Nokia Corporation (NOK), the largest mobile phone manufacturer in the world, declared solid second quarter 2011 financial results, beating both the top-line and bottom-line expectations. However, loss of market share in the global mobile phone market persisted as the company sold lesser number of handsets.
Second Quarter Highlights
Quarterly net revenue was approximately $13,182 million, down 7% year over year. Reported revenues, however, surpassed the Zacks Consensus Estimate of $13,171 million. Quarterly net loss was approximately $523 million or a loss of 10 cents per share compared with a net income of $323 million or 9 cents per share in the prior-year quarter.
However, adjusted (excluding special items) EPS of 9 cents in the reported quarter was significantly above the Zacks Consensus Estimate of 2 cents.
Quarterly adjusted operating income was approximately $556 million, down 41% year over year. Adjusted operating margin in the second quarter was 4.2% compared with 6.6% in the year-ago quarter. Operating cash flow in the reported quarter was a negative $250 million.
Agreements of Analysts
Of the 24 analysts covering the stock in the last 7 days, none revised their estimates for the third and fourth quarter of fiscal 2011. Similarly, for fiscal 2011 and 2012, in the last 7 days, out of the 29 analysts covering the stock, none revised their estimates upward or downward.
Such cautious stance by the analysts suggests that they prefer to remain on the sidelines till Nokia launches its much-hyped Window Phone 7 based smartphones by the end of 2011.
Currently, the Zacks Consensus EPS Estimate for the third quarter of fiscal 2011 is pegged at a loss of 1 cent, which indicates a loss of 105.26% year over year. The projected annual growth is also negative. Similarly, for the fourth quarter of fiscal 2011, the Zacks Consensus EPS Estimate of 6 cents reflects a loss of 79.58% year over year.
Magnitude of Estimate Revisions
During the last 7 days, the Zacks Consensus Estimate for third quarter 2011 was in line with the current estimate of a loss of 1 cent per share. Likewise, for the fourth quarter of fiscal 2011, the Zacks Consensus Estimate 2011 was in line with the current estimate of 6 cents per share.
Likewise, for fiscal 2011 and 2012, the Zacks Consensus Estimates were in line with the current estimates of 31 and 38 cents, respectively.
Earning Surprises
With respect to earnings surprises, the company’s consistent track record in the last four quarters is expected to persist in the coming quarters. In the last quarter, Nokia produced an earnings surprise of 7 cents or 350%. The ongoing quarter and the fourth quarter contain a downside potential of 100% and 33.33% (essentially a proxy for future earnings surprises), respectively.
Likewise, fiscal 2011 reflect a downside potential of 3.23% while fiscal 2012 reflect 0.00% upside potential.
Our Recommendation
Continuous loss of market share coupled with stiff competition from Google Inc’s (GOOG) Android-based smartphones and Apple Inc’s (AAPL) iPhones are headwinds for the company. Furthermore, delay in the launch of Windows Phone 7 based smartphones may act as negative catalysts for the stock in 2011.
However, increased shipments of Nokia’s dual-sim handsets in the emerging nations as well as aggressive cost reduction steps implemented by the company may act as catalysts for growth going forward.
We, thus, maintain our long-term Neutral recommendation for Nokia. Currently, Nokia has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
Zacks Investment Research
