Nokia Defies Gravity

Nokia said July 17 that it increased sales, shipments, and operating margins in the second quarter, despite flat growth in Europe, exchange rate movements, and a continued decline in the average selling price per phone. The news buoyed its stock, which surged nearly 8%, and gave a lift to the entire mobile industry, suggesting that despite global economic uncertainty, demand for mobile phones remains strong.

Indeed, Nokia estimates that global handset sales grew 15% year-over-year in the quarter, to 303 million units, while its own shipments climbed 21%. That helped banish concerns about the health of the handset market raised earlier this year after a downbeat growth estimate from Texas Instruments, later reinforced when Sony Ericsson reported disappointing quarterly results in June.

Partly because some of its rivals (especially Motorola) are stumbling, Nokia’s market share in the second quarter topped 40%, up from 39% in the previous quarter and 38% a year earlier. Nokia said the growth in market share was driven by its strong position in emerging markets and a slight improvement in North America.


The numbers did contain a few worrisome notes. Despite the 21% increase in unit shipments, Nokia's revenues from handsets and services actually declined by 1%--an indication of just how much prices are falling. And Nokia's reported net profit fell 61% year-over-year due to restructuring charges.

Still, on the whole there were more positive than negative signs. A big part of the company's growth in the quarter came from Nokia Siemens Networks, its telecom equipment joint venture with Siemens, whose sales surged 18%, to more than €4 billion. That's an indication telcos are putting money into building and upgrading their wireless networks--also good news for rivals like Ericsson and Alcatel-Lucent.

What's more, even in a tough environment Nokia managed to boost its operating margins to 20.1% in the second quarter, up from 19.4% in the same period last year. That's impressive, analysts say, because the average selling price of a Nokia phone fell in the quarter to €74 euros ($118), down from €79 in the first quarter. One reason, of course, is that a greater proportion of sales are coming from emerging markets, where people often pay $30 or less for a new handset.

Nokia's strong position in emerging markets also is shielding it from being hit as hard as competitors such as Sony Ericsson by flat sales growth in Europe, says Geoff Blaber, an analyst with CCS Insight, a mobile consultancy. In short, Nokia "is well positioned to respond to the challenges that the current market is facing," says Carolina Milanesi, research director, mobile devices at technology consultancy Gartner.

Nokia is ticking all the boxes for what's hot in mobile applications, such as music, maps, Internet access, and social networking, Milanesi says. That's important because the big winners in the future will be those players who successfully integrate services and hardware while offering easy-to-use devices.

Analysts say Nokia is succeeding on the first count, at tying together services. But if it wants to maintain strong results, they add, it will have to come out with more user-friendly interfaces when it launches products in the second half of the year.

One step in that direction: On July 17, Nokia said that its first touchscreen product will be aimed at the mass market, surprising analysts who were expecting a high-end device to compete with the Apple iPhone. Nonetheless, Milanesi predicts the new touchscreen phone will help sales in the second quarter, as will planned mid-tier to high end phones.