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Can Lumia Help Nokia Remain Relevant?

Posted on Thursday, Jan 31st 2013

Nokia’s (NYSE:NOK) woes continued during the last quarter. According to an IDC report, in the December quarter sales of smartphones reached 219 million worldwide, compared with 161 million a year ago and 180 million a quarter ago. But Nokia is not enjoying this increase: researchers estimate that for the year 2012, Samsung’s smartphone market share grew from 20% to 30%, with shipments of more than 213 million units. Apple’s share remained constant at 19% of the market, but Nokia’s share dropped sharply from 15% to 5% during the year.

Nokia’s Financials
Q4 revenues fell 18% over the year to 10.61 billion, missing the market’s target of $10.66 billion. EPS of $0.08 was ahead of the Street’s target of $0.05 for the quarter. This was the first profitable quarter for Nokia in the past six quarters. That being said, profits were driven by cost control efforts, not by improving sales. Declining sales and pressure on margins forced Nokia to cancel its dividend payout for the first time in 143 years.

By segment, revenues from devices and services fell 36% over the year following a drop in smartphone sales and the average prices of phones sold. Smartphone sales for the quarter fell 55% over the previous year. Although Nokia sold twice as many feature phones as smartphones during the previous quarter, the average sale prices of phones fell 15%, hurting the segment. Location and Commerce revenues were down 9% over the year.

Lumia’s Growth Story
The only ray of hope in Nokia’s quarter was the sales of Lumia phones. These phones have been rated among the best smartphones released last year. Critics have raved about their attractive colors and features such as the ability to multitask, a high-quality camera, charging pad–based charging and super sensitive touch technology that lets people with gloves or long nails use the touch screen with equal deftness. The Windows Phone–based phones sold 4.4 million units worldwide in the quarter and 14 million units for the year. Growth is said to be driven by more recent models. In fact, reports estimate that Nokia received more than 2.5 million orders for Windows 8 based Lumia’s latest version, model 920, within 20 days of its November 2012 release. Nokia projects that number to increase. Last month, Nokia entered into an agreement with China Mobile that will make Nokia’s smartphones available to more than 700 million customers of the network.

To expand its smartphone market presence, Nokia is investing more than $250 million in its venture capital division, Nokia Growth Partners. The division will help Nokia improve its phone offerings by funding mobile communication companies in the United States, Europe, and Asia. The venture fund will also help Nokia expand its presence in China, the country with the highest volume of smartphone sales in the world.

In addition, Nokia introduced features such as a 3-D printing development kit for Lumia 820. The 3-D kit is available on the company’s website and comes with mechanical drawings of the back shell of the Lumia 820. Users with 3-D printers can now print their own smartphone covers.

But this Lumia growth will lead to additional costs. As part of its agreement with Microsoft, Nokia receives $250 million a quarter toward platform development expenses. However, in the current year, Nokia expects sales of Lumia to rise so that it will have to pay Microsoft a royalty fee of more than $1 billion in the year.

Nokia Streams Music
To help attract more buyers, Nokia is also extending its music streaming services. For a monthly subscription fee of $3.99, Nokia users can access a music subscription service called Music+. The service lets consumers listen to higher-quality music streams, get unlimited downloads, see song lyrics, and access features such as unlimited skipping between songs and a Music+ app for PCs.

The stock is trading at $4.09 with a market capitalization of $15.32 billion. It touched a 52-week low of $1.63 in October 2012. This quarter will be very interesting to watch for both Nokia’s and Microsoft’s future directions. If the Windows 8–based Lumia does well, both companies will breathe sighs of relief.

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