Nokia’s (NYSE:NOK) second run with Microsoft’s (NASDAQ:MSFT) Windows Phone seems to be off to a flying start. The Finnish handset maker issued a very positive fourth quarter guidance Thursday, beating its expectations on both the feature phones and the Lumia front. Lumia shipment volume was 4.4 million units, more than 4 times the same in the fourth quarter of 2011. While there seemed to be high demand for the new Lumia Windows Phone 8 smartphones with various retailers and carrier partners in the U.S., Europe and China reporting stock sell-outs throughout Q4, it wasn’t clear if the same was due to a limited supply of the Lumias. The Q4 guidance does lift a fair bit of that uncertainty and with Windows Phones finally outselling Symbian and Meego models (by 2:1), a new era at Nokia seems to have finally begun. Moreover, as a result of the solid performance, Nokia expects its devices division to regain underlying profitability in Q4 2012.
The rising optimism surrounding Nokia’s comeback bid with Windows Phones saw its stock rising by close to 20% Thursday, bringing the share price closer to our $4.50 price estimate. However, it still remains to be seen how much of the Lumia mix was driven by Windows Phone 8 volume and if the shipment volume was propped up by some of the older Lumias that were deeply discounted. Further, the coming months will be very important for Lumia since Nokia will need to work hard to ensure that the demand doesn’t fizzle out post the initial euphoria in order to stage a turnaround in its smartphone business. Still, we believe that even a small improvement in Nokia’s handset business, together with its patent monetization initiatives and the ongoing turnaround in the wireless infrastructure joint venture with Siemens, should help it sustain the value that the market is assigning to the stock currently despite the huge rally in recent months. (see Nokia Worth $4.50 On Patent Licensing And Nokia Siemens Networks)
Nokia banks on strong carrier partnerships
Nokia’s strong start to its latest Lumia launch, especially in the U.S., is a good launchpad for the company to build it into a bigger success. The U.S. smartphone market is extremely crucial for handset makers since success here generally translates into positive consumer sentiment in other markets. However, Nokia has traditionally lagged rivals in this very important smartphone market due to a lack of strong carrier relationships. This time however, the company has aimed to set the record straight by launching customized variants of the Lumia with multiple U.S. carriers – a move that allows it get the most marketing dollars behind the Lumia brand.
AT&T, for example, which is backing the Lumia to the hilt and is the only carrier to have the high-end Lumia 9xx, could use its past iPhone experience to prove an able ally in this quest to create a third mobile ecosystem. The carrier had earlier put a lot of marketing weight behind the Lumia 900 launch, affording the phone a “hero” status at its stores and making it the exclusive free phone for all AT&T employees to generate awareness. The Lumia has therefore benefited from a greater marketing push of not only its founding partners but also one of the country’s biggest national carriers.
As for China, its smartphone market is expected to be the largest in the world by the end of the year. With 3G penetration at about 20%, the growth potential is huge. Even the carriers here are actively trying to transition their huge 2G base to 3G. Nokia has already roped in two of the country’s biggest wireless carriers, China Mobile and China Unicom, to carry the Lumia 920 in China. The deal with China Mobile could be the game-changer given that the carrier is in need of a flagship smartphone to promote its 3G network, an area where it has lagged behind its competitors. (see China Mobile Needs To Step Up As 3G Growth Slows) It is pursuing an iPhone deal, but government concerns over the high subsidies associated with the iPhone and Apple’s reluctance to compromise is a big deterrent. However, it may not be long before the iPhone arrives on China Mobile, so Nokia will be looking to make the most of the opportunity.
WP8 has essential ingredients for success
Overall, the Lumias have seen decent traction build up with carrier support in the U.S. and China helping Nokia sell about 14.3 million units in all since their launch in late-2011. However, where carrier partnerships have not been hard to come by, getting people to warm up to the Windows ecosystem has proved tough considering how well-entrenched Android and iOS have become as mobile ecosystems. The iTunes store and Google Play boast close to 700k apps respectively while there are only about 150K available in the Windows Phone Marketplace.
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 shared the same kernel and therefore inherited the same rich feature set that has made Windows a household name in the PC industry. This has helped 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, from both developers and users alike, thereby driving the sales of Windows Phones in general and the Lumia in particular.