Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) may have set its future on the achievements of its new range of Lumia smartphones, but the company’s earnings will not base themselves on the performance of that line. The most important products in the Nokia basket for the first quarter are its old Asha smart phones.
A new report from Bank of America Corp (NYSE:BAC) investment banking unit, Merril Lynch, puts an underperform rating on the company because the analysts expect the Asha line of smart phones to deliver lower returns in the first quarter of the year than had been previously expected. The report mostly stays away from commenting on the Nokia Lumia sales, because those sales don’t matter as much to the company’s bottom line in the short term.
Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) sold 9.3 million Asha smart phones across the world in the fourth quarter of 2012. The aging smart phones, which uses an operating system that has been around since 1999, make the Lumia sales of 4.4 million look like a pygmy in the market it is hoping to make headway in. If the analysts are right about the company’s prospects, the Lumia line may overtake Asha shipments much sooner than thought.
Competition in the budget smart phone sector, the last in which Nokia has been thriving, has been increasing as an increasing number of low budget models running on Google Inc (NASDAQ:GOOG)’s Android systems have appeared. The range of features on those models make the Nokia Asha line look poor in comparison.
Competition is also increasing in the higher end of Nokia’s business. Microsoft Corporation (NASDAQ:MSFT) has partnered with Huawei Technology Co Ltd (SHE:002502) to release a cheap Windows 8 phone designed for the Africa market. The model, which will retail for around $150, will cut into sales of Nokia’s made range handsets on the continent.
If Nokia Asha line of smart phones suffers a greater than expected reduction in demand, it will create several problems. The first of these will be a loss in revenue. That will hurt investors confidence and leave the company pressed for the cash flow needed to invest in research and marketing for its future.
A second problem associated with an earlier than expected drop in demand for Asha models is that a return in the popularity of the phones is not likely to happen, and the decline is likely to accelerate. The company’s Asha line is so far behind the competition on features that they’re unlikely to have any role in the market going forward.
Cut price Android models are going to destroy a vital revenue stream for Nokia Corporation, and this report makes it look like that trend will come sooner rather than later for the company. Asha is not the future of Nokia, but it is the present of the company. A decline in the revenue streams from the models, despite the low margins, will hurt the company overall.
The company was always going to have to go through a transition, but executives were hoping to have a soft turning point. The Bank of America Corp (NYSE:BAC) report suggests that the turning point will be a sharp one, and the company will have to do everything it can to avoid spinning out of control. Investors who believe the company has a future in the smart phone market need to do the same.
The Bank of America Corp (NYSE:BAC) report puts a price target of 1.90 euro on the company’s shares. Lumia is the future of Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V), but the Asha is vital for its transition. Without revenue from the lower end of the market to smooth the company’s move into the smart phone market, its chances of success may be drastically reduced.