MSI Motorola Solutions Inc

Nokia Corp. (NOK), the largest mobile phone manufacturer of the world, declared its first-quarter 2011 financial results, beating both the top line and bottom line of the Zacks Consensus Estimates. Today Nokia entered into a definitive agreement with Microsoft Corp. (MSFT) to develop a smartphone ecosystem. Last February, Nokia announced that it has decided to use Windows Mobile 7 software as an operating system for all its future smartphones.

In another positive development, Nokia Siemens Network, the 50-50 joint venture between Nokia and Siemens AG (SI) received the Chinese regulatory clearance to acquire wireless network infrastructure assets of Motorola Solutions Inc. (MSI). This was the last hurdle for this long pending deal.

Quarterly net revenue was approximately $14,214 million, up 9% year over year and also above the Zacks Consensus Estimate of $13,751 million. All the three business divisions of Nokia reported year-over-year revenue growth.

Quarterly net income was approximately $470 million or 13 cents per share compared with $477 million or 13 cents per share in the prior-year quarter. The first quarter of 2011 adjusted (excluding special items) EPS of 18 cents was significantly above the Zacks Consensus Estimate of 13 cents.

Quarterly operating income was approximately $962 million, down 14% year over year. Operating margin in the first quarter was 6.8% compared with 8.6% in the year-ago quarter. Operating cash flow in the reported quarter was a negative $237 million.

At the end of the first quarter of fiscal 2011, the company had around $8.75 billion of net cash and marketable securities compared with $9.52 billion at the end of fiscal 2010. At the end of the first quarter of 2011, Nokia’s net debt-equity ratio was a negative 40% compared with a negative 31% at the end of the year-ago quarter.

Devices & Services Segment

Quarterly revenue was approximately $9.687 million, up 9% year over year. The increase was attributable to higher volumes in most regions driven by stronger demand and higher average selling price (ASP). In the reported quarter, ASP was around $89, up 4.8% year over year but down 5.8% sequentially. However, gross margin was 29.1% compared with 32.4% in the prior-year year. Adjusted operating margin was 9.8% compared with 12.1% in the year-ago quarter.

In the first quarter of 2011, Nokia shipped 108.5 million mobile handsets, up 1% year over year but down 12% sequentially. However, Nokia shipped a higher percentage of high-margin converged mobile devices in the same quarter. The company shipped 24.2 million converged mobile devices (smartphones and tablets), up 13% year over year but down 14% sequentially.

Nokia Siemens Network Segment

Quarterly revenue was approximately $4,334 million, up 17% year over year. Increase in revenue is mainly due to higher sales in Greater China, Latin America, and Asia-Pacific regions. However, adjusted operating margin was 0.1% compared with 0.6% in the prior-year quarter.

NAVTEQ Segment

Quarterly revenue was approximately $317 million, up 23% year over year. The increase was due to improved conditions in the automotive industry and growth in mobile devices sales. Adjusted operating margin was 23.3% compared with 21.7% in the year-ago quarter.

Future Industry outlook

Nokia is expecting its second-quarter 2011 revenue for the Devices & Services segment to be within the range of approximately $8.34 billion - $9.02 billion. The company expects an adjusted operating margin of 6%-9% in its core Devices & Services segment in the second quarter of 2011. The second-quarter 2011 revenue for the Nokia Siemens Networks is expected between $4.4 billion - $4.8 billion. Adjusted operating margin is expected to be around 1%-4% in the same quarter.

Recommendation

Nokia’s free fall in the smartphone market is continuing owing to huge competitive threat from Apple Inc. (AAPL), Research In Motion Ltd. (RIMM), Samsung, and HTC. More dangerous signal is that the company is quickly losing its market share in the emerging markets to low-cost Chinese, Taiwanese, and Indian handset developers. These are the key markets for the company’s future sustainability. We maintain our long-term Neutral recommendation on Nokia. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

 
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