Spillikins №155. Nokia 2011 Results: A Billion Euro Down

The last week's biggest event was the release of the Nokia yearly financial report that can tell us a lot about what is going on with the company and what are its positions on the market. This report makes it clear that in 2012 Samsung is more than likely to become number one mobile phone manufacturer in the world while Nokia will continue to lose its market share. Here I will explain why it is happening and how the company tried to 'spruce the report up.
By the way, this issue of the Spillikins is going to be a two-parter: I am well aware that not everyone is curious about Nokia's destiny and I don't want to make an article too big as there were plenty of news besides Nokia. So the next part will be a regular Spillikins while this one is dedicated to the most important event of the last week.

Nokia's Yearly Report – Lies, Hush-Ups and The Truth

This yearly and quarterly Nokia report was hugely anticipated because it contains information about the company's nearest future. The report was filed in the best PR traditions as well as the CEO's statement. And as far as I remember it is the first Nokia report to feature direct misinterpretation given by the CEO.
Before the report was released I said that the company would not dare to publish data on Nokia 800/Nokia 710 sales as their Windows phone 7 initiative was a total failure. However, as if trying to prove me wrong Stephen Elop stated that 'To date we have sold well over 1 million Lumia devices'. Afterwards there were a lot of posts on the web about how successful Nokia WP7 phones were since over a million of them were sold and Nokia fans began flooding the web with rubbish like 'Nokia is back in game'.
Unfortunately, it's all lies and Nokia had to admit it almost immediately when analysts and journalists began asking questions. To my direct question 'Sales to what date?' Nokia reps reluctantly answered 'to January 26, 2012'. The Wall Street Journal has already published data contradicting with Nokia statements but most Nokia admirers never care for such 'tiny details'. And although many still believe in a million sold handsets the actual sales in Q4 2011 could not have exceeded 500 thousand units. Nokia 800 went on sale in Britain on November 15 and in four more countries on December 1. Nokia 710 was released in mid December and distributed just like Nokia 800.
Just a year ago Symbian^3 phones hits the market and in Q4 2010 the company shipped four million handsets. And though the sales of Symbian^3 started earlier thanks to the 'January 26' trick with Lumia phones we have valid figures for comparison. So despite the immensely bigger ad support and lower price for Nokia 710 (as compared to Nokia C7) the company only managed to ship one million handsets which four times less than a year ago with Symbian^3 phones which did not have all the PR and promoting like free XBOX360 with Nokia 800 or 40 day try and buy offers (I mentioned these offers previously in the Spillikins).
These figures concern shipments to channels i.e. shipments to carriers, retailers, wholesale companies etc. not end buyers. All manufacturers reports these shipments and it's normal. However, our story contains an example of how a manufacturer can overstate these figures like Nokia did.
Nokia wanted to convey several messages in their Q4 report and the main of them is that the Lumia series is successful, to prove with data that the company is on the right course. Juggling with words allowed them to do it as far as PR is concerned even though the sales figures they provided are not impressive at all. Even if it were a million handsets it would still be an utter failure in this case.
The second message is that the company managed to stop the plummeting of their smartphone sales. This is very important for investors as the future of the company depends on the smartphone market. The decision to ditch Symbian was suicidal and it has been killing Nokia smartphone sales ever since but the company could do nothing to stop it. But they needed to assure the market that they are doing well so they reserved to a very old marketing support trick some top managers use: they simply show data for the most successful period of time to get their 'well-deserved' bonuses. Let's have a closer look at this trick.

