Economic crisis casts a long shadow on Nokia fourth-quarter result

Sales of handsets declined in all market areas; job-cuts in prospect

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The last three months of 2008 saw the world's largest manufacturer of mobile phones Nokia reduced to mere mortal status.
      The result for Q4/2008 in the Devices and Services division - responsible for handset sales - was the worst on record during the current decade.
      Operating profit declined by around EUR 1,600 million to less than a billion euros, which represents a drop of more than 50% from the last three months of 2007.
      In spite of the collapsing profit figures, the plain truth is that Nokia's operating profit in this branch of the business was greater than that of its three largest competitors combined.
     
Mobile phones accounted for some 64% of Nokia's aggregate net sales, and hence the failure in this department was enough to put a severe dent in the overall result, even though improved figures from Nokia Siemens Networks and Navteq did a little to soften the blow.
      Nokia predicts that the current year will be a difficult one. The company anticipates a 10% decline in global handset sales relative to 2008.
      In order to position itself for a worldwide decline in sales, Nokia intends to reduce costs by around EUR 700 million in the course of this year.
      According to President and CEO Olli-Pekka Kallasvuo, this means that a sharp eye will be cast on all cost items, and there will be an impact on staff numbers.
      As one part of the savings programme, Nokia announced on Thursday that all this year's salary increases have been frozen.
      The Board of Directors is recommending to the shareholders' meeting that a dividend of EUR 0.40 be paid on 2008, down by EUR 0.13 on the previous year.
     
One obvious reason for the weakened result from the mobile phone giant is the sudden slamming on of the brakes in handset sales from the early autumn onwards.
      Telecoms operators, wholesalers, and the large retail chains all responded to the economic bad news by pulling in their horns and reducing orders from manufacturers, and by attempting to whittle down their inventories.
      In the current chilly climate, having a lot of capital tied up in unsold stock is a very risky exercise.
      Normally, the Christmas trade has been a boom time for mobile phone sales, with dealers ramping up their stocks.
     
Speaking on Thursday, Kallasvuo said he believed the emptying out of inventory shelves would continue into the current year, and hence Nokia does not anticipate any improvement in profitability in the first months of 2009, but only in the latter part of the year.
     
Another significant factor in Nokia's present problems is the rapid fluctuations we have seen in the currency markets, in part a knock-on effect of the nerve-racking economic conditions.
      For instance Nokia has bought a lot of components from Japan in yen-denominated deals, and the Japanese currency has strengthened dramatically against the euro of late.
      By the same token, currency devaluations in emerging markets such as Brazil, Mexico, Indonesia, and Thailand forced Nokia into cutting prices in order that its phones would remain competitive.
     
The South Korean manufacturers Samsung and LG were the only large players in the market to actually see increased sales in the last part of 2008, and in part this was attributable to a fall in the local currency, the won, which gave the Koreans the opportunity to move aggressively in the market.
      Above all, Nokia took a hit in the important Chinese market, where sales were down by 36%. In the Middle East and Africa the decline was 23%, and in North America 20%.
      Sales in Europe showed a more moderate fall of 7%.
     
Nokia's figures prompted investors to shed the company's shares, and the Nokia stock fell in Helsinki on Thursday by just over 9%, dragging down the OMX Helsinki all-share index by just over 3%.
      On Friday morning things had stabilised somewhat, though trading was choppy, and at 13:00 the share was down around 1% on its opening price.


Previously in HS International Edition:
  Nokia result plummets in fourth quarter (22.1.2009)

Links:
  Nokia: Q4/2008 figures and report
  NASDAQOMX Nordic - Nokia share price information

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