Nokia's Slide Raises Fears of Price War

Some investors now expect the hobbled Finn to take its surging peers down in a market-share grab.
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Nokia (NOK) - Get Report reminded investors Friday that it's always darkest before the dawn.

The struggling wireless giant said that contrary to the hopes of its many Wall Street fans, its sales numbers will have to get even worse this year before business finally picks up in earnest around year-end.

After the Finnish cell-phone giant handed Wall Street its

second dose of disappointment this month, executives told analysts on a conference call Friday to brace for a rough ride as the company prepares to sacrifice profit margins to win back market share.

Unhappy with Nokia's performance and the harsh cure needed to regain its glory, investors continued a selling assault. The stock dropped $1.42, or 8.85%, to $14.63 Friday. Nokia shares have lost a third of their value since the company warned of a sales shortfall on April 6.

Nokia's stunning stumble comes at a time when worldwide demand for cell phones is at record levels, leaving little to blame outside of the company's stale lineup of handsets.

While Nokia still sells over a third of all cell phones in the world, the company lost 2 percentage points of market share in the first quarter as fickle fashions favored folding photo phones from outfits like






CEO Jorma Ollila characterized the poor performance as an "architecture issue," presumably meaning that it takes a lot of time to make flip-open clamshell phones when all you've previously made are candy-bar shapes. But Ollila says the changes are well under way and that six of the 40 new phones coming this year will be folding models.

Short of declaring an all-out price war, Ollila said the company was "prepared to use the tactics available" to regain its dominant sales lead.

Ollila says the cut in projected earnings, to about 14 euro cents from 17 cents in the current quarter ending in June, is directly related to lower anticipated margins in the handset business. He also said total handset volume will increase slightly this quarter. When these factors are taken together, analysts say, Nokia is clearly ready to cut prices in order to sell more phones.

"Market share is absolutely critical," says Ollila. "It gives us tremendous advantage."

In years past, price has been an effective weapon for Nokia. Motorola was dethroned as the handset king in the mid-'90s after Nokia gambled that lower prices would win away more of Motorola's customers. Motorola has since dropped to No. 2 and, thanks to missteps of its own, has yet to show it has stopped the fall.

American Technology Research analyst Albert Lin points out that Korea's Samsung made sales gains that correspond to the sales losses posted by Nokia. This give-and-take between Nokia and Samsung signals that the Korean electronics giant has become a formidable player in the global phone industry, says Lin, who has a buy rating on Nokia.

"We believe this serves as further proof that the industry remains healthy and the normal shifts between Tier 1 players will continue as it has for the last few years," Lin wrote in a research note Friday.

For its first quarter ended March 31, Nokia posted earnings of 816 million euros ($979.2 million), or 17 European cents a share, down from 977 million euros, or 20 cents a share, a year earlier. Sales slipped 2% from a year ago.

For the second quarter, Nokia predicts earnings will be just 13 to 15 euro cents a share, which is equivalent to about 16 cents to 18 cents a share and well short of Wall Street's 23-cent consensus estimate. The company said second-quarter sales would be flat to even with the year-ago 7 billion euros ($8.4 billion). That's short of the Wall Street estimate of $8.52 billion.

Handset sales aside, Nokia saw better-than-expected demand for wireless networking gear as telcos boost capacity and make upgrades. This is good news for the rest of the equipment supplier pack, led by










Nokia bulls are now looking ahead to a potentially stronger future. In fact, the

recent introduction of an improved N-Gage game-console phone suggests to some investors that Nokia's design talents and market strength will soon have competitors on the run again.