Nokia says handsets on the upturn, but will it reap the rewards?

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Nokia says handsets on the upturn, but will it reap the rewards?

By CAROLINE GABRIEL

Published: 17 July, 2009

READ MORE: Nokia | Handset

Nokia finally made a definitive call that the handset market had bottomed out and would now enter a phase of slow recovery. Good news for the sector, given Nokia's position as the primary bellwether, but the question for its shareholders, as the leader announced a 66% year-on-year decline in Q2 profit and trimmed its market share forecasts, was how far the Finn would, itself, be able to reap the rewards of recovery.

Nokia is taking strong steps to lead what is sure to be the key trend of 2010 - pushing smartphone platforms to the mass market, and has the scale and channels to achieve its goal. It is positioning itself for the longer term goal of dominating the move to mobile web services integrated tightly with devices. And it is also making gradual progress in north America, which could explode next year if AT&T makes a much rumored strong commitment to the Symbian platform, and if Nokia gets into Verizon Wireless with its first own-branded CDMA products.

However, for all the potential bright spots on the horizon, Nokia faces a tough year ahead in terms of keeping leadership at the high end - under siege from a mushrooming line-up of highly featured handsets - and continuing to leverage its scale and legendary supply chain efficiency at the low end, in the face of increasingly effective challenges from Samsung, and margin corrosion at the hands of Taiwanese and Chinese ODMs.

For the second quarter, Nokia said the global mobile device market is "bottoming out", but its own net profit fell from €1.1bn ($1.55bn) a year ago to €380m - which was actually comfortably ahead of analyst consensus forecasts of €316m. Sales were down 25% year-on-year, but up 7% on Q1, at €9.9bn. This pattern indicated that of the handset market in general - recovering from the dark days, and inventory corrections, of Q408 and Q109, but a long way from getting back to the position of earlier in 2008. And unlike its profits, Nokia's revenues disappointed analysts, who had expected €10.11bn. This indicated that Nokia was doing a decent job of holding on to its margins, through a combination of cost cutting, supply chain efficiencies and its stated determination not to engage in destructive price wars with low end manufacturers (whose rockbottom prices the Finn argues are unsustainable in the medium term).

More worrying than the budget vendors is Samsung, which is increasing share and volumne, and getting ever closer to Nokia's magic combination of strong margins and massive economies of scale. In share terms, Nokia estimated it held 38% in Q2, down from 40% (its permanent target) a year before but up from 37% in Q1, mainly at the expense of low end suppliers. The important quarter in terms of predicting Nokia's share of the hugely competitive market going forward will be the holiday period, when its refreshed high end line-up and a barrage of emerging market webphones will start to have impact. The risks to its share, especially in the overcrowded smartphone segment, are higher than ever before, though so far it is holding out well against the specialists like Apple, Palm and RIM, with overall smartphone share up on the last quarter, to 41%. But again, Q4 will be vital, with the Koreans' numerous smartphone launches kicking into play in geographies as broad as Nokia's.

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