Nokia's Second Quarter Fails to Please Investors

Nokia CEO Olli-Pekka Kallasvuo allowed that he was "quite pleased" with the Finnish company's second-quarter earnings, which showed improvement over the dismal first quarter. But stock markets disagreed—big time.

Shares in the world's largest maker of mobile handsets plunged 15% in New York trading as investors brushed off a rebound in profit and instead focused on Nokia management's more pessimistic forecast for the rest of 2009. The company said it expects its global market share of 38% to be little changed from 2008, instead of increasing as the company had predicted earlier. Nokia also said its profit margin won't improve as much as hoped during the rest of the year.

The revised forecast fueled fears that Nokia (NOK) still hasn't figured out how to regain the initiative from Apple (AAPL) and BlackBerry maker Research in Motion (RIMM) in the lucrative smartphone market. Investors "don't think some of the devices Nokia is bringing to market will be competitive enough," says Carolina Milanesi, research director at market watcher Gartner (IT). "I think that's what made the stock react the way it did."

The N97's ImpactThere was actually quite a bit of encouraging news in the July 16 earnings report. Compared with the first quarter of this year, operating profit rose eightfold, to $602 million, from $78 million, better than expected, while sales rose 7%, to $14 billion. (The numbers still look terrible compared with the second quarter of 2008 before the world went into recession. Sales fell 25%, and operating profit plunged 71% from the year-earlier period.) Thanks to new models such as the touch-screen equipped N97, Nokia also regained some of the share it had lost in the smartphone market, claiming 41% of the segment vs. 39% in the previous quarter.

"We think industry demand is bottoming out," Nokia CFO Rick Simonson told analysts and reporters on a conference call. But he added: "We remain in a fragile global economic environment."

It was the second part of Simonson's statement that investors seemed to be focusing on. Stock markets were probably looking to Nokia for evidence that the tech sector is rebounding, Simonson said in an interview, and were disappointed when they didn't get it. "Perceptions got ahead of reality, and they wanted us to feed into that," he said. He defended the cautious forecast as "prudent and appropriate."

Mobile PCsWhat's probably most important in the long term is for Nokia to prove that it can produce not only sexy, easy-to-use devices but also that it can link the handsets to online services. Nokia aims to boost users of services such as music or navigation to 80 million by the end of 2009 from 47 million today. And the company is sending ever-stronger signals that it will soon unveil products that are closer to mobile PCs than mobile phones.

The top-of-the-line N97 already resembles a pocket-size laptop, with a slide-out keyboard for typing e-mail or entering data in Web sites. While Nokia will continue to focus on pocket-size devices, Simonson said, he left open the possibility that the company could begin selling larger portable PC-like products if there is demand. While he declined to give specifics or name launch dates, his comments suggest Nokia could bring out products that are somewhere in between smartphones and netbooks, probably before the end of the year.

Although investors were inevitably focused on the quarterly numbers, CEO Kallasvuo made an attempt to direct their gaze to brighter horizons. Mobile handsets in use already outnumber PCs, he said on the conference call, and will be the main on-ramp to the Internet for most people. "The mobile industry is going through [the] biggest change in [its] 20-year history and [is] available to be shaped by Nokia," he said.

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