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On Thursday, Nokia (NOK) announced its quarterly results. Initially, it led to a sell-off but the company's stock price finished the day nearly flat as the investors started digging deeper into the company's earnings report. After digesting the company's results, I think they are just "blah." They aren't anything to write home about, but they are not bad enough to push investors in a depression either. There was very little, if anything, unexpected in the company's earnings report.

Lumia Sales

Lumia sales grew by double-digits which is in line with the company's guidance in the last quarter. The average sale price per smart phone was slightly up due to the extinction of the Symbian phones, but they were somewhat suppressed due to the fact that most Lumias sold during the quarter were cheaper models like the Lumia 520. Nokia sold 7.4 million Lumias in the quarter, which is up 32% compared to the last quarter. Most of the increase was due to cheaper Lumia models. On a bright note, the number of Lumias sold in the last quarter was higher than the number of all phones sold by BlackBerry in the last quarter (i.e., 6.8 million). Nokia offers many Lumia models that address many different price points, which proved to be somewhat successful in maximizing the demand in the company's product line. In the next quarter, Nokia expects Lumia sales to increase compared to the last quarter; however, no specific number was mentioned this time. During the announcement of the first quarter's earnings, Nokia had specifically said that it expected Lumia sales to grow by approximately 27% in the second quarter (which it accomplished).

Feature Phone Sales

Unfortunately, the Lumia sales weren't high enough to offset a sharp decline of feature phone sales. Nokia's feature phone sales continued to disappoint in this quarter. Last year, Asha sales were doing really well in markets like India, but the phone brand's hotness seems to have cooled off rather quickly. The volume of mobile phones fell from 84 million units to 62 million units (year-to-year) even though average sale price for these phones fell from $62 to $59. Nokia's feature phones division is shrinking and the company will have to turn this around. If feature phone sales continue to shrink at this rate, the growth in Lumia sales will not mean that much for the company's profitability. There is a lot of pressure from Chinese, Korean and Indian companies in the feature phone market and things are getting tough for Nokia. In the last quarter, Nokia sold 4.3 million Asha phones, down from 5.0 million in the last quarter.

Phone Sales Across the Globe

Out of the 6 geographical areas where the company sells phones, it reported declining revenues in 4 markets compared to the last quarter. In North America, the company's revenues were up by 22% and in Latin America, the revenues were up by 9%. On the other hand, revenues were down by 16% in the Middle East and Africa, 9% in Europe and China and 6% in Asia-Pacific. Year-to-year the revenues in China were down by 57% which is devastating. On a positive note, Nokia's volume increased by 21% in China and 22% in North America, which is pretty much explained by the introduction of cheaper phones (such as Lumia 520, known in the North America as Lumia 521) in these two regions. Nokia launched a new Asha phone (i.e., Asha 501) towards the end of the quarter. In the conference call, it was mentioned that Asha 501 is seeing encouraging demand in Asia.

Nokia Siemens Networks

In the last quarter, the well-established trend continued and Nokia Siemens Networks continued to be the savior of the company. This is exactly why it doesn't make sense for Nokia to sell this business unit (as I've already mentioned many times). Nokia Siemens Networks saw a decline in its sales (17% year-to-year and 1% quarter-to-quarter); however, the business unit's margins were improved. Nokia Siemens Networks had a gross margin of 38.3% in the last quarter compared to the 34.0% in the previous quarter and the 26.6% in the same quarter a year ago. The business unit's operating margin was 11.8%, up from 7.0% in the last quarter and 0.8% in the same quarter a year ago. NSN's revenues grew in Europe, Middle East, Africa and Greater China whereas the company's revenues fell in Asia-Pacific (mostly Japan) and the Americas compared to the previous quarter. While Nokia Siemens Networks had healthy numbers, Nokia will continue to restructure the business unit and cut costs further in order to be proactive about a possible slowdown in the future.


