Nokia's Q2 Revenue Up 4% but ASP Keeps Falling

Nokia has posted a 4% rise in second-quarter revenue boosted by more-than-expected growth in handset shipments and an encouraging performance in its Nokia Siemens Networks joint venture. Nokia said revenues rose to 13.15 billion euro (US$20.86 billion) in the quarter ending 30 June from 12.59 billion a year ago. Revenue from Nokia Siemens Networks jumped 18% to 4.07 billion euro as the division moved up from its low point in 2007. Despite shipping 122 million handsets in the quarter—a 21% year-on-year (y/y)—growth revenues from the group's Devices and Services division fell by 1% as the continued fall in average selling prices (ASP) took its toll. Nokia said its ASP for the quarter fell to 74 euro from 90 euro a year ago (see World: 18 April 2008: Nokia Q1 Sales Rise, ASP Fall Raises Concerns).

Despite the falling ASP, Nokia's operating profit remained solid in the quarter. Excluding special items, the groups operating profit rose by 39% to 1.93 billion euros. However, thanks to costs incurred in the closure of the Bochum plant in Germany and other accounting costs related to Nokia Siemens Networks, the group's reported operating profit fell 38% to 1.47 billion euros. Accordingly, the group's net profit fell 61% y/y to 1.1 billion euros (see Germany – Finland: 9 April 2008:Nokia Can Leave Bochum Plant in Germany in Return for 200 mil. Euro).

Outlook and Implications

• Handset Bonanza Continues: Nokia maintained its impressive dominance of the mobile devices market in the quarter, ratcheting up its market share to an estimated 40% in the market. At a time when the arrival of the iPhone and the global credit crunch raised doubts about the company's ability to sustain growth, Nokia forged ahead, boosting its handset shipment volumes in all its regions (except Europe where it was flat). However, the company paid a price in the ASP parameter as its steady push into the low-end market in developing economies dampened the effect of strong sales of its high end devices such as the N95. While the company may have managed once again to hit the 40% market share mark, Nokia knows it has got a battle on its hands in the near term. With a 3G iPhone on the block, and a steady push by Samsung and co., coupled with the growth in operator-branded handsets in the low-end market, Nokia would have to do much more than relying on its existing clout in the market, to retain dominance. Indeed, the battle will only get tougher and full-year results will ultimately show if Nokia has managed to weather the storm in 2008 (see World: 15 July 2008: One Million 3G iPhones Sold in Opening Weekend Despite Problemsand 3 April 2008: Nokia Launches New Handsets for the Replacement Segment of Emerging Markets).

• The Looming Mobile Software Battle: Rather than worry about how Nokia will cope with the onslaught of the open-source software initiatives, the company has catapulted itself to the top of the pile with its decision to take full control of Symbian and make it free under an open-source format. Such was the audacity of Nokia's action that it instantaneously wiped out threats from Google's Android to rewrite the mobile software industry. In fact, by re-inventing Symbian, Nokia has fatally derailed Android, and has dealt a sizeable blow to Microsoft's Windows Mobile platform. But the battle is not over yet. Nokia insists that mobile services are a key plank of its future and has managed to win over leading mobile operators to its Ovi software platform. But the true test will be in following it up with viable services that appeals to users. At a time when the open internet model is gathering momentum, pitching a portal on devices could easily repeat the discredited "walled-garden" approach and if not handled carefully, can nullify all the success that Nokia has managed to achieve so far (see World: 24 June 2008: Battle of the Mobile Software—Nokia Buys Out Symbian to Fight Google's Androidand 22 May 2008: The Battle of the Portals—Nokia's Deal with Orange Guarantees a Future with Ovi)