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Nokia cuts forecasts, confirms slowdown

Finland's Nokia on Tuesday said that it expected flat earnings for the first quarter of 2001, confirming fears that the world's most successful mobile phone maker is succumbing to a sector slowdown.

Nokia -- once seen as largely immune to troubles affecting rivals Motorola of the United States and Sweden's Ericsson -- forecast first quarter earnings per share would be unchanged on the same quarter of last year at 0.19 euros ($0.18).

Nokia also cut its forecast for 2001 industry-wide handset sales to between 500-550 million units from 550 million, but chief executive Jorma Ollila acknowledged he was unable to predict where the industry was going.

"We just don't know exactly what is going to happen and therefore we have come out with a band of 500 to 550 (million)," Ollila told a conference call. Nokia estimated more than 405 million phones were sold last year.

"It's just not possible to predict in the same way as it was in previous years," he admitted, adding that uncertainty about the US economy was a major influence.

His comments did little to calm market concerns about the future of the handset industry, in which Nokia is the largest player with over 30 per cent of the market share.

Nokia's stock closed 6.85 per cent lower at 37.12 euros, off a low of 32.70 euros touched in October last year but significantly lower than its life-high of 65 euros reached in June last year.

Tech shares weaker

The news helped pull the Dow Jones Technology index almost two per cent down in late trade. Motorola traded one per cent lower at $22.87, while Ericsson was flat.

On Nasdaq Nokia -- which has a market capitalisation of around $172 billion -- was trading 8.35 per cent lower at $33.90.

Merrill Lynch said Nokia shares may fall to as low as 32 euros in the immediate term and the investment bank said it would likely cut its 2001 earnings forecast by 15 per cent.

The company attributed its forecast of flat first quarter earnings to a combination of slower than expected market growth and the cost of gaining further market share.

"This reflects somewhat slower-than-anticipated market growth during the first quarter and the company's strategy of aggressively gaining market share especially in mobile phones," said Ollila, credited with turning Nokia into one of the world's leading technology groups.

Nokia's gloomy forecasts increased concerns about a sector battered by weak fourth quarter results and the outlook from Motorola and Ericsson, which last week pulled out of mobile phone manufacturing to stem losses in that division.

The market will watch closely results from Germany's Siemens, which is one of the fastest growing mobile phone makers, and France's Alcatel, due out on Wednesday.

Nokia's pre-tax profit for the fourth quarter of last year rose 39 per cent year-on-year to 1.77 billion euros ($1.62 billion), slightly above the median forecast in a Reuters poll of 1.70 billion euros.

Fourth-quarter net sales showed a better-than-expected jump of 46 per cent to 9.28 billion euros.

Weaker than expected sales growth forecast

Nokia also forecast weaker-than-expected first quarter sales growth of around 25-30 per cent, with only 25 per cent growth for its handset unit, which makes up some 70 per cent of total sales.

Analysts said Nokia was in effect issuing a first quarter profit warning, and said it was the second warning in three quarters. Last July it warned about third quarter profits.

The group, hit along with rivals by slowing global mobile phone sales and subscription demand, said operating margins at its key handset division would reach 20 per cent at the latest in the fourth quarter of this year.

Nokia's handset margins are traditionally above 20 per cent.

"The (Q4) result was in line with expectations, it's getting tougher in the market place," said fund manager Jamie Sandison, Edinburgh Fund Management, which holds Nokia and Ericsson stock.

Ollila also said he saw mobile phone market growth to be stronger in the second half of 2001 than the first half.

But despite the gloomy industry outlook Nokia is still expected to be best placed to make most profits in this sector, as has been proven in past quarters, according to analysts.

They say Nokia has the economies of scale to make profits from both low-end and high-end phones.

But some questioned whether that was enough.

"Nokia is a fantastic company and one you should own stock in if you think handset demand is going to be strong," said Stuart O'Gorman, director of technology investments at Henderson Global Investors, who oversees a $4 billion portfolio, including a small Nokia stake.

Rate of demand uncertain

"I don't know how strong demand is going to be, but at the moment we don't favour the handset and networks wireless space."

Ericsson on the other hand has seen its position weaken considerably and announced losses amounting to almost 25 billion crowns ($2.60 billion) for the mobile handset unit last year, including the cost of outsourcing its entire production unit.

Ericsson, the world's third largest mobile phone supplier, posted a fourth quarter 1.5 billion crowns operating loss.

Nokia also said it expected to double outsourcing of mobile phone manufacturing to 20 per cent this year.

Analysts fear it may take longer for customers to warm to high-speed mobile Internet GPRS or even faster, new "third-generation" (3G) mobile phones, which operators and cellphone makers had hoped would be big sellers in coming years.

Nokia posted an operating margin of 21.3 per cent for its mobile phones in the fourth quarter below its fourth quarter of 1999 but considerably higher than the 2.1 per cent Motorola reported for its division in the fourth quarter and the negative 74 per cent at Ericsson's loss-making cellphones unit.

But Nokia's margin for the division was lower than some had expected in the industry, confirming tougher market conditions and increased price pressure on phones -- even for Nokia, which has largely been immune to this due to its ability to sell popular and user-friendly phones, especially inexpensive phones.

Nokia also pushed back the launch of its high-speed GPRS mobile phone -- which will give "always on" Internet access -- to the third quarter of this year from the first half, also confirming industry worries that the success of GPRS will take longer than earlier expected.

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