Nokia Converts Margin-Sapping India, China Into Profit Machines
July 16 (Bloomberg) -- Nokia Oyj, the world's largest cell- phone maker, disappointed shareholders twice in the past three years by failing to keep up with consumer trends. This time, the company may have it right.
Models such as the 550 euro ($759) N95 are paying off as customers trade up from starter phones in India and China. The shift is restoring profit margins that Chief Executive Officer Olli-Pekka Kallasvuo sacrificed last year when he focused on cheaper phones to win sales in those countries, where Nokia is the dominant brand.
The shares have climbed 41 percent this year to 21.76 euros. Investors who bought at previous peaks, in early 2004 and again in 2005, were disappointed when competitors took away sales with new designs Espoo, Finland-based Nokia ignored. The shares remain at one-third their peak of 65 euros in June 2000.
``The miss in clamshells in 2004 and then in slim phones have been the main disappointments,'' said Marko Alaraatikka, a fund manager at Evli Investment Management in Helsinki, which oversees about 6 billion euros including Nokia shares. ``I haven't heard anybody saying the stock will rise to 65 euros again, but I think it could up to 24 to 25.''
Nokia is touting the N95, with a dual-sliding cover, GPS navigation and a 5 megapixel camera, and the 250 euro 6300 slim phone to affluent users in Mumbai and Beijing, as well as the U.K. and Europe. The popularity of these handsets will help prop up Nokia's average selling prices, said analysts including Kulbinder Garcha at Credit Suisse in London.
Profit Gains
In China, Nokia's biggest market, the company's unit share was about 42 percent in the first quarter, according to Framingham, Massachusetts-based researcher IDC. In India, Nokia has about two thirds of the market, the Times of India reported in May, citing a company executive. The company doesn't break out India figures from the Asia-Pacific region.
Investors underestimate the impact the new phones will have on Nokia's profit, said Garcha, who has a ``trading buy'' rating on the shares.
Amid a global slump in handset prices, Nokia exploited its size to lower production costs more than rivals, and eked out an expansion of its gross profit margin to 33.1 percent of sales in the first quarter from 32.4 percent in the fourth. Motorola Inc., the second-largest phone maker, had a gross margin of 26 percent and its mobile-phone unit posted an operating loss.
Motorola Woes
As prices stabilize, at least four analysts have boosted second-quarter profit estimates for Nokia in the past month. The company, which booked a ``significant'' one-time cost in the second quarter from job cuts at its network equipment venture, is expected to report profit of 1.06 billion euros, or 28 cents a share, based on the average of 36 estimates compiled by Bloomberg.
Nokia had a profit of 1.14 billion euros, or 28 cents, a year earlier, including a gain from an asset sale. Sales jumped 31 percent to 12.9 billion euros from a year earlier, according to the average estimate. The company reports second-quarter results Aug. 2.
``Nokia is by far the most efficient in logistics and distribution,'' said Mika Heikkilae, chief investment strategist at Arvo Omaisuudenhoito in Helsinki, which oversees about 370 million euros.
Nokia has also capitalized on missteps at Motorola, which said last week that second-quarter sales will miss its forecast, the third time the company has fallen short of its own predictions this year.
The Schaumburg, Illinois-based company failed to bring out devices with more features to replace the best-selling Razr, and is losing sales to Nokia, Samsung Electronics Co. and newcomer Apple Inc. Motorola reports results on July 19.
China, India
The shares, at their highest in five years, may reach 25 euros, said Ehud Gelblum, an analyst with JPMorgan Securities Inc. in New York. Motorola shares fell 19 cents to $17.89 July 13 in New York Stock Exchange composite trading and have dropped 13 percent this year.
Nokia lowered its prices last year in emerging markets to keep Motorola's share from rising and ensure scale advantages, Evli's Alaraatikka said. Motorola's decision to drop aggressive pricing this year should boost Nokia's profits, said Gelblum, who rates the shares ``overweight''.
Nokia controlled 36.2 percent of the global market in the first quarter, up from 33.2 percent a year earlier, according to researcher Strategy Analytics Ltd. The company said in May that its share would rise in the second quarter.
Motorola's share fell to 18 percent from 20.4 percent and Suwon, South Korea-based Samsung, the third-largest handset maker, increased to 13.8 percent from 12.6 percent. Samsung overtook Motorola in the second quarter in terms of shipments, according to reports from the companies.
New Models
Nokia's sales in China and the Asia-Pacific region each jumped 39 percent last year, after Kallasvuo focused on selling entry-level phones. India, the world's fastest-growing cell- phone market, is Nokia's third-largest territory. Revenue in China has risen 75 percent since 2002.
