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Nokia May Report Shrinking Profit, Pressuring Elop for Change

Nokia's CEO Stephen Elop
Stephen Elop, chief executive officer of Nokia Oyj. Photographer: Chris Ratcliffe/Bloomberg

Nokia Oyj, the world’s biggest mobile-phone maker, may post its smallest third-quarter profit since 2001, underscoring Chief Executive Officer Stephen Elop’s challenge to claw back share from Apple Inc. and Google Inc.

Product delays and price competition probably weighed on the results to be released tomorrow, analysts said. It’s the first earnings report from Espoo, Finland-based Nokia since Elop, a former Microsoft Corp. executive, took over last month.

“The third-quarter results are less important than they’ve historically been because people are really waiting for the new CEO to find out what his views are on a number of issues, including the high-end operating systems,” said Andy Perkins, a London-based analyst at Societe Generale. “Any comments there will perhaps be more important than the results themselves.”

Elop took over from Olli-Pekka Kallasvuo after investors and customers called for a leader better able to compete with the iPhone and devices based on Google’s Android platform. Nokia lowered its guidance three times since April as delays in software development pushed volume shipments of the new N8, its first smartphone with the new Symbian 3 operating system, into the fourth quarter and left it with lower selling prices.

The delays and price erosion may have resulted in third-quarter net income of 182.5 million euros ($251 million), from a 559 million-euro loss from Nokia Siemens Networks writedowns a year earlier, according to the average estimate of 26 analysts surveyed by Bloomberg. Sales probably rose 1.7 percent to 9.99 billion euros, the average of 41 forecasts showed.

Apple, RIM

Apple reported a 70 percent gain in profit to $4.31 billion for the quarter, with iPhone shipments almost doubling to 14.1 million and surpassing the 12.1 million BlackBerrys Research In Motion Ltd. shipped in its most recent quarter.

The average analyst estimate for Nokia’s shipments, including low-end phones and smartphones, was 115 million, or an increase of 6 percent over last year.

“Nokia is the biggest and we admire them for being able to ship the number of handsets that they do but we don’t aspire to be like them,” Apple CEO Steve Jobs said, adding that Apple wants to be “the best” rather than the biggest.

Nokia shares have lost more than 60 percent of their value since Apple’s 2007 introduction of the iPhone. Elop’s appointment has done little to boost the stock, which has fallen 2.8 percent since he started on Sept. 21 and is unchanged since his appointment was announced on Sept. 10.

Nokia’s market value has slumped to 28.9 billion euros, while Apple’s has soared to $282.7 billion.

Elop’s Changes

Elop, 46, a computer engineering major at Canada’s McMaster University, headed Macromedia Inc., which popularized the Flash animation software, and Microsoft’s business products division before moving to Nokia. He told Finnish financial magazine Kauppalehti Optio this month that “internally, changes have already begun” at Nokia and that the “number of changes will increase as we move forward.”

For many analysts, the margin Nokia was able to squeeze out of sales will be the key number to watch.

“It’s well understood that the third quarter will mark a low point this year for Nokia,” said Nicolas von Stackelberg, a Frankfurt-based analyst for Macquarie Group Ltd. “People will check that they’ve delivered on their guidance, with the margin in the devices and services business being the most important point to look out for.”

The company has forecast an adjusted operating margin of 7 to 10 percent in the handset division for the quarter.

Analysts said they will also look for details on the sales of the smartphone N8, which has gotten mixed reviews, and its companions, the C7, C6 and E7. Consumers have been waiting for a hit touchscreen device from Nokia for more than three years.

‘Margins, Margins’

“I’ll be looking for improvement in the overall situation, trying to get a handle on the sell-in of the N8, C6 etc. into the service provider channel,” said Michiel Plakman, who helps manage 7 billion euros including Nokia shares at Rotterdam-based Robeco NV. “And then of course margins, margins, margins are going to be the focus.”

The company forecast 10 percent to 11 percent for the full-year device margin after a second-quarter margin of 9.5 percent.

Nokia targeted full-year market share of 34 percent, flat with last year, which analysts said it would have a hard time keeping as the new smartphones face competition from a blizzard of handsets with Google’s Android, priced as little as $150.

In the second quarter, Nokia’s share of smartphone sales to end users fell to 37.4 percent compared to 45 percent a year earlier, according to Gartner Inc.

“I think they have to revise the market-share target downward because after nine months they are clearly behind and would need a huge jump of 4 to 5 percentage points in the fourth quarter to reach that target,” said Michael Schroeder, a Helsinki-based analyst with FIM Bank.

Symbian 4, MeeGo

Nokia’s next chance to impress the market will be the launch of smartphones using Symbian 4, a further refinement of the Symbian 3, and the announcement of devices running MeeGo, the Linux-based platform it is developing with Intel Corp.

“Analysts are divided on how well this portfolio renewal will lift off in 2011,” said FIM’s Schroeder. “I think the relative competitiveness in smartphones won’t improve until we see Symbian 4 and MeeGo devices making up most of the portfolio.”

Nokia’s Nokia Siemens Networks venture with Siemens AG may also affect results this quarter. Nokia hasn’t said whether it will turn an operating profit, guiding for a margin range of -2 percent to 2 percent.

Earnings Estimates

Of the 54 analysts who cover Nokia, 26 rate it a “buy,” 11 recommend selling it and 17 suggest holding the shares, according to Bloomberg data.

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 third quarter, unless noted. The market share estimate is an approximation using the ratio of the other estimates given. Estimates for figures for average selling price and shipments were compiled in a separate survey and compared to figures reported by Nokia in the year-earlier quarter.

                         Forecast             Reported
                         3rd quarter 2010     3rd quarter 2009

Average estimate            9.99  billion        9.81 billion
Highest estimate           10.60  billion
Lowest estimate            10.02  billion

Net income
Average estimate             182.5 million        -559 million
Highest estimate             260   million
Lowest estimate               94   million

Non-IFRS net income
Average estimate             368 million        634 million
Highest estimate             536 million
Lowest estimate              282 million

Earnings per share
Average estimate              0.05 euros        -0.15 euros
Highest estimate              0.07 euros
Lowest estimate               0.03 euros

Adjusted earnings per share
Average estimate              0.10 euros         0.17 euros
Highest estimate              0.14 euros
Lowest estimate               0.08 euros

Nokia device shipments      (13 estimates)
Average estimate             115 million         108.5 million

Industry device shipments   (11 estimates)
Average estimate             345 million         288 million

Nokia market share (year-ago share restated by Nokia in March)
Average estimate              33.1 percent         34 percent

Nokia average selling price   (14 estimates)
Average estimate                 60.0                  62

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