Smartphone Wars: Nokia 1Q 2011 Results - Is Steven Elop Killing Nokia?
4/25/2011 by: Tomi Ahonen
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.
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.
WHAT IF NOKIA DID NOT HAD THE CHINA SYNDROME?
And can we remove the China effect? We can do that for all handsets (Nokia doesn't give the breakdown by smartphones). Lets remove China sales, and see what happened to the rest of the regions. Without China included, Nokia sold 101.8 million phones in the remaining 5 regions in 4Q. That is down to 84.6 million for 1Q, ie a drop of 17.2 million units of handsets, or 17% drop in sales. That is just over one sixth of the total customer base. If Nokia lost that same number of unit sales each following quarter, there would be no customers left in... 18 months!
No wonder Nokia HQ was desperate to not touch the China sales. The results would be hysterical without the Chinese New Year.
But wait! This China effect was for all phones. The Nokia numbers are worse for smartphones than dumbphones. And the Elop Microsoft effect happened on 11 February, so the first sales day that Nokia's new smartphone strategy was known, was 12 February. In the three months, January-to-March 2011, out of the 90 days in the period, only 48 days (53%) were under the influence of Stephen Elop's announcement. If we factor in that time, and adjust it for the 90 day period, we have witnessed an actual decline 'rate' (outside of China, after Stephen Elop's Microsoft announcement) of a 32% drop! In one quarter! So if this rapid suicide-dive rate were to continue at the same pace, Nokia's total smartphone customer base could be totally extinguished - yes, wiped out - by the middle of 4Q of this year! A suicide-kamikaze move, but where your own pilot flies into your own aircraft carrier to sink it! Good job Stephen Elop! Who was it who set the platforms on fire?
HOW DOES IT COMPARE TO FORECAST?
Remember I did this forecast right after the Elop announcement in February? I projected each quarter how Nokia
smartphone sales would decline, and what its market share would be by the end of the year 2011 (and which rivals would eat what parts of the Nokia voluntary loyal customer give-away bonanza). I forecasted that by the only model we had from before, Microsoft's similar announcement of ending the migration of its smartphone OS path, and what its market share would do in 4 quarters. I projected Nokia market shares, unit sales, average sales prices, and total revenues to be like this:
Quarter . . . Market Share . . . Unit Sales . . . . ASP . . . . . Total Revenues of Smartphones
1Q 2011 . . 28% . . . . . . . . . . 29 M . . . . . . . . 146 Euro . . 4.3B Euro
2Q 2011 . . 21% . . . . . . . . . . 25 M . . . . . . . . 136 Euro . . 3.3B Euro
3Q 2011 . . 16% . . . . . . . . . . 21 M . . . . . . . . 126 Euro . . 2.6B Euro
4Q 2011. . 12% . . . . . . . . . . 17 M . . . . . . . . 116 Euro . . 2.0B Euro
I said clearly that this model was the 'best case' scenario, as there was plenty of Nokia doom and gloom at the time (including my previous analysis of the decision and how it was made). But there were several competent analysts who came to the blog who said they felt I was being too harsh on Nokia, that while it would be bad, it wouldn't be quite that bad. Well, now we have the very first evaluation of those numbers. And yes, it is worse. I had expected 1Q best case to be and what it actually was:
My projection 1Q . . 28% . . . . 29 M . . . . . . . 146 Euro . . 4.3B Euro
Nokia actual 1Q . . 24% . . . . . 24 M . . . . . . . 147 Euro . . 3.6B Euro
After the Elop announcement, Nokia market share in smartphones for 1Q fell enormously but is 14% worse than I projected. Nokia unit sales in smartphones fell dramatically but are 17% worse than I projected, the average sales price declined severely but is less than 1% better than I projected. The total revenues of the smartphone unit crashed, yet are still 16% worse than I projected. And many experts said I was 'too
pessimistic' in my scenario. And my scenario expects first Microsoft phones to arrive like the US cavalry to save the pilgrims, in 4Q. And by that time, my original forecast projects Nokia smartphone market share to hit 12%. These first quarter numbers push that 'best case' scenario to single digits!
Who else told you how bad it would get immediately, and who else gave you the specific units, market shares, average sales prices and total revenues? And who else said that this being the best case scenario, the reality was likely even worse. Do please be prepared, Nokia year 2011 will be the Annus Horribilis like we have never seen in this industry. But now, with all that, let's go back to the quarterly results, for an interesting view to this quarterly performance. Check out what Stephen Elop wrote of the results: "Following a solid first quarter, we expect a more challenging second quarter."
