By The Wall Street Fox → Tuesday, October 29, 2013
Nokia (NOK) released their much-anticipated Q3 earnings report before the bell today, appeasing many shareholders, with shares up more than 8% in pre-market trading. Much of the fanfare is attributed to the underlying profitability Nokia achieved, and the strong guidance they gave for their fourth quarter. With seasonality negatively affecting NSN and Here, Nokia's numbers were still strong, and now it is becoming clearer to investors how successful a phoneless Nokia can be. Shares are retesting their highs of $7.40, and it is now clear that the more than 3% drop in shares prior to Nokia's earnings release presented a great buying opportunity. With earnings out of the way, and strong guidance for the upcoming quarter, Nokia seems poised to breakout to new highs, finally cross Blackberry's share price, and begin to flirt with double digits. The future seems brighter than ever for New Nokia.
Perhaps the most eagerly awaited number from Nokia was its number of Lumia models shipped, coming in at 8.8 million units. This represented an increase of approximately 20% quarter over quarter, and was more than triple the 2.9 million Lumias sold year over year. Nokia's feature phone sales increased quarter over quarter, coming in at approximately 55.8 million units. This number is not pretty, representing a 27% decline year over year. The competitive landscape and sea of cheap Androids has made it difficult for Nokia to stand out in emerging markets, though their Asha phone models continue to post encouraging growth, selling almost 6 million units this quarter. While Nokia has still been struggling with its feature phone sales, it seems a bottom was placed last quarter when they sold approximately 54 million units.
However, if the Microsoft (MSFT) deal closes in the first quarter of 2014, the above numbers are moot. This is now Microsoft's problem. It is interesting to wonder how the street would view these numbers if a deal with Microsoft was not on the table right now. The Lumia is posting slow, yet steady growth, and the continued rise throughout Europe does not seem to be stopping. Furthermore, Nokia's presence in North America continues to post strong growth levels, due to their extremely low penetration. Nokia's smart phone sales increased 180% quarter over quarter, and 367% year over year in North America. Nokia's strong efforts aimed towards becoming a true competitor in the smart phone industry seem to be bearing fruit, and now Microsoft has the advantage of taking the reins of this unit and all of its momentum.
With Lumia sales sitting at 8.8 million units, it is not the 9.5+ million units some investors were hoping for, meaning it is more than likely that Microsoft's offer of $7.2 billion will remain just that. Nokia's device unit is leaving on a high note, with last week's announcement of an impressive tablet, and two phablets. It will be interesting to see If Nokia breaches 10 million Lumia units for the holiday quarter, and if so, what the effects will be on its share price.
Nokia Solutions Network
The true driver of Nokia's business took the stage during Nokia's conference call, NSN. NSN achieved its 8th consecutive quarter of positive cash flow, and 6th consecutive quarter of operating profitability. NSN achieved an operating margin of 8.4%, which beat the streets estimates by 1.4%. Though this is lower than past figures, weak seasonality and restructuring have an effect here, and the strong guidance for quarter four of 12% operating profit +/- 4% seems to be the real number investors are focusing on.
NSN presence in North America increased 5% year over year. Nokia's attempt at organic growth in North America does not seem to be working, and though Nokia executives say "market forces" will determine whether they acquire another company, it seems more than likely that a joint venture with Alcatel Lucent's (ALU) wireless division (or acquisition) will be necessary for NSN to gain considerable market share and become a true competitor in North America.
Nokia Solutions Network contributed $3.7 billion and $2.06 billion to Nokia's gross and net cash position, respectively. With strong margins moving forward, strong growth prospects, and continued development of 5G technologies, NSN should continue to contribute a considerable amount to Nokia's overall business for the coming years, and be a true competitor to Ericsson (ERIC), Huwaeii, and others.
Here, Advanced Technologies, Taxes, and Dividends
Here Maps recorded $290 million in net sales, and a non-ifrs operating margin of 9.5%. The operating margin increased more than 6% quarter over quarter, but both sales and operating margins for Here are significantly down year over year. What is encouraging however, is their strong presence in the automobile industry, and recent buzz surrounding future products, including connecting your car's dashboard to the cloud and accessing all of your content. Nokia has announced relationships with several auto manufacturers, including Mercedes Benz, and their penetration in the industry does not seem to be slowing down. Here may become an increasingly valuable business as Nokia signs more contracts and adds more value to their offerings for the automobile industry.
Nokia made it clear in their conference call that due to patent royalties being extremely lumpy and random, it is nearly impossible to predict guidance for the advanced technologies division. Having said that, management explained that they will begin "active management of their patent portfolio", and with Nokia's handset division on its way out, the possibility of counter suits seem less and less likely, meaning Nokia will become extremely aggressive with their valuable patent portfolio. We can expect these revenues to increase, and Nokia may be on the verge of receiving nearly $1 billion in licensing fees and royalty payments in the coming quarters.
Nokia also made it clear that they are committed to continue their research and development into advanced technologies, and plan on continuing the development of projects already in the works. The continued focus on R&D should continue to add valuable patents to Nokia's portfolio, with the possibility of generating recurring revenues and large sum payments. Some technologies in the works at Nokia include the development of Graphene, possibly the thinnest, most durable material ever made, and the next generation of mobile bandwidth, 5G. Being at the forefront of development of 5G technologies is reassuring to investors who want to open a long position in Nokia.
One piece of information that is extremely bullish for Nokia, their investors, and cash position is taxes. Nokia has suffered a considerable loss over the past few years, and with strong profitability expected in the coming quarters, it is reassuring to know that Nokia has the ability to shield up to $11 billion in future profits from taxes. Yes, $11 billion. Those tax savings can significantly add to Nokia's net cash position and bottom line. Furthermore, the Finnish corporate tax rate is expected to drop to 20% next year, which should also add to Nokia's profitability in the future.
The dividend is coming. When executives were asked when investors should expect shareholder distribution of excess cash, they simply responded, probably around when the Microsoft deal closes, and not before. Therefore, it is safe to say that the reinstatement of Nokia's dividend will occur in the first quarter of 2014. This should attract a plethora of dividend investors and continue to add to the momentum of Nokia's stock price appreciation.
Nokia has reemerged from the depths of possible bankruptcy and is now a shining star among analysts and investors, including Dan Loeb. The strong operating margins of NSN, and encouraging future outlook for Nokia's remaining businesses, has reassured investors that Nokia is here to stay. Nokia has turned into a cash cow thanks to Microsoft, and the billions of dollars in excess cash will serve Nokia and its investors well in the future. With some price targets for Nokia upwards of $20 (even $60!), I believe it is not farfetched to see Nokia test double digits once the Microsoft deal has been closed. Current investors who got in before the Microsoft deal was announced should continue to hold on to Nokia, and wait for the Microsoft deal to close and their dividend to be reinstated until taking profits. Nokia's downside continues to be limited at these levels; it is pre-mature to sell shares.
All financials were sourced from Nokia's 3Q report.