Nokia Pins Hopes On Lumia

In April 2011, Nokia (NYSE:NOK) entered into an agreement with Microsoft to adopt the Microsoft Windows Phone platform. They released their Lumia range of phones, their first phones based on the Windows operating system, in November 2011. In their recent financial results they reported sales of more than one million Lumia phones, exceeding analyst estimates. Let’s take a closer look.

Nokia’s Financials
Nokia recently reported fourth quarter revenue of €10 billion ($13.25 billion), down 21% y-o-y but up 11% q-o-q. Operating loss was €954 million ($1.26 billion) or €0.29 per share compared to operating profit of €884 million or €0.20 per share last year and operating loss of €71 million or €0.02 per share in the previous quarter. The company ended the quarter with liquidity of €10.9 billion ($14.45 billion) and net cash balance of €5.6 billion ($7.42 billion).

For the full year, revenue was €38.7 billion ($51.3 billion), down 9%. Operating loss was €1.07 billion ($1.41 billion) or €0.31 per share compared to operating profit of €2.07 billion or €0.50 per share last year.

During the fourth quarter, Devices & Services net sales decreased 29% y-o-y but increased 11% q-o-q to €6 billion ($7.95 billion). Shipments fell 8% y-o-y but increased 6% q-o-q to 113.5 million. Shipments in North America dropped by a massive 81%, followed by a 33% decline in Greater China and a 24% decline in Europe. Shipments increased 17% in the Middle East and Africa, 11% in Asia Pacific, and 2% in Latin America. 

During the fourth quarter, total mobile phone shipments were down 1% y-o-y and up 5% q-o-q. Smart device shipments were down 31% y-o-y and up 17% q-o-q to 19.6 million. Nokia said the y-o-y decline in smart device shipments continued to be impacted by the strong momentum of competing smartphone platforms relative to Symbian. The sequential increase was, however, helped by the sales of N9 as well as Nokia Lumia 800 and 710 in select markets.

For the first quarter 2012, Nokia expects their non-IFRS Devices & Services operating margin to be around breakeven, ranging either above or below that point by approximately 2 percentage points. They continue to aim to cut Devices & Services non-IFRS operating expenses by more than €1 billion for the full year 2013, compared to the re-forecasted full year 2010 Devices & Services non-IFRS operating expenses of €5.35 billion. The stock is trading around $4.96 with a market cap of $18.57 billion.

The Windows Strategy
The transition from Symbian to Microsoft Windows is taking a financial toll on Nokia as operators abandon Symbian models or demand price cuts for them. To deal with these losses, Nokia plans to cut 4,000 jobs or 7% of its workforce at three factories in Hungary, Finland, and Mexico and shift production to Asia to be closer to their component suppliers.

Nokia had expected to sell close to 150 million Symbian devices in the transition to the Microsoft Windows platform. However, the company now feels that because of changing market conditions, they will sell fewer Symbian devices than anticipated. To maximize the value of the Symbian asset, the company said they will continue shipping Symbian devices in specific regions and distribution channels and provide software support to Symbian customers through 2016.

Nokia is also looking to focus on their important re-entry into the North American market. Earlier this month, T-Mobile started selling the low-cost Nokia Lumia 710 as a lead device. Walmart was reportedly offering the device free with a T-Mobile connection. E.D. Kain on Forbes says the Walmart offer should give the phone manufacturer a boost.

Nokia also announced the high-end Nokia Lumia 900 with AT&T, which is expected to hit stores in March. The Nokia Lumia 900 is the company’s third Lumia device and their first long-term evolution (LTE) device designed specifically for the North American market, and AT&T is positioning the Lumia 900 as a lead LTE device. The phone has received positive reviews, and many believe Lumia to be a direct challenge to the iPhone and high-end Samsung phones. It features a 4.3-inch, AMOLED Clear Black display, the largest screen on a Lumia device so far, a 1.4-GHz processor, and a 1830 mAh battery.

Nokia seems to be executing on their Windows strategy well, and the sales of one million Lumia phones are encouraging for launch in the North American market, the pulse of the smartphone industry. Nokia has over the past few years lost out on the momentum of the convergence trend because of their lack of focus on this market. For a long time, they sold their phones directly to consumers without any relationship with carriers. This strategy worked for them outside the U.S. but not in the carrier-dominated U.S. market. The free Walmart offer shows how focused they have now become. I hope the Lumia 900 will help the company regain their lost glory.