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Nokia reports Q4 profit, but axes dividend and warns of hard times ahead

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Nokia surprised analysts by announcing plans to axe its annual dividend payment in an effort to bolster its cash reserves. The company reported underlying profits in its fourth quarter--its first profitable quarter in a year--and unexpectedly boosted its net cash by €796 million to around €4.36 billion.

For the fourth quarter Nokia reported a net profit of €202 million, a major swing upward from the €1.07 billion loss it posted in the year-ago period. Nokia has been undergoing a major cost-cutting initiative, especially for its key devices and services unit, and announced 10,000 job cuts last June. However, net sales in the quarter fell to €8.04 billion, down 20 per cent from €10.01 billion in the year-ago quarter.

Nokia CEO Stephen Elop told the FT that investors had urged the company to be prudent on cash. "[The dividend cut] goes a way to removing the cloud of liquidity concerns that relates to Nokia," he said.

However, Nokia warned that this improved cash position would likely undergo a reversal with its handset unit liable to post an operating loss for the first quarter. Nokia said that this loss would be equivalent to 2 per cent of sales, with an error margin of plus or minus 4 percentage points, according to Bloomberg.

Elop was undaunted by this likely downturn. "We are still moving through a very challenging transition, but it is the case today that our products are significantly more competitive," he said on a call with reporters, according to Bloomberg. "We've shown how we can effectively balance our cash and liquidity through this period."

The company's share price fell by over 11 per cent to €3.09 as analysts reacted to the news that Nokia's core handset business would soon start burning cash again. Analyst Pierre Ferragu at Bernstein Research also raised the issue that Nokia might soon be asked by Microsoft to start paying fees for using the Windows Phone 8 platform with its Lumia smartphones.

Other industry watchers have called for Elop to change strategy or even leave if no turnaround becomes evident," analyst Mikael Rautanen from equity research firm Inderes told Reuters. "They have had two transition years now, and this year will be yet another one. The ramp-up continues. It has been way too slow."

JP Morgan analyst Sandeep Deshpande registered his frustration with Nokia's progress, telling Reuters: "The turnaround in itself is likely not to be sustainable in the mid- to long-term unless Nokia smartphones show clear trends of gaining traction - which they did not."

Sales of Nokia's Lumia Windows Phone smartphones climbed to 4.4 million in the fourth quarter including 700,000 units in North America, but total handset volumes fell 24 per cent year-over-year to 86.3 million phones. Sales in China plunged 69 per cent to 4.6 million units.

"U.S. volumes are very weak," Evli Bank analyst Mikko Ervasti told Bloomberg, who predicted North America sales of 1.2 million Lumias. "U.S. ramp-up is not going as expected."

For its part, Nokia stated that it had "significant supply issues" with its flagship Lumia 920 device during its fourth quarter. Commenting on the issue, Informa Telecoms & Media analyst David McQueen said this was partly self-inflicted as Nokia feared a potentially costly stockpile of unsold Lumia handsets, but there were also shortages of key components.

"While this is a worry on one hand, it a positive on the other as Nokia's Windows Phone sales could have grown even faster and perhaps now is the time for the company to take the brake off supplying Lumia devices," McQueen said in a statement.

Elop also used the occasion to drop heavy hints that the company might launch a tablet device, saying: "We are watching the market very closely." In particular, he told the FT the company was watching sales of Windows 8 tablets to gauge when would be the right time to launch a Nokia tablet device.

For more:
- see this release
- see this FT article (reg. req,)
- see this Bloomberg article
- see this Reuters article
- see this Informa Telecoms & Media statement

Special Report: Wireless in the fourth quarter of 2012

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