feature phone sales on strong demand for the newly launched fully-touch Asha phones, smartphone sales fell off a cliff as the Lumia saw tepid demand ahead of the Windows Phone 8 transition. After doubling Lumia sales every quarter for the last three quarters, Nokia managed to sell less than 3 million Lumias in Q3, a 25% drop sequentially. In the emerging markets, Nokia continued to see pricing pressures due to the proliferation of Google’s (NASDAQ:GOOG) cheaper Android smartphones but Asha’s performance this quarter helped feature phone ASP stabilize q-o-q.
The company incurred a headline operating loss of about 750 million Euros but a significant component of the loss was nonrecurring special charges related to the ongoing restructuring and amortization of intangible assets. Excluding these items, Nokia actually posted an operating profit of about 80 million, or more than 1% of sales on a non-IFRS basis. This came on the back of Nokia Siemens Networks’ return to operating profitability, which helped more than offset the sustained losses being incurred on the devices front. The division has now generated positive cash flows for the four straight quarters now, and accounts for more than 28% of our $4.50 price estimate for Nokia’s stock. Our price estimate is about 60% ahead of the current market price.
- Here’s Why Nokia Is Increasing Focus On The Healthcare Segment
- How Much Can Wireless Infrastructure Segment Add To Nokia’s Revenues In The Next Five Years?
- Why We Revised Nokia’s Price Estimate
- Why Is Nokia Acquiring Gainspeed?
- How Nokia Can Benefit From The Acquisition Of Withings
- Can Nokia’s Return To The Mobile Phone Market Drive Its Revenues?
Lumia sales tepid
A big reason for the Lumia’s sharp sales decline this quarter was the company’s announcement of a transition to Windows Phone 8 during the holiday season. Nokia introduced new Windows Phone 8 Lumias in Q3 and many may therefore have deferred their purchases until the launch of these phones in Q4. However, the company will probably not benefit a lot from this seasonality next quarter since it is not aggressively rolling the Lumias out globally. Instead, it is focusing on limiting the launch to key markets and a few target carriers in order to get the maximum marketing mileage out of each carrier partnership.
In the U.S., for example, Nokia plans on offering carriers exclusive access to different custom-built Lumias, so that the carriers can look to differentiate themselves from competitors and hence put more marketing effort behind the Lumia. (see Nokia Lures Carriers With Different Lumia Models; T-Mobile Joins AT&T) AT&T and T-Mobile have already jumped on the new Lumia offerings, and Nokia is expected to add Verizon soon. With Windows Phone 8, carriers will be looking to increase ecosystem competition in the smartphone market and lessen the impact of subsidies on their margins.
Further, Nokia is pushing Lumia hard in China as well, which is expected to supplant the U.S. as the world’s biggest smartphone market by the end of the year. Nokia has already launched the Lumia 800C and announced the cheaper Lumia 610 on China Telecom, and is rumored to have roped in China Mobile as well for its WP8 plans. 3G penetration is still at a lowly 18% in China, and the carriers there are actively trying to transition their huge 2G base to 3G. With a billion strong mobile subscriber base and growing demand for 3G services, China presents Nokia with a huge opportunity to create a smartphone niche for itself. But it will have to push the Lumia down to lower price points if it wants to pose a challenge to Android’s growing popularity.
NSN could be the dark horse
While Nokia is trying to get its mobile division in order, its joint venture with Siemens seems to be turning around pretty well. Nokia Siemens Networks (NSN), which is vying with Huawei for the 2nd position in the wireless infrastructure market, returned to operating profitability last quarter – a big positive sign that the company’s cost-cutting initiatives are taking hold. Underlying operating profitability rose to more than 320 million Euros in Q3 2012 from about 6 million Euros during the same period last year. Even after adjusting for restructuring and amortization, the division reported more than 180 million Euros in operating profit for the quarter.
NSN had announced in late 2011 a major restructuring initiative that would cut 17000 jobs and help it achieve savings of 1 billion Euros by the end of 2013. The restructuring is helping NSN sell off non-core assets and focus better on wireless broadband which has strong long-term growth trends as opposed to the relatively stagnant landline market. As a result, NSN has now generated cash for the last four quarters and this quarter’s strong 9% operating margins, coupled with the next quarter guidance of 8%, shows that the division is well and truly turning around.
With 4G LTE deployments ramping up in many parts of the world, NSN will benefit from the 3G to 4G wireless shift in the coming years. The company has close to 70 LTE contracts globally and is focusing on key regions in North America, Japan and Korea where LTE is being laid out. Of particular interest to NSN in the coming quarters will be TD-LTE, a variant of 4G technology that is being used in many emerging markets such as China and India. NSN is the current TD-LTE market leader with five out of a total of 11 commercially deployed TD-LTE networks using NSN’s gear.  Both China’s and India’s biggest wireless operators, China Mobile and Bharti Airtel, have chosen NSN to deploy their respective LTE networks. With NSN’s future prospects looking brighter than ever before, Nokia will be banking on the division to generate cash and help it tide over the tough Windows Phone transition.Notes:
- Nokia Siemens Networks sets TD-LTE speed record, goes beyond 4G, NSN Press Release, September 18th, 2012 [↩]