Nokia's Halting Turnaround Hit By Weak Handset Sales

(Reuters) - Weak quarterly sales of Nokia smartphones raised the heat on CEO Stephen Elop, whose decision to adopt Microsoft's untested Windows Phone software has yet to deliver the recovery in the company's fortunes he was hired to achieve.

Nokia has pinned its hopes on its Lumia smartphones to close the yawning lead of the market frontrunners Samsung and Apple, but progress has disappointed many investors and analysts.

Nokia shares fell as much as 6 percent on Thursday after the company said it shipped 7.4 million Lumia phones in the second quarter, up 32 percent from the first quarter but fewer than the 8.1 million units forecast in a Reuters poll of analysts.

Analysts, some of whom had said Nokia needs to hit 10 million Lumia sales within the next few quarters to convince them it could survive in smartphones, said they were worried Nokia's Windows Phone models had come too late to the race.

Phones running Google's Android and Apple's iOS operating systems accounted for well over 90 percent of the global smartphone market in the first quarter, while Windows Phone handsets accounted for only around 3 percent, according to market research firm IDC.

A large base of established Android and iOS users attracts a larger base of software developers to create the apps that run on the phones, which in turn enhances the phones to buyers.

Weak results from BlackBerry and HTC Corp, and a profit warning by market leader Samsung have recently raised concerns that the market was reaching saturation.

"The concern is that the high-end smartphone market looks weak across the board, whether it be weak numbers from HTC or BlackBerry, or Samsung coming in lower than expected. That's going to make it tough for Nokia and Lumia volumes," said Canaccord Genuity analyst Michael Walkley.

Nokia has launched several new handsets this year, including lower-priced Lumia handsets. Last week, it unveiled its newest high-end model, the Lumia 1020, with a 41-megapixel camera.

"Nokia's just announced a high-end product into a very weak market," Walkley said. "It's a fantastic product on its own. But consumers are happy buying an iPhone 4 at reduced prices. It will be interesting to see whether the Lumia 1020, with its megapixels, is differentiated enough."

The weak Lumia sales number was particularly worrying since sales of regular mobile phones, which account for over half of its device sales and are a valuable source of cash while Nokia waits for Lumia sales to take off, were also below expectations.

Shipments of such handsets fell 4 percent from the previous quarter to 53.7 million units, while the market's average forecast had been 56.2 million.

Analysts said customers appeared to be switching to low-priced smartphones more quickly than expected and switching to rival handsets running Android.

Nokia said it would restructure its mobile phone business and could cut up to 440 jobs globally, though some employees could move to newly created positions.

CASH AND NSN

Nokia has been cutting costs and selling off assets to buy time for a turnaround plan, which Elop said would take two years but is now into its third.

Its net cash reserves fell to 4.1 billion euros ($5.4 billion) from 4.5 billion euros in the previous quarter, in line with expectations and towards the top end of the company's own range of forecasts.

The bright spot in the quarterly report was the improved profitability at Nokia Siemens Networks, a formerly troubled joint venture with Siemens. Nokia agreed earlier this month to buy Siemens's stake.

NSN's operating margin rose to 11.8 percent from 7 percent in the first quarter, which put an even better complexion on the 1.7 billion euro deal Nokia had struck to buy the rest of it.

"It seems that the price they paid for the acquisition was very cheap," said Juha Varis, Danske Capital's senior portfolio manager whose fund owns Nokia shares.

Elop gave little indication of what Nokia planned to do with NSN. Analysts expect Nokia eventually to sell it or float it, although some believe it will provide the company with some stability while its devices business struggles.

"The good profitability at NSN takes away some of the 'rush factor'. There is no need for them to make any kind of panicky move," said Nordea analyst Sami Sarkamies.

Nokia shares were down 2.9 percent at 3.00 euros in Helsinki at 1500 GMT. They had risen more than 18 percent prior to Thursday's announcement, boosted both by the NSN deal and a media report that said it had held talks with Microsoft, albeit abortive.