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Earnings Preview: Nokia Corp.

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Nokia Corporation (NOK - Free Report) is slated to release its third-quarter 2012 results on Thursday, October 18, before the opening bell. The current Zacks Consensus Estimate for the quarter is a loss of 12 cents, representing a massive decline of 405.26% from the year-ago quarter.

We believe the bearish momentum on the stock is based on the fact that the company has failed to improve its smartphone sales amidst stiff competition from its rivals – like Apple Inc. (AAPL - Free Report) and Samsung Electronics Co – despite repeated efforts. 

With respect to earnings surprises, Nokia has outperformed the Zacks Consensus Estimate in three out of the four quarters with an average beat of 121.32%.

Second Quarter Recap

On July 19, Nokia reported its second-quarter 2012 financial results. Quarterly net loss was approximately $1,964 million or a loss of 49 cents per share compared with a net loss of $523 million or 10 cents per share in the prior-year quarter. However, adjusted Earnings Per Share (excluding special items) of a loss of 10 cents per share in the reported quarter was better than the Zacks Consensus Estimate of a loss of 11 cents.

Quarterly net revenue was approximately $9,689 million, down 19% year over year. However, revenue surpassed the Zacks Consensus Estimate of $9,333 million. Operating margin in the second quarter was a negative 11%, far worse than a negative 5.3% in the year-ago quarter. Nokia sold 10.2 million smartphones in the second quarter of 2012 as compared to 50.2 million and 26 million smartphones by Samsung and Apple, respectively.

Agreement of Estimate Revisions

In the last 30 days, out of the 19 estimates, there were no revisions in either direction for the third quarter. For the fourth quarter of 2012, out of the 18 estimates, no upward revision was witnessed, while one estimate revised downward over the same time frame.

For 2012, in the last 30 days, out of the 19 estimates, only one estimate revised the estimate upward while 2 estimates moved in the opposite directions. For 2013, out of the 23 estimates, none have revised their estimates upward, while two have revised downward over the same period.

Magnitude of Estimate Revisions

Over the last 30 days, the current Zacks Consensus Estimate has improved only by a penny to a loss of 12 cents for the third quarter of 2012. However, there was no change for the fourth quarter estimate over the same time period. While there was no change in the Zacks Consensus Estimate for 2012 over the last 30 days, the estimate deteriorated by 2 cents for 2013.

Our Take

Currently, Nokia is losing market share to Apple Inc.’s iPhone and an array of smartphones that run on Google Inc.’s Android operating system. In spite of teaming up with Microsoft Corporation (MSFT - Free Report) to develop Windows-based smartphones, the company’s performance was not up to the mark and going forward faces tough competition from Asian manufacturer Samsung Electronics Co. and HTC Corp., who have recently come up with their own Windows-based smartphones.

However, Nokia is still a strong brand and possesses a strong portfolio of 30,000 patents and around 10,000 patented innovations in its arsenal. The company is trimming its patent assets to improve its cash position. Furthermore, management has opted for another 10,000 headcount reduction and plans to close down three facilities, which we believe will help the company to improve its margins going forward.

We maintain our long-term Neutral recommendation on Nokia Corp. Also, NOK has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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