Finnish handset maker Nokia Corporation (ADR) (NYSE:NOK) recently reported its first quarter earnings, and Wall Street freaked out. The stock plunged more than 11% on April 18 after the company reported weaker than expected revenue due to a mixed bag of gains and losses. Let’s pick apart the company’s first quarter results to determine if Nokia is a worthy long-term investment or a falling knife.
A mixed first quarter
During the first quarter, Nokia Corporation (ADR) (NYSE:NOK) reported a loss of 272 million euros ($355 million), a major improvement from the loss of 928 million euros ($1.21 billion) it reported in the prior year quarter. However, revenue fell 20% to 5.85 billion euros ($7.6 billion), far below the 6.52 billion euros ($8.51 billion) analysts had been expecting.
This means that although Nokia is crawling back toward profitability, its top line has been shrinking due to waning sales of lower-end phones. Total smartphone sales, Nokia’s most widely watched figure, plunged 32% from last quarter.
However, Nokia’s cash position – which investors had been increasingly concerned about after Nokia suspended its dividend – still came in at an encouraging 4.5 billion euros ($5.87 billion).
Smartphones and dumbphones
Despite all the doom and gloom surrounding Nokia, the company is still the second largest handset maker in the world after Samsung.
2012 units sold (millions) | 2012 Global Market Share | 2011 units sold (millions) | 2011 Global Market Share | |
Samsung | 384.6 | 22.0% | 315.1 | 17.7% |
Nokia | 333.9 | 19.1% | 422.5 | 23.8% |
Apple | 130.1 | 7.5% | 89.3 | 5.0 |
ZTE | 67.3 | 3.9% | 56.9 | 3.2% |
LG | 58.0 | 3.3% | 86.4 | 4.9% |
Source: Gartner, February 2013
This strong market share is due to Nokia’s dominance of the “dumbphone” market in developing and emerging markets. At around $20 per phone, however, these low-end phones don’t generate much revenue for the company.
That’s why Nokia Corporation (ADR) (NYSE:NOK) desperately needs a successful higher-end smartphone to grow its top line. In 2012, out of those 333.9 million units sold, only 15.9 million were smartphones.
Lumia and Asha
During the first quarter, Nokia reported that it sold 5.6 million Lumia handsets, a 29.5% improvement over the 4.4 million it sold last quarter and in line with analyst expectations. However, sales of its Asha series plunged 46% from 9.3 million to 5.0 million. Symbian smartphones, which have been discontinued, sold 2.2 million units last quarter. Although these signs of growth are encouraging, Nokia is still dwarfed by
Samsung, which shipped 61.6 million smartphones during the quarter, and Apple Inc. (NASDAQ:AAPL), which shipped 36.9 million.
In my opinion, those mixed numbers show that CEO Stephen Elop’s decision to center Nokia’s efforts on Windows Phones was the right call. The terrible Asha numbers are simply proof that consumers are no longer interested in a smartphone that runs on an isolated, proprietary operating system, cut off from the exciting world of globally available apps on Google Inc (NASDAQ:GOOG) Android, iOS, or Windows Phone.
Therefore, Elop should replace the Asha with lower-end Lumias instead, especially in India, where upper middle class consumers can now easily afford an Apple iPhone 5 or Samsung Galaxy S3. A lower-end smartphone still needs to be a major part of Nokia’s strategy in building upon its brand recognition in global markets, but the Asha was too much like a touch-enabled “dumbphone” than a true low-end smartphone.
Supply issues and BlackBerry
I believe that Lumia sales would have come in higher if Nokia Corporation (ADR) (NYSE:NOK) hadn’t run into supply issues during the quarter. Demand of Lumia’s flagship 920 was high in China, but the company was unable to meet it with appropriate supply until near the end of the quarter. Those supply issues, along with rising competition from Samsung and Apple, caused sales in Greater China to decline 56% to $334 million, despite its partnership with China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU).
With these supply issues resolved, sales of the Lumia series, and its upcoming high-end 928 handset, should get Nokia back on the right track by the second quarter.
In addition, Research In Motion Ltd (NASDAQ:BBRY)’s launch of the Z10 during the quarter likely drew away some Nokia users, who generally lean toward products not running on iOS or Android. However, that impact should be marginal at best, since BlackBerry and Nokia tend to cater to two very different demographics – enterprise and retail consumers, respectively.
Margin growth
Another problem is Nokia’s lack of margin growth, as seen in this chart. Its profit margin is even weaker than BlackBerry, mainly due to its massive low-end handset business.
Looking ahead, Nokia revised its adjusted operating margin for next quarter from 0.1% down to negative 2.0%. In other words, Nokia expects to demand for low-end phones to decline as its smartphone business continues to struggle. Competition from BlackBerry’s upcoming “make or break” Q10, which features its classic keyboard and BlackBerry 10 operating system, as well as Samsung’s eagerly anticipated Galaxy S4, could hurt Lumia sales going forward.
Yet I believe that later this year, if Nokia Corporation (ADR) (NYSE:NOK)’s Lumia numbers improve, then its lower-end market will become increasingly irrelevant. Stronger brand recognition of Lumia devices will give Nokia more flexibility to offer a wider variety of branded higher-end and lower-end models, just as Sony did with the Xperia series and Samsung did with its Galaxy brand.
Nokia Siemens Networks
Although Nokia may constantly look like its being pounded against the ropes by its sleeker, sexier competitors, in reality the company is a survivor. Many Nokia investors often overlook the fact that Nokia still has an infrastructure joint venture – Nokia Siemens Networks – which is the world’s fourth largest telecom equipment manufacturer. This business, which Nokia owns more than half of, has benefited from the rising demand for telecom equipment to expand 3G, 4G LTE and broadband networks.
While NSN used to only generate sales that were roughly half of Nokia’s handsets segment, today they are relatively equal. During the first quarter, NSN posted a small profit of $4 million on sales of $3.7 billion, compared to $3.8 billion in handset and device sales. In addition, NSN was Nokia’s only business segment to post a profit or positive margins.
The Foolish Bottom Line
Even though I have stated before that I believe Nokia has more to gain if it starts producing Android handsets, I believe that Stephen Elop’s strategy of following Microsoft is a viable alternative. Windows Phones, which Nokia devices account for 80% of, will never take out Android or iOS, but they can hold on to a niche market and grow it.
Although smartphone users who aren’t followers of Android or iOS will be faced with a choice between Windows Phones and BlackBerry devices, I believe that there is room for both in the market, as they only indirectly compete with each other.
Nokia is a turnaround story in process, and these efforts take time. I believe that Elop came in just in the nick of time to save the company from completely collapsing, and Nokia now at least has one line of smartphones that is slowly growing. Given enough time, Nokia could return as a major name in the industry it helped create.
The article It’s Time to Stop Worrying About Nokia originally appeared on Fool.com.
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