Nokia's Windows Phone Reality Check

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On Jan. 10, Nokia (NYSE: NOK) issued a preliminary report on its Q4 2012 results, claiming that its phone division, Devices and Services, “has exceeded expectations." But in fact, Nokia’s smart device sales continue to collapse on a year-over-year percentage basis. 

Smart device unit sales (including Lumia phones) declined by a whopping 66.3% compared to Q4 2011 while revenue dropped by 56.3% year over year.  The news that Nokia had exceeded expectations was sufficient to spark a rally in Nokia shares, but given the grim Q4 outlook Nokia stated in its Q3 Earnings Report, this should come as cold comfort to investors. 

Continuing Collapse
Nokia reports sales figures for the Smart Device classification in its Devices and Services division, which include all Lumia Windows Phones.  The continuing collapse of Smart Device sales can be seen in the table below, drawn from Nokia’s quarterly earnings reports. 

<table> <tbody> <tr> <td> <p><strong>Quarter</strong></p> </td> <td> <p><strong>Smart   Device Unit Sales (M)</strong></p> </td> <td> <p><strong>Y/Y   Unit Sales Change</strong></p> </td> <td> <p><strong>Smart   Device Revenues (Euros)</strong></p> </td> <td> <p><strong>Y/Y   Revenues Change</strong></p> </td> </tr> <tr> <td> <p>Q4   2011</p> </td> <td> <p>19.6</p> </td> <td> <p>-31%</p> </td> <td> <p>2.75E+09</p> </td> <td> <p>-38%</p> </td> </tr> <tr> <td> <p>Q1   2012</p> </td> <td> <p>11.9</p> </td> <td> <p>-51%</p> </td> <td> <p>1.70E+09</p> </td> <td> <p>-52%</p> </td> </tr> <tr> <td> <p>Q2   2012</p> </td> <td> <p>10.2</p> </td> <td> <p>-39%</p> </td> <td> <p>1.54E+09</p> </td> <td> <p>-34%</p> </td> </tr> <tr> <td> <p>Q3   2012</p> </td> <td> <p>6.3</p> </td> <td> <p>-63%</p> </td> <td> <p>9.76E+08</p> </td> <td> <p>-56%</p> </td> </tr> <tr> <td> <p>Q4   2012 Estimate</p> </td> <td> <p>6.6</p> </td> <td> <p>-66.3%</p> </td> <td> <p>1.20E+09</p> </td> <td> <p>-56.3%</p> </td> </tr> </tbody> </table>

Unlike previous quarters, Nokia did actually break out separate numbers for Lumia and Symbian sales within the Smart Device category: 4.4 million and 2.2 million, respectively. 

The Lumia sales number of 4.4 million is particularly interesting, since it represents the first hard data on Windows Phone 8 sales that has become available since the platform debuted in October.  Assuming as a best case that all 4.4 million sales were of Windows Phone 8 devices, the number is still dismal. 

Last quarter alone, Apple (NASDAQ: AAPL) sold 26.9 million iPhones, and in Q4 they are expected to sell considerably more, because the holiday season is traditionally strong for Apple.  Likewise, in the third quarter, Google (NASDAQ: GOOG) reported activating 1.3 million Android devices per day, most of which are Android based phones, and Android can also be expected to have a strong holiday season. 

The point I made in Is Nokia Overvalued? bears repeating:  Given the explosive growth of the smart phone industry as a whole, Nokia’s smart device sales would also have to grow rapidly just to keep up, but in fact, the collapse continues.  Nokia’s data confirms that Windows Phone 8 has failed to arrest the decline in Smart Device sales. 

Obfuscation and Spin

The earnings reports of troubled companies often become increasingly obfuscatory as their managements seek to minimize the bad news in the eyes of shareholders.  They tend to resort to non-standard accounting to characterize earnings and profitability, or engage in other tactics designed to confuse investors.  Nokia’s preliminary earnings release does both.  The report states that Devices and Services “achieved underlying profitability” with a net non-IFRS (International Financial Reporting Standards) positive operating margin.  We can assume that this means that the IFRS-compliant results for the division will probably show a loss, as they have throughout 2012. 

Beyond the accountancy details, Nokia chose to lump together Asha, Lumia, and Symbian smartphones for a total number of 15.9 million sales for the quarter.  This seems intended to give the tech media a made-to-order headline: “Nokia Sells 16 million Smartphones in Q4”.  Lumping the three devices together may or may not make sense, but doing so seems intended to obscure the performance of Windows 8 Phones. 

Asha is not really in the same class as smart phones such as Android, Windows Phone, or iPhone.  Asha is a feature phone with a touch screen, running an OS derived from Symbian Series 40 that is just called Nokia OS.  It is intended for emerging markets (think razor-thin margins) and will probably never make its appearance in the U.S.

It had become obvious even before this report that both Microsoft (NASDAQ: MSFT) and Nokia intended to spin the poor sales results for Windows Phone 8 devices as a consequence of “limited availability”.  (Microsoft also intends to employ the same gimmick to explain away poor Surface RT sales, I am confident.)  In the age of online retailing, “limited availability” seems a poor excuse. 

If true, what does this say about the competence of Microsoft and Nokia managements?  In effect, they are implying that they missed a major opportunity because they weren’t ready.  I doubt that this is really true.  I can’t find even anecdotal evidence to support the contention that demand exceeded supply except perhaps in the first few weeks after WP8’s introduction.

2013 Turnaround?

I wouldn’t be surprised if this post receives comments to the effect that low Lumia sales really were the result of limited availability, and that sales will begin to take off in 2013.  This is not beyond the realm of possibility, I concede, but here I’m inclined to side with Nokia’s own guidance for Q1 2012.

Nokia stated that it expects Devices and Services to sink back into a loss, even on a non-IFRS basis, citing weak seasonal demand for Lumia and Asha smartphones. 

Let me conclude by offering some observations based on comments received by my last post, Is Nokia Overvalued?.  I understand that people can be very passionate about their chosen device platforms and their investments.  Even though I’m an iOS developer, all the reader has to do to realize that I’m not particularly biased towards Apple is read my article Apple’s Tim Cook: Insularity without Inspiration.  In fact, I use Windows PCs and Macs, and I even own an Android tablet.  I don’t owe allegiance to any particular platform, and I don’t base my business assessments of them on my personal preferences. 

Personally, I like Windows Phone 8, and I consider it to have the most innovative user interface of the three major mobile OS’s.  And I consider the Lumia 920 to be one of the best smart devices available from a hardware standpoint, better than Nexus 4 or iPhone 5. 

But these things don’t change my fundamental assessment that most consumers are not interested in Windows Phone.  More than ever I stand by my last post's assessment:  Nokia's return to sustained profitability will be difficult if not impossible in 2013 if Windows Phone 8 doesn't succeed.  To succeed, WP8 has to gain significant market share, and this is looking increasingly unlikely.  Faced with mounting losses, Nokia may seek a merger with none other than. . . Microsoft. 

MarkHibben has a position in Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and 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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