Nokia's Surprising Profitable Quarter

| About: Nokia Corporation (NOK)
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Gartner's latest quarterly report on worldwide mobile phone sales saw phone sales grow 3.6% over the year to 435 million units in the second quarter of this year. During the same period, worldwide smartphone sales grew 47% to 225 million units, while sales of feature phones fell 21% to 210 million units. The report revealed that due to the declining feature phone demand, sales of Nokia (NYSE:NOK) phones fell to 61 million units from 83 million units last year. But Nokia's smartphones are helping the company out as Nokia's Lumia sales grew 112.7% over the year. The phone manufacturer is still facing stiff competition from Google (NASDAQ:GOOG) Android devices and the lower cost phones manufactured by regional and Chinese manufacturers.

Nokia's Financials

Since Microsoft (NASDAQ:MSFT) announced the proposed acquisition of Nokia's phone unit, things have been looking up for Nokia. During the recently ended quarter, it announced a surprising profit. Q3 revenues fell 22% over the year to €5.7 billion (~$7.81 billion), missing the market's projections of €5.9 billion (~$7.84 billion). Adjusted EPS for the quarter came in at $0.01 compared with the break-even quarter projected by the market.

By segment, revenues from devices and services segment fell 19% to $3.84 billion, with sales from smartphones growing 28% to $1.66 billion. Mobile phone sales fell 37% over the year to $1.97 billion. Nokia Siemens Network Segment revenues fell 26% to $3.43 billion, and revenues from their mapping segment fell 20% to $0.28 billion.

Among other metrics, average selling price of smartphone devices fell 8% over the year to $189.40 during the quarter. The metric for mobile phone devices was down 13% to $35.8. During the quarter, Lumia smartphone shipment grew 40% over the year to 8.8 million units. Mobile phone sales, however, continued to decline and fell 22% to 64.6 million units.

Nokia and Microsoft Continue to Count on Lumia

Lumia sales may have registered an impressive growth, but they are still far behind smartphone sales of other manufacturers. Samsung was the leader in the segment, with sales of more than 88 million devices, and Apple's (NASDAQ:AAPL) iPhones were the second largest phones with 33.8 million units. Nokia's performance is rather disappointing considering that once upon a time, it was the leader in phone sales and now manufacturers like LG (OTC:LGEIY) and Lenovo (OTCPK:LNVGF) also beat the company with sales of 12.7 million and 11 million units, respectively.

But Lumia's growth has been impressive in the North American market. Last quarter, sales of Lumia devices grew 366% in North America to 1.4 million units. Lumia's growth has been attributed to the availability of the low-cost 520 series and its Verizon flagship, Lumia 928. As part of its focus on Lumia devices, Nokia is working on a Windows-based Lumia tablet, code-named Illusionist. The 8-inch Windows tablet is expected to be released early next year and will feature Windows RT 8.1 and a Qualcomm processor.

As Microsoft and Nokia wait for regulatory approval to their merger, Nokia is preparing for the launch of Lumia 929 handset on Verizon (NYSE:VZ) and a low-cost Lumia 525 Windows Phone. Earlier last month, it released a six-inch smartphone, Lumia 1520 and a low-cost option in the Lumia 1320.

The new smartphone boasts of a 1080p full HD display. This is Nokia's first attempt at a six-inch phablet based on the Windows Phone, a Qualcomm (NASDAQ:QCOM) quadcore Snapdragon 800 CPU and PureView imaging sensor which delivers 20MP images. But the phablet will have to deal with the fact that Windows Phone still has a small selection of apps.

Nokia is certainly bombarding the market with a series of Lumia devices before it hands over the reins to Microsoft. Meanwhile, the stock is trading at $7.46 with a market capitalization of $27.94 billion. It touched a year high of $7.99 earlier this month.