Amid predictions of the largest year ever for the mobile-phone industry, market leader Nokia Corp. stunned investors with news that its first-quarter revenues will clock in below expectations due to poor mobile-phone sales. The company’s stock dropped almost 20 percent following the announcement, leveling off at about $17 per share.
“We were not able to maintain our market position and fully capitalize on the positive market developments in Europe and the United States,” said Jorma Ollila, the company’s chairman and chief executive officer. “The overall Nokia sales were negatively impacted because we were not able to fully exploit the usual seasonal market pickup in March, and the mobile phones product mix was weighted towards the low end.”
Nokia’s announcement comes as a slap since the company has regularly matched its typically optimistic growth forecasts. Indeed, law firm Milberg Weiss Bershad Hynes & Lerach L.L.P. filed a class-action lawsuit against Nokia because of the company’s about-face, alleging Nokia misrepresented its sales expectations between January and April. Nokia said it will fight the charges. Further, Nokia’s news follows gangbuster outlooks from the company’s rivals, specifically Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd., and predictions of a record year of 600 million global-phone shipments.
From most accounts, Nokia’s mobile-phone slippage is due to gaps in its product line-up as well as increasing competition from players like Motorola Inc., Samsung and smaller, regional phone vendors. Perhaps more worrisome, several analysts also suggested that wireless carriers are shifting away from Nokia because of the company’s resistance to build customized devices.
“Product segmentation is becoming increasingly challenging for Nokia, and the fact that carriers are moving toward using smaller vendors more willing to customize products in mid- and high-tier product lines makes this an ongoing concern about Nokia’s ability to continuously meet carrier needs and compete effectively in this segment,” said Neil Mawston, an analyst for the Wireless Device Strategies Service at research and consulting firm Strategy Analytics.
For its part, Nokia blamed a “poor product mix” in Europe and the United States for its sluggish sales. The company said it did not provide enough mid-range GSM and clamshell handsets in the two regions-the company’s strongest markets. Nokia also faulted its new organizational structure, an- nounced last year, which separates its business into phone, enterprise, multimedia and infrastructure divisions.
“Although we are already starting to see the long-term benefits of the new organization, in the short term its implementation slightly slowed down our reactions and operational effectiveness,” Ollila said.
Most agreed that Nokia would lose some of its market share to rivals as a result. Still, the company has a comfortable cushion as its market share is more than double the 15 percent of No. 2 player Motorola. The real question is when Nokia will manage to patch its product line-up and return to full strength.
“We’ve certainly had a quiet spell in our product roadmap,” Ollila conceded. However, Ollila said the company will rectify its mid-range gaps in the second half with additional phones and new designs. “There will be plenty to come. You will have only seen the beginning,” he added.
For the first quarter, Nokia said it expects to see sales growth in its phone business of about 19 percent-below overall market growth of 25 percent. Analysts now expect Nokia to report about 45 million phone shipments in the first quarter, down from previous predictions of 46 million. Since phone sales make up the majority of Nokia’s revenues, the company said its net sales for the first quarter will be around $7.9 billion, a 2-percent decline compared with the same quarter a year ago and much different from the 3- to 7-percent growth the company had forecast. The company said its multimedia division-which sells the N-Gage mobile phone/video game device, among others-also would come in below expectations, but that its enterprise and infrastructure businesses would come in above expectations.
Caught in the crossfire were RF Micro Devices Inc. and Texas Instruments Inc., Nokia’s two main chip suppliers, which saw their stocks fall slightly following Nokia’s announcement. However, RF Micro Devices reconfirmed its quarterly expectations of between $152 million and $163 million in revenues.
Analysts differed on their view of Nokia’s troubles, with some calling it a “bad miss” and a “disappointment,” while others said it was only a bump in the growth of the market.
“We believe Nokia has solid long-term value, with leading global market share, strong brand recognition, strong cash flow and balance sheet, and economies of scale that lead to a strong operating margin structure,” wrote RBC Capital Markets in a research note. “However, we believe it could take several quarters to update its product portfolio. With concerns regarding its aging handset portfolio and the potential for further market-share losses, we do not foresee any near-term catalysts for the stock. As such, we are downgrading the shares.”
Others took a more positive view. Albert Lin of American Technology Research maintains a “buy” rating on Nokia’s stock. Lin said market-share fluctuations are normal, and Nokia’s newly launched products likely will rejuvenate the company’s sales.
Strategy Analytics’ Mawston largely concurred: “Handset margins are likely to be unaffected, and of all vendors, Nokia is best positioned to absorb a product portfolio anomaly, especially in Europe.”
Nokia plans to report its first-quarter results April 16.
