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Nokia Misses on Revenue, but It-Could-Have-Been-Worse Thinking Boosts Stock

The wireless leader's CEO predicts only slight growth for next quarter.

Updated from 8:10 AM

Nokia

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wasn't kidding about a slowdown.

Nokia confirmed its June warning before the market Thursday, narrowly beating Street estimates with 15 cents a share in earnings, but missing revenue expectations with $6.3 billion for the second quarter. Analyst consensus called for 13 cents a share earnings on $6.5 billion in revenue, according to Multex.com. Nokia announced June 12 that its second-quarter revenue would hit $6.58 billion, or 10% growth over the year-ago quarter, because of a spreading geographical slowdown in the wireless industry. It fell short of that mark.

Nokia was up more than 15% in recent trading, boosted by relieved investors who were expecting the worst.

CEO Jorma Ollila detailed a global outlook that featured the strongest revenue growth in Asia/Pacific, but saw Germany join Southern Europe and the U.S. in a sharp decline. Two weeks into the new quarter, Nokia forecast that deteriorating business would stabilize enough to produce flat to 5% sales growth in the third quarter but a slightly decreased 12- to 13-cent profit. Ollila kept his outlook conservative for the fourth quarter, predicting sequential growth in sales and earnings, but giving no specifics.

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After banner first-quarter growth that defied a U.S. economic slump, Nokia's overall sales fell 8%. Nokia mobile-phone revenue dropped off 8% to $4.6 billion after the first quarter's sequential 20% growth. Nokia Networks, its infrastructure business, notched $1.6 billion in revenue in the quarter, a 6% quarter-over-quarter decline. Those numbers were considerably toned down from the 35% sequential growth in the first quarter. Profit margins on its wireless equipment dropped from 18% to 15.8% in an environment where carriers were loath to spend on current-generation infrastructure.

The mobile-phone market leader's comments returned several times to stern criticism of unnamed competitors (we'll take a stab:

Motorola

(MOT)

) and handset pricing during the second quarter. Ollila scolded that "selling below sales margin is a game that's not much good for shareholder value. We won't play a game to shoot up market share at any cost." It was a poke at Motorola, which boasted during its earnings conference last week that it gained 1% to 2% in handset market share, largely by selling older model phones in China.

Nokia maintained a 35% slice of the mobile-phone market in the third quarter, and Ollila asserted that it kept its average selling prices on phones "stable on a sequential basis." Nokia mobile phones held on to 17.9% operating margins, down a touch from the first-quarter's 20.7% figures. Analysts grilled the CEO on the strategy of maintaining phone prices, fearing that Nokia would lose market share to discounting competitors. Ollila countered that "if there is not significant volume flowing, there is clearly no advantage." Take that!

Ollila defended both Nokia's cash position and its $4.3 billion in vendor-financing practices. As with last quarter, he stressed Nokia's solid balance sheet and lauded its almost 1 billion euros ($855 million) in cash flow. He implied that Nokia would cut back on financing for the rest of the year, calling current financial commitments to customers "bridge funding" that was necessary to help them shoulder the cost of third-generation systems until revenues roll in.

Ollila added that he does not believe the timetable for 3G rollout has been pushed back since the revised plans of late 2000, but added that investors won't see equipment revenues on Nokia's books until mid-2002. Nokia expects initially lower pricing of 3G equipment as the technology catches on, followed by higher-margin sales.