Nokia Q2 – Hit and miss

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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.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.