Nokia Turns To North America To Bolster Market Share

Last Thursday Nokia (NYSE:NOK), the world’s leading mobile phone vendor with annual revenue of €50.7 billion, reported declines in its sales, profits, margins, and market share in its second quarter results. The company also cut its 2009 outlook for market share as it faces tough competition in the high-end smartphone sector from Apple, RIM and recently Palm with its innovative release, Palm Pre. However, one bright spot is the change in Nokia’s strategy towards the North American market. Let’s take a closer look.

According to Gartner, Nokia’s Q1 mobile phone market share dropped to 36.2% from 39.1% last year and in the smartphone market, its Q1 share declined to 41.2% from 45.1% last year. RIM’s share increased to 19.9% from 13.3% while Apple’s share doubled to 10.8%. As we have seen earlier, Nokia’s Symbian operating system (OS) is not innovative enough to challenge the iPhone, and as a result its OS market share is also declining. Symbian’s Q1 smartphone OS market share declined to 49.3% from 56.9% last year. Further, analysts say that the company has multiple smartphones but not a single flagship model, which makes it difficult to attract software developers.

Another area that Nokia needs to work on is its applications. After its Ovi Store launch failed to get many positive reviews, Symbian recently announced the launch of the Horizon application publishing platform, which will allow content creators to create, market and distribute mobile applications. Although the program is free, Symbian Foundation will be choosing the applications it decides are good enough to be published. Nokia also announced recently that Accenture will be acquiring Nokia’s Symbian Professional Services unit responsible for Symbian OS customer engineering and customer support.

As for Nokia’s financials, Q1 revenue was down 25% and up 7% q-o-q to €9.9 billion, and below the Street estimate of €10.3 billion. Operating profit declined 71% to €427 million while adjusted EPS was €0.15, in line with expectations. It ended the quarter with total cash of €7 billion and net cash of €1.5 billion.

By segment, Devices & Services revenue was €6.6 billion, down 28% y-o-y and up7% q-o-q on shipment of 103.2 million units, down 15%. Device ASP was down to €62 versus €65 last quarter and gross margin was 34.0%, down from 36.1% last year and up from 33.8% last quarter. Nokia Siemens Networks revenue was down 21% y-o-y but up 7% q-o-q to €3.2 billion. NAVTEQ had net sales of €147 million, up 11% q-o-q.

In our last post, we also discussed how Nokia is losing out on the momentum of the convergence trend due to its lack of focus in the North American market, where its market share is just 6.7%. Nokia is now trying to work on its relationship with US carriers. Nokia’s flip phone, Intrigue was launched on Verizon for $129 with service and its smartphone E71x was available on the AT&T network for $100 with service. As a result, E71 volumes increased 26% q-o-q.

However, the E71 is not a formidable competitor for the iPhone or BlackBerry, the leading smartphones in the US. Its latest release, N97, marketed as a touchscreen mobile computer, would be a better bet. But the phone is losing out in the American market due to its high price point of $600 compared to the $99 iPhone 3G, which is made possible by the huge subsidy from AT&T. Nokia shipped 0.5 million N97 units in June, compared to the 1 million iPhone 3GS units shipped in the first weekend of its launch.

Nokia has announced another smartphone, Surge, on the AT&T network for $79.99 with a two-year contract. It comes with e-mail, downloadable applications, an HTML browser with Flash support, a QWERTY keyboard, and a 2MP camera. But is that enough?

Nokia is increasingly being compared to Motorola for sticking to its aging OS and not being innovative enough. I suggested in my last post that Nokia should consider acquiring Palm, and there were also some rumors hinting that Nokia is working on an Android phone. Though Nokia has denied these rumors, I hope it gets the message that it should either innovate its OS or work on a different OS to get into the big league.

Nokia expects its market share in Q3 to be flat. However, it has cut its market share outlook for 2009. It now expects 2009 market share to be flat compared to an increase earlier. Its shares declined about 15% and have been downgraded by Charter Equity and UBS from Buy to Neutral. The stock is currently trading around $13 with market cap of about $50 billion. It hit a 52-week low of $8.47 on March 9.