It's Becoming Smartphone World, And Nokia's Hurting Badly Because Of It

Financial reports that begin with a phrase like this mean nothing good will follow: "The challenges we are facing during our strategic transformation manifested in a greater than expected way in Q2 2011." Expectations hadn't been particularly rosy for Nokia, since analysts know how much of a hole there is in Nokia's smartphone business. But that opening line tells a much more woeful story.

Nokia is no longer the world's pre-eminent smartphone seller, and has dropped from first to third place in a single quarter.

Nokia's confident that it can turn itself around, though, noting that "even within the quarter, we believe our actions to mitigate the impact of these challenges have started to have a positive impact on the underlying health of our business." Here the firm is talking about structural changes being made inside the company to reduce costs, and its plans to embrace Microsoft's promising Windows Phone 7 OS to power its future smartphones.

CEO Stephen Elop is quoted in the report saying Nokia "took a more responsive approach to pricing around the world," has successfully addressed an "inventory build-up that occurred in the first quarter of 2011" and has "shifted our sales focus and marketing resources" (those online store closures, for example). He also says that Nokia expects "competitive pressure to continue" during this period of change, but is happy that early users of its Windows smartphones are "optimistic" about them.

But his confidence can't mask the figures: From net sales of €9.3 billion ($13.2 billion) the company actually delivered an operating loss, in accounting terms, of €487 million ($690 million). No matter how many billions you rake in in sales, if you can't convert it into operating profit then you're doing something very wrong--and when the sales themselves are an 7% slide on last year's figure, then the story is even more unhappy.

Nokia sold 16.7 million smartphones, which places it third in the smartphone selling ranks behind Apple and Samsung. It represents a 25% slide on the same quarter last year. The mobile phone business is becoming more and more about smartphones, and this is what's damaging Nokia the most. It's not yet met the challenge set by Apple and Google with a world-beating smartphone of its own, and this is a problem because the devices can make a higher profit margin than the dumbphones that are Nokia's core business, and the world is slowly eschewing the dumbphone.

Nokia's woes are likely to continue: In what should've been a relatively fallow period for Apple, the firm has just reported record sales, revenues and profits--driven to a great extent by its smartphone sales. And in the next several months it'll release its next edition of the iPhone, which will undoubtedly be another best-seller, particularly if rumored plans to address a lower-price market come true. All of this threatens Nokia's plans.

The one positive thing Nokia has to look forward to is royalty payments from Apple--worth about $608 million--and a partnership deal with Microsoft--some of this cash seems to have arrived in the last quarter, and though due to accounting regulations Nokia can't report it, the cash has actually resulted in a net profit of €391 million. However, it's the core business figures (and that huge financial loss) that investors will be looking at, and even this notional profit is a 41% slide on the same figure for 2010.


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