Should You Say No to Nokia?

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

Mobile handset developing company Nokia (NYSE: NOK) is trying to revive its business, but the recent quarterly result indicates that the company is struggling, as it recorded a massive drop in sales. Personally, I am not a big fan of Nokia, but is it a worthwhile investment? Continue reading to find out.

Performance of the past

Even though the sales of the Lumia smartphones surged 32%, as compared to the previous quarter, the company recorded a fall of 24% in revenue. The second quarter revenue came in at $7.5 billion, not even coming close to the analysts’ estimate of $8.4 billion. The drop in revenue was primarily because of the reduced demand for basic and economical handsets.

The drop in sales of both handset segment, as well as Nokia Siemens Network, or NSN, affected the top-line. The NSN segment contributed $3.6 billion to the revenue, signifying a decline of 16.8% from the previous fiscal year. Adjusted operating profit increased by a massive 1,072% to $429.5 million as compared to the preceding year. The increase in the income of this segment was an outcome of the segment’s reduced expenses.

Nokia also booked a net loss of approximately $364 million or $0.08 per share, taking the company’s net loss over the past nine quarters to over $6.5 billion. Not an impressive statistic for a company trying to re-establish itself as a global powerhouse.

What to expect from the future?

Is Nokia capable of bouncing back? Let’s take a look at the company’s future plans.

Nokia is trying to reduce its losses by cutting down on the expenses. Nokia Siemens aims to cut down about $2 billion in expenses as the company is trying to restrict the loss. Meanwhile, Nokia has also struck up a deal of $2.2 billion to acquire a 50% stake of Siemens AG in NSN. The company is also planning to reduce the operational expenses in the Device and Services segment by $4 billion.

Nokia is also trying to build on the success of the Lumia series smartphones. The massive increase of 32% in the sales of the Lumia series has given the company enough confidence to start the production of a new phone in the series. Nokia recently announced the Lumia 1020 and will start shipments before the end of August.

Following the trend of introducing low-priced phones, Nokia has also introduced a series of economical smartphones to unlock the stern market. The company has unveiled economical Lumia phones targeting the emerging market. On the back of success of the Lumia series, Nokia expects that low-priced version of the smartphone, with new features, will help the company boost its margins.

But, in my opinion, Nokia’s reluctance to switch to Android based mobile phones will prevent it from returning back to its glory days.

 Cut-throat competition

The presence of the big competitors like Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) has made things even more difficult for Nokia as it tries to revive its dominance. Let’s take a look at Nokia’s competitors one by one.

Apple

In these stringent economic conditions, many mobile developing companies are struggling to amplify their margins by selling flagship devices, but not Apple. Apple recently released its quarterly earnings and the results were phenomenal as it booked an all-time high in revenue for the quarter. The revenue of for the quarter increased $300 million to $35.3 billion, indicating a growth of 1% from the previous year.

The net income of the company was $6.9 billion primarily propelled by the increase in sales of the iPhone, which compensated for the decline in sales of the iPad and Mac. The extensively high loyalty rate of Apple costumers makes it difficult for any other competitor to damage Apple’s sales.

Apple is further trying to expand its presence as the company ended the quarter by opening six new stores across five countries and backed it up by planning to open nine more stores before the end of the present quarter. The expected launch of iOS 7 will not be good for Nokia, as Apple has promised a dazzling new interface and many splendid new features.

Google

Google also recently released its quarterly results as the company generated revenue of over $14 billion, signifying an increase of 19% year-over-year, but falling shy of the consensus estimates. The 900 million activated Android devices, along with 1.5 million new devices being sold every day, boosted Google’s margins drastically.

The company is planning to make certain advancements to its devices which will make Android even more user friendly. These advancements include the following:

  • Upgraded Google Maps, which is more user-friendly and easier to use is now available on almost all Android devices.
  • New software in Google Plus, which automatically improves and enhances the quality of the clicked photo.
  • New communication app, called Hangout, for video chatting and messaging.

All these innovations will certainly help Google to perform better and will damage the sales of Nokia.

Final summary

While the competitors of Nokia are making their phones more user-friendly, Nokia is focused on cutting expenses, and, in my opinion, Nokia may not be able to perform well in the future. Further, Nokia’s unwillingness to switch to Android operating system will have a negative impact on its future performance. 

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Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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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