End of the year look at Nokia

It's almost been 2 years since Nokia CEO Stephen Elop announced the drastic strategy change in smartphones from Symbian & Meego to Windows Phone. The announcement was done in Feb 11, 2011 - a date well remember by all ex-Nokia employees like me. At the time the strategy change was announced all of us knew that a change is needed. Symbian - once the most widely used  smartphone OS - was losing it's appeal. Symbian's UI was unintuitive, execution was slow, and organization was slow and bloated beyond imagination. Meego was promising, but was taking forever! 

A drastic change was needed, but was the shift to Windows Phone - an unproven smartphone OS from Stephen Elop's former employer - the correct choice? Let's take a look at how Nokia has been performing financially, ever since Stephen Elop took over (third quarter, 2010) to today.

Nokia Revenues Q3 2010 to Q3 2012

The above graph plots Nokia revenue & net profit over Q3 2010 to Q3 2012. In Q3 2010 Nokia earned approximately 10 billion euros in revenue, and only 322 million in profits. Not the best performance for a quarter - earning just a few hundred millions for over ten billion in sales means that something needs to change in the company. That "something" would probably be controlling costs, increasing ASP (Average Selling Price of handsets) by focussing more on smartphones, and getting rid of businesses that were burning cash. 

Is HTC in trouble?

There have been quite a few blog posts about HTC's 4Q 2011 and full year 2011 performance. As stated here and here, the 4Q results were disappointing, while the full year results were encouraging. So let's look at the company's full year results (adjusted for exchange rates of New Taiwanese Dollar to US Dollar).

HTC yearly revenues, 2009 to 2011.

HTC revenues grew 111% in 2010, and 61.5% in 2011. These are pretty robust numbers. The smartphone industry growth has been between 55% and 65% according to analyst estimates, and HTC's growth seems to be in line with the industry growth. It all looks fine, until we take a look at the quarterly numbers (again adjusted for exchange rates at end of each quarter).

Apple's Q4 2011 results makes it the largest PC maker

Last week Apple released their calender Q4 2011 results (Q1 2012 for Apple fiscal year). The 37,044,000 iPhones sold makes them the largest smartphone maker for Q4 2011. They also sold 15,434,000 iPads, 1,479,000 Mac desktops, and 3,719,000 Mac laptops. This adds upto 20.6 million personal computing devices sold in the quarter. This, according to research firm Canalys, makes Apple the largest personal computing device maker. The analysis obviously considers a tablet like the iPad as a personal computer (PC), which I think is about right. 

"Hi, we're both PC's now!"

I'm not sure how Canalys predicted that Apple has sold more PC than HP, as HP's 4Q 2011 (calender) results are still not public, but maybe they have estimated the numbers. But if these numbers are correct, then we are seeing an interesting change. The "WinTel" (Windows OS running on Intel processors) duopoly is seriously challenged. The rise of the iPad, and it's challenge to the WinTel PC is very well documented by Horace Dediu in his blog.

It would be interesting to see what happens to Microsoft once they lose the dominance of the personal computing market. It may be a step back in time... back to the eighties, when Microsoft was writing applications for Macintosh! This was, of course, before Windows and Office took off. Maybe Microsoft will get back to writing applications for iOS and OSX devices. That would be interesting indeed!

Analysis of Nokia 4Q 2011 results

Results Summary
21% Year on year decline in revenue, 155% decline in earnings per share (IFRS), and 8% decline in mobile device volumes. Things certainly dont look too good for Nokia, especially considering these are Q4 results (the Christmas quarter). As the interim report states...

"On a year-on-year basis, the decline in our total Devices & Services volumes in the fourth quarter 2011 was driven by significantly lower Smart Devices volumes. Mobile Phones volumes were approximately flat year-on-year. "



Specifically, "Devices & Services" business saw a 29% decline in net sales, 11% decline in operating margins. The decrease in margins are quite likely due to the shift to Windows Phones OS, which increases the BOM if each phone (licensing royalties to Microsoft). At least I see no other explanation, as gross margin is very simply revenue - cost of goods sold.

Revenue & Net Profit Trend
I tracked Nokia’s revenues & profits over the last 3 years, and the chart below shows the trend from 2009 to 2011.

Nokia 2009 to 2011

The two peaks in the blue revenue line shows the seasonal phenomenon in the electronics/computer industry where Q4 sales are always much higher than previous quarters. It is interesting to see that there was a good peak in Q4 2010, but it was followed by a quick decline in Q1 2011 onwards. This is most likely due to the 11-Feb-2011 announcement of moving away from Symbian, which reduced the demand for Symbian smartphones overnight. As Nokia says...
"Following the announcement of our strategic partnership with Microsoft in February 2011, our strategy included the expectation to sell approximately 150 million more Symbian devices in the years to come. However, changing market conditions are putting increased pressure on Symbian. In certain markets, there has been an acceleration of the anticipated trend towards lower-priced smartphones with specifications that are different from Symbians traditional strengths, which has contributed to a faster decline of our Symbian volumes than we anticipated."
While the revenue is increasing sequentially (i.e. increasing from Q3 2011 to Q4 2011) it falls short of what Nokia was selling in 2010, and even in 2009. This is probably quite serious for the company... it’s performing worse than it was 2 years back.