Nokia Earnings: Smartphone Sales Soar, but Its Lead Is Almost Over

Nokia (NOK) announced its third quarter earnings, and investors are undoubtedly happy that results surpassed analyst expectations and swung back to profitability. But even sharp year-over-year smartphone unit growth leaves the Finnish handset vendor highly vulnerable to Apple (AAPL) and Google (GOOG).

Nokia saw overall handset growth of 2 percent year-over-year and yet a 1 percent drop from last quarter. When you realize that its converged devices -- smartphones, tablets, and their ilk to the rest of us -- grew 61 percent year-over-year, you realize something critical. Out of 110.4 million devices sold in the quarter, 26.5 million, or 24 percent, were converged devices. Smartphones. In the same quarter last year, Nokia sold 108.5 million units overall, out of which 16.9 million were converged devices.

That means 91.6 million regular handsets last year versus 83.9 million this year, or an 8.4 percent drop. Just last quarter, the company sold 111.1 million total units and 24.0 million converged devices, leaving 87.1 million regular handsets. The traditional handset business dropped 3.7 percent in just one quarter. Nokia's regular handset sales are still massive, but they are dying.

Nokia must be panicked by the pattern. It has to continue domination in smartphones if it is to maintain its size and position in the industry. But that simply isn't going to happen without a significant change in operations and fortune that increasingly seems unlikely.

Compare where Nokia is to its major competitors in this all important market. Apple sold 14.1 million iPhones alone in its last reported quarter versus 7.4 million in the same time last year, which translates into 90.5 percent growth. But even that is deceptive, because it doesn't count the 4.2 million iPads and whatever portion of iPods are touches. You have to include all of these if you want a parallel comparison, because Nokia looks at smartphones and mobile computers.

As I mentioned the other day, Apple likely shipped well over 20 million iOS units. Unless Nokia can do something to tip the scales back in its direction, Apple will have flashed past it by this time next year.

As for Android, Google already activates about the same number -- its equivalent of shipping units -- as Apple does, except it is growing even faster because of availability through multiple hardware vendors and carriers. In fact, Google has run between 40 percent and 60 percent growth quarter over quarter.

By this time next year, Nokia will be, at best, number three in this device category. Even RIM (RIMM) or Microsoft (MSFT), if they can do enough things right, could have an outside chance of passing Nokia. RIM would need to have a real hit in its tablet, and Microsoft would have to have a much bigger market win than currently seems likely with Windows Phone 7, given early reactions. And given management turmoil, further delay in seeing phones that run the MeeGo operating system, and the disappointment that the N8 may be in the market, Nokia doesn't show signs of pulling ahead in the near future. Maybe that's why it plans layoffs.

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Image: Flickr user Anton Gurevich, CC 2.0.

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