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Device Depression for Nokia, Sony Ericsson

Times are tough for Nokia Corp. (NYSE: NOK) and Sony Ericsson Mobile Communications . The manufacturers sold fewer devices during the second quarter of 2009 compared with a year earlier, and both maintain their depressing outlook of a 10 percent contraction for the global handset market this year.

Current conditions appear to be hitting Sony Ericsson harder than its bigger rival, both of which have been cutting staff and operating costs to adjust to the new market. While Nokia at least managed to improve its sequential shipment numbers during the second quarter, Sony Ericsson saw its device shipment volumes dip compared with the first three months of the year.

During the second quarter, Sony Ericsson shipped 13.8 million devices, down 5 percent from 14.5 million in the first quarter, and down 43 percent compared with the second quarter of 2008.

As a result, the joint venture reported a 40 percent decline in revenues year-on-year to €1.68 billion ($2.37 billion), and recorded a net loss of €213 million ($300 million). (See table below.)

Table 1: Sony Ericsson Q2 2009
Q2 2008 Q1 2009 Q2 2009 Year-on-year change
Units shipped (millions) 24.4 14.5 13.8 -43%
Average selling price per unit (euros) 116 120 122 +5.2%
Revenues (millions of euros) 2,820 1,736 1,684 -40%
Gross margin 23% 8% 12% --
Operating income (millions of euros) -2 -369 -274 --
Net income 6 -293 -213 --




Nokia, meanwhile, shipped 103.2 million devices, up 11 percent from the first quarter but down 15 percent from a year ago.

Nokia's revenues from its Devices & Services division were down 24.6 percent year-on-year to €6.59 billion ($9.3 billion). Across all three of its divisions (Devices & Services, Navteq, and Nokia Siemens Networks), the Finnish giant's second-quarter revenues were down 24.6 percent to €9.9 billion ($14 billion). (See table below and Slump Slams Nokia Siemens .)

Table 2: Nokia's Devices & Services division, Q2 2009
Q2 2008 Q1 2009 Q2 2009 Year-on-year change
Units shipped (millions) 122 93.2 103.2 -15%
Average selling price per unit (euros) 74 65 62 -16.2%
Revenues (millions of euros) 9,090 6,173 6,586 -27.5%
Gross margin 36.1% 33.8% 34% --
Operating income (millions of euros) 1,565 547 763 -51.2%




Nokia also has the added problem of a growing negative reaction in Iran, where consumers are boycotting its products as a result of a perceived connection with state espionage. (See NSN Has a Bad Day and this Guardian article.)

Nokia estimates that global mobile device shipments totaled 268 million units during the second quarter, up 5 percent from the first quarter but down 12 percent compared with a year ago. Nokia commanded a second -quarter market share of 38.5 percent, while Sony Ericsson took a 5.1 percent slice of the total market.

Nokia expects global mobile device shipments in the third quarter to be about the same, or slightly higher than, the second quarter's total. Perhaps crucially, though, Nokia now believes its share of the total device market will be flat this year, compared with its previous expectation that its share would increase.

Both companies expect 2009 global mobile device shipments to dip about 10 percent from 2008's 1,190 million to around 1,070 million.

The news slammed Nokia's share price, which fell by 13.4 percent to €9.61 on the Helsinki stock exchange. Sony Ericsson, though, has been in trouble for some time now, and investors weren't expecting anything different. As a result, Ericsson AB (Nasdaq: ERIC), which holds a 50 percent stake in the mobile handset firm, saw its share price dip by less than 1 percent on the Stockholm exchange to 76.10 Swedish Kroner.

Nokia sees the current downturn as an opportunity to transform itself. CEO Olli-Pekka Kallasvuo told analysts on today's earnings conference call that the industry is "at the start of a major transformation" that will see the lines between mobile devices and PCs blur.

As a result, Nokia is accelerating the pace at which it is basing its R&D efforts more on customer feedback and the impact of the Internet and media services, stated the CEO, who added that the vendor has been hiring new staff with new skills to help speed up its strategy.

"We need to change our operating model... [We will] start with the user experience" and make that the basis of Nokia's R&D efforts, rather than develop new products and services in the hope they will fit customers' needs."

The company has even set itself a target by which to gauge whether this approach is a success or not. Kallasvuo noted that Nokia currently has 46 million customers that are repeatedly using Nokia services -- the company is calling them "active users."

Nokia aims to have 80 million of these "active users" by the end of this year, and have 300 million by the end of 2011. "Deepening our relationship [with consumers] will help us work more effectively... this is the new battleground."

If that's the new battleground, it would be easy to say that Apple Inc. (Nasdaq: AAPL), with the success of its App Store, has stuck a very big flag in the turf and is celebrating an early advance.

— Ray Le Maistre, International News Editor, Light Reading

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