Good News for Nokia, but Still a Long Road Ahead

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.

Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next generation of Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2013, at 8:45 PM, ctyank99 wrote:

    "Nokia pays Microsoft fees for using the Windows Phone OS, while Microsoft pays Nokia $250 million each quarter to help the company stay afloat." That is not wholey true. Microsoft pays Nokia $250 million each quarter to help to market Windows 8. It's is part of a $3 billion marketing deal. What are you trying to suggest with such a screwed up manipulation of the truth?

  • Report this Comment On March 08, 2013, at 10:13 PM, ctyank99 wrote:

    An analyst just came out and estimated 15 million units in sales for this year alone on the new 520 alone. Nokia just did a filing recently that said profits on services and devices will exceed 10% and stated that their production problems were now solved. They supposedly had a party in China for their 2 millionth windows phone sold, and Nokia/Siemens announce five new contracts in the last month? Nokia will survive and thrive. They’ll be a classic turnaround story.

  • Report this Comment On March 09, 2013, at 12:15 PM, USuptick wrote:

    ctyank99,

    1) can you clarify in which time table Nokia services and device will exceed 10%? We have, so far, heard only it to be a long term target.

    2) you claim that Nokia has stated that their production problems were now solved. Okay, please link us to that official Nokia statement. We have not seen that.

    If Nokia really wants to be succesful with low end Lumias, it should also launch WP phones with dualsim availability as Samsung does with android phones. Otherwise It can be very difficult to be successful in Asia like in India and in China. We have not anything heard about dualsim Lumia phones, not even any time- schedules etc.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2301759, ~/Articles/ArticleHandler.aspx, 9/17/2014 7:41:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 10 hours ago Sponsored by:
DOW 17,131.97 100.83 0.59%
S&P 500 1,998.98 14.85 0.75%
NASD 4,552.76 33.86 0.75%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/16/2014 4:00 PM
MSFT $46.76 Up +0.52 +1.12%
Microsoft CAPS Rating: ***
NOK $8.57 Up +0.01 +0.12%
Nokia CAPS Rating: **
AAPL $100.86 Down -0.77 -0.76%
Apple CAPS Rating: ****
CHL $62.08 Down -1.04 -1.65%
China Mobile CAPS Rating: ****

Advertisement