Nokia's Sales and Profits Plummet

Nokia (NOK) startled analysts and investors on Jan. 22 when it reported a slump in sales and earnings that exceeded even pessimistic forecasts and that bode ill for other manufacturers of consumer technology. The Finnish handset maker, whose products are the world's most widely used brand of consumer electronics, said that fourth-quarter sales dropped 19% from a year earlier, to $16.5 billion, while operating profit plunged 80%, to $639 million.

Nokia sales declined at both the high and low ends of the market. In China, which has been the company's largest market, Nokia sold 36% fewer devices in the quarter vs. a year earlier as local dealers cleared out excess inventory. Nokia has so far refused to be drawn into a price war in developing countries, a strategy that hit sales and helped push the company's worldwide market share down to 37% from 38% the previous quarter.

Meanwhile, sales of high-end handsets—those with features such as e-mail or Internet browsing—fell to 15.1 million in the fourth quarter of 2008 vs. 18.8 million a year earlier, even as the total market for such devices soared. Nokia lost market share to the Apple (AAPL) iPhone and new consumer-oriented handsets from BlackBerry maker Research In Motion (RIMM). "Nokia is now having to cope with a double whammy of market slowdowns in both developed and developing markets," said Neil Mawston, analyst at market watcher Strategy Analytics. The company's operating profit margin on handsets is at its lowest point in 10 years, he said.

Disappointed CEO

Nokia Chief Executive Officer Olli-Pekka Kallasvuo said he was disappointed by the results, which pushed company shares down 5% in Helsinki trading. But he held out the possibility of a recovery later in 2009 as dealers clear out excess inventory. "The markets that have been hit hardest are the markets that are our strongholds," Kallasvuo told BusinessWeek. "The underlying need in emerging markets continues to be there."

Nokia's quarterly earnings report, closely watched for what it says about technology demand, will feed expectations that the handset industry is in for one of its roughest years ever. Nokia forecast that sales by all handset makers will fall 10% this year compared with 2008—double what the company previously predicted—but with a steeper decline in the first half of the year than the second. "The [sales] channel is destocking. We believe that well before the end of the first half, this destocking will run its course and underlying consumer demand will come into play," Kallasvuo said.

The decline could hit other handset makers more severely. Sony Ericsson Mobile Communications, the handset joint venture between Sweden's Ericsson (ERIC) and Japan's Sony (SNE), earlier reported a $243 million loss for the fourth quarter. Ericsson CEO Carl-Henric Svanberg told BusinessWeek on Jan. 21 that "the rationale for the joint venture is still there."

Market Shakeout

Still, analysts expect the abysmal economic climate to drive some weaker manufacturers from the market, which could ultimately benefit Nokia. The company's huge market share allows it to manufacture at a lower cost per unit; it has a wider range of products than any competitor; and its distribution network is regarded as one of the best in the world. "Nokia is best placed to deal with the current market conditions," says Carolina Milanesi, research director, mobile devices, at market watcher Gartner (IT).

Until the handset market revives, though, Nokia will be forced to cut costs drastically—a painful move for a company used to growth. The company plans to reduce annual costs in its devices and services operations by more than $900 million by the end of 2010, with most of the cuts this year. Job reductions are inevitable, Kallasvuo said, though he wouldn't specify how many Nokia workers will be affected.

He also vowed to win back share in the crucial market for high-end devices with new products such as the 5800 Xpress Music, which features an iPhone-like touchscreen but sells for a lower price. The handset, launched late last year, has been selling well, according to Nokia. In coming months, Nokia will also launch the top-of-the-line N97, which features a touchscreen as well as a slide-out miniature keyboard for writing e-mail. "The empire is striking back," Kallasvuo said.

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