Nokia sales tumble overshadows Lumia pick up

* Sees Q2 phone unit margins worsening to minus 2 pct

* Nokia shares fall as much as 12.6 pct

A sharp fall in sales of Nokia’s basic phones overshadowed a stronger performance from its Lumia smartphones in the first quarter,sending its shares tumbling.

The results renewed pressure on Chief Executive Stephen Elop,who was hired in 2010 to turn the Finnish mobile phone maker around after falling behind rivals Samsung and Apple in the smartphone race.

He made the controversial decision to switch to Microsoft’s untried Windows Phone software in early 2011 and had said the transition would take two years,a period that’s now over. Analysts said he was running out of time.

“Basically,he has only the second quarter,” said Mikko Ervasti at Finnish investment banking and wealth management group Evli.

Nokia said it sold 5.6 million units of Lumia handsets in the first quarter,up from 4.4 million in the previous quarter and in line with expectations.

But shipments of mobile phones slumped 21 percent to 55.8 units,a far steeper decline than the 8 percent fall that markets expected,with unit sales down in every region.

As a result,overall net sales fell 20 percent to 5.9 billion euros from a year earlier,far short of the 6.5 billion euros forecast by analysts in a Reuters poll.

Sales at its equipment venture NSN fell 5 percent to 2.8 billion euros,weaker than expected,although its underlying profit was higher than expected due to restructuring.

STAYING RELEVANT

Nokia’s future is seen as depending on higher-margin smartphones as a growing number of global consumers want access to apps such as Twitter from their handsets,but it also needs to protect its position in the basic phone market so buyers of its lower-end handsets don’t defect to other brands when they eventually upgrade to smartphones.

In markets such as China,Nokia faces strong competition not only from rivals such as Samsung but also from emerging,cut-price competitors.

“The fall in numbers for the low-end devices is quite alarming,” said Nordea analyst Sami Sarkamies. “Even with Lumia doing better,we still care about those. Nokia is still a second-tier player in smartphones,and it’s only because of its position in mobile phones that it’s still relevant.”

Elop told reporters that the main reason for the fall in mobile phone sales was tougher competition and the company would aim to fight back with more innovative,low-priced products.

Nokia recently launched a 15 euro phone in an effort to boost its share in emerging markets,and has been expanding its mid-tier offering,too,with its range of Asha feature phones to keep customers loyal.

Though Nokia said it expected Lumia sales to grow more strongly in the coming quarter,Samsung and Apple,which between them will have shipped nearly 100 million smartphones in the first quarter,show little sign of ceding market share. Samsung’s Galaxy S4 is set to go on sale later this month and is expected to outsell its predecessors with monthly sales of around 10 million.

PROTECTING CASH

Some analysts said they were worried about Nokia’s forecast for margins in its devices and services business to be “approximately negative 2 percent”,give or take 4 percentage points in the second quarter,down from a positive 0.1 percent in the first.

Cost cuts helped its net cash position improve to 4.5 billion euros from 4.4 billion in the previous quarter,rather than fall as markets expected.

The company’s first-quarter underlying loss,which excludes special items,decreased to 0.02 euros from 0.08 euros a year earlier. Markets had expected a 0.04 loss,according to a Reuters poll.

Despite such bright spots,weak sales in the bread-and-butter mobile phones briefly sent Nokia’s shares down 12.7 percent to a year-low of 2.30 euros.

By 1155 GMT the shares traded at 2.47 euros,higher than their lifetime low of 1.33 recorded last year but still a far cry from their 65-euro peak in 2000.

Nordea’s Sarkamies said the weak results in mobile phones might force analysts to reconsider what they see as the sum value of the company’s parts,which include its handset business,Navteq mapping unit and stake in NSN. Many analysts had estimated that to be around 4-5 euros.

“Worries about the mobile phone business are now greater,” he said

Analysts’ reactions to Finnish mobile phone maker Nokia’s Q1 results.

FRANCISCO JERONIMO,RESEARCH MANAGER AT IDC

“6 million Lumias is quite promising.”

“They are on a right track and we can see a much better year for Nokia smartphones. They are far from volumes of Samsung and Apple,but that is not where Nokia is trying to compete now. Nokia is trying to go for the mass market.”

“They are trying to compete on the segment where consumers are moving from feature phones to smartphones,but they want cheap smartphones.”

“I think when Nokia gets to over 10 million of Windows phone 8 … (that is the) volume that will keep Nokia in the game.”

LARS SODERFJELL,ANALYST AT ALANDSBANKEN

“Overall,in terms of results and cash flow,the report as such is slightly better than expected,if from a very low base.

“The main disappointment is the rather cautious guidance on the Devices & Services operating margin in the second quarter at -2 percent,within a range of 4 percentage points. My view is that the consensus is somewhere around breakeven.”

“Otherwise,I feel the report looks pretty decent at first glance. The deliveries of Lumia phones met my expectations anyway.”

HAKAN WRANNE,ANALYST AT SWEDBANK

“The shortfall is in the (cheaper) mobile phone side,where both volumes and average selling prices came lower than expected. That is of course a bit worrying since that has been their bread and butter business in the Devices and Services unit.”

“I think we will see market’s profit estimates for 2014 come down.”

“The top line disappointment is significant here,so a sell-off is reasonable even though their cash flow was good in the quarter.”

MIKAEL RAUTANEN,ANALYST AT INDERES EQUITY RESEARCH

“The group result was a bit better than expected,but the outlook for the second quarter was more important this time,and that was a bit of a disappointment. They should have guided at least a zero operating margin level for the Devices and Services unit.”

“Although the volumes for Lumia and cheaper phones were somewhat weak,the phone unit’s result was pretty good,showing the impact of their cost-cutting.”

“As the first quarter is seasonally weak,it is a good sign that Lumia phone deliveries were on the rise from the previous quarter.”

“Smart phones business should grow faster to make the unit profitable. That would require the Lumia phone deliveries reach 10 million units in a quarter.”