Motorola gains, Nokia in pain

The globe’s two largest handset makers had second-quarter earnings calls that were vastly different. Nokia painted a dark picture for handset revenues for the remaining quarters of the year, while Motorola was flying high on record handset sales as it continued to close the market share gap between itself and the Finnish cellphone leader.

Motorola shipped 33.9 million handsets in the second quarter--a record for the company--an increase of 41% over Q2 of last year. Second-quarter revenues also jumped 24% year-over-year to $4.9 billion, driven by sales of many of its new high-end products like the Razr. Motorola estimates its global handset market share increased 1.7 percentage points to 18.1% and it is now the No. 2 handset supplier in Europe as well as the No. 1 supplier in North and Latin Americas.

Nokia by no means saw a decline in its own cell phone leadership. It shipped 60.8 million units last quarter, a 34% increase over volumes from last year’s second quarter, and it also enjoyed similar year-over-year revenue increases to Motorola, posting a 20% increase in net sales at EUR 4.86 billion (U.S. $5.33 billion). By its own calculations of 183 million phones shipped last quarter industry-wide, Nokia has a 33% market share, an increase of 2 percentage points over the last quarter. What worried the financial markets was not its market share gains for the first half of the year, but rather its profit forecasts for the current quarter.

Nokia chairman and CEO Jorma Ollila said that while global handset volumes are increasing at a dramatic level, most of those sales are going to developing countries where the average price of phones--and the margins of profit--are far lower. This flood of low-end phones will eat away at Nokia’s profits in the second half of 2005, Ollila said.

“Overall industry volumes were slightly higher than we expected, prompting us to upgrade our full-year market estimate by 20 million to about 760 million units,” Ollila said at Nokia’s earnings call. “But as this growth came primarily from emerging markets where low-end products predominate and pricing pressures are currently intense, industry average selling prices continued to edge downward. This was certainly the case for Nokia in the second quarter, which in turn impacted our profitability. We currently believe these trends will continue for both the industry and Nokia for the remainder of the year.”

Nokia projected that revenues across all its divisions would be between EUR 7.9 billion and EUR 8.2 billion ($9.6 billion to $10.0 billion), which would be a significant increase over last year’s second-quarter EUR 7.1 billion in sales. But it projected that profits would fall from the EUR 799 million ($974 million) posted this last quarter. Financial analysts and the markets didn’t look very kindly on those numbers, and Nokia shares plummeted 10% on the Helsinki Stock Exchange.

Motorola, meanwhile, saw overall Q2 revenues of $8.83 billion, a 14.6% year-over-year increase, and far beat analysts earnings expectations with $933 million in net profits, compared to the $233 million loss posted last year. For the third quarter it projected sales in the range of $8.9 million to $9.1 billion and earnings per share between $0.27 and $0.29, well ahead of analysts expectations of $0.25 per share.

While Motorola did see increases in revenue from its networks group (up 3% to $1.6 billion) and its government and enterprise group (up 7% to $1.7 billion) most of its impressive performance came from the handset group. While the stylish Razr is often cited as the reason for that success, Motorola has shipped only 5 million of those devices since its launch, meaning Motorola is enjoying increased sales across its handset lines. Speaking at a Motorola earnings call CEO Ed Zander said that Motorola has gained 3.3% points of market share in the last year, placing it firmly in the No. 2 slot ahead of Samsung. Zander said Motorola now has its sights set on Nokia.

“We're a stronger No. 2 than we have been in a long time,” he said. “This year, we set our sights on No. 1. In fact, we're targeting a lot of our products at the No. 1 player.”