Here saw a 8% quarter-to-quarter revenue growth due to strong external sales (rising 19%) even though internal sales continued to shrink (by 27%). Nokia's partnerships with the car companies have been paying off as the company takes advantage of the booming car sales everywhere (with the exception of Europe, of course). The business unit's gross margin was a healthy 76%; however, its operating margin was down from last year. The revenues and margins of Here have been very volatile as they fluctuate wildly from quarter to quarter. It is very difficult to predict the performance of this business unit. Nokia will have to stabilize this business unit and find more ways to monetize it as the usage increases.

Patent Income

Nokia earned $201 million from patent payments in the last quarter. In the first 2 quarters, Nokia's patent portfolio generated $376 million. These numbers are not mentioned explicitly in the company's earnings report; however, it is easy to calculate it by comparing two separate tables where Nokia presents its revenues with and without patent payments. Nokia's patent payments are also kept into account when calculating in average sale price of phones. This is separate from the payments Nokia receives from Microsoft (MSFT), but it is important to note that Microsoft's payments to Nokia are shrinking in size as Nokia sells more phones (Microsoft pays Nokia a flat fee of $250 million per quarter in partnership fees and Nokia pays Microsoft a set amount per phone sold for the Windows phone license. As the number of phones sold increases, Nokia ends up paying more to Microsoft. As mentioned in the conference call, in the last quarter, Microsoft paid Nokia a little more than Nokia paid Microsoft but this may change next quarter when Nokia's phone sales approach 10 million).

Cash Position

Due to restructuring charges and some other items, Nokia's cash position deteriorated during the quarter. The company's total cash fell from $13.13 billion to $12.23 billion and its net cash fell from $5.82 billion to $5.29 billion. Next quarter, Nokia's cash position will get a little bit worse as the company will have to pay for the acquisition of Nokia Siemens Networks, but things are not in the "danger zone" yet.

Things Are Looking Flat

For the last 5 quarters or so, Nokia has been stuck in the same position. The company either posts a tiny profit or a tiny loss (or a breakeven) as a result of its operations. When one division of Nokia over-performs, another division under-performs to offset this. If Nokia Siemens Networks performs well, the mapping business performs badly. If Lumia sales increase, feature sales decrease. It seems to be very difficult for the company to perform well in all of its units. The company is working hard to cut costs and reach profitability but this turned out to be a huge challenge.

In the last 2 quarters, 14 million Lumia phones were sold, which is great for increasing the company's visibility. I am sure most Lumia users love to show off their phones to their family members and friends and there is no better marketing than word of mouth. As the number of Lumias in the market increase, the company's footprint will also increase. Think of it like a feedback cycle where the number of Lumia users increase and they tell their friends about their great experiences with their phones, and more people hear about Lumias and more people end up buying these phones. Having said that, I expect the third quarter to be very similar to the second quarter for Nokia. The company will probably announce a small profit or a small loss with tiny margins overall. In the fourth quarter, Nokia may be able to do better, as consumer electronics companies usually perform the best during this quarter because of the holiday season. Nokia should be able to grow its Lumia sales fast enough to offset the declines in the feature market (or better yet, grow its smart phone and feature phone markets simultaneously).

In this quarter, I expect Nokia's stock price to perform similar to the company's performance (in other words remain relatively flat). If Nokia's share price falls below $3.50, I will add more shares to my portfolio. Currently, I don't plan on selling my Nokia shares because I write covered calls every month and create my own "dividends" which yield between 2% to 4% each month. This is why I don't mind Nokia's share price to remain flat for the time being. Nokia's last quarter wasn't that impressive but at least it wasn't anything like BlackBerry's last quarter. There is still light at the end of the tunnel, it is just farther away than we thought it was. I am sure many Nokia investors are feeling what I call "the investor's fatigue" which is a condition (that I made up) characterized by feeling sick and tired of long waiting periods before companies can turn things around and investors are rewarded, but we all knew that Nokia was a long-term play, didn't we?

Source: Nokia Corporation's (NOK) Quarterly Results: Blah