Nokia reports big Q2 losses, but CEO notes progress

Mobile phone giant Nokia today posted a loss of 368 million euros, or $523 million, in the second quarter as the company's sales slipped.

This compared with a profit of 227 million euros, or $323 million, during the same period a year ago. Sales fell about 7 percent during the quarter to 9.3 billion euros, or $13 billion. The previous year, Nokia reported revenue of 10 billion euros or $14 billion.

Nokia's losses and weak sales were expected. The company has been facing stiff competition from Apple and Google in the high-end smartphone category. And it's been getting squeezed at the low end by Asian manufacturers, such as ZTE.

Nokia is currently in the midst of trying to get its strategy back on track. The company is moving away from building smartphones that use its Symbian operating system toward devices that use Microsoft Windows Phone software.

The company is expected to release the first Windows Phone devices later this year. But it won't ship these devices in volume until 2012, the company has said.

Still, CEO Stephen Elop said in a statement that Nokia is making better-than-expected progress toward its strategic goals.

"While our Q2 results were clearly disappointing, we are executing well on the initiatives that are most important to our longer term competitiveness," he said in a statement. "Some progress is already evident, and thus we are targeting to end this year with more net cash and liquid assets than at the end of Q2 2011. We firmly believe that our deliberate and unwavering commitment to making the changes necessary at Nokia is the right way to deal with the disruptive forces in our industry and drive value creation for our shareholders."

Nokia did manage to make some money from its patent portfolio. In June, the company began receiving royalty payments from Apple for the use of Nokia patents.

Short-term losses, long-term prospects

Nokia's long-term strategy of ditching the Symbian operating system for Microsoft's Windows Phone operating system could help the company get back in the game. But at least in the short term, Nokia is expected to continue to lose market share.

During the second quarter, total shipments of mobile devices were down 20 percent compared with last year. Smartphone shipments dropped 34 percent.

In fact, rival Apple shipped more iPhones during the second quarter than all of the different varieties of smartphones that Nokia shipped in the quarter. Apple shipped 20.3 million iPhones compared to 16.7 million smartphones from Nokia.

Nokia also took a hit in feature phones. Sales dropped 16 percent to 71.8 million units, the lowest volume since 2005, research firm IDC noted.

IDC estimates Nokia's overall worldwide market share to be at 25 percent, down from 34 percent market share a year ago. But the biggest slide is in the smartphone category where IDC estimates the company's market share has fallen to 15 percent from 40 percent a year ago.

IDC believes that Nokia has now lost leadership in smartphones worldwide to Apple for the first time. And Nokia has now fallen to third place behind Apple and Samsung. As Samsung attacks Nokia at the low-end as well, Nokia risks losing its position as the overall No. 1 mobile handset king to Samsung, according to IDC.

"These disastrous results show how quickly bad a business can become for a company that does not understand the trends ahead of competitors or is too slow to react to those trends, in a such fast-moving industry," said Francisco Jeronimo, an analyst following the European mobile device market for IDC. "Nokia is bleeding in all fronts. On the smartphone segment its portfolio is not attractive in terms of user experience, ecosystem and even price."

Jeronimo noted that Nokia has been trying to keep its competitive edge since 2009 through price cuts. But as prices on Google Android smartphones decline and with rumors of a lower-cost iPhone on the horizon, the company will have a hard time keeping up.

"Consumers can already find better Android devices at lower prices than Nokia smart devices," he said. "This can even get worse over the next quarters as Apple is rumored to launch a cheaper iPhone in September."

Hope in the form of Windows Phone
During an earnings conference call this morning, Nokia's CEO said that with the new Microsoft Windows Phone devices, Nokia will target a broad range of pricing.

"That's one of the reasons why we made the decision to go with the Windows Phone platform" Elop said. As the ecosystem for Windows Phone is built, Elop believes the company will be able to hit a variety of price points using the OS.

Analysts agree that the launch of the Microsoft Windows Phone devices is Nokia's only hope for a turnaround. And IDC's Jeronimo thinks that the company will see some improvement. He said Microsoft has gotten the basics right with respect to the software. Feedback from consumers has been positive. But he believes it will take time to build an ecosystem to rival Apple iOS and Google Android. Still, mobile operators are expected to support the new platform, which should give Nokia a boost.

"The new platform will play an important role on Nokia's results next year and there are strong signs that it can reverse the current situation," Jeronimo said. "(But) the question that no one can answer now is whether or not it won't be too late for Nokia? The past has proven to be very difficult or impossible for a company regain its leadership after it has lost it."

Update at 7:30 a.m. PT: This story was updated with analysis and comments from Nokia's conference call with investors.