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Nokia May Report Profit Drop, Stoking Calls for Change of CEO

Nokia Oyj will probably report lower profit and flat sales tomorrow, fueling investor concern the world’s biggest maker of mobile phones needs a leadership change to better compete with Apple Inc. and Research In Motion Ltd.

Second-quarter net income may have fallen 24 percent to 287 million euros ($374 million) from 380 million euros a year earlier, according to the average estimate of 26 analysts surveyed by Bloomberg. Sales were probably little changed at 10 billion euros, the average of 43 forecasts showed.

Nokia, which is losing market share in high-end smartphones as it struggles to finish the flagship N8 device, has seen two- thirds of its market value wiped out since Apple’s 2007 introduction of the iPhone. The company may name a new chief executive officer to replace Olli-Pekka Kallasvuo as early as this month, the Wall Street Journal reported yesterday.

“Management has to deliver evidence this year that Nokia is catching up with the front runners, or something must happen,” said Bengt Nordstrom, the CEO of Stockholm-based consultancy Northstream AB. “It’s already late July and we’ve seen no evidence that they are catching up.”

By contrast, Apple yesterday reported a 78 percent jump in second-quarter profit to $3.25 billion, beating analysts’ estimates, as customers flocked to the iPad tablet computer and the latest version of the iPhone. Sales in the period surged 61 percent.

Credit Rating

Nokia’s performance in the increasingly crowded smartphone market is putting pressure on its credit ratings, Fitch Ratings said in a report today. Nokia’s decision to continue developing the 10-year-old Symbian platform may leave it at a disadvantage compared with newer operating systems such as iPhone, RIM’s Blackberry and Google Inc.’s Android, according to the agency.

“How the company deals with those issues over the second half and into next year will be more important for the company’s ratings than tomorrow’s results,” Stuart Reid, a Fitch telecommunications analyst, wrote in the report. The agency rates Nokia at A-, the seventh highest of 10 investment grades, with a stable outlook.

Nokia is revamping is Symbian 3 operating system to eliminate extra menus and actions left over from the pre- touchscreen era. The N8 is scheduled for release this quarter from Vodafone Group Plc and other carriers, and will be followed by more advanced devices running the Symbian 4 and MeeGo operating systems which have not been announced yet.

Shares Decline

“Everyone’s going to be looking for comments on Symbian 3 -- are they on track, can they give us release dates, what else is in the pipeline?” said Jason Willey, a London-based equity analyst at Standard & Poor’s who rates Nokia “strong buy.”

The stock has declined 21 percent this year, cutting the company’s market value to 25.9 billion euros. Of the 54 analysts who cover Nokia, 18 rate it a “buy,” 12 recommend selling it and 25 suggest holding the shares, according to Bloomberg data.

Nokia, which is still the world’s largest handset maker by volume, needs the new devices to stem its decline in the percentage of industry revenues it earns, known as “value share.” Smartphone sales grew 49 percent in the first quarter, according to industry researcher Gartner Inc., with Nokia’s Symbian phones declining by more than 4 percentage points as Apple and Google Inc.’s Android operating system gained.

‘Get an American’

Hiring a CEO who has built successful products or turned around a U.S. company may be the first step in making Nokia more competitive, analysts said, citing Apple, Google, Palm Inc. and Microsoft Corp. as desirable companies from which to hire.

“They should get an American who knows how to put the customers in front, not a European who has always placed engineering on top of everything,” said Jacques Abramowicz, a Frankfurt-based analyst at Silvia Quandt & Cie AG, with a “neutral” rating on Nokia. “Using their phones is very unpleasant, to put it mildly, so they need to find someone to shake up their management culture.”

Kallasvuo in June lowered his targets for the second time in three months, forecasting a second-quarter adjusted margin of about 9 percent. When Apple introduced the iPhone in 2007, that figure was more than 20 percent.

Nokia said last quarter it sold more smartphones than anyone else, increasing its share of the fastest growing handset segment to 41 percent. The growth has come by expanding the definition of a smartphone and cutting prices, analysts said.

Average Selling Price

The company’s traditional high-end smartphone lines, the N and E series, are contributing a declining portion of shipments. The two lines sold a total of 8.6 million units in the second quarter, down from the 10.7 million reported by Nokia in the fourth quarter, estimated Mark McKechnie, a San Francisco-based analyst at Gleacher & Co. with a “neutral” rating on Nokia.

The average selling price for Nokia devices in the second quarter may have declined to 59 euros from 62 euros a year earlier as increased competition forced the company to cut prices, according to 20 estimates compiled by Bloomberg.

Apple shipped the iPhone 4 June 24 and has already sold more than 3 million in less than a month, while Sony Ericsson said last week it increased its average selling price by one third to 160 euros as it offered new Android handsets.

The company may have shipped 112 million handsets for a market share of 34 percent, 20 analysts said. The calculation is approximate since global handset sales are also affected by changing inventories at resellers.

Analyst Estimates

“Nokia doesn’t have a lot of new products, so you’ll see their struggles in smartphones continuing,” McKechnie said. “People understand it’s going to be tough.”

Nokia will report earnings at about 1 p.m. local time tomorrow, with a conference call at 3 p.m. that can be monitored on the company’s website.

The following is a table of analysts’ estimates. All figures are in euros except for unit shipments, and refer to the second quarter unless noted. Estimated figures for average selling price and shipments were compiled in a separate survey of 20 analysts and compared to figures reported by Nokia in the year-earlier quarter.

                         Forecast             Reported
                         2nd quarter 2010     2nd quarter 2009

Sales
Average estimate           10.0  billion        9.91 billion
Highest estimate           10.8  billion
Lowest estimate            9.29  billion

Net income
Average estimate             287 million        380 million
Highest estimate             431 million
Lowest estimate              135 million

Non-IFRS net income
Average estimate             396 million        552 million
Highest estimate             577 million
Lowest estimate              243 million

Earnings per share
Average estimate              0.08 euros         0.10 euros
Highest estimate              0.13 euros
Lowest estimate               0.04 euros

Adjusted earnings per share
Average estimate              0.11 euros         0.15 euros
Highest estimate              0.15 euros
Lowest estimate               0.07 euros

Nokia device shipments
Average estimate             112 million        103 million

Industry device shipments
Average estimate             328 million        295 million

Nokia market share
Average estimate              34 percent         35 percent

Nokia average selling price
Average estimate                 59                  62

To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

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