Nokia's cash reserves hold up despite big loss

by Reuters    Jul 20, 2012

NokiaAiling mobile maker Nokia is not burning through its cash as quickly as feared, it revealed on Thursday, as it turned in another thumping loss.

As the company tries to arrest a decline in a smartphone market dominated by Apple’s iPhone and Samsung’s Galaxy models, it has been burning through money at a rate that would clean it out in a couple of years.

But at the end of the second quarter alongside a 1.53 billion euros loss, Nokia said it had net cash of 4.2 billion euros, compared with a market estimate of 3.7 billion euros.

The shares rose 18 percent on the news. They are down 80 percent since February 2011 when new Chief Executive Stephen Elop announced a shift to the largely untried Microsoft Windows phone operating system.

Quarterly sales of Nokia’s new Lumia phones, which run the Microsoft software, doubled from a low base in the previous quarter, but have yet to grab share back from Apple and Samsung Electronics in the most profitable part of the mobile market.

Analysts views were mixed. Some saw a ray of hope in the figures while others said the quarterly result was more proof of an inexorable decline, with some speculating that Elop’s days were numbered if there is no change by year-end.

Nokia reported a second-quarter net loss of 1.53 billion euros, or 0.08 euros a share when adjusted for one-off items, compared with the market’s average forecast for a loss of 0.09 euros a share.

“Clearly, our financial performance is not acceptable,” Nokia’s CFO Timo Ihamuotila conceded. The company is trying to improve its finances by cutting 10,000 jobs globally and focusing spending in areas like research and development that it hopes will generate a payback.

Its net cash of 4.2 billion euros is still down from 4.9 billion euros three months earlier.

Nokia generated 102 million euros of cash from operating activities in the quarter, but paid out 742 million euros in annual dividends to shareholders.

The cash position was helped by the contribution from Nokia Siemens Networks, its telecoms gear joint venture with Siemens, which reported better-than-expected profit and forecast improvement in the third quarter, in contrast with struggling rivals like Alcatel-Lucent.

Details showed that advance royalty payments of 400 million euros had put a gloss on its cash position, but Nokia shares were nevertheless up 12 percent at 1.535 euros at 1543 GMT.

“After a seemingly endless run of bad news, these results offer a glimmer of hope for Nokia,” said Ovum analyst Nick Dillon.

The gains were helped also by short-sellers rushing to close their positions as many investors had made a bet on further falls in the stock price.

Spreads on Nokia’s bonds tightened following the results, and five-year credit default swaps (CDS) on Nokia debt fell to 1,173 basis points, according to Markit.

This means it costs $1.2 million annually to buy $10 million of protection against a Nokia default using a five-year CDS contract, implying a default probability of 64 percent.


Nokia forecast its third-quarter loss in the phone business would be just as steep as the second quarter, an outlook that was worse than analysts had expected.

“I don’t think there’s anything fundamentally fixed,” said Lee Simpson, analyst at Jefferies & Co.

In the third quarter, Nokia is likely to struggle to sell its Lumia phones after Microsoft announced a software upgrade that will not apply to existing Windows Phones.

Juha Varis, who holds Nokia shares as part of the Danske Invest Finnish Equity Fund, said he was worried Nokia had placed all its bets on Windows Phone, which wasn’t yet showing it could help reverse Nokia’s fortunes.

Nokia sold 4 million Windows phones in the second quarter, still only a fraction of Apple’s expected sales of 30 million iPhones or Samsung’s 50 million smartphones.

“I think currently the company is too dependent on Microsoft. What happens if this marriage ends?” Varis said, adding that Elop was likely to come under pressure to quit if there’s no breakthrough by the end of the year.

“If Windows Phones stay at current levels, I think they have to do a Plan B. They would need to do something drastic, and I think the view is that Elop isn’t that guy,” he said.