Wait, Wasn't That a Good Nokia Quarter?

Last Thursday, Finnish telephony veteran Nokia  (NYSE: NOK  ) reportedits first quarterly profit in almost two years. CEO Stephen Elop waxed poetic about it all: "We are very encouraged that our team's execution against our business strategy has started to translate into financial results," he said. More specifically, Nokia's high-end smartphones are finally getting some traction. The company sold 4.4 million top-shelf Lumia phones in the holiday quarter.

Sounds like great news, right? But it's not all rainbows and unicorns. In fact, Nokia shares plunged as much as 10% on the news and haven't recovered since.

So what's the bad news that overpowered a rare sliver of good tidings? Oh, where do I start?

Net sales in the crucial handset division fell 36% year over year. Improved operating income here comes from deep, deep cost-cutting moves -- not from any kind of market success.

The Lumias may be doing all right, but other Nokia smartphones aren't following suit. Smartphone unit sales dropped by 55% from 2011 levels. Nokia sold twice as many feature phones (think dumb phones) as smartphones this quarter, and average sale prices for the combined basket fell 15%.

Oh, and inventories of unsold handsets are building up to uncomfortable levels. Nokia has six weeks of extra supply on hand, assuming that sales at least stay at current levels for a couple of months.

None of this is sustainable, and Nokia's board of directors has decided to do something about it.

Not something really drastic, like abandon the sputtering Microsoft  (NASDAQ: MSFT  ) Windows smartphone strategy in favor of a proven platform. Oh no, Elop made it very clear that Androids are off the table as long as he's in charge. Elop made a solemn commitment to former employer Microsoft, his company acts as the standard bearer for Redmond's mobile future, and Elop won't be going back on that promise.

No, but Nokia hit "pause" on its dividend this week. Yeah, I know. Ouch.

The move will certainly conserve some much-needed cash for "strategic flexibility," as Nokia puts it. The Finns paid out $1 billion to shareholders last year, and $2 billion the year before.

But it's Nokia's first dividend interruption in 143 years, according to Bloomberg. The uninterrupted dividend stretches back through the mists of time, when Nokia was a tire company, a paper mill, a wheelchair manufacturer, and a maker of electric power transmission cables. Nokia kept the checks coming through two world wars (including a failed Russian invasion of Finland itself), untold recessions, and high water.

But the iron-man streak has ended. Smartphones are killing Nokia, and it needs the cash just to stay afloat. Maybe it's time to jump into yet another totally unrelated industry. Fast food restaurants, maybe? I can see it now -- "Nokia, connecting people to their lunch."

So in the end, the bad news overshadowed the good for real. No wacky random walks down Wall Street this time.

Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next generation of Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.

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  • Report this Comment On January 29, 2013, at 4:29 AM, emuster wrote:

    "Smartphone inventories are building up" - Seriously? No offense but the author seems to be somewhat uninformed. One of Nokia's main problems this quarter has been that they couldn't produce fast enough for the demand. Lumia Win 8 models have been very popular and sold out everywhere. Demand for older Symbian and Win 7 smart phone models has been rapidly declining because of the popularity of the new Win 8 models.Sales of the long awaited Lumia Win 8 models only started in December or January in many markets. Nokia is in the process of transitioning. Even Nokia's "dumb phones" have internet browsers these days and sell great in developing markets. New inexpensive Lumias will be released in February and target countries without carrier subsidies and lower average income- the biggest growth market for smart phones. The falling stock price has been mainly due to the "buy the rumor, sell the news" effect. It's as simple as that. There was nothing in the earning release that wasn't known already beforehand. Short-term investors piled into the stock after the earnig pre-anouncement and have been taking profits after the earnings release. Others got scared and followed suit. Short sellers defend their positons. Those analysts that have been negative on Nokia for a long time could find enough bad points in the earnings release to defend their sell ratings (no Analyst wants to be wrong). All this works together to drive the stock down temporarily but the general uptrend is going to continue.

  • Report this Comment On January 29, 2013, at 4:53 AM, emuster wrote:

    Correction: I cited the author wrongly above. He wrote "handset inventories are building up". However, the picture he's paining is still dead wrong. Sure Nokia isn't completly out of the woods yet - that's why the stock is still priced low - but it definetly turned the corner and is going up.

  • Report this Comment On January 30, 2013, at 3:20 AM, ajaykc wrote:

    "Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next generation of Windows smartphones."

    Can't you come up with a new sentence when you are so called "author" and have time to promote your own agenda?

    Your favorite stock "Apple" tanked more than 12% after it reported its biggest earning in its history. So don't tell me that Wallst. is always smart. If Wallst. was so smart then stocks will never move 10% up or down, because they will always gauge the right price for any stock.

    "Nokia sold twice as many feature phones (think dumb phones) as smartphones this quarter, and average sale prices for the combined basket fell 15%."

    Could you please back up this statement? I thought average selling price (ASP) went up significantly due to the launch of Windows Phone 8.

    Here is an article to support my arguments to buy Nokia shares. Please read it if you have time.

    Someone else called out "inventory building up" error in this article so I don't have to. Lumia 920/820 didn't sell well because enough stock was never built up in stores and customers went back home without a Nokia Lumia 920.

    I for one can testify that I have been waiting for Cyan Lumia 920 and haven't been able to get one.

    I don't think that you understand economics and financials of companies. Nokia shouldn't have paid dividend last year, including this year to conserve cash. Last year, Nokia was priced as if it will go bankrupt and it is still priced at distressed levels. Otherwise a company which has a revenue of like 10 billion/qtr is trading at $4.21? So, if you ask any prudent financial advisor and they will advise what Nokia has already done "to cut the dividend to zero". I hope this information helps you understand. Here is my guess "you don't want to understand" and have an agenda. Sorry but I have to say that.

  • Report this Comment On January 30, 2013, at 4:53 AM, Mobira wrote:

    ""Nokia sold twice as many feature phones (think dumb phones) as smartphones this quarter..."

    86.3 Million devices shipped of which 6.6. Million smartphones.

    "Twice as many"?

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