Nokia Q2 – Hit and miss

 

 

 

 

 

Light Q2 sets up potential for a bounce in Q3.

• Nokia missed revenue expectations but profitability improved to allow profits to come in ahead of expectations.

Q2A                Consensus    RFM estimate

Units                          61.1m              74.0m                        62.0m

Mobile Phone           53.7m             66.0m           55.0m

ASPs                           €26                 N/A                 €27.0

Lumia Devices          7.4m               8.0m              7.5m

ASPs                           €157                €175                €165

D and S Revs              €2,724m        €3,091m         €2,950m

Adj-EBIT                    -€32m                -€40m           -€45m

Margin                       -1.2%               -1.2%               -1.5%

 

NSN Revenues         €2,781             €3,133m          €3,050m

NSN Adj EBIT           €328m           €221                €305m

Adj. Margin              11.8%               7.0%               10.0%

 

Group Revs               €5,695m        €6,394m        €6,221m

Group Adj EBIT        €303m           €130m            €195m

Group Adj Margin          5.3%          2.0%               3.1%

Group EPS                 €0.00           -€0.02            €0.02

 

Source: Company Data, RFM estimates, Bloomberg.

 

• The miss was mostly due to a reduction in channel inventory in Mobile Phones but also due to a small miss at NSN.
• The Lumia 520 and 720 were the real volume devices but this comes as no surprise as these are cheaper devices.
• This quarter’s performance brings the Microsoft Windows Phone ecosystem into third position in terms of units shipped pushing BlackBerry into fourth.
• RFM analysis indicates that BlackBerry still has more active users than Windows Phone but I do not expect this to last very long.
• Cash flow was poor with a combination of an increase in working capital as well as restructuring cash outflows.
• Cash position remains healthy at net cash of €4.1bn and so I am far from concerned regarding a liquidity shortage.
• Q3 guidance was positive with D&S revenues expected to grow when seasonality would infer flat revenues at best.
• Profitability forecasts were once again very cautious and very wide with D&S services margins expected to be +2.0% to -6.0%.
• This gives the company plenty of space to manoeuver but I think that margins could easily come in better than the 1.2% recorded this quarter.
• This is due to higher revenue as well a mix shift towards newer products in Q3 given the product launches in mobile phones towards the end of Q2.
• Hence, I am optimistic that Nokia will have a good Q3 and this will set the company up nicely for a run into Q4 and 2014.
• The outlook for the Windows Ecosystem is improving slowly and I am hopeful that H2 2014 will see more compelling devices in terms of tablets, hybrids, phones and ultrabooks.
• Nokia remains the best way to play this trend and remains second only to Yahoo! in terms of stocks to look at in the world of mobile ecosystems.