Nokia right to stand by Windows

Perseverance is the word which comes to mind following on from the release of Nokia’s 2Q12 results, and subsequent results call.
Overall shipments marginally rose by 1% to 83.7 million quarter-on-quarter, nothing like the huge drop in shipments seen from 4Q11 to 1Q12. Feature phones have performed better than perhaps expected, with shipments actually up quarter-on-quarter by 4% to 73.5 million. Smartphone shipments were down by 14% quarter-on-quarter, and although Lumia shipments hit a high of four million units, Nokia has still not plugged the gap in sales left by former Symbian devices. ASP for smartphones increased quarter-on-quarter by 6% to €151, while the overall ASP decreased by 6% owning to a decline in ASP for feature phones.
Revenue for Devices and Services was down by 5% quarter-on-quarter, combined with an operating loss of €474 million, leaving the division operating at a -11.8% margin. The increase in operating losses, by 116% quarter-on-quarter, was attributed to a big inventory write down of its smartphones. Net cash flow, while declining quarter-on-quarter by 14%, actually increased by 8% year-on-year.
Despite the numbers revealing very little encouragement for the Finnish company, Nokia continues to place great faith in the forthcoming Windows 8 platform, due for release later in the year. Nokia recently released the Asha range of phones and while this had little impact on the 2Q12 results, it hopes that Asha will impact sales in 3Q12. Sales for Lumia phones running Windows 7.5 are expected to slow, particularly preceding the launch of Windows Phone 8. However, long term Nokia aims to increase volume through sales of lower end phones, while also increasing margins through sales of higher end phones.
Nokia has received criticism for relying too much on the Windows Phone platform. While there are other options, such as using the Android OS, Nokia is right to persevere with the Windows Phone OS. Lumia sales have picked up in 2Q12, particularly in North America, a key market in which Nokia has struggled in recent times.
As a stand-alone OS Windows Phone will not succeed, and will remain a niche product. However, Microsoft has a huge market share in terms of desktop computers, laptops and Ultrabooks. The release of Windows 8 across multiple platforms, including the new Surface tablet, will provide the consumer with more exposure to [the] OSs unique features and benefits, and will give the boost in sales that Nokia needs.
However, the biggest challenge that lies ahead for Nokia is maintaining its market share in China where it faces tough competition from local brands.
Admittedly Nokia is running out of time; however it still has sufficient cash to make it through subsequent quarters, and is willing to do whatever it takes, whether it be decreasing its work force or spinning off parts of the business not relevant to its central strategy, such as luxury phone brand Vertu.
Julian Jest is a research analyst covering the global mobile handset and smart device sectors with Informa Telecoms & Media.