With Nokia now entrenched, Kallasvuo's bet on India and China may pay off. The company's gross margin, the percentage of sales left after production costs, will increase to more than 35 percent in the fourth quarter, mainly because of phones such as the N95 and 6300, Garcha said. India's economy grew at the fastest pace in almost 20 years in the 12 months ended March 31, and China's retail sales jumped 15.9 percent in May, the fastest pace in three years.
The 6300 model, aimed at mid-tier customers, started shipping in the first quarter and was the second most sold cell phone in China in April in its price range.
Replacement Phones
That's helped bolster average prices for phones Nokia sold in China. They rose 3.8 percent to 81 euros in the second quarter from the first, Garcha estimated in a June 6 note. In the Asia Pacific region including India, prices he predicted prices increased 4.1 percent to 77 euros.
As customers move up in price range, Nokia is benefiting from the users' tendency to stick with a brand whose products they have already learned how to use, analysts and investors including Heikkilae said.
Replacement phones will make up 60 percent of emerging- market sales this year, up from 50 percent in 2006, according to Nokia. Globally, the replacement market is expected to climb to 80 percent by 2010 from current 65 percent.
``Replacements will give the basis for the future and the market leader should benefit the most from it,'' said Mika Heikkinen, fund manager at FIM Asset Management in Helsinki, which manages 8.5 billion euros including Nokia shares.
Investors including Alaraatikka are aware that Nokia has disappointed investors before. After rising more than 650-fold from 1992 to mid-2000, the shares fell to as low as 10.55 euros in March 2003.
Momentum Shift
The shares recovered to reach 19.09 euros a year later, then dropped by more than half in four months to 8.83 euros as the company was slow to introduce phones that flip open like clamshells. They dropped again in July 2005 when Motorola gained share with slim models such as the Razr.
Now the momentum has swung back to Nokia, which charged into emerging markets early and so far has maintained its lead.
Nokia started to address the ``slim issue'' in late 2006, when it unveiled the 6300 model and discussed its ``Barracuda'' model, a 9.9-millmeter thick phone that will go on sale in the third quarter. In May, Nokia introduced its slimmest device yet, the 6500 Classic that also allows faster Internet access. It will be also available in the third quarter.
The N95, which started shipping at the end of the first quarter, is the best-selling device in the U.K. and No. 4 in Western Europe, Nokia says. Apple's iPhone, released in the U.S. June 29, hasn't yet gone on sale in Europe or Asia.
``Nokia has managed to lift its market share and its product portfolio is being improved,'' Alaraatikka said. ``The situation is very good and this could go on.
Models such as the 550 euro ($759) N95 are paying off as customers trade up from starter phones in India and China. The shift is restoring profit margins that Chief Executive Officer Olli-Pekka Kallasvuo sacrificed last year when he focused on cheaper phones to win sales in those countries, where Nokia is the dominant brand.
The shares have climbed 41 percent this year to 21.76 euros. Investors who bought at previous peaks, in early 2004 and again in 2005, were disappointed when competitors took away sales with new designs Espoo, Finland-based Nokia ignored. The shares remain at one-third their peak of 65 euros in June 2000.
``The miss in clamshells in 2004 and then in slim phones have been the main disappointments,'' said Marko Alaraatikka, a fund manager at Evli Investment Management in Helsinki, which oversees about 6 billion euros including Nokia shares. ``I haven't heard anybody saying the stock will rise to 65 euros again, but I think it could up to 24 to 25.''
Nokia is touting the N95, with a dual-sliding cover, GPS navigation and a 5 megapixel camera, and the 250 euro 6300 slim phone to affluent users in Mumbai and Beijing, as well as the U.K. and Europe. The popularity of these handsets will help prop up Nokia's average selling prices, said analysts including Kulbinder Garcha at Credit Suisse in London.
Profit Gains
In China, Nokia's biggest market, the company's unit share was about 42 percent in the first quarter, according to Framingham, Massachusetts-based researcher IDC. In India, Nokia has about two thirds of the market, the Times of India reported in May, citing a company executive. The company doesn't break out India figures from the Asia-Pacific region.
Investors underestimate the impact the new phones will have on Nokia's profit, said Garcha, who has a ``trading buy'' rating on the shares.
Amid a global slump in handset prices, Nokia exploited its size to lower production costs more than rivals, and eked out an expansion of its gross profit margin to 33.1 percent of sales in the first quarter from 32.4 percent in the fourth. Motorola Inc., the second-largest phone maker, had a gross margin of 26 percent and its mobile-phone unit posted an operating loss.
Motorola Woes
As prices stabilize, at least four analysts have boosted second-quarter profit estimates for Nokia in the past month. The company, which booked a ``significant'' one-time cost in the second quarter from job cuts at its network equipment venture, is expected to report profit of 1.06 billion euros, or 28 cents a share, based on the average of 36 estimates compiled by Bloomberg.
