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If you missed Tuesday's Q3 earnings announcement from Nokia (NOK 5.19%), the 10% jump in its stock price for the day is a pretty good indication of how the quarter went. That's great news for Nokia fans, and you can bet the folks over at Microsoft (MSFT +2.05%) are loving it, too. With the $7.2 billion deal to acquire Nokia's devices and services unit expected to close in Q1 of 2014 -- assuming shareholders at the special meeting scheduled for Nov. 19 give the go-ahead -- Microsoft is keeping a close eye on Nokia's mobile sales.
What has Microsoft whooping it up after Nokia's 2013 Q3 announcement is largely Nokia's Lumia sales. No, Nokia didn't sell a record-setting 33.8 million smartphones like its iFriend did, but Apple's not the measuring stick -- yet. Right now, what Microsoft's looking for from Nokia, before taking over the smartphone reins for good, is positive momentum. And that's exactly what it got.
The good news
For Nokia, the world won't revolve around smartphones much longer. That means there's a lot riding on Nokia Solutions and Networks, or NSN, and to a lesser extent its HERE mapping unit, as well as the Advanced Technologies division. But NSN is the big one, and Nokia reported a solid, if not spectacular, third quarter in broadband and service-related revenue.
On the downside, NSN sales dropped both year over year and sequentially by 26% and 7%, respectively. Operating profit on a non-IFRS basis, which is akin to non-GAAP results that remove one-time and extraordinary items, also dropped in Q3 by a whopping 33% compared to 2012's third quarter. So, what's the good news? In spite of what Nokia said were pressures brought on by seasonality and a change in strategic focus, NSN was its one profitable unit, which makes six quarters in a row.
NSN's non-IFRS operating margin dropped a bit compared to last quarter to 8.4%, but according to guidance included in Nokia's earnings report, margins should jump to a very respectable 12% in Q4 of 2013. The improvement, according to Nokia, will come as a result of new network deployments, seasonality, and most important, continued efficiencies gained under its restructuring initiatives.
The better news
Though the number of mobile phones sold in Q3 dropped to 55.8 million units from last year's 76.6 million, sequentially Microsoft -- I mean, Nokia -- actually improved by 4% over Q2's 53.7 million mobile phones. Not bad when you consider so much emphasis (and marketing expense) is directed toward the Lumia line of smartphones running Microsoft's Windows Phone OS. And that's where Nokia really made a splash and why Microsoft should be thrilled.
The 8.8 million Lumias Nokia sold last quarter blew away last year's results by an impressive 40%. Better still, that was a 19% jump from the prior quarter and now we're heading into the all-important holiday season, so the upward trend should continue. What that means to prospective Microsoft investors is that its soon-to-be-theirs smartphone division is gaining momentum, and at this stage of the smartphone game, that's all anyone could ask for.
Foolish final thoughts
Nokia's Q3 demonstrates its transformation, and by extension Microsoft's, is making headway. By no means are the reinvented partners out of the woods; making a dent in Apple's dominance is going to be a long, uphill climb for Microsoft. But even with its commitment to mobile, the opportunity for Microsoft investors goes beyond smartphones, tablets, and phablets: One look at its 103% jump in commercial cloud revenue in its recently announced fiscal Q1 is evidence of that.
For Nokia, successfully implementing such a dramatic change in business focus will continue to challenge interim CEO Risto Siilasmaa, and whoever takes the reins permanently. But with NSN beginning to fire on all cylinders, Nokia'ssm ridiculously valuable patent portfolio, and a strong cash position, Nokia's future is looking brighter than it has in months, if not years.
