Nokia Q1/2008: Weak dollar eating into value of handset market

Nokia share price slashed in spite of fundamentally sound first quarter figures

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Nokia’s forecast that the euro-denominated value of handset sales would decline in 2008 caused the company’s stock to go into freefall on Thursday.
      By the close of trading on the day that the mobile phone giant announced its first-quarter results, the stock had shed 13.6% of its value and nearly EUR 11 billion had been sliced off the market capitalisation.
      Fundamentally, Nokia’s performance over the first three months of the year was sound, and more or less in line with expectations. Net sales grew to EUR 12.7 billion, and net profit was EUR 1.2 billion.
     
However, it was the change of tune on forward sales prospects that did the damage.
      As recently as January of this year, Nokia was anticipating that the value of the handset market would increase in 2008. The company’s President and CEO Olli-Pekka Kallasvuo commented that the forecasting turnaround was a product of the falling US dollar and slower economic growth in the U.S. and parts of Europe.
      The dollar has weakened markedly against the euro in the early part of 2008. On Thursday a euro would buy you practically USD 1.60, whereas at the turn of the year it was still around USD 1.45.
     
Kallasvuo noted that had the currency markets had remained stable the company would still be talking about expectations of market growth in euro terms.
      The weakened dollar was also to be seen in Nokia’s net sales, since around half of the company’s sales revenue comes in dollars.
      In any event, the markets were shocked and stunned at the change in the forward picture, even though of itself Nokia’s result for January to March left little to be desired.
      Group operating margin stood at 14.7%, up year-on-year from 13.6% in Q1/2007, though down from 15.9% in Q4/2007, and diluted earnings per share stood at EUR 0.32 (EUR 0.38 excluding special items), against EUR 0.25 twelve months previously.
     
The profitability of handset sales weakened slightly from the stellar levels of the end of last year, but operating margin for “Devices and Services” (Nokia's Mobile Phones, Multimedia and Enterprise Solutions) was still an excellent 20.3% of net sales.
      This was even in the face of a decline in the average selling price (ASP) for handsets, down from EUR 83.00 in 4Q/2007 (and as much as EUR 89.00 in 1Q/2007) to EUR 79.00.
      Nokia Siemens Networks, on the other hand, are still struggling, and the unit showed a first quarter operating loss of some EUR 74 million.
      Kallasvuo was nevertheless relatively upbeat about the network side of the business, given the fact that the company is still only in its infancy and much energy has had to go into fusing the two large organisations.
     
Kallasvuo was equally sanguine about the news that Nokia’s handset market share had slipped from 40% in late 2007 to 39%.
      He put it down to normal seasonal fluctuations: companies strong in the European market prosper over the Christmas season, while those strong in Asia benefit from the string of celebrations in that part of the world in the early part of the year.
      Nokia expects the market share figure to climb once more in the course of the current year.
     
It has been feared that the recession looming in the US will be reflected in lower consumer demand on this side of the Atlantic.
      Nokia’s year-on-year change in the volume of handset sales in Europe was up by just 7.5%, compared with sizeable double-digit increases noted in all other geographical areas except North America.
      When set against the outstanding Q4/2007 figures, European sales volume not surprisingly dipped by around 30%.
     
Speaking to analysts on Thursday, Kallasvuo was reluctant to draw any far-reaching conclusions on the European outlook, pointing out that it was a mixed bag, with Russia and some Central European countries still doing very well indeed. International economic forecasters have warned of the impact on consumer behaviour of the steep rise in food prices in the developing world.
      When food staples become more expensive, the knock-on effect is to reduce consumers’ spending potential.
      Kallasvuo countered that the rising foodstuffs bills had not thus far been taking away customers, citing the case of India, where nine million new mobile phone users are minted every month, and where the phone is now seen as something of a necessity, putting it relatively high on the list of consumers’ priorities.
     
One subject that was bound to surface in the wake of the Nokia results was the impact on sales in Germany of the calls for a boycott of its products after the announced closure of the Bochum plant.
      According to figures received by Helsingin Sanomat, Nokia lost about 4%-points of its market share in Germany as a result.
      At the end of last year, Nokia enjoyed a 40% share of Germany’s handset market.
      By February, after the announcement that Bochum was to be shut down in favour of a new plant in Romania, the figure dipped to around 35%.
     
Even when one considers that market share in Western European territories is at a peak over the Christmas season, the drop was considerable.
      Olli-Pekka Kallasvuo believes the effects will be of short duration, and that the situation will normalise as the year goes on.
      Nevertheless, the news of the decline in market share is quite dramatic, given that Germany is one of those countries where consumers get a phone as a “free add-on” with a mobile subscription.
      This means in effect that consumers have had to specifically reject a Nokia phone and demand from operators such as Deutsche Telekom or Vodaphone another brand in its stead.
     
By late morning in Helsinki on Friday, Nokia’s shares had clawed back around 1.5%-points of the previous day’s losses.
      The OMX Helsinki index, which tumbled more than 5% on Thursday, was narrowly back in positive territory.


Previously in HS International Edition:
  Nokia offers Bochum workers massive social package (9.4.2008)
  Anti-Nokia sentiment unites Ruhr region in massive protest (23.1.2008)

Links:
  Nokia Q1/2007 results
  Nokia on the Helsinki Exchanges

Helsingin Sanomat