Nokia posts solid earnings, despite Euro and U.S. woes

Nokia Corp. is making lots of money churning out mobile phones, but the pattern of its success is shifting.
Its position as the world’s leading handset maker was easily confirmed as it claimed solid revenue, profits and handset shipments in the fourth quarter of 2006. It claimed a new high of 36 percent global market share for last year.
Growth for Nokia slowed in Europe, while it took off in the Asia-Pacific region. And Nokia’s retreat from CDMA and its nominal presence at carriers in the United States resulted in a precipitous 40-percent drop in shipments to North America over the year-ago quarter.
The results appear to reflect the vendor’s near-term disaffection with the carrier-dominated U.S. market, placing the United States in second-tier status for Nokia among global priorities. Long-term, Nokia’s strategy in the United States-if such a phrase holds any water-would appear to depend on at least three factors: growing alternative channels, patience as the carrier-dominated model frays, and the growth of smartphones. All three factors are incremental at best and carrier dominance here shows little sign of eroding.
Those issues, however, are speculation and, if they hold water, clearly are secondary to the handset giant’s pursuit of market share, revenue and profit.
Essentially, Nokia made money on tremendous volumes of its low-cost phones in emerging markets, where the action was in fourth quarter. Nokia’s news stood in stark contrast to results last week from Motorola Inc., which announced it shipped record volumes of phones but earned dismal profits and would cut 3,500 jobs.
Nokia broke out its handset volumes by region and therein was intriguing news about the vendor’s challenges. Its greatest volume by region came in Europe with 33.3 million units; however, that represented only a modest 11-percent gain over the year-ago quarter. In contrast, the vendor shipped nearly 24 million units into the Asia-Pacific region, a whopping 60-percent increase over the year-ago quarter. The vendor saw 33-percent gains in volume in Latin American and more than 50-percent gains in the Middle East/Africa and China on smaller volumes. Shipments to North America, at less than 6 million units-less than half of the volumes going to any of its six defined markets-represented a 40-percent drop from the year-ago quarter.
Nokia said that its global revenue and profit in the fourth quarter both rose about 20 percent over the year-ago quarter on handset volumes of about 106 million units, a 26-percent jump from the year-ago quarter. Average selling prices, however, continued to decline and sales in Europe were weak and in North America reflected virtual retreat. Nokia cited “seasonality”-when applied to the first quarter, this is code for static sales-in its outlook for the first three months of this year, with modest 10-percent growth over the course of the year. Nokia’s stock traded nearly 4 percent on its results and news that the company would purchase $5.2 billion worth of its own stock.
Nokia makes more than three-quarters of its revenue on handsets. Results in its smaller enterprise and network businesses were mixed; positive results in its enterprise unit were driven by handset sales and were accompanied by a minimal increase in revenue and a 50-percent drop in profit in the networks division.
In the fourth quarter of 2006, Nokia earned overall $15.2 billion in revenue, up 20 percent from the year-ago quarter. The company produced $1.7 billion in net profit, a 19-percent increase over the year-ago quarter. ASPs fell to $116 from $129 in the year-ago quarter.
For 2006, Nokia posted revenue of $53 billion, up 20 percent over the prior year. Net profit was $5.6 billion, up 19 percent over the prior year.
With Nokia’s fourth-quarter results in, two major market analysis firms said that mobile phone vendors had shipped more than one billion handsets last year. Strategy Analytics and IDC both said shipments reached about 1.02 billion; SA quantified that as a 25 percent increase over 2005, while IDC’s figure was closer to 23 percent.
More interesting, perhaps, were the new, global market share projections for the top five vendors at the close of 2006. The two analysis firms’ market share numbers were in synch: Nokia (34.1 percent), Motorola (21.3 percent), Samsung (11.6 percent), Sony Ericsson (7.3 percent) and LG (6.3 percent).
While the numbers establish a clear pecking order by volume shipments, they tend to obscure two factors: Motorola’s slip in profitability-some analysts believe it may cede some market share this year to grow profits-and Sony Ericsson’s outperformance of the market, which may soon accentuate the distance between it and LG.