Nokia Needs To Step Up Its Pace

| About: Nokia Corporation (NOK)

Nokia's (NYSE:NOK) latest earnings release highlighted something I noted previously. The low-end of the mobile phone market is rapidly changing and the decision by both Nokia and Microsoft (NASDAQ:MSFT) to focus on hero devices was a serious mistake for both Nokia and the Windows Phone platform. Nokia's strength has been its attending to the needs of the vast mobile phone consumer at the low end of the price spectrum.

While the Lumia 920 is a brilliant piece of work and a great ambassador for Windows Phone and Nokia it was never going to sell in the kind of volume fast enough to offset the rise of the entry-level smartphone. Now with the latest earnings release we have a quarter, which is an object lesson in mismatching one's product line with the trends within the industry.

Nokia's revenue was hit by the double whammy of not only a drop in mobile phone sales but also ASPs, which dropped from $33 to $28 year over year and from $31 in Q4. Conversely, the ASPs for smartphones rose nicely from $186 to $191 along with gross margins but not nearly enough to cover this drop.

The report is not a disaster, but it does rob the company of any goodwill from a solid increase in Lumia sales. Had Nokia been out the door with the Lumia 520 or 620 back in November along with the 920 they would have had themselves a volume player at the low-end of the market along with the 920 in a kind of reverse bait and switch arrangement that would have driven sales. They also would have been better prepared to ramp up production on the easier to produce lower end phones in response sooner.

So, while 27% unit sales growth for Lumia is good, it could have been much better. Both Microsoft and Nokia were too timid in their WinPhone 8 launch strategy.

Instead the whole Lumia strategy was focused on trying to legitimize the brand in a North American market that, frankly, is not going to be won over that quickly. That Q1 sales in North America actually dropped significantly is telling. Mix in the carrier exclusivity tied to AT&T (NYSE:T) and we have a roll out that, while successful, was not capable of being sustained without a product that would attract the cost conscious buyer. How many Android owners would have switched to a 520 for less than $200 during the initial supply constraints surrounding the Lumia 920? We won't ever know.

But we do know that in the markets where an entry-level phone was shipped alongside the 920 we saw adoption. That's the good news. And it is very good news for Nokia and Windows Phone. But, the mishandling of the U.S. and the lackluster response to the 820 - too similar to a 920 to simply make people on Verizon (NYSE:VZ) and T-Mobile angry they didn't have access to a 920 - is an opportunity cost that both Microsoft and Nokia can ill afford.

The 30% drop in feature phone sales is indicative of how slowly Nokia actually responded to its predicament. Maybe there is only so much a firm can accomplish in a given amount of time, but given the law of large numbers I went over in my last article on this subject, Nokia needs to be shipping 10 million Lumias in Q2 not 7 million, which is effectively what management is guiding - similar percentage sequential growth at 27-30%.

So, this earnings report was one that was pretty predictable, all things considered. Producers like Huawei, Lenovo (LNGVY.PK) and ZTE (OTCPK:ZTCOF) are all selling millions of cheap, disposable smartphones now, the same way that Nokia used to sell candy bar phones at astonishing rates. Moreover, in the earnings call CEO Stephen Elop mentioned that the Asha line is due for a refresh, yet gave no guidance as to when it would happen. If Asha sales are already starting to fade rapidly without a replacement to staunch the bleeding then Elop and his team need to figure out a way to sell 10 million or more Lumias in Q2.

Like the rapid shift downward in PC sales the rapid move away from feature phones has put Nokia back in a difficult position. The turnaround strategy is working and if not for a couple of strategic mistakes would be farther along than it is. The mistake in the U.S. market is that the hero device strategy is simply a big marketing tool.

The U.S. is not going to turn Nokia now after 20+ years of not doing so. But, with a proper lineup of Lumias to sell around the world now the hero device strategy has a better chance of succeeding in accelerating growth. Elop teased us with a new device in his remarks on the earnings call and the rumors are everything from a phablet to a 7 tablet to a Lumia EOS - with a 41 megapixel PureView camera.

These are all good to have, but Nokia's future looks a lot like its past - great, durable devices at a great price for the masses. Without this core business operating well, the rest of the company's offerings simply do not matter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a windows phone