Nokia’s New Strategy Launches

Early this year, Nokia (NYSE:NOK) announced plans to adopt the Microsoft Windows phone operating system as their primary smartphone strategy and move away from their proprietary Symbian operating system. Nokia recently released the Lumia range of phones, their first phones based on the Windows operating system, and are apparently off to a running start in the U.K. market. Nokia has pinned its hopes on this new strategy to strengthen their increasingly tenuous hold on the smartphone market. Let’s take a closer look.

Nokia’s Financials
In October, Nokia reported third quarter revenue of €9 billion ($12.11 billion), down 13% y-o-y and 3% q-o-q. Operating loss was €71 million ($95.54 million) or €0.02 per share compared to operating profit of €403 million or €0.14 per share last year and operating loss of €487 million or €0.10 per share in the previous quarter. The company ended the quarter with liquidity of €10.8 billion ($14.5 billion) and net cash balance of €5.1 billion ($6.86 billion).

Devices & Services net sales decreased 25% y-o-y and 1% q-o-q to €5.39 billion ($7.26 billion). Shipments decreased across all regions except the Middle East and Africa, where they increased 3% y-o-y. North America led the decline with a 68% drop in shipments to 0.073 million, followed by a 41% decline in Europe. Shipments decreased 25% in Greater China, 20% in Asia Pacific, and 7% in Latin America.

During the third quarter, total mobile device volumes were down 3% y-o-y and up 20% q-o-q to 106.6 million, and smart device shipments were down 38% y-o-y and up 1% q-o-q to 16.8 million. Mobile phone shipments were up 8% y-o-y and 25% q-o-q driven by the strong demand for Dual SIM, which reached 17.9 million shipments during the quarter, and higher demand for QWERTY-keyboard products. Mobile Phones sales in Q3 were led by the Nokia C3, C2, C1, 1616, and X1; these models range in price from €15 ($20.20) to €65 ($87). Smart Devices sales in Q3 were led by the Nokia 5230, the C5 family, the N9, and the C7, which range in price from €75 ($101) to €230 ($310).

Overall, ASP decreased 22% y-o-y and 18% q-o-q to €51 ($69). Mobile phone ASP was €32 ($43), down €8 ($11) from last year and €4 ($5.30) from the previous quarter. Smart device ASP was €131, ($176) down €2 ($2.70) from the previous year and down €11 ($14.80) from the previous quarter. Nokia said that smart devices continued to be impacted by the strong momentum of competing smartphone platforms relative to its higher-priced Symbian devices, as well as by competitors’ pricing tactics.

During the quarter, Nokia launched and started shipments of the Nokia 500, an affordable smartphone with a 1GHz processor and powered by Symbian Anna. Nokia launched three new smartphones, the Nokia 700, Nokia 701, and Nokia 600, all powered by Symbian Belle, a major software update following from Anna. Nokia started shipments of the Nokia C2-03, a Series 40-based device with Nokia’s unique dual SIM capabilities. The dual SIM functionality enables users to connect to two different networks to receive calls and messages.

For the fourth quarter, Nokia continues to expect its net cash and other liquid assets at the end of 2011 to be above the €3.9 billion ($5.25 billion) balance at the end of the second quarter. It continues to aim to reduce its Devices & Services non-IFRS operating expenses to more than €1 billion ($1.34 billion) for the full year 2013, compared to full-year 2010 Devices & Services non-IFRS operating expenses of €5.65 billion ($7.60 billion). To achieve this goal, the company plans to cut the number of employees, the use of outsourced professionals, and facility costs. The stock is trading around $5.41, near its 52-week low of $5.02, with a market cap of $20.26 billion.

The new Lumia phones on the Windows operating system have received mixed reviews. According to an Appcelerator-IDC research report, there is increased interest among developers for the Windows phone operating system following its deal with Nokia. However, analysts are skeptical about the success of the Lumia phones. Pacific Crest analyst James Faucette downgraded the new phone sales estimate in the December quarter from 2 million units to less than 500,000.

Bernstein Research analyst Pierre Ferragu says:

“With no breakthrough innovation, we believe Nokia’s new phones are unlikely to get traction in a highly concentrated high-end. Second, we don’t believe Lumia phones are competitively priced. Third, we believe in economics of increasing returns for mobile ecosystems and judge rather unlikely that Windows can gain critical mass against Android and iOS. Fourth, we have seen evidences of lack of traction for the Windows operating system over the last 12 months and challenge the idea that the Nokia brand can make a meaningful difference today.”

Despite analyst reactions, Nokia said the Lumia 800 phones in the U.K. are off to an excellent start and that they are having difficulty meeting demand for the model. Nokia will be launching the Lumia phones in the highly competitive U.S. market early next year. That could well be the acid test for Nokia and its new Windows phone strategy. I hope that the momentum from success in the U.K. market will carry over to the U.S. launch.