Nokia pins hopes on Windows Phone 8 after €220m writedown

Embattled Finnish handset maker Nokia is expecting Windows Phone 8 to boost its smartphone margins, after it wrote down €220m in smartphone component inventory.

"Because our sales outlook is lower, we believe we will not be able to use some of the components we already have on our books as well as components we have committed to purchase," Nokia's chief financial officer Timo Ihamuotila said on an analyst call on Thursday afternoon.

The news comes on the day the company announced a €1bn operating loss for the second quarter of this year.

Nokia had also reduced the "carrying value" of some its existing inventory and warned that it may increase or decrease inventory allowances, depending on future sales.

The writedown included components for Lumia, Symbian and MeeGo devices, and reduced Nokia's gross margins for smartphones from 15.6 percent in the first quarter of this year to 1.7 percent in the second quarter. 

Ihamuotila declined to divulge the breakdown of its inventory loss, but said the largest component related to Lumia devices. 

While the inventory writedown has cut Nokia's margins dramatically, the pre-writedown levels of 15 to 16 percent is still a fraction of Apple's 47.4 per gross margin on iPhones.

Nokia chief exec Stephen Elop told analysts it was "indeed the case that margins need to go higher" on smartphones.  

Windows Phone 8

Elop is hoping the forthcoming Windows Phone 8 platform will help Nokia differentiate its devices, reach higher price points and create bigger margins. However, as one Credit Suisse analyst pointed out on today's call, attempting to raise prices after setting a low bar would buck the experience of the entire smartphone industry.  

"The catalyst becomes the next wave of Lumia devices and the next wave after that, where you will see us consistently pushing up in price point and gross margin, driven through differentiation, which we can achieve more readily with this cycle of Windows Phone than we could with the previous cycle," said Elop.

Nokia was late to the Windows Phone development cycle in its current Lumias, according to the Nokia chief, which meant what consumers saw was the standard chassis and little product differentiation.  

Getting in at the outset of Windows 8 would help Nokia push gross margins, said Elop, however he added Nokia also needed a "volume play", pointing to potentially bigger subsidised deals with Chinese carriers that have seen Android adoption accelerate there.