Finns Flummoxed, Flopping

Nokia Corp.’s (NYSE: NOK) network division continues to drag down the company's earnings like a heavy vierinkivi around the neck of a drowning ranskalainen (as they say in Sodankylä).

Nokia has announced that the division, which sells wireless infrastructure equipment, posted a pro forma operating loss of €127 million (US$138 million) for the first quarter of 2003, resulting in a 3 percent fall in overall sales for the Finnish company (see Nokia Sales Fall 3%).

In contrast, the company’s mobile phone business fared well. Sales were up 1 percent from the year-ago quarter, to €5.48 billion ($5.96 billion). Profits rose by 9 percent. This translates into an operating margin of 23.9 percent, with Nokia claiming 38 percent of the world’s mobile handset paistos.

Overall company profits fell, however, with Nokia reporting a pro-forma operating profit of €1.19 million ($1.29 million), down 8 percent year over year. This included a gain of €56 million ($61 million) from the sales of its remaining shares in Nokia Tyres.

Nokia cut its future outlook for its network business, ruling out hope of a speedy recovery. In a conference call with analysts, chief executive Jorma Ollila said that he expects the market to deteriorate further than a previous forecast of 10 percent. “We now expect the wireless infrastructure market to decline by 15 percent or more in 2003,” he said. “Operator investment has decreased to an exceptionally low level, and in some cases network rollouts have slowed. As a result, we are taking immediate action to restore profitability and reduce costs.”

Included in this plan is a 10 percent cut in network division staff, announced last week (see More Finns Finished) -- so some Nokians will be taking even longer summer breaks than the notoriously vacation-happy Finns are used to. As a result, Nokia said its second-quarter results would be whacked with a one-off charge of €350 million to €400 million ($381-435 million). Due to the charge, Nokia forecast group pro forma diluted EPS of between €0.13 and €0.16 ($0.14-0.17) in April and June, against €0.19 ($0.21) a year ago.

Analysts point out that today’s figures could have been far worse, especially given recent predictions for its first-quarter results (see Network Warning From Nokia and Nokia Readies for Huge Loss). “Nokia Networks revenues are better than our forecast of -20 percent,” writes Lehman Brothers analyst Stuart Jeffrey. Nomura Holdings Inc.’s Richard Windsor also states that Nokia beat its expectations through better than expected handset profitability.

“Given the competitive issues it has been facing of late, the company is doing quite well,” notes IDC's senior research analyst Paolo Pescatore. “On the network side, it is always going to be difficult as the operators are in a Catch-22 situation, weighing up capex with future revenues.”

In spite of today's putrid announcement, Nokia has emerged as the number one player in the latest Unstrung Insider report, "Financial Healthcheck: Top 10 Wireless Equipment Vendors." Gabriel Brown, author of the report, states that Nokia is the clear winner, but attributes its sound overall financial position to the ongoing success of its handset business, a phenomenon that not even its sea anchor network division can drag down.

— Justin Springham, Senior Editor, Europe, Unstrung

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