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What Do Nokia’s Results Portend?

Nokia Corp. (NYSE: NOK), the world’s largest cellular handset OEM, reported results Thursday morning that were below Wall Street consensus expectations. However, despite the "miss" the stock rallied about 10 percent during the trading day. Was this short covering, or is this communications equipment bellwether trying to tell us something?

The short answer is that business was not as bad as some had feared either in Nokia's handset operations or in Nokia Networks . This is another case of investors looking at the second derivative – the rate of change of the rate of change – as their cue for the near-term direction of Nokia’s fortunes. (See Nokia's Cellphone Hope.)

There was nothing particularly compelling about the March quarter results other than the fact that there was genuine fear that they’d make last quarter’s disaster look good in comparison. Nokia reported revenue in the quarter of €9.27 billion (-27 percent year-on-year; -27 percent quarter-on-quarter) with GAAP (generally accepted accounting principles) EPS of €0.03. Both of these results were below consensus but not dramatically. The company’s gross margin held up surprisingly well at 31.3 percent, down about 400 basis points (bps) on a year-on-year basis but almost flat from the December quarter. However, its operating margin suffered, primarily due to the lower revenue levels as well as the restructuring charges taken to reduce its cost basis. In reality, Nokia’s handset operations actually performed fairly well under the circumstances. Revenue was €6.17 billion, down 33 percent year-on-year and 23 percent quarter-on-quarter. Here again, despite the dramatically lower revenue, gross margin for the handset operations was flat with the December quarter on nearly €700 million less in revenues and an average selling price (ASP) of €65 versus €71 in the prior quarter. While part of the ASP decline was due to mix, some was attributable to aggressive pricing by Samsung and LG as they profit from a short-term foreign exchange advantage. What didn’t manage to hold up was the operating margin for this business segment. It fell to 8.9percent, less than half of what it was a year ago and down about 50 bps from the fourth quarter.

Handset units were 93 million versus 113 million last quarter. Granted, these numbers aren’t pretty, but what Nokia and the industry have been seeing for the last six months is destocking by the supply chain. The panic reaction to deteriorating end-demand by distributors and service providers was to cut as much inventory as possible as quickly as they could. Obviously, sales aren’t going to accomplish that, so you cut your own inventory by slashing orders at your suppliers. Those cuts were well below the level of end-demand. As an example, if you remember last fall, Intel Corp. (Nasdaq: INTC) saw its expected fourth-quarter revenues drop from $10.5 billion to $7 billion in a period of less than 60 days. Nokia and everyone else experienced the same implosion of demand.

Despite the fear that spread through technology and telecom as 2008 drew to a close, Newton’s laws of physics appear to apply to this situation as well, although we can’t really prove that mathematically. In this circumstance, for every overreaction to the market conditions, there comes a point at which orders have to snap-back to meet actual end-demand levels. That’s essentially what we saw begin to take place in the middle of the March quarter. Light Reading and numerous other trade publications began to hear rumblings of "rush orders" at semiconductor foundries. Many of those rumors were tied to companies in the wireless handset supply chain, particularly those doing business in China.

As Taiwanese companies began to report their February and March revenues, much of the data confirmed that there was indeed a rebound taking place. Indeed, the table below bears that out. About half of Nokia’s handset units were sold into China and the greater Asia/Pacific region. Those two geographies were among the best performers versus the December quarter results.

Table 1: Nokia's Handset Performance
Percent of Q1 Units Change from Q4
Middle-East & Africa 16% -19%
China 19% 39%
Asia/Pacific 30% -6%
Latin America 7% -50%
North America 4% -17%
Europe 24% -36%
Source: Company Reports




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menexis 12/5/2012 | 4:06:07 PM
re: What Do Nokia’s Results Portend? Despite these week results I still think Nokia has positioned themselves to do much better in coming quarters. But the results are not as bad as I was thinking they were going to be.
vsomanv 12/5/2012 | 4:06:05 PM
re: What Do Nokia’s Results Portend?

that is bound to be the case when you prefer a Cell Phone over an AC or other consumer electronic.

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