Nokia, which is currently graded as a junk stock, disappointed the market yesterday when it said handset units fell 27% in the second quarter. However, the group, in the midst of a turnaround, saw some margin improvements quarter-on-quarter.
The group said yesterday that net sales fell 24% year-on-year and 3% quarter-on-quarter to EUR5.7 billion. Nokia generated negative cash from operations, losing EUR196 million compared to a gain of EUR102 million in the previous quarter.
However, operating margins from its device unit improved to minus 1.2% from a negative margin of 11.8% in the previous quarter. Nokia Siemens Networks (NSN), which Nokia is buying out, reported operating margins of 0.3%, from a negative 6.8% in the first quarter.
It ended the period with net cash of EUR4.1 billion. Standard & Poor's has dropped Nokia's rating to the level below junk and is now characterising it as "highly-speculative". Moody's has Nokia at the last notch before "highly-speculative", but warns it could be further downgraded, and Fitch is at the same rating.
Standard & Poor's move came after Nokia said it would buy out half of NSN for EUR1.7 billion, taking its stake to 100%, but causing the rating agency to have concerns over Nokia's free cash flow.
High hopes
During the second quarter, Nokia sold 7.4 million smartphones, a 27% year-on-year drop, and 53.7 million mobile phones, also a 27% drop on the same quarter in 2012. Nokia has migrated from Symbian to Lumia and saw Lumia volumes grow from 4 million last year to 7.4 million in the current quarter, while Symbian sales are about zero.
CEO Stephen Elop says the mobile phone business started showing some signs of recovery in the latter part of the second quarter following a difficult start to the year. "Also, towards the end of the second quarter, we started to ship the Asha 501, which brings a new design and user experience to the highly competitive sub-$100 market."
Elop says, although Nokia is encouraged by the reception to its innovation, the mobile device unit plans to take action to focus its product offering and improve product competitiveness.
"Overall, Lumia volumes grew to 7.4 million in the second quarter, the highest for any quarter so far and showing increasing momentum for the ecosystem. During the third quarter, we expect that our new Lumia products will drive a significant part of our smart devices revenue."
Not impressed
Zacks Equity Research writes in a blog that Nokia's results were mixed in the quarter and it continues to lose market share in the mobile device market, despite witnessing sequential growth of its flagship Lumia series of smartphones.
Zacks says the quarterly adjusted earnings per share were better than expected, but net revenue was well below its consensus estimate. "Ever since Apple's iPhone hit the market, Nokia is facing distressing times. The situation further aggravated once Google launched its Android software and several handset manufacturers adopted the operating system."
Sasha Naryshkine, Vestact analyst, doubts that Nokia has anything mind-blowing technology-wise in the pipeline and comments its phones are out of favour. He says its revival has been short-lived and the drop has come over the past year.
Over the past five years, Nokia shares have lost 85%, although the stock is 120% higher in the last year, says Naryshkine. He does not see buyers of the stock "in a great hurry".
According to Reuters, the stock lost as much as 6% during the day, but it closed only slightly lower than its open price after having recovered. The share ended at $4.03, $0.01 or 0.25% lower, before losing another $0.03 in after-hours trade.
Naryshkine points out that Google makes enough "spare" cash to buy Nokia out in any given year, but he doubts Google would want the company.
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