The Finnish handset giant endured another setback Thursday,
lowering its profit target for the third quarter ending in September. On a conference call with analysts, Nokia execs warned that price cuts, high research-and-development costs and rising advertising expenses will cut into the bottom line. Meanwhile, sales will be flat even as the handset market braces for continuing expansion.
"It's going to be a bad quarter, a bad year for Nokia," says Charter Research analyst Ed Snyder. "The visibility of their recovery has just moved further out."
Snyder has a neutral rating on the stock, which dropped $2.11, or 15%, to $12.13 Thursday, putting it at levels not seen in six years.
Nokia's latest pratfall took the wind out of some rivals' sails as well. Though its
handset venture posted a
strong second quarter, Swedish wireless company
saw its shares drop 6% Thursday. That decline came even as Sony Ericsson boosted its industrywide handset-sales forecast some 9% to a record 600 million.
For its part, Nokia continues to be haunted by its poor holiday planning last year. A rare lapse by Nokia's vaunted designers left the company with a stable of stale blocky phones, just as customers were seeking the fashionable clamshell-shaped color camera models from rivals like
and Sony Ericsson.
The fashion faux pas has turned out to have enduring repercussions. Nokia's worldwide market share dropped sharply in the first quarter, to 29% from 35%, according to Gartner Group. Worse still, in Europe, Nokia's home, its share fell a whopping 10 percentage points in the March quarter. Those declines continued to be felt in the latest quarter, as Nokia slashed prices but failed to regain its momentum.
"Owing to extensive in-house market research, they sold themselves on the idea that people didn't want a clamshell phone, and that killed them," says ABI Research analyst Ray Jodoin.
CEO Jorma Ollila acknowledged on the earnings call Thursday that the key to the company's revival lies in the introduction of better phones across all price categories. Ollila said he expected to see some improvement in the lineup in the fourth quarter as the company rolls out newer designs.
Meanwhile, despite cutting handset prices to win sales, Nokia did not manage to gain any lost ground in the most recent quarter. Sure, the company stopped its market share losses, but it ended up leaving June pretty much in the same position as it was in March. Considering the costs of the latest price war, that's not a happy outcome for Nokia investors.
"Nokia's story is going to be much more about the costs of playing catch-up, than the costs of a vicious price competition," says Sanford Bernstein analyst Paul Sagawa, who rates the stock buy and whose firm doesn't do underwriting.
"Nokia fell behind on development and had to go outside for design and engineering help to get back on track," adds Sagawa. "Now they are going to advertise and promote the living heck out of new product intros starting in August and September."
Getting to the top of the handset market was a brilliant achievement by Nokia, but staying on top will require a more sustained, gritty effort.
On the positive side, few observers are calling for Nokia's demise.
"The curtain certainly isn't coming down on these guys," says Charter's Snyder.