Nokia's Q4 Operating Profits Jump 18.9% Y/Y, Boosts Market Share to 39% on Smartphone Growth

Nokia has announced its fourth quarter operating profits had jumped 18.9% year-on-year (y/y) to 1.47 billion euro (US$2.06 billion), as the world number-one handset vendor boosted its share of the lucrative smartphone market. Finland-based Nokia also reported its revenues in the quarter were down 5.3% y/y to just under 12 billion euro, but the company's net profits jumped by 65% y/y to 948 million euro, significantly beating analyst expectations of profits in the region of 600 million euro, as stringent cost-cutting plans paid off.

Nokia also released its full year 2009 figures, which showed revenues had fallen 19.2% y/y to just under 41 billion euro, while operating profit was down 50.2% to 3.5 billion euro compared to 2008's result, as the ongoing global economic downturn hit handset sales, and Nokia suffered from restructuring costs.

However, the vendor announced its global market share had bounced back to an estimated 39%, up from 37% at the end of 2008, as it sold 127 million handsets in the fourth quarter, up 12.4% y/y from 113 million units in the fourth quarter of 2008, although the average selling price had dropped to 63 euro in the fourth quarter of 2009, down from 71 euro a year earlier. Nokia's fourth-quarter revenues in Europe dropped by 1.2% y/y, and around 7% in the Americas, but the vendor saw significant growth in the APAC region, boosting revenue by 15%, and by 36% in China.

Nokia has maintained its previous outlook from December for a 12–14% operating margin in 2010, down from 15% in the fourth quarter, a flat handset volume market share, and 10% handset market volume growth this year.

Outlook and Implications

• Nokia Claiming a Victory as Smartphone Wars Heat Up: Nokia said its global market share of the smartphone market rose to 40% in the fourth quarter, from 35% in the previous quarter, while its revenue from smartphones jumped 26% from the the third quarter to 3.9 billion euro. The world number-one handset vendor has made no secret of the fact it is targeting the smartphone market this year, as it expects the high-end to amount to a bigger share of its device sales, although the vendor expects competition to remain fierce as it takes on the likes of RIM's BlackBerry stable and Apple's iPhone (see World: 5 January 2010: Nokia Reiterates Aim to Hold 40% of Global Handset Market in 2010—Report). Nokia has locked horns with Apple in particular, moving into the computing segment with its netbook, a segment which Apple has taken aim at this week with the iPad (see World: 28 January 2010: The iPad is Revealed, with Book Downloads and 3G from AT&T), and the tussle between the two vendors has spilled over into the courtroom (see United States: 18 January 2010: Apple Files Counterclaim Against Nokia with ITC). Nokia has largely attributed its fourth-quarter success to its high-end devices, such as its N900 and N97 smartphones, which have pushed its operating margins in its key devices and services segment to 14.9%, from 9.4% in the fourth quarter of 2008. However, average smartphone prices dipped to 186 euro from 190 euro in the third quarter, as the firm tried to win back customers with discounts, and Nokia has still lost significant ground to Apple's iPhone and Blackberry-maker Research in Motion during 2009. Nokia's growth in the smartphone market share has largely been stolen from Sony Ericsson and Motorola, not from key rivals Apple and RIM, and the Finnish giant is still seeing its greatest gains in emerging markets—not the key smartphone markets it covets.
• Cost Cutting Kicks In: Nokia has trimmed costs throughout 2009 in response to tough market conditions, announcing more than 3,000 job cuts during the year, including voluntary buyouts, and it pulled back work from contractors. It also said in November that Nokia Siemens Networks (NSN), its joint venture (JV) with German engineering giant Siemens, would cut as many as 5,760 jobs this year, in the second reorganisation since its creation. Nokia has also halved its smartphone launch plans for 2010, trimming back on R&D costs as it seeks to further streamline its operations. This strategy has largely paid off, as its fourth-quarter result beat almost all market expectations, which will see it well-placed to benefit from recovery in the handset market in 2010.
• Value-Added Services Targeted for Growth as Nokia Diversifies: Nokia is aiming to boost the profit margin at its key Devices and Services unit to 14% in 2010, as it shifts its focus towards new technologies and the services sector, in particular its online apps portal Ovi (see World: 3 November 2009: Nokia Calls Time on N-Gage Platform as Focus Shifts to Ovi Store). Nokia CFO Timo Ihamuotila told Dow Jones the company aims to improve the usability of its devices and launch new services to further boost its smartphone market share, after it last week made its Ovi Maps navigation service subscription-free. Ihamuotila also said Nokia is further exploring the border area between smartphones and computers and may introduce more netbooks following its newly launched Booklet 3G, although he admitted it was too early to tell how much of a threat Apple's new iPad may pose. Meanwhile, sales at NSN fell 16% y/y in the fourth quarter to 3.6 billion, although the unit swung to a 17-million-euro operating profit, from a 179-euro-million loss a year earlier, when it  was hit by restructuring costs. NSN has recently secured several key 4G deals, including those from TeliaSonera in Sweden and Finland (see Sweden: 13 January 2010: Ericsson, NSN Win Key 4G LTE Deals with TeliaSonera in Scandinavia). However, as competition in the network vendor sector reaches breaking point, NSN has predicted that there will be casualties, and IHS Global Insight expects to see some significant consolidation with the next year.
• Any Signs of Recovery in Handset Market? Nokia's U.S. rival Motorola has also reported strong smartphone sales this week, led by its Droid, based on Google's Android platform, which helped it swing to a fourth-quarter profit even, although its overall handset market share has fallen to 3.7% from 4.7% a year ago, keeping it at number five in the global rankings behind Nokia, Samsung, LG, and Sony Ericsson, and the U.S. vendor is predicting a loss in the current quarter. Samsung has recently announced sales volumes were up 30% in the fourth quarter to 69 million but is also reporting lower margins than in the previous quarter. Last week Sony Ericsson warned recovery may be slower than expected as it reported its seventh straight quarterly operating loss, while its fourth-quarter revenues had risen 3.5% from the previous quarter, but were still down by 39.7% y/y, with only 57 million phones sold in 2009, from nearly 97 million in the previous year (see World: 22 January 2010: Sony Ericsson's Losses Continue in Q4; Outlook Improves). The majority of vendors are still looking for a quick buck by targeting the lucrative high-end and smartphone markets, but Nokia's success in capturing significant market share and building its brand strength in the developing world should not be ignored.