Nokia Results: Grim, but Some Rays of Hope

Posted by: Andy Reinhardt on October 15

There’s not much to cheer about in quarterly results from mobile phone giant Nokia that included an unexpected net loss of $834 million (the first since Nokia started reporting quarterly results in 1996) and a nearly 20% decline in revenues year-over-year. That’s €2.43 billion less on the top line, or $3.62 billion at today’s exchange rate. Investors were certainly in no mood to celebrate: By late afternoon in Helsinki trading, Nokia shares were down nearly 9%, to €9.41, and they plunged more than 10% in New York in the morning.

But Nokia’s bleak third quarter report issued on Oct. 15 contained some important nuggets of hope. To start with, the company actually did somewhat better than many analysts had predicted. Though revenues were slightly short of Wall Street consensus (€9.81 billion, vs. analyst expectations of €9.93 billion) tight cost controls allowed the world’s largest mobile handset maker to turn in better-than-expected earnings before interest and taxes (EBIT) of €741 million, vs. consensus of €702 million.

As a result, Nokia’s earnings per share, represented by non-IFRS (International Financial Reporting Standards) accounting, came in at €0.17, compared with an expectation of €0.13. Nokia’s €0.15 per share net loss according to IFRS rules owed to restructuring charges, goodwill writedowns, amortization of intangible assets, and other “impairments” adding up to €1.167 billion.

What’s more, there were several positive trends in underlying sales performance. Nokia’s quarterly volume of 108.5 million handsets topped expectations by nearly 3 million units, and its average selling price of €62 ($92.40) was above analyst estimates of €61.20. Though Nokia’s estimated global market share fell slightly to 37.6%, below some estimates, it was well within the range of expectations.

More broadly, Nokia predicted that the global handset market as a whole will shrink less this year than analysts had feared, down by 7% instead of earlier forecasts of 10%, and will grow sequentially in the fourth quarter. Coupled with the company's ability to hold the line on prices, this somewhat higher-than-predicted sales volume produced a 5% sequential rise in Nokia's handset revenues compared with the previous quarter, to €6.9 billion.

In a statement, Nokia chief executive Olli-Pekka Kallasvuo offered a modestly upbeat appraisal of the company's future prospects. "The demand for mobile devices improved in many markets during Q3," he said, predicting higher handset volumes, flat market share, and slightly improved operating margins for the company's devices and services unit in the fourth quarter.

That's the good news. The bad—very bad—news came primarily from Nokia's wireless infrastructure joint venture with Siemens, called Nokia Siemens Networks (NSN). The unit, which has struggled amid lower capital spending by telcos and sharpened competition from Ericsson, Alcatel-Lucent and rising Chinese players Huawei and ZTE, reported a sickening 21.2% fall in revenues compared with a year earlier, to €2.76 billion, and a 13.7% decline from the second quarter of 2009. All told, the unit posted an operating loss of €1.1 billion according to IFRS rules, which take into account all the writedowns charged against it.

CEO Kallasvuo promised that Nokia will "continue to support Nokia Siemens Network's actions to improve its performance." But he couldn't offer much optimism. Though he now predicts that the wireless network equipment sector as a whole will shrink by only 5% in 2009, v. an earlier estimate of 10%, he also cautions that NSN will lose more market share this year than earlier expected.

These are among the darkest days Nokia has ever known, and it doesn't help that rivals such as Apple and BlackBerry-maker Research in Motion have stolen so much limelight in the profitable and high-profile smartphone sector. But Nokia has bounced back from worse crises before, and it still enjoys unparalleled brand equity, distribution, and manufacturing prowess.

If handset sales really do bounce back in the fourth quarter, Nokia could see a big jump in results for its devices and services business due to its enormous leverage. But as long as NSN keeps bleeding red ink, bottom line results will continue to look ugly.