Hits & Misses: A look at Nokia’s Interim Report for Q2 2013 and January-June 2013

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On Thursday July 18, 2013, Nokia released its second quarter 2013 and January – June 2013 interim report, which is available here.

After a brief analysis of the report, here is our take on the company’s operations, categorised as either “HITS” (positive) aspects or “MISSES” for negative portions of the document.

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Hits

 

Misses

 

1 The Nokia Group achieved underlying operating profitability for the fourth consecutive quarter, with a Q2 non-IFRS operating margin of 5.3%, driven by strong performance of Nokia Siemens Networks (NSN). Nokia Group net sales in Q2 2013 were EUR 5.7 billion, down 3% quarter-on-quarter
2 The Group ended Q2 with gross cash of EUR 9.5 billion and net cash of EUR 4.1 billion. NSN’s contribution to Nokia Group gross and net cash was EUR 2.5 billion and EUR 1.4 billion respectively. Devices & Services Q2 net sales decreased 6% quarter-on-quarter to EUR 2.7 billion.
3 NSN achieved underlying profitability for the fifth consecutive quarter, with a Q2 non-IFRS operating margin of 11.8%, reflecting record non-IFRS gross margin and continued progress relative to its strategy, exceeding the earlier expectation of 5%. Mobile Phones Q2 volumes decreased 4% quarter-on-quarter to 53.7 million units.
4 Devices & Services achieved Q2 non-IFRS operating margin of negative 1.2%, which was consistent with the earlier expectation for approximately negative 2%, plus or minus four percentage points. Nokia Group net sales for the first half 2013 decreased 22% year-on-year.
5 HERE achieved Q2 non-IFRS operating margin of 3.4%. This exceeded the earlier expectation for a negative non-IFRS operating margin. HERE’s Q2 net sales increased 8% quarter-on-quarter to EUR 0.2 billion. In Q2 2013, Nokia Group’s total cash and other liquid assets decreased sequentially by EUR 649 million and Nokia Group net cash and other liquid assets decreased by EUR 413 million.
6 NSN’s Q2 net sales decreased 1% quarter-on-quarter to EUR 2.8 billion, reflecting Nokia Siemens Networks’ focused strategy. Net sales decreased in all regions primarily due to lower sales in our Mobile Phones business unit. The largest year-on-year decline in net sales was in Greater China followed by Asia Pacific, Middle East & Africa and Latin America. In Greater China and Europe the net sales declines were primarily due to lower sales in Nokia’s Smart Devices business unit whereas in Asia Pacific, Middle East & Africa and Latin America the net sales declines were primarily due to lower sales in the firm’s Mobile Phones business unit.
7 Lumia Q2 volumes increased 32% quarter-on-quarter to 7.4 million units, reflecting strong demand from customers for a broadened Lumia product range. The year-on-year decline in Nokia’s Smart Devices volumes in the second quarter 2013 continued to be driven by the strong momentum of competing smartphone platforms and its portfolio transition from Symbian products to Lumia products, primarily due to lower Symbian volumes, partially offset by higher Lumia volumes. Symbian volumes decreased from 6 million units in the second quarter 2012 to approximately zero in the second quarter 2013 while Lumia volumes increased from 4.0 million in the second quarter 2012 to 7.4 million in the second quarter 2013.
8 In Q2 2013, Nokia received a quarterly platform support payment of USD 250 million (approximately EUR 192 million) from Microsoft. Nokia’s Mobile Phones volumes in the second quarter 2013 were negatively affected by competitive industry dynamics, including intense smartphone competition at increasingly lower price points and intense competition at the low end of its product portfolio. Compared to the second quarter 2012, Nokia’s Mobile Phones volumes declined across its portfolio, most notably for the non-full-touch devices that it sells to customers for above EUR 30, partially offset by higher sales volumes of Asha full-touch smartphones.
9 Devices & Services non-IFRS research and development expenses decreased 37% year-on-year in the second quarter 2013. The non-IFRS research and development expenses decreased 8% in the second quarter 2013, primarily due to reductions in certain Mobile Phones-related activities, ramping down Symbian and MeeGo research and development efforts and overall cost controls.Devices & Services non-IFRS sales and marketing expenses decreased 38% year-on-year in the second quarter 2013. Overall, the decline in the Nokia Group net sales in the first six months of 2013 resulted from lower net sales in Devices & Services, as well as lower net sales in Nokia Siemens Networks and HERE. Within Devices & Services the net sales of Mobile Phones declined more than net sales in Smart Devices. Mobile Phones net sales decline was due to lower volumes and ASPs, affected by competitive industry dynamics, including intense smartphone competition at increasingly lower price points and intense competition at the low end of our product portfolio.
10 Sales and marketing expenses declined primarily due to overall cost control, a lower cost base as a result of business divestments, headcount reductions and lower product-specific marketing. Devices & Services non-IFRS sales and marketing expenses increased 5% in the second quarter 2013. Sequentially, sales and marketing expenses increased primarily due to higher marketing spending in support of newly launched Lumia and Asha products, partially offset by lower accrued incentive expenses consistent with Devices & Services business performance.
11 At the end of the second quarter 2013, Devices & Services and Corporate Common had approximately 31 400 employees, a reduction of approximately 12 200 compared to the end of the second quarter 2012, and approximately 200 compared to the end of the first quarter 2013.
12 The increase in Smart Devices volumes in the second quarter 2013 was due to higher Lumia volumes, as the firm started shipping the Lumia 520 and 720 in significant volumes. In the second quarter 2013, the vast majority of Smart Devices volumes were from Windows Phone 8-based Lumia products.
13 During the second quarter 2013, Nokia shipped 53.7 million Mobile Phones units, of which 4.3 million were Asha full-touch smartphones. During the second quarter 2013 it nnounced the new Asha 501 and started shipments in mid-June
14 Nokia started production at its new manufacturing facility in Hanoi, Vietnam, which has been established to produce the affordable Asha smartphones and feature phones.
15 Nokia was ranked ninth in Interbrand’s Best Global Green Brands survey, ahead of all its peers in the mobile industry.
16 The Windows Phone Store continued to strengthen in terms of the quantity and quality of applications. The Windows Phone Store now offers more than 165 000 applications and games.
17 Nokia started shipping in volumes the Nokia Lumia 520, its most affordable Windows Phone 8 smartphone, delivering experiences normally found only in high-end smartphones, such as the same digital camera lenses found on the Nokia Lumia 920, Nokia Music for free music out of the box and even offline, and HERE services.