Nokia Should Also Consider Acquiring Palm

The Palm Pre’s initial reviews are out, and most suggest it can challenge the iPhone with its QWERTY keyboard and a touch screen interface that finally matches the iPhone’s. Meanwhile, Apple is announcing a new iPhone on June 8 while Nokia is releasing the Nokia N97 mobile computer worldwide in June. In this post, let’s analyze the performance of the two leading mobile phone vendors, Nokia (NYSE:NOK) and Samsung (SEO:005930).

In the two years since the launch of the iPhone, there have been numerous touch screen models but the Palm Pre seems to be the first to match the distinguishing factor of the iPhone: its intuitive interface and software. Unless Nokia also works on its software, its phones will be just another touch screen device.

One feature that Nokia seems to be working on is the availability of applications with its new Ovi Store, with mixed results. The iPhone has more than 40,000 applications, and the Palm Pre has only about a dozen. The number runs in hundreds for the Ovi Store, but its reviews are not as encouraging. And while Apple’s App Store has thousands of applications for just one device, Nokia has just a few hundred applications for about 50 devices.

Another major downside to Nokia is that its phones are not available with US carriers at subsidized rates. Though the company’s focus has been emerging markets, it is losing out on the momentum of the convergence device trend in the US by not addressing this issue. This is of concern, because, for now, the technological leadership in smartphones is coming out of the US.

And there is a growing need for Nokia to work on these technologies in its upcoming smartphones if it wants to increase its market share, which has slipped to 38.1%, and its shipment volumes, which dipped below 100 million for the first time in two years. The overall mobile phone market declined 15.8% while the smartphone market grew 4% y-o-y. No prizes for guessing where all players need to put serious emphasis!

On the financial front, Nokia, the leading handset vendor with annual revenue of €50.7 billion reported its first quarter results on April 16. Revenue was €9.3 billion, down 27% while operating profit plunged 89% to €55 million from €1.531 billion last year.

The Devices and Services segment revenue declined 33.4% to 6.173 billion. Its ASP was down to €65 from €75 last quarter mainly due to pricing pressure, lower-than-expected high-end device sales and a higher mix of low-end phones. Gross margin, however, stayed healthy at 33.8% driven by the success of the 5800 XpressMusic device. Total cash and other liquid assets of €8.1 billion at the end of Q1 2009. Q4 analysis is available here.

NAVTEQ sales were €134 million while Nokia Siemens Networks segment sales were down 12% to €2.9 billion.

Nokia expects its mobile device market share to increase sequentially in the second quarter. It is currently trading around $15 with a market cap of about $56 billion. The stock hit a 52-week low of $8.47 on March 9. If the Palm Pre is as big a success as it could turn out to be, Nokia could also acquire Palm to gain access to the talent, and a strong foothold in Silicon Valley, now the hotbed of innovation in the convergence device arena.

Samsung, unlike Nokia, increased its market share to 18.8% from 15.9% last year. Samsung seems to have caught on well to the smart phone trend and sustained the interest of consumers. Though its models do not boast of an intuitive interface and software, it provides features that are top-class. It has recently launched a touch screen smart phone with a 12-megapixel camera. Its first Android-powered device, the i7500, is expected to hit the European market in June.

Samsung, the second largest handset vendor and also the world’s largest semiconductor producer with annual revenue of 72.95 trillion won ($55 billion) reported its first quarter results in April. With its focus on the high end phones, it has increased its Telecommunications profit margin from 1% last quarter to 11%. First quarter revenue was 28.67 trillion Korean won ($23 billion), down 13% q-o-q and 13% y-o-y. Net income, however, increased to 620 billion won ($498 million).

Samsung has come back strongly from a loss last quarter led by its strong performance in the Telecommunications segment as well as the stabilizing semiconductor prices and its cost control measures. By segment, semiconductor revenue was down 2% to 5.22 trillion won ($4.2 billion), LCD segment revenue declined to 4.24 trillion won ($3.4 billion), Telecommunications revenue increased 30% to 9.77 trillion won ($7.8 billion) and Digital Media revenue increased 19% to 10.07 trillion won ($8.1 billion).

Samsung ended the quarter with cash balance of 5.3 trillion won ($4.3 billion), down from last quarter’s 6.6 trillion won ($5.3 billion). Liabilities are 15.7 trillion won ($12.6 billion). While culturally, the company is not into acquisitions, it certainly has the financial muscle to do so if it desires!