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Nokia Plunges on Lower-Than-Estimated Net, Outlook

Olli-Pekka Kallasvuo, chief executive officer of Nokia OYJ
Olli-Pekka Kallasvuo, chief executive officer of Nokia OYJ, poses for a photograph at the company's headquarters near Helsinki, on Dec. 8, 2009. Photographer: Henrik Kettunen/Bloomberg

Nokia Oyj, the world’s biggest maker of mobile phones, plunged more than 14 percent after posting a lower-than-estimated profit on competition from Apple Inc.’s iPhone, and cutting its margin forecast.

Shares tumbled the most in nine months after the company said net income rose to 349 million euros ($465.6 million), or 9 cents a share, from 122 million euros, or 3 cents, a year earlier. Analysts had predicted profit at the Espoo, Finland- based company of 409.6 million euros, according to the average of estimates in a Bloomberg survey.

Nokia lacks a hit high-end touchscreen device to take on Apple’s iPhone and Research In Motion Ltd.’s BlackBerry, with its market-share gains coming mainly from lower-priced smartphones. On entry-level devices, a boom in phones from so-called grey market vendors in Asia led Nokia to revise down its market-share figures in March.

“It looks like they’ve had to drop prices very aggressively in order to keep market share afloat, both in the low end where Chinese competition is fairly relentless and at the high end where Apple and its imitators are eating into market share,” said Alexander Peterc, a Paris-based analyst at Exane BNP Paribas.

Apple on April 20 said iPhone sales more than doubled to 8.75 million units in the quarter ended in March as new carriers signed on in Europe and Asia. The Cupertino, California-based company reported a 49 percent increase in revenue and a 90 percent increase in net income.

Tough Competition

Nokia fell 1.60 euros in Helsinki to 9.68 euros, the biggest drop since July 15. The company’s market value of about 36 billion euros, or $48 billion, compares with Apple’s $236 billion. In 1999, Nokia had the highest market value of any European company -- 203 billion euros.

Nokia today cut its adjusted margin target for the handset unit to between 11 and 13 percent this year, from 12 to 14 percent earlier. The second-quarter margin could be as low as 9 percent, it said.

Sales in the first quarter of 9.52 billion euros fell short of analyst estimates of 9.78 billion euros in a Bloomberg survey. Nokia Siemens Networks, the company’s telecommunications equipment unit, reported an operating loss of 226 million euros, reversing a profit last quarter.

“We continue to face tough competition with respect to the high-end of our mobile device portfolio, as well as challenging market conditions on the infrastructure side,” Chief Executive Officer Olli-Pekka Kallasvuo said in a statement.

Prices, Margins

Nokia’s market share in smartphones and overall edged up in the quarter over last year as prices plunged. Smartphone prices fell 18 percent, while prices for low-end mobile phones declined 13 percent, the company said.

“A lot of the bull case for the stock rests on the company’s ability to take back share at the high end, and that’s not apparent from today’s report,” said Ben Rogoff, who manages $2.5 billion in assets including Nokia shares at Polar Capital Partners in London. The contrast with the news from Apple, the biggest holding in his portfolio, is “stark,” he said.

Nokia sold 21.5 million smartphones in the quarter. The company said its smartphone market share rose to 41 percent from 40 percent in the fourth quarter, based on sales into the channel. Apple’s smartphone market share last year was 14.4 percent according to Gartner, based on sales to end users.

“The weakness in pricing in smartphones confirms the competitive pressure from Apple,” said Rogoff.

‘A Disaster’

The company will start shipping its new high-end smartphones using the Symbian 3 system in the third quarter, later than expected, Kallasvuo said on a conference call.

“While this is somewhat later than our original internal plan, it is really most important to get the quality and user experience right,” he said. The lowered forecast reflects the delay, he said.

Nokia faces the challenge of maintaining its hold on the smartphone market as Apple brings the iPhone down from a luxury to an upscale mass-market handset, while Google Inc. makes its Android platform available on dozens of smartphones, including a Google-branded device.

The margin downgrade was “a bit of a disaster, way below what everybody expected,” Exane’s Peterc said. He rates Nokia shares “underperform” and Apple shares “outperform.”

Nokia shares plummeted to 6.91 euros in March 2009 from 28.60 euros in November 2007. Before today, the stock had risen about 26 percent since the start of the year.

“If you stack this against what Apple reported a few days ago it looks like an outright disaster, especially as people have turned positive on the shares feeling Nokia will benefit from increased penetration of smartphones in emerging markets,” Peterc said. “We now see the loss of competitive strength we’ve observed in the last two years is continuing.”

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