As average selling prices fall, market boos mobile phone-maker's results

October 19, 2006

3 Min Read
Nokia Stumbles in Q2

Demonstrating that the mobile-phone business can be bruising even in a period of rapid sales growth, Nokia Corp. (NYSE: NOK) reported a 4 percent drop in earnings this morning despite a sharp rise in the number of phones it sold in the second quarter.

Rival Ericsson AB (Nasdaq: ERIC), meanwhile, the No. 1 builder of mobile networks in the world, reported similarly mixed results: Net profits at the Kista, Sweden supplier rose 17 percent, but both earnings sales, which climbed 13 percent, were below Wall Street estimates.

As of 1:00 p.m., Nokia's share price was down 3 percent on the NYSE, while Ericsson's stock, trading on the Nasdaq, had actually climbed about 3.5 percent. On European markets, Nokia closed today down 6.5 percent while Ericsson eked out a 1.7 percent gain.

Nokia's problem is a direct result of its strategic choice to build market share in emerging markets, at the expense of average selling prices. The average price of Nokia phones dropped to $117 from $128 during the second quarter, as the Espoo, Finland-based company -- the world's No. 1 seller of mobile phones -- sold a higher proportion of low-end phones in countries like India and China. After selling 88.5 million mobile handsets in the quarter, Nokia says its global market share in mobile phones is now 36 percent, up from 34 percent in the second quarter.

Building market share at any cost is, at the moment, not proving an attractive strategy to investors. Rival phone sellers Motorola Inc. (NYSE: MOT) and Sony Ericsson Mobile Communications , meanwhile, are also increasing sales rapidly: Motorola's volume rose 39 percent over the same quarter in 2005, while Sony Ericsson, the joint venture formed in 2001 between Ericsson and Japanese consumer-electronics giant Sony Corp. (NYSE: SNE), enjoyed a whopping 43 percent rise in the same timeframe. (See Nokia, Ericsson Face Off.)

Ericsson's results were boosted by the mobile-phone unit, as its core business -- building wireless networks for service providers -- continues to struggle.

"Revenues, gross margins and operating profit all came in just below the market's consensus," observed Richard Windsor, global communications equipment analyst at Nomura International , in a research note. "However, [Ericsson] management's hints at an unusually strong Q4 saved the shares from punishment."

"Q4 should not only be stronger than normal but will also make up a bit for the third quarter," said Ericsson CEO Carl-Henric Svanberg in a conference call announcing the results.

The executive's rosy forecast could be linked to today's report from Cingular, which said its rollout of a new 3G UMTS network in the U.S. was proceeding well.

"This should also have some good impact on Ericsson’s figures," says Akshay Sharma, research director for carrier network infrastructure at Gartner Inc. , "as much of the radio core 3G UMTS and SGSN switches that Cingular is deploying are from Ericsson."

Svanberg also predicted that growth in the sector in 2007 will be "moderate" -- meaning that Ericsson will still be relying on its mobile-phone unit to prop up its performance in other areas.

— Richard Martin, Senior Editor, Unstrung

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