Nokia Earnings Will Hinge On Lumia Sales

NOK: Nokia logo

Nokia (NYSE:NOK) is set to announce its Q2 FY 2012 earnings on July 19th. The company has already warned that it may post a worse-than-expected Q2 as it continues to reel under the heightened competitive pressures from Apple’s (NASDAQ:AAPL) iPhone and Google’s (NASDAQ:GOOG) Android smartphones. 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 it will be the first full quarter that it has had a big presence in the U.S. and to an extent, China. We will also be taking a look at the company’s operating margins and how its initiatives to cut back on expenses are coming along.

See our complete analysis for Nokia

Nokia’s emerging market focus

Relevant Articles
  1. Is Nokia Stock A Buy At $4?
  2. Nokia Stock Looks Undervalued At $4
  3. Nokia Stock Poised For Recovery After Dismal Week?
  4. Nokia Stock Looks Set For Rally After Rough Month
  5. Can Nokia Stock Continue Weathering The Storm In The Broader Markets?
  6. Can Nokia Stock Continue Its Post-Earnings Outperformance?

Last quarter saw Nokia’s revenues from emerging markets fall more than 40% y-o-y 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. By our estimates, Nokia’s emerging markets division accounts for about 40% of the company’s value, the most among all the divisions; hence pricing pressures in emerging markets can take a huge toll on Nokia’s value.

We believe that Nokia has taken steps to address this concern with its recent launch of three new redesigned and fully touch Symbian Asha models which will help Nokia compete directly with the cheap Android smartphones and slow down Symbian’s decline. (see Nokia Expands Asha Line To Include Fully-Touch Phones; Bolsters Emerging Market Prospects) However, while a redesigned Symbian smartphone may help hold fort in the short-term, Nokia still needs a Lumia low-cost offering for the emerging markets considering the huge demand for such offerings.

China, for example, is expected to be the largest smartphone market in the world by the end of 2012. With 3G penetration at a lowly 16%, the growth potential in this market is huge. Even the carriers here are actively trying to transition their huge 2G base to 3G. But they are also wary of margin pressures that expensive 3G smartphones such as the iPhone entail. Nokia is trying to alleviate these concerns by offering more handset choices at lower prices or packing in more features for the same price. The company has launched Lumia 800C on China Telecom, and it plans to bring varied flavors of the Lumia to the other two Chinese carriers soon. While the iPhone retails at an unsubsidized $775 in China, Nokia’s Lumia 800C is priced at a competitive $570, cheaper by $200.

Still, Lumia 800C is a smartphone with high-end specs and Nokia will need to broaden its Lumia portfolio to include low-cost offerings. That, and the addition of the other two carriers, will help Nokia increase its presence in both the high-end and the low-end of the burgeoning Chinese smartphone market.

Lumia to gain momentum

While Symbian sales dropped off a cliff last quarter, Nokia managed to sell about 2 million Lumia phones in Q1, at an average selling price of $340. That wasn’t enough to make for Symbian’s decline but it was still double the 1 million that Nokia sold in the previous quarter. While the company is clearly struggling to negotiate a painful transition process from Symbian to Windows Phone, it is a good sign that the Lumia gained traction both in the U.S. and internationally while not having the best of carrier presence in key markets.

Last quarter, for example, the company had only just marked its re-entry into the U.S. with the launch of Lumia 710 on T-Mobile’s network in January. However, with the launch of the Lumia 900 on AT&T in April and the second largest U.S. wireless carrier affording it a “hero” welcome at its stores, we expect U.S. Lumia sales to have increased this quarter. The U.S. is a key market for Nokia, and an increasing presence of Lumia (Nokia has said a Verizon Lumia will “soon” be made available) will help it provide users as well as carriers with a competitive third alternative mobile ecosystem. Lumia also stands to gain from Microsoft’s renewed mobile push with the launch of Windows Phone 8 later this year.

Nokia’s earnings this week may not be impressive, but the company is making good progress on its Windows Phone plans so far. The transition from Symbian to Windows Phone has not been easy, and the shift in focus will continue to put pressure on financials as Symbian phones perform poorly. But the Lumia has been the subject of some of the most glowing reviews so far and if Nokia’s Windows Phones continue to see steady growth and reach a tipping point eventually, they can help make up for most of Symbian’s losses in due course of time.

Understand How a Company’s Products Impact its Stock Price at Trefis