Nokia's startling profitability
Following disastrous results from competitor Ericsson, Nokia has surprised the market by squeezing remarkable levels of profitability from sales that are merely on-trend.
Ovum
Nokia's has released Q3 results that comfortably beat market expectations on profitability.
Mobile phone shipments were 111.7 million in the quarter, up 11 per cent on Q2 and 26 per cent over the year. This brought total revenue growth of 28 per cent to €12.9 billion.
However, profitability improvements lifted operating profit by 69 per cent to €1.86 billion, and net profit by a thumping 85 per cent, with the bulk of this coming from the mobile phones and multimedia divisions, although the enterprise division also improved strongly.
In reviewing these results we need to remember that Q3 last year was not great for Nokia. At that time the mid-range portfolio was ageing, there were no thin phones and the partial withdrawal from the CDMA business brought significant exceptional charges. These serve to inflate the growth rates in today's numbers.
Nonetheless these are very strong results from Nokia indeed. Device volumes are on the trend, but the profitability gains are startling. All divisions are showing improvement.
In the mobile phones division the numbers are helped by the 6300 series thin phones and the entry level 1100 and 1600 ranges. At the entry level, Nokia launched its single chip 1200 series earlier this year and promised the fastest production ramp in the history of the industry with them. The results should start to show in Q4 and should improve margins. Although the average handset selling price fell from €93 to €82 bringing revenue growth of only 3 per cent over the year, profits in this division rose 78 per cent. Other vendors will weep at the 22.6 per cent operating margin of this group.
The multimedia division has held its 50 per cent share of the rapidly growing smartphone segment and improved its margins by 57 per cent on 23 per cent revenue growth. This is largely down to the N70, N73 and N95 models.
The slight concern in these results is that Nokia lost market share in the quarter in Europe, Latin America and the middle east most likely thanks to gains for Samsung and LG in those regions. More encouragingly it gained share sequentially in North America, although this is still very small and remains "work-in-progress".
The enterprise solutions division broke even for the first time in Q2 07 and continued its improvement this quarter, helped along by significant growth of enterprise devices, bringing sales growth of 105 per cent. Nokia suffered some component shortages on the E90, which have now been fixed and it expects stronger performance in Q4.
Nokia Siemens Networks has been the subject of much press speculation and comment in recent weeks. It improved its position from Q2, lifting sales by 7 per cent and recovering margins from -10 per cent to -1 per cent. The market dynamics in networks remain challenging, so it is encouraging to see NSN able to get on with building the business while also going through such a large restructuring. Nokia said that it will increase the expected synergies from €1.5 billion to €2 billion. This performance also appears to show that the difficulties experienced by Ericsson this quarter are company specific, more than market issues.
The biggest challenges for Nokia going forwards are: to get through the impending restructuring of divisions without disrupting the business; to articulate the targets and detailed plans for the internet strategy for 2008, especially the integration of its recent acquisition Navteq; and to continue to improve NSN, building back to healthy profitability.
Martin Garner is mobile practice leader at telecoms, IT services and software consultant Ovum
Nokia's has released Q3 results that comfortably beat market expectations on profitability.
Mobile phone shipments were 111.7 million in the quarter, up 11 per cent on Q2 and 26 per cent over the year. This brought total revenue growth of 28 per cent to €12.9 billion.
However, profitability improvements lifted operating profit by 69 per cent to €1.86 billion, and net profit by a thumping 85 per cent, with the bulk of this coming from the mobile phones and multimedia divisions, although the enterprise division also improved strongly.
In reviewing these results we need to remember that Q3 last year was not great for Nokia. At that time the mid-range portfolio was ageing, there were no thin phones and the partial withdrawal from the CDMA business brought significant exceptional charges. These serve to inflate the growth rates in today's numbers.
Nonetheless these are very strong results from Nokia indeed. Device volumes are on the trend, but the profitability gains are startling. All divisions are showing improvement.
In the mobile phones division the numbers are helped by the 6300 series thin phones and the entry level 1100 and 1600 ranges. At the entry level, Nokia launched its single chip 1200 series earlier this year and promised the fastest production ramp in the history of the industry with them. The results should start to show in Q4 and should improve margins. Although the average handset selling price fell from €93 to €82 bringing revenue growth of only 3 per cent over the year, profits in this division rose 78 per cent. Other vendors will weep at the 22.6 per cent operating margin of this group.
The multimedia division has held its 50 per cent share of the rapidly growing smartphone segment and improved its margins by 57 per cent on 23 per cent revenue growth. This is largely down to the N70, N73 and N95 models.
The slight concern in these results is that Nokia lost market share in the quarter in Europe, Latin America and the middle east most likely thanks to gains for Samsung and LG in those regions. More encouragingly it gained share sequentially in North America, although this is still very small and remains "work-in-progress".
The enterprise solutions division broke even for the first time in Q2 07 and continued its improvement this quarter, helped along by significant growth of enterprise devices, bringing sales growth of 105 per cent. Nokia suffered some component shortages on the E90, which have now been fixed and it expects stronger performance in Q4.
Nokia Siemens Networks has been the subject of much press speculation and comment in recent weeks. It improved its position from Q2, lifting sales by 7 per cent and recovering margins from -10 per cent to -1 per cent. The market dynamics in networks remain challenging, so it is encouraging to see NSN able to get on with building the business while also going through such a large restructuring. Nokia said that it will increase the expected synergies from €1.5 billion to €2 billion. This performance also appears to show that the difficulties experienced by Ericsson this quarter are company specific, more than market issues.
The biggest challenges for Nokia going forwards are: to get through the impending restructuring of divisions without disrupting the business; to articulate the targets and detailed plans for the internet strategy for 2008, especially the integration of its recent acquisition Navteq; and to continue to improve NSN, building back to healthy profitability.
Martin Garner is mobile practice leader at telecoms, IT services and software consultant Ovum
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