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Nokia: What Squeeze?

Nokia Corp. (NYSE: NOK) would have us believe that size does matter: In its latest mid-quarter trading update, the company says it has won additional market share in the global handset market and now commands 38 percent of the market (see Nokia Gains Market Share).

That gain, however, has come with increased volume sales at a lower-than-usual average price. "We are selling more of the so-called volume categories," Olli-Pekka Kallasvuo, Nokia's CFO, told analysts during its conference call today. "The ASPs [average selling prices] obviously are down year-on-year and sequentially."

Overall, the company expects its second-quarter net sales to be down year-on-year by between 2 percent and 6 percent, to about €6.9 billion to €7.2 billion (US$6.5 billion to $6.8 billion). Earlier guidance had called for growth of up to 7 percent.

All the same, the financial markets reacted favorably to Nokia's prediction that it will hit its earnings per share target. Nokia's share price on the NYSE was up nearly 8 percent early afternoon.

Nokia said its handset unit sales had risen by more than 10 percent year-on-year, but revenues had only increased between 0 percent and 4 percent over the same period. And although Nokia believes the overall handset market will grow by 5 percent in the second quarter of 2002, from a base of 89 million units, the company declines to say what the overall income from these handsets is likely to be -- an interesting omission.

The real issue for Nokia, however, isn’t the size of the handset market but the amount of cream on it. Analysts at the London offices of Nomura Holdings Inc. suspect Nokia "has been able to continue to squeeze its capacity-rich suppliers in order to make up the shortfall," and they stick to the EPS guidance of €0.18 to €0.20. However, they’re gloomy about the future. Nomura has a Sell recommendation on Nokia stock, saying "there will be little news to lift a share price that seems to have no bottom."

Nokia says its good financial performance stems from manufacturing efficiencies, not gouging its component suppliers. "We are in long-term partnerships with component suppliers," says a Nokia spokesperson. "We are obviously in a situation where prices need to be competitive, [but] getting components comes first, then the small prices."

What makes analysts at Nomura question where efficiencies could really be coming from is Nokia's spookily steady operating margin. For the handset division, this was 21.8 percent in Q1, and it is expected "be above" 20 percent in Q2 as well, despite the fact that Nokia has seen its mix slide toward the cheaper models.

However, this does not mean that Nokia is aiming to pile 'em high and sell 'em cheap. CFO Kallasvuo stressed that "the pricing strategy as such has not changed. We continue to believe that gaining market share in this business and maintaining high profitability are not mutually exclusive."

He told analysts that Nokia was going through "an unprecedented transition in its product portfolio" and argued that its ASPs will start to climb again in the second half of the year, following the launch of new models. Kallasvuo said the company made progress in all of the markets and in all standards and categories. The suspicion remains, however, that Nokia is losing high-end customers to rivals such as Samsung Electronics.

In the mobile infrastructure sector, Nokia says it is still aiming for a 35 percent share. But whilst the vendor had earlier expected infrastructure sales in Q2 to shrink by 5 to 10 percent year-on-year, that estimate has dropped to a likely fall of 20 to 25 percent. The U.S. market, where Nokia is not a big presence, is said to be steady. The main areas of concern are the key GSM markets of Europe and Asia.

Nokia's full second-quarter results will be released on July 18.

— Ouida Taaffe, special to Unstrung
http://www.unstrung.com
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