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

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

Summary: Expect more expensive Lumias, says Nokia's CEO, after writing down the value of the components the company carries following a lowered sales outlook

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TOPICS: Nokia, Smartphones
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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.

Nokia Lumia 800
Nokia is putting its hopes on Windows Phone 8 after writing down costs on components for its Lumia smartphones. Image credit: Nokia

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.

Topics: Nokia, Smartphones

Liam Tung

About Liam Tung

Liam Tung is an Australian business technology journalist living a few too many Swedish miles north of Stockholm for his liking. He gained a bachelors degree in economics and arts (cultural studies) at Sydney's Macquarie University, but hacked (without Norse or malicious code for that matter) his way into a career as an enterprise tech, security and telecommunications journalist with ZDNet Australia. These days Liam is a full time freelance technology journalist who writes for several publications.

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15 comments
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  • Finally...

    An unbiased article.... just pure news... Thank you!
    Sunovavic
  • Peculiar

    The international launch of the Lumia 900 was supposedly delayed because of component shortages due to the successful launch of the device in the U.S. Something's not adding up, you know.
    WebSiteManager
    • 3 month difference

      Phone was released in April. Now is July.
      paul2011
      • International Launch

        The international launch was delayed sometime in May or June because supposedly they had shortages due to the successful U.S. launch. If they were short on units then, have they ramped up too quickly, and the phone stopped selling? Or was there not really any impact of the U.S. launch on international, and the reason they gave was bogus? Don't misunderstand me, I'm a happy U.S. Lumia user (since the Friday before it was officially released), and I'll gladly see it take the world by storm. I just think that if they now have surplus, they were probably telling us stories back in May/June.
        WebSiteManager
        • Yeah

          Yeah, they lied like there was no tomorrow. [/sarcasm]
          paul2011
  • Haven't we heard this song before?

    How many "Nokia pins hopes on Windows Phone 7" posts were there back in early 2011? To be fair, Windows Phone 8, or more likely Windows 8 Phone, running a true Windows NT kernel is intriguing, but the fact is that it's probably too little too late.
    matthew_maurice
    • Too late?

      It would be too late if Samsung would be selling millions of windows phones. Now Android is a king but man... what a mess it is. Just looked at nexus tablet with Jelly Bean on it... Yes, it is improvement over old Windows Mobile but it does not come near iOS or Windows Phone.
      paul2011
    • Not Windows Phone 8, but Windows 8

      With WP7 or WP8, your phone continues to be a novelty most people are uneasy to try (especially when they sign a two-year contract and/or buy a $500 or so device). Once people are familiar with Metro through Windows 8 - even by having seen it used by friends/co-workers - they'll be readier to buy a Windows Phone.
      WebSiteManager
  • Ouch

    1.7% gross margin is not sustainable. That doesn't leave any money to pay the engineers, the accountants, or the salespeople. Or to buy any ads.

    Since Windows 8 doesn't ship until October, Nokia has at least another quarter of this dismal "lose a billion" performance.

    I personally do not understand how Windows 8 is going to save their bacon. "Well, it has the NT kernel!" What phone buyer gives a rat's patootie about that? "Just wait until everyone sees the Metro GUI on all the Windows desktops!" Nokia doesn't have that long. They need success Real Soon Now, not when the corporate world starts deploying Windows 8.

    It's sad, but I think if Microsoft is ever to make a dent in the phone business, they're going to have to find a new friend.
    Robert Hahn
    • It's worse than that.

      Operating margin was NEGATIVE 11.8%, and I don't think that takes into account the recent price decrease. So, the next quarter will probably show the full effect of trying to sell a smartphone with deprecated OS.

      While I agree that most consumers won't care about WP8 vs WP7, in and of itself. I believe that WP8 will make mobile app development even easier than current Metro development which will certainly appeal to the Enterprise, and easier app development in general means more general apps in the MS App Store. Granted it may not help much, but it certainly won't hurt.

      Agreed "Nokia doesn't have that long", but they haven't had a chance to remain an independent company for a while now. The only question is when does MS acquire Nokia? The bigger question is there even a space for a #3 mobile device OS? Is Windows Phone X just the OS/2 of the smartphone world?
      matthew_maurice
  • Looking forward to their WP8 phones...however....

    If this ship starts to sink, I bet MS buys them on the cheap and makes it their flagship for their phone hardware.
    Cagny
    • Why do they want it?

      What is it you think Microsoft would be buying?

      The factories? Nokia is selling its factories as fast as it can and shifting production to China. Why does Microsoft -- home of XBox -- need lessons in contract manufacturing?

      The people? Once you announce there's a 10,000-employee layoff coming, anybody with two neurons to rub together is out looking for something else. By the time any buyer comes around, the only people left will be the ones nobody else wanted.

      The brand name? Why does Microsoft need a brand name?

      The only reason I can see for Microsoft to buy Nokia is to try to head off the lawsuit that will for sure be filed by Nokia shareholders, alleging bad faith, underhanded dealings, etc. leading to the loss of value of Nokia. (Let us not debate here whether any of that is true; let's just agree that there would probably be such a trial, and it would go on for a long time.)
      Robert Hahn
    • Re; If this ship starts to sink.

      What do you mean by that ?
      Unfortunately it has been sinking for a while already.

      MS buy them on the cheap ?
      Buy what ?
      hkommedal
  • differentiation? differentiation OF WHAT ? ! !

    "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"

    differentiation? differentiation OF WHAT ? ! !

    I don't see any differentiation between Lumnia Windows Phone 8
    vs Samsung Windows Phone 8 and HTC Windows Phone 8..

    ..anymore than the differentiation between Lumnia Windows Phone 7.5
    vs Samsung Windows Phone 7.5 and HTC Windows Phone 7.5..

    Sink Nokia, sink..

    Android could have saved you.

    ff
    ffinder-cy
  • Read Nokia's full report before commenting

    People should read from which of Nokia's business units its losses are coming from before commenting. Most people seem to think Nokia is just a mobile phone manufacturer. This is but one part of their operation.
    genghis7777