Nokia earnings exceed forecasts, Windows Phone partnership detailed

Nokia (NYSE:NOK) said it will cut $1.46 billion in operating expenses from its core devices and services business as it begins the transition to using Microsoft's (NASDAQ:MSFT) Windows Phone 7 as its primary smartphone platform. To that end, the two companies announced they signed a definitive agreement on their long-term partnership that will give Nokia billions of dollars in payments.

The world's largest handset maker posted better-than-expected net profit of $499.5 million for the first quarter, down slightly from the $506.8 million it recorded in the year-ago quarter, but better than a consensus of analysts polled by Bloomberg. Nokia posted net sales of $15.1 billion in the quarter, up 9.2 percent from $13.8 billion in the year-ago period. Nokia's devices and services sales clocked in at $10.2 billion, up from $9.67 billion in the year-ago quarter.

During the company's earnings conference call, Nokia CEO Stephen Elop said he was pleased that Nokia and Microsoft had inked their agreement ahead of schedule, and believes it is a "win-win partnership." However, he cautioned that the company is going through a difficult but necessary transition phase, and also warned of potential supply disruptions in the second quarter due to the March 11 earthquake and tsunami in Japan.

Nokia's deal with Microsoft includes a number of key elements, including the integration of Nokia's Ovi services, navigation and mapping capabilities into Windows Phone. Microsoft's Bing search engine also will power the search function on all of Nokia's devices, not just its Windows Phone gadgets. Additionally, the companies will engage in joint developer outreach and application sourcing, and will make Windows Phone developer registration free for all Nokia developers. The companies also will open a new, Nokia-branded global application store that will give developers access to a single portal to publish and distribute apps to consumers who use Windows Phone, Symbian and Series 40 devices.   

Microsoft will receive a running royalty from Nokia starting when the first Nokia Windows Phone devices ship. Elop did not commit to a specific device release timeline, but said that, "We're happy with the fact that time to market and ability to produce devices will be substantially faster than anything we've been able to do with other platforms." He also said that Nokia will work to bring Windows Phone devices to a wider variety of price points than is currently available. Microsoft will pay Nokia billions of dollars in payments, which Elop said will become apparent in Nokia's quarterly earnings as it starts shipping Windows Phone devices. The companies also put in place mechanisms for exchanging rights to intellectual property, and said Nokia will receive "substantial payments" under the agreement.

Elop said that Nokia has worked to mitigate supply chain disruptions related to the disaster in Japan, but that the company's second-quarter outlook--which forecasts weaker sequential devices and services sales--reflects the ongoing turmoil related to the disaster. However, he said that by the third quarter he expects fewer disruptions. 

In the first quarter Nokia shipped 108.5 million units in the quarter, up 1 percent from the year-ago period but down 12 percent from the fourth quarter of 2010. Nokia estimated that its overall handset market share was 29 percent in the quarter, down from 33 percent in the year-ago quarter and 31 percent in the fourth quarter. Nokia said it shipped 24.2 million smartphones in the quarter, up 13 percent year-over-year and down 14 percent sequentially. However, the company's smartphone market share continued to get battered, with Nokia estimating its smartphone market share at 26 percent in the first quarter, down from 41 percent in the year-ago period and 31 percent in the fourth quarter of 2010. The company's average selling price climbed to $94.38, up from around $90 in the year-ago quarter.

Elop said the company is feeling pressure because of its lack of dual-SIM handsets, and will begin shipping more dual-SIM handsets, starting with the C2, in the latter part of the second quarter.

According to research firm Strategy Analytics, Apple (NASDAQ:AAPL), which shipped a whopping 18.6 million iPhones in its most recent quarter, and posted $12.3 billion in iPhone and iPhone accessory sales, became the world's largest handset maker by revenue. "We estimate Apple's wholesale revenues for its iPhone handset division stood at $11.9 billion in the first quarter of 2011," Strategy Analytics analyst Alex Spektor said. "Apple overtook Nokia for the first time, which recorded a lower $9.4 billion of wholesale handset revenues. With strong volumes and high wholesale prices, the PC vendor has successfully captured revenue leadership of the total handset market in less than four years."

At Nokia Siemens Networks, Nokia's infrastructure joint venture with Germany's Siemens, the company reported an operating margin of $4.35 million, down from an operating margin of $21.78 million in the year-ago period. Sales clocked in at $4.6 billion, up from $3.94 billion in the year-ago period. Nokia Siemens said it received all necessary regulatory approvals to acquire Motorola Solutions' (NYSE:MSI) networking business for $975 million, including unconditional approval from the Ministry of Commerce in China, and that it aims to close the transaction April 29. Nokia Siemens said it continues to believe that its net sales will grow faster than the market in 2011, and is targeting its operating margin to be above breakeven in 2011.

For more:
- see this earnings release
- see this Nokia-Microsoft release
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this AllThingsD article
- see this FierceWireless Q1 earnings special report

Related Articles:
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Moody's cuts Nokia's credit rating as HTC bounds ahead in market cap
Nokia credit rating cut for first time by S&P
IDC: Windows Phone 7 to pass Apple's iOS by 2015
Nokia CFO reaffirms commitment to Symbian sales

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