Uh-Oh: Nokia Lowers Its Q1 Forecast On Pressures In Emerging Markets, Margins On Smartphones

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Not great news for Nokia this morning in its ongoing attempt to reverse declines in its sales and market share in the world of mobile phones that it once easily dominated.

The company has announced it is lowering its outlook for the first and second quarters of this year, citing lower-than-expected sales in its devices and services segment. In a market statement today, Nokia did not specifically give any numbers on overall revenues but it said that operating margins in the first quarter are expected to be at negative three percent — down from earlier estimates of being either breakeven or within two percentage points of that; it also said that Q2 margins will be similar to or below Q1 levels.

As for the the silver lining, Nokia also noted that it has sold more than 2 million Windows Phone Lumia smartphones, with the average selling price at €220 ($262). There are now over 80,000 apps in the Windows Phone Marketplace app storefront, it added.

The financial revision come on the same day that the company launched a new NFC device, and one day after it said it would offer Lumia 900 customers credits on devices due to data faults on handsets.

Q1. Nokia will be presenting full quarterly results on April 19. Today it noted that it estimates net sales in the devices & services segment in Q1 were €4.2 billion. Within that, feature phones brought in €2.3 billion (on 71 million units), smartphones €1.7 billion (on 12 million units), and all other services bringing in €0.2 billion. Nokia said that’s actually within the 4-6 week range it had provided earlier but also represents a decline on the previous quarter.

In the statement, Nokia does not give any guidance on Q2 revenues but highlights that it is seeing a lot of pressure in two specific areas: emerging markets — particularly India, the Middle East, Africa and China — as well as margin declines in the smart devices unit.

In a conference call, CEO Stephen Elop spelled out a bit more here, which hints at continuing margin pressures ahead as the company looks to continue to compete against lower cost Android devices and other cheap handsets from what Elop referred to as white-box Chinese manufacturers.

The pressures, Elop said, are at the low end of smartphones, and the high end of the feature phone markets — precisely where Android handset makers are being so aggressive in emerging markets. “We are taking the first step of pushing down the prices of Lumia devices with the 610,” he said. “And we are accelerating the rate at which we do that to compete better.”

He also noted that the continuing investments that are being made to develop its new business around Windows Phone comes at a price: “With this third ecosystem effort we have to really break through, with the U.S. and China just starting… you see a lot of things that [need to] build,” said Elop. “We need the right levels of investment to break through.”

Nokia and Microsoft’s efforts to break the stronghold that Apple’s iOS and Google’s Android have put on the smartphone market have yet to bear fruit. Figures from Gartner estimate the Windows Phone platform accounted for less than 2 percent of smartphone sales at the end of 2011.

The other question to ponder going into next week is where its legacy smartphone OS, Symbian, will be sitting in all of this and whether its Lumia strategy will be able to offset ongoing sales declines in that line of devices.

Full release below.

Nokia lowers Devices & Services first quarter 2012 outlook and provides second quarter 2012 outlook

Difficult financial performance reflects company in transition

Positive early momentum in Lumia smartphone strategy

Nokia Corporation
Stock exchange release
April 11, 2012 at 15.00 (CET+1)

Espoo, Finland – Nokia today provided preliminary information on certain aspects of its first quarter 2012 financial performance, including a lowered first quarter 2012 outlook for Devices & Services. During the first quarter 2012, multiple factors negatively affected Nokia’s Devices & Services business to a greater extent than previously expected. These factors included:

- Competitive industry dynamics, which negatively affected net sales in the Mobile Phones and Smart Devices business units, particularly in India, the Middle East and Africa and China; and
- Gross margin declines, particularly in the Smart Devices business unit.

The impact of these factors on the non-IFRS Devices & Services operating margin in the first quarter 2012 was partially offset by a significant benefit from lower warranty costs.

Updated outlook for Devices & Services for the first quarter 2012:
Nokia currently estimates that its non-IFRS Devices & Services operating margin in the first quarter 2012 was approximately negative 3 percent, compared to the previously expected range of “around breakeven, ranging either above or below by approximately 2 percentage points” primarily due to the factors noted above.

