Nokia Profit Falls but Forecast Solid for Handsets

Top mobile handset maker Nokia (NOK) posted falling profits and sales on Thursday but sent its shares higher by saying its main handset unit would continue to spin cash and counter losses at its bleeding networks unit.

Nokia said sales at its key cell phones unit, which generates four-fifths of total sales, would grow between four and 12 percent in the second quarter, up from one percent growth in the first. More color and multimedia models would drive sales.

"Strong profitability at Nokia Mobile Phones is expected to continue," the company said in a statement.

Nokia said January-March pre-tax profit fell four percent year-on-year to 1.26 billion euros ($1.38 billion), beating all estimates in a Reuters poll. Sales fell three percent to 6.77 billion, the lowest level since the first quarter of 2000.

Pro forma diluted earnings per share fell to 0.18 euros from 0.19 euros a year ago, above expectations in the poll and supported by a share divestment.

Nokia shares climbed 4.9 percent to 14.45 euros, pulling the DJ Stoxx tech index up 2.5 percent. Its key chips supplier STMicroelectronics rose two percent. Nokia's stock remains down some five percent in 2003.

"It was a stellar performance in mobile phones, and the guidance for the second quarter shows they expect profit margins to remain high, despite falling ASPs," said analyst Hendrik Zonnenberg at ING Barings, who has a "buy" rating on the stock.

However, other analysts were more cautious. "This is a very good set of results from Nokia and the handset margins are terrific," said analyst Thomas Langer at WestLB Panmure. "However, I'm not confident that this margin in handsets can be maintained," added Langer, who repeated an "underperform" rating on the stock with 12 euros as fair value.

Nokia's strong earnings were again underpinned by Nokia Mobile Phones (NMP), which despite the glum economic conditions saw unit sales climb by 13 percent. The company's tight cost controls offset the hit from a strong euro versus the dollar and the fall in average selling prices (ASPs) of phones.

Operating profit at NMP, which makes more than one in three cell phones sold globally, rose almost 10 percent year-on-year to 1.3 billion euros, and its operating margin was a heady 24 percent -- the best margins in the industry.

But Nokia suffered setbacks in two of its key markets -- the United States and China -- saying sales were "substantially weaker" in the Americas and somewhat slower in Asia-Pacific.

Motorola, market leader in China, warned this week that local rivals there were snapping at its heels.

"(Nokia) is losing market share in the United States, and despite what they say, they are also losing ground in China," said Bear Stearns analyst Wojtek Uzdelewicz. "Clearly the local Chinese guys are gaining market share."

Nokia claimed its global market share was stable at 38 percent and Chief Executive Jorma Ollila told CNBC television that he expected Nokia to increase market share in mobile phones running the CDMA standard in China in the next few quarters.

Motorola, the world's second largest cell phone maker, this week also tweaked its industry-wide handset shipments estimate for 2003 to 430 million units, at the low end of its previous range of 430-440 million units.

Nokia did the same, saying it now expected around 10 percent sector growth in 2003 versus its previous forecast of 10 percent or more.

The good show in handsets was, however, offset by Networks, which in the first quarter booked its first operating loss -- of 127 million euros -- since it started quarterly reporting in 1996.

Like its rivals, including Sweden's Ericsson, Nokia has been hit over the past two years by falling demand for networks gear as cash-strapped telecom operators rein in spending, having cut their investments by 25 percent since 2000.

Nokia said its second-quarter result would be hit by continued weakness at Nokia Networks, and the firm will take a one-time charge of 350-400 million euros due to previously announced lay-off plans.

Due to the charge, Nokia forecast group pro forma diluted EPS of between 0.13-0.16 euros for April-June versus 0.19 euros a year ago.

The company also cut its outlook for its networks market, saying its market would fall by "15 percent or more" in the year against a previous forecast of a fall of up to 10 percent.

"In the network infrastructure business, we do not expect market conditions to improve during the year," Nokia said. "Operator investment has decreased to an exceptionally low level, and in some cases network rollouts have slowed."