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Nokia as Rorschach card: Investors reward results, then resume gloom: UBS notes Nokia’s one-time settlement to Qualcomm of $2.3B

Nokia Corp. posted a 5% drop in revenue and a 21% drop in operating profit over the year-ago quarter, but its profit margin remained strong and the company stuck with its industry projection for 10% annual growth for the global handset market.
Profit margins in the company’s handset division – its primary engine for earnings – remained strong, boosting investor confidence despite the mixed results.
Investors first breathed a sigh of relief that the difficult third quarter had not been worse for the Finnish giant and rewarded Nokia, sending its stock up 3% in morning trading before taking back half that gain as general market pessimism reasserted itself. The stock was trading around $15.42 at midday.
Nokia reported shipping nearly 118 million devices in the quarter, up 5% from the year-ago quarter but below expectations. It projected that the industry’s global shipments reached 310 million units for the quarter, up 8% from the year-ago quarter.
The company said its projected market share slipped to 38% from 39% in the year-ago quarter and 40% in the prior quarter. Nokia said after the second quarter that it would cede incremental market share in the third quarter due to “unsustainable” pricing by competitors, but projected that it would hold its own in the fourth quarter.
Nokia said its results were due to weakness in Europe and North America, where handset shipment volumes dropped nearly 6% and 17%, respectively. The company found year-on-year strength in the vast Asia-Pacific market, as well as Latin America, the Middle East and Africa – but Asia-Pacific and Latin America showed steep sequential declines of nearly 8% and 28%, respectively.
Average selling prices slipped to $97 during the quarter, from $99 the prior quarter.
Analysts drew different conclusions from Nokia’s results, which have been anticipated as a bellwether for the handset industry.
UBS analyst Gareth Jenkins declared Nokia’s device business “absolutely fine” and said that the company’s outlook was “fairly consistent” and thus represented no big surprise. UBS said that Nokia’s projected, one-time settlement payment with Qualcomm Inc. – due this quarter – would be about $2.3 billion, higher than the analyst expected. The two companies agreed to a cross-licensing agreement in July.
In contrast, analyst Tero Kuittinen at Global Crown Capital L.L.C. said that “the beginning of the Big Dip in the phone market is here.”
“Nokia’s unit volumes and ASP disappointed,” Kuittinen said. “But it’s an oddly triumphant moment, because the handset operating margins were rock solid at 18.6%.”
“The sector is facing a disastrous year” in 2009, the analyst added. “We are now staring at a vicious, double punch of simultaneous volume and price weakness in coming quarters. But Nokia is showing it can take some real pain and still keep margins high.”
Kuittinen said that Nokia’s margins, a reflection of its cost-management discipline, would encourage investors when in contrast they see results from Sony Ericsson (due Friday), Samsung Electronics Co. Ltd. and Motorola Inc.
Meanwhile, before Nokia reported, Gartner had already cut its projection for 2008’s annual growth in shipments from the prior year to 8%, down from its prior 10% or better.


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