Nokia pre-released third quarter earnings on January 10th. Overall investors were certainly happy as the stock surged over 25% since the release. Nokia’s strong Lumia sales helped boost investor confidence about the Finland based company. There are still many mixed opinions about the future of the company. There is a wide spectrum of opinion in part due to a lack of clarity. Nokia refused to say what percentage of the Lumias sold were the newest models as opposed to the older discounted version. This missing data makes the quarter harder to analyze. Nonetheless, the future of Nokia appears to lie with the Nokia Lumia, which we examine below:
Nokia Corporation (NYSE:NOK) was not able to benefit fully from the Lumia 920 success, due to supply constraints. However, Nokia Lumia sales still beat many forecasts. The company sold 4.4 million Lumia phones compared to Citigroup estimates’ of three million. Citi notes that Lumia was indeed selling well at several AT&T Inc. (NYSE:T) locations in U.S. and other stores in Europe, albeit off low unit delivered per store. A better supply situation and regional as well as operator/retailer coverage should create higher Nokia Lumia volumes and earnings in the Smart devices segment.
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On the conference call, management highlighted the supply constraints relating to Nokia Lumia products and especially the Nokia Lumia 920, which has capped the successful translation into earnings. Supply constraints were said to relate to component availability and Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s deliberate/conservative planning. Supply constraints remain, but Nokia is dealing with the issue and has provided no further clarity on likely developments in Q1.
The US telecom market is dominated by four major players – AT&T, Verizon Communications Inc. (NYSE:VZ), Sprint Nextel Corporation (NYSE:S) and T-Mobile USA. Before the Windows Phone 8 introduction, Nokia Lumia devices in the US were available at AT&T and T-Mobile USA. Now Verizon has joined the club, and Sprint is also set to enter Windows Phone market. This could more than double the sales firepower of the devices, measured by the smartphone sales volumes of the top four operators.
Analysts at SEB Enskilda, raised their Nokia Lumia volume estimate from 30m to 37m for 2013 and from 52m to 55m for 2014, with a higher 2013 ASP and higher gross margin (up 150bp) for Smart devices (analysts at Credit Suisse estimate sales of 22.5mn Nokia Lumia phones in 2013). They expect that Nokia Lumia sales volumes will be boosted by an improving supply situation, better regional coverage (as highlighted by management, due to the launch of Windows Phone 8 devices in China and India) and broadened distribution in operator and retailer coverage.
However, the picture is not entirely bright. Lumia sales have definitely improved from a depressed Q312 level, and that Nokia’s flagship product, the 920, was “supply constrained” (was it under-ordering by Nokia or a component problem?). However, even with a beat of 4.4m Lumias (including the WP7 and WP8 models) the number only amounts to a 2% global share in smartphones. In order to gain a decent level of profitability in any CE market, a company needs to achieve a 10-15% share, according to analysts at Berenberg Bank. They do not expect this to happen unless Nokia’s low-end Windows devices gain serious traction.
Analysts at Nomura believe that component constraints likely hit the Lumia 920 only. They estimate that Nokia may have sold around 1mn 920s. Even if demand was double the supply, this would mean only 1mn units were lost. While Lumia traction is positive, they believe that there is still no tangible basis on which to base longer-term market share forecasts.
Bottom line: The future is Nokia Lumia, but it remains unclear how strong sales were in the quarter, which makes forecasting future sales even harder.
Disclosure: No position