Nokia's facing pricing pressure

The entry of low-cost Android smartphones leaves the phone maker with little choice.

By Trefis Apr 25, 2012 9:41AM
Nokia (NOK) issued a profit warning earlier this month only to follow up with an even bleaker earnings report last week. The company's revenues fell 29% year-over-year, and operating losses nosedived to $1.7 billion in Q1 2012.

However, a majority of the losses incurred were on account of non-recurring restructuring-related expenses in its Nokia-Siemens Networks division. Still, even after accounting for the one-time expenses, Nokia's operating loss comes down to $342 million, a sharp contrast from the $925 million operating profit returned during the same period last year.

Nokia is facing a downhill battle as its feature phones face pricing pressures in emerging markets, and the newly launched Lumia smartphones struggle to make up for the Symbian losses caused by increasing competition from Apple's (AAPL) iPhone and smartphones based on Google's (GOOG) Android.

Emerging markets

The most valuable market for Nokia has historically been emerging markets where, although its market share has been declining fast, it is still ahead of the competition in terms of total units shipped. By our estimates, Nokia's emerging markets division accounts for about 23% of the company's value, the most among all the divisions. This is why we believe the worst news to come out this quarter is from this division.

Nokia's revenues from emerging markets fell more than 40% over Q1 2011 as the proliferation of cheap Android-based smartphones manufactured by Asian rivals ate into the volumes of its S40 based feature phones. Up until now, Nokia had been able to bring down the prices of its feature phones or enter into the dual-sim phone segment to compete and turn a small profit. But the entry of low-cost $100-$150 Android touch-based smartphones leaves it with little choice but to bring the prices of its feature phones further down to drive sales.

Nokia Emerging Markets Mobile Phone Prices

This will only serve to decrease operating profits in the coming quarters. Nokia's feature phone unit is already on the verge of plunging into losses, with its operating margins falling drastically from 13.5% at the end of the December quarter to 4.6% after March.

What we believe the company needs right now is to broaden its Lumia portfolio to include a low-cost smartphone for emerging markets. The current Asha series is based on the legacy Symbian platform, which isn't competitive enough to stave off Android. And the only low-cost Windows Phone based smartphone it has right now is the Lumia 610, which is not cheap enough to address the flagging emerging market sales.

Nokia Market Share in Emerging Markets

Developed markets

Meanwhile, Nokia's performance in developed markets continued to disappoint as revenues slumped 35% over the same period last year. Symbian smartphone sales continued to fall and the Lumia failed to make up for the losses due to its limited time and exposure in the market.

However, Nokia's new flagship line has built up some momentum going into the second quarter, with the company shipping twice the number of units as it did in the previous quarter. Lumia's presence also helped perk up the ASPs of developed market mobile phones. But gross margins on smartphones fell almost 29% year-over-year, implying that Nokia is selling most of these phones at low margins to create initial demand.

Nokia Market Share in Developed Markets

Apple and the horde of Android smartphones in the market have created two firmly entrenched ecosystems that customers have familiarized themselves with. To create a third ecosystem with Microsoft, Nokia faces a long and hard battle, but the first signs of this partnership coming along are encouraging.

The second quarter will be the first full quarter of the Lumia 900's presence in the U.S. market along with the Lumia 800C's on China Telecom, and a continued strong performance in the two key markets of U.S. and China should bring some cheer back to the battered stock. (see Nokia Faces Big Tests This Year In China And U.S.)

We are in the process of revising our estimates lower based on these results.

Apr 25, 2012 10:10AM

all the down beat on nokia and i can't even get a cyan color lumia 900 att  cause there sold out and not that i wanted a white one but there sold out too. The past is the past last year was last year it's a whole new ball game and all the bad comments in the world is not going to stop what people want. So go take a pill an quiet yourself down nokia going to do just fine. an your going to have egg on your face. Nokia has sold 2 million plus in the last the month and would have sold more but ran out.

Apr 25, 2012 10:54AM
Nokia's problems are in converting their smartphone portfolio to Windows Phone from S40 and pushing Windows Phone down to Android device levels. Their new Asha 202 and 302 take low end smartphones down to the $75-132 USD range. Nokia isn't really going head-to-head with Apple until Microsoft brings out Windows 8 and Windows Phone 8 which will allow Nokia to put hero chips and high res screens in their Lumia 800 and 900 products. Microsoft's adding some new power to their cloud ecosystem releasing new SkyDrive apps for W7, WP7.5 and Apple OS's this week.  The global release of Lumia 900 has been delayed two weeks due to strong demand in US. Windows 8 release in October should give Microsoft and Nokia a needed boast.
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