Trick 1: High Quarterly Sales

So you have an objective to boost smartphone sales. What do you do if the demand is low? There are a bunch of tricks you can use to change the situation at the expense of other products' sales and the future of the company.
Nokia does not have many smartphones in the higher mid-range: Nokia 800 is the key product in this range and it's been just released so the company did not want to mess with its price. Instead they chose Nokia N8 and Nokia C7 and a number of cheap Symbian smartphones as locomotives of smartphone sales growth. The latter were simply very actively promoted to the channels while Nokia N8 became an object of a game of generosity. Direct Nokia partners and major retailers were offered up to €50 for every handset sold on condition of active sales. It is like an extra discount returned to vendors in the end of a financial period. Subsequently, December witnessed a 'miracle': in pursuit of the promised bonus retailers upped their orders for Nokia N8 and boosted the sales. In Russia the sales of N8 soared by 4-5 times and the smartphone became a bestseller.
This may sound great but this is a temporary boost and eventually it will ruin the model as such tricks always do. Retailers go to lengths trying to sell this phone and for an unpopular model like N8 it certainly takes some effort. Such aggressive sales also raise the number of returns and lowers the sentiment of user reviews but at this point it is a problem of retailers – Nokia is not losing anything directly.
Anyway, the funniest thing is that the price for N8 in Q4 2011 does not include these marketing expenses and bonuses for retailers. Nokia will have to pay the retailers for the phones they have sold in the next quarter. So the figures of Q4 2011 are boosted at the expense of the next quarter. An elegant solution, isn't it?
But the trick is not over here. Nokia may have boosted shipments, sales and the average price for the model but it is a short term deal. By January 2012 the quantity of phones stockpiled by Nokia partners exceeds their needs so they will begin to get rid of the surplus by cutting the price. Since November 2011 the retail price for Nokia N8 in Russia has been falling by $18-20 every month. In early February it it will plummet even more dramatically and will cost about 12.000RUB (the recommended price is 13.500-14.000RUB). This will be a race among retailers for the quickest riddance of N8 stockpile. The stock surplus also means that in February Nokia partners will order a lot fewer units if any.
So, the trick basically consists of boosting quarterly sales by sacrificing sales of the next quarter and cutting down on the price which very unhealthy for a company that is currently losing the market but it can only work if the overall sales are going up. Quite possibly, Nokia accountant will find a way to conceal price fall for the smartphone in Q1 2012 by presenting these expenses as direct losses but there is no way they can make them disappear.
The Stephen Elop's statement that Symbian sales are falling faster then expected is an indirect proof of what I have just said. What Nokia's CEO means is Symbian sales will be terrible in Q1 2012 due to the above mentioned reasons. Now you understand how companies sometimes manipulate their reports (Nokia is not the only one – most manufacturers use this trick).

Trick 2: The Average Phone Price

There is another trick to manipulate figures and it is a lot simpler. Nokia includes patent fee income from Apple (starting from Q3 2011) and a number of other companies into the income of the Device&Services department. So the average phone price figure we see is the actual average price and split patent profit. But even with this artificial price the average phone price in Q4 2011 fell by 23% as compared to Q4 2010 and rose by 4% as compared to Q3 2011. I suppose that these 4% or €2 per Nokia handset are patent payments from Apple since there were no other factors that could have raised the average Nokia phone price. The 4% stand for impressive €227 million but this figure is just a speculation. But it is an interesting speculation so I went as far as divide this figure by the 37 million sold Apple iPhones in Q4 2011 and the result is €6 per Apple handset for Nokia patent fees which seems quite possible to me.

“Excellent” Data from Nokia

Let's continue to explore the latest figures from Nokia. Pay attention to some details, which look exemplary to me.

• Losses in the 4th quarter of 2011 reached 1.4 USD billion with 1 USD billion to write off expenses on the cards department and the acquisition of Navteq;
• In 2011 the company sold 77.3 million smartphones (100.3 million one year ago), which gives a decrease of 23% with the international market skyrocketing by 60%;
• In 2011 Nokia sold 417 million phones compared to 452 million a year ago with the sales dropping from 29 billion Euros to 24 billion Euros;
• In 2010 the company had a profit of 900 million Euros, which was reversed to the loss of 1,073 million Euros in 2011;
• The company's share of the smartphone market shrank from 29% to 12%.

