Nokia's (Slightly) Better Cell Phones

A trio of higher-priced phones that still won't break the bank could lift profitability in some of the world's fastest-growing markets

Wireless stocks got a lift Mar. 30, thanks to a bullish outlook from Nokia, the world's top maker of mobile phones. The Finnish cell-phone giant said during its annual general meeting that it expects unit sales by all cell phone makers worldwide to grow 15% this year, vs. 10% the previous year.

That was welcome news at the end of a relatively weak first quarter, and it sent Nokia (NOK) shares up 5.2% to $21.27. Shares of other industry players were also buoyed. Texas Instruments (TXN), which makes chips used in Nokia handsets, climbed 3.4%.


  For some, the improved outlook wasn't much of a surprise. Nokia has made something of a habit of upping forecasts, sometimes several times a year. In 2005, Nokia ultimately forecast 24% sales growth, after an initial 10% target. Even now some analysts say Nokia is being overly conservative. "I think 15% is a baseline, a minimum forecast," says Paul Sagawa, an analyst at Sanford Bernstein. "All our checks suggest strong growth."

Much of that growth is coming in markets such as India and China. And Nokia used its annual meeting to unveil handsets aimed squarely at those places. The trio of new models, the Nokia 1112, Nokia 2310, and Nokia 2610, is designed for developing countries like China, which last year became Nokia's largest market, accounting for 11% of sales. They're also pitched toward India, where Nokia expects to displace the U.S., to make that country its No. 2 market by 2010 (see BW Online, 3/27/06, "Nokia Connects").

The phones signal a key refinement in the way Nokia is approaching the world's fastest-growing markets. In the past, Nokia offered its basic Nokia 1100, introduced in 2003, to consumers in emerging markets like China for about $50. At the same time, it offered a variety of handsets that cost about $100 or more. But buyers looking for handsets costing somewhere in between didn't have much choice -- until now.


  For cell-phone users in the U.S. and Europe accustomed to paying well above $100 for a new handset, the intermediate price difference may appear trivial. But not in other markets. The low-priced 1100 accounted for 25% of Nokia's sales last quarter, says Piper Jaffray analyst Michael Walkley. In all, the company has sold more than 100 million of these phones. The three new models may grab a chunk of those sales, he believes. And since the new line will sell for $55 to $79, any time they displace sales of the 1100, average sale prices improve, Walkley says.

Better still, the new phones are expected to improve operating margins. Profitability has been declining amid the company's push in recent years for customers in developing countries. Its handset division (which accounts for 60% of total sales) has seen operating margins drop to 17.1% in the fourth quarter of 2005, from 18.9% a year earlier. The new models are designed to offer 20% operating margins, says Sagawa. And more phones in the $50 to $100 price range could be forthcoming, analysts say.

Nokia packed the phones with features. While the 1100 has a monochrome screen, the 2610 has a color display. Capabilities include e-mail and Web access, and the model lets users record and send audio messages. It also has a built-in English-Chinese dictionary. A basic phone it's not.

Ditto for the new Nokia 2310. That phone actually has a built-in FM radio and sound-visualization graphics that move in time with the music. The device also offers advanced short text messaging functionalities. Even the Nokia 1112, the most basic of these new phones, has a talking clock and alarm which speaks a variety of local languages.


  The more users develop a taste for multifeature phones, the more they may be enticed to trade up to even more advanced, expensive phones. China and India are already among Nokia's top-five markets for multimedia phones, Walkley says.

As it gets smarter in low-end phones, Nokia's not neglecting higher-end devices. Rumor has it that Nokia will unveil new ultrathin models, designed to compete with Motorola's successful Razr, at the end of April. The launch could be timely, given speculation that Motorola's Q phone, ultrathin and designed for mobile e-mail, will be delayed (see BW, 2/27/06, "Why Zander Jumped to Motorola").

Of course, Nokia still has to make sure its new products gain traction. That's no small task in super-competitive emerging markets, where Nokia squares off with local phone manufacturers as well as sellers of refurbished cell phones, says Bill Hughes, an analyst with consultancy In-Stat. Such used phones can sell for less and may offer more features than Nokia's new gadgets.

Still, judging from Nokia's track record in China and India lately, the company's bullish outlook appears fully warranted.

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