Is Asha the future for Nokia?

Nokia yesterday reported its results for the fourth quarter of 2012, beating many analysts estimates and delighting the financiers. Quite a contrast from Apple’s world-beating performance announced the previous day, which merely dismayed the very same analysts. If there’s logic at work here, it’s proving somewhat elusive.

For starters, Nokia reported Q4 revenue of $10.73 billion – down from $13bn year-on-year. However, operating profit was roughly $585 million, although net profit came in at $270 million. Certainly a big improvement over Q4 2011’s $1.2 billion loss. Full year 2012 produced revenues of €30.2bn, down 22 per cent from 2011. Operating profit for the year was €126m, down a massive 93 per cent from 2011.

But it’s phones that matter. Nokia CEO Stephen Elop bet the shop on products that supported the new Windows Phone operating system, much to the surprise and horror of most. He gave his plan two years to produce results. Well, here we are, more than two years on, and what’s happened?

Drilling into the released figures, it appears that Nokia is being a little naughty – it groups its Asha touchscreen feature phones under the same ‘smartphone’ heading as Windows Phone and Symbian devices. Tut, tut. It justifies its actions by claiming this “full smartphone classification” was awarded to them “from global market research companies and analysts such as GfK”. Well, not from the rest of the industry.

Breaking the numbers out, Lumia sold 4.4m in Q4 (as Nokia already reported earlier this month), Symbian 2.2m, and Asha 9.3m. Nokia’s ‘Smart Devices Business Unit’ managed to achieve Q4 sales of 6.6m devices, at an average selling price of €186. Its gross margin per handset dropped a couple of points to 18.0 per cent. The unit contributed a 21.6 per cent margin loss to the group’s financials.

It’s worth noting is that Nokia has confirmed that the Nokia 808 PureView smartphone (launched last February and featuring the massively high resolution camera) was the last Symbian based phone the company will be releasing.

Turning to ‘dumb phones’, Nokia reported quarterly sales of 79.6m, down 15 per cent year-on-year. As mentioned, 9.3m of these were S40-based Asha touchscreen models. With an average selling price of just €31, it still managed a gross margin of 22.2 per cent (down from 27.7 per cent) and at least the unit managed a positive margin contribution of 8 per cent.

It saw lower sales in all geographic areas except North America year-on-year. In North America it reported a 40 per cent growth, but only to just 700,000 sales. It’s biggest, and most worrying, fall was in China, where it saw a 69 per cent fall over the year.

The Asha numbers are worth a closer look (or as much as Nokia chose to provide.) During the year, Nokia introduced two new Asha models with dual SIM capability, along with two new touchscreen Asha models towards the end of Q2. The latter features an open environment for third-party application development. During the first two quarters that the touchscreen Ashas were on release, Nokia reported a total of 15.8m units. Oh for Lumia to have achieved these numbers.

Two year’s ago, Nokia had a global smartphone market share of around 29 per cent. Today, that number has fallen to around 3 per cent. This is despite the smartphone market more than doubling in volume over the period. Did Nokia manage to convert all of its Symbian sales into Windows Phone sales? Unfortunately not – it’s still way off this target. There is a lot of analysis of projected Windows Phone market share out there on the web, and all of it points to a considerably worse situation than the optimistic goals of 25 per cent set by some analysts two years ago. Microsoft may well fail in making its OS the third largest ecosystem.

If that is the case, where does that leave Nokia’s strategy? Assuming no sudden executive departures and radical reversals in strategy, Nokia needs a back-up plan. Actually, it may already have it, in Asha. If it can fight off the low-cost manufacturing threat from Chinese vendors, it could well be that emerging markets prove to be its salvation – not through sales of expensive Lumia devices, but the much lower cost Asha. It already owns the OS, and is making steps to open up the platform to third party developers. Asha already features a built-in Facebook client and has a web browser. S40 could be a serious threat to low-cost Android devices, proprietary feature phones, and the forthcoming Firefox OS.

During an analyst call, Elop elaborated on its strategy for low-end devices.

“We are clearly innovating with Microsoft around Windows Phone, and are focused on taking that to lower and lower price points. You will see that over time compete with Android. But at the same time we’ve said consistently — and we’re just beginning to see it in the Asha full-touch products — that we will continue to innovate around our Asha smartphone line in order to compete with the very lowest levels of Android.”

Elop emphasised that Nokia is not considering any other OS strategy other than Windows Phone and Asha’s S40. Nokia’s has stated that, through Asha, it wants to lower the overall total cost of ownership of, shall we say, “smart-ish” devices.

“We continue to invest and innovate in what we’re doing with the Asha product line. There’s a lot of excitement with that product line this year, there’s no question.”

So for 2013, we’ll be focusing more on the Asha sales figures than the Lumia ones, as we suspect there’s going to be far more interest and development around Nokia’s home-grown, low-cost handset business.