Nokia's Profits Up 16%

Further cementing its position at the top of the handset food chain, Nokia Corp. (NYSE: NOK) this morning posted better-than-expected fourth quarter 2006 results largely bolstered by the recovery of its mobile phone unit after several less than stellar quarters.

The Espoo, Finland-based vendor reported fourth quarter net profit up 19 percent year-on-year at $1.65 billion. Revenues rose 13 percent to $15.22 billion for the fourth quarter compared to the last three months of 2005.

The vendor reported a 27 percent bump in handset shipments for the quarter, shipping 106 million units in the last three months of 2006. Nokia's closest rival, Motorola, sold 65.7 million handsets in the same period, which represented an increase of nearly 50 percent year-on-year for the Schaumburg, Ill.-based company. But Motorola's margins fell sharply and its profits dropped 48 percent on the quarter. (See Motorola Profit Falls 48%.)

Analysts say Nokia is ramping up its device performance by aggressively marketing towards fast-growing developing markets such as China and India. "Nokia is poised to dominate the emerging markets, such as India, with new mobile devices designed specially for the market," notes Ginny Lee at Technology Business Research Inc. (TBR) . "The company has invested heavily in emerging geographical region through investments in India with a manufacturing plant in Chennai."

The only issue with Nokia's focus on these vast new customer bases is that, since it cannot charge as much to the typical consumer as it would in the U.S., Europe or the highly developed parts of East Asia, the company takes a hit on average selling price [ASP]. Finding ways to make decent margins in emerging markets is critical to the future of the major cellphone manufacturers.

The firm saw its ASP for its gagdets fall to $115 this quarter. "ASPs for [both Nokia and Motorola] are being sacrificed as the battle heats up to gain market share in developing countries," says Lee.

In fact, at the moment, the main areas where Nokia could be said to be weak is in North America and the higher-end "feature-phone" market. The company saw sales fall 34 percent to $683 million in North America this quarter.

The Finnish giant has consistently been outperformed by hometown hero Motorola in the U.S. over the last few years, particularly after the introduction of the RAZR in 2004. (See The Perils of Being Slim.)

The emergence of Sony Ericsson Mobile Communications as a multimedia phone contender, on the other hand, is a new threat to Nokia's dominance. Sony Ericsson last week reported fourth-quarter net profit up 144 percent to $578 million compared to the same quarter a year ago. Revenues were up 60 percent from $2.99 billion to $4.89 billion year-on-year. Sony Ericsson said that much of this growth had been driven by fancy phones such as its "Walkman" MP3 and "Cybershot" camera models.(See Motorola to Cut Handset Staff?.)

In contrast, Nokia is still experiencing delays with getting high-end product out the door. Its multimedia unit saw sales climb a mere 6 percent for the quarter. (See Nokia: No Enterprise Love.)

Despite these setbacks, however, analysts are largely painting this as a breakthrough quarter for Nokia, when much of the strategy that it talked up throughout 2006 has started to bear fruit.

"Nokia's emerging markets dominance strategy is finally beginning to pay off," writes Sandeep Malhotra in a Merrill Lynch & Co. Inc. research note.

— Dan Jones, Site Editor, Unstrung

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