Nokia's stellar result

Nokia has produced excellent fourth quarter results, widening the (big) gap between them and the other handset vendors.

For the quarter handset shipments were 133.5 million, up 20% sequentially and 27% year on year.  The average sale price rose slightly to 83, yielding total revenues of EUR15.7 bn - a 22% sequential gain and 34% rise over the year. Profitability also improved with operating margin at 15.9%, up from 13% for Q4 2006 thanks to gains in all divisions except Nokia Siemens Networks (although it was up sequentially). The company generated EUR2.7 bn in free cash flow.

Over the full year, the company shipped 437m handsets, with EUR51bn in revenue (up 24%) and operating profit of EUR7.99 bn (up 46%).

President and CEO Olli-Pekka Kallasvuo described this as an impressive performance for the quarter. He estimated that Nokia's market share has now reached the much-anticipated 40% mark and stressed that Nokia will continue trying to build market share.

In looking ahead, Nokia said that there is currently no sign of a slowdown in mobile phone sales. So Q1 08 should follow normal seasonal trends and the guidance for 2008 is volume growth of 10% to 1.25bn.

Impressive understates this performance. Nokia is now as big as Samsung, Motorola, Sony Ericsson and LG added together.  These numbers were delivered in spite of some component shortages, a drop in Nokia's shipments in the US and a slight loss of market share in China.  Also, inventory levels going into 2008 are lower than they were a year ago, so the extra volumes have not just been filling up the channels.  It's hard to see any other vendor getting close to this level for a long time.

Nokia Mobile Phones, which does mid- and low-tier devices, saw 5% growth y-o-y on quarterly revenue and 48% growth of operating profit, bringing its operating margin up to an incredible 25%.  Just four of its products (the new 1200 and 1208, plus the older 1110 and 1600) shipped over 50m units in Q4, which is 25% more volume than the whole of Motorola. And they were contributing very healthy profits.

Nokia Multimedia, which designs the high-end N-Series devices, saw quarterly revenue grow by 42% over the year, and operating profit up by 106%.  Its highlights were the now ageing N73 and this year's star - the N95 (two versions).  The N95 has shipped 6m so far and was the #1 profit generator for Nokia in Q4.

The Enterprise division improved performance with quarterly sales up 120% to 670m and operating margin up to 17.6%, having broken even only at the end of Q2 07. The E65 was its star, although the E51 and E90 Communicator also did well.

The rise in the average sale price of devices across these divisions is down to a change in the mix for Q4 favoring mid- and high-end products. More importantly Nokia's average operating profit per phone rose from EUR15 a year ago to EUR19.7.

As an object lesson on the importance of new product development and portfolio management, Nokia said that 30% of Q4 revenue and profit came from new products that only started shipping in Q4.

 

Nokia Siemens Networks also improved with revenue up 25% sequentially and its profit improving from -3.3% in Q3 to 0% in Q4, although both of those figures have significant 1-off items in them.

No financial details were disclosed for the new Internet services business areas.  Nokia did say, though, that they were pleased with progress with the navigation service and music store and with the response from operators.

Mr Kallasvuo did acknowledge that the stars were favorably aligned for Nokia in Q4.  It was clearly firing well on almost all cylinders.  However, challenges for 2008 will include:

Bedding down the new organization and getting it working effectively

Providing good proof points for Internet services to show the finance community that the strategy is working and can deliver meaningful revenue growth

Giving Samsung a hard time as it seeks to strengthen its position in the low end of handsets.

Building share in the US without getting burnt if there is a recession.

Martin Garner, Mobile Director at Ovum

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