Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) posted better than expected results on the adjusted EBIT level for the second quarter, but “accelerating” decline in revenues for the Nokia Siemens Network (NSN) is a “negative surprise” and adds a “new uncertainty layer, ” says a report from Deutsche Bank by research analysts Kai Korschelt and Johannes Schaller.


NSN revenues missed estimates

Second quarter revenues from Nokia (-25 percent yoy) missed the Deutsche Bank’s estimate by 2 percent while the EBIT at Euro 303 million beat the Deutsche Bank’s estimate of Euro 125 million. 7.4 million Smartphones shipped by the Finnish company was in line with the estimates, but a 13 percent decline in average selling price (ASP) reflects a struggling performance in the high-end smartphones.

Shipments of the mobile phones at 54 million exceeded the Deutsche’s estimate of 44 million, but 8 percent quarterly decline in ASP is a cause of concern. Adjusted EBIT margins at -1 percent also beat the Deutsche Bank’s estimate of -4 percent.

Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) reported NSN revenues of Euro 2.8 billion that missed the Deutsche Bank’s estimate of Euro 3.1 billion, primarily due to weaker Capex in Japan & Europe. However, margins reported by NSN at 11.8 percent beat the Deutsche Bank estimate of 8 percent. As per the guidance provided by the handset maker, report expects the margin to remain broadly stable.

Nokia to face intense competition in low-cost Android smartphones

For the second quarter, 52 percent of D&S revenues and 41 percent of D&S Gross Profit came from mobile phones. According to the report, revenue decline has accelerated to -35 percent year over year compared to 21 percent in 2012, and going forward, with the release of Google’s upcoming Android 5 release, the segment will face intense competition from low-cost Android smartphones. Presently, Android smartphones with greater than $100 price tag are based on outdated versions of Android such as 2011’s ‘Gingerbread/2.3’.

Apart from this, accelerating revenue decline of 11 percent year over year in the second quarter for NSN is a concern for Nokia. Slowing of key markets like Japan and “divestments taking their toll revenue underperformance may be the price to pay for sustainably higher margins,” believes the report.

Analysts believe that Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will have to compensate for the decline in “legacy mobile phones” with the growth in sales of smartphones, which the report believes will be challenging.  Deutsche Bank maintains a “Sell” on the shares with a price target of Euro 2.2