Nokia reports loss in face of stiff competition

The company is planning to make changes to both its feature phone and smartphone portfolios

Nokia reported a sales drop and a loss during the first quarter, as it struggles to sell cheap phones as well as Symbian-based smartphones, and Windows Phone sales remain small.

The company reported sales of €7.4 billion (US$9.7 billion), down 29 percent year-on-year, making a net loss of €929 million, compared to a net profit of €344 million a year earlier.

Nokia also reported a €1.3 billion operating loss, compared to an operating profit at €439 million a year earlier.

The report comes after a difficult week for Nokia. On April 11, the company lowered its expectations for the first quarter because of surprisingly weak sales, including those of its cheapest phones in India, the Middle East and Africa and China.

Over the last year Nokia has made progress on its new strategy, but the company has faced greater than expected competitive challenges, it said in a statement.

The lowered expectations resulted in Moody's downgrading Nokia's credit rating. Nokia replied by saying that its financial position is still strong, with €4.9 billion in net cash, down 24 percent compared to the end of March last year.

Specifying when or if Nokia will get in cash trouble is difficult to say, because analysts don't know how bad things are going to get before a possible turnaround.

"We don't actually see Nokia getting into financial trouble yet. Basically, things would have to get a lot worse before the company would actually get into a situation of cash shortage," said Richard Windsor, global technology marketing analyst at Nomura International.

Nokia sold a total of 82.7 million mobile phones during the first quarter, including 11.9 million smartphones. That compares to 108.5 million phones, including 24.2 million smartphones, during the same period last year.

Nokia also sold more than 2 million Windows Phone-based Lumia devices. The company has seen sequential growth in Lumia device activations every month since starting sales in November 2011.

"Doubling the number of Lumia devices sold quarter-on-quarter is a respectable pace," said Nokia's CEO Stephen Elop during a conference call.

While Nokia exceeded sales expectations in markets including the U.S., establishing momentum in others including the U.K. has been more challenging, according to Nokia.

The ability to work closely with U.S. operators AT&T and T-Mobile has helped sales, while the U.K. retail market is more fragmented, Elop said.

To boost Windows Phone sales it will expand market coverage, increase advertising and introduce more products, it said.

Nokia entered the Windows Phone space, when the development the current version of the OS had already started. Being involved in the development of future versions from day one will allow the company to develop better products.

While the company has differentiated its existing products with design and unique apps, there is so much more it can and should do, according to Elop.

"We are just getting started with products that are great in the market right now, but we think we can do a lot better than that," said Elop.

In today's smartphone market, the availability of apps is very important, and here Windows Phone has been lagging the competition. But that is starting to change.

"We will soon have two-thirds of the top 100 applications from competing ecosystems on the Windows Phone Marketplace, and that continues to grow," said Elop.

To change its fortunes, Nokia is also to planning to strengthen the feature-phone line-up based on Series 40 during the second quarter.

"I think we need to do a better job with the feature-phone business," said Elop. That includes launching full touch products, he said.

Nokia also plans to increase savings in the Devices & Services unit, will sell more assets and share "further details as quickly as possible," it said.

At this point, it doesn't make much sense for Nokia to do anything more with Symbian, according to Roberta Cozza, principal analyst with Gartner.

"Nokia is not retaining customers with Symbian, as it thought it could do by making improvements. Instead Nokia should focus its resources on Series 40," said Cozza.

Even then, it will have a gap in its portfolio between the feature phones and the cheapest Windows Phones. So Nokia needs to evolve Series 40 and also continue to push down the cost of Windows Phone, she said.

"But all of this is going to take time," said Cozza.

During the conference call, Elop was asked about theexistence of a new platform that will take Series 40's place. But he declined to comment.

However, the acquisition of Smarterphone will help make Nokia's feature phones more competitive, according to Elop.

The success of product launches in the U.S. and China are key to a more rosy future for the Lumia family because the size of those two markets, according to Pete Cunningham, principal analyst at Canalys, who added that Nokia also needs to start shipping the Lumia 610 as soon as possible.

The Lumia 610 will go on sale first in the Philippines in the final week of April, and in China, Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and Vietnam in the following weeks, Nokia said on Thursday.

Nokia now has a clear sense of urgency to move its strategy forward even faster, it said.

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Copyright © 2012 IDG Communications, Inc.

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