Update: Nokia reports loss as smartphone sales drop by a third

The company's planned move to Windows Phone has hit sales of its current smartphone range

Nokia made a net loss in the second quarter following a dramatic decline in smartphone sales, it reported Thursday.

The company reported net sales of €9.275 billion ($13.35 billion), down 7 percent on a year earlier, but sales of smartphones plunged 32 percent in value (and 34 percent in volume) to €2.37 billion. Nokia reported an overall operating loss of €487 million, compared to an operating profit of €295 million a year earlier. The net loss -- €368 million, compared to a net profit of €227 million a year earlier -- translates to earnings per share of €0.10 ($0.15), compared to earnings per share of €0.06 a year earlier.

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"The Q2 results were clearly disappointing," said CEO Stephen Elop, in a conference call with analysts.

Nevertheless, he said, the company's recent strategy changes and cost-cutting measures are bearing fruit.

"We are starting to see a very positive impact on the health of Nokia, which gives us great hope for the future."

Looking further ahead, he said: "I have increased confidence that we will ship our first Windows Phone device this year and that we will ship devices in volume in 2012."

The arrival of the first Windows Phone devices will herald the end of the Symbian era: Nokia will ship at most 10 new phone models running Symbian phone in the next 12 months, Elop said.

Sales of Nokia's smartphones have been slowing since it announced on Feb. 11 that it will use Microsoft's Windows Phone as the OS for its future smartphones, signalling that the Symbian OS used in its current devices will become a technological dead end. The average selling price of Nokia's smartphones fell by 3 percent compared to the previous quarter, as Nokia cut prices to attract customers. Sales of Nokia's less-sophisticated mobile phones fell 20 percent to €2.55 billion, with a similar decline in volume.

"We took a more responsive approach to pricing," Elop said.

The reduction in sales volumes is more dramatic than it first appears: the overall market for mobile phones has grown by 10 percent over the last year, Nokia CFO Timo Ihamuotila said during the same call.

Uncompetitive pricing was one of the reasons Nokia fell behind its competitors, Ihamuotila said. In China, sales dropped 52 percent between the first and second quarters, causing inventory to build up to six weeks' supply from Nokia's average of around five. During the second quarter the company brought that figure down to normal again, he said.

Nokia has seen the price of its Symbian smartphones undercut by competing models running Android. In future, Elop expects Windows Phone to provide Nokia with the answer to that challenge.

"We are targeting a broad range of prices and bringing Windows Phone down the price curve," he said.

Results were buoyed by an increase in sales at the company's network infrastructure joint venture, Nokia Siemens Networks. Nokia's share of sales rose 20 percent to €3.64 billion, while operating loss dropped to €111 million, from €179 million a year earlier.

Analysts had forecast revenue of around $13 billion, and earnings per share of around $0.03. Two months ago, analysts were more optimistic about Nokia's profitability, predicting earnings per share of $0.14, but on May 31 Nokia revised its financial outlook, forecasting device sales "substantially below" its previously expected range.

Nokia forecasts that its operating margin on phone sales will be "slightly above breakeven" in the third quarter.

The company has focusing on cutting costs, and now expects to exceed its goal of reducing expenses by €1 billion a year in 2013. Already, said Elop, Nokia has consolidated its research and development activities in a smaller number of centers, four working on Windows Phone and three on mobile phone hardware.

Nokia has also removed four layers of management, he said, resulting in engineers seeing speedier decisions.

Nokia's stock price on the Helsinki stock exchange rebounded slightly on news of the results. It has fallen by half since February, dropping sharply the day Nokia announced its new smartphone strategy, rallying only slightly with the announcement of the company's first-quarter results and second-quarter outlook on April 21, and plunging again when Nokia revised its financial outlook on May 31.

Nokia's sales were much lower than anticipated, Garner analyst Carolina Milanesi said via e-mail. If rival Samsung reports a strong second quarter, then Nokia could slip from being the leading smartphone vendor to number three, behind Apple and Samsung, she said.

"Q2 needs to be the bottom of the barrel for Nokia with some positive impact from the new products coming in Q3," she said. She doesn't expect Nokia's situation to improve significantly before the second half of 2012, however.

Nokia's biggest challenge now is to "get the wow back in the brand," she said. The combination of Microsoft's software and Nokia's hardware -- and the company's recent work on the user interface of the N9 smartphone, albeit based on an entirely different OS, Meego, gives her confidence that will happen, she said.

Copyright © 2011 IDG Communications, Inc.