Nokia Corporation (ADR) (NOK) Q4: Mixed Results, Declining Margins

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BMO Capital Markets analysts Tim Long, Alex Spektor and Ari Klein rate Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) as Market Perform as the smartphone maker announces mixed results with solid top-line figures for NSN and HERE.

Nokia’s earnings

Results for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) were mixed, with solid top-line figures for NSN and HERE and weakness in Advanced Technologies and the discontinued handset business. March guidance was a bit weak, putting pressure on the back end to meet full-year targets. We expect NSN revenues to decline slightly in 2014 after an 18% drop in 2013, with operating margins down 150 – 200 bp. We are discouraged by the outlook for the now independent Advanced Technologies IPR licensing business. We believe guidance implies no growth in 2014 (ex-MSFT), which followed no growth in 2013.

Operating margins in the low 60% range were not as high as we would have expected, either. The HERE business is struggling as well, with margins likely lower again in 2014. We are changing our 2014 EPS estimates from EUR0.35 to EUR0.19 and introducing a 2015 EPS estimate of EUR0.23. Our model assumes that the Microsoft Corporation (NASDAQ:MSFT) deal closes in Q1 and that Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) starts a meaningful stock repurchase program in Q2.

Impact and Analysis

Each of the three major businesses saw revenues decline in 2013, and we don’t expect much of a top-line rebound this year. We are most concerned about declining margins in NSN as the company gets more aggressive and in the lack of growth in royalty revenues.

Valuation and recommendation for Nokia

Our price target of US$6.50, down from US$7, assumes that Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) trades at 20x the 2015 pro forma EPS of US$0.32. We rate NOK shares Market Perform.

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