Nokia Q4 2011 results. PR lipstick on the approaching trouble
On Thursday Nokia announced its results for Q4/full year 2011.
And it is a mixed bag of goods. On the surface, the result looks pretty good, and it seems that Nokia managed to stop the free fall it experienced in the first half of last year.
But if you look closer at the reported numbers and guidance for the next quarter – things look a lot bleaker.
Nokia Q4 results. The bright side
The number that impressed me the most – was the the amount of the smartphones Nokia was able to ship in Q4. 19.6 million. It is a huge drop from 28.6 million in the same quarter last year. But it is a huge improvement over the sales crash Nokia experienced in the beginning of this year. Which should indicate that they managed to stop the decline in smartphone volumes in Q3, at 16.8 million level, and now are back to growth again. Depending on how the final numbers in total smartphone shipments pan out, Nokia may have even kept the market share at Q3 level, or gained a point there. Which would be the first time in 15 months. And they finally stopped the price erosion in their smartphones, with average device selling price rising from 131 Euro in Q3 to 140 in Q4.
Another bright spot comes from Nokia’s Mobile Phones unit. They sold almost the same amount of feature phones in Q4 2011 as they did in Q4 2010. And they increased units shipped by 5% from Q3, while keeping ASP at third quarter levels of 32 EUR. At this point in time, Nokia’s mobile phone unit looks like the healthiest part of the company, and the only sustainably profitable business division of Nokia. As Tero Kuittinen noticed at Forbes – Nokia’s $40 feature phones are now vastly more profitable then Sony Ericsson’s or Motorola’s Android smartphones. And while most mobile phone vendors (except Samsung) abandoned feature phone development, Nokia is increasing R&D investments and earning good money from them. The income generated by mobile phone division might be the only thing that keeps company afloat through the transition, until Windows phone strategy starts bearing fruits.
And even if Windows Phone does not pan out for Nokia, the increased R&D investment and development of next generation Meltemi OS with Qt and Swipe interface on top – might be what saves company from going under. Feature phones as a category might be going away in a few years, but cheap phones most certainly aren’t. If Nokia can create a competitive smart OS for cheap mobile computing devices, and make money selling them – they might buy some time while they explore options of how to get back to the more lucrative part of the market.
Which brings us to the part of earnings report we’ve been waiting the most. The sales of the new Nokia Lumia Windows Phones.
According to Nokia press release – they have shipped “well over 1 million Lumia devices to date”. Given the limited time and market footprint Nokia had, the number looks promising. In fact, as I told you back in November, anything between 1 and 1.5 million units shipped – will be an extremely good result.
Unfortunately, upon closer examination, things are not as great as they seem.
Nokia Q4 results. The dark side
That “well over 1 million Lumias shipped to date” is just a PR trick by Nokia. Because that “to date” part includes not only phones in Q4 2011, but also those shipped between Jan. 1st and 26th, this year.
There’s no doubt that their trick worked. If you read the headlines about Nokia quarterly results, 90% of them report that 1 million, when the actual Lumia shipments were somewhere between 500K and 700K. Nokia will probably be able to build on that next quarter, without disclosing actual sales. And inserting a line with “Lumia sales grew 200% or 300% or 400% in Q1” in their next earnings release.
But that does not change the fact that it was just a trick. And, because of the expectations they created since Nokia World, the actual Q4 Lumia sales were a big disappointment. I wish they were more careful with the expectations game all along, and did not have to resort to PR trickery to paint things better then they are. In the grand scheme of things the number of Lumias they managed to sell in the first 7 weeks is not that important. Staying honest and straightforward, and constantly surprising us to the upside – is. Nokia should just stop the stupid trickery and number painting, and let us sort things out for ourselves.
Another really worrying bit of info in the earnings report was in Nokia’s guidance for the next quarter. Which was not good.
According to Nokia – they expect a higher then normal seasonal decline in Devices&Services net sales. This decline is mainly due to the:
- “pressure in Symbian, which is where we see now in percentage terms the greatest risk of sequential unit decline”.
- lower than seasonal decline in OpEx because of continuing investments Lumia marketing and support, as well as R&D investments in Mobile Phones division
- while the ramp up of the sales of new Windows Phones is too slow to offset the losses in Symbian phones in Q3.
All this will lead to a significant drop in non IFRS operating margin in Devices&Services – from 4.9% in Q4 to somewhere between +2% and –2% in Q1.
Translated from corporate speak, that means that Nokia will probably lose a boatload of money in smartphone division in Q1. And mobile phones may not be enough to keep company profitable on even non-IFRS basis. Including various charges and other non-IFRS items, Nokia may record a loss that will be higher 485 million Euro we saw in Q2 2011.
These loses will come mainly due to the big decline in Symbian smartphone shipments. I am not sure what Nokia means by “greater than normal seasonal decline”, But if last year’s 14% drop in smartphone shipments between Q4 and Q1 was a normal seasonal decline, it will be pretty bad. The 14% decline will bring Nokia smartphones to Q3 16.8 million unit level, and if it’s more then that, it may dip well below that. Which will mean that even with Lumia handsets selling for 5 months in many markets, Nokia is still not able to stem the decline in its smartphone shipments.
To be fair – the Q1 2012 comparisons to Q4 2012 will not be easy to every other smartphone maker too. One of the reasons for those huge upside surprises we saw from Apple and Samsung in Christmas quarter, was because Q4 lasted a week longer then usual last year. Also the Chinese New Year gift giving season started earlier and impacted overall sales already last year. Which means that quite a bit of the smartphone sales in Q4, were effectively borrowed from Q1. So in January-March quarter we may see the first sequential decline in smartphone market in years.
But neither the overall market decline, nor PR tricks with triple digit growth in Lumia sales will be enough to cover/spin a whopper of bad quarter that Nokia will announce in April.
The only thing that can cushion the blow, will be a very positive guidance for the rest of the year or at least next quarter. By then Lumia phones will be in many more markets, including Lumia 900 on AT&T, and, hopefully, another Lumia on Verizon or Sprint. Also, Windows Phone Tango and lower priced Lumia phones for many more countries should be out by then, as should the next Lumia flagship.
Maybe that will be enough, maybe not. One thing is for sure, while Q3 and especially Q4 numbers came in pretty good for Nokia, it surely wasn’t the turnaround we’ve been waiting for. The first half of 2012 is shaping up to be as bad as the first half of 2011.
The good news is – Nokia does have enough cash, resources and (still) profitable Mobile Phones division to weather this more or less intact. But the time seems to be running out and we better see some real turn around by the end of this year, at latest.