Nokia Raises Hopes Again

The company appears to be making slow but steady progress from a costly fashion mishap.
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Stateside stumbles notwithstanding, it's starting to look like Nokia (NOK) - Get Report is getting its game back.

The Finnish handset leader beat third-quarter estimates and boosted financial targets. The good news came as the company sold more phones than expected despite a parts shortage. Nokia also raised its estimates for 2004 industry cell-phone unit volume, easing fears of an inventory glut. The company even regained some lost market share, adding that it plans to continue to hammer rivals on price as it sees fit.

Nokia shares jumped 30 cents, or 2%, to $14.28 in early trading Thursday after the company turned in a better-than-expected performance in the third quarter ended last month.

"Results were very strong," says Sanford Bernstein analyst Paul Sagawa. "With new handset announcements set for Nov. 3 at the upcoming analyst conference, and the general hype of Christmas season, I expect Nokia to be a great fourth-quarter performer."

The fact that some analysts are beginning to look at Nokia as a comeback kid says a lot about how far the wireless gearmaker has come. It was only earlier this year that consumers shunned the company's stale, blocky phones.

While slow to bend to fashion and to the demand for folding camera phones, Nokia has been able to throw its weight around on prices to help defend its position until new models were brought along.

This summer, because of the design debacle, Nokia's market share had dropped nearly 10 percentage points to 29%, from 39% late last year. But as of the most recent quarter, the company says it has regained share and now commands a third of the market.

Industry observers say Nokia's price-war tactics and new phone designs should help the big Finn win more sales at its rivals' expense.

Sagawa says

SonyEricsson

has had success with three popular models, but he fears the venture of

Sony

(SNE) - Get Report

and

Ericsson

(ERICY)

will be outmatched by the dozen or so new phones Nokia will bring to market this fall. Meanwhile,

Motorola

(MOT)

is riding high on the popularity of its new "triplets" flip phones. If the company can deliver as promised, it may have luck on 3G, or next-generation, phones, says Sagawa, who has a buy rating on Nokia and a neutral on Motorola.

Nokia's biggest gains will likely come from more vulnerable phonemakers like

Samsung

and

Siemens

(SI) - Get Report

, says Sagawa. Samsung hasn't updated last year's designs, and Siemens has been slipping against Nokia, and "software glitches" have not helped ignite sales of its high-end phones.

But Nokia's presumed gains won't come without a cost.

On a conference call with analysts Thursday, Nokia executives said they expect marketing costs to increase as the company works to drum up interest in its new phone launches.

While the company saw market share gains in Europe and China, the U.S. business slipped. And surprisingly, amid concerns about parts surpluses, Nokia said its inventory levels, especially in China, were "historically very, very low at this time."

And even more surprisingly, Nokia ran into component supply shortages for some of its more popular phones. Even with the holdup, the company shipped 51.4 million phones, well above the 48 million that analysts had been looking for.

Nokia now says total industry handset sales should hit 630 million units this year, 10 million more than previously estimated, continuing the cell-phone sector's record run.

For the quarter ended Sept. 30, Nokia earned 660 million euros, or 14 euro cents a share. That's down 20% from the year-ago 823 million euros, or 17 euro cents a share. Sales rose 1% to 6.94 billion euros, though the company said the top line increased 8% on a constant currency basis.

With the euro fetching about $1.23 recently, that translates to latest-quarter dollar-based earnings of 17 cents a share on sales of $8.6 billion. Wall Street was expecting third-quarter earnings of 15 cents a share on sales of $8.4 billion.

For the fourth quarter, the company expects to earn 21 cents a share on sales of $10.4 billion. For the fourth quarter ending in December, analysts surveyed by Thomson Financial expect a 19-cent profit on $9.4 billion in revenue.

Still, skeptics say Nokia needs to show it can reverse its slide in the U.S., particularly in the fast-growing code division multiple access, or CDMA, market. Outfits such as Verizon Wireless and

Sprint

(FON)

have meager Nokia offerings going into the holidays.

Nokia executives said they were working with the CDMA carriers, and that they expect to show some progress in the coming quarters. Observers said that means sometime early next year.

Seems Nokia can try to get its game back in other markets until then.