Is A Turnaround Afoot For This Tech Giant?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The once unbeatable technology giant, Nokia Corporation (NYSE: NOK), is facing some serious competition. Nokia missed out on the smart phone revolution and is losing the lead among its peers. Earnings have been going down for quite some time, along with investors' faith in the stock. In an effort to revive its old glory, the company is focusing on expanding its operations to the emerging markets. Will Nokia's attempts for regaining momentum be successful? Analysts do not expect that to happen in the near future.

Nokia needs to reestablish its place within the market by reinforcing a strong and competitive growth strategy. The management needs to "think out of the box" and come up with an idea that will catch its rivals unawares. I do not expect the company to return to its past fortunes in the immediate future. However, I do suggest that Nokia's strategic alliance with Microsoft (NASDAQ: MSFT) will contribute to the company's gradual recovery.

Nokia and Windows Phones

CEO Steven Elop, a former head of Microsoft's business division, took the reins of the company two years ago hoping to lead it to a new era. In 2011, Nokia joined forces with Microsoft in an attempt to regain ground lost to Apple (NASDAQ: AAPL) and Samsung. Apple is the undisputable leader in the market. However, without any exciting new products, sales are likely to stabilize in soon future. Its ecosystem is highly loyal, but the premium paid by the consumers cannot continue forever. After all, competing ecosystems are becoming more appealing to users.

When establishing the alliance with Microsoft, Elop was, in fact, preparing for a battle of ecosystems. The new devices operating Microsoft Windows 7 system were expected to help Nokia reemerge as a stronger contender against iOS and Android.

Lumia 800 and Lumia 710 were the first phones to result from Nokia's partnership with Microsoft. During the last six weeks of 2011, Nokia shipped about 1 million Windows Phones. This number looks tiny compared to the 30 million iPhone sales just for Q4 2011. However, for a company trying to come back from the dead, it is not that bad at all. For Q2 2012, Nokia beat analysts' estimations and sold about 200,000 more Lumia devices. Undoubtedly, Android and iOS dominated the market with a combined share of 82 percent of total smart phone shipments. Nevertheless, Nokia is following a slow but steady path with over 7 million units shipped for the first half of 2012. Nokia's Lumia devices gained extra points in popularity among Europeans. Windows Phone saw growth rates of 6.6, 3.5, and 2.3 percent in Italy, France and the U.K., respectively.

Some analysts expect Nokia to knock out Research In Motion (NASDAQ: BBRY) in Europe by the end of this year. I also have my own doubts about Blackberry’s survival. The company needs to follow Nokia’s steps to move ahead, or it seems a likely candidate to be the next fallen angel. Blackberry is going through the same hardships, but apparently there is not anything new about the company. On the other hand, Nokia is trying very hard to regain its popularity.

For Q3 2012, Lumia sales were down to 2.9 million compared to 4 million in the previous quarter. This was indeed a sharp decrease, but overall expected. Nokia recently announced that no Windows Phone 7 device would be upgradeable to Windows 8.

Nokia backed its decision to restrict Windows Phone 8 to new phones by recalling hardware improvements and changes in the platform architecture. Overall, Lumia sales indicate a bright spot for a company struggling to return to profitability. Pre-orders of the new Lumia 820 and 920 have already begun in Europe. The new devices are being sold at a furious pace with reserved units being already sold out in Italy.

Financials

The Finnish manufacturer is making steady steps towards achieving a health financial position. Over the past three years, revenue has been going down. However, we do observe a promising decrease in quarterly operating losses. For Q1 2012, Nokia reported total operating loss of $1.7 billion, which was narrowed to $754 million for Q3 2012. Despite the slowdown in Lumia sales during the third quarter, Nokia recorded its first sub-billion quarterly loss for the year.

Q3 2012 financial results are weak, but non-IFRS figures are encouraging. Non-IFRS results exclude purchase price accounting related items, intangible asset amortization, and inventory value adjustments deriving from business acquisitions. Therefore, non-IFRS results can be seen as a measure of Nokia's underlying performance.

Q3 2012 non-IFRS figures reveal operating profit margin of $100 million or 1.1 percent. It might be small, but still this non-IFRS profit indicates signs of strong business management. Overall, Nokia's latest financial results were slightly ahead of market expectations. Sales reached €7.2 billion versus expected sales of €6.9 billion. Nokia ended the quarter with net cash of €3.6 billion versus market expectations of €3.4 billion.

Foolish Summary

Change does not come over night. Nokia is applying a transition strategy that requires time in order to pay off. The company has placed a bet on Windows 8 devices hoping to achieve desirable yields. North America is a tough market for Nokia. However, Europe is embracing the Lumia phones and is offering a promising source of income stream. Moreover, the company is moving aggressively to emerging markets.

Nokia is promoting low cost smart phones to countries, such as India, Indonesia, and Latin America where smart phone penetration is not yet matured. Nokia is trying to gain a foothold in the mobile market by expanding its operations to places that can offer serious growth opportunities. Will this be enough? Even though, Nokia's current position does not allow much room for enthusiasm, I do believe that the company has strong upside potentials. Q4 2012 financial results will be an initiate indicator of whether Nokia's transition strategy can offer a first class ticket.

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