Nokia surprises: Feature phone volumes grow and smartphone ASP bounces

Nokia Q2 2012 Earnings Analysis

Nokia’s (NOK) share price rebounded sharply after it announced its second-quarter report on Thursday, bouncing as much as 18% in Helsinki on short-covering. The stock was up 6% in New York at Thursday’s close. Much of the investor surprise stemmed from the way Nokia was able to avoid average sales price meltdowns in both smartphone and feature phone categories.

Perhaps the most widely reported upset in Nokia’s report was the Windows Phone shipment volume, which at 4 million units topped most estimates. Another surprise was the Nokia-Siemens infrastructure unit swinging to a profit during the quarter. But perhaps the most intriguing numbers come on the average sales price front.

In the second quarter, Nokia shipped 10.2 million smartphones at the average sales price of 151 euros — and oddly enough, the smartphone ASP actually moved up 7% year-on-year and 6% quarter-on-quarter. This ASP improvement was unanticipated, because about 60% of Nokia’s smartphones are still Symbian devices, which are facing brutal pricing erosion as the operating system nears the end of its lifespan. Despite the unfavorable mix, Nokia was able to deliver an ASP uptick in its smartphone unit.

Moving 4 million Lumias in a quarter is more than expected, but that just tells us how low the Wall Street consensus had moved ahead of Thursday’s report. Five years ago, Nokia shipped 13.9 million smartphones during the second quarter in 2007 — the quarter when the first iPhone launched. After five years of explosive smartphone industry growth, Nokia’s combined Symbian + Lumia smartphone volume is now about a third lower than it was in the spring of 2007.

Back in 2007, Nokia did not break down feature phone and smartphone ASP levels like it currently does. Nokia’s blended device ASP was 90 euros. The vendor’s smartphones still command a premium over the blended average of 2007, but the feature phone ASP plunged to 31 euros in the second quarter this year. As low as it may sound, it represents 14% annualized ASP decline for the feature phone category. Many expected worse.

Holding the annual feature phone ASP decline to 14% was an important defensive win because Nokia achieved something almost nobody expected during the spring quarter: 2% annual feature phone volume growth.As we all know, the feature phone as a consumer product has started dying, and somewhat faster than the industry expected a few years ago. Despite the fact that global feature phone volumes are now declining at a double-digit clip year-on-year, Nokia managed to eke out slight volume growth in a dying sector.

This is important, because Nokia’s hope for survival lies in maintaining big feature phone volumes until cheap Windows Phones can start substituting Series 40 devices in Asia, Africa and Latin America.

The apparently unremarkable feat of achieving 2% feature phone volume growth on 14% ASP decline is actually a notable surprise — it implies Nokia was able to hold its own against Asian low-end Android vendors in emerging markets during the quarter. The company needs to repeat that defensive victory again and again in coming quarters — cheap Windows Phones are not expected to arrive until the third quarter of 2013 or later.

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