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Nokia: High-End Hurt

Nokia Corp. (NYSE: NOK) shares tumbled today on a prediction, made during its first-quarter earnings report, that the overall device market will decline in value in euro terms this year compared to 2007.

Analysts say the Finnish phone giant may have to consider pushing low-end sales if people in the U.S. and other developed markets aren't going to be spending hard-earned dollars on the latest smartphone this year.

Nokia sold 115.5 million handsets in the first quarter of 2008, raising its worldwide market share to 39 percent from 36 percent a year earlier. This easily maintains the company's status as the No. 1 phone maker in the world but didn't quite match analyst estimates of a 40 percent share for the quarter.

"Smartphones were disappointing," notes Richard Windsor at Nomura Securities . The weakness of the U.S. dollar against the euro has also helped to deepen Nokia's stateside blues.

Overall, the company is still predicting a 10 percent rise in overall sales of mobile phones. These, however, will mostly be cheaper handsets sold in booming markets like India and China.

India and China already make up 75 percent of the company's sales, with China growing over 30 percent year-on-year. Compare that to the U.S., where sales nearly halved in the first three months of this year.

The big problem for Nokia, and by inference all the other major phone makers, will be to maintain its margins on devices its sells in hugely competitive markets like India.

"The fact that average selling prices in the really high volume, emerging markets, is falling, helped to depress their overall earnings," says Jack Gold at J. Gold Associates. "What is important is not only if they can increase sales, but if they can be a low-cost producer and keep up their margins at the lower averages."

Gold also believes that competition with other high-end manufacturers in the U.S. could be a factor for Nokia. "At the high end, which is a relatively small portion of the overall market, competition from iPhones and RIM (and Samsung and LG) kicked in."

Nokia reported a net profit of $1.9 billion in the first quarter of 2008, 25 percent more than $1.6 billion in the same period in 2007. Revenue grew 28 percent to $20 billion from $15.6 billion in 2007.

Nonetheless, Nokia's shares fell more than 13 percent, to $28.95, on the firm's gloomy cellphone forecast.

— Dan Jones, Site Editor, Unstrung

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