Nokia Tumbles on Outlook, ‘Competitive Challenges’

Nokia Oyj fell as it forecast smaller margins in the first quarter, underscoring Chief Executive Officer Stephen Elop’s challenge in the fight against Apple Inc.’s iPhone and Google Inc.’s Android.

The world’s biggest mobile-phone maker fell as much as 8.7 percent in Helsinki before closing 0.8 percent lower at 7.74 euros. Espoo, Finland-based Nokia said in a statement today that operating margins for devices will fall to between 7 percent and 10 percent from 11.3 percent in the fourth quarter.

“What spooks everyone is the outlook; a combination of lack of giving an upside and disappointing margins,” said Leon Cappaert, a fund manager at KBC Asset Management in Brussels with 360 million euros ($495 million) in investments, including Nokia shares. “The stock is dead money and I think it will go to 7 euros and stay there until we get some positive news.”

Elop, 47, who took over as Nokia CEO on Sept. 21, is trying to stem the drop in the company’s market share since the 2007 unveiling of Apple’s iPhone. Nokia, which shipped its N8 smartphones with revamped Symbian 3 software before the holiday season, faces an uphill task as Apple expands into new markets and Android becomes the favored alternative for customers and application developers.

Photographer: Henrik Kettunen/Bloomberg

A Nokia Oyj sign is displayed outside the company's offices in Helsinki. Close

A Nokia Oyj sign is displayed outside the company's offices in Helsinki.

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Photographer: Henrik Kettunen/Bloomberg

A Nokia Oyj sign is displayed outside the company's offices in Helsinki.

“Nokia faces some significant challenges in our competitiveness and our execution,” Elop said in the company’s earnings statement today. “The industry changed and now it’s time for Nokia to change faster.”

Nokia also forecast devices sales of between 6.8 billion euros and 7.3 billion euros in the first quarter, down from 8.5 billion euros in the fourth quarter.

Tough Quarter

“They’re predicting a fairly tough first quarter, certainly much tougher than the markets were hoping for,” said Andy Perkins, a London-based analyst with Societe Generale Corporate & Investment Bank.

In the fourth quarter, the first full period on Elop’s watch, Nokia posted profit that beat estimates on sales of new smartphones. Net income fell to 745 million euros from 948 million euros, a year earlier, the company said. Sales rose 6 percent to 12.7 billion euros. Analysts predicted profit of 529 million euros on sales of 12.4 billion euros, according to the average estimate in a Bloomberg survey.

“The earnings beat stemmed from a cut in marketing costs, which is unsustainable,” said Alexander Peterc, a London-based analyst at Exane BNP Paribas. “In this competitive market, cutting down on marketing to make your margins isn’t necessarily a good long-term business plan.”

‘Structural Challenges’

The 21 percent drop in profit in the latest period contrasts with results at Cupertino, California-based Apple, which this month reported a 78 percent jump in profit for the last three months of 2010 to $6 billion.

Nokia shipped more than 5 million units of the N8 and its companion models with the revamped Symbian, the company said. It shipped 28.3 million smartphones altogether at an average price of 156 euros compared to 186 euros a year ago. The average selling price for all devices rose to 69 euros from 64 euros last year.

Nokia’s smartphone market share declined to 31 percent in the quarter from 38 percent in the three previous months even as it started volume shipments of the new models. Shipments of low- end mobile phones declined 10 percent to 95.4 million units.

“Structural challenges continue to weigh and we see few options for Nokia’s new CEO to materially improve near-term performance or convince the market of Nokia’s long-term ability to stem market share losses,” Tim Boddy and other analysts at Goldman Sachs International wrote in a report.

Elop’s Challenge

Since 2007, when Nokia shipped its last hit smartphone, the N95, poor design and buggy software have pulled margins into single digits and dragged the share price below 10 euros. Elop announced 1,800 job cuts and moves to streamline development in his inaugural results presentation in October.

He also said last year that Nokia would delay devices on its new high-end platform, MeeGo, until an unspecified date this year. The MeeGo software, which is jointly developed with Intel Corp., was announced last February and the partners expected to ship devices in the second half of 2010.

“We must absolutely deliver great products on a consistent basis,” Elop said on a conference call today. “If we rush to market with something that is below what our brand should stand for, then we will do long-term harm.”

Elop said he will lay out his strategy for the company at Nokia’s investor meeting in London on Feb. 11.

Apple, Android

Investors and analysts are not holding out any hopes for an improvement in the company’s fortunes in the near term.

“Expect downgrades for first-quarter earnings per share of about 15 to 20 percent, and full-year earnings per share of anything between 5 and 15 percent, depending on how negative people get,” said Peterc of Paribas.

Meanwhile, Apple continues to set the pace for the industry, selling 16.2 million iPhones last quarter to produce handset revenues of $10.5 billion.

Android devices are also fast gaining ground. At the Consumer Electronics Show in Las Vegas this month, Android phonemakers showed 3D screens, devices with dual core processors for faster operation, and new touchscreen gestures. More than 100 tablets and e-book readers were on display.

Android is selling more than 300,000 activations per day, Google CEO Eric Schmidt said on Jan. 25. HTC Corp., the world’s largest maker of handsets using software from Google and Microsoft Corp., more than doubled its net income in the fourth quarter on products including the Desire handset line.

NSN’s Fate

“Given the product line-up so far and the competition coming in the market, it is difficult to see how the second quarter will improve significantly, meaning investors will have to put their faith in product launches, so far unseen for the second half and beyond,” Gareth Jenkins and other London-based analysts at UBS wrote in a report.

Separately, the company said Nokia Siemens Networks, its joint venture with Siemens AG, will make a loss or break even in the first quarter.

NSN, as it is known, has struggled to stay profitable against larger rival Ericsson AB and Chinese competitor Huawei Technologies Co. The unit’s bid to expand in the U.S. and Japan with assets acquired for $1.2 billion from Motorola has been checked by delays with Chinese authorities and a lawsuit in the U.S. from Huawei.

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

To contact the editor responsible for this story: Vidya Root in Paris at vroot@bloomberg.net

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