Quick Review of Windows Phone/Lumia 820

About a month back, I broke my self-imposed promise of never buying a Windows Phone, and purchased a Lumia 820. There are a few reasons why I chose a Lumia over the iPhones or Androids.

• Why not an Upgraded iPhone? - My previous phone was the iPhone 3GS, which I thoroughly enjoyed for about 1.5 years. I missed a good primary camera (before the iPhone I had a Nokia N8), front facing camera for Skype calls, good video recording, and a battery that lasts the whole day. The 3GS was a great phone... actually, make that a great "entertainment device". As a phone, the iPhone was moderately good. Several times the phone would lose network connectivity, and not tell me about it (i.e. the RSSI indicators still sow full signal, but drop down when I try to make a call). I used to get a lot of complaints from people trying to get in touch with me, that my phone's always unreachable. Well, despite this issue, I loved using the phone, for surfing, facebook'ing, twitter'ing, keeping track of my stocks, and catching up on emails. But the minimal customization meant that I was getting tired of the UI... I guess this is bound to happen, as we use our phones every hour that we're awake. So when I was thinking of an upgrade, I was sure it's not going to be another iPhone. Although the Apple store was running a good offer of 7,000 bucks off on the iPhone 4, and 4S, but by now I was questioning what good would it be buying a phone which looks and feels pretty much like my old phone, but has some incremental improvements. So no iPhone for me!
• Why not Android? - Android would have made the most sense, since I recently landed a job with an Android OEM, and was eligible for a product discount, but somehow I didn't want an Android phone. The main reason (and a very personal reason, IMHO strictly), is that I find the Android UI very un-aesthetically designed. The different screens have no unifying concept, and it looks like messy patchwork to me. Maybe it was my work - the fact that I have to handle these phones most of my working hours may have built a "familiarity breeds contempt" syndrome. So again, no Android.
• Why Lumia? - One reason for leaning towards Lumia is of course, Nokia. Firstly, I worked for Nokia for a good 6.5 years (5 years as a employee, 1.5 years as a Accenture sub-contractor). There's still a good bit of emotional connect with the company, and I do want them to do well, as it's a good company. Emphasis on "good" is the topic of a later post maybe. Now, besides this emotional connect, there were a few things that I looked forward to from a Nokia phone - firstly, the great design. The Lumia devices all look great, and Nokia has even won design awards for the 720, 820 and 920 series (or was it 620, 720... I forget, but you get the point). 

Sure looks good, just sitting there!

The second reason for Lumia was that as a ex-Nokia customer, there are a few things that I can take for granted - for e.g. the camera will be great, the audio quality excellent, and the battery life better than either iOS or Android. The presence of HAAC (High Amplitude Audio Capture) was also a feature that I was looking forward to, as I am an amateur musician.
At this point, maybe I could also explain why I chose a 820, and not the then-flagship 920... well the reason was that I was still not too sure about the Windows Phone platform. So I thought, instead of paying big bucks for the 920, and then having the possibility of not liking the phone interface, and cursing myself later, the 820 was a more affordable way to take a peek at how good or bad WP8 really is.

A Look At the Pre-Elop Years

Recently I got a really relevant comment on my earlier post on Nokia. Let me copy-paste the comment here.

Anonymous said...

It Would be nice to see pre-Elop year in the graphs. Let's say Q3 2009 onwards. Now we know Nokia switched the strategy but do not e.g. see the rise of Android and drop of Nokia market share behind it.

April 20, 2013 at 9:00 AM

I created this post to extend the revenue & profit graphs in the pre-Elop years. In fact, right from Q1 2009 to Q4 2012. So here's the first graph, showing revenues & net profit for Nokia group.

Click for larger view

As can be seen, the revenues were rising from 2009 onwards, peaking in each Q4 (the Western holiday season which sees greater revenues). However, the profitability of the company was not too great. Q3 2009 was loss-making, while most of the quarters, Nokia manged to make a few 100 million euros of profit.

Profits shot up in the Q4 of each 2009 (882 million euros), and 2010 (742 million euros). In Q1 2011, Elop's new Windows-Phone strategy was announced, and revenues started falling, and profitability was hit. But this was covered also in the last post.

Although it is easy to see that revenues were higher in the pre-Elop years of 2009 and 2010 (Elop joined Nokia in Q3 2010), one can always argue that the profitability of the company was in question. So was Nokia feeling the heat of the iPhone and Android beating down on it's profitability? To answer this,as in the last post, I looked at just the "Devices & Services" business... the one which is responsible for the smartphones and feature-phones.
So here's just Devices &Services over the same quarters...

