Nokia's 'better-than expected' results buys it time and options

Nokia's stronger-than-expected quarterly results mean the mobile phone maker now has breathing space and better options to help it claw back a place alongside Samsung and Apple in the smartphone market.

The Finnish handset maker, whose fall from market leader to loss leader was so bad its chief executive said two years ago it was on a "burning platform", may even be in a position to list or sell its Nokia Siemens Networks (NSN) arm at a premium, instead of having to auction assets cheaply as had been feared.

Nokia's improved performance also gives it time to carry on marketing the new Lumia handsets on which it is staking future smartphone success, which were launched in November and have recently gone on sale in crucial markets like China and India.

"Reasonable Lumia volumes and much better margins and guidance in devices could reframe the debate on the longterm sustainability of the handset manufacturing business," said Morgan Stanley analyst Francois Meunier.

NSN looks an attractive proposition both for public investors and private equity firms now that it is posting higher margins and profits on the back of cost cuts and improved sales of higher-margin network equipment gear to operators investing in faster 4G - "fourth generation" - wireless broadband.

NSN's underlying margin was between 13 and 15 percent in the third quarter, beating the forecast 8 percent and helping Nokia trounce market expectations when it posted numbers on Thursday.

Cash from the sale or listing of NSN could then be ploughed back in to investment in Lumia.

Michael Schroder at Finnish investment group FIM and other analysts estimate the business to be worth well above 5 billion euros, although Nokia owns only half of it and could also choose to retain a stake in it.

"A listing could happen sooner than markets expect," said Inderes analyst Mikael Rautanen, adding that he was surprised by the rapid turnaround at the unit which had been struggling to improve profitability. "Going back 6 months, no one would've believed it could have such good margins."

Time to grow
Investors have been growing impatient in the two years since chief executive Stephen Elop announced Nokia's controversial switch to Microsoft Windows software with the statement that its home-grown platform was burning and a drastic change was needed.

With the two-year transition period identified then by Elop almost over, and Nokia's cash position worsening, some had started to make noises about Elop having to leave if no improvement could be identified soon.

Nokia's net cash fell to 3.6 billion euros in September from 4.2 billion in June. Its latest cash position, along with other final details of its fourth quarter results, is due January 24.

However analysts say Nokia's cash position is now less of a concern than a few months ago, helped also by an issuance of 750 million euros in convertible bonds. The company has also been hard at work selling off assets including its headquarters and pushing to win royalty payments on its vast patent portfolio.

Morgan Stanley's Meunier said the stronger performance may m ean Nokia's liquidity improved by 550 to 650 million euros in the fourth quarter. He still recommends an "underweight" in the shares due to an uncertain earnings outlook.

If the market gains more confidence in the survival of Nokia's mobile phone business, analysts said, its shares could rise further.

Since Thursday's announcement, Nokia shares have jumped around 13 percent, but are still below some analysts' price targets.

The stock closed at 3.396 euros on Friday, below the 4.00 euro target by Nordea analyst Sami Sarkamies, who rates them a "buy".

Sarkamies has been studying various scenarios for Nokia's mobile phone business, ranging from a come-back in smartphones to worse outcomes. He said that even in the worst-case scenario of being forced to exit the mobile phone business by the strength of Google's Android phones, Nokia should be valued at 2.7 euros.

Sarkamies joked that Thursday's announcement was Nokia saying "leave me alone, I know what I'm doing" - a phrase coined by another Finnish great, Formula One driver Kimi Raikkonen last year as he brushed off his engineers' advice during the Abu Dhabi Grand Prix.

Raikkonen went on to win the race.

© Thomson Reuters 2012