Nokia (NOK) is set to announce its Q3 FY 2012 earnings on Oct. 18. As the company guided during the last quarter’s earnings call, we expect Nokia to have had a challenging Q3 in the face of heightened competitive pressures from Apple (AAPL) and Google (GOOG) in the smartphone market. With a tough transition period ahead, we believe that the extent of the drop in Symbian sales and the corresponding pick up in Lumia’s will be the key takeaways this quarter.
Lumia's performance this quarter will be especially important since Nokia is transitioning to the new Windows Phone 8 platform this holiday season and it will be interesting to see what impact that might have had on customer purchases. Apart from the Lumia sales, we will also look at the company’s device revenues from the emerging markets, where Nokia has a significantly stronger hold. While Nokia’s operating results this quarter are unlikely to be pretty, the company will be looking to conserve its cash balance and hold on long enough for its new Lumias to generate traction and more than offset the Symbian losses.
In order to drive operational efficiency, Nokia is restructuring its operations, shutting down plants and cutting almost 10,000 jobs to realize around $2 billion in cost savings, as compared to 2011, in the devices business by the end of 2013. Last quarter, the company managed its working capital well enough to generate positive free cash flows to the tune of $117 million despite reporting a big operating loss. The Nokia Siemens Networks division, which contributes more than 22% to Nokia’s value by our estimates, has now generated cash for the last three quarters.
As the company executes on its turnaround plans, Nokia’s cash position will be one of the key focus areas that we will be taking a look at this quarter. We have a $4.50 price estimate for Nokia’s stock, about 70% ahead of the current market price.
Nokia's Emerging Market Focus
Nokia started 2012 worryingly with a big drop in revenues from what has traditionally been seen as one of the company’s strongholds -- the emerging markets. The March quarter saw Nokia’s revenues from the region fall more than 40% year over year as the proliferation of cheap Android-based smartphones manufactured by Asian rivals ate into the volumes of its S40 based feature phones. As a result, it even lost its position at the top of the handset market to Samsung.
However, the company has since addressed the situation well with the early launch of the Lumia 610, its cheapest Windows Phone yet, in Asia and other emerging markets in April. This, along with the successful roll-out of its S40 Asha range as well as dual-sim devices, helped Nokia post sequentially flat emerging market revenues and unit sales of almost 68 million units in the July quarter -- a growth of more than 2% sequentially.
The more recent launch of three new redesigned and fully touch Asha models will further boost Nokia’s competence with the cheap Android smartphones and slow down the decline, giving Windows Phones enough time to gain momentum. The positive response to Nokia’s phones in emerging markets this quarter shows the company’s brand value in these regions and the launch of cheaper Lumia models should help the company defend its emerging market share in the coming quarters.
Carrier Support and Microsoft Partnership Key
At the same time, Nokia is looking to penetrate the U.S. smartphone market, which is crucial for it since success here generally translates into positive consumer sentiment in other markets. It will not be easy considering that Nokia is a relatively new player here as compared to Apple and Google who command a lion’s share of the market. However, Nokia’s bet on Windows Phone means that it has the backing of a determined Microsoft making a reinvigorated bid on the fast-growing mobile market with the Windows 8/Windows Phone 8 launch this holiday season (see "Nokia Announces Lumia WP8; Likely To Wait For Windows 8 Launch Before Shipping").
In addition, Nokia is counting on the support from carriers who are looking to increase competition in the smartphone market to lessen the impact of subsidies on their margins. AT&T and T-Mobile have already jumped on the new Lumia offerings, and Nokia is expected to add Verizon soon. Nokia’s strategy with the Lumia in the U.S. is that by offering carriers exclusive access to different custom-built Lumias, so that the carriers can look to differentiate themselves from competitors, it would be able to garner more marketing support from them.
Further, Nokia is pushing Lumia hard in China as well, which is expected to supplant the U.S. as the world’s biggest smartphone market by the end of the year. Nokia has already launched the Lumia 800C and announced the cheaper Lumia 610 on China Telecom, and is rumored to have roped in China Mobile as well for its WP8 plans. 3G penetration is still at a lowly 18% in China, and the carriers there are actively trying to transition their huge 2G base to 3G. With a billion strong mobile subscriber base and growing demand for 3G services, China presents Nokia with a huge opportunity to create a smartphone niche for itself.
Where carrier partnerships have not been hard to come by for Nokia, getting people to warm up to the Windows ecosystem has proved increasingly tough considering how well-entrenched Android and iOS have become as mobile ecosystems. This is where WP8 offers both Nokia and Microsoft their best chance to find a place in the growing mobile market. While building Windows 8 and WP8, Microsoft ensured that both share the same kernel and therefore inherit the same rich feature set that has made Windows a household name in the PC industry. This will help integrate the two platforms closely, thereby making apps developed for either platform easier to port. Having a huge user base for its Windows PC platform will therefore help Microsoft generate significant support for the new integrated Windows8/WP8 user experience, driving the sales of Windows Phones in general and the Lumia in particular.
Disclosure: No positions.