Nokia: Signs of Stabilization?

Inventory reduction may eventually recharge Nokia's growth despite the sales and profit declines expected in its upcoming earnings report

Investors scanning the horizon for rays of economic hope may find some cheer in first-quarter results from Nokia (NOK), which the world's largest mobile-phone maker is set to release on Apr. 16. While sales and profits most likely declined in the period, some analysts expect the Finnish company to say it has worked down the bulging handset inventory that built up in the fourth quarter of 2008, setting the stage for a return to growth.

If so, Nokia, which is renowned for its supply-chain efficiency, would build support for the view that one reason the current downturn hit so suddenly was that companies reacted more rapidly than in the past to a drop in demand. They dialed back production drastically when the global economy slowed—but could also ramp up fairly quickly as the market stabilizes. "If the supply side is leaner and fitter and sharper during the downturn, then it has potential to race back faster in the upturn," says Neil Mawston, a senior analyst of the wireless industry for market researcher Strategy Analytics.

Nokia shareholders are due for some good news. In the fourth quarter of 2008, sales dropped a stomach-churning 19% from a year earlier, to $16.5 billion, while operating profit plunged 80%, to $639 million. One reason was a surfeit of phones, combined with Nokia's refusal to engage in price wars in developing countries. In China, the company's largest market, Nokia sold 36% fewer devices in the fourth quarter compared with the year-earlier quarter.

Stock on the Rise

Analysts expect Nokia to report further steep declines during the first quarter of 2009. Brokerage Nomura International forecasts a 26% drop in sales, to $12.5 billion, while net profits could plunge 90% year-over-year, to $113 million. But Nokia shares have been rising recently—up 60% since their 2009 low on Mar. 6—on expectations that sales hit bottom in early March and have begun to lift.

One reason for the improvement may be that, like other tech companies, Nokia absorbed the lessons of the last big tech downturn in 2001. The company developed ways to avoid being stuck with idle assembly lines and warehouses full of unsold products. For example, Nokia moved quickly to shut down production at the contract manufacturers that were responsible for 17% of handset production. Nokia also operates an extensive sales-tracking network even in remote regions of Africa, so it has good intelligence on which way the market is going.

Strategy Analytics' Mawston estimates that Nokia now has a four-to-six-week supply of handsets in its sales channels. That's below the six-to-eight weeks that are normal for the company, he says, suggesting that supply has actually fallen behind demand. "It's not a perfect situation," he says. "Consumers like to see more choice on the shelves, while retailers and operators like to have a little buffer. But being understocked is probably preferable to being overstocked."

Tentative Recovery for Mobile-Phone Makers

Relatively decent Nokia results would be a tonic for the whole wireless industry. Already, analysts perceive tentative signs of recovery, in part because mobile phones are a must-have product for many people. Folks may delay purchase of a new handset, but not for too long. "Although it cannot be said that the market is getting better everywhere, there were signs of improvement in North America, India, and China," says Carolina Milanesi, wireless industry analyst at market watcher Gartner (IT), in an e-mail.

Investors also will be alert to any statements from Nokia about sales of smartphones. Nokia has recently lost share in high-end devices to the Apple (AAPL) iPhone and Research In Motion (RIMM) BlackBerry. Though generally bullish on Nokia, analyst Mark McKechnie at researcher Broadpoint AmTech rates its shares neutral due to concern over whether the company can regain ground in smartphones.

Early data suggest that Nokia's touchscreen 5800 XpressMusic handset is selling well. If so, that will reassure shareholders. "It seems that the 5800 picked up some momentum as it was rolled out into more countries, and this might have helped Nokia stabilize its share," Gartner's Milanesi says. The proof will be in the numbers.

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