Nokia Profit May Fall 49% as Pressure Grows on Handset Goal

Nokia CEO Stephen Elop
Stephen Elop, chief executive officer of Nokia Oyj. Photographer: Simon Dawson/Bloomberg

Nokia Oyj may tomorrow report a 49 percent decline in profit and forecast further erosion before the world’s biggest maker of mobile phones introduces its first smartphones using Microsoft Corp.’s operating system.

First-quarter net income at Espoo, Finland-based Nokia may drop to 177 million euros ($253 million) from 349 million euros a year earlier, according to the average of 19 analyst estimates compiled by Bloomberg. The operating margin for devices and services adjusted for some items probably fell 3.6 percentage points to 8.5 percent, the average of 23 estimates shows.

Chief Executive Officer Stephen Elop, a former Microsoft executive, said in February Nokia will adopt Microsoft’s Windows Phone 7 as its main smartphone operating system, replacing the Symbian platform it has used for more than a decade. Investors want to know how long it will take to reach a goal of selling 150 million more handsets on the last versions of Symbian.

“I’ll be looking at the slope of the decline -- whether or not the second quarter ends up being weaker than the first quarter and therefore by implication how deep the trough might be before we get a new product-driven recovery,” said Stuart Jeffrey, an analyst at Nomura International Plc in London who has a “reduce” rating on the stock.

Operating Margin

Nokia hasn’t provided a full-year forecast, citing uncertainty caused during the transition to Microsoft’s software. On Feb. 11, the day it announced the agreement, Elop set a long-term target to increase handset sales faster than the market with an adjusted operating margin of 10 percent or more after the shift to Windows Phone, which he expects to take place during 2011 and 2012.

The shares added 7.5 cents, or 1.3 percent, to 5.86 euros at 10:30 a.m. in Helsinki, valuing the company at 21.9 billion euros. Before today, Nokia had lost 29 percent since announcing the Microsoft partnership.

Investors will look for guidance on how long handset margins will stay below last year’s 10.9 percent level, and how big the reorganized company will be.

Elop has predicted “substantial reductions” in jobs from cuts that analysts say may slash a third of the 3 billion-euro annual research and development budget.

Job Cuts?

“As the current Symbian portfolio matures and actually starts to expire without any new Windows devices coming out in the near future, I think the second half and specifically the third quarter might be very, very difficult,” said Mikko Ervasti, a Helsinki-based analyst at Evli Bank.

Symbian’s market share, at 37.6 percent in 2010, will fall to 19.2 percent this year and 5.2 percent in 2012, according to forecasts by researcher Gartner Inc., which measures sales to consumers. In the fourth quarter, Nokia had a smartphone share of 30.8 percent, down 20 percentage points since Apple Inc. shipped its first iPhone in 2007, according to Gartner.

Apple, which reports results today, may say profit rose 64 percent to $5.03 billion on sales of about $23.4 billion. Nokia’s own first-quarter forecast for devices and services sales is 6.8 billion euros to 7.3 billion euros, with an operating margin in devices, adjusted for restructuring charges and amortization of acquired assets, of 7 percent to 10 percent.

Apple, Sony Ericsson

Sony Ericsson Mobile Communications Ltd., which shifted to Android from Symbian last year, yesterday reported a surprise profit of 11 million euros after the company sold more higher-priced handsets.

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

“My sense is that the temptation will be quite strong for Elop to kitchen-sink this quarter -- try to set a clear canvas by saying it’s possible we could be down 20 percent year on year in unit shipments,” said Lee Simpson, an analyst at Jefferies International Ltd. in London.

Nokia device shipments in the first quarter, typically the company’s weakest, probably slipped 1.6 percent from a year earlier to 106.1 million units, according to analysts surveyed by Bloomberg. The company’s portfolio in the quarter included the N8 touchscreen phone that it used to release an improved Symbian in September, along with three related models including the C7, which T-Mobile USA is selling as the Astound.

Android, IPhone5

First-quarter revenue probably rose 6.5 percent to 10.14 billion euros, the average of 39 estimates, as Nokia rolled out the new models to more operators and markets.

Nokia last week unveiled a further update to Symbian and two smartphones to ship in summer, when they’re likely to compete with Apple’s iPhone 5 and the latest models running Google Inc.’s Android system from vendors including Samsung Electronics Co., the world’s second-largest handset vendor, and HTC Corp., the Taiwanese manufacturer that passed Nokia in market value this month.

Gartner predicts Android will run on 38.5 percent of smartphones sold this year. The Google software is moving into cheaper hardware and starting to compete with the high-volume, low-margin phones business that made up half of Nokia’s handset revenues and 78 percent of its unit sales last year.

“Investors will want to get a sense of how long a tail Symbian will have, how quickly it’ll ramp down,” said Stephen Patel, a San Francisco-based analyst at Gleacher & Co. “ It’ll depend on consumer reaction to Nokia going end-of-life with Symbian. Some don’t care and others don’t want to buy a product that isn’t going to be around in a few years.”

Japan Effect

Investors will also look for guidance on whether disruptions following the earthquake in Japan last month will affect shipments in the second and third quarters, Patel said, adding that it could offset the usual seasonal increase.

“I’ll be looking at the potential impact of Japan especially in terms of supply chain, potential bottlenecks, and the margins -- whether or not the deterioration we’ve seen during the last year will continue,” said Leon Cappaert, a fund manager at KBC Asset Management in Brussels with 330 million euros under management, including Nokia shares in a general fund for weighting purposes.

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