Nokia Beats but Outlook Weak - Analyst Blog

Nokia Corp. (NOK), the largest mobile phone manufacturer of the world, declared its fourth quarter 2010 financial results, which beat both the top line and bottom line of the Zacks Consensus Estimates. Favorable product-mix biased toward converged mobile devices (smartphones & mobile computers) resulted in higher average selling price (ASP).

However, Nokia has provided a weak financial outlook for its core Devices & Services segment. Additionally, Nokia Siemens Networks, a joint venture between Nokia and Siemens AG (SI), is facing a legal battle from Huawei Technologies of China regarding its proposed acquisition of wireless infrastructure assets of Motorola Solutions Inc. (MSI).

Quarterly net revenue was approximately $17,206 million, up 6% year over year and also above the Zacks Consensus Estimate of $16,864 million. This was primarily due to the significantly higher sales from the NAVTEQ segment.

Quarterly net income was approximately $1,009 million or 27 cents per share compared with a net income of $1,200 million or 35 cents per share in the prior-year quarter. The fourth quarter 2010 adjusted (excluding special items) EPS was 30 cents, which was significantly above the Zacks Consensus Estimate of 25 cents.

Quarterly operating income was approximately $1,202 million compared with $1,552 million in the year-ago quarter. Operating margin in the same quarter was 9% compared with 9.5% in the year-ago quarter. Operating cash flow in the reported quarter was more than $3.31 billion, up 59% year over year.

At the end of fiscal 2010, the company had around $9.52 billion of net cash and marketable securities compared with $5 billion of net cash and marketable securities at the end of fiscal 2009. At the end of fiscal 2010, Nokia's net debt-equity ratio was a negative 29% compared with a negative 25% at the end of fiscal 2009.

Devices & Services Segment

Quarterly revenue was approximately $11,559 million, up 4% year over year. The increase was attributable to higher volumes in most regions driven by stronger demand and higher ASP. This segment continues to generate the bulk (67.2%) of total revenue.

In the reported quarter, ASP was around $94, up 7.8% year over year and also up 6.2% sequentially. However, gross margin was 29.2% compared with 34.3% in the same quarter of the previous year. Adjusted operating margin was 11.3% compared with 15.4% in the year-ago quarter.

In the fourth quarter of 2010, Nokia shipped 123.7 million mobile handsets, down 3% year over year but up 12% sequentially. As a result, global market share of Nokia declined to 31% from 35% in the yea–ago. However, Nokia shipped a higher percentage of high-margin converged mobile devices in the same quarter. The company shipped 28.3 million converged mobile devices, up 36% year over year and 7% sequentially.

Nokia Siemens Network Segment

Quarterly revenue was approximately $5,387 million, up 9% year over year. Increase in revenue is mainly due to higher sales in North America, Latin America, and Asia-Pacific. However, adjusted operating margin was 3.7% compared with 5.5% in the same quarter of the previous year.

NAVTEQ Segment

Quarterly revenue was approximately $420 million, up 37% year over year. The increase was due to improved conditions in the automotive industry and growth in mobile devices sales. Adjusted operating margin was 32.4% compared with 24% in the same quarter of the previous year.

Future Industry outlook

Nokia is expecting its first quarter 2011 revenue for the Devices & Services segment to be within the range of approximately $9.25 billion - $9.93 billion. The company expects an adjusted operating margin of 7%-10% in its core Devices & Services segment in the first quarter of 2011.

The first quarter 2011 revenue for the Nokia Siemens Networks is expected between $3.8 billion - $4.2 billion. Adjusted operating margin is expected between -3% to a break-even in the same quarter.

Recommendation

Nokia's free fall in the smartphone market is continuing owing to huge competitive threat from Apple Inc. (AAPL), Research In Motion Ltd. (RIMM), Samsung, and HTC. More dangerous signal is that the company is quickly losing its market share in the emerging markets to low-cost Chinese, Taiwanese, and Indian handset developers. These are the key markets for the company's future sustainability.

We maintain our long-term Neutral recommendation for Nokia. Currently, it has a short-term Zacks #3 Rank (Hold) on the stock.

 
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