In Part 1 of Nokia's (Hidden) Value, I detailed how I believe Nokia (NYSE:NOK) is taking the necessary steps towards righting its well-documented fall from the world's dominant cell phone maker just a few years ago to a company now trying to dramatically reinvent itself. Next, I will discuss the areas that, when combined with its restructuring, could push the company back towards profitability.
When analysts, pundits and reporters have talked about Nokia in the past two years, they have inevitably discussed how Nokia was once the world's top selling manufacturer of cell phones. In fact, it was only in Q1 of 2012 that Samsung finally overtook Nokia, after more than a decade as the top seller, peaking with sales of over 400M units per year from 2007-2011. While it is true that Nokia's total sales and market share have both plummeted, it is still the second highest selling manufacturer in the world - and by a large margin over third placed Apple (NASDAQ:AAPL) (19.9% market share in Q2 2012 compared to Apple's 6.9%). With sales of just under 83M devices in Q1 2012 and just over 83M in Q2 2012, Nokia is on pace to sell over 300M units this year.
Granted, the vast majority of these sales will not be smartphones (which have a much higher profit margin), but it still means Nokia has a strong base for revenue from these sales and puts it in the enviable position of being a very well-known and well-liked brand for people who are looking to upgrade their phones, particularly to their first smartphone. Consider when you sell over 400M phones per year for five straight years, you will likely have millions (billions even) of potential repeat-customers, with many of those in markets that are just now starting to purchase smartphones in meaningful quantities. This is where Nokia has the possibility of a huge comeback, as the Finnish brand is one of the most visible and well-liked in these emerging markets. Evidence of this can already be seen with Nokia's Asha feature phone in India, where the cheap smartphones (aka feature phones) are doing well, especially compared to low-end Android phones. This potentially positions Nokia for its low-end Lumia Windows Phone devices to perform well in these soon-to-be burgeoning markets. Strong basic-, feature- and low-end smartphone sales in emerging markets might not be enough to convince potential investors of Nokia's upside, but coupled with its restructuring efforts, could help the company reach profitability sooner and give it more time to increase its market share in the (higher-end) smartphone market.
Many point to the disappointing sales of the Lumia Windows Phone 7.5 series worldwide, and in North America in particular, as the reason for Nokia's steep decline, as they were unable to replace the rapidly falling sales of its Symbian-based phones. It was, however, unreasonable to expect Lumia to be able to replace Symbian sales right away, especially in light of how Nokia jumped from Symbian's "burning platform". All things considered, Lumia was doing reasonably well as it shipped/sold 1M units in Q4 2011, 2M in Q1 2012 and 4M in Q2 2012. This means it was doubling its sales every quarter-yes, they are not nearly at the levels Apple and Samsung sell at, but they were moving in the right direction.
So why were sales not more robust and why do many industry analysts expect a drop in Lumia sales for Nokia in Q3 2012? Consider the circumstances of the Lumia sales, and you might see they were actually not as bad as they could have been. The first 3M units of Lumias sold were made up of the 800 and 710 models, as the 900 and 610 weren't released until Q2 2012 (April). However, the Lumia line was very well reviewed (even Siri said so), award winning, and, when the Lumia 900 was released in the United States in April, it even topped Amazon's (NASDAQ:AMZN) best seller list. But this meant that Nokia didn't have a "high-end" Windows smartphone to sell until five months after the first Lumias were put on sale, possibly hurting sales from those people wanting a device that could compete with the iPhone. As well, the 900 wasn't released until mid- or late-Q2 outside of the United States & Canada. For example, the 900 was only released in the UK in May, China and Russia in mid-June and it didn't come to India until September. So most of those markets would have only had one to two months to allow the 900 to impact Q2 sales figures, and some (such as India) wouldn't start counting until Q3.
Even when the devices did become available, sales might not have been as brisk as Nokia had hoped as many potential buyers knew that Windows Phone 8 was coming later in the year. It might even have been understandable that the more tech-savvy buyers were holding off purchasing a Windows Phone until WP8 came out, but as soon as Microsoft (NASDAQ:MSFT) announced that existing Windows Phone 7.5 devices would not be upgradeable to Windows Phone 8, it undermined the Lumia WP7.5 sales, causing Nokia to have to slash prices on the phones just to keep them selling. The timing of the announcement also didn't help that just as some of the aforementioned markets were getting the Lumia 900, they were hearing that it wouldn't be upgradeable to WP8.
While this announcement might have hurt Nokia's existing Lumia sales, all evidence points to Nokia's new Windows Phone 8 phones, starting with the Lumia 920 and 820 (and variants), as having all the opportunity, and backing, to do much better than their predecessors. Microsoft's CEO, Steve Ballmer, exclaimed that "this will be the biggest product and services launch year in our company's history, creating massive opportunities for our partners to grow their businesses." And Microsoft seems to be backing that up by preparing a massive advertising campaign which Forbes describes as "the biggest product launch in the history of the industry", rumored to be as much as US $1.8B. Not to mention that Windows Phone 8 is expected to be supported in 180 markets at launch, that is compared to just over 50 markets around the world that Nokia has sold its Lumia devices in so far. By all accounts Nokia made a great product with the Lumia 900, and by all accounts the Lumia 920 is even better, continuing the Lumia line's award-winning design trend that set it apart from its competition combined with distinctive features.
One of those features is Nokia Maps which has recently been thrust into the spotlight with the release of the iPhone 5 and its disappointing Apple Maps. But it is not just Nokia Maps that can help Nokia return to profitability, it is the entire Location & Commerce business unit that created the backbone for Nokia Maps' strength. Nokia has been investing heavily in this side of its business, most notably with its US $8.1B purchase of NAVTEQ in 2008. Well, that huge investment might just start to payoff in the coming years as Nokia has signed mapping/location deals with many companies such as Oracle (NYSE:ORCL), Amazon, Yahoo! (NASDAQ:YHOO), Groupon (NASDAQ:GRPN), BMW and Mercedes. Location & Commerce is Nokia's smallest business unit, bringing in just over EUR 1.0B in net sales in 2011 (compared to EUR 24.0B and EUR 14.0B for its Devices & Services and Nokia Siemens Networks (NSN) business units respectively), but it seems to be the one poised for the most new growth (as opposed to just trying to re-acquire lost market share).
The final area that Nokia could potentially see some growth is with its NSN business unit which returned to an (non-IFRS) operating profit in Q2 2012. Couple this with recent news that saw the United States' Congress state that NSN's competitors Huawei and ZTE "cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States", and similar allegations by the Australian government, which barred Huawei from work on its national broadband network earlier this year, and it could mean more opportunities for NSN ahead.
Nokia is undergoing a dramatic change. It is cutting out and selling off unprofitable parts of its business and launching new and innovative products. It has a lot of work ahead, but it is taking the difficult and necessary steps to achieve success. Q3 2012 will be another tough quarter for the Finnish company, but it will lead into the final quarter of the year in which we could all see that hard work come to fruition. The launch of Windows Phone 8 will be crucial to Nokia's turnaround, and while it might not take the world by storm, à la Apple and Samsung, even moderate success will push Nokia back towards it once-great heights, and take its investors up with it.
Disclosure: I am long NOK. 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.