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Has Nokia bottomed out? El Reg drills into the detail

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Analysis When a company is in crisis, it wants to tell the world that it’s still got oodles of cash and is jolly busy putting things right. This is true even if you're Europe’s biggest technology company - right, Nokia?

The phone firm got the bad news out of the way first in its financial results this week. The company is €675m poorer than it was three months ago, a period in which the major ratings agencies have downgraded its bonds to junk status. The cash-flow portion of the results give an indication of Nokia’s current burn rate: it has drawn on €488m from operating activities in the first six months of the year, but only €102m in the past three months. Nokia raised €416m from flogging assets and investments, giving an overall cash drain of €514m for the quarter, or €940m for the first six months of this year.

So the haemorrhaging is slowing to an improbable dead calm. What about the revenue picture?

Contrary to what you might believe if you get your information the tech blog echo-chamber, Nokia does more than sell Windows Phones – incredible as this may seem. Overall sales fell five per cent from the first quarter of 2012, and although the company’s revenue is down by 25 per cent from a year ago, the crash has steadied.

Alas, and this may be a consequence of its European roots, costs have not (yet) been cut to reflect the lower revenues. The phones division sold €4bn worth of gear, but the gross profit of €729m is before a billion-euro bill for sales, marketing and R&D teams are accounted for. Opex was down 14 per cent.

That explains why the management announced the latest, most savage cuts a month ago, before the detailed results emerged today.

Nokia said it had shipped 4 million Lumia phones, and about 600,000 in the United States. So we must believe them, and Nokia did say "sold" not "shipped". Sold means "stays sold". Nokia still sells more Symbian phones (officially it isn’t called Symbian any more) than it sells Windows devices.

Net cash was better than expected, at €4.2bn.

However the worst part of the numbers is Nokia’s margins for the reasons outlined above. The company’s cost base hasn’t fallen as quickly as its revenues have fallen. Non-IFRS margin is 18 per cent, but it’s making a loss on each phone.

Nokia confessed it had overestimated the popularity of its smartphones. It will write down €220m worth of components which can’t now be sold in phones. Since this includes Lumia, Symbian and Meego handsets, we can’t infer that Nokia had overestimated the appeal of Windows. Not without more information.

So what’s the prognosis, then? Windows 8 is very near, which must be quite a relief. Nokia said that it was on top of Microsoft’s release cycle to OEMs. It was late to the party with Windows Phone 7 and had to take what was on offer. Now it was ahead of the curve. With the Windows mobile market as small and uncompetitive as it is, you wonder whether this makes much difference, and it doesn’t today. But it means that rather than lining up a 21-gun salute for what is effectively a pretty generic outsourced device (Lumia 800 and 900), it can start to produce distinctive devices again.

It wouldn’t harm Nokia if it could squeeze in the 41MP sensor found on the PureView into its Windows portfolio soon.

Nokia also said it hadn’t seen a fall in Lumia activations after last month’s news stories that Lumias won't run Windows 8.

In a reality check, Nokia supremo Stephen Elop reminded analysts his company needed to flog a lot of cheaper devices in Asia, where Android phones are now as cheap as chips, where Windows is still costly, and the Series 40 is not really competitive. Nokia watchers should probably look to this for the next indication in the company’s fortunes. We won’t really know what a Windows 8 smartphone world looks like until Christmas, or just afterwards. ®

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