Nokia’s cryptic warning:: Weaker consumer confidence, sequential share drop

Nokia Corp. gave somewhat vague mid-quarter guidance last Friday that sent its stock tumbling more than 9% to a new 52-week low.
The Finnish giant, with about 40% global market share, said it sees “weaker consumer confidence in multiple markets,” a cryptic remark it did not elaborate on that nonetheless carries significant weight for the industry as a whole.
On a conference call Friday morning, Rick Simonson, Nokia’s CFO, rebuffed analysts’ attempts to quantify the impacts on Nokia’s volumes, revenue and profit margins. Having identified various market conditions for the back half of the year, the company may well be working furiously now on those very points.
Nokia predicted it would lose some market share sequentially from the second quarter to the third quarter, while insisting it would end the year with a market-share gain over the prior year.
The company also reiterated its view that the industry’s annual growth rate would reach 10% or more, year on year. More than one analyst pointed out, however, that the first two-and-a-half quarters had already delivered the bulk of that growth.
The upshot?
The possibility of a “lousy” fourth quarter, according to Tero Kuittinen, analyst at Global Crown Capital L.L.C.
The fourth quarter, of course, is the holiday season in the Western world and many vendors, carriers and others in the ecosystem depend on it for their strongest quarterly performance each year.
Multi-faceted forecast
Nokia’s mid-quarter guidance had several components, the company said.
In a statement, Nokia said it had decided not to match price competition by “some competitors” in unspecified “entry markets” and cited “overall market competition.” And it cited “the slower ramp-up” of a mid-range smartphone as a contributing factor.
Nokia’s lack of details left some analysts in the dark.
“Nokia simply refused to talk about margins or sales, so that made this news kind of strange,” said Kuittinen. “The call was not very illuminating.”
Handset companies, in general, want to guide on isolated factors to avoid sparking panic, the analyst said. But Nokia’s remarks contained “a basketful of surprises.”
According to Kuittinen, Nokia’s cryptic references translated to:
–Price competition by Chinese vendor MediaTek and other local vendors in China. MediaTek recently guided for higher volumes and share in the Chinese market, the analyst said. While Nokia has often used price competition to squeeze competitors, it apparently feels that Chinese vendors cannot profitably sustain their low prices.
–The reference to weak consumer confidence probably referred to Nokia’s home market of Europe. If the European back-to-school market now underway is “a bust” and the housing slump continues, consumers may postpone handset upgrades at a time when most vendors are rolling out their high-tier, margin-rich offerings, the analyst said. That would mean “a real problem” for the holiday season.
–With 13% to 14% growth for the handset industry in the first half of the year, a “lousy” fourth quarter could still deliver 10% aggregate growth for the year.
If all these factors are borne out by events, the two vendors most likely to feel pain are Motorola Inc. and Sony Ericsson Mobile Communications, according to the analyst. Motorola and Samsung Electronics Co. Ltd. are the only multinational handset vendors who contend with Nokia in China, he said. Samsung may have to cede some ground to arch-rival LG Electronics Co. and Motorola may struggle as it tries to rise from the mat.
“The new leadership at Motorola doesn’t have much room to move,” Kuittinen said. “They simply don’t have the money for price competition.”
Motorola’s stock was down less than 1% in mid-day trading, well above its 52-week low.
Nokia’s points
Nokia’s Simonson did give some assurances to analysts prodding him for insight on the conference call last week.
The company’s revised forecast on market share related to unit volumes in the third quarter, not to its profit margins, he said. As for the sequential downturn in market share, it was “too early to estimate with precision” but Nokia is “not talking about several points” of lost share, Simonson said. Historically, there’s some volatility in unit volumes and, thus, market share, from quarter to quarter, the Nokia CFO said.
“History is on our side,” Simonson said in reference to Nokia’s prudent pricing strategies.
Any issues with the launch of one mid-tier smartphone were “absolutely not systemic” or reflective of broader component or manufacturing process problems, Simonson said. The problem was limited and mundane, he added.
Pressed by one analyst on whether gross margins would suffer in the third quarter, Simonson said he was feeling good about gross margins in the third and fourth quarters, though the third quarter had some “plusses and minuses.”