Nokia Profits More Than Double on Strong Sales

HELSINKI, Finland – A robust appetite for new phones in emerging markets boosted second-quarter sales and profits at Nokia (NOK), the world's top cellphone maker, and hoisted its shares to their highest level in more than five years.

Nokia said its underlying second-quarter earnings per share rose 39 percent from a year ago to 0.32 euros, compared with expectations of 0.25 euros in a Reuters poll, when adjusted for the performance of its networks venture with Siemens.

Shares in Nokia soared 9 percent to 22.50 euros, levels they last saw in early 2002, pulling European indexes higher. Shares in Nokia are up 44 percent so far this year.

"We are kind of hitting on all cylinders," Nokia's Chief Financial Officer Rick Simonson told a conference call.

Operating profit margins at Nokia's handset units rose to 20.9 percent, their highest level since end-2003 and well above analysts' average forecast of 16.9 percent.

"I think the investment story has now even improved if Nokia is to remain at such margin levels," said Marko Alaraatikka, Portfolio Manager at Evli Funds in Helsinki. "Margins were so strong thanks to Nokia's economies of scale .... as well as due to Motorola's weakness."

Nokia's closest rival for years, U.S.-based Motorola, has reported losses so far this year as it failed to win more business from Nokia in the lower end of the market, and lost market number two spot to Samsung Electronics.

"The competitive situation we did face has been relatively easy (in the second quarter)," Chief Executive Olli-Pekka Kallasvuo told the conference call. "We will see margin volatility going forward."

APPROACHING 40 PERCENT MARKET SHARE

Nokia sold 100.8 million phones in the quarter, more than its three closest rivals combined, and estimated its market share at 38 percent, above analysts' consensus of 37.7 percent, and up from 34 percent a year ago.

Strategy Analytics said Nokia should reach 40 percent market share during the second half of the year, helped by its strong lead in emerging markets such as China and India.

When Nokia last approached 40 percent market share in 2003, operators -- key retailers on European and U.S. market -- started undercutting the Finnish firm's position and its market share dropped to 30 percent.

"The difference this time around is that Nokia's biggest volumes are now in emerging countries, where operators have much less control over retail channels," said Neil Mawston from Strategy Analytics.

Average selling price for Nokia cellphones in the second quarter was 90 euros, compared with the average forecast of 90 euros in the poll and 89 euros in the first quarter.

Nokia said it expected global sales of mobile phones to grow 10 percent or more this year from 978 million phones in 2006, compared with its earlier forecast of at best 10 percent growth.

Nokia stock trades at 15.7 times expected 2008 earnings, valuing the firm at around 90 billion euros, but below many other technology firms' valuations, as many investors think the dominant player in the market has more to lose than to gain.

NETWORKS DEEP IN RED

Nokia Siemens Networks, which started operations in April, reported an operating loss of 1.3 billion euros, including restructuring charges and inventory write-downs. Excluding the one-off items, Nokia said the loss from operations was 64 million euros.

"Networks' figures were depressing and show there is need for further restructuring," said Carnegie analyst Lauri Rosendahl.

The world's mobile network gear makers are suffering from cost-cutting at top telecoms operators, and April-June results of the three top telecoms equipment vendors were weaker than expected, due to stagnating demand and falling prices in key European markets.

"Price competition in the infrastructure market was unusually aggressive," Nokia said in a statement.

Nokia said the venture aimed to reach its annual cost savings target of 1.5 billion euros by the end of 2008, compared with an earlier plan of 2010, and said it was targeting further cost savings of 500 million euros per year.