Smartphone Wars: Nokia 1Q 2011 Results - Is Steven Elop Killing Nokia?

Where Apple was perfection in its 1Q results, Nokia is the total opposite. Nokia results were awful in almost every way. While the industry grew smartphone sales from 4Q of 2010 to 1Q of 2011, Nokia lost unit sales in smartphones, saw declining average sales prices, lost revenues, declined profits. However, we knew this would happen. My analysis was not the first one, nor the only one to explain why the February 11 announcement of a two-year shift from Symbian (and MeeGo) to Microsoft as the operating system for Nokia's smartphones, would damage short-term Nokia smartphone sales. This whole year we will be seeing a decline in Nokia smartphone market shares, at least up to the quarter when the Microsoft powered smartphones arrive (possibly 4Q of 2011, more likely early 2012). We knew Nokia was going to have a rough time.

ITS WORSE THAN WE EXPECTED

The point is, this 1Q was even worse than expected. And before we even look at smartphones, lets glance at the other two thirds of Nokia's revenues, outside of smartphones. In the telecoms infrastructure unit, NokiaSiemens Networks, sales were down by 20% from just three months earlier. And the hard-earned tiny operating profit earned by NSN for 4Q was lost, and now the unit is again reporting losses. Meanwhile Huawei, the Chinese telecoms giant has now passed NSN for second place in the brutal world of telecoms infrastructure competition (and is chasing Ericsson for the world leadership role).

And what of the second of the three legs? Nokia's 'dumbphone' business, where roughly a third of Nokia's revenue is generated? Compared to 4Q, now in 1Q Nokia dumbphones unit sales are down by 12% to 84 million units. The average sales price is down by one Euro to 42. Total revenues yes, are obviously then also down, by 14% to 3.5 Billion Euro. And the ones growing in dumbphones? Samsung and major Chinese makers from ZTE to Huawei to G'Five.

If Nokia's top management focus this Spring is in a shift of platforms from Symbian/MeeGo to Microsoft, then what they'd hope is for the other sisters in the organization to have strong years to finance this transition. In this way both NSN and the dumbphones units are failing Nokia now when their contributions are direly needed.

SMARTPHONES FIASCO

So we get smartphone numbers. And it's not pretty. The smartphone industry grew something like 5% from 4Q to 1Q (based on my preliminary numbers, we'll see more as the data comes in, but for comparison, in 2010 the same period grew 6% after the Christmas quarter into the January quarter). So if Nokia grew by about 5% in smartphone unit sales, that would only be 'holding steady' with the industry. But no, Nokia did not report smartphone unit sales 'growth'. No. They reported an actual decline in smartphone unit sales of 14%. Nokia invented the smartphone. While their market share was destined to decline from 100% (when you are the inventor, you start with 100% but as rivals come in, that is impossible to keep) and dropped below 50% about a decade after the first Nokia Communicator, Nokia actual unit sales of smartphones have grown from quarter to quarter, essentially forever. Even from 3Q to 4Q, while Nokia's smartphone market share declined, their smartphone unit sales grew by 7% in just one quarter. Now from 4Q to 1Q, even after the big Chinese new year's sales, Nokia total smartphone sales declined for the first time.

Note, the overall handset market grew, but smartphones grew much faster in the past 3 months. Nokia reported a decline in dumbphones of 12%, but it reported a bigger decline in its smartphones of 14%. The part of the industry which grew the strongest, saw the biggest actual decline in Nokia sales. I do not mean 'relative decline' as in market share loss. I mean real decline. Nokia was the best-selling smartphone in the world, and when that sector is the biggest growth area, Nokia doesn't manage a growth in it, Nokia sees not just a decline, its decline in it is even worse than the decline in Nokia dumbphones!

This is a massive disaster for Nokia. So its customers are suddenly saying, I hate your smartphones so much, I would rather buy a Nokia featurephone (a non-smartphone, a dumbphone) than a Nokia branded smartphone! This is a total reversal of how it had always been for Nokia, quarter after quarter, year after year, Nokia smartphones had higher demand than Nokia's (world-leading) brand in dumbphones. This was true until Stephen Elop took control.

And as the customers don't want the phones, even as Nokia released its long-delayed N8 in 4Q and its latest flagship, even more expensive E7 in 1Q, and should have a very competitive duo of 'iPhone killers' in the large screen touch screen slim superphone space, and for 4Q Nokia did see an increase in its average sales price, that is now in crash-dive. The ASP came down 6% from 156 Euros to 147 Euros. The customers are buying 14% less Nokia branded smartphones in just 3 months, and when they buy some, are then paying 6% less for the smartphones! This while Nokia has released previously missing top-priced superphones to plug the hole in the top end of the price pyramid. What is wrong with this picture?

With lower prices and lower volumes, obviously total sales revenues are down drastically, by 19% in just three months, in the smartphones unit, generating 3.55 Billion Euros, just slightly more than the dumbphones unit. (for 2Q the dumbphones unit will earn more than smartphones, so Nokia is severely regressing now! All of its major rivals are pushing really hard to achieve the opposite, where smartphones could bring more income than dumbphones, but Nokia now is essentially walking away from all that profitable smartphone business, and will find from 2Q that more of their income comes from low-cost 'Emerging-Market-phones' with their modest profitability, than in the high-end smartphones sector. This from the inventor of the smartphone. This while the smartphone sector has its strongest growth ever. Sad.) And while Nokia doesn't break down its smartphones and dumbphones profitability by type, for all handsets, the operating profit crashed 32% in the past quarter. Obviously this is primarily driven by the disaster happening in smartphones.

KUNG HEI FAT CHOI

So then in a most calculated move, Stephen Elop ensured his announcement of the Microsoft selection did not hurt the most important sales region of Nokia smartphones of 1Q, one of the markets where Nokia's market share was the strongest - that of China. Like I reported here last year and Nokia itself verified in its 2010 quarterly results for 1Q, there is a Kung Hei Fat Choi i.e. Chinese New Year's gift-giving season, which is akin to the Christmas sales in the Western world. Because China only launched 3G networks in 2009, we witnessed that surge in smartphone sales for the first time for first quarter of 2010. But it will now happen for many years to come. And Nokia knew this. So they did not want to jeopardize the Chinese surge in smartphone sales. That is why Elop did his announcement on February 11, he waited deliberately for Chinese sales to happen first. Pretty nasty, I think the Chinese customers might not reward Nokia for this with their next upgrades.

Nonetheless, we see the regional split of Nokia sales. The Chinese region grew sales by 9% (note, Apple, who had a huge Chinese gift last year, now reported 250% growth in 1Q of 2011). But yes. China was to be expected. What of the rest of the world? The Middle East bought as many Nokia phones in 1Q as in 4Q, their sales were 'flat' (while the industry grew, so even here Nokia lost market share). But the rest? In Latin America unit sales down 14%. In Asia-Pacific down 13%. In what little Nokia had in North America, with the new North American CEO and all, unit sales down by another 50%. and Nokia's home market, Europe, down by 30%. This is disaster. Note that Europe and USA are the two biggest regions for smartphone sales and that is where Nokia saw its biggest losses. This is not just bad for Nokia, it is a massacre.