Knockout Time for Nokia
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nokia’s (NYSE: NOK) troubles have been about as well documented as the rate manipulation within the 16 LIBOR banks. The mountain of column inches spilled over the former king of communications would probably stretch to the moon and back. If that’s hyperbole so be it as their challenge to restore some semblance of their former business is a Herculean one. At least CEO Stephan Elop isn’t acting like Jim Gordon at the end of The Dark Knight knowingly lying to the investors and the public about their prospects like that 'joker' running Research in Motion. He knows Nokia is in a bad way as well as at the mercy of the success or failure of Microsoft’s (NASDAQ: MSFT)Windows Phone 8 over the next 12-24 month.
Reduce, Remove, Re-Vitalize
Nokia’s latest earnings report was a sincere surprise to its harshest critics, managing their cash reserves in Q2 very well and giving the company breathing room to exit 2012 in a position to stay in the game. This along with the very surprising result that they managed to increase volume in the feature phone segment, albeit on rapidly shrinking Average Selling Prices speaks to a few things:
- Nokia’s brand is still very strong that they are still the first choice in emerging markets for quality phones over other competitors in a dying market
- Their new line of touch-enabled Asha quasi-smartphones will sell very well in large volume in their intended emerging markets at good margins.
- ASP’s for their smartphones, with thin gross margins on non-competitive specs and last year’s OSs were still an impressive 151 Euros, up 7% on the year, with 60% of them shipping with Symbian.
- 4 million Windows Phones were sold, half of which were Lumia 900’s indicates continued strong unit growth.
Nokia has been aggressive in cost-cutting, monetization of both non-core assets and patent licensing as well as restructuring Nokia-Siemens Networks to become a stand-alone profitable business.
While management made a point to note the growth of their Location and Commerce division it’s both high margin and a small portion of their revenue, but looks to be a potentially large area of growth as licensed products within all flavors of Windows and Bing. The acquisition of NAVTEQ puts them in a potentially dominant position for location-based data assessment. This is a one of those areas that will be very accretive if market penetration of Windows Phone/RT grows to be competitive.
Foundations of Phones
Stop for a second, ditching all of the Nokia/Microsoft baggage and ask yourself this question. Would you be interested in a platform that has been able to double its installed user base quarterly for three successive quarters, selling almost twice the number of units as Apple’s product did over the same span of time doing so against two entrenched competitors?
If you answer yes then this is the exact situation that Nokia and their Lumia line is in. In nine months Nokia has sold nearly 7 million Lumias across 4 models. Now add back in the Nokia brand, Microsoft’s commitment to building an ecosystem and the fact that much of the industry is pushing for this to succeed. Microsoft and Nokia have dominated in the past, and the fall from grace for both of them has been painful for some, enjoyable for others and at times nearly incomprehensible.
But, the foundations have been laid. Users of the Lumia 900 have been uniformly happy with their purchase with more than 95% of them satisfied with their purchase to recommend it to others. Nielsen recently reported that more than 98% of all users think their phone is without comparison and spend $15 per month on apps, twice the industry average.
As Microsoft courts developers and the Windows Phone app store continues to fill out (more than 100,000 apps have been released) the numbers point that Nokia is on track. Nokia World is the first week in September. Given the early success of the Google (NASDAQ: GOOG) Nexus 7 and the Kindle Fire previously, Nokia would be wise to develop the signature 7” Windows RT tablet to work alongside Microsoft’s Surface and the creative hybrid ones coming from the OEMs.
The 7” tablet is a fundamentally winning design that is complimentary to a desktop more so than the 10” tablet. It is a far more functional device for all-day use, I’m thinking now specifically about restaurant servers, and is a glaring hole in the announced forms for Windows 8 this fall.
Can the stock sink lower? Definitely. There’s nothing between now and September to support the stock in the short-term. Nokia’s rebirth is not going to happen all at once. Expecting huge market share gains to grab headlines is not on the docket. Rebuilding a once great company brick by brick, sale by sale is how investors should judge them at this point. The numbers say they are succeeding. The question is will it matter?
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google, Microsoft, and Nokia. 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.If you have questions about this post or the Fool’s blog network, click here for information.