Nokia (NYSE:NOK) is expected to release its Q2 2013 results before the market opens on July 18th. The former mobile industry leader has fallen on difficult times of late as its handset business is reeling under the effects of a slumping feature phone market amid a slow smartphone transition to Windows Phone.
In Q1, Nokia’s results were marred by a higher-than-expected decline in feature phone sales even as Lumia Windows Phones performed strongly in what is seasonally a weak quarter for smartphones. While Nokia’s future as a mobile phone player definitely depends on the success of its Lumia line, its near-term outlook is still heavily dependent on the feature phone business which not only accounts for a majority of its device revenues currently but is also the segment’s only profitable arm. It is in this regard that the performance of Nokia’s Asha line of feature phones in the emerging markets will be closely followed this earnings call and could be key to its profitability for the quarter.
The sales of the Lumia line of smartphones have on the other hand been steadily growing each quarter. Despite having not yet launched the low-cost Lumia 520 and 720 models in many markets, the company posted an impressive 27% growth in Lumia volumes last quarter. With the Lumia available at almost every price point currently (except the very low-end), Nokia’s Q2 results will provide us the first insights into Lumia’s ability to hold off competition from Android rivals in emerging markets. Nokia is however incurring huge expenses in marketing and pushing the Lumia into new markets, and this is likely to be a drag on profitability in the near-term. The company has therefore made a wise decision to buy out Siemens’ stake in their joint venture, Nokia Siemens Networks, which has been generating steady cash flows of late and is on its way to sustained profitability. NSN’s performance will be especially important for Nokia from this quarter on given that it will now be owning the business entirely and not just 50%.
Sales Of Low-end Lumia And Asha Are Key
With the launch of the high-end Lumia 920 and 820 during the holiday season last year, Nokia managed to generate positive buzz around its new Windows Phones with innovative features such as wireless charging and the much-touted PureView camera. However, the high-end smartphones aren’t central to Nokia’s value in mobile phones most of which is concentrated in the emerging markets where Android has been getting increasingly popular with its wide range of cheap smartphone options. For Nokia to not lose one of its key strengths, it needs its Lumia smartphones to do well in the emerging markets where a huge population of feature phone users are gradually switching to low-end smartphones. Despite its falling market share, Nokia is still one of the more popular brands in these markets selling almost 30% of all feature phones worldwide. A turnaround in Nokia’s mobile business therefore hinges on its ability to draw more of these eventual smartphone switchers to one of its mobile platforms. (Asha or Lumia)
It is here that the importance of Nokia’s Asha line of quasi-smartphones lies. The Lumia family of smartphones may have managed to break the $200 price barrier with the Lumia 520, but Nokia is still using the Asha line of S40 phones to bridge the gap between its feature phones and the low-end Lumia. These Asha phones, together with the more recently launched Lumia 520 and 620, have been Nokia’s answer to the growing number of cheap Android options in the emerging markets. Last quarter was however marred by unusual seasonality as Asha sales fell to about 5 million units, down by over 45% sequentially. By our estimates, the emerging markets account for more than 60% of the entire value in Nokia’s mobile division, and the demand for these low-end smartphones is key to how Nokia fared in Q2.
NSN acquisition buys time for Nokia
Nokia’s recent decision to assume full control of its networks business by buying out Siemens’ 50% stake in the venture will help it tide over some of the near-term uncertainty surrounding its mobile division. Buoyed by the ongoing transition to 4G LTE taking place in many regions worldwide, Nokia Siemens Networks is making some impressive market share gains in the wireless infrastructure market and increasingly showing signs of turning the corner afters years of making losses. It now has a position in most of the active LTE markets round the world, such as Japan, South Korea and the U.S., and is looking to break into the new ones – China, India, Chile and Brazil. As of the third quarter of last year, NSN had succeeded in increasing its market share to about 20% of the wireless infrastructure industry, only 2% behind #2 player, Huawei.  NSN now expects to reclaim its #2 spot behind Ericsson by the end of 2013.
Apart from revenue share gains, NSN is also benefiting from the streamlining of operations and the ongoing job cuts. By the end of 2013, NSN aims to cut around 17,000 jobs and achieve a total of $1.35 billion in savings as part of the restructuring initiative announced in late 2011. Simultaneously, NSN has sold off many non-core assets and is increasing its focus on wireless broadband which has strong long-term growth trends as opposed to the relatively stagnant landline market. As a result of the reshuffle, NSN has performed really well recently, returning to operating profitability in Q4 2012 and managing to turn a small profit in a seasonally weak Q1 as well. We estimate NSN’s EBITDA margins in 2012 to have doubled over the previous year. More importantly, the business has generated cash for the last six quarters now, and has proved to be a very valuable business for Nokia as it looks to revitalize its hanset divison. Last quarter, for example, the company managed to generate cash solely because of NSN’s performance. While NSN generated more than 230 million euros in free cash flow last quarter, Nokia Group, as a whole, could manage less than 90 million Euros.Notes:
- Nokia Siemens gains market share in telecom equipment: Dell’Oro, November 13th, 2012 [↩]