Nokia Delivers, but Cautions on Year

The handset maker comes to terms with the faltering economy and investors get skittish, but operating profits for the quarter were up

Nokia released earnings on Apr. 17 that largely met analyst expectations, yet its shares plunged nearly 14% in Helsinki and New York trading. The reason: Nokia (NOK) executives turned more pessimistic about the global economy, saying the total value of the handset market, measured in euros, could slip this year. Some analysts even fear that soaring food prices could hurt sales in fast-growing emerging markets where low-income customers may have to choose between rice and mobile communication.

Nokia Chief Executive Officer Olli-Pekka Kallasvuo, responding to an analyst's question on a conference call, said the possibility that food prices could hurt handset sales is "pretty remote. The mobile phone is a necessity item." But some analysts are worried that Kallasvuo is wrong. "Income in emerging markets is very limited," says Jari Honko, deputy head of research at eQBank in Helsinki. "When food prices are rising, there is definitely a risk sales of handsets could decline."

With investors already nervous about economic growth and stock markets skittish around the world, Nokia's mildly pessimistic outlook was enough to wallop shares in the Finnish giant. That, despite first-quarter results that Martin Garner, analyst at market watcher Ovum (INF.L), called "very healthy." Nokia's revenues grew 28.4% from the same quarter last year, to €12.66 billion ($20 billion), and its operating profits rose 20% to $2.4 billion, fueled by emerging markets that are still growing despite the U.S. slowdown.

Investors Focus on Bad News

Not counting special items such as the cost of closing a factory in Bochum, Germany (, 3/11/08), operating profit rose 39%, Nokia said. And analysts were pleasantly surprised to see better-than-expected operating margins of 14.7%.

But investors focused on the bad news. Nokia said in a statement that the value of the global handset market measured in euros could slip in 2008, primarily as a result of the weak dollar, but also because the European economy may begin to slow. The company's average selling price for handsets also continued its downward trend, to just €80.2 ($127) in the quarter, some 10% below the figure a year earlier.

In addition, Nokia's results in the U.S., where the company has long been much weaker than in the rest of the world, were even more dismal than usual. Nokia sold just 2.6 million units in the first quarter in North America, down 46%. Market research firm Strategy Analytics estimates Nokia's market share in the U.S. was only 7% in the first quarter, down from 20% two years earlier. "North America remains a serious problem-child for Nokia," said Neil Mawston, director at Strategy Analytics, in an analysis of the results.

Still Has the Biggest Share

Nokia's global market share also slipped, to 39.8% from a record 40.6% in the previous quarter, according to Strategy Analytics. But that slight fluctuation concerns Nokia watchers less because the company remains dominant in most of the world and its share is still greater than that of its next three rivals—(Samsung, Motorola, and LG Electronics)—combined.

In fact, a closer look at Nokia's prospects suggests the share price decline is overblown. With Motorola's (MOT) handset division in crisis, Nokia finally has a chance to gain ground in the U.S. And none of its competitors in the rest of the world have anywhere near the same resources as Nokia to invest in development of highly profitable smartphones and new Internet-related businesses.

"Many companies in our industry and some who have exited the market have struggled because of lack of scale," Kallasvuo said. "We expect this to continue, and we continue to expect to benefit from our scale." Investors are understandably twitchy at any signs of slowing consumer purchasing, but more than 1 billion handsets still are likely to fly off the shelves this year. If any company looks to benefit from that business, it's Nokia.

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