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Smartphones, replacements ring in profits for Nokia

Smartphones, replacements ring in profits for Nokia
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First Published: Tue, Jul 17 2007. 01 06 AM IST
Updated: Tue, Jul 17 2007. 01 06 AM IST
Helsinki: Nokia Oyj, the world’s largest cellphone maker, disappointed shareholders twice in the past three years by failing to keep up with consumer trends. This time, the company may have it right.
Models such as the 550 euros N95—it retails for Rs34,283 in India—are paying off as customers trade up from starter phones in India and China. The shift is restoring profit margins that CEO Olli-Pekka Kallasvuo sacrificed last year when he focused on cheaper phones to win sales in those countries, where Nokia is the dominant brand.
The shares have climbed 41% this year to 21.76 euros. Investors who bought at previous peaks, in early 2004 and again in 2005, were disappointed when competitors took away sales with new designs Espoo, Finland-based Nokia ignored. The shares remain at one-third their peak of 65 euros in June 2000.
“The miss in clamshells in 2004 and then in slim phones have been the main disappointments,” said Marko Alaraatikka, a fund manager at Evli Investment Management in Helsinki, which oversees about €6 billion, including Nokia shares. “I haven’t heard anybody saying the stock will rise to 65 euros again, but I think it could, up to 24 euros or 25 euros.”
Nokia is touting the N95, with a dual-sliding cover, GPS navigation and a five megapixel camera, and the 250 euros 6300 slim phone, which retails for Rs9,450 in India, to affluent users in Mumbai and Beijing, as well as the UK and Europe. The popularity of these handsets will help prop up Nokia’s average selling prices, said analysts such as Kulbinder Garcha at Credit Suisse in London.
Profit gains
In China, Nokia’s biggest market, the company’s unit share was about 42% in the first quarter, according to Framingham, Massachusetts-based researcher IDC. In India, Nokia has about two thirds of the market, say company executives. The company doesn’t break out India figures from the Asia-Pacific region.
Investors underestimate the impact the new phones will have on Nokia’s profit, said Garcha, who has a “trading buy” rating on the shares.
Amid a global slump in handset prices, Nokia exploited its size to lower production costs more than rivals, and eked out an expansion of its gross profit margin to 33.1% of sales in the first quarter from 32.4% in the fourth. Motorola Inc., the second-largest phone maker, had a gross margin of 26% and its mobile-phone unit posted an operating loss.
As prices stabilize, at least four analysts have boosted second-quarter profit estimates for Nokia in the past month. The company, which booked a “significant” one-time cost in the second quarter from job cuts at its network equipment venture, is expected to report profit of €1.06 billion, or 28 cents a share, based on the average of 36 estimates compiled by Bloomberg. Nokia had a profit of €1.14 billion, or 28 cents, a year earlier, including a gain from an asset sale. Sales jumped 31% to €12.9 billion from a year earlier, according to the average estimates. The company will report second-quarter results on 2 August.
“Nokia is by far the most efficient in logistics and distribution,” said Mika Heikkilae, chief investment strategist at Arvo Omaisuudenhoito in Helsinki, which oversees about €370 million.
The company has also capitalized on missteps at Motorola, which said earlier this month that second-quarter sales will miss its forecast, the third time the company has fallen short of its own predictions this year. The Schaumburg, Illinois-based company failed to bring out devices with more features to replace the best-selling Razr, and is losing sales to Nokia, Samsung Electronics Co. and newcomer Apple Inc. Motorola reports results on 19 July.
China, India
The shares, at their highest in five years, may reach 25 euros, said Ehud Gelblum, an analyst with JPMorgan Securities Inc. in New York. Motorola shares have dropped 13% this year.
Nokia lowered its prices last year in emerging markets to keep Motorola’s share from rising and ensure scale advantages, Evli’s Alaraatikka said. Motorola’s decision to drop aggressive pricing this year should boost Nokia’s profits, said Gelblum, who rates the shares “overweight”.
Nokia controlled 36.2% of the global market in the first quarter, up from 33.2% a year earlier, according to researcher Strategy Analytics Ltd. The company had said in May that its share would rise in the second quarter.
Nokia’s sales in China and the Asia-Pacific region each jumped 39% last year, after Kallasvuo focused on selling entry level phones. India, the world’s fastest growing cellphone market, is Nokia’s third largest territory.
With Nokia now entrenched, Kallasvuo’s bet on India and China may pay off. The company’s gross margin, the percentage of sales left after production costs, will increase to more than 35% in the fourth quarter, mainly because of phones such as the N95 and 6300, Garcha said.
India’s economy grew at the fastest pace in almost 20 years in the 12 months ended 31 March, and China’s retail sales jumped 15.9% in May, the fastest pace in three years.
The 6300 model, aimed at mid-tier customers, started shipping in the first quarter and was the second most sold cellphone in China in April in its price range.
That’s helped bolster average prices for phones Nokia sold in China. They rose 3.8% to 81 euros in the second quarter from the first, Garcha had estimated in a 6 June note.
As customers move up in price range, Nokia is benefiting from the users’ tendency to stick with a brand whose products they have already learned how to use, analysts and investors, including Heikkilae said.
Replacement phones will make up 60% of emerging- market sales this year, up from 50% in 2006, according to Nokia. Globally, the replacement market is expected to climb to 80% by 2010 from current 65%.
“Replacements will give the basis for the future and the market leader should benefit the most from it,” said Mika Heikkinen, fund manager at FIM Asset Management in Helsinki, which manages €8.5 billion, including Nokia shares.
Investors, including Alaraatikka, are aware that Nokia has disappointed investors before. After rising more than 650-fold from 1992 to mid-2000, the shares fell to as low as €10.55 in March 2003.
Momentum shift
The shares recovered to reach €19.09 a year later, then dropped by more than half in four months to €8.83 as the company was slow to introduce phones that flip open like clamshells. They dropped again in July 2005 when Motorola gained share with slim models such as the Razr.
Now the momentum has swung back to Nokia, which charged into emerging markets early and so far has maintained its lead. Nokia started to address the “slim issue” in late 2006, when it unveiled the 6300 model and discussed its “Barracuda” model, a 9.9mm thick phone that will go on sale in the third quarter. In May, Nokia introduced its slimmest device yet, the 6500 Classic that also allows faster Internet access. The N95, which started shipping at the end of the first quarter, is the best-selling device in the UK and No. 4 in Western Europe, Nokia says.
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First Published: Tue, Jul 17 2007. 01 06 AM IST
More Topics: Nokia Oyj | N95 | Espoo | Motorola | Corporate News |