Nokia Corp. (NOK), the largest mobile phone manufacturer of the world, declared its third-quarter 2011 financial results, beating both the top line and bottom line estimates of the Zacks Consensus. This encouraging performance was primarily attributable to better than expected sales of its basic mobile phones. At present, Nokia is on the verge of introducing its much-hyped first smartphone using the Windows Phone 7 operating system of Microsoft Corp. (MSFT).
Quarterly net revenue was approximately $12,711 million, down 13% year over year, but surpassed the Zacks Consensus Estimate of $12,296 million. Quarterly net loss was approximately $214 million or a loss of 3 cents per share compared with a net income of $456 million or 20 cents per share in the prior-year quarter. However, the third quarter of 2011 adjusted (excluding special items) EPS of 4 cents was significantly above the Zacks Consensus Estimate of a loss of 1 cent.
Quarterly adjusted operating income was approximately $357 million, down 60% year over year. Adjusted operating margin in the third quarter was 2.8% compared with 6.2% in the year-ago quarter. Operating cash flow in the reported quarter was $1,206 million, up 94% year over year.
At the end of the third quarter of fiscal 2011, the company had more than $7.17 billion of net cash and marketable securities compared with $9.52 billion at the end of fiscal 2010. At the end of the reported quarter, Nokia’s debt-to-capitalization ratio was 0.22 compared with 0.21 at the end of fiscal 2010.
Devices & Services Segment
Quarterly revenue was approximately $7,632 million, down 25% year over year. Within this segment, smart devices (including smartphones and tablets) revenue was $3,123 million, down 39% year over year. Mobile Phone revenue was $4,109 million, down 14% year over year.
Smart devices average selling price (ASP) was $185, down 2% year over year. Mobile Phone average selling price (ASP) was $45, down 20% year over year. In the third quarter of 2011, Nokia shipped 16.8 million smart devices, down 38% year over year and 89.8 million Mobile Phones, up 8% year over year.
Nokia Siemens Network Segment
Quarterly revenue was approximately $4,831 million, up 16% year over year. Quarterly adjusted operating profit was approximately $9 million compared with a negative $164 million in the prior-year quarter. Adjusted operating margin was 0.2% compared with negative 3.9% in the prior-year quarter.
NAVTEQ Segment
Quarterly revenue was approximately $341 million, down 4% year over year. Quarterly adjusted operating profit was more than $96 million, down 8% year over year. Adjusted operating margin was 28.2% compared with 29.4% in the year-ago quarter.
Future Outlook
Nokia expects an adjusted operating margin of 1% to 5% in its core Devices & Services segment in the fourth quarter of 2011. Management expects to reduce operating expenses of this segment by Euro 1 billion during fiscal 2013. The fourth-quarter 2011 revenue for the Nokia Siemens Networks, a JV with Siemens (SI) is expected between $5.24 billion – $5.66 billion. Adjusted operating margin is expected to be within the range of 1% to 4%.
Recommendation
Nokia’s free fall in the smartphone market is continuing owing to competitive threats from Apple Inc. (AAPL) and several smartphones based on Google Inc.'s (GOOG) Android software. Nevertheless, we believe the company is at an inflexion point, where much will depend on the success of its Windows Phone 7 based smartphones. We maintain our long-term Neutral recommendation on Nokia. Currently, it holds a short-term Zacks #3 Rank (Hold).
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