Nokia's strong Q1 performance

Nokia posted very strong results for Q1 2008 on April 17 and said it is targeting share gains in a market that it believes will soften in the US and Europe.

Revenues for the group were €12.66 billion, up 28% over the year from €9.86 billion. Operating profit rose by 20% from €1.27 billion to €1m53 billion. This is a decline in operating margin from 12.9% to 12.1%, which is due to exceptional items, without which operating margin would have risen to 14.7%

Nokia shipped 115.5 million phones, which is slightly above the normal seasonality and trend figure, giving growth of 27% over the year.  The average selling price (ASP) declined from €83 in Q407 to €79, so revenues grew a more modest 13% to €9.23 billion. However, operating profit in the devices and services business rose 50% over the year from €1.25 billion to €1.88 billion, giving an operating margin of 20.3%, up from 15.3%.

CEO Olli Pekka Kallasvuo described the results as strong and said Nokia is targeting market share gains in the second quarter.

Nokia continues to forecast volume growth in the market of 10% for 2008, but said that it now expects the handset market value to decline over the year because of the weaker US dollar and weakening economic conditions in the US and - possibly - Europe.

This is the first set of results reported by Nokia under its new reporting structure, so it is not simple to do a direct comparison on all aspects. It is a very healthy set of results, underlining the strength of Nokia's phone portfolio and its market position in most areas.

The devices and services business performance shows that the market is not yet being affected by economic conditions to any material degree. It showed impressive double-digit growth in all regions except the US and western Europe. 

In the US Nokia's volumes fell both year on year and sequentially - this has been a thorn in its side for over a year now and it is running a big internal project to improve the position during 2008.  There have not been many devices launched purely for the US market yet, but we expect to see more in the coming months.

In western Europe Nokia grew volumes by 7.5% over the year. The best growth overall was in Latin America (63% y-o-y) and the best pick-up in this quarter's results was in China, where Nokia had slipped slightly - it saw 4% sequential and 33% year on year growth.

The fall in average sale price is due to a shift in the mix, with fewer high-end models selling after the Christmas season and a greater weight of emerging markets in the overall picture.

At the high end, where Nokia has previously enjoyed a roughly 50% market share, we saw slower growth.  Volumes were up 24% to 14.6 million, compared to market growth of 42%. 

This has become a very busy area of the market with a number of strong offerings from each of the other major players. Nokia is still in a strong position in this segment, but we should expect to see gradual erosion of its share over the coming year as the 3G iPhone comes to market and the list of other competing offerings grows.

 

On the networks side the business fell sequentially in line with normal trends. 

Revenue was €3.4 billion, down 26% from €4.58 billion in Q407, with an operating loss of €74m. This is represents a small deterioration on the operating margin of Q4 but it is in line with the seasonal fluctuations that take place in the networks business.

A direct comparison over 12 months is not possible because Nokia Networks was still separate from Siemens Networks until April 1, 2007, but it is clear that Nokia will be looking for somewhat improved profitability from NSN during the coming months.

The sting in the tail of these results is in the change of outlook, where Nokia estimates that economic conditions will have an effect on the market in the US and, maybe, Europe. 

This effect will be compounded by currency effects (which are already significant in these results) and will combine to reduce the handset market value.

Nokia is better placed than any vendor to ride such a slowdown, and emerge even stronger from it.  It has a broader portfolio of competitive products across all segments than any other, and somewhat higher margins as a buffer against harsher price competition. 

It has also made it clear that it believes it can pick up market share during the coming year, which should come out partly of the improved position it is trying to build in the US at present. But Sony Ericsson and Samsung have declared the same intention and all three need to be careful that they do not give too much away in trying to strengthen their relationships with US carriers, or let costs rise too far in trying to win market share there.

Martin Garner, Mobile Director at Ovum

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