Is Nokia's windows phone focus finally paying off?

The company's 4Q earnings preview looks promising, but is it the beginning of a trend?

By Motley Fool Jan 17, 2013 12:09PM
Businessman using smartphone Image Source Image Source Getty ImagesBy John Casteele

Nokia (NOK) had some good news recently. The company released an update showing that it had managed to beat its fourth quarter forecasts, achieving underlying profitability thanks in part to its Windows Phone-powered Lumia smartphones. After struggling to find relevance in the smartphone-driven world and losing an increasing amount of market share to competitors such as Apple (AAPL) and Samsung (SSNLF), some are hoping that the boost in profits and increased popularity of Lumia phones signals the beginning of a turnaround.

It's important to note that the profitability of the past quarter isn't solely a result of Lumia sales, of course; the launch of new Lumia models and the slashing of prices on previous models was only one of several factors in Nokia's fourth quarter performance. The company managed to cut costs during the quarter and saw a strong performance from its Nokia Siemens networks that was better than expected. Royalties from Nokia-owned patents also contributed over $65 million to the company's earnings.

Nokia isn't the only one who's likely pleased with this news. Both Microsoft (MSFT) and AT&T (T) have reason to celebrate due to the partnerships they've forged with the Finnish phone manufacturer. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Since Nokia partnered with Microsoft in 2011 and began focusing on Windows Phone models, the Lumia line has been considered a flagship Windows Phone product. If Lumias start selling more, that means that more people are choosing Windows Phone and helping Microsoft claw its way into the smartphone market where it falls significantly behind iOS and Android devices. AT&T, which offers exclusive Lumia devices and subsidizes the cost of the smartphones, also has reason to celebrate if more people begin buying Lumia phones since a good number of those contracts will likely be through AT&T.

So does this mean that Nokia's finally out of the woods and poised to make a comeback? Not necessarily. The earnings update was released while the stock was dipping yet again, and though it resulted in a decent bounce it remains to be seen whether the fourth quarter results are the beginning of a trend or just a fluke. One positive earnings report does not a turnaround make, and Nokia needs to begin consistently showing growth and profitability before the rest of the world celebrates along with the Nokia team.

While Lumia smartphones are selling, they are by no means a breakout hit like some of the competition, and short supplies have limited the number of phones that can be sold. Even the profitability shown in the earnings preview just squeaks under the wire; Nokia estimates its operating margin being between the breakeven point and 2%, which while better than the -6% that was originally forecast is still fairly slim.

Nokia recently unveiled a long-rumored Windows RT tablet to go along with its  Windows Phone smartphone offerings, something that might bolster sales and help the company to turn a higher profit in upcoming quarters. Though a specific release date hasn't been set, the tablet is said to have a launch window early in 2013 and will be available from AT&T and possibly other outlets later. Given how new the Windows tablet market is and how a must-have tablet hasn't yet emerged, if the tablet has the right price and the right features then it might end up more popular than Nokia's smartphones.

In the end, the earnings preview that Nokia released does show that there might be a light at the end of the tunnel but it's really too early to tell. Investors who have faith in Nokia's tablet could invest now in hopes of getting in on the ground floor, but more cautious investors would be better served using a "wait and see" approach to find out whether the company's fourth quarter earnings was a one-time hit that provided a temporary boost before the company drops closer to $3 a share.

At the very least, I would recommend waiting until more information is available about the tablet since too high of a price or too few features could easily kill any surge that the tablet might bring.
5Comments
Jan 17, 2013 3:05PM
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Yes, Nokia;s Lumia WP8 devices rock! The Lumia 920 is the best phone available. The Lumia 620, 820 and 920 are just now starting to ship in China and other Asian countries. Next we'll see 400m W8 Intel ultrabooks and other PC Plus devices ship in the next 12 months,

Jan 17, 2013 4:16PM
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Many are expecting "a breakout" product as a sign of better times ahead but if memory serves correctly, the Galaxy line was not a blockbuster hit right out of the gates. Apple enjoyed this because it was unique and the only product at the time. With so much competition, a runaway hit is not likely. What is likely is that Nokia will steadily grow this business again with a series of successful products. Same for Microsoft.
Jan 17, 2013 2:29PM
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Nokia unveiled a tablet, eh? Wow, I must have been living on another planet when they did so. I don`t see any info on their website in regards to this unveiling. Are you sure you did not dream this?
Feb 4, 2013 8:35AM
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I recently compared Nokia Lumia 920 with other of Nokia series of Win Phone, with htc win Phone..and really both are rock solid.. the tiled interface on Windows Phone O.S  might require a bit of time for any new users to get adjusted to, but truly, Microsoft really seem to have seen a hidden success in this and patiently getting the public to understand and see the potentials of Windows O.S on Tablets...and seems it is slowly paying off.
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