Nokia Predicts a Fourth-Quarter Rebound

Updated from 8:45 a.m.

Riding a mini-revival in mobile phones, market leader Nokia (NOK) Friday met third-quarter earnings estimates and forecast a fourth-quarter rebound.

The Finnish cell phone giant said profit margins were showing a warming trend, though it once again reduced its industry-wide handset sales estimate. The company also took a $729 million charge to write off some so-called vendor-financing loans.

For the third quarter, Nokia earned 0.16 euro (15 cents) a share on revenue of 7.05 billion euros ($6.53 billion), down from year-ago earnings of 16 cents on revenue of $6.8 billion. Nokia's critical mobile phone segment showed strength in the U.S. and Asia, overcoming a weak performance in Europe.

For the fourth quarter, the company forecast earnings of 16 to 18 cents a share, at the high end of Wall Street's expectations, on 20% sequential sales growth. CEO Jorma Ollila said fourth-quarter sales in the company's core mobile phone segment would jump 25% from third-quarter levels, as the company plans a number of product rollouts for the holiday season. Nokia has rolled out three new products in the past month.

The mobile phone segment posted third-quarter profit of $989 million on revenue of $4.88 billion. Its market share slipped to 34% in the third quarter from 35% in the second quarter, but Ollila expects that to turn around in the fourth quarter. "We see the competitive landscape normalizing as our competition runs out of end of life phones," Ollila said, taking a shot at Motorola(MOT). Nokia's competitor gained two points of market share in the second quarter in part by selling low-end phones into the Chinese market, but acknowledged in its third-quarter results last week that it had few older phones left to sell. Nokia pushed its phone margins up to 19% from 17.9% in the second quarter, while infrastructure operating margins fell to 9.3% from 15.8%.

"We don't get used to the kind of margins we saw in the third quarter, obviously," Ollila said of the wireless equipment segment, which garnered $1.5 billion in revenue for a $144 million profit in the quarter. Nokia projects it will ship 4,000 base stations units for third-generation wireless systems in 2001, though it will not book any revenue on those shipments until mid-2002, a point it has emphasized in the past several quarters.

Nokia cut its 2001 industry-wide handset sales estimate to 390 million from around 405 million phones, continuing the steady erosion of that number. Industrywide sales estimates ranged as high as 600 million phones at the start of the year, before the depth of the worldwide economic slowdown became apparent. Shares in mobile phone outfits such as Nokia, Ericsson(ERICY) and Motorola have plunged throughout 2001 as it became apparent that the industry's once-boundless ambitions would have to be scaled back.

As a result, the wireless companies were steadily paring back their sales and earnings expectations for 2001 and beyond, even before the Sept. 11 terrorist attacks that further disrupted business around the globe. The morning of Sept. 11, before the attacks on New York and Washington, Nokia toned down its third-quarter revenue outlook while maintaining its profit goals.

For the third quarter, Nokia took a one-time $729 million charge, primarily to write down potential nonpayment of vendor financing from Turkish cell phone operator Telsim. Vendor financing is the practice in which equipment sellers such as Nokia finance customers' purchase of that gear, often on favorable terms. Nokia maintained $3.89 billion in vendor financing commitments at the end of the third quarter. The practice has come under fire throughout the telecom industry in the last year as cash-strapped customers have gone belly-up, leaving big equipment sellers such as Nokia, Nortel and Lucent often holding the bag on unsecured loans.

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