Nokia’s Devices Unit Lost $452M In Q1 Before The Microsoft Hand-Off

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Nokia has reported interim results for its Q1, revealing a tough time for its devices & services business unit during in a transitionary quarter as the company worked towards the hand off of that unit to Microsoft.

That multi-billion transaction completed last Friday — sightly later than expected, and also after the close of Q1, meaning Nokia’s results for the quarter include a heading for “Discontinued Operations”; aka the devices & services business now owned by Microsoft.

Not closing the devices & services sale in Q1 also meant Nokia did not end the quarter as cash flush as it had hoped (being as it hadn’t yet been paid by Microsoft). It notes that had the transaction closed in Q1, it would have had ended the quarter with gross cash of approximately 10.5 billion and net cash of approximately 7.1 billion.

Nokia said it expects the increase on the previously agreed transaction price for the devices business unit (of 5.44 billion) to be increased by approximately 170 million as a result of estimated adjustments made for net working capital and cash earnings. This additional amount to be paid by Microsoft will be finalized during Q2, it added.

Turning to the performance of the devices & services business unit in Q1, it had a terrible quarter — making a loss of 326 million (~$452M) on revenue of 1.929 billion. That represents a year-on-year drop in net sales of 30%. While not surprising, given the transitionary nature of the quarter and Nokia’s business focus clearly being elsewhere, it’s an inauspicious hand-off point for Microsoft’s new mobile making business.

Nokia did not break out sales of Windows Phone devices in the Q1 report, as it did not in last quarter’s earning report – although it noted a decline in smart devices sales for Q4. (The WSJ reported Lumia sales last quarter being 8.2 million — so assuming that figure was correct Nokia sold less than 8.2 million smartphones in Q1.)

Nokia primarily blamed the unit’s year-on-year and sequential declines in net sales during the quarter on lower mobile phones net sales, but also “to a lesser extent” lower Smart Devices net sales.

That’s perhaps one bright spark for Microsoft — as Nokia notes higher Smart Devices volumes helped to offset the lower Mobile Phones unit volumes (although, of course, Microsoft owns all Nokia devices now, including the ones that don’t run Windows Phone).

Smart Devices refers primarily to Nokia’s Windows Phone running devices, but is also likely to include the new Nokia X line of forked Android devices. So it may be that sales of Android-based Nokia devices helped stem further losses in Smart Devices.

Nokia also noted that the average selling price for both Mobile Phones and Smart Devices declined on both a year-on-year and sequential basis in Q1. That factor underlines why Microsoft needs to focus on services as it quests for profit with its new phone-making business unit, as hardware margins continue to be squeezed by “competitive industry dynamics” in the mobile space — at both the low and high ends.

As Nokia notes:

On both a year-on-year and sequential basis, our Mobile Phones net sales were 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. Our Smart Devices net sales were affected by competitive industry dynamics including the strong momentum of competing smartphone platforms.

Also today, Nokia named a new CEO — choosing the head of its NSN networking division, Rajeev Suri, who had been widely tipped to take over from interim CEO Risto Siilasmaa (who remains in post as Nokia Chairman).

The performance of the Networks division was a strong point for Nokia, and is its new business nexus post-devices, with a 10% year-on-year rise in non-IFRS operating profit, to 216 million, or 9.3% of net sales, compared to 196 million, or 7.0%, in Q1 2013.

Nokia said underlying operating profitability for all its continuing operations in Q1 increased to 304 million, or 11.4% of net sales, compared to 254 million, or 8.1% of net sales, in Q1 2013.

Nokia has also streamlined the naming of its remaining business units — to Networking (rather than NSN) and Technologies (rather than Advanced Technologies). HERE, its mapping division, remains with the same name.

Nokia said HERE’s external net sales were 185 million, an increase of 13% year-on-year, driven by “strong” sales to vehicle customers. Non-IFRS operating profit was €10 million.

The Technologies division’s external net sales were 131 million, with a non-IFRS operating profit of €86 million. Nokia noted the increased in net sales was primarily due to higher intellectual property licensing income, primarily related to new agreements — noting that it entered a licensing agreement with HTC in the quarter.

Nokia said the Nokia Group ended Q1 2014 with gross cash of 6.9 billion and net cash of 2.1 billion compared to 9.0 billion and 2.3 billion, respectively, at the end of Q4 2013 – with the sequential decline primarily due to repayment of debt facilities totalling approximately 1.8 billion during the first quarter 2014.

(Now that the Microsoft transaction has closed, post Q1, Nokia’s cash position has of course been beefed up by a further 5.44 billion.)

Commenting on the results in a statement, Nokia’s Siilasmaa said: “With the closing of our transaction with Microsoft, Nokia begins a new era. We are confident in our future. Nokia’s vision is to be a leader in technologies which will be important in a world of billions of intelligent connected devices. With our strategic direction now set, our highly talented teams can focus fully on realizing our vision by building on Nokia’s three strong businesses – Networks, HERE, and Technologies. In all three businesses, Nokia has a solid foundation and we continue to see attractive opportunities to invest in growth. Additionally, we will focus on managing our capital effectively, and we have announced a comprehensive 5 billion program to optimize our capital structure.

“In the first quarter of 2014, all three of our businesses delivered solid performance. In particular, we were pleased by the continued strength of Networks’ underlying operating profitability. Under the leadership of Rajeev Suri, Networks has become an innovation leader, with tremendously improved strategic focus and financial results. I believe Rajeev is the right person to lead Nokia forward, and that his passion for technology will help ensure that Nokia continues to deliver technologies that have a positive impact on people’s lives.”