Nokia delivers, but forecast sends stock tumbling

Nokia Corp. posted strong results for the typically tepid first quarter, but its stock dipped 14% in midday trading after the company said that the handset market’s overall value, in Euro terms, would decline from last year.
Nokia reported revenue of $20.2 billion in the first quarter, up 28% over the year-ago quarter. The company said net profit reached $1.9 billion, a 25% rise over the year-ago quarter.
Operating profit in its “devices and services” division – a new designation for the company’s most successful business – was up 50% over the year-ago quarter and operating margins in handsets reached 20%, up from 15% a year ago. Company-wide operating margin, however, dropped to 12.1% from 12.9% in the year-ago quarter.
The outlook
As is often the case on Wall Street, the company’s performance was overshadowed by its market outlook.
“The sting in the tail of these results is in the change of outlook,” said Martin Garner, analyst at Ovum. “This is the first set of results reported by Nokia under its new reporting structure, so it’s not simple to do a direct comparison on all aspects. It is a very healthy set of results, underlining the strength of Nokia’s phone portfolio and its market position in most areas.”
Analyst Mark McKechnie at American Technology Research said that Nokia’s performance largely met expectations and agreed that its stock dove on the company’s “cautious macro commentary.” McKechnie said he expected Nokia to deliver more new handset models to market in the second half of the year, after a second-quarter lull. Nokia’s touchscreen effort, an answer to Apple Inc.’s iPhone, is due late this year, according to the company.
Nokia stuck to its market forecast for 10% annual growth in global handset unit volumes for this year and said it expected to continue growing its market share, which various estimates place at about 38% to 40%.
Economic worries
Analysts were keenly interested in the outlook from the world’s dominant handset maker in order to gauge whether the United States’ sluggish economy would infect Nokia’s European stronghold, a handset replacement market that yields high profit margins. Nokia said that was indeed the case.
Nokia said that its change in outlook “primarily reflects the negative impact of the recently weakened U.S. dollar, the general economic slowdown in the U.S., and possibly going forward some economic slowdown in Europe.” Nokia also changed its outlook for the network infrastructure market to flat in Euro terms in 2008, down from its previous view of “very slight growth.”
Though Nokia has targeted the U.S. market, where its share has languished badly, it reported that shipments here declined further.
Neil Mawston, analyst at Strategy Analytics, said that North America accounted for 16% of global handset demand, but remained “a serious problem child” for Nokia. Mawston faulted the company’s “lackluster” CDMA handset offerings and “weak relationships” with U.S. carriers. Nokia’s U.S. market share has plunged to 7%, down from 20% in the first quarter of 2006.
Mark Louison leads Nokia’s efforts to regain footing in the U.S. handset market by meeting carriers’ customization requirements and he said in a recent interview that the company’s long-term strategy here is just beginning to gain traction.
A fuller picture of handset vendors’ fortunes awaits further earnings reports next week. Sony Ericsson Mobile Communications and Apple report quarterly earnings on April 23. Motorola Inc. is scheduled to report April 24.