Nokia Wakes Up

Nokia last week reported weak fourth quarter earnings and provided a weak outlook as its market share continues to decline in a competitive market. This was the first full quarter under the new CEO, Stephen Elop. Last quarter, Elop announced plans to restructure Nokia’s smartphone business by cutting 1,800 jobs, and this quarter he acknowledged the need for a strategy change in a fast-changing and highly competitive industry.

Nokia’s Financials
Nokia reported fourth quarter revenue of €12.65 billion ($17.34 billion), up 6% y-o-y and 23% q-o-q. Operating profit was €884 million ($1.2 billion) or €0.20 per share compared to €114.1 million ($155.2 million) or €0.26 per share last year. For the full fiscal year 2010, revenue was down 3.6% to €42.46 billion ($57.84 billion) versus €40.984 billion ($55.76 billion) last year. Operating profit was €2.07 billion ($2.82 billion) or €0.50 per share versus €1.197 billion ($1.64 billion) or €0.24 per share last year. The company ended the year with liquidity of €12.3 billion ($16.7 billion).

During the fourth quarter, total mobile device volumes were down 3% y-o-y and up 12% q-o-q to 123.7 million and convergence device shipments were up 36% y-o-y and 7% q-o-q to 28.3 million. Mobile phone ASP was €43, up €1 from last quarter and €3 from last year. Converged mobile device ASP was €156, up €20 from last quarter but down €30 from last year.

Nokia seems to have fared better in the converged device category this quarter than the previous quarter. The Nokia N8, the first of the new Symbian devices, started shipping at the end of Q3, and Nokia says it delivered a solid performance in Q4. Following the N8’s success, Nokia introduced the Nokia C7 and the C601, and in total shipped more than 5 million new Symbian devices in Q4, helping it to deliver a better mix of sales and higher ASPs than in Q3. In the low to mid range, the Nokia C3 QWERTY device continued to see strong demand in Q4 and was one of the top contributors to overall revenues and gross profits.

Devices & Services net sales increased 4% to €8.5 billion. Devices & Services gross margin was 29.2%, down from 34.3% in Q4 2009 and up from 29% in Q3 2010. Shipments decreased across all regions except Greater China, where they increased 24%. North America led the decline with 32% decline to 2.6 million. Latin America, which showed double-digit growth of 20% last year, declined 2% to 12.2 million.

For the first quarter, Nokia expects Devices & Services sales to be €6.8 billion to €7.3 billion. The stock is trading around $10.5 after hitting a 52-week low of $8 on June 29.

Declining Market Share Calls for Strategy Change
Nokia’s preliminary estimated mobile device market share was 31% in the fourth quarter 2010, down from an estimated 35% in the fourth quarter of 2009 and up from an estimated 30% in the third quarter 2010. Nokia’s preliminary estimated share of the converged mobile device market was 31% in the fourth quarter 2010, compared with an estimated 40% in the fourth quarter 2009 and an estimated 38% in the third quarter 2010. According to IDC, Nokia’s mobile device market share in Q4 2010 was 30.8%, down from 37.2% in Q4 2009. IDC reports that the company’s share in the third quarter was 32.7%, down from 38.3% in 3Q09.

Nokia’s market share has been on the decline ever since Apple launched the iPhone in 2007. The Android effect has added to its troubles and contributed to the erosion of its market share. Vendors like Samsung, HTC, and even Motorola have been riding high on the Android OS. With Elop’s announcement, it seems that Nokia is finally waking up to the need to reinvent itself and its OS. Strategy changes are to be announced in February. During the earnings call, Elop said,

“In short, our industry changed, it’s time for Nokia to change faster. Therefore, on February 11th we will present Nokia’s strategic direction. Today, I will provide you insight into the framework upon which we are making our decisions.

One, we must consistently deliver a great product. Our success must begin and end with winning products. Of course today’s product is more than just a great device, which leads me to number two. Nokia must compete on an ecosystem to ecosystem basis.

In addition to great device experiences we must build, capitalize and/or join a competitive ecosystem. The ecosystem approach we select must be comprehensive and cover a wide range of utilities and services that customers expect today and anticipate in the future.”

What does joining a competitive ecosystem indicate? Which ecosystem would it be?

Based on the comments in the earnings call, Gustav Sanstrom on WSJ reports that analyst Geoff Blaber at research firm CCS Insight thinks the most likely option would be Google’s Android:

“Still, while Android has a lot of traction right now, the competition in that segment is extremely tough, and Android-based devices may be hard to differentiate, so it’s not obvious that adopting the platform would be Nokia’s best strategic step,” said CCS Insight’s Mr. Blaber.

And while some market watchers have criticized Symbian’s user interface for being old-fashioned compared with Android’s, at least Nokia’s new line-up of Symbian smartphones, including the N8 flagship, generated pretty strong sales over Christmas, helping Nokia to report stronger-than-expected earnings for the past quarter.

Of course Mr. Elop’s previous employer, Microsoft, has produced its own mobile operating system, but according to Mr. Blaber the Android eco-system is much bigger than Windows Phone 7 and a switch to the bigger system is far more likely.”

Android has been adopted by many vendors, including Samsung, HTC, and Motorola, and has helped them take on the iPhone’s challenge. But, as Blaber points out, differentiation could be another roadblock for Nokia.

Another option is Microsoft, which is less proven in the marketplace but could still help Nokia get a foothold in the U.S. market. Matthaus Krzykowski on VentureBeat reported back in September that there are rumors of Nokia’s embracing Microsoft Windows Phone 7 as an additional platform. In December, Ryan Kim on GigaOM discussed talks between Nokia and Microsoft and added that

“Microsoft’s OS may be a more attractive alternative than Android for Nokia. It is, despite some deficiencies, very polished and it would seem to have fewer patent concerns, something Google’s Android is having to deal with. And it could give Nokia a way to break into the U.S. market, where it has almost no presence. Nokia has great hardware; it just needs some good software. Meanwhile, Microsoft could use all the support it can get in trying to become relevant on smartphones again.”

Embracing another OS would be a good move for the limping company. As I said last quarter, Nokia needs to reinvent itself and do away with Symbian altogether. With a cleaner OS strategy, it should focus on the North American market, the pulse of the smartphone industry.