Apocalypse now?
Things had been looking positive for the Finnish handset maker based on Lumia sales, but while this was true, the Lumia line was limited compared to the rest of the handset stable for Nokia. Sales had to be robust to cover the other areas where Nokia was due to lose ground. Unfortunately, lose ground it did.
However, there is certainly some positivity to be gained out of this report, enough that maybe the apocalypse isn’t coming quite yet for Nokia Corporation (ADR) (NYSE:NOK); only this time around, an even better quarter might be necessary to keep Nokia in the worldwide smartphone conversation.
We are choosing to see this is a sign that the Nokia resurgence is taking hold, and maybe one more quarter will be the indicator of a turnaround being fully implemented. Why are we still somewhat bullish, even if the numbers didn’t add up very well in general? Let’s break this down.
Overall earnings
It is usually a positive sign when a company beats earnings estimates, which Nokia Corporation (ADR) (NYSE:NOK) did. OK, so the bar wasn’t set very high (an estimate of -4 cents per share), but Nokia did beat estimates with an EPS of -2 cents. Though overall sales dropped precipitously (from nearly 83 million in the first quarter of 2012 to 62 million this year), the company still reduced its net loss by more than 30 percent from a year earlier.
But what about the Lumias? Weren’t they the panacea?
Smartphone sales
While the overall number of smartphones sold by Nokia dropped year-over-year (from nearly 12 million in the first quarter of 2012 to just more than 6 million this time), the percentage of high-end, premium-margin Lumia handsets jumped both Y-o-Y and Q-o-Q, from 2 million Lumias in Q1 2012 to 5.6 million this time. And with Lumia sales expanding by more than 25 percent from the previous quarter (4.4 million to 5.6 million), that helped narrow the earnings gap to just beat estimates. But another similar jump this quarter just might be the recipe for getting that minus off the front of the EPS number.
The lower-budget Lumias
The Lumia 520, 620 and 720 handsets – the smartphones that are a tier below the high-end 820 and 920, designed for those with smaller budgets but a desire for smartphone features, namely consumers in China, India and Brazil – were revealed during Mobile World Congress in Barcelona just in February, and really didn’t start to hit store shelves until the end of the quarter.
So this current quarter will be the first time we’ll get a look at how the whole Lumia line is doing. If these additional Lumias can push the percentage of Lumia sales past the 10% mark of overall sales – maybe even touching 12%-15% – this just might be enough to finally staunch the bleeding.
The cash stash
Despite the overall gloomy numbers, Nokia Corporation (ADR) (NYSE:NOK) was able to add a little bit of cash to its meager store, up about 2%. When a company has been burning through cash like Nokia in the last couple of years, any increase in cash reserves has to be a welcome sight.
North America
Anchored by the U.S., this is a very robust market for smartphones – and is usually a bellwether for many companies. In the overall revenue number for devices and services, North America was the one region of the world where Nokia actually increased revenue from the previous year. If that continues for another quarter, that could be a true sign for a rally for the handset maker, considering how intensely competitive the U.S. smartphone market is right now.
Well yeah, but does this prove that the Windows Phone experiment has worked?
The Windows master plan
Nokia Corporation (ADR) (NYSE:NOK) CEO Stephen Elop said in 2011, when he announced that Nokia was dropping its native Symbian OS for Windows Phone, that it would probably take about two years for Nokia and Windows as an alliance to take hold. Well, the two-year mark will arrive with the next earnings report in July. The numbers here seem to indicate a positive trajectory, but this next quarter has to see some real growth – especially with the Windows handsets – for Elop to be truly prescient. And perhaps still be employed in Finland.
What can investors do?
From a valuation standpoint, shares of Nokia trade at bargain bin sales and cash flow multiples of 0.3 and 0.9, respectively. The massive dividend yield near 8% is icing on the cake. Microsoft Corporation (NASDAQ:MSFT), meanwhile, sports higher price-to-sales (3.3) and price-to-cash flow (3.5) metrics, and has a dividend less than half that of Nokia Corporation (ADR) (NYSE:NOK).
Smartphone peer Research In Motion Ltd (NASDAQ:BBRY) is also nearly twice as expensive on the revenue side, and it doesn’t offer one cent of dividend payments to its shareholders. Analysts may argue on the long-term viability of its Z10 and Q10 series—especially against future iterations of Nokia’s Lumia—it’s really up in the air.
When pressed to choose, it’s conceivable for some to go with Nokia because of its cheapness relative to its peers in the smartphone space. Sure, the yield’s a bit bloated from the stock’s latest sell-off, but it’s quite possible that if turnaround-focused investors are correct about this stock, even in the short run, value and income bulls will follow suit over the longer run.
Don’t forget, Nokia also has one heck of a patent portfolio—about 10,000 strong. To read more about it, check out our extensive coverage on Insider Monkey.
The article Apocalypse Now? Not Quite, Nokia originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
