Summary and comment
The last week has not been the greatest of weeks for Nokia with the release of its preliminary financial results for Q1, 2012 and its credit rating downgraded, first by Fitch and then Moody’s.
The financials painted a poor first three month of the year and the outlook for Q2, 2012 does not look much positive.
The Group suffered an operating loss of 1.3 billion Euro, making a further dint in its cash reserves as it continues to navigate its path through a very challenging transitional period. It’s a painful period for Nokia as it restructures the business and streamlines its manufacturing processes; actions which incur short term costs even though they are ultimately aimed at making the business leaner and more able to improve margins in an extremely competitive market.
Strategy and competition
However, there are a number of contributory factors to Nokia’s financial position. All three of the groups divisions posted losses for the period. Its devices and smartphones division (the heart of the mobile giant) managed to sell 87.2 million units worldwide in Q1, 2012. This sounds quiet impressive until you realise that the volume is down a massive 30.8 million compared to the previous 3 months and 24% down on the same period last year.
Of the total devices sold, only 11.9 million were ‘smartphones’; 7.7 million less than during the final quarter of 2011 and a year-on-year fall of 51%. One of Nokia’s difficulties is that its new ‘Lumia’ Window’s phone series (which is its key smartphone strategy) has not yet taken off. The Lumia 800 and 710 were first launched during Q4, 2011 but its new 4.3 inch screen Lumia 900 was only released in early April and then only to US markets exclusively through AT&T. The non-LTE variant of the new flagship phone will not be launched in global regions until later in Q2, 2012 and similarly, Nokia has yet to release the budget Lumia 610 smartphone. Lumia is neither reaching all regions nor all price points.
Meanwhile, whilst Nokia has said it will continue to support the outgoing Symbian operating system until 2016, the wind down of sales has been steeper than anticipated. Whilst the average lifespan of a smartphone device is around 2 years, consumers don’t really want to buy a phone which they know is being put out to pasture. Why would they, when there are plenty of Android devices that will offer all the apps they want and at a low price? More importantly, even if the consumer does not entirely understand the significance of one operating system versus another, the retail distributors certainly do and they know what will be the easier ‘sell’. Not even ground breaking innovation such as the Nokia 808 Pureview symbian phone with its 42 Mpx camera on board will be able to slow the decline in Symbian-based devices.
Nokia’s former future smartphone strategy, the Meego operating system and the sole device launch on the platform, the N9, allegedly contributed well to sales during Q4, 2011 with volumes rumoured to be any from 1.3 to 2 million units. It is likely that similar volumes were sold in Q2,2012. However this is pure conjecture, as no official N9 figures have been released and it remains a phone that is only available in selected regions, and very few countries where Nokia retains a strong brand and established customer base.
So pressure in the smartphone market and further bruising in the non-smartphone or ‘mobile devices’ business too. The latter help prop Nokia through tough times but now Asian competition is rolling out cheaper priced phones which are directly hitting Nokia’s share of the budget market and its Asha mobile phone series. Nokia shifted 13.5 million fewer mobile devices in Q1, 2012. That is a staggering 25% less than the previous quarter in a market sector which Nokia had continued to perform strongly, even though it had fallen way behind in the high-end markets against the likes of Andriod and Apples iPhone.
Structural transition, stiff competition and a weakened product portfolio have all contributed to Nokia’s current woes. The outlook for Q2, 2012 is not positive and Nokia has made no predictions for the second half of the year. Clearly it needs to stem the tide as soon as possible and has stated that it continues to drive costs cuttings as well as pushing forward the release of new phones; the Lumia 900 and 610 plus a further seven Asha devices to follow.