Microsoft Counting on Nokia and Vice Versa

Nokia has managed to surprise the market this quarter by announcing better than expected financial results. However, its continuing decline in the smartphone market has done little to improve its market valuation. Analysts remain skeptical of whether Nokia will ever regain its market leadership again. A recent report saw Nokia fall to the 7th position in the global smartphone market, with Apple and Samsung maintaining their leadership in the segment. Gartner estimates that total smartphone sales grew 47% over the year to 169.2 million units, and they accounted for 40% of the mobile phone market. One player counting on Nokia’s regeneration is, of course, Microsoft. Last week, I was at the Churchill Club event with Steve Balmer jumping up and down about Windows 8 and the company’s phone strategy. Will Nokia deliver?

Nokia’s Financials

Nokia’s (NYSE:NOK) Q3 revenues fell 19% over the year to €7.24 billion (~$9.23 billion) ahead of the market’s estimated €6.82 billion (~$8.70 billion). The net loss per share of €0.07 (~$0.09) was also better than market estimates of a loss of €0.10 (~$0.13) for the quarter.

Revenues of devices and services segment fell 34% over the year to $4.46 billion. Within this segment, revenues from smartphones fell 56% over the year to €976 million (~$1.24 billion). Revenues from Nokia Siemens network segment grew 3% to $4.38 billion and location & commerce segment saw revenues decline 6% to $332 million.

Nokia continued to battle with sales of smartphones. During the quarter, Nokia’s smartphone sales fell 63% to 6.3 million units. Lumia sales also fell drastically to 2.9 million units compared with 4 million units in the previous quarter as many buyers delayed buying the phone in anticipation of the newly released Windows 8 supported model. Within the U.S., the company’s smartphone sales were only 300,000 units, and China sales also fell more than 80% over the year. There was a minor ray of hope as Nokia saw the average price of smartphones grow 18% to $194. Including other mobile phone sales, Nokia’s device volume fell 22% over the year and 1% sequentially to 82.9 million units.

Nokia’s Windows 8 Phones

According to an IDC estimate, last quarter, Android OS commanded more than 75% of the world’s smartphone OS market. Microsoft’s Windows OS came a distant fifth, with a mere 2% market share. But things may be looking up for Microsoft. Windows 8 is the most significant upgrade for Windows since Windows 95, and analysts believe that the OS may pose a reasonable threat to both iOS and Android. Windows 8’s biggest fallout, for now, is the lack of available apps. But this should improve in time. Nokia’s earlier launched Lumia series was not compatible with Windows 8, but the company is changing that now and recently released two new phones, Lumia 820 and Lumia 920, that work on the new OS.

Nokia is pinning its hopes on these new Lumia phones to help them regain lost ground in the smartphone market segment. The phones come with new features such as wireless charging capability, optical image stabilization on its 8-megapixel camera, and Cinemagraph that lets users take videos and freeze certain frames to photographs. It also has Nokia-branded apps such as Nokia Drive for navigation, Nokia City Lens for augmented reality and Nokia Smart Shoot for burst photography. The 920 model does have its shortcomings, especially in terms of looks and battery life.

Nokia is working hard on driving the phone sales. It tied up with AT&T in the U.S. to sell Lumia 920 for $99.99 on a two-year contract, a very reasonable price compared with other smartphone contracts of up to $200 for the new iPhone 5. It also announced its partnership with Verizon to sell the Lumia through its network.

Nokia has played a big gamble with its relationship with Microsoft. Last year, its agreement with Microsoft meant that Nokia would replace both Symbian- and MeeGo-supported phones with Windows-based smartphones. The relationship does seem rather one-sided as Microsoft has not retained an exclusive relationship with Nokia and Windows phones are available through other partners, including Samsung and HTC. Nokia’s management, though, remains convinced that Windows 8 will help it turn around the trend of declining smartphone sales.

Nokia’s Mapping Initiative

Nokia is also counting on Apple’s debacle with its Maps to gather lost market share. Recently, it announced the acquisition of Earthmine, a Berkeley-based 3-D mapping technology maker. Nokia also recently announced the launch of its mapping service, Here. Here is a Web-enabled service that will soon be released for iOS- and Android-based devices. It has features such as voice-enabled navigation, map editing, and the ability to select public transportation systems.

The stock is trading at $2.77 with a market capitalization of $10.37 billion. It touched a 52-week low of $1.63 earlier this quarter.