Nokia Corp. (NYSE: NOK) makes and sells more smartphone handsets than any other stock in the world. But Nokia faces two problems: it doesn’t compete with high-end smartphones like the Apple Inc. (NASDAQ: AAPL) iPhone, Research in Motion Ltd. (NASDAQ: RIMM) BlackBerry, or even the Motorola Inc. (NYSE: MOT) Droid where prices and margins are high. Second, price competition from low-cost makers is eroding the Nokia’s industry-leading market share on smartphone sales.
Nokia said today that its sales outlook for its second fiscal quarter will be at or below the bottom of its previously announced range of EUR6.7 – EUR7.2 billion. The company also expects operating margins to be at or below its expected range of 9%-12%. The company blames lower than expected gross margins for the low operating margins and the lower revenues to reduced volumes and lower prices.
For the full year, the company expects its mobile device value market share for 2010 to be “slightly lower” than 2009 and its volume market share to be flat. Annual operating margins are expected to be at or below the announced range of 11%-13%, although the company does expect a pickup in operating margin in the fourth quarter.
The turnaround is based on the company’s expected introduction of its N8 smartphone in the third quarter. That device features an upgraded Symbian3 operating system, turn-by-turn navigation, and a 12 megapixel camera.
Of the features planned for the N8, the operating system upgrade is the most critical to Nokia. Recent enhancements to Apple’s iOS, the new 2.2 version of Android from Google Inc. (NASDAQ: GOOG), and the widely admired webOS release from Palm Inc. (NASDAQ: PALM) have left the venerable Symbian platform in the rear-view mirror. Nokia needs the upgraded OS to entice apps developers to its platform and buyers to its Ovi apps store.
Nokia delayed the release of its revamped OS in April due to what the company called “quality requirements.” That led the company to reduce its profitability outlook from a range of 12%-14% to the current 11%-13%. The company knows that it has to make a splash on the high-end smartphone business with Symbian3 in order to get back on track.
Nokia may have done the right thing by withholding the new OS until it is fixed, but the delay raises expectations even as it defers revenues. That’s a tough combination to overcome. Nokia shares are down about 10% on double average daily volume so far.
