Some Pain, Some Gain

By David Danna - August 2, 2012 | Tickers: AMZN, AAPL, GOOG, MSFT, NOK | 0 Comments

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Second quarter results are rolling in and there is interesting and somewhat unexpected news from several of the biggest names in tech. One of the early tech companies into the spot light was Nokia (NYSE: NOK). Nokia recently made a large strategic shift and got into bed with Microsoft (NASDAQ: MSFT) and their Windows Phone operating system. Before this, Nokia had several mobile operating systems for various mobile devices, however with their billion dollar deal they now use Windows Phone exclusively. The first wave of these smartphones is the Lumia line, of which there are three models, all running Windows Phone 7.

For the second quarter of 2012 Nokia posted an operating loss of one billion dollars on net sales of 9.2 billion dollars. This is a slight increase in net sales from last quarter; however sales are still down nearly twenty percent from a year ago. This increase in net sales has also came at a cost, the operating loss from these sales has nearly doubled from last quarter. Nokia did manage to sell four million of the Windows Phone smartphones, in line with estimates and Nokia’s hopes for the Lumia line. However Nokia sold 10.2 million smartphones total, meaning that their outdated Symbian based smartphones are still outselling Windows Phone smartphones. Nokia also shipped just 600,000 Lumia phones in North America in the second quarter.

The average selling price of their smart devices rose nearly ten dollars from $176 last quarter to $185 this quarter. This increase was largely credited to the four million more expensive Lumia smartphones that were sold. However at the same time the average selling price of the Lumia smartphones is dropping, from $270 last quarter to $228 this quarter. This in turn is because Nokia is aggressively pricing the Lumia phones in an attempt get more sold. In the week before Nokia released their second quarter earnings they cut the on contract price of their flagship AT&T Lumia phone from its already reasonable $99 price to $50.

This was Nokia’s fifth straight quarter of falling revenue and Nokia predicted that the third quarter of 2012 would be similar to the first half of the year. With smartphone sales still dropping and non-smartphone sales slightly up the pain is likely to continue. Nokia is also seeing weak sales in China and flat sales in the United States. It is possible that customers are holding off purchasing a Windows Phone smartphone until Windows Phone 8 comes out. However most customers probably don’t even know Windows Phone 8 is about to launch and they simply don’t want any of the current Windows Phone smartphones.

When Microsoft announced Windows Phone 8 in June it came with a host of new features, including a common core with Windows 8. This common core will allow much easier development of programs that run on both Windows 8 and Windows Phone 8. The downside of this is that Microsoft is not brining Windows Phone 8 to any existing Windows Phone devices. While Microsoft can easily whether this storm in the interest of building a long term ecosystem of devices and services, it will be harder for Nokia. This lack of upgradability could keep Lumia sales from hitting what they should for several quarters. Though with this latest release we saw Lumia sales double from 2 million a quarter to 4 million. Existing Windows Phone devices will be getting an update to version 7.8, which will make Windows Phone 7 look like Windows Phone 8 but it will not be Windows Phone 8.

Nokia’s stock shot up 12% on the news, though the next day they had given 5% of that back. Even with Lumia sales increasing Nokia still has a very hard road ahead of it. The vast majority of their sales still come from feature phones. Feature phones are not very profitable and as the world shifts to smartphones, Nokia needs to make sure they are shifting with it. Here in the US smartphone penetration has already passed 50% of mobile users. Additionally the competition will do nothing but heat up going forward.

Google (NASDAQ: GOOG) has just announced their new Android operating system, Android 4.1 Jelly Bean and we will see it rolling out on phones later this year. Apple (NASDAQ: AAPL) in June announced iOS 6 and we are seeing a flood of rumors about a new iPhone launching this fall. It seems that this iPhone will feature a larger screen and be thinner. It may also be 4G equipped with an LTE chip and feature NFC technology like some Android phones do now. An exec at Verizon, as well as others have hinted at a possible fourth quarter release. Even Research in Motion will eventually get their next generation Blackberry operating system, Blackberry 10 out, though it has been delayed until 2013.

Nokia does not have a tablet and Microsoft has launched two Windows based tablets, the Surface tablets. Tablet sales are set to exceed 115 million this year and Apple controls 60% of the tablet market with the iPad. Thus competitors are looking to give Apple a run for their money. Google recently launched their Nexus 7 tablet and there are a host of other Android tablets as well as Amazon’s Kindle and rumors of a Blackberry Playbook 2. With Nokia missing from the tablet market it is just another area of mobile where they are falling behind.

Nokia also faces competition from within the Windows Phone ecosystem. Microsoft has been looking for other partners for Windows Phone 8 and HTC, Samsung and the Chinese handset maker Huawei are all set to release Windows Phones.  

Nokia is still hanging in there, selling Lumia Phones in line with their targets, and receiving large quarterly checks from Microsoft. However they are far from out of the woods and their long term standalone survival is far from certain. 

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