Nokia had a profit of 1.14 billion euros, or 28 cents, a year earlier, including a gain from an asset sale. Sales jumped 31 percent to 12.9 billion euros from a year earlier, according to the average estimate. The company reports second-quarter results Aug. 2.
``Nokia is by far the most efficient in logistics and distribution,'' said Mika Heikkilae, chief investment strategist at Arvo Omaisuudenhoito in Helsinki, which oversees about 370 million euros.
Nokia has also capitalized on missteps at Motorola, which said last week that second-quarter sales will miss its forecast, the third time the company has fallen short of its own predictions this year.
The Schaumburg, Illinois-based company failed to bring out devices with more features to replace the best-selling Razr, and is losing sales to Nokia, Samsung Electronics Co. and newcomer Apple Inc. Motorola reports results on July 19.
China, India
The shares, at their highest in five years, may reach 25 euros, said Ehud Gelblum, an analyst with JPMorgan Securities Inc. in New York. Motorola shares fell 19 cents to $17.89 July 13 in New York Stock Exchange composite trading and have dropped 13 percent this year.
Nokia lowered its prices last year in emerging markets to keep Motorola's share from rising and ensure scale advantages, Evli's Alaraatikka said. Motorola's decision to drop aggressive pricing this year should boost Nokia's profits, said Gelblum, who rates the shares ``overweight''.
Nokia controlled 36.2 percent of the global market in the first quarter, up from 33.2 percent a year earlier, according to researcher Strategy Analytics Ltd. The company said in May that its share would rise in the second quarter.
Motorola's share fell to 18 percent from 20.4 percent and Suwon, South Korea-based Samsung, the third-largest handset maker, increased to 13.8 percent from 12.6 percent. Samsung overtook Motorola in the second quarter in terms of shipments, according to reports from the companies.
New Models
Nokia's sales in China and the Asia-Pacific region each jumped 39 percent last year, after Kallasvuo focused on selling entry-level phones. India, the world's fastest-growing cell- phone market, is Nokia's third-largest territory. Revenue in China has risen 75 percent since 2002.
With Nokia now entrenched, Kallasvuo's bet on India and China may pay off. The company's gross margin, the percentage of sales left after production costs, will increase to more than 35 percent in the fourth quarter, mainly because of phones such as the N95 and 6300, Garcha said. India's economy grew at the fastest pace in almost 20 years in the 12 months ended March 31, and China's retail sales jumped 15.9 percent in May, the fastest pace in three years.
The 6300 model, aimed at mid-tier customers, started shipping in the first quarter and was the second most sold cell phone in China in April in its price range.
Replacement Phones
That's helped bolster average prices for phones Nokia sold in China. They rose 3.8 percent to 81 euros in the second quarter from the first, Garcha estimated in a June 6 note. In the Asia Pacific region including India, prices he predicted prices increased 4.1 percent to 77 euros.
As customers move up in price range, Nokia is benefiting from the users' tendency to stick with a brand whose products they have already learned how to use, analysts and investors including Heikkilae said.
Replacement phones will make up 60 percent of emerging- market sales this year, up from 50 percent in 2006, according to Nokia. Globally, the replacement market is expected to climb to 80 percent by 2010 from current 65 percent.
``Replacements will give the basis for the future and the market leader should benefit the most from it,'' said Mika Heikkinen, fund manager at FIM Asset Management in Helsinki, which manages 8.5 billion euros including Nokia shares.
Investors including Alaraatikka are aware that Nokia has disappointed investors before. After rising more than 650-fold from 1992 to mid-2000, the shares fell to as low as 10.55 euros in March 2003.
Momentum Shift
The shares recovered to reach 19.09 euros a year later, then dropped by more than half in four months to 8.83 euros as the company was slow to introduce phones that flip open like clamshells. They dropped again in July 2005 when Motorola gained share with slim models such as the Razr.
Now the momentum has swung back to Nokia, which charged into emerging markets early and so far has maintained its lead.
Nokia started to address the ``slim issue'' in late 2006, when it unveiled the 6300 model and discussed its ``Barracuda'' model, a 9.9-millmeter thick phone that will go on sale in the third quarter. In May, Nokia introduced its slimmest device yet, the 6500 Classic that also allows faster Internet access. It will be also available in the third quarter.
The N95, which started shipping at the end of the first quarter, is the best-selling device in the U.K. and No. 4 in Western Europe, Nokia says. Apple's iPhone, released in the U.S. June 29, hasn't yet gone on sale in Europe or Asia.
``Nokia has managed to lift its market share and its product portfolio is being improved,'' Alaraatikka said. ``The situation is very good and this could go on.
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