NOKIA CORP. RODE A CONTINUING WAVE of worldwide consumer demand for handsets in the third quarter, posting impressive gains in revenue and profit and volume.
The other top-tier, incumbent handset makers also posted healthy numbers for the quarter just over. Motorola Inc. reports Thursday.
“People are still buying a lot of phones,” said Mike Gartenberg, analyst at Jupiter. “And we’re seeing consumers adopting more features on their handset. It’s the device they use not just to talk but to get information and be entertained.”
Gartenberg said he saw signs that emerging markets were entering an upgrade cycle, which is already under way in many developed markets, such as the United States. The analyst said that media buzz over the iPhone has raised consumer awareness of the value of handsets, features are being driven down into lower-priced handsets and data service rates are falling.
Ken Hyers, analyst at Technology Business Research, Inc., concurred.
“Consumers are willing to spend more for devices and I partly credit that to the iPhone,” Hyers said. “What surprised me is how well Nokia did without introducing a lot of new products during the quarter.”
Nokia’s total revenue for the quarter, including all four business units-mobile phones, multimedia devices, enterprise solutions and Nokia Siemens Networks-reached $18.4 billion, up 28% from the year-ago quarter. Total operating profit reached $2.7 billion, a 69% jump over the year-ago quarter. The company shipped nearly 112 million handsets, more than its three nearest rivals together.
No competitive business produces truly rosy scenarios, of course, and Apple Inc.’s iPhone threat-measured in terms of both global “mind share” and initial sales in the United States-has led the Finnish giant to respond in several ways, including an aggressive U.S. media campaign for its N Series smartphones and innovation in its N Series S60 operating system.
The fact that Nokia dominates the global handset business with 39% market share and may sell nearly a half-billion phones this year, yet has reacted swiftly to Apple’s challenge, illustrates the market’s intense competitiveness and the degree to which giants can be wounded by one well-aimed arrow.
As for the Finnish giant glancing in its rear-view mirror with a degree of alarm at how fast Apple is eating up the road, Hyers said: “Nokia is a large, successful company, but they’re not always nimble.”
Analyst Tero Kuittinen gave Nokia credit for its approach to manufacturing and mastery of two very different kinds of handsets-entry-tier models for emerging markets and “multimedia computing devices” for the high end.
Hugos and Rolls Royces
Nokia’s nearly 112 million handsets shipped in the quarter was a 26% increase from the year-ago quarter. The company credited much of its volume to widespread sales of sub-$43 handsets-and, accordingly, saw a substantial drop in average selling prices-to $117 from $129.
Still, the company managed to improve its operating margins, Kuittinen said, a reflection of its mastery in cost-controlled manufacturing and component sourcing. That the Finnish giant earned a similar, enviable operating margin of about 22% in both classes of devices is extraordinary, Kuittinen said.
“No other manufacturer is doing this,” Kuittinen said. “It’s like turning out Hugos and Rolls Royces at the same time.”
At the same time, Kuittinen was cautious about anointing Nokia king of the hill. “The fact is Nokia showed no big sequential growth in Europe with its N Series, the competition is hot and all the incumbents are rolling out very attractive high-end models right now. Nokia may have stalled at 39%.”
The outlook, according to Gartenberg, is all about handset design, features and matching products to markets. “The challenge is to capture the hearts and minds of consumers with exciting devices. It comes down to the product line-you have to align your portfolio not only with the interests of consumers, but also the carriers, which are the leading retail channel to consumers.”
“Apple,” Gartenberg said, “has certainly shaken that model.”
“Apple itself is not the problem,” Kuittinen said. “The problem is that network operators are choosing to market rivals’ smartphones. Competitors are stealing share with iPhone-like models. The threat to Nokia’s fourth quarter is the upgrade market in Europe. The fourth quarter is going to be tough-both Nokia and Motorola are clearly behind in the large display business.”
With four of five top-tier vendors having reported solid numbers, all eyes are turning to Motorola on Thursday. “They’ve got to find their groove again,” Gartenberg said. “They have tremendous design and engineering talent, but their execution has been lackluster. Will there be an executive shakeup? What is the strategy for regaining a sense of excitement and value in their portfolio?”
