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Nokia Beats, Outlook Grim

Zacks Equity Research

Nokia Corp. (NOK), the beleaguered mobile handset developer, has managed to outperform the Zacks Consensus Estimates in the third quarter of 2012. However, its flagship Windows-based smartphones failed to generate any meaningful market traction. Management has provided a disappointing outlook for the ensuing fourth quarter of 2012, which will include the most important holiday season.   

Quarterly net revenue was approximately $9,057 million, down 19% year over year, surpassing the Zacks Consensus Estimate of $8,890 million. Quarterly net loss was approximately $1,180 million or a loss of 33 cents per share compared with a net loss of $189 million or 3 cents per share in the prior-year quarter. However, quarterly adjusted (excluding special items) loss per share of 9 cents was better than the Zacks Consensus Estimate of a loss of 12 cents.

Quarterly gross margin was 27.5% compared with 28.1% in the year-ago quarter. Operating loss in the reported quarter was $721 million, up 711.3% year over year. Quarterly operating margin was a negative 8% compared with a negative 0.8% in the year-ago quarter.

At the end of the third quarter of 2012, Nokia had approximately $10,984 million of cash and cash equivalents compared with $13,641 million at the end of fiscal 2011. Total debt, at the end of the reported quarter was $6,525 million compared with $6,658 million at the end of fiscal 2011. 

Devices & Services Segment

Quarterly total revenue was approximately $4,458 million, down 33.9% year over year. Within this segment, Smartdevices (including smartphones and tablets) revenue was $1,221 million, down 55.5% year over year. Mobile Phone revenue was $2,960 million, down 18.8% year over year. Other revenue was $277 million, down 21.9% year over year.

Smartdevices average selling price (ASP) was $194, up 18% year over year. Mobile Phone ASP was $39, down 3% year over year. In the third quarter of 2012, Nokia shipped 6.3 million Smartdevices (including 2.9 million Lumia-series phones) and 76.6 million Mobile Phones, down 63% year over year and 15% year over year, respectively.

Nokia Siemens Network Segment

Quarterly net revenue was approximately $4,381 million, up 2.6% year over year. Quarterly adjusted operating profit was approximately $228 million compared with an operating loss of $143 million in the prior-year quarter. Adjusted operating margin was 5.2% compared with a negative 3.3% in the prior-year quarter.

Location & Commerce Segment

Quarterly net revenue was approximately $332 million, down 6% year over year. Quarterly adjusted operating loss was $70 million, down 34.1% year over year. Adjusted operating margin was a negative 21.1% compared with a negative 30.1% in the year-ago quarter.

Future outlook

For the fourth quarter of 2012, Nokia expects its Devices & Services operating margin to be approximately negative 6%, plus or minus 4%. However, Nokia Siemens Networks segment operating margin is expected to improve in the fourth quarter. Nokia further expects to reduce the operating expense in this segment by more than €1 billion by 2013 from the 2010 level of €5.35 billion.

Recommendation

Nokia is nowhere near to gain market share from Apple Inc.’s (AAPL) iPhone or Google Inc. (GOOG) developed Android-based smartphones. However, the stock price plummeted more than 60% in the last year. We thus maintain our long-term Neutral recommendation on Nokia. Currently, the company has a Zacks#3 Rank, implying a short-term Hold rating on the stock.

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