Is Nokia's Windows Phone Focus Finally Paying Off?

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Editor's Note: The initial version stated that Nokia unveiled a tablet. Nokia did not unveil a tablet. This was relayed by a third party source. This version has been corrected and Motley Fool regrets the error.

Nokia (NYSE: NOK) had some good news recently; the company released an update showing that it had managed to beat its Q4 forecasts, achieving underlying profitability thanks in part to its Windows Phone-powered Lumia smartphones. After struggling to find relevance in the smartphone-driven world and losing an increasing amount of market share to competitors such as Apple and Samsung, some are hoping that the boost in profits and increased popularity of Lumia phones signals the beginning of a turnaround.

It's important to note that the profitability of the past quarter isn't solely a result of Lumia sales, of course; the launch of new Lumia models and the slashing of prices on previous models was only one of several factors in Nokia's Q4 performance. The company managed to cut costs during the quarter and saw a strong performance from its Nokia Siemens networks that was better than expected. Royalties from Nokia-owned patents also contributed over $65 million to the company's earnings.

Nokia isn't the only one who's likely pleased with this news; both Microsoft (NASDAQ: MSFT) and AT&T (NYSE: T) have reason to celebrate due to the partnerships they've forged with the Finnish phone manufacturer. Since Nokia partnered with Microsoft in 2011 and began focusing on Windows Phone models, the Lumia line has been considered a flagship Windows Phone product. If Lumias start selling more, that means that more people are choosing Windows Phone and helping Microsoft claw its way into the smartphone market where it falls significantly behind iOS and Android devices. AT&T, which offers exclusive Lumia devices and subsidizes the cost of the smartphones, also has reason to celebrate if more people begin buying Lumia phones since a good number of those contracts will likely be through AT&T.

So does this mean that Nokia's finally out of the woods and poised to make a comeback? Not necessarily. The earnings update was released while the stock was dipping yet again, and though it resulted in a decent bounce it remains to be seen whether the Q4 results are the beginning of a trend or just a fluke. One positive earnings report does not a turnaround make, and Nokia needs to begin consistently showing growth and profitability before the rest of the world celebrates along with the Nokia team. While Lumia smartphones are selling, they are by no means a break-out hit like some of the competition and short supplies have limited the number of phones that can be sold. And even the profitability shown in the earnings preview just squeaks under the wire; Nokia estimates its operating margin being between the break-even point and 2 percent, which while better than the -6 percent that was originally forecast is still fairly slim.

Nokia is expected to unveil a long-rumored Windows RT tablet to go along with their Windows Phone smartphone offerings, according to a report from The Verge. Sources claim that the reveal will occur at Mobile World Congress in February, with a spring 2013 release planned through AT&T and possibly other outlets later.

This could bolster sales and help the company to turn a higher profit in upcoming quarters. Given how new the Windows tablet market is and how a must-have tablet hasn't yet emerged, if the tablet has the right price and the right features then it might end up more popular than Nokia's smartphones.

In the end, the earnings preview that Nokia released does show that there might be a light at the end of the tunnel but it's really too early to tell. Investors who have faith in Nokia's tablet could invest now in hopes of getting in on the ground floor, but more cautious investors would be better served using a "wait and see" approach to find out whether the company's Q4 earnings was a one-time hit that provided a temporary boost before the company drops closer to $3 a share. At the very least I would recommend waiting until more information is available about the tablet since too high of a price or too few features could easily kill any surge that the tablet might bring.


Croaxleigh owns shares of Microsoft. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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