How a company losing 1 billion Euros a year be still considered successful? It is absurd! You cannot stay successful and lose your market share in all key and secondary segments at an alarming rate! The losses will not be reversed as Nokia has nothing to generate income from. Two quarters ago Nokia was blessed with a half a billion transfer from Apple when the Finnish manufacturer won the patent lawsuit. As a result in the second quarter of 2011 Nokia lost only 488 million Euros. In the next quarter key performance indicators were airbrushed even more to show a positive dynamics, but we know now that losses were simply transferred to the last quarter of the year.
In 2012 Nokia is planning to cut expenses by around 1 billion Euros, which will be achieved by firing employees, closing down factories and selling patents (in January Nokia already sold 450 key patents in telephone communications). How desperate can you get to sell key patents! It is absolutely amazing! Selling all your valuables is the only possibility to return to profit-making in the short run.
If Nokia manages to save 1 billion Euros a year, sheds 15% of staff and closes down several plants the losses for the year will float between 0.5 billion Euros and 1 billion Euros. This is the optimistic scenario without the further decrease of the market share in all segments. A more realistic forecast based on the downward pressure on international Nokia sales is that losses will likely to fluctuate between 0.75 billion Euros and 2 billion Euros. In fact this is the amount of money the company needs to save in order to stay on the market. It has enough cash to agonize for 1.5-2 years, but you never know. Decrease in manufacturing increases the cost and brings down the margin. I cannot think of any positive factor for Nokia in 2012. I have a gut feeling that sales are continuing to fall and there is no reason for growth. Sales figures for Lumia show that Nokia is losing even its key markets in Europe.
Additional reading:

• Tomi Ahonen describes the fall of Nokia and how Stephen Elop has been destroying the company

Quarterly Microsoft Support of 250 million dollars

Nokia report contains the data about the positive developments in the shape of 250 million dollars received from Microsoft in the 4th quarter of the year. It is a loyalty payment transferred by Microsoft to all manufacturers of handsets on Windows Phone 7. Nokia has a special place in this scheme, because the amount is the largest and it will probably become a monthly one. We do not know how long Microsoft will be supporting Nokia, but it will be longer than 1 year, so in 2012 Nokia may expect 1 billion dollars from the source, which is enough to cover all expenses on the development of Windows Phone 7 models. The first payment covers the cost of 1 million Nokia 800/Nokia 710 including development, but excluding promotion and advertising. The Microsoft agreement helped to put off even bigger losses, which could have been staggering.
I am pretty sure that Microsoft must have added a clause about the required sales targets in order to provide ongoing support. This can be difficult to achieve for Nokia as the current management of the company cannot plan longer than for a couple of weeks. In the 4th quarter report we are told that the target of 150 million Symbian smartphones (planned for February 2011 - 2013) will not be reached. We are given vague hints about the “market forces” preventing Symbian from showing its “strong points”. It is still a secret for me.

Other Figures from the Nokia Report

Annual comparisons in the report tell the true picture of where the company is heading losing segment after segment. Before giving the overall table I would like to highlight several points. First, look at the 4th quarter results (2011) and growth rate, which is negative across the board.

Now look at financial assets of Nokia to see whether they spent or saved. Once again the dynamic is negative.

Sales in monetary terms were on the decline on all markets.

In millions of handsets sold the situation was not that grim, but look at the North American market with the sales in the last quarter plummeting by 81%. I wonder if Nokia manages to rebound at least until the last quarter of 2010.

Smartphones sales were depressed too.

And finally overall results of the quarter and 2011.

Brief Conclusion

Nokia people are skillful at showing the public that their failure is in fact an achievement. The market reaction shows that they will be successful to some extent. To be more precise we have to speak about Internet reaction rather than market one. Discussions on blogs and websites do not influence the sales much though, so Nokia is hopeless here.
It is always a bad sign when top managers start telling lies or shy from answering difficult questions. Stephen Elop did not say the truth about the time frame for Lumia shipments, which is not surprising. It was made on purpose, but why lie when discussing latest results that Nokia 900 enjoyed good reviews?! There was no single review yet! It just shows how the company is managed.
Today the company is wasting not only money, but reputation and brand image, which took years to create. Even when the company goes bust or becomes really small there will be enough people to blame me, bad weather or circumstances. Nevertheless, I think that the main culprit is the management of the company responsible for the destruction of Nokia. This failure is unprecedented on the market. Nokia unpleasantly surprised many and succeeded in losing so much, that I cannot stop being surprised. The fans of Nokia should think twice if they help the company by advising to buy its products. It will go down anyway, though fans can influence the speed of the process. The only hope is to exacerbate the problems for the top managers to be replaced. Otherwise the current management will completely destroy the once mighty empire by the summer of 2012 and we will not see this brand again. So far the second scenario looks more realistic, which is a pity.
P.S. Have a nice week and remember that no matter what your phone brand is do not take it too close to your heart. We are just speaking about phone manufacturers and not even football clubs.