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Day July 17, 2009

Nokia Quarterly Results

Nokia’s latest quarterly results and forecast caused a 15% drop in the share price on a day when the S&P rose by about 1%. The drop was the largest single day change in the company’s valuation since 2004. The cause for the drop was not macroeconomics or performance in the previous quarter, but the guidance provided.

The shock was in an unchanged low margin and a flat market share. Both of these measures of performance were expected to improve as the overall market improved. What Nokia is saying, in effect, is that it will perform no better than the market average. Naturally, its value should therefore be no higher than the market average.

The trouble is that the “market” for mobile phones is abysmally free of value and hence of profits. Taking the sum of profits for all the major incumbents (Nokia, Samsung, LG, Sony Ericsson and Motorola) we find that net profits for the entire industry are, at best, flimsy, at worst, negligible. But this begs another question: why is value missing in mobile devices–a market that seems to be growing faster than almost any other technology market?

First a few facts:

  • Focusing only on Devices & Services, Nokia did make a net profit of EUR763 million on sales of 103.2 million phones. That’s EUR 7.39 average operating profit per phone. In Q1 Nokia Devices made about EUR 6 per phone, so a slight improvement, but down from about EUR 20 a year ago.
  • Sony Ericsson entered its fourth quarter of losses.
  • Motorola entered its 9th consecutive quarter of losses.
  • Samsung and LG are at about break-even.

So if one were to look at the incumbents, the ~1 billion phones they sell a year seem to be generating barely EUR2 per phone, most of it in the hands of Nokia.

The exceptions are, of course, the entrants RIM and Apple with EUR 60 and EUR 120 profits respectively per phone, orders of magnitude above average.

Nokia seems to be the best of a bad lot. Can Nokia expect to join the entrant cohort or sink with the incumbents? Answering this question forces us to go through a deep examination of what correlates with value in the new device market.