Nokia impresses with gains in profit, margins

Martin Garner/Ovum
22 Oct 2007

Nokia's Q3 results comfortably beat market expectations on profitability.

Mobile phone shipments were 111.7 million, up 11% on Q2 and 26% over the year. This brought total revenue growth of 28% to EUR12.9 billion. However, profitability improvements lifted operating profit by 69% to EUR1.86 billion, and net profit by a thumping 85%, with the bulk of this coming from the Mobile Phones and Multimedia divisions, although Enterprise also improved strongly.

CEO Olli-Pekka Kallasvuo said "the quality and depth of our device portfolio continues to give us a good competitive edge and we believe our portfolio looks promising for next year."

In reviewing these results we need to remember that Q3 last year was not great for Nokia. At that time the mid-range portfolio was ageing, there were no thin phones and the partial withdrawal from the CDMA business brought significant exceptional charges. These serve to inflate the growth rates in today's numbers.

Nonetheless these are very strong results from Nokia indeed. Device volumes are on the trend, but the profitability gains are startling. All divisions are showing improvement.

In the Mobile Phones division the numbers are helped by the 6300 series Thin phones and the entry level 1100 and 1600 ranges. In the entry level Nokia launched its single chip 1200 series earlier this year and promised the fastest production ramp in the history of the industry with them. The results should start to show in Q4 and should improve margins.

Although the average selling price fell from EUR93 to EUR82, bringing revenue growth of only 3% over the year, profits in this division rose 78%. Other vendors will weep at the 22.6% operating margin of this group.

The Multimedia division has held its 50% share of the rapidly growing smartphone segment and improved its margins by 57% on 23% revenue growth. This is largely down to the N70, N73 and N95 models.

The slight concern in these results is that Nokia lost market share in the quarter in Europe, Latin America and MEA - we believe largely thanks to gains for Samsung and LG. More encouragingly, it gained share sequentially in North America, although this is still very small and remains "work-in-progress".

The Enterprise Solutions division broke even for the first time in Q2 07 and continued its improvement this quarter, helped along by significant growth of enterprise devices, bringing sales growth of 105%. Nokia suffered some component shortages on the E90, which have now been fixed and it expects stronger performance in Q4.

Nokia Siemens Networks has been the subject of much press speculation and comment in recent weeks. It improved its position from Q2, lifting sales by 7% and recovering margins from -10% to -1%. The market dynamics in networks remain challenging, so it is encouraging to see NSN able to get on with building the business while also going through such a large restructuring.

Nokia said it would increase the expected synergies from EUR1.5 billion to EUR2 billion. This performance also appears to show that the difficulties experienced by Ericsson this quarter are company specific, more than market issues.

The biggest challenges for Nokia going forward are:
- Get through the impending restructuring of divisions without disrupting the business
- Articulate the targets and detailed plans for the Internet strategy for 2008, especially the integration of its recent acquisition Navteq
- Continue to improve NSN, building back to healthy profitability.

Martin Garner is mobile practice leader at Ovum

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