Nokia files 2012 annual report as 20-F

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Nokia today filed its annual 20-F form with the US Securities and Exchange Commission yesterday. This is a requirement under US law for companies that have shares traded on a US exchange and is a standardised version of a company's annual report. The purpose of the 20-F is to ensure that investors can can evaluate foreign companies alongside US based companies in a fair and standardised manner.

The report includes a section on the risk factors a company believe it faces. This can provide an interesting view of the challenges and threats that a company believe it will face in the future. For Nokia's smartphone business these unsurprisingly focus on Windows Phone and Nokia's partnership with Microsoft, but, for the first time in many years, Symbian no longer merits a mention.

The filing of a 20-F is a requirement under US law for companies that have shares traded on a US exchange and is a standardised version of a company's annual report. The purpose of the 20-F is to ensure that investors can can evaluate foreign companies alongside US based companies in a fair and standardised manner.

One of the points of interest in the financial expansion, which was highlighted in this Nokia press release, is the balance of payments between Microsoft and Nokia, which, going forward, will favour Microsoft to the tune of €500 million, but the full impact of this will not be felt until after this year. 

The remaining minimum software royalty commitment payments from Nokia to Microsoft are expected to exceed the remaining platform support payments from Microsoft to Nokia by a total of approximately EUR 0.5 billion over the remaining life of the agreement.

However, in 2013 the amount of the platform support payments from Microsoft to Nokia is still expected to slightly exceed the total amount of the minimum software royalty commitment payments from Nokia to Microsoft.

Section 3D of the 20-F asks companies to provide an assessment of the risk factors it faces. It is this section of the that usually report that attracts most interest from the media and industry commentators. Compared to most company statements, this section can be very forthright about what might go wrong, but it is important to note that these are what can happen, not what is likely to happen. Or, to explain it another way, a well written a 20-F will hand plenty of ammunition to a company's critics critics, but at the same time, and more importantly, it will deny that same ammunition to any potential litigants.

Nokia 2012 20-F Section 3D open with this general comment, which sums up why creating the "third ecosystem" is so important for Nokia:

We may not be able to make Nokia products with Windows Phone a competitive choice for consumers unless the Windows Phone ecosystem becomes a competitive and profitable global ecosystem that achieves sufficient scale, value and attractiveness to relevant market participants.

We believe that successful smartphone platforms require a successful ecosystem around them. At the heart of the major smartphone ecosystems is the operating system and the development platform upon which smartphones are based and services built. Today, industry participants are creating competing ecosystems of mutually beneficial partnerships to combine hardware, software, services and an application environment to create high-quality differentiated smartphones. Certain smartphone platforms and their related ecosystems have gained significant momentum and market share, specifically Google’s Android platform and Apple’s iOS platform, and are continuing apace, with Android-based smartphones continuing to gain significant market share during 2012 and also reaching lower price points.

The creation of an ecosystem for Windows Phone smartphones that receives acceptance from contributing parties and reaches sufficient scale is critical to making our Nokia products with Windows Phone a competitive choice. If a successful Windows Phone ecosystem does not materialize in a timely manner, this would have a material adverse effect on sales of our Nokia products with Windows Phone and our profitability, and otherwise significantly impair our ability to compete effectively in the smartphone market. 

The report then highlights a number of risk and challenges that "could prevent the creation of a successful ecosystem for Nokia Windows Phone", some of these include:

  • The Windows Phone platform may not achieve or retain broad or timely market acceptance or be preferred by ecosystem participants, mobile operators and consumers.
     
  • Microsoft has recently launched the Windows 8 operating system used to power personal computers and tablets, and the related Windows Phone 8 operating system is used in the latest Nokia smartphones. The success of Nokia’s Windows Phone 8smartphones will be negatively affected if the Windows 8 platform does not achieve or retain broad or timely market acceptance or is not preferred by ecosystem participants, mobile operators and consumers.
     
  • Other competitive major smartphone ecosystems, primarily Google’s Android and Apple’s iOS, have advantages that may be difficult for the Windows Phone ecosystem to overcome, such as first-mover advantage, momentum, a larger share of the smartphone market, engagement by developers, mobile operators and consumers and brand preference, and their advantages may become greater over time.
       
  • Our competitors may use various technical and commercial means to make the Windows Phone ecosystem unattractive compared to other ecosystems, including for instance hindering application development, not providing tools to allow applications to be developed to industry standard or not allowing certain applications to work or work efficiently on the Windows Phone platform.
       
  • We may not succeed in rapidly expanding the Windows Phone platform and related ecosystem to more affordable smartphones, limiting the expansion of this ecosystem.
       
  • The Windows Phone ecosystem is relatively small, and thus it may not be compelling for hardware and software suppliers and developers, which may for instance lead to our reliance on a limited number of suppliers, later availability of the latest innovation sand increased cost of components and software.
       
  • Mobile devices are increasingly used with other technical appliances, for instance speakers and car audio systems or have accessories and gadgets that can be used in conjunction with the mobile device. As the Windows Phone ecosystem is relatively small, it may not be compelling for third parties to design such technical appliances, accessories or gadgets to a similar extent as with other ecosystems.
       
  • Consumers may be reluctant to provide personal data to us as a result of our partnership with Microsoft, which would hamper the success of the Windows Phone ecosystem.

The report goes on to list similar risk factor around producing Windows Phone devices (flexibility of the platform, securing operator support, and consumer preferences), many of which are repeated from last year's report.

There are also a list of risk factors for the mobile phones business, the HERE business, intellectual property portfolio, the partnership with Microsoft, and more. A few items that caught out attention include:

  • The market we address with the more affordable devices from our Mobile Phones business unit may further reduce in size if the higher-end price points become dominated by more affordable smartphones, such as Android-based smartphones, and the higher end devices from our Mobile Phones business unit are not sufficiently competitive compared to those.
       
  • We are also seeing the emergence of various local mobile device manufacturers that are strong in a certain country or region, especially in emerging markets. Success of such competitors could adversely affect sales of our mobile devices in various countries such as China, Indonesia and India where we have been traditionally strong.
       
  • HERE is a recently launched brand and platform and as such may be disadvantaged to more established brands and platforms.
       
  • The implementation and ongoing fostering and development of the Microsoft partnership will require significant time, attention and resources of our senior management and others within the organization potentially diverting their attention from other aspects of our business.
       
  • We may not be able to sufficiently influence Microsoft in bringing the features or functionalities for the Windows Phone platform that we deem most important, or Microsoft may otherwise focus on other areas of its business leading to reduced resources devoted to the Windows Phone platform or failures to implement features or functionalities. This may be heightened if our position in the partnership deteriorates, for instance through other companies using leverage to influence Microsoft, or if Microsoft chooses to develop its own mobile devices, including smartphones, or if Microsoft otherwise develops interests that are contrary to ours.

The full report can be downloaded from the Nokia website.

Source / Credit: Nokia