Article / 19 April 2012 at 7:01 GMT

After the profit warning, only uncertainty remains in Nokia

Matt Bolduc Matt Bolduc
Equity Analyst

The annual tradition continued this year with Nokia releasing another profit warning. Nokia has issued an amazing 14 profit warnings in the past 10 years, but yet again investors were surprised with a nice slap in the face. Nokia issued a profit warning a week ago highlighting competitive pressures and low margins on phones, largely due to competition in mobile phones in growing economies (exc. Smartphones), which is Nokia’s bread and butter.

We can see from Chart 1 that analysts’ estimates are simply all over the place, with varying profit margins and a large deviation especially in EPS. This simply highlights the risk in the company, as visibility of earnings is very low which increases the risk of owning the stock. This is most likely why, unless Nokia surprises massively at either end, the stock will probably not move much from its present level.

Consensus EPS estimates: -0.07

Consensus Revenue estimates: € 7.533bn

Analysts Estimates

The perhaps silver lining to the cloud is that Windows Phones did relatively well with 2 Million Lumias sold in Q1, although the company expected this figure to be closer to 3 million. What is more problematic for the company in the short term is that Nokia will not have a complete lineup for Windows Phones until late 2012. This will most likely keep the price of the stock down for the most part of 2012, the especially worrying part is that while Nokia is slowly gearing up in the smartphone space under the Windows banner, it might bleed market share from growing economies switching from mobile to low end smartphones which Nokia is unprepared for. So while Q1 will be bad, so will Q2, with CEO Elop saying that investors should expect the same margins. But if the trend continues Q2 will turn out to be even worse than expected, so prepare for the worst in the next quarter. The big test for Nokia, is the Lumia Easter launch with AT&T in the US which should be very important to investors, as both companies have devoted significant resources to helping Nokia succeed in the US smartphone market.

It’s all about the Windows Phone for Nokia now…

Matt Bolduc Matt Bolduc
EPS (ecl. ext-ord) came out -0.08 and sales at 7.4 billion, both just below consensus. With one time items, EPS was -0,25-.

But more importantly, Windows Phones results were mixed as they 'exceeded expectations' in the US, but the UK has been more challenging. We will see if Microsoft will add a bit more color to the Windows Phone situation...
Peter Garnry Peter Garnry
Nokia is in a tailspin. I am very negative on the company and it is only a matter of time before their debt is downgraded to junk. Many argue that they can turn it around as Apple did. Well wait a minute! Nokia has 130,000 employees as of December 2011 whereas Apple had around 11,000 when Steve Jobs came back in 1996. It is a factor 10 in difference - Nokia is way bigger and fatter elephant. And where Steve Jobs could create intense focus on the right products and cut number of employees, Elop at Nokia has failed big time. Steve Jobs slashed the number of employees from 11,000 to 6,500 in two years and launched several groundbreaking products (iMac). Fours following the introduction of the iPhone, Nokia has increased the number of employees from 112,000 to 130,000 and failed to innovate. For me it is game over unless some miracle happens.
TomasBerggren TomasBerggren
I can't drop this! Nokia crushed Ericsson and Motorola in the early 00's as these players got it all wrong. If this is history repeating itself, Nokia is going to die a slow and painful death, since they have no alternative to the devices business. The Nokia Siemens Network division is a lot of the fat you are talking about Peter. This has been the ugly cousin for years. Proudness won over good business sense in building this behemoth. There is no natural buyer for this business that is a problem. But when come to think of it the sum of the parts still represents an intriguing story as long as Nokia can dampen the cash burn. Whether it requires a miracle for the phones to rebound, I don’t know, but the current patent valuation story still represent a fairly strong value. Nokia sits on some +20k patents. They need a sugar daddy, to carry them through 2012. Matt, do you think MSFT will do us the honor?
Matt Bolduc Matt Bolduc
There is no chance that MSFT is looking to acquire a hardware maker. MSFT is basically using Nokia as a mule to carry Windows Phone until WP8 comes out later this year. If Nokia is relatively successful with WP, MSFT will be able to push the software to other manufacturers. Telephone companies are also willing to help MSFT along they way as they try to break the Android-Apple duopoly as it is destroying their margins. Once (if) Windows Phone is successful, MSFT will not need Nokia anymore as the software should have momentum. If this happens Nokia will be competing with other manufacturers on the same ecosystem, which will commoditize their offering. So basically, MSFT has nothing to gain from acquiring Nokia and a bunch of money to lose. MSFT is happy to be the middle man and let the manufacturers battle it out.
TomasBerggren TomasBerggren
Thanks Matt for clearing this out. So who would you say will be the market leader on Windows phones in 2014, if it makes a great run?
Matt Bolduc Matt Bolduc
I don't think Windows Phone will become that big that fast, but I do believe that MSFT is positioning itself to have Windows Phone become a decent revenue stream.
TomasBerggren TomasBerggren
It looks like investors are giving up on Nokia. Stock now is free fall, this far today down almost 6%.


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