Nokia Corporation (NOK, Financial) made a surprising return to profit in its third quarter which beat analyst estimates and caused a bullish trend in trading of the company’s stock. Nokia has made some significant changes in its business structure which seem to be paying off. One of the most prominent changes is the sale of its handset division to Microsoft (MSFT, Financial). With the company’s focus set on profitable business segments such as network equipment, Nokia seems intent on enhancing its profitability in the subsequent financial periods resulting in an overall positive outlook for the company’s market performance among investors and analysts.
The business segments that outperformed the analyst estimates were: networks segment, HERE segment, and technologies segment. Nokia’s networks business unit showed a 13% revenue growth, to $3.9 billion. Commenting on its strong earnings, the company said that the financial performance represents its “strong position in a world where technology is undergoing significant change.” One of the core reasons behind the growth in the networks segment is the continuous growth in 4G LTE technologies in China and North America. Consumers are still transitioning from 3G to 4G LTE and the sales of the company’s networking equipment are expected to continue the growth in the subsequent periods. This represents promising outlook for Nokia’s financial performance. The revenue for Nokia’s HERE segment grew 12% year over year, to $313 million; and technologies segment grew 9% year over year, to $201 million. Thus, it can be said that currently Nokia’s driving force is its networks segment and a continuous focus on this segment’s growth will help the company regain the lost ground in the market.
With regard to its financial performance in Q3, the company disclosed a total revenue of EUR 2.9 billion which was higher than Q2’s EUR 2.7 billion. However, the revenue was lower than the company’s revenue in the same quarter in previous year in which the revenue was EUR 3.2 billion. This is because the company sold its handset business, which was at one time the most profitable business of the company, to Microsoft. The most surprising aspect of the company’s financial information for Q3 is its net income, which more than quadrupled from its net income in the previous year. The net income for Q3 was EUR 2.5 billion while the company had disclosed net loss for the previous four quarters. In addition to the growth in its business segments, Nokia acquired a EUR 2 billion tax gain from its businesses in Germany and Finland which gave a major boost to the company’s net income after tax. Figure 1 represents the financial performance of the company for the past five quarters.
Figure 1: Financial Performance of Nokia
(Source: Google Finance)
As Nokia exited the handset business, the company’s competitor landscape has also shifted. Considering the company’s core strength, which is networks segment, the company’s direct competitors are: Alcatel Lucent (ALU) and Ericsson (ERIC). Alcatel Lucent disclosed a net loss margin of 9.27% for the quarter ended in June 2014 while Ericsson reported a net profit margin of 3.56% for the quarter ended in March 2014.
With regard to Nokia’s market performance, the company’s stock price jumped by 6% after the disclosure of unexpectedly positive financial results. Considering the positive outlook surrounding the company, it can be expected the positive trend in market performance of the company will continue in the foreseeable future. At the time of this edition, Nokia’s stock was being traded within the range of $8.28 - $8.50 which the 52-week range of the stock price is $6.64 - $8.73. It can be said that the stock is currently trading near its 52-week high and if the positive trend continues, it may break its 52-week high soon. Figure 2 represents the trend of market performance of Nokia for the past year.
Figure 2: Nokia’s Market Performance
(Source: Google Finance)
Considering the financial and market performance of Nokia, it will not be wrong to say that the company’s decision to scrap its ailing handset business segment was right. By focusing on its more profitable business segments, Nokia may finally be able to bring its financial performance around and regain the financial and market performance that prevailed in the days when Nokia was leading the market in handset business. In view of the positive outlook, Nokia’s stock can be given a ‘buy’ rating because the trend in stock price is expected to continue in the upward direction in the future.
