Nokia's Q2 smartphone sales fell 39 percent, as loss widens

Nokia shipped 4 million Lumia smartphones in Q2, nowhere near enough to counter the slide in Symbian smartphone sales

Nokia reported a 39 percent year-on-year drop in the number of smartphones it sold in the second quarter, to 10.2 million, while its net loss more than trebled.

The company's total revenue for the quarter fell 19 percent year on year, to AA!7.54 billion (US$9.5 billion), while its net loss widened to AA!1.53 billion from AA!492 million a year earlier. The company sees little scope for improvement in the months ahead, forecasting that the operating loss in its phone business will continue at the same level through the third quarter, and could worsen.

"We have limited near-term visibility in the devices and services business," said CFO Timo Ihamuotila in a conference call with analysts.

AA!400 million of that revenue came from Nokia's patent portfolio, although that level of licensing revenue cannot be guaranteed in future quarters, said CEO Stephen Elop during the conference call.

Smartphone sales were the hardest-hit sector, as the company makes the difficult transition from its own Symbian operating system to Microsoft's Windows Phone OS. Most of the 10.2 million smart devices it sold were older models running Symbian: It shipped just 4 million Lumia smartphones running the Windows Phone OS. Windows Phone has yet to make its mark, with Android and Apple's iOS still taking the lion's share of the market.

The conversation is still going on with operators about building a "third ecosystem" for Windows Phone OS alongside the networks of developers and app stores that already exist for Android and iOS, said Elop. "We have also been encouraging other manufacturers to participate in the Windows Phone ecosystem" to compete with Android and iOS, he said.

The decline in sales of Symbian devices was not offset by sales of Lumia phones -- except in North America, where it was more than made up for by sales of the high-end Lumia 900, distributed by AT&T in the U.S., and the mid-range Lumia 710, sold through T-Mobile.

That Nokia is having more success in the U.S. than in Europe is not surprising, said Carolina Milanesi, research vice president at Gartner.

"They're really trying to change the brand perception in Europe, where Nokia is seen as appealing more to parents than to kids. It's easier in the U.S. because consumers don't really have a recollection of Nokia as a brand. Its easier to recreate the brand in a market that forgot you."

News that existing Lumia models will not be compatible with Windows Phone 8, the next major upgrade to the OS, may dampen enthusiasm for the phones, although Nokia has promised that existing phones will receive many of the expected new features through an interim upgrade, Windows Phone 7.8.

The fact that current products are only going to be upgraded to Windows Phone 7.8 is going to put off carriers more than consumers, said Milanesi. Most consumers aren't really aware of which version of the OS is running on the devices they buy, she said.

Elop said that activations of new Lumia devices have been stable or increased since Microsoft's announcement of Windows Phone 8. "Owners of existing Lumia devices still have updates coming," he said, adding that Nokia will continue to upgrade older phones with new features even after the launch of Windows Phone 8.

He contrasted this with Android phones, many of which cannot be upgraded even though 60 percent of them ship with an OS three versions or more behind the latest version, he said.

While the volume of Nokia's smartphone sales fell by 39 percent year on year, smartphone revenue dropped only 34 percent, to AA!1.54 billion, as sales of the more expensive Lumia phones boosted average smartphone selling prices 7 percent. That effect may not continue, though: Earlier this week, Nokia halved the retail price of the Lumia 900 sold through AT&T, to $50.

Nokia's goal is to increase the average selling price and gross margin of its Lumia smartphones in order to return to profitability, Elop said.

To justify those higher prices, he said, "You will see increasing differentiation and unique capabilities."

"We have had more time to work with Microsoft in terms of the differentiating capabilities," he said. "With the existing range of Lumia products we had limited opportunity because we were late to the market."

Nokia sold 73.5 million feature phones in the quarter, up 2 percent year on year, but average selling prices fell 14 percent to AA!31 before operator subsidies and taxes, pushing feature phone revenue down 11 percent to AA!2.29 billion.

The company has introduced a number of new phones recently, including the first touch-based model in its low-cost Asha range, but those phones started shipping too late to show up in second-quarter sales figures, said Ihamuotila.

The biggest obstacles to Nokia's recovery are competition for its phones, and uncertain consumer demand for its Lumia products, it said. The company expects the third quarter to be particularly challenging as it transitions to new smartphones. Microsoft hasn't said when it will release Windows Phone 8, but it is widely expected this fall.

Revenue from Nokia's mapping business rose 4 percent, to AA!283 million, although it continued to make an operating loss of AA!95 million, a slight improvement on the year-earlier figure of AA!104 million.

Nokia owns Navteq, which supplies the mapping service used by Microsoft's Bing Maps.

"We have a dependency on Microsoft as it relates to Windows Phone, but they have a dependency on us for location-based services," Elop said.

The network infrastructure business, Nokia Siemens Networks, saw an 8 percent fall in sales, to AA!3.34 billion, while its operating loss widened to AA!227 million from AA!111 million a year earlier.

Elop said that Nokia Siemens Networks will be given more independence, and that all options are open for its future. Nokia Siemens Networks' results are consolidated in Nokia's accounts, although it jointly owns the infrastructure company with Siemens, which treats its stake as an equity investment. Last year the two partners failed to reach an agreement on the sale of Siemens' stake, and Elop's remarks suggest that the matter is not closed.

Milanesi is broadly optimistic about the decisions that Nokia is making. "The denial phase before Elop started, when they kept clinging on to Symbian has obviously been put behind them," she said.

Nokia's effort to make its phones look different from the other black or white slabs is significant, she said.

"Imaging and apps and services are important, but the hook is still the hardware. If you don't pick up the phone, if it's not a wow phone, you won't get to experience the rest," she said.

But even that may not be enough. "The core in all this turning out right, is marketing and branding," she said.

Peter Sayer covers open source software, European intellectual property legislation and general technology breaking news for IDG News Service. Send comments and news tips to Peter at peter_sayer@idg.com.

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