Nokia Q1 Sales Rise, ASP Fall Raises Concerns

Nokia yesterday announced its first-quarter 2008 results showing a 28% year-on-year (y/y) rise in revenue, but with ASP falling drastically. Nokia said it shipped 115.5 million mobile devices in the quarter, helping its revenue grow to 12.66 billion euro (US$20.16 billion) from 9.86 billion euro a year ago. The 115.5 million units shipped in the quarter was 27% higher than the shipment volumes for the same time in 2007, but was down 13% from the highs reached in the last quarter of 2007. Accordingly, Nokia said its mobile handset market share fell back to 39% from its peak of 40% in the fourth quarter of 2007. Group operating profits were also up, rising 20% y/y to 1.53 billion euro in the quarter. However, despite the overall positive results, market perception of Nokia fell, mainly as a result of the dip in its ASP. Nokia's ASP fell to 79 euro per unit from 83 euro per unit in the previous quarter and 89 euro a year ago.

Outlook and Implications

• Falling ASP Shows Paradigm Shift: The four-euro dip in ASP in the first quarter of 2008 is a timely reminder that Nokia, like most of its peers, is relying more on developing markets for sales—and the figures prove it. In the quarter, Nokia device shipment volumes in Europe and North America were the worst performers; they were the only regions without an over-20% y/y growth. Device shipments in Europe only grew by 7.5% and in North America shipment fell by a massive 45.8%. In contrast, shipment volumes rose by 28.7% in Middle East & Africa, 33.8% in China, 43.9% in Asia-Pacific, and 63% in Latin America. Nokia attributed its declining ASP to the greater volume of units in ships in the developing markets coupled with the negative impact of the weaker US dollar. However, although Nokia has so far relied on its solid supply chain to remain profitable with such low ASPs, the company's key concern will be how to sustain growth without allowing ASPs to fall below profitable levels. Generally though, shipment volumes across all the regions failed to match that of the last quarter of 2007 as a result of the recurrent seasonality in sales over the end-of-year holiday period.

• Will Emerging Markets Remain Strong for Good? Although emerging markets have helped Nokia and its peers to offset declining sales in the developed regions, there is growing concern that growth in those emerging markets may be peaking too soon. Earlier this month, Nokia unveiled four new handset models at an event in South Africa, suggesting that it was targeting the replacement segments of emerging markets. The company said it expects replacement sales to grow to more than 60% of the sales volumes in emerging markets in 2008—from 50% in 2007—as consumers who already own a phone aim to replace them. However, such a high replacement component of sales is exactly the reason for slow growth in Europe. At its basic level, the drive to offer low-cost handsets is driven by the expectation that there is supposed to be a pent-up demand for new customers willing and eager to join the mobile phone phenomenon, but who are disenfranchised by cost. Accordingly, the relatively low (usually less than 50%) mobile penetration rates in some of these markets, when compared with the over-100% penetration rates in Europe, suggest there is still massive growth left in those markets. Nevertheless, given the prevailing economic realities, the theoretical penetration rate target of over 100% may have to be replaced by a more realistic penetration rate target for the near term, with a long, drawn-out timeframe before penetration rates can creep up to 100%. If this trend is to become more pronounced, emerging-market handset sales may begin to mirror sales patterns in Europe (see World: 3 April 2008: Nokia Launches New Handsets for the Replacement Segment of Emerging Markets).

• Tougher Times Ahead: Despite Nokia's continued grip on the market, its latest result is an indication that its aura of invincibility may not remain for long. After hitting the 40% mark in fourth-quarter 2007, there were expectations that the company will build from there to stabilize its share at above the 40% mark. But that accolade barely lasted a quarter. Instead, the gradual recovery of rivals plus the presence of new players like Apple, HTC, Huawei, and ZTE, have conspired to rekindle a sense of competition in the market. Going forward in 2008, Nokia will have to fight even harder to retain its share of the market. The company has paid a heavy price in trying to reclaim the goodwill it almost lost when it shut its Bochum plant in Germany but will still have to fight hard to ride out the effects of the global economic downturn in the developed markets. Importantly too, Nokia needs to reclaim the initiative in the mobile handset market from Apple's iPhone and reassert itself as the primary innovator in the market (see Germany: 9 April 2008: Nokia Can Leave Bochum Plant in Germany in Return for 200 mil. Euro).