The cash flow generated at Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V), excluding NSN has declined fast. In 2010, cash from operating activities came in at €4.7bn, which declined to €813mn in 2011 and further to €2.0bn in 2012, according to a report from Bank of America Merrill Lynch.

The turnaround in NSN’s fortunes has helped Nokia group cash flow and masked poor underlying core trends. The cash from operating activities for NSN was + €3 million in 2010, +€324 million in 2011 and +€1,628 million in 2012.

NSN was the key highlight at Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) in fiscal 2012, which generated €1.6bn of cash from operating activities. According to the report there were possibilities that cash would decline in the first quarter of 2013, and D7S margin can come down along with the normalizing of positive working capital.

Working Capital inflows at NSN were €985mn during 2012 (more than 60 percent of the cash generated), which is the reason to believe that peak level of cash generation in 2012 will lost it momentum in 2013.

NSN also acknowledged that they reaped the benefit from the exceptionally large proportion of higher margin software and products in the priority markets thus giving more strength to the conviction that margin could decline in 2013.

Giving an ‘underperform’ rating to Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s stock, the Bank of America report believes there are five major concerns for Nokia.

  • Declining cash flow at Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will even get worse in the first quarter of 2013.
  • There can be cost savings although minimal in D&S.
  • As per market data there could be a decline in the market share of Nokia’s profitable Asha product line and vanishing demand of Windows phone in Europe.
  • Some major product launches by the close competitors, which would be a hurdle in margin expansion for Nokia.

Decline in the Cash flow generated at NSN as margin normalize and working capital is no longer a tailwind.

Chart 1 And 4 NSN

Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) and Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE) together published their first annual report in which a standalone income statement, Balance Sheet and Cash Flow Statement was mentioned. The cash flow statement of NSN was analyzed along with Nokia Core cash flow statement to read the cash flow generation at Nokia without NSN.

There was also some detail mentioned in the annual report of NSN regarding revenue split between mobile broadband (equipment sales and software/capacity upgrades), and Global Services.

NSN established that the profit was earned from sales of an exceptionally large proportion of higher margins software and products in the dominant market. According to BAML, the margins of NSN will decline from the levels experienced during the third and fourth quarter of 2012 (9.2 percent and 14.4 percent respectively) to 7.3 percent for 2013 and 4.7 percent for 2014.