Click for larger view

Now this graph shows solid revenue, profitability and growth in Devices & Services until Q4 2010. Note that the nature of the industry is such that the "Q4 peaks" will always occur. So for e.g. it was not alarming that revenues fell from Q4 2009 to Q1 2010. Note that even in weaker quarters, D&S maintained respectable profits. In fact, in some quarters it was the "sole bread earner", compensating for NSN's losses. All that changed from Q1 2011. Of course, there's no point in going over that again, as it's already covered in my last post.

Nokia in Q2 2012: A lighter balance sheet, and a free OS

I’m not doing a full analysis of Nokia Q2 2012 results here. Very briefly, Nokia group revenues were 7.5 billion EUR with a loss of 1.53 billion EUR. A billion plus euro loss cannot be very rosy, of course, but maybe investors expected worse, as the stock price spiked up briefly after the announcements of the results on Thursday, 19 July.

Revenue & Profitability has taken a hit for the last one year, when the strategy of shifting from Symbian & Meego OS’es to Windows Phone has gone disastrously wrong for the company. A very detailed analysis of this strategy gone wrong can be found on Tomi Ahonen’s communities-dominate blog. As for this current post, the chart below tracking Nokia revenues is enough to describe the problem.

Nokia revenues - falling since 2011.

But in this post I try to delve into some of the revelations in the Q2 earnings release.

4 Billion EUR Lighter Balance Sheet

If we take a look at the balance sheet on Nokia's Q2 earnings release, there is a reduction of assets of about 4 billion EUR between Q2 2011 and 2012. About 1.4 billion EUR of this comes from impairment of Goodwill & amortization of intangible assets. This is also explained in a discussion on the operating results in the Q2 2012 interim report.

"During the second quarter 2012, based on a combination of factors, including the decline in our market capitalization, credit rating downgrades as well as our operating results, we concluded that there were sufficient indicators to require Nokia Group to perform an interim goodwill impairment analysis as of June 30, 2012. "

This explains the 1.4 billion reduction in goodwill and intangible assets. But what else did to reach this 4 billion EUR figure? 

"In the second quarter 2012, Nokia recognized EUR 800 million in valuation allowances related to its Finnish deferred tax assets in accordance with accounting standards "

Deferred tax assets is when a loss making company expects to make profits in the future, and sets aside a portion of their losses as tax credits to take advantage of, when they return to profitability. But this is allowed, in Finnish and International accounting laws, only if there is sufficient indication of the company returning to profitability. Deferred tax assets sits on the balance sheet as a current asset, and this accounts for another 800 million of the total 4 billion reduction in assets. 

The rest of the 4 billion is made of lower accounts receivable (amounts due to the company), and prepaid expenses. 

Now, I may be reading a bit too much into this, but cleaning up the balance sheet of intangibles, and deferred tax assets may be to make it more palatable to a buyer. Even though Nokia is currently valued low (it's currently valued lower than what Motorola was picked up for), most buyers would not be convinced by intangibles & goodwill on the balance sheet. Goodwill comes up when a company acquires another company, and pays more than the net asset valuation of the acquired company. The excess amount paid is not treated as a loss, but projected as an asset, which is the intangible valuation of expected synergies from the acquisition. Goodwill appears on the Nokia balance sheet because of the past acquisitions of Navteq, and others. 

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).

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.

Five Reasons Why Forbes May Be Wrong on Microsoft's Windows Phone

My LinkedIn homepage directed me to this article today on Forbes, titled “Five reasons why Microsoft Windows Phone will make a big splash”.

Interesting read, but sadly, not many of these 5 reasons cited by the author make much sense to me. Of course, they all make sense, in general, but I don’t see any of these 5 reasons strong enough to make a “big splash”!

Reason #1: Windows Phone Has A Totally Unique UI

Yes it does. So did RIM playbook, but that did not help RIM much, did it? Having a unique UI may or may not help make the product a success. Having a UI that makes something simpler, easier or faster to do may help, but still cannot guarantee success. 

Reason #2: Originality Means Fewer Forays Into The Patent Wars

Come on now! When you have a minefield of patents for everyday activities like clicking a button on a touch-screen, or uploading a photograph, no smartphone OS maker can be safe from patent wars. The only way to prevent patent wars is to build a big & mean portfolio of patents as a deterrent to any infringement claims. I believe Microsoft already has this, and so the point of fewer patent wars is valid, but the reason is not "originality".

Reason #3: Uniformity Across All Devices & Carriers

iOS already has this. So what's new? And who says that tight control and uniformity is the key to success in smartphones? We're talking about the world here, not USA. Android's "clopen" system is successful, Apple's closed iOS is also successful. Microsoft has just chosen to go the Apple way instead of the Google way.