On its pursuit to catch up with the market leaders Samsung (OTC:SSNLF) and Apple (AAPL), Nokia (NOK) reported a steep drop in first-quarter sales. Revenue dropped by 20% compared with the first quarter year-over-year and it was down 27% just from the last quarter of 2012. Bearish reaction was huge because analysts predicted a plunge of about 10% in Europe not 20% as was announced.
Even with the announcement that Lumia handset sales increased by 27% compared to the last quarter of 2012, Nokia could not get away from the fact that it's two largest businesses "device and services" and " Nokia Siemens Networks" both lost significant business. Nokia has been anchoring its hope on Lumia phone sales to help the company turn the ship around. In the first quarter of this year the company sold 5.6 million units, which was up from 4.4 million the previous quarter. But overall net sales fell 20 percent to 5.9 billion euros from a year earlier, while phone volumes tumbled 30 percent on the previous quarter.
The "device and services" division has been the bread and butter business for the company. It is a bit worrisome when the less-expensive mobile phone arena lost volume and average selling price.
Investors are getting skittish and it's understandable why they are. Stephen Elop, the chief executive, made the decision to set the sails of the company into the winds of opportunity that Windows software would bring even though it was untried. He estimated that the transition would take a couple years and that was two years ago but the company has yet to show a turnaround.
Everyone who has invested in the company wants to see it profit and stop bleeding cash. Having to get rid of the dividend and sell its headquarters just to lease it back to boost its bottom line is getting old. While the company sells more regular mobile phones than smartphones its future is going to depend on those high-margin smartphones and the company is going to have to grow those. But Samsung and Apple have no desire to, and are showing signs of giving up their market share. Just to let you see in comparison of what Nokia is up against: in the same quarter that the company shipped 5.6 million units, up 27%, Samsung shipped 61.6 million units and Apple shipped 36.9 million iPhones. And very soon Samsung's Galaxy S4 is going to be coming out and is expected to do very well.
Trying to Jump Start Low-end Phone Sales
In an attempt to address the company's recent slump in low-end phones in emerging markets, the Lumia 520 is well priced, less than $200 and this should help the company battle low-end android smartphones in markets like China and India. In regions like South Asia, the Middle East and Africa, Nokia is very popular and the Lumia brand is expanding the Windows 8 phone to its less expensive price point models in these regions that is intended to boost sales in a popular region already.
I believe the key to the company's success will be addressing the supply constraints the company had the fourth quarter of last year in China. If you would remember, the Lumia 920 was launched by three large carriers in China as the year ended. Initial response was overwhelming and the demand was great but the mobile carriers sold out within hours. Nokia could not replace the phones. It is planning to launch its cheaper line of phones starting with China Mobile its 720, 620, 520 models ahead of Samsung, LG, or even BlackBerry's launch of its mid-range BB10 handsets later this year. This will give it a jump on the competition and if the phones are well received sales should continue to help lift the company.
Uncertainty Still Persists
I am of the opinion that the company's focus on the Windows phone in the smartphone industry is the key to its future success and we need to see the Windows phone sustain itself and grow in popularity because the viable alternatives just aren't there. The Windows phone is the only alternative to the iOS and Android operating systems. BlackBerry's BB10 is unproven and uncertain so there's not much I can comment on that yet. I am sure investors want to see the Windows phone grow fat and happy on android and iOS market share but the challenge is great and this is not something that could happen quickly.
If the company would become an "Android" company, then it would have to compete directly with Samsung, HTC, Sony and LG plus many other handset makers in the emerging markets. How would it be able to differentiate itself against the crowd as it struggles, and how would it market directly against a company like Samsung? The Windows phone gives the company more opportunity for marketing power behind its Lumia brand and it also has Microsoft (MSFT) behind it promoting its platform. So the Windows platform makes sense for Nokia because it does set the company apart and gives it a trumpet to sound that is all its own. But at the same time, as goes the Windows phone so it looks like Nokia might go. Food for thought investors, food for thought.