THURSDAY: Nokia result exceeds gloomy analysts' forecasts, but outlook remains cloudy while smartphone sales lag behind the competition

Definitive agreement with Microsoft signed ahead of schedule

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The problems surrounding mobile phone manufacturer Nokia did not lift during the first quarter of 2011, although the interim report issued today (Thursday) came in ahead of analysts' forecasts.
      The company's non-IFRS operating profit for the period stood at EUR 704 million, down 14% on the EUR 820 million in Q1/2010.
      Operating profit for the key Devices and Services unit was also down 14% at EUR 694 million on net sales of EUR 7,088.
      At 9.8%, the margin was nevertheless appreciably higher than the 8.6% that market analysts had predicted.
      Aggregate net sales, including NAVTEQ and Nokia Siemens Networks, were up 9% at EUR 10,400 million.
     
Diluted earnings per share stood at EUR 0.13, whereas the 31 analysts polled in advance by the Reuters news agency had anticipated EPS would come in at EUR 0.10.
      After opening in the morning at EUR 5.96, an hour on from the announcement of the quarterly figures the Nokia stock was up nearly 3% to EUR 6.10.
      It then drifted gradually downwards, before gathering some momentum once more to be up around 2.8% at 16:00.
     
Nokia was also upbeat in announcing the signing of a definitive agreement with Microsoft on the partnership that it hopes will result in "a new global mobile ecosystem, utilizing the very complementary assets of both companies".
      Completed ahead of schedule, the agreement is consistent with the original joint announcement made in February, and it takes the company one step closer to the eagerly-awaited unveiling of the first Nokia devices to be built on the Windows Phone platform that Nokia is henceforth to adopt as its principal operating system..
     
This was basically the extent of the good news, and investors were prevented from showing much more enthusiasm for the Nokia stock in Helsinki by warnings from CEO Stephen Elop that the next three months would be "more challenging" than the last.
      "In the first quarter, we shifted from defining our strategy to executing our strategy. On this front, I am pleased to report that we signed our definitive agreement with Microsoft and already our product design and engineering work is well under way. Following a solid first quarter, we expect a more challenging second quarter. However, we are encouraged by our roadmap of mobile phones and Symbian smartphones, which we will ship through the balance of the year. We are fully focused on delivering the needed accountability, speed and results to positively drive our future financial performance", said Elop.
     
The company expects to see Devices & Services net sales of between between EUR 6,100 million and EUR 6,600 million in the second quarter of 2011, with non-IFRS operating margin in this sector coming in at between 6% and 9% for Q2 and for the year as a whole.
      Profitability is weakened in particular by the continued poor showing in high-end smartphones, by a shortage of components following the catastrophe that overwhelmed Japan in mid-March, anticipations of a greater impact from the lack of dual-SIM devices than was experienced in the first quarter, and also by a lower contribution from new products in Q2/2011 compared to the reported period, as the company plans to backload deliveries of new models in the second half of the year.
     
Nokia sold 108.5 million handsets in the first quarter, up 1% year-on-year and down 12% sequentially, although this is understandable, since the fourth quarter with its Christmas sales is always a bumper period.
      Sales volumes of converged mobile devices (the all-important smartphones and mobile computers) were at 24.2 million units, up 13% year-on-year and down 14% sequentially.
      The mobile device ASP (average selling price, including services revenue) was EUR 65 in Q1/2011, up from EUR 62 in Q1/2010 but down from EUR 69 in Q4/ 2010.
     
Market share fell 4%-points year-on-year and 2%-points from the fourth quarter of 2010 to stand at 29%, based on estimated overall industry mobile device volumes of 374 million units.
      Cheaper rival products and the popularity of other smartphones such as the iPhone, Blackberry, and Android devices are cutting into Nokia's earlier dominance of the market.
      Smartphone mobile device volumes worldwide in the first quarter of 2011 increased to 92.3 million units, and in this segment Nokia's preliminary estimated share of the market was 26%, compared with an estimated 41% at the beginning of 2010 and an estimated 31% in the fourth quarter of last year.
     
Doing something about these numbers - which is where the serious margins are made - will continue to occupy minds in Nokia's HQ for a good while to come, with the obvious hope being that the marriage with Microsoft produces a range of devices that can finally start to compete favourably with the high-end opposition.


Previously in HS International Edition:
  Analysts anticipate Nokia´s operating profit will weaken by about one-third during Q1/2011 (18.4.2011)
  Nokia starts co-determination talks with staff as planned (15.4.2011)
  Nokia´s new strategy prompts suspicions among investors and consumers alike (15.2.2011)

Links:
  Nokia Interim Report Q1/2011
  Nokia and Microsoft sign definitive agreement ahead of schedule
  NasdaqOMX Nordic: Nokia share in Helsinki

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