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Nokia Corporation (ADR) (NOK) Earnings Smackdown

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Nokia CorporationNokia Corporation (ADR) (NYSE:NOK)‘s 2013 Q1 earnings report offered only another harsh reality check for its investors.  Although the bad news in the 2012 Q4 report was largely denied by Nokia Corporation (ADR) (NYSE:NOK) and Microsoft Corporation (NASDAQ:MSFT) fans hoping for a comeback, this time it was undeniable.  As of this writing, Nokia is down 11%.

A case of cannibalization

Judging by the comments I’ve received in previous posts about Nokia, Microsoft Corporation (NASDAQ:MSFT) and Nokia investors assumed that the low Lumia sales of the Q4 2012 were an artifact of “limited availability”  and that there was much pent up demand remaining for Nokia’s Windows 8 phones.  Last quarter, Nokia sold 4.4 million Lumia smartphones.

This quarter, the number of Lumia phones sold rose to 5.6 million.  In fact, this was higher than I expected since I was expecting a sequential decline to 3 million as phone makers normally experience this after the Holiday season.  But investors have little reason to cheer about this.

Nokia Corporation (ADR) (NYSE:NOK) pumped up its Lumia sales volume by selling steeply discounted low-end Lumia phones into emerging markets.  The reader might recall recent reports that Lumia was outselling iPhone in Russia. In the process, Nokia very effectively cannibalized their own alternative smart devices, the Asha and legacy Symbian smart phones.  The Asha runs an OS called simply Nokia OS, a variant of Symbian.  The net effect was an overall decline in sales volume for the smart device category, as well as mobile phones.

Quarter Lumia Units in million Asha Units in millions Symbian Units in millions Total in millions
2012 Q4 4.4 9.3 2.2 15.9
2013 Q1 5.6 5 0.5 11.1

Not only did Lumia cannibalize Nokia Corporation (ADR) (NYSE:NOK)’s non-Windows phones, but appears to have cannibalized feature phones as well.  Total mobile device shipments shrank by 28% sequentially to 61.9 units.  Net sales for the Devices and Services business unit decreased by 32% year-over-year to EU 2.88 billion.

The myth continues

Once again, CEO Stephen Elop declared that Devices and Services had achieved “underlying profitability,” but of course, this was by virtue of excluding a 72 million restructuring charge.  The IFRS (International Financial Reporting Standards) compliant operating income for the group was EU -42 million, while Nokia on the whole had an operating loss of EU -150 million (IFRS).

This points out why I dislike such exclusions. Nokia was supposedly done with restructuring, but here we go again.  As I’ve pointed out in the past, companies suffering the revenue collapse that Nokia is still going through (-20% for the quarter year-over-year to EU 5.852 billion) can’t reasonably exclude restructuring charges as “one time only” since they tend to recur quarter after quarter.  Such charges have a very real impact by diverting cash flow from more productive uses and should be considered by investors.

Revealing geographic data

Nokia’s geographic data also confirms the lack of penetration in what is arguably the most knowledgeable and sophisticated smart phone market: North America. Mobile device sales volume declined catastrophically by -43% sequentially to a mere 400,000 units, a mere 0.65% of total shipments.  This was followed by a -39% decline in Europe to 11.8 million units, 19% of total shipments.

Currently mobile device volume is the highest in the Asia pacific region (excluding China) at 23.1 million, 37.3% of total.  I often heard it asserted that Nokia was going to do well in China, but Nokia Corporation (ADR) (NYSE:NOK)’s geographic data completely belies this. The greater China sales volume of 3.4 million (5.4% of total) is the second smallest after North America, and also suffered a precipitous -26% sequential decline from Q4.

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