Price War Takes Toll on Nokia

The handset giant beats estimates but notes a sharp decline in phone unit profits.
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Updated from 7:20 a.m.

Nokia

(NOK) - Get Report

continues to pay the price for last year's mistakes.

The Helsinki, Finland, wireless giant beat Wall Street estimates with its third-quarter earnings early Thursday. It also boosted fourth-quarter guidance and offered bullish commentary on the industry's sales pace. Its shares rose 2% in early trading.

But the company continues to sputter in the crucial U.S. market, losing market share there in the latest quarter in spite of a price war that punished operating margins.

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 a share on sales of $8.6. Wall Street was expecting third-quarter earnings of 15 cents a share on sales of $8.4 billion.

Nokia also highlighted the strength of the wireless market overall, saying it sold 51.4 million phones during the quarter and that industrywide sales were 158 million. The company boosted its annual handset sales target to 630 million units, continuing the handset world's record run.

But despite those solid numbers, much attention will be paid on Wall Street to the company's misfortunes in the U.S. "Nokia's mobile device market share increased quarter on quarter to 33%, according to our preliminary estimate," the company said in a Thursday morning press release. "We made substantial market share gains in major Western European markets and maintained our leadership position in China. However, in the U.S. we lost market share during the quarter, and despite strong sales growth, our market share in Latin America was down slightly from the second quarter 2004."

The company also said the mobile phone unit that makes up the bulk of its earnings and revenue suffered a 44% operating profit drop on a 13% year-over-year sales decline.

Still, the news wasn't all bad. 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.

The news comes as the company seeks to put a difficult stretch behind it. Nokia has encountered fierce competition that whittled its once-commanding wireless-handset market share lead and punished its stock. Nokia has suffered a number of earnings disappointments even as the wireless telecom market expanded at a gangbusters pace.

The most recent setback

took place in July, when Nokia missed second-quarter estimates and trimmed its third-quarter profit target. Execs warned at the time that price cuts, high research-and-development costs and rising advertising expenses would cut into the bottom line.

Ultimately, success in its cost-cutting push helped Nokia shrug off the third-quarter worries and

boost its profit target by a third last month. Still, skeptics were piqued by the mere 2% uptick in Nokia's revenue forecast at the time.

Taking a look at third-quarter numbers, investors had hoped that Nokia would gain or at least hold on to its share of the global handset market. The company is still trying to recover lost ground a year after it failed to anticipate strong consumer demand for camera-equipped flip phones.

But some observers say Nokia still has a ways to go to strengthen its product lineup and compete with popular models from

Motorola

(MOT)

,

Samsung

,

LG

and

Sony Ericsson

. The last is a joint venture between

Sony

(SNE) - Get Report

and

Ericsson

(ERICY)

.

The third quarter is seasonally weak. The holiday season typically makes the December financial period the strongest for handset makers.

Healing?
Nokia's third-quarter rebound

Analysts expected Nokia to sell 48 million phones in the third quarter ended last month. An increase to the current forecast for total industry handset sales to exceed 620 million will be red meat for the wireless bulls.

Handset sales, and especially forecasts, have accelerated to record levels this year, leading some analysts to suggest that the industry could be left sitting on a mound of phones and components -- particularly in Asia -- after this winter's holiday selling frenzy tapers off.

In September, Nokia said inventory levels were "healthy." Nokia also promised it would improve its market share in Europe, but found the U.S. market was still a challenge.

Recent market share reports indicate that Nokia has had some success recapturing some of its lost turf. But most of the evidence suggested that the sales were coming at the expense of European rival

Siemens

(SI) - Get Report

, and not from No. 2 and No. 3 challengers Motorola and Samsung.

Analysts and investors expect Nokia will update its new phone introduction plans and give some details about new models that may be available later this year.

Early Thursday, Nokia rose 32 cents to $14.30.