Little Sign of Turnaround Shown As Nokia's Q1 Revenues Plunge 29%

Nokia has revealed that its first-quarter revenues plunged 29% year-on-year (y/y) to EUR7.35 billion (USD9.64 billion), as it showed little signs of a reverse in fortunes with a 40% y/y drop in sales at its vital Devices and Services unit, including a 35% fall in Europe, a 34% drop in North America and a slump of 70% in China:

• Nokia also revealed that it suffered a first-quarter operating loss of EUR1.34 billion, down from an operating profit of EUR439 million in the same quarter of 2011, and significantly lower than its losses of EUR954 million in the fourth quarter of last year.

• As previously announced, its mobile device shipments dropped 24% y/y to 82.7 million units, but Nokia also revealed that its mobile device average selling price (ASP) fell 22% y/y in the quarter to reach just EUR51, from EUR65 in the same quarter of 2011. Its gross margins also fell to 24.4%, from 28.8% in the first quarter of 2011, while it slumped to an operating margin of -5.2%, from 10.3% in the same quarter of last year, and significantly down from 3.4% in the fourth quarter of 2011.

• Nokia's networks vendor Nokia Siemens Networks (NSN) saw its first-quarter revenues fall 7% y/y to EUR2.95 billion, while its own operating margin fell to -34.1%, from -4.5% in the same quarter of last year. Nokia said it hoped operating margins at NSN would improve in the second quarter, but it gave no forecasts – and cast a shadow over the future of the unit, with a pledge to sell off unspecified "non-core assets" as it strives to return to profitability.

Our Take

• Despite the disappointing results, Nokia CEO Stephen Elop said the vendor had "exceeded expectations" in some markets including the United States, but admitted that establishing sales momentum in certain markets such as the United Kingdom has been "more challenging". The CEO also said Nokia was still navigating through a significant company transition, in an industry environment that "continues to evolve and shift quickly"—a fairly frank admission that its efforts to catch up with its more dynamic rivals are yet to succeed. Nokia has reiterated its forecast that operating margins in the second quarter would be "similar to or below the first quarter 2012 level of negative 3%" and the company has said it would not provide annual targets for 2012 since it was in a "year of transition".

• Nokia has also promised to further cut costs, accelerating its target of reducing operating expenditure by EUR1 billion by 2013, following the cutting of 4,000 jobs already this year, as well as relocating a great deal of its assembly sites from Europe to Asia, so it can be closer to its suppliers (see Vietnam: 17 April 2012: Analyst Commentary). The Finnish giant said it would share further details "as quickly as possible", but has not ruled out further job cuts. An early casualty is Colin Giles, head of global sales at Nokia since January 2010, who will leave the company later this year as part of a restructure of its sales unit.

• Nokia has described the success of its flagship Lumia handset as "disappointing", something of an understatement as its shipments of smart devices plunged 51% y/y to 11.9 million units in the first quarter The vendor claimed it had seen "slight growth" in smartphone sales the vital North American market, but the total number of handsets sold in the region plunged 50% y/y to just 600,000 units. Elsewhere, the story was not much better, with total devices shipped falling 32% y/y in Europe to 15.8 million, while in China they plunged 62% y/y to 9.2 million. Nokia, which earlier described the first-quarter sales as "disappointing" (see World: 12 April 2012: Disappointing Windows Phone Sales and Fresh Profit Warning See Nokia Shares Nosedive), has now admitted there is a "clear sense of urgency" to accelerate its strategy of pushing the new smartphone, its first based on the Windows Phone platform.

• The vendor is reportedly struggling to persuade European network operators to push its Lumia range, with executives from four unnamed carriers telling Reuters that the handsets are simply not good enough, and sales staff are unwilling to push the new device over more entrenched rivals such as the iPhone and Android devices from the likes of Samsung, which is expected to overtake Nokia as the world's largest handset vendor by volume this year. This reflects the amount of work Nokia needs to do to rebuild its brand, even in traditionally strong markets (see Europe: 18 April 2012: Report Claims Little Interest for Nokia Smartphones Among European Operators Ahead of Vital Q1 Results).

• Across all of Nokia's smartphones, gross margins were poor at just 16%, while the average selling price (ASP) of its Lumia devices was just EUR220 (USD288)—dangerously low, given that the latest estimates from IHS iSuppli suggest the top-of-the-range Lumia 900 model costs USD217 to build. While Nokia is attracting some significant operator interest in the US with heavy subsidies, sacrificing a degree of per device revenue to drive adoption, this strategy will only work in the short term, and gives the vendor little room to manoeuvre if it fails. Nokia desperately needs its results to improve in the second and third quarters of this year, or operators will lose interest and its low margins will prove unsustainable.

• Nokia has announced that it now aims to drive down the prices of its Lumia range to compete better against Asian rivals in emerging markets, as even its basic revenues from sales of low-end and feature phones in Asia-Pacific, the Middle East and Africa are under threat as cheaper Asian vendors such as Huawei and ZTE push into the low-end Android smartphone range. The vendor has admitted that, if the Windows Phone move fails, it has no "plan B"—and now may be the time for Nokia to create a back-up strategy, possibly focusing on feature phones such as its Pureview handset if its assault on the mainstream smartphone market fails.