New crisis at Nokia as feature-phone sales fall by 21 per cent

Emerging market feature-phone buyers desert Nokia as they trade up to Android smartphones

The crisis at mobile phone maker Nokia is intensifying as sales of its once-bedrock feature phones fell by more than 21 per cent in the first quarter, according to the company's latest financial report.

Feature phones have kept the company afloat as it has sought to shift its smartphone range from Symbian to Windows Phone devices, which have not taken off as expected.

However, the latest figures show that sales of these basic phones have started to fall sharply as core buyers in emerging markets upgrade from feature phones to low-end Android smartphones.

Sales of feature phones fell from 70.8 million in the first quarter of 2012 to 55.8 million in the first quarter of 2013 as buyers either traded up or bought equally cheap feature phones from Samsung and low-cost Chinese manufacturers instead.

Because Nokia has standardised on Microsoft's Windows Phone 8 smartphone operating system, for which it pays a quarterly licence fee of approximately $230m (£150m), it is unable to produce a suitably competitive low-end smartphone for customers looking to trade up.

Nokia's Asha range of "semi-smart" phones, based on the ageing S40 operating system and typically retailing in the £50-£100 price range, are not true smartphones because they lack multi-tasking capabilities. In addition, they do not offer the kind of rich app ecosystem that has made Android smartphones so popular.

The news overshadowed the bottoming out of the precipitous two-year fall in smartphone sales at Nokia. In the first quarter, Nokia shipped some 5.6 million flagship Lumia smartphones, of which 3.7 million were based on the latest Microsoft Windows Phone 8 operating system.

Most of the remainder were marked-down Windows Phone 7 devices that failed to sell before the launch of Windows Phone 8 six months ago. A further five million Asha mobile phones were also shipped, and just 500,000 Symbian smartphones - largely PureView 808 phones with 41-megapixel cameras.

As a result, Nokia's smartphone sales fell by half, year-on-year, compared to the same quarter a year earlier, when it shipped some 11.9 million smartphones.

In total, Nokia shipped 61.9 million mobile phones, down by 25 per cent from the 82.7 million shipped in the same quarter a year earlier.

Financially, the company posted a decline in revenues of one-fifth, from €7.35bn (£6.28bn) to €5.85bn (£5bn) - the company's lowest quarterly revenues since 1999. Operating losses were reduced, though, from €1.338bn (£1.14bn) to €150m (£128.1m) following two years of aggressive cost cutting.

As a result, operating margins in the Devices & Services division, which includes handsets, were just 0.1 per cent, and that was only achieved as a result of an accounting device that added back €50m (£42.7m) in "inventory related allowances" from the previous quarter.

However, after two years of cost cuts, operational expenditure is not expected to fall in the second quarter and if the company is to eke out any profitability, it will need to increase sales of all its lines.

Nokia has been embroiled in crisis since CEO Stephen Elop took over in autumn 2010 and declared that the company's Symbian smartphone operating system was a "burning platform" in a leaked February 2011 memo.

While sales of Symbian smartphones predictably crashed, sales of the Windows Phone-based devices that Elop standardised Nokia on have failed to take off as well as hoped. Continuing robust sales of low-cost feature phones had kept the troubled company afloat over the past two years.