Outlook for Devices & Services for the second quarter 2012:
Nokia expects its non-IFRS Devices & Services operating margin in the second quarter 2012 to be similar to or below the first quarter 2012 level. This outlook reflects that the first quarter 2012 benefit related to lower warranty costs is expected to be non-recurring, as well as expectations regarding a number of factors including:

- competitive industry dynamics continuing to negatively affect the Smart Devices and Mobile Phones business units;
- timing, ramp-up, and consumer demand related to new products; and
- the macroeconomic environment.

“Our disappointing Devices & Services first quarter 2012 financial results and outlook for the second quarter 2012 illustrates that our Devices & Services business continues to be in the midst of transition,” said Stephen Elop, President and CEO of Nokia. “Within our Smart Devices business unit, we have established early momentum with Lumia, and we are increasing our investments in Lumia to achieve market success. Our operator and distributor partners are providing solid support for Windows Phone as a third ecosystem, as evidenced most recently by the launch of the Lumia 900 by AT&T in the United States.”

Additional commentary on the first quarter 2012 for Devices & Services and Nokia:
Nokia currently estimates that Devices & Services net sales in the first quarter 2012 were EUR 4.2 billion, comprised of Mobile Phones net sales of EUR 2.3 billion (71 million units), Smart Devices net sales of EUR 1.7 billion (12 million units), and Devices & Services Other net sales of EUR 0.2 billion. Based on the preliminary view, Nokia ended the first quarter 2012 around the high end of our normal 4 to 6 week channel inventory range, but on an absolute unit basis, channel inventories declined sequentially.

Nokia currently estimates that Devices & Services gross margin (including Devices & Services Other) for the first quarter 2012 was approximately 25%, with Mobile Phones gross margin of approximately 26% and Smart Devices gross margin of approximately 16%.

In the first quarter 2012, Nokia sold more than 2 million Lumia devices at an average selling price of approximately EUR 220 (reported within the Smart Devices business unit). Furthermore, Nokia has seen sequential growth in Lumia device activations every month since starting sales of Lumia devices in November 2011. Lumia has gained market share with both distribution partners and consumers. The Windows Phone ecosystem is also attracting developers and has expanded rapidly with more than 80,000 applications available.

Nokia currently estimates that at the end of the first quarter 2012, the company’s gross cash and other liquid assets were approximately EUR 9.8 billion, and Nokia’s net cash and other liquid assets were approximately EUR 4.9 billion. The sequential decline in net cash and other liquid assets was driven by Devices & Services, which experienced unfavorable and mostly non-recurring net working capital changes as well as operating losses. Nokia Siemens Networks contributed positively to Nokia’s cash flow in the first quarter 2012 due to net working capital improvements. This was despite Nokia Siemens Networks having a preliminarily estimated non-IFRS operating margin of approximately negative 5 percent in the first quarter 2012, in line with the previously provided outlook.

Actions to Address Competitive Industry Dynamics Affecting Devices & Services
Nokia is quickly taking action. Nokia will continue to increase its focus on accelerating Lumia sales, as well as on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position.

- In the Smart Devices business unit, Nokia is increasing investments in Lumia to bring more products to more consumers in more markets.
- In the Mobile Phones business unit, Nokia is taking tactical pricing actions in the near term and plans to bring new products to market in the second quarter 2012.
- Nokia will accelerate planned cost reductions and will pursue additional significant structural actions if and when necessary.

“We are continuing to increase the clock speed of the company,” said Stephen Elop, President and CEO of Nokia. “The change is tangible, and we are proud of the way Nokia employees are quickly responding to the needs of consumers and partners.”

Nokia will provide full first quarter results and more details when it reports its first quarter 2012 results on April 19, 2012.

Nokia will be hosting a conference call today at 13:30 UK time (8:30 EST). The dial-in number for media (listen only – the question and answer session will be limited to financial analysts and investors only) is +1 706 634 5012. Conference ID: 67681834.

The dial-in number for financial analysts and investors is US: +1 888 636 1561. Conference ID: 67681834. UK: +44 1452 560 299. Conference ID: 67997871.

A replay of the call will be available soon after the call completion. The replay number is US: +1 800 585 8367.  Conference ID: 67681834. UK: +44 1452 55 0000. Conference ID: 67997871.