Nokia (NOK) used to make the coolest handsets on the market. In some of the best product placement in history, the cute Nokia 8260 phones were featured in the "Charlie's Angels" film in 2000. Everybody wanted one. Nokia's design was sleek and the utility great. Along came the functionality of having a mobile handset that operated as more than a phone and Nokia just lost it. It went from being the number one go-to company for handsets to recently, the number two behind Samsung with Apple (AAPL) in the number three position and gaining quickly. After the long run of domination what is next for Nokia?
Nokia's book value per share is $3.77, which at its current price of around $2.80 has it trading below its book value. Nokia has total debt of $6.31 billion and total cash of $12.91 billion. The stock has a year high of $8.56 and a year low of $2.79. The price earnings are negative ($0.84) and it pays a dividend of 6.40%.
In April, Nokia provided its first-quarter 2012 numbers and outlook for second-quarter performance. Changes in the competition landscape diminished sales in India, the Middle East, Africa and China. China manufactures entry level mobile handsets called white box handsets. These are an unbranded, inexpensive, multifunction mobile phone.
These handsets are promoted in emerging markets and exported to South Asia, Southeast Asia, Middle East, Africa and South America. White box exports to India were a big growth factor in 2011. South America, Africa, and the Ukraine showed triple-digit rises in imports of white box handsets in 2011 compared with 2010. Nokia experienced declines in gross margins in the first quarter of 2012. Lower operating margins in the first quarter of 2012 were partially offset by lower warranty costs.
Nokia expects that operating margin in devices and services to be a negative 3% as opposed to a previously forecast break-even scenario. Nokia estimates that devices and services gross margins will be 25%, with mobile phone gross margin of 26% and smart devices gross margin of 16%. Nokia sold more than two million Lumia devices in the first quarter of 2012 at approximately $280 per device. Siri, the voice of the Apple iPhone used to say that the Lumia 900 is the best smartphone on the market. Apple now claims that this was a bug in the system and Siri no longer recognizes the Lumia at all. Nokia is betting on the Lumina smart device by increasing its investments in Lumina to achieve success in emerging markets. Its distributor partners are providing solid support for Windows Phone evidenced by the launch of the Lumia 900 by AT&T (T) in the U.S.
Nokia got rid of its own operating system in exchange for a Windows platform in partnership Microsoft (MSFT) to bolster its sales, particularly in China where its handsets are supported by China Telecom (CHA). Nokia currently uses a Texas Instruments (TXN) chip as the processor for mobile devices. A recent announcement has Nokia potentially shifting to a processor by Ceva (CEVA) for its low cost Asha smartphone, which has performed well for Nokia. The news release also speculates that Nokia will use the Ceva-produced processors for all of its handsets when its current agreement with Texas Instruments completes. The Ceva-produced processors are supported by Intel (INTC) and Broadcom (BRCM). Nokia's Lumia handsets are currently supported by Qualcomm's (QCOM) processors. The switch to the lower-cost Ceva product will help Nokia out with production costs.
Nokia has been hit with a class action lawsuit that alleges its officers told investors that Nokia's conversion to the Windows platform would stop its diminishing position in the smartphone market. Nokia disclosed that its first-quarter results were worse than expected and there was a glitch in the Lumia 900, which uses the Windows offering. To compensate for this glitch, Nokia had to offer customers $128, which essentially made the handset free. The result of this disclosure was that Nokia's ADRs dropped 16% in a single day.
Gartner Inc.'s report on mobile phone sales says that the worldwide sales of mobile phones declined 2% in the first quarter of 2012. This is the only time since 2009 that the market has measured a decline. The report says that Samsung's smartphone sales in the first quarter of 2012 were responsible for 40% of the smartphone sales in the global market. No other vendors reached more than a 10% market share. The first quarter of 2012, showed a lack of new product launches from manufacturers. Users delayed upgrades in the hope of better smartphone deals in the 2012, which did not happen. Global sales were due to a slowdown in the Asia Pacific region.
Global mobile phone sales for the first quarter of 2012 in order of most to least are Samsung with 20.7% of global sales, Nokia has 19.8% of global sales and Apple had 7.9% of global sales. Nokia's mobile handset sales declined by 22.7% from the same period in the previous year and Apple's grew by 96.2% as a result of the sales of the iPhone 4S released in October 2011. Google's (GOOG) operating system for the Android had 56% of the market in first quarter 2012 and IOS - Apple's operating system, was second largest with 22.9% of the market share.
The lower results in the first quarter have led manufacturers to be cautious about sales for the remainder of 2012. It is anticipated that the roll-out of new 3G smartphones by local and regional manufacturers will increase demand in Asia. The demand for product in mature markets for new versions of the Android and Windows Phone operating systems and the iPhone 5 will drive stronger demand in Western Europe and North America. Despite this demand there will be a downward adjustment in 2012 figure in the area of 20 million units.
That the industry did not see these declines coming is beyond belief. The West's increasing dependence on emerging markets to drive growth has become a bit of a joke. Large populations do not equal sales. The smartphone does not mean much in countries where a large portion of the population earns less than a subsistence wage, lives in areas where there are no cell phone towers and goes about the day not needing to communicate with anyone.
Macro-economic factors in Western Europe certainly come into play as the purchase of a new handset will not take precedence over food or housing. That being said, Apple's marketing superiority is the biggest obstacle for handset producers. Apple is able to make just about anyone long for a new gadget. Marketing is where competitors in the space have to step up their game to stay relevant. I don't know of any marketing campaigns in North America that focus on Nokia handsets. The only thing that I have seen is a video of a Lumia being used to hammer nails. I am pretty sure that I don't think about the utility of a handset as a repair tool when buying one.
While it is shocking to some in the industry that Nokia has been unseated, I believe that this was inevitable and it presents a great opportunity. I believe that Nokia got lazy and comfortable in its position. I think that Nokia suffers from not marketing its products well. Nokia has the ability to change the marketing plan, which is really all it will take for it to regain the number one place. Nokia has to make people more aware of its products.
It is difficult for any company to turn on a dime when market demand changes. Nokia will have a period of readjustment to market demands. The debt situation is low relative to other handset manufacturers and it has the ability to either grow its own talent to manufacture a better smartphone or buy the expertise from another manufacturer in the industry.
The stock is trading below book value, it has a great portfolio of intellectual property, ongoing orders for its handsets and the expertise and ability to re-adjust to the current market demand. The wild card is the management. If you believe the management is not capable of steering this company through a sea of change, don't buy it. If you think management can weather this, there is no reason not to buy this stock. I have faith in Nokia's management, and expect this stock to trade between $4 and $5 by late 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.