Telecom & Wireless

Weak Lumia and Asha Sales Create Earnings Worry for Microsoft

Microsoft Corp. (NASDAQ: MSFT) is buying Nokia Corp.’s (NYSE: NOK) mobile phone and devices business to boost its presence in the ultra-competitive smartphone market. But the question is whether the Nokia operations can truly compete against Apple Inc.’s (NADSAQ: AAPL) iPhones or Samsung’s Galaxy lines.

Nokia reported that sales for the business fell 29% in 2013 to $2.63 billion euros ($3.6 billion) Worse, the business saw its loss for the year climb to 201 million euros, or nearly $275 million, from 51 euros, or $69.7 million. Microsoft is paying close to some $7.2 billion for the unit.

The problem looks primarily to be Nokia’s lower-end Asha line of phones, whose sales have fallen along with prices. Nokia’s high-end Lumia business did fairly well in the fourth quarter, with sales of some 8.2 million units, double the sales of a year ago. But the Lumia sales were down 7 percent from the third quarter’s 8.8 million units, suggesting that Nokia and Microsoft were unable to create holiday buzz around the devices.

For the year, Lumia sales totaled about 30 million units, up 126 percent from a year ago. But The Wall Street Journal said Microsoft believes sales need to hit 50 million units for the deal to break even.

To put the Lumia sales into context, Apple sold 33.4 million iPhones in its fiscal-fourth quarter, which ended in September. First-quarter sales are typically much larger. Apple is scheduled to release first-quarter results after Monday’s close.

Under outgoing CEO Steve Ballmer, Microsoft decided to buy the Nokia business in a bid to boost its presence in the mobile phone and devices space. Combining its software with the hardware is supposed to lead to more innovation and allow for more coordinated marketing, The Journal noted.

Nokia’s remaining business also reported weak results, and the shares were off 73 cents, or 9.4 percent, to $6.98 in New York. Microsoft was off 32 cents, or 0.9 percent, to $35.61.

The challenges that the Nokia deal poses for Microsoft may get a lot of attention Thursday afternoon during the software giant’s conference call. Microsoft will release its fiscal-second-quarter earnings after the close.

How the Nokia business performs after the deal is closed will be closely watched as well. There was skepticism about the purchase when it was announced. Thursday’s news only deepens the concerns.

Analysts may ask more questions about when the company will name a new CEO. The slowness of the search suggests Microsoft is having problems identifying a right chief. Challenges including figuring out how to improve the prospects for its flagship Windows and Office software as well as getting the Nokia purchase to work.

Microsoft is expected to earn 68 cents a share in the quarter, down from 76 cents a year ago. The consensus revenue estimate is $23.7 billion, up 10.4 percent.