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Technology / Software

Analysis: Smartphone losses crippling Nokia as cash starts to dry up

The company’s woes don’t look like settling for quite some time, as Nokia’s net sales were down 19%, from €9.3bn this time last year to just €7.5bn.

Operating profit has fallen by another 41%, from a €487m loss this time last year to an €826m loss. This remains an improvement on last quarter, which saw a €1.34bn loss. The company has been engaged in aggressive cost cutting manoeuvres, including the sacking of 10,000 staff.

"Nokia is taking action to manage through this transition period. While Q2 was a difficult quarter, Nokia employees are demonstrating their determination to strengthen our competitiveness, improve our operating model and carefully manage our financial resources," said CEO Stephen Elop.

The company continues to haemorrhage cash, going from €4.9bn in cash and assets to €3.2bn, a fall of 14%.

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It has repeatedly issued profit warnings for 2012, and does not expect to return to profitability until 2013.

Much of the company’s problems remain in mobile sales, particularly smartphones. While a drop in sales across the last quarter of 10% is never a good look, a year or year drop of 34% is near catastrophic. Especially just months after the launch of a new range of smartphone products – the much hyped Nokia Lumia range.

Long awaited as the company’s successor to its own Symbian-based smartphones, they were the first devices to run Microsoft’s Windows Phone 7.5. The range has not been successful, selling only 4 million units in the last quarter. AT&T is now selling the devices for just US$49 (£32) in the USA to stimulate demand/dispose of inventory.

Across the company’s entire smartphone range, Nokia sold only 10.2 million units in the quarter. Apple sold 35 million iPhones across the same time period.

Microsoft has since given up on the platform and moved on to Windows Phone 8, leaving Nokia’s current range to rot on the vine. Windows Phone 8 is not compatible with any of Nokia’s current Lumia devices, which means consumers will be wary of buying the obsolete devices before its launch in October.

Bizarrely the company launched a new smartphone, the Pureview 808, which, while sporting new camera technology runs on an archaic hardware and the obsolete Symbian OS.

The company announced a €220 million writedown on unsold Lumia, Symbian and MeeGo devices.

"We shipped four million Lumia Smartphones in Q2, and we plan to provide updates to current Lumia products over time, well beyond the launch of Windows Phone 8. We believe the Windows Phone 8 launch will be an important catalyst for Lumia," said Elop.

What is worrying for the struggling company is that feature phone sales are flattening too.

Nokia sold 73.5m feature phones, up 4% on the year prior. While not bad in itself, the net sales in Euros were down 1% year on year and 11% compared to the quarter prior.

Basically, any advantage the company has had in feature phone sales has been swallowed up low margins. While its feature phone gross margins remain healthy at 24.1% (Q1 2011 was 24.7%), the fall in gross margins on smartphones has been astonishing – from 23% this time last year, to just 1.7% – essentially within the margin of error.

The company is basically making no money from any smartphones sold.

The low margin producers, especially Chinese phone manufacturers such as ZTE, are rapidly swallowing up the low end breadbasket that has protected Nokia for so long, while consumers show no interest in the top end.

Overall the phone division saw operating margins of -4%. That decline has now reached -11.3%. In the same time the mobile phone division’s losses have expanded, from €216m to €474m.

These problems are no longer geographically limited either – in the past Nokia has been able to ride emerging markets’ feature phone growth to counter its difficulties combating Apple and Android smartphones in the developed world. No more.

The only growth spot has been in the USA – and this comes from a historically low base – €88m to €128m. Billion Euro strongholds the Europe and the Middle East saw net sales collapse by 34% and 33% respectively (year on year), China fell by 41% and former strong holds South America and Asia-Pacific by 11% and 13%.

Nokia Siemens continues to be a drain on the company, posting losses of €227m up 50% on last years €111m loss. However this isn’t a completely fair assessment, given that the company purchased Motorola Solution’s for $975m in April last year.

The company’s outlook remains unclear, amidst aggressive restructuring.

"We are executing with urgency on our restructuring program. We are disposing of non-core assets like Vertu. We are taking the necessary steps to restructure the operations of the company, which included the announcement of a new program on June 14. Faster than anticipated, we have already negotiated the closure of the Ulm, Germany R&D site, and the negotiations about the planned closure of our factory in Salo, Finland are proceeding in a collaborative spirit," said Elop.

"We held our net cash resources at a steady level after adjusting for the annual dividend payment to our shareholders. While Q3 will remain difficult, it is a critical priority to return our Devices & Services business to positive operating cash flow as quickly as possible."

The company’s share price is at US$1.73. It was worth $40 around the time of the iPhone launch in 2007.
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