A what first quarter? Stephen Elop sees his Networks unit go from profitable to loss-making, and losing its world second place standing to Chinese low-cost rival Huawei. Nokia sees its dumbphones unit reverse a unit sales growth into unit sales decline, lose market share, reverse a growth in average sales price to ASP decline, see total dumbphone revenues decline, and see an increasing operating profit turn into declining operating profit. And worst of all, in its premier smartphones unit for the first quarter ever, see a loss of actual smartphone unit sales, see a crash of market share, reverse its growth of average sales price into massive decline, see a huge shrinking of total revenues produced by this key business unit, and see the growth in operating profit turn once again into declining operating profit for smartphones!
And this new CEO Stephen Elop calls a 'solid' first quarter? I wonder what he'd have called Toyota's failing brakes quarter or BP's oil spill quarter or Rolls Royce's exploding Airbus A380 engine quarter? An 'unsettled' quarter perhaps? How bad does it need to be for the CEO to admit that his ship is trouble, if except for an opportunistic China gift-season, the rest of the company lost one sixth of its existing customer base, while the industry itself grew!
Even when Motorola did its massive market share hara-kiri suicide from the peak of the Razr hysteria, Moto only lost 6% to 8% of its customer base per quarter. That was our world record for destroying your own customer base in mobile phone handsets, Motorola devastated 3 out of every 4 existing customers in a four year period between 2006 and 2010, as it struggled to react to the iPhone, re-invent a new Razr hit phone, and finally abandoning those, it put all its eggs in an Android strategy where it now is listed as only the 4th best-selling Android brand globally while the company was split up and many parts of it were sold.
Nokia is not doing twice as bad as Motorola in its worst quarters, Nokia is right now doing about Four times as badly, as Motorola in its darkest hours. And this the new brave honest American-style CEO calls a 'solid' first quarter? What business school did Stephen Elop go to? This sounds like "They will greet us as liberators" style Rumsfeld-Cheney'ian deliberate suspension of any tiniest thread of reality. When I said, that for any Nokia CEO to write the 'burning platforms' memo, I said he'd have to be a "delusional psycopath who willingly suspends reality." Come on? Stephen Elop called 1Q of Nokia 'solid'?
If he had said they had a 'troubled' 1Q or a 'difficult' 1Q or a 'disappointing' 1Q or even a 'patchy' 1Q then I'd be willing to say Elop is reasonably sound in his communications. I know he is not 'stupid'. Of course he knows the numbers, he knows the facts, he has smart management advising him. He is not delusional. But he IS communicating to the investors as if he was a lunatic in charge. Come on! Let's be honest here Stephen! This was a bloodbath quarter for Nokia, even with the China silver lining.
And now, all who follow Nokia, that wonderfully honest and open CEO, is saying "Following a solid first quarter, we expect a more challenging second quarter."
The second quarter will be worse than this past disastrous first quarter. Stephen Elop himself warns us, however you rate 1Q, now 2Q will be worse. That he promises us. And I am telling you, it keeps getting worse in 3Q (and 4Q and possibly beyond) until the Microsoft smartphones are selling and even then, that launch quarter won't save Nokia, it will only start to slow the losses. If the new handsets are desirable, if the Nokia-loyal consumers like the new Microsoft look-and-feel which will appear at least unfamiliar. And assuming the first Microkia Nokisoft phones are bug-fee, and well tested and not rushed with problems like say what... the N97?
Nokia smartphones unit is in a death-spiral. It will go from making most of Nokia's profits, to loss-making by this summer. The market share will crash to single digits by year-end. And the overall loss-making of smartphones (with no significant help from NSN or the dumbphones units, both of which suffer from the smartphone unit troubles) will push all of Nokia corporation to generate a loss by the end of the year. This is an ever more obvious scenario the further we move into this year of the Bloodbath 2, Electric Boogaloo.
Thats my review of Nokia 1Q. More Bloodbath Year 2 reviews coming soon. Remember, if you need all the stats and numbers on the handset market, I have released my TomiAhonen Phone Book with 98 tables and charts of all market shares, feature installed bases, form factors, operating systems, average prices etc, costing only 9.99 Euros. See more at TomiAhonen Phone Book.
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