Nokia's scale helps it weather economic storm
By Nick Wood , Total Telecom
16 October 2008
Net profit down 30% on year but CEO says handset maker is "well positioned" in current climate.
Nokia on Thursday reported a 30% decline in net profit from 2007, citing aggressive pricing competition and a tougher economic environment, but said its scale and margins leave it in a strong position.
"We have our eyes wide open to what's happening out there," said Olli-Pekka Kallasvuo, CEO of Nokia, during the company's quarterly analyst call."But Nokia is strong, we have the scale, [and] we have one of the best brands in the world," he commented.Third-quarter profit fell to €1.09 billion from €1.56 billion a year earlier and group revenue declined 5% from €12.99 billion in 2007 to €12.24 billion.Sales at Nokia's core devices and services business declined 7% year on year to €8.61 billion from €9.24 billion.One analyst shares Kallasvuo's confidence."In the current economic environment, out of all of the handset vendors, Nokia is best positioned to deal with it," said Carolina Milanesi, research director at Gartner, who explained to Total Telecom that it has the size and distribution strategy to cope with tougher times."Economies of scale are going to matter more and more," she added.Indeed, Nokia shipped 117.8 million handsets during the third quarter, an increase of 5% from 2007, when it shipped 111.7 million.That said, on a sequential basis, the Finnish handset maker saw shipments to Latin America fall by 28.1%, while growth in its North American and European shipments was largely flat at 0% and 1.1% respectively.As such, Nokia's market share fell slightly to 38% from 40% in the second quarter, a decline it attributed to aggressive competition on pricing from its rivals."It sometimes happens in the market, we decided tactically not to participate…We will try to take market share in a sustainable manner," said Kallasvuo."But don't expect us to give our competitors a free ride," he said.Yet Gartner's Milanesi hinted at weakness in Nokia's handset portfolio.She said that Nokia's top-of-the-range N96 model, which launched in early September, is unlikely to drive ARPU."Operators are getting pretty smart when it comes to subsidising the handsets that are likely to drive ARPU, and there's a danger that the N96 will be seen as an upgrade to the N95, rather than a completely new handset," she said.She also explained that Nokia's 5800 is a late arrival to the fiercely competitive touch screen scene, which could explain why it lost some of its market share."Samsung with its Omnia device will have picked up some volumes, you also have the HTC Diamond, and the 3G iPhone of course – so there has been a lot of competition on the touch screen side that Nokia couldn't compete with," Milanesi explained.Still, Nokia maintained steady operating margins of 12.0% across the group, with its handset business showing a slight dip to 18.6% from 21.2% during the same period in 2007.Its infrastructure arm Nokia Siemens Networks meanwhile saw its margins improve from -3.3% in the third quarter of 2007 to 0% in the three months ending 30 September.Going forward Nokia said despite the financial crisis it expects mobile shipments across the sector to increase during the seasonally strong fourth quarter, and for full year industry volumes to reach 1.26 billion units, up from 1.14 billion in 2007.However, Milanesi has taken a more pessimistic view on the handset market for the fourth quarter."We don't expect the weakness in Q3 to be made up in the fourth quarter," she said.Nokia's CFO Rick Simonson also said the infrastructure market remains uncertain, as Nokia Siemens Networks reported a 4.7% decline in year-on-year sales, and a 13.9% drop sequentially from the second quarter."[Nokia Siemens Networks] saw a sharp net sales decline....The infrastructure market is still in a tough environment as we go into what is a seasonally weak quarter," he said.
