Nokia sees end to troubles in sight

Nokia’s profits fell 90% in the first quarter of 2009 to 122 million euros ($160 million) down from 1.22 billion euros year-over-year, but the worst may have passed for the global handset leader. Analysts said that Nokia started to return to stability in the midpoint of the first quarter with business solid through March, and while it will take time, a turnaround is imminent.

Despite the fