Wrong numbers for Nokia
By Nicholas George
Published: July 30 2000 23:42GMT | Last Updated: July 31 2000 03:05GMT
With about E56bn ($51.9bn) being wiped off Nokia's share price in a matter of hours last Thursday, the world's number one producer of mobile telephones may be asking what it did wrong.
The fall, which in absolute terms is probably the largest ever single-day loss by a European company, came despite the company announcing record second-quarter profits and reaffirming its buoyant outlook for the mobile handset market in general.
However, what the market focused on was the Finnish company's warning that third-quarter earnings per share would be lower than those of the second quarter - though in line or above year earlier results - because of delays in the introduction of new models.
Partially, the collapse in the Nokia share price can be seen as a results of the company's own success. Even results in line with expectations can disappoint a market that has consistently seen average forecasts beaten.
"It eventually becomes a self-defeating cycle, because you can't keep exceeding expectations when the expectations are so high," commented Susan Anthony, analyst at Credit Lyonnais Securities.
Yet coming less than a week after arch-rival Ericsson of Sweden revealed serious problems in its own handset division, Nokia's comments were pounced upon by nervous investors as perhaps pointing towards more long-term difficulties in the industry.
Nokia insists that the slowdown in earnings is purely a matter of timing with the launch of several new products - most notably the mass volume 6210 handset - delayed by a couple of months.
With older models facing constant price erosion, this means that Nokia's product mix will be less favourable during the third quarter and therefore operating margins will drop below the record 25 per cent achieved in the second quarter. By the fourth quarter, things will return to normal, the company says.
d3 Do recent comments by Ericsson and Nokia indicate stumbling growth rates in the handset market? Nokia says no, predicting sales of well over 400m this year compared with between 260m-280m in 1999.
Moreover, Jorma Ollila, Nokia chief executive, is keen to stress that the replacement market now accounts for about 50 per cent of sales, indicating that even in countries where mobile penetration is high, the market for handsets is by no means saturated.
There remain fears that in some European countries the high-cost telecoms operators are having to pay for third-generation mobile licences will stunt market growth.
Yet this threat seems to have receded following events in the Dutch 3G auction, where the spiral of bidding failed to materialise.
On top of that, it is not proven that high licence charges will retard market development. With so much at stake operators may roll out services quicker in an attempt to recoup the cost of the licences.
What perhaps is really worrying investors is the fear that Nokia will find it more difficult to recapture its premium margins.
As its two closest rivals have found, making money out of handsets even in a booming market is not that easy. Ericsson's troubled handset division recorded a loss in the second quarter, while Motorola of the US managed an operating margin of just 4 per cent in handsets.
Nokia has some points in its favour. It has a proven record of judging the market trends and of producing winning models throughout the price range.
Its leading market share, estimated at 27.9 per cent in May by research group Dataquest, gives it huge volumes and economies of scale its rivals cannot match.
As Merrill Lynch analysts pointed out, handset profitability may erode but it "is not going to fall off a cliff". |
