Summary:

Nokia’s Q4 earnings, released on Thursday, make for some challenging reading for even the most hopeful of Nokia (NYSE: NOK) watchers. The ha…

Broken Nokia device
photo: Whatleydude, Flickr

Nokia’s Q4 earnings, released on Thursday, make for some challenging reading for even the most hopeful of Nokia (NYSE: NOK) watchers. The handset maker confirmed analyst estimates that it has sold over a million Lumia Windows Phone handsets – but that didn’t stop a horrible 31 percent slide in its total smartphone sales compared with last year. What’s more, drastic cost-cutting measures taken in the last year are not paying off so far. Revenues are down by 21 percent over last year, and the company reported an operating loss of nearly €1 billion.

Nokia currently has two models Windows Phone devices in the market, the Lumia 800 and Lumia 710, both 3G models, and is planning to launch a new 4G version in the U.S. in March of this year.

The day before Nokia’s results, a trio of news items released by the company — combined with the “leak” that it would be offering its first 4G phone, the Lumia 900, at a massive discount to the rest of the 4G offerings out there — looked a little like padding for worse news to come today, and that’s more or less what we got:

Handset unit sales were down eight percent to 113.5 million.

Feature phones actually held up in their unit sales: 93.9 million for the quarter, down by only one percent.

Smartphones, however, did significantly worse: 19.6 million devices, down 31 percent.

Device revenues overall were €6 billion, down 29 percent. Again, the biggest weakness was in smartphones, which had sales of €2.74 billion, down 38 percent.

Not surprisingly, Nokia is very much trying to draw a line under last year, one of profound transformation for the company, and look ahead to what 2012 will hold.

It’s taking a very aggressive strategy to pick up much-needed market share for its devices in key markets like the U.S. and UK, offering its handsets at massive discounts — and in the case of the UK, even free under certain contracts. That tactic will come at a big price though: unless Nokia has worked out a way to make high-end devices for less money than its competitors, it will continue to see erosion of its margins and device average selling price. In other words, it might win business, but at what cost?

In the quarter just ended, those margins continued their decline. In this quarter Nokia reported gross margins of 23.7 percent on smart devices, compared to 30.8 percent for the same quarter a year ago. ASP for smartphones was down by only three percent to €140 — a figure that was helped by sales of more expensive models such as the N9 and the Lumia 800, according to Nokia. Feature phones saw a decline of 10 percent in ASP to €35, their lowest price yet.

Windows Phone sales. Nokia reached a milestone — or a “beachhead” as it calls it — by selling more than 1 million Lumia handsets. But this number is still a far, far cry from the 20.8 million smart devices that Nokia sold in Q4 of 2009, let alone the 37 million iPhones sold by Apple (NSDQ: AAPL) sold in Q4 2011.

The Windows Phone platform, according to figures from Kantar out this week, accounted for less than two percent of sales in any of the nine countries it surveys as a barometer of smartphone demand. That points to a very long road ahead for both companies to bring those numbers into a more credibly competing realm.

Nokia says that it will introduce its first WP7 devices into China and Latin America in the first half of 2012. This is important for a number of reasons: Greater China is currently Nokia’s second-largest market after Europe (€5 billion in device sales for China compared to €7 billion for Europe), but it is declining, seeing an 18 percent drop in revenues over last year and 20 percent in volumes. Meanwhile, LatAm is Nokia’s second-smallest market after North America but it’s one of the only ones that is growing (Middle East being the other growth region.) In LatAm, Nokia had sales of €2.5 billion on volumes of 46 million units.

LatAm and China are also both markets where Microsoft (NSDQ: MSFT) has yet to introduce Windows Phone, and where there is still a lot of room for smartphone growth — something that Apple, RIM (NSDQ: RIMM) and Android makers have not overlooked, either. Still, that means a population of consumers with less preconceptions about Android and iOS being “the” smartphone platforms of the future — getting through to those consumers is crucial if Microsoft truly hopes to makes its OS a truly global smartphone player.

Design front and center. In one more move to shore up confidence for the year ahead, Nokia today, separately, also announced that Marko Ahtisaari has been promoted to the position of EVP of design, and has also joined the company’s leadership team. Ahtisaari is a Nokia veteran who left the company and then returned after it acquired his social networking startup Dopplr. The emphasis on design is a significant one, considering that this is where Nokia will have to differentiate and excel in the years ahead as it makes phones on a platform — Windows Phone — that is also being used by its competitors.

During the earnings analyst call, Nokia executives gave a bit more color to the results:

CEO Stephen Elop acknowledged some of the big issues facing declining sales for the Symbian platform but still said the company would continue to remain committed to supporting the OS through 2016. Nokia earlier this year struck an outsourcing deal with Accenture to take over the management of the platform as part of its gradual winding down of operations. In the last year, Nokia has rolled out several new devices based on Symbian, and has a roadmap for updates to the software for the year ahead.

Nokia also highlighted the platform support payments and licensing fees that Microsoft and Nokia are paying each other. It was described by the company’s CFO Timo Ihamuotila as a “competitive” structure that will run in the billions of dollars between the two companies — although no indication of which party benefits more financially from those. This last quarter, Nokia recorded a payment of $250 million from Microsoft as a result of this arrangement and did not specify whether it paid out money to Microsoft as well. Consider that without that quarter-billion dollar payment those bottom-line results would have been even more gloomy.

The company will be offering a dividend of 20 euro cents per share and has no plans for stock repurchases in the year ahead.

Elop also highlighted something we have heard many times already — from carriers and Nokia itself: “The third ecosystem” argument is “very strong” with carriers. One wonders what that might mean between the lines. More big discounts, subsidized by operators, in the pipeline? More large orders ahead? Preferential treatment for Nokia over other platforms and handset makers?

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