Nokia Phones In a Profit

Nokia Corp. (NYSE: NOK) today announced double-digit profit growth for the first quarter of 2006, thanks in large part to sales of cool handsets. But the future of the Finnish giant's CDMA products is iffy.

Net sales in the period ending March 31 grew some 29 percent to €9.5 billion ($11.73 billion), while net profit was €1.05 billion ($1.3 billion), up 21 percent from the same period in 2005.

"I'm very happy with our profitability in the first quarter," said Jorma Ollila, CEO of Nokia. "This is my last results conference call as CEO of Nokia, and it feels great to leave after a quarter like this one." (Ollila is leaving the company in June, for a gig as non-executive chairman of Royal Dutch Shell. He will be succeeded by Olli-Pekka Kallasvuo, the head of Nokia's mobile phone unit.)

The company shipped 71.5 million devices in the quarter, equaling 35 percent of total worldwide handset market share, according to Nokia officials.

In the mobile phone division, first quarter net sales grew 30 percent to €5.9 billion ($7.3 billion), compared with €4.5 billion ($5.5 billion) in the first quarter 2005. Operating profit grew 25 percent, even with the inclusion of a €14 million ($17.2 million) initial restructuring charge, related to plans for a new company that will comprise the CDMA mobile device businesses of Nokia and Sanyo Electric Co. Ltd. (Nasdaq: SANYY)

Speaking of CDMA, Nokia acknowledges that its licensing agreement with Qualcomm Inc. (Nasdaq: QCOM) might come to an end next year, per a report that Qualcomm filed to the U.S. Securities and Exchange Commission yesterday. In part, Qualcomm says the following: "We have a license agreement with Nokia Corp. which in part expires on April 9, 2007. While the parties have been in discussions to conclude an extension or a new license agreement beyond that time period, there is no certainty as to when we will be able to conclude an agreement or the terms of any such agreement."

The end of the agreement could mean bad news for anyone hoping to buy or sell Nokia equipment that supports CDMA. Qualcomm owns the majority of CDMA patents. However, Qualcomm uses Nokia technology in some of its products, too.

The two companies have a tenuous history. In November, Qualcomm sued Nokia for patent infringement; this followed Nokia's complaint to the European Commission that Qualcomm engaged in unfair business practices. (See Qualcomm Sues Nokia.)

Nokia addressed the issue briefly during its earnings call. "This is a very big topic," Ollila said. "We are committed to license our IPR [intellectual property rights] on nondiscriminatory terms...we expect others to respect the similar principles."

Despite the terseness, analysts expect the companies to work out their differences in the coming year. "It's my view that Qualcomm and Nokia need access to each other's IPR portfolio and cannot really do business for long without some kind of agreement," says Inder Singh, senior VP of networking and wireless at Prudential Equity Group LLC . "I feel they should be able to reach an agreement on a renewal, since they have already begun negotiations. The two need each other's technology if either wants to benefit from the [wideband] CDMA upgrade cycle, so they just need to find a win-win technology licensing agreement they can both feel good about."

Back to the earnings: In Nokia's Multimedia division, first quarter 2006 net sales increased 55 percent to €1.8 billion ($2.2 million), compared with €1.1 billion ($1.35 billion) in the first quarter 2005. Net sales increased year on year in all regions except North America, with the strongest growth in China.

In the networking division, net sales increased 19 percent year-on-year to €1.7 billion ($2.09 billion). Ollila said this was due in part to a major managed services deal with the Indian carrier Hutchison Essar . However, operating profits in the networks division decreased 33 percent from the previous year to €149 million. Officials blamed this on "regional mix and strong price competition."

The only real pock mark in an otherwise happy earnings announcement was the Enterprise Solutions division. Net sales for the unit decreased 39 percent to €186 million ($229 million), compared with €307 million ($378 million) in the first quarter 2005. Net sales were down in all regions except China and North America, officials said. This was due in large part to delays in shipping of the company's e Series phones, aimed at enterprise customers. Officials said they don't expect the enterprise division to fare very well in the second quarter, either.

"The Nokia e Series products are not expected to reach big volumes until the third quarter," said Rick Simonson, CFO of Nokia, in a conference call with analysts.

Here's how Nokia's results break down:

Table 1: Nokia's first quarter by division
EUR million Q1/2006* Q1/2005** Change (%)
Net sales 9 507 7 396 29
Mobile Phones 5 869 4 527 30
Multimedia 1 758 1 133 55
Enterprise Solutions 186 307 -39
Networks 1 699 1 431 19
Operating profit 1 367 1 118 22
Mobile Phones 1 085 869 25
Multimedia 323 155 108
Enterprise Solutions -66 -9
Networks 149 221 -33
Common Group Expenses -124 -118
Operating margin (%) 14.4 15.1
Mobile Phones (%) 18.5 19.2
Multimedia (%) 18.4 13.7
Enterprise Solutions (%) -35.5 -2.9
Networks (%) 8.8 15.4
Net profit 1 048 863 21
Basic 0.25 0.19 32
Diluted 0.25 0.19

— Carmen Nobel, Senior Editor, Light Reading

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