Nokia to increase solutions, if not market share

Despite a significant drop in earnings and lowered expectations for the rest of the year, Nokia (NYSE:NOK) Chief Executive Officer Olli-Pekka Kallasvuo said he can see the bottom. Nokia announced its second-quarter earnings today, including a 66% year-on-year decline, and is counting on an aggressive focus on solutions to drive its trek to the bottom.

“Going forward, our intent is to create significant sales value, and accomplishing this requires Nokia to develop new skill sets, because the mobile industry is undergoing a fundamental transformation driving our strategic transformation into a services company,” Kallasvuo said on Nokia’s Q2 earnings call.

This fundamental transformation, which Kallasvuo said is the biggest change in mobile’s history, is being driven by smartphone growth and the rise of the mobile Internet. Nokia will accelerate the pace of change in its devices business, he said, focusing on developing solutions optimized for speed, mobility and transformation. Nokia’s vision is one of a location-aware mobile Internet, complemented by its Ovi Store strategy and operating system of choice, Symbian.

Overall, sales for the world cell-phone leader fell 25% to 9.9 billion Euros in Q2 but were up 7% year-over-year. Even with an earnings decline, however, device sales improved sequentially, and Kallasvuo said that growth in Nokia’s services business met its expectations. In total, Nokia shipped 103.2 million devices during the quarter, 15% less than a year earlier, but 11% more than the previous quarter. This was in part because of a dip in Nokia’s average selling price, down from 74 Euros last year to 62 Euros today.

The ASP decline began in Q1 when Nokia also saw its shipment volumes fell below 100 million for the first time in two years. Since then, the company has cut more jobs and narrowed its services focus, relying more on third parties. In response to its poor Q2, Nokia also cut its profitability and market share outlook. It is now predicting its mobile phone operating profit margin will match the first-half at 11.3%, less than analyst predictions of 17.4% and that its market share will stay the same as last year, compared to original forecasts of a rise. Rick Simonson, executive vice president and chief financial officer, said that in today’s economic climate, it is only prudent and rational to refine guidance and, while Nokia thinks its industry demand picture is bottoming out, it remains fragile and volatile given the market conditions.

“An important metric we were obviously getting criticism and concern about on the back-half of 2008 was our smartphone market share was declining,” Simonson added. “We said we’d stop the decline and work to improve. Now we have two quarters in a row where we’ve improved our market share in smartphones, and we are going to democratize the smartphone market. We’ve said that we’re doing it and there’s proof of that. That will help us offset some of these headwinds in the second half.”

Today’s revision to its guidance, could also suggest that Nokia will drive its ASP even lower, but Simonson said this metric will be helped by its higher-end smartphone market share. He expects the industry ASP to go down overall as there is still more volume from the lower end. If consumers decide to cut back by trading down in handsets, he said Nokia will be well positioned to provide the lower-end of phones, as well as the higher-end. He doesn’t anticipate losing any customers based on pricing.