Sales of Nokia Mobile Phones in the third quarter are expected to grow by 4% – 9%, compared with the third quarter 2001. Nokia sees mobile phone profitability in line, if not exceeding, earlier expectations. Pro forma operating margins are expected to be at or above 20%, reflecting good take up of Nokia’s new products, including the Nokia 7650 imaging phone.

Backed by a strong overall demand pickup especially in Europe during the first two months of the quarter, the company is increasingly confident with its full-year overall market volume estimate of 400 million handsets in 2002.

In mobile networks, the GSM market environment remained challenging with operator investments showing greater-than-expected declines. W-CDMA equipment deployment and testing is proceeding well and the company expects W-CDMA revenue recognition to start in the third quarter. As a result of the GSM market decline, Nokia Networks third quarter sales are expected to decline by approximately 5% compared with the third quarter in 2001, with Nokia Networks pro forma operating margins now estimated to be about 5% for the third quarter.

Insight

Nokia’s mid-quarter update roughly maintains current guidance, with a strong performance in handsets off-set by continuing weakness in the networks business. The handset margins remain the envy of the industry. PMN sees Nokia maintaining and even slightly increasing margins over the next 12 – 18 months as the product mix tilts in favour of smartphone devices. Some financial analysts have suggested that competition in this product sector will drive down margins, but PMN sees lower margins on entry-level smartphones (e.g. 3650) being off-set by the introduction of new categories of advanced smartphones and communicators (e.g. Nokia 9210i, 7650 replacements).

The networks business continues to cause concern, but it is reassuring that Nokia can turn a profit at all when the market leader – Ericsson – is still reporting massive losses. The cycle will return to growth eventually and when it does, Nokia will be well positioned to challenge Ericsson for dominance in the infrastructure market.