Nokia Corporation (ADR) (NOK) Post-Earnings Analysis: Evercore

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Evercore analysts Mark McKechnie and Zachary Amsel maintain their Equal-Weight ratings for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) as the company announces its Q413 report.

We maintain our Equal-Weight rating and $7PT following Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s Q4’13 report which we view as transformational as it gave new detail in the post-handset financials. Fundamentally, we were disappointed by 1) NSN Q4 margins and near-term outlook, and 2) Advanced Technology outlook, especially with the Samsung settlement. Nokia’s geographic results with a pause in the US partly offset by the ramp in China and Europe were in-line with our early/mid-cycle industry view on the global 4G LTE build.

Nokia’s earning highlight

EPS of 0.08 on 3.48B in sales missed our 0.09 on 3.48B forecast. Sales were in line, but operating margin of 11.7% missed our 13.6% forecast due to lighter AT sales ( 22M of the 65M op. profit miss) and lighter NSN margins (11.2% vs. our 12.0% est – 25M of op profit miss). We note some expectations for a positive ex handset surprise in margins which did not play out. Net cash declined q/q by ~ 100M to 2.3B, in line with our expectations.

NSN 2H’14 loaded

NSN guide calls for Q1 margins of 5% +/- 4% and CY14 margins at the high end of its 5-10% target. Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) expects a seasonally weak 1H’14 for both sales and margins as new projects with Sprint Corporation (NYSE:S), which replaces T-Mobile US Inc (NYSE:TMUS) (peaked in Q3’13) and China Mobile Ltd. (ADR) (NYSE:CHL), represent lower margin coverage builds, and the European cutover to 4G/LTE faces a wind-down of 3G projects. NSN expects a return to y/y growth in 2H’14 as its divestments anniversary in Q2’14.

Samsung arbitration in CY15 could prove incremental

Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) guided AT sales to a run-rate of 600M post the MSFT deal. This marks a disappointment for bulls as 1) it suggests just a net ~ 100M from Microsoft vs. expectations that had been in the 125 – 150M range, and 2) comes despite the Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) settlement. Nokia is tight-lipped on the details, but we think the guide includes conservative contribution from Samsung with upside pending the 2015 arbitration to agree on the amount.

7.6B in net cash post Q1 with the Microsoft deal

Microsoft Corporation (NASDAQ:MSFT)’s 5.44B cash for the D&S business and license agreement should hit in Q1 and thus result in ~ 7.6B in net cash assuming ~ 200M cash burn due to capex, restructuring, and some more D&S remaining losses. For CY14, we model ~ 260M in cash burn from operations/capex, 450M in restructuring costs, and 1B in CFO thus see ~ 8B or $2.76 per share ending net cash.

Lowering forecast for Nokia

We have lowered Our CY14 and CY15 to 0.25 on 12.9B from 0.27 on 13.3B prior and to 0.30 on 13.4B from 0.31 on 13.7B prior.

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