Yesterday, Nokia (NYSE:NOK) filed a 20-F with the SEC and said the company would net slightly more with its current Microsoft (NASDAQ:MSFT) deal this year than it pays out in software fees to the Redmond company. That's good news for Nokia investors, but there's still a lot of work to be done.
Let's make a deal
Under the 2011 agreement between Microsoft and Nokia, the Finnish company pays Microsoft fees for using the Windows Phone OS, while Microsoft pays Nokia $250 million each quarter to help the company stay afloat. Nokia expects its deal with Microsoft to pay off through sales of its Lumia smartphone line and other phones. In the recent filing, Nokia said it expects its smartphone and mobile phone growth to outpace the market and bring in an operating margin of 10% or more.
In the filing, Nokia said, "Over the life of the agreement the total amount of the platform support payments is expected to slightly exceed the total amount of the minimum software royalty commitment payments. As of the end of 2012, the amount of platform support payments received by Nokia has exceeded the amount of minimum software royalty commitment payments made to Microsoft, thus the net cash flows have been in our favor."
So far, Nokia has sold a total of 15 million Lumia phones, 1 million in the last few months of 2011 and 14 million in 2012, with 4.4 million of those coming in Q4 2012. The money from the Microsoft deal and the current Lumia sales are all good news for Nokia, but the company still faces some major difficulties.
The road ahead
China is the world's largest smartphone market, yet Nokia only holds 1% of the handset market share in the country. The company ran into supply problems in China recently, which hurt sales of the Lumia 920T, and further hindered the company's expansion in the market. But Nokia recently released the Lumia 520, a Windows Phone starting around $180 that the company hopes will make huge gains in China. A successful Windows Phone in China would be great news for Nokia, but it would also bring up other concerns.
If the Windows Phone platform takes off, Nokia could face increased competition from other companies looking to add Windows Phone offerings to their lines. IDC expects the Windows Phone OS to make up over 11% of the global smartphone market share by 2016. Right now, Samsung and HTC offer only a few Windows Phones, but that could change as more consumers start adopting the OS. If Samsung were to build more Windows Phones that compete with Nokia, it could certainly hurt Nokia's chances for a smartphone comeback.
The waiting game
Investors should be cautious with Nokia right now, as the company's future is still highly unstable. If the Windows Phone OS picks up steam, then Nokia will surely benefit from the trend. But the mobile space is extremely competitive and Apple is looking to expand even further into China, a place where Android devices rule. If Apple can seal a deal with China Mobile this year, or possibly introduce a cheaper iPhone in the country, then Nokia could get slammed in the region.
One advantage Nokia has is that it knows how to sell low-cost phones in emerging markets, and it just introduced two new ones at the Mobile World Congress earlier this month. If Nokia can gain mobile traction with the low-end phones in emerging markets then it could retain some mobile relevance and slowly work on its high-end smartphone sales. The tricky part is figuring out whether or not Nokia has enough time to actually make that happen.
Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, China Mobile, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.