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Nokia Shares Drop as Profit Misses Analyst Estimates (Update1)

Nokia Shares Drop as Profit Misses Analyst Estimates

July 21 (Bloomberg) -- Shares of Nokia Oyj, the world's largest mobile-phone maker, had their biggest drop in a year after the company's second-quarter profit rose less than analysts expected and it said earnings may fall this quarter.

The stock fell as much as 10 percent to 13.22 euros, and traded at 13.36 euros as of 1:56 p.m. in Helsinki. Second-quarter net income rose 15 percent to 799 million euros ($972 million), or 18 cents a share, from 695 million euros, or 15 cents, a year earlier, Nokia said. It forecast third-quarter profit will be 14 cents to 17 cents a share, compared with 15 cents a year earlier.

``Prices are coming down for Nokia's phones, while Motorola has succeeded much better in terms of pricing, design and brand,'' said Jussi Hyoety, an analyst at FIM Securities in Helsinki, who is reviewing his ``buy'' rating for the stock. ``Nokia's margins have slumped across the board.''

Nokia's profitability slipped as competition from rivals including Motorola Inc. led to lower prices. The Espoo, Finland- based company is adding features such as higher-resolution cameras and music players to lure buyers. Chief Executive Jorma Ollila is also expanding in countries such as India, where margins are smaller, to tap rising demand outside Europe and the U.S.

As sales growth ``came primarily from emerging markets where low-end products predominate and pricing pressures are currently intense, industry average selling prices continued to edge downwards,'' Ollila said in the statement. ``This was certainly the case for Nokia in the second quarter, which in turn impacted our profitability.''

Sales Rise

Second-quarter sales rose to 8.06 billion euros from 6.46 billion euros, Nokia said in a statement to the Helsinki exchange today. Nokia said sales this quarter will be 7.9 billion euros to 8.2 billion euros, up from 7.1 billion euros a year earlier.

Analysts expected second-quarter net income of 869 million euros, or 20 cents a share, on sales of 8.05 billion euros, according to the median forecast of 12 analysts surveyed by Bloomberg News. Nokia on April 21 predicted second-quarter earnings of 15 cents to 18 cents a share on sales of 7.9 billion euros to 8.2 billion euros.

Ericsson AB, the world's largest maker of mobile-phone networks, earlier today said second-quarter profit rose 18 percent 5.8 billion kronor ($749 million), and that sales gained 18 percent to 38.4 billion kronor. Ericsson said the network industry will show ``high single-digit'' growth this year, up from an earlier forecast of as much as 5 percent.

Margin Pressure

The combined operating margin for Nokia's handset units slumped to 13 percent from 17 percent in the previous quarter, FIM's Hyoety said.

``Price competition from Samsung, LG and Motorola is fierce,'' said Rene Bastiaenen, a partner at money manager Eureffect BV in Amsterdam. ``Nokia is fighting back but for now the battle is waged at the expense of profitability. The third- quarter outlook is below expectations.''

Eureffect sold its Nokia holdings ``a few weeks ago'' and doesn't plan to buy the stock, he said.

Sales at the unit making the most basic mobile phones increased 20 percent to 4.86 billion euros. Still, operating profit at the unit slipped 1.6 percent to 789 million euros.

The network unit increased sales 5.9 percent to 1.62 billion euros. Operating profit at the business, the world's second- largest maker of wireless networks behind Ericsson, fell to 209 million euros from 227 million euros.

Before today, Nokia shares had gained 27 percent this year, making them the third-best performers in Europe's Dow Jones Stoxx 50 Index. Shares of Schaumburg, Illinois-based Motorola, the No. 2 handset maker, added 16 percent in the same period, and Samsung Electronics Co., the No. 3, gained 24 percent.

Hot Competition

Suwon, South Korea-based Samsung on July 15 reported a 10 percent drop in second-quarter revenue from telecommunications. LG Electronics Inc., the No. 4 handset maker, on July 18 posted a 70 percent plunge in second-quarter profit as competition from Nokia and Motorola drove the company into what it called an ``unimaginable'' loss from its handset business.

Motorola on July 19 reported net income of $933 million, or 37 cents a share, from a loss a year earlier. Sales rose 17 percent to $8.83 billion, excluding revenue from a chip business spun off last year.

While Nokia's sales growth is accelerating, Ollila is trying to uphold profit margins amid intensifying competition. Nokia, whose revenue slid in 2002, 2003 and 2004, plans to start making phones and network equipment in India next year to cut costs and tap demand in the country.

Cost Focus

Nokia said Nov. 4 it plans to cut research and development spending to between 9 percent and 10 percent of sales by the end of 2006, to help lift profit margins. The ratio was 12.4 percent in the first quarter. Nokia on Jan. 11 said it plans to cut ``a few hundred'' jobs at the unit making camera and game phones.

The company targets an operating profit of 17 percent to 18 percent of sales for its mobile-phone units in the next two to three years. In the first quarter, the basic handsets unit margin was 19.2 percent, while the camera and gaming phone unit had a 13.7 percent margin. The business handsets unit had a loss.

In the first three months of the year, Nokia lost market share for the first quarter in four to Motorola and Samsung, Gartner Inc. said May 25. Its share of the global handset market fell to 30.4 percent from 33 percent in the preceding three-month period. Motorola's market share rose to 16.8 percent from 16.3 percent, and Samsung's share to 13.3 percent from 12.2 percent.

Market Expansion

Global mobile-phone sales in 2005 will reach 779 million units, up from the 674 million units sold last year and 520 million in 2003, Gartner said yesterday. Still, growth is slowing as more and more people already own mobile phones. Nokia today raised its target for global industry sales by 20 million units to 760 million.

Nokia said today it's global handset market share rose to an estimated 33 percent in the quarter.

The Finnish company, which has a long-term target of 40 percent market share, has said it plans to introduce 40 new models this year. Ten of them will be so-called third-generation, or 3G, phones with faster data speeds and videoconferencing capabilities.

To contact the reporter on this story:
Ville Heiskanen in Helsinki at [e-mail]


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