Nokia’s second-quarter earnings report had a couple of bright spots but was mostly concerning as the firm’s mobile phone business continues to languish.  The favorable view of Nokia’s pending acquisition of the remainder of its Nokia Siemens Networks (NSN) joint venture is mostly offset by a rapidly deteriorating basic phone market and only modest Windows Lumia phone adoption to date. Nokia sold 7.4 million Lumia phones in the quarter, a decent boost from 5.6 million in the March quarter. However, Lumia average selling prices fell 14% sequentially to EUR 157 and fully offset the rise in unit sales, as revenue from Nokia’s smartphone segment was flat sequentially.

Many anticipate that Nokia’s sweet spot for Lumia sales will come from the low- to mid-range of the smartphone market; while they still expect Lumia phone volumes to rise in both the near term and long term, analysts don’t expect Nokia to attain premium pricing for most of these devices, in turn offsetting the firm’s smartphone revenue growth. Meanwhile, Nokia’s basic phone business continues to dwindle at an alarming rate. Sales of 53.7 million units were down 27% from the yearago quarter, as customers in emerging markets are clearly trading up to low-end Android-based smartphones, rather than Nokia feature phones.

Revenue from NSN, which Nokia plans to acquire in full in the third quarter, was down 11% from the year-ago quarter (excluding divested businesses) and down 1% from the seasonally soft first quarter. Analysts are encouraged by the 12% adjusted operating margin that NSN earned in the period. Many anticipate a stronger sales rebound later in 2013 as China Mobile CHL , in particular, begins its massive 4G TD-LTE network buildouts. Finally, even with stagnant sales levels in the near term,  Nokia’s purchase price of EUR 1.7 billion for Siemens’ SI 50% stake in NSN is an attractive price.

However, this acquisition is one of the few remaining bright spots for the company. Our fair value for Nokia still essentially equates to a sum-of-the-parts valuation for the company in terms of cash on hand, the value of the firm’s patents, and the company’s stake in NSN. Regarding Nokia’s basic phone business in particular, unit sales in China (including both Windows and Symbian-based smartphones) were down 48% from the year-ago quarter. Further, sales of Nokia’s touch screen, non-smartphone Asha devices, targeted at emerging markets, were only 4.3 million units, down from 5.0 million sold in March.

In total, Nokia’s basic phone business only broke even this quarter, a far cry from the company’s days as a phone manufacturing superpower. While we’ve long expected Nokia’s basic phone business to dwindle over time, we expected at least some cash flow to be harvested from this business segment. Although we think Nokia’s Asha lineup of phones might help support the company’s basic phone business over time, the sharp decline in basic phone sales over the past couple of quarters indicates that Nokia may need to take more drastic measure