Nokia Reinventing Itself With Microsoft

Nokia (NYSE:NOK) recently reported first quarter results that beat estimates but gave a disappointing outlook for the second quarter as it is hit by supply chain problems due to the earthquake and related crisis in Japan. And that is not the only hurdle that Nokia has to leap over. Amidst the intense competition in the smartphone market, Nokia’s market share has been declining and for the first time has dipped below 30%. Apple has overtaken it to become the leading vendor by revenue. To reverse its declining market share, Nokia recently announced that it has signed an agreement with Microsoft to make the Windows phone platform its primary smartphone strategy.

Financials
Nokia reported first quarter revenue of €10.39 billion ($15.19 billion), up 9% y-o-y but down 18% q-o-q. Operating profit was €439 million ($642 million) or €0.09 per share, down 10% over last year and down 50% from last quarter. The company ended the quarter with liquidity of €11.1 billion ($16.24 billion) and net cash of €9.36 billion.

During the first quarter, total mobile device volumes were up 1% y-o-y and down 12% q-o-q to 108.5 million and convergence device shipments were up 13% y-o-y and down 14% q-o-q to 24.2 million. Mobile phone ASP was €42, up €3 from last year and down €1 from last quarter. Converged mobile device ASP was €147, down €8 from last year and €9 from last quarter. Overall, ASP increased 6% y-o-y to €65, mainly due to an increase in the ratio of converged mobile device sales led by its new products including the Nokia N8, Nokia C7, Nokia C5 and Nokia E7, as well as the attractively priced Nokia 5230 touch screen and Nokia E63 QWERTY devices.

Nokia launched the C3 QWERTY device last year, and in Q1 the lower-priced Nokia X201 QWERTY ramped up nicely. In total, the company said it shipped more than 8 million C3 and X201 devices in Q1. However, it said it felt the pressure of the lack of dual-SIM products. It plans to ship the Nokia C2 dual-SIM device by the end of Q2 2011.

Nokia’s preliminary estimated mobile device market share was 29% in the first quarter 2011, down from 33% in the first quarter of 2010 and 31% in the fourth quarter of 2010. Nokia’s preliminary estimated share of the converged mobile device market was 26% in the first quarter 2011, compared with 41% in the first quarter of 2010 and 31% in the fourth quarter of 2010.

Devices & Services net sales increased 6%y-o-y but declined 17% q-o-q to €7.087 billion. Devices & Services gross margin was 29.1%, down from 32.4% in Q1 2011 and 29.2% in Q4 2010. Shipments decreased across all regions except Greater China, Latin America and the Middle East & Africa, where they increased 30%, 29%, and 8%, respectively. North America led the decline with a 36% drop in shipments to 1.4 million, while Europe and Asia Pacific declined 5% and 3%, respectively.

For the second quarter, Nokia expects Devices & Services sales to be €6.1 billion to €6.6 billion. The company expects devices and services revenue in the third quarter to be flat with the second quarter, with a seasonal pick-up in the fourth quarter. Nokia said that its device volumes in Q1 were not significantly impacted by the devastation caused by the earthquake and tsunami in Japan, but it expects some impact to its mobile devices volumes in Q2 and Q3 2011.The stock is trading around $8.86 with a market cap of $33.76 billion after hitting a 52-week low of $7.73 on March 15.

Nokia’s Microsoft OS Strategy
In February, Nokia announced that it will be adopt the Windows Phone platform as its principle smarphone strategy and last week signed its agreement with Microsoft. Nokia expects to gain from Microsoft’s strength in productivity, advertising, gaming, and social media as well as its search services. On its end, Nokia will deliver mapping navigation and certain location-based services to the Windows Phone ecosystem, and Microsoft will benefit from Nokia’s global scale and supply network. As I have said earlier, Nokia needs to reinvent itself and its OS. This Microsoft deal could also pave the way for cracking the North American market. Analysts had speculated that Android, which has been gaining traction, would be a good option. However, Android faces the problem of fragmentation. While the Microsoft OS is less proven in the smartphone market than Android, it is a better alternative for Nokia as it would be a better differentiator and involve fewer patent issues. But a lot will depend on how well Nokia executes on its new strategy.