3 Takeaways From Nokia Corporation (ADR) (NOK)’s Q1 Results

Nokia CorporationDeath of the feature phone.

Nokia Corporation (ADR) (NYSE:NOK) posted its first quarter earnings on Thursday. While there are a few glimmers of hope for investors in the report, nothing could cover up the rapid decline in the company’s mobile business. Here are the three takeaways from the quarter:

Rapidly eroding mobile business

In 2012, Nokia Corporation (ADR) (NYSE:NOK) amazingly managed to starve off declines in its core feature phone business with the roll-out of its Asha model. That miracle is clearly over. Nokia’s feature phone volume declined 21% year-over-year despite drastic price cuts. Inventories are building and further price reductions will be needed to clear storage. Expect heavy margin pressure in upcoming quarters.

Two competitive factors are hampering the company’s feature phone operations.

Android: Google Inc (NASDAQ:GOOG)‘s Android devices are rapidly falling in price and approaching parity with Nokia Corporation (ADR) (NYSE:NOK)’s Series 40 feature phone platform.

Open Source: In addition, the arrival of cheap, open-source operating systems like Ubuntu and Firefox OS also threaten Nokia’s core business.

More alarming were the massive drops in Nokia’s combined shipment numbers. The company posted a 63% drop in China, a 20% drop in Latin America, and a 28% decline in the Middle East and Africa. Nokia has historically been strong in emerging markets. But with numbers like these you start to question that assumption.

Smartphones gaining traction

Despite the dismal headlines there were a few positives in the report. As the result of a cost cutting initiative, the company reduced losses from $1.21 billion in the first quarter of 2012 to $358 million this quarter.

Nokia Corporation (ADR) (NYSE:NOK)’s smartphone business met Wall Street expectations. The company sold 5.6 million Lumia handsets, up 27% quarter-over-quarter. CEO Stephen Elop expects sales growth to accelerate going forward. These numbers are a relief for investors as it proves Nokia’s bet on Windows is paying off and the company is successfully transitioning into smart devices.

However, these numbers spell trouble for Microsoft Corporation (NASDAQ:MSFT)‘s Windows ecosystem. With each passing quarter, Windows falls further behind Google’s Android and Apple Inc. (NASDAQ:AAPL)‘s iOS. For comparison based on estimates provided by Reuters, Apple Inc. (NASDAQ:AAPL) shipped 36.9 million iPhones during the first quarter. During the same time frame Samsung shipped 61.6 million Android devices. While Windows holds 2.6% of mobile market share, expect this figure to decline if Lumia sales don’t accelerate quickly.

Several possible catalysts

Another positive for investors in this conference call was the hint of several upcoming catalysts.

Tablet: Rumors are swirling about what may be coming out next from Nokia Corporation (ADR) (NYSE:NOK)’s research labs. According to a report in the Financial Times, the company may be planning a tablet, similar in size to the Samsung Galaxy Note but with better specs. While there was no confirmation in the call, Elop hinted that the company may be exploring new form factors.

Lumia 928: Elop also anticipates the launch of a new Lumia device that could achieve hero status with a major U.S. carrier in the upcoming quarter. Rumor mills suggest Verizon Communications Inc. (NYSE:VZ) may soon launch the new Lumia 928 with Microsoft Corporation (NASDAQ:MSFT) financially backing the effort.

Foolish bottom line

To turn a profit, Nokia Corporation (ADR) (NYSE:NOK) needs to quickly ramp up Lumia sales to offset the decline of its feature phone business. That wasn’t evident this quarter.

The article 3 Takeaways From Nokia’s Q1 Results originally appeared on Fool.com and is written by Robert Baillieul.

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