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A Wave of Relief at Nokia's Quarterly Results

Investors looked past wretched sales and earnings to drive Nokia shares up 10% on signs of stabilization in the mobile-phone industry

Pessimists could look at first-quarter results issued by Nokia (NOK) on Apr. 16 and point out that sales fell 27% from the year-earlier quarter, operating profit plunged 96%, and the average selling price for the company's portfolio of mobile phones—a closely watched indicator of demand—fell to $86 from $94 at the end of 2008.

But investors, who bid up Nokia shares more than 10% in New York trading after the earnings were announced, were more in a mood to focus on the positive—for instance, a prediction from Nokia that sales are stabilizing and that the Finnish company is regaining the initiative in smartphones it had lost to Apple (APPL) iPhones and Research in Motion (RIMM) BlackBerry devices.

There were other reasons to cheer the results, too. Sales in China, Nokia's largest market, rebounded from 2008's abysmal fourth quarter, rising 39%. Market share in the U.S., where the company has struggled, stabilized in the quarter. And Nokia maintained a 9% operating profit margin on handsets, despite the decline in selling prices, because of tight cost control and a rapid cutback in output.

Wary of raising expectations too high, Nokia execs struck a cautious note. "It's too early to call a bottom in end-user demand," Chief Financial Officer Richard Simonson told BusinessWeek. But he noted that Nokia and other industry players seem to have sold off most of the oversupply of handsets that had been clogging warehouses and storefronts, driving down prices. "The massive de-stocking in inventory is largely complete," Simonson said.

Strange Good News

In ordinary times the numbers would have seemed catastrophic. First-quarter sales fell to $12.6 billion from $16.7 billion a year earlier. Operating profit plummeted close to the break-even point, $73 million compared with $2 billion a year earlier. Much of the decline was due to one-time costs such as restructuring charges as Nokia laid off workers and scaled back manufacturing and research and development.

But on a day when U.S. bank JPMorgan Chase (JPM) reported better-than-expected profit, investors seemed to be more alert for evidence supporting the hope that the global downturn is coming to an end—or at least bottoming out. Nokia fed the optimism by predicting in a statement that sales of mobile phones will be flat in the second quarter of 2009, or even rise slightly. Nokia also said it expects its market share, currently 37% globally, to rise over the course of the year.

Another positive indicator: Nokia's performance in the smartphone market. The company had been losing share to the iPhone and BlackBerry products aimed at consumers. Although Internet-connected smartphones amount to a relatively small share of the overall industry, they are the most profitable segment. In addition, Nokia needs to maintain a strong position there as it pursues its long-term goal of earning more revenue from mobile Internet services such as music downloads or navigation.

Nokia says it sold an impressive 2.6 million units in the quarter of its popular 5800 XpressMusic phone, which features a touchscreen and other features similar to the iPhone but costs about half as much. Launched in November, the 5800 and other new feature-rich products helped the company boost its share in smartphones to 38% from 36% the previous quarter, according to market watcher Strategy Analytics.

The gain suggests that Nokia can continue to retake market share as it launches more new smartphones, such as the top-of-the-line touchscreen N97 due out in June. "Nokia is very good at moving features from the high end to the midrange and low end," says Mark McKechnie, an analyst at Broadpoint AmTech in Greenwich, Conn. But with the likes of Apple, RIM, and even Google (GOOG) pushing into the market, he cautioned, "they are facing a new type of competitor."

Ewing is BusinessWeek's European regional editor.

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