Nokia’s second quarter results confirmed it has a long, tough road to recovery, though its results actually beat some admittedly pessimistic forecasts, and higher than expected Lumia sales offered a ray of hope.
Nokia sold 4m of its flagship Windows Phone devices during the quarter, ahead of market projections of 3.8m, and that headline result was enough to send the vendor’s stock up by 8% to $1.87 despite otherwise depressing results. However, there was no growth in its sales to its most difficult market, North America, where it sold about 600,000 devices ‘ the same as in Q112. Nonetheless, North America was the only region not to show a decline in device sales, though that was mainly because it has virtually no Symbian legacy base to lose.
CEO Stephen Elop highlighted how critical Lumia is, but also that a Windows-fuelled turnaround would be a long process. He said: ‘We shipped 4m Lumia smartphones in Q2, and we plan to provide updates to current Lumia products over time, well beyond the launch of Windows Phone 8. We believe the Windows Phone 8 launch will be an important catalyst for Lumia’ (although, of course, one of Nokia’s challenges is that there will be no upgrades for current models to WP8).
The Finnish firm’s total handset sales were up 2% year-on-year to 73.5m units, but ‘smart devices’ were down a huge 39% to 10.2m (and €1.54bn in revenue) as the legacy Symbian operating system declines far more quickly that the original Nokia recovery plan had catered for. However, the shift towards Windows Phone did at least boost average selling prices, which were up from €141 to €151 for smartphones. Featurephone revenues were down 11% to €2.29bn, partly because of increased competition in formerly key markets like China, and partly because ASP was down by 14% to just €31.
Overall, net sales in the quarter were down 19% year-on-year to €7.54bn ($9.3bn), up slightly on the first quarter of 2012. Sales in the core Devices & Services unit fell by 26%. All that led to a net loss of €1.53bn ($1.87bn), almost four times last year’s figure, and though sales results were somewhat better than many analysts had predicted, the deficit was far worse ‘ they had looked for a $784m loss.
Elop said: ‘While Q3 will remain difficult, it is a critical priority to return our Devices & Services business to positive operating cashflow as quickly as possible.’ He commented: ‘Nokia is taking action to manage through this transition period. While Q2 was a difficult quarter, Nokia employees are demonstrating their determination to strengthen our competitiveness, improve our operating model and carefully manage our financial resources.’
Although Nokia has not yet been the subject of activist investor campaigns like those seen at RIM, analysts and some shareholders are starting to question whether it should be broken up, especially when its stock fell to a 17-year low on Tuesday. Its market capitalization was down to €5.46bn ($6.72bn), a 98% decline from its peak in 2000 ‘ less than it paid for its Navteq location business, which came with a price tag of $8.1bn (and less than the $8.5bn Microsoft, seen by some as a white knight for Nokia, paid for Skype).
Navteq is one of the assets which some think should be sold or separated in order to unlock hidden value, and some observers put a value of about €2bn on Nokia’s location and commerce division, which is centered on Navteq. Analysts can still see significant value in various Nokia assets and businesses, including its patent portfolio, possibly valued at about €5bn, and about the same amount in net cash (though that pile is being burnt up by restructurings).
There are two big flies in the break-up ointment though. It could be tough to sell the struggling handset business, despite rumors of interest either from Microsoft (to preserve its main Windows Phone partner) or a Chinese phonemaker. The other is the Nokia Siemens joint venture, which Richard Windsor, an analyst at Nomura, said would require a €4bn injection to stand on its own feet.
Meanwhile, while Nokia and RIM struggle for life, the profits of the industry increasingly find their way into the hands of Apple and Samsung. The Korean firm currently has the upper hand in this battle of the Titans, at least until the next iPhone appears in the fall. Indeed, Samsung having grabbed the smartphone top spot last year ‘ leapfrogging both Nokia and Apple ‘ it is now widening its advantage, according to a poll of over 40 analysts by Reuters.
The strength of the Galaxy S II and the new S III is likely to propel Samsung to hit 50m smartphone sales in the second quarter, well ahead of Apple’s forecast 30.5m iPhones. ‘We are expecting to see the biggest smartphone volumes ever shipped from one single vendor in one quarter, driven by strong demand of the Galaxy portfolio, particularly the Galaxy S II and S III,’ said IDC analyst Francisco Jeronimo, pointing to its huge product portfolio, and its timing, which increasingly sees it alternating its bighitting launches with those of Apple rather than going head-to-head.