Nokia Increases Lead over Rivals, Claims 39% Market Share

Nokia has announced another set of impressive of results that confirm its status as the dominant mobile phone vendor, with estimated market share increasing by 3% year-on-year (y/y) and 1% in the second quarter of 2007 to reach 39%, as the volume of devices shifted by Nokia rose by 11% in the second quarter and 26% y/y to reach 111.7 million units out of an estimated industry total of 286 million units. Revenues grew by 28% y/y to reach 12.9 billion euro (US$18.43 billion), while operating profits grew by 69% to 1.86 billion euro and net profit grew by 85% to 1.56 billion euro. The battery problems that led to a recall earlier in the quarter were not mentioned, but if accounted for in this quarter, appear to have done little to dent profitability (see World:15 August 2007:Nokia Succumbs to Battery Recall Woes). An increasing proportion of devices were sold in the sub-30 euro bracket, with average selling price falling drastically from 90 euro in the second quarter of 2007 to 82 euro in the third quarter of 2007, making the increase in profit margin an impressive feat.

Sales of converged devices—advanced smartphones, such as the Nokia N Series handsets, which are included in the Multimedia segment—rose to 16 million units, some 53.8% up y/y. The estimated industry total sales of converged devices for the quarter were 31.7 million units. Over 9 million N Series devices, mainly competing in the same high-end consumer market as the Apple iPhone, Sony Ericsson Cybershot and Motorola Z8 territory, were sold (see World: 15 October 2007: Nokia Begins Shipment of 8 GB N95). As these are based on the S60 platform, they have a wide ecosystem of applications and PDA-like functionality, such as that of Sony Ericsson's UIQ-based devices, the P990 and P1, and those based on the Windows Mobile operating system (see World: 16 October 2007: Motorola Buys 50% of UIQ Operating System from Sony Ericsson and 23 October 2006: Microsoft Aims to Double Windows Mobile Devices).

In the Enterprise Solutions segment, over 2 million of the business/email-oriented E Series devices, which Nokia again categorises as converged devices, were sold. These compete with the RIM Blackberry and Motorola Q-type devices, and Nokia's effective entry into this market is confirmed by the 105% rise in revenues to 526 million euro and a swing to an 88 million euro operating profit. RIM has released results for its fiscal second quarter, ending 1 September 2007, which appear to show that this is a high growth market, with room for more than one player, RIM having shrugged off the increasing competition from Nokia by boosting revenues by an impressive 27% quarter-on-quarter (q/q) and 108% on the same period a year ago to US$1.37 billion, generating a net income of US$287.7 million, even as a host of competitors entered the same device category market (see World: 5 October 2007: RIM Continues to Rise, Breaks 10 mil. Subscribers).

The only troublesome area in this picture of rude health was the poor performance of the Nokia Siemens Networks division, which while it was hit by an 86 million euro restructuring charge and other 'special items', turned a 131 million euro operating profit into a 120 million euro loss. While R&D spending in all groups rose y/y, the networking division raised R&D expenses from 262 million euro to 686 million euro, while sales and marketing and administrative expenses also tripled following the merger, which completed in April this year (see World: 15 March 2007: Nokia Siemens Networks Scheduled to Start In April and 19 June 2006: Nokia, Siemens in Multi-Billion-Dollar Networks Unit Merger).

On a sequential quarterly basis, Nokia Siemens has seen some improvement, with sales up 6.9%, showing strength in Europe, the Middle East, and China—all up by 21-26%—while Latin America saw sales rise by 46%, but the previously lucrative Asia Pacific market lost 28% and the United States 7%. Capital expenditure on mobile networks appears to be highly variable as upgrades are deployed in a competitive fashion. Nokia is not the only infrastructure vendor to have suffered this year, with the freshly merged Alcatel-Lucent seeing similar problems as the lucrative U.S. market tightened and low-cost vendors took an increasing market share (see World: 13 September 2007:Alcatel-Lucent Cuts Revenue Outlook for 2007 and  28 August 2007: ZTE Records 300% Increase in GSM Volume Shipment in H1 2007). Cost savings and restructuring, including personnel reduction, the launch of a new manufacturing plant in China, and investing US$100 million in Indian operations where the Services business unit will be based, have been planned as Siemens is integrated into the networking business. These will of course come with their own short-term costs, with the expectation that 1.5-2 billion euro savings will be realised by the end of 2008 (see World: 3 August 2007:Nokia Siemens Underperforms in Q2, Targets US$2.1 bil. in Annual Cost Savings By 2008).

Outlook and Implications

On a regional basis, Nokia has shown stellar growth in North America where it has previously underperformed. The company had announced that it would exit the CDMA business and move its headquarters to New York to improve the marketing of Nokia handsets. The CDMA announcement was also a slight red herring, with new Nokia products still being produced, only now using an ODM-style production arrangement, while with Nokia designs and interfaces ensuring a Nokia product is built onto a CDMA platform. T-Mobile has also shown strong performance in recent quarters and has a wide selection of Nokia handsets that will have boosted Nokia's position.