The headline number from Nokia Corp.’s (NYSE: NOK) third quarter earnings report is that sales fell by -13% year-over-year. But there were some positives as well. Instead of an expected EPS loss of $0.02, Nokia posted adjusted EPS of about $0.04. Cash flow from operations nearly doubled year-over-year. None of this is to say that the company is on its way back to its once dominant position in the mobile phone market, but Nokia may have some hope.Nokia’s deal with Microsoft Corp. (NASDAQ: MSFT) is expected to bear its first fruit next week when Nokia announces its latest Windows Phone-powered smartphone. More devices are in the pipeline for early next year, and Nokia sold 16.8 million smartphones in the third quarter, just barely less than the 17 million iPhones sold by Apple Inc. (NASDAQ: AAPL). The difference between the two companies is more about average selling price (ASP) and gross margin than it is about volume. Samsung Electronics (OTC: SSNLF), which relies primarily on the Android operating system from Google Inc. (NASDAQ: GOOG) is believed to have sold 20 million smartphones in the last quarter, making it the new volume leader.
Nokia’s ASP and gross margins fell both on smartphones and on feature phones. The smartphone ASP fell from about $183 to $181, and gross margin fell from 30.5% to 23.3%. The company’s ASP on feature phones fell from about $55 to $44 and gross margins were off about -1.7%.
Unit shipments of feature phones rose 8% year-over-year and 25% sequentially. Nokia attributes the rise to sales of its dual-SIM devices, which are popular in developing countries. But in reality, the company simply sold its phones at lower prices in order to compete with other low-priced vendors and to clear its inventory as it gears up to produce more smartphones.
The most likely market for Nokia’s new Windows-based smartphones is the sub-$100 category. The company is a partner with ARM Holdings, plc (NASDAQ: ARMH), which just yesterday introduced a new microprocessor for the sub-$100 market, and the chip can also be paired with an existing ARM chip to address the high-end market. A partnership with Intel Corp. (NASDAQ: INTC) to develop a new operating system to run on new Intel chips crashed and burned earlier this year.
Microsoft has been rumored to be willing to spend up to $1 billion in technical and marketing support to get the Nokia smartphones into the market. Samsung has also introduced a Windows-based phone, and Google’s acquisition of Motorola Mobility Holdings, Inc. (NYSE: MMI) could speed up Samsung’s development of new devices using Windows Phone.
The interesting parallel here is with Hewlett-Packard Co. (NYSE: HPQ), which hired a new CEO, appeared to accept his strategy for the company, and then threw him under the bus when the going got rocky. Nokia’s board appears to be standing behind its new CEO, his new smartphone strategy, and it’s giving him room to put the new strategy into action. Unlike HP, Nokia seems to have figured out that something is seriously wrong with how its been doing business and that it needs to change radically if it is to have a chance of surviving.
Nokia’s biggest problems are that it might have waited too long to adopt a smartphone strategy that has a chance of working, its competitors are introducing new and more capable products even as Nokia tries to catch up, and, perhaps worst of all, the skyrocketing growth of the smartphone market has slowed. These are big problems, but Nokia and Microsoft both hold large piles of cash that could solve a lot of the issues.
Nokia shares are up about 8.5% in pre-market trading this morning, at $6.64, in a 52-week range of $7.73-$11.81.
Paul Ausick
Top Gaining Stocks
Top Losing Stocks