Nokia Earnings: What to Expect After the Microsoft Deal

Nokia (NOK -0.27%) will release its quarterly report on Thursday, and investors continue to celebrate the deal the handset pioneer made with Microsoft (MSFT -2.45%) to sell off the core unit. Even though the new Nokia will continue to face competition from Alcatel-Lucent (NYSE: ALU), Ericsson (ERIC -0.76%), and others in the network infrastructure market, Nokia hopes that its restructured operations will have more growth potential after the Microsoft deal than it had before.

For a long time, Nokia led the mobile industry, with its mobile phones being ubiquitous around the world. But when the smartphone revolution came, Nokia fell behind, and casting its lot with Microsoft in a Windows Phone partnership proved insufficient to pull Nokia up from its share-price funk. After the Microsoft sale, though, Nokia will have billions of dollars to use to grow its key Nokia Solutions and Networks business. Let's take an early look at what's been happening with Nokia over the past quarter and what we're likely to see in its report.

Say goodbye to Nokia's past, as former CEO Stephen Elop leaves as part of the Microsoft deal. Photo source: Microsoft.

Stats on Nokia

Source: Yahoo! Finance.

Where will Nokia earnings go next?
In recent months, analysts have had mixed views on Nokia earnings, cutting $0.02 per share from their fourth-quarter estimates but adding twice that to their full-year 2014 projections. The stock has added to its big gains from after the Microsoft deal was announced, rising another 12% since mid-October.

Nokia's third-quarter earnings report gives some hints about what the post-Microsoft Nokia will look like. Revenue for the Nokia Solutions and Networks division dropped 26% from the year-ago quarter, with a 33% decline in adjusted operating profit pointing to difficult times for the unit. Yet investors still cheered the fact that the NSN unit was actually profitable, pointing to better times for Nokia once it unloads its money-losing handset business. With mobile-phone sales falling 27% from year-ago levels, Nokia is clearly looking at the door when it comes to the long-struggling division.

But Nokia surprised many investors by choosing not to move forward with a potential merger with Alcatel-Lucent. For months, many speculated that a merger would help the post-Microsoft Nokia compete more effectively against Ericsson and Chinese competitor Huawei in the network infrastructure business. Yet in November, the rumored deal reportedly came off the table over concerns about the compatibility of the two companies. Given the struggles that Alcatel has had with debt and tough business conditions, the failure of a merger to go forward isn't all that surprising.

Moreover, Nokia has had some early signs of success with its business. It got a part of a Sprint contract to build out its Spark LTE network, showing the advantage Nokia has over Huawei in capturing U.S.-carrier business. The end of major projects in South Korea and Japan will pressure sales, though, forcing Nokia to consider taking on less profitable business just to maintain revenue. Nokia is still forecasting profit margins higher than Ericsson's, but the future trend could be toward lower-margin business.

In the Nokia earnings report, look for the latest update on when the Microsoft deal will finally close. Once the deal is done, Nokia can turn its attention fully toward choosing its strategic direction for the future as a slimmed-down player in the potentially lucrative wireless-network infrastructure industry.

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