Recently, Nokia Corporation (NYSE:NOK) posted its first-quarter earnings for 2013. Following the results, the stock headed down, depicting investor dissatisfaction. The company's mobile segment volumes decreased by around 30% on a quarterly basis to 55 million units. Also, the sales of phones under Asha range fell by more than 40% in the quarter. Moving ahead, I expect that mobile sales will pick up with improvements in the product portfolio. The company is renewing its Asha range, which can provide a boost to its second-quarter sales.
On the positive side, Lumia volumes were up by 27% to more than 5 million units as compared to the previous quarter, which came as a bright spot in the results. Lumia sales were up in all the regions, except North America where it is facing competitive pressures. The ASP (average selling price) increased to 34% on yearly basis, thus helping the company's devices and services segment to achieve profits for the second consecutive quarter.
To capitalize on the success of its Lumia range of smartphones, Nokia announced the launch of a new product in the U.S. by the end of the second quarter. This product will continue to use Microsoft Corporation's (NASDAQ:MSFT) Windows 8 platform. The upcoming Lumia 928 should achieve a leading status with major U.S. carriers in the future. Additionally, the company is working on its new device known as a 'phablet,' which would be placed somewhere between a phone and a tablet. Nokia is following Samsung's (OTC:SSNLF) footsteps by venturing into this area and its product will directly compete with Samsung's Galaxy Note series. The company is presenting its phablet as its most innovative product of 2013. Although, these products have to go a long way to give real competition to the market leaders, but such products will definitely keep the sales momentum going for the company.
Another turnaround factor for the company will be its low-cost phones targeted at the emerging countries, where it already has a good brand reputation. At the Mobile World Congress held in Spain, Nokia launched two affordable models Lumia 720 and Lumia 520 under the Windows 8 platform. According to an ABI report, around 46% of the smartphone market will be captured by low-cost phones in the next five years. This comes as a huge opportunity for Nokia to gain a higher market share in the emerging countries. Apart from Lumia, Nokia's additions to its Asha range of phones also provide an opportunity to the company to revamp its declining mobile segment. Recently, it launched Asha 210 under its low-cost range, which will hit the market in the second quarter. The most attractive feature for this device will be free subscription to WhatsApp for the life of the device, which costs $0.99 annually after one free year. The device is loaded with some high-end features at a reasonable price, aiming to capture the price sensitive customers. Nokia has around 10 such new devices in its pipeline in 2013 under the Windows 8 platform thus paving the way for better cash flow for both Nokia and Microsoft.
The concern area
China, the largest smartphone market is the main concern area for Nokia. Device sales in this region fell by around 26% on quarterly basis and by a massive 60% on yearly basis in the first quarter of 2013. This has greatly impacted the company's smartphone market share, which is trailing at just around 1%. The sales were adversely affected by growing competition from Apple (NASDAQ:AAPL) and devices based on Google's (NASDAQ:GOOG) operating systems, which control the high-end market in China. Moreover, it faces serious competition from the Chinese vendors such as Huawei and ZTE (OTCPK:ZTCOF). In order to enhance its market presence in China, the company is focusing on low-cost smartphones to capitalize upon its durable brand image among the Chinese customers. For this, Nokia already has a partnership with China Mobile Limited (NYSE:CHL), which has more than 700 million subscribers. This large base of subscribers gives Nokia an access to a wider market enabling it to recover in this region. China Mobile started offering Lumia 920 to its customers in late 2012 and it is committed to sell the recently launched models i.e. Lumia 720 and Lumia 520. The deal with Nokia also comes in handy for China Mobile. With low 3G penetration in China, the growth potential is really big. Most of the carriers were continuously trying for a smooth transition to 3G. Therefore, China Mobile always needed a flagship smartphone in the market to boost its network and for gaining a competitive edge.
Nokia's first-quarter results surely weaken my previous buy recommendation on the stock. However, the growing momentum of Lumia phones still keeps me going. I feel the stock will remain range bound, until Lumia volumes achieve a breakthrough level with more than 10% market share. The company is broadening its portfolio and geographic reach, which will be the tailwinds for the stock in the future. On the whole, I have a neutral take on the stock and further, wait for any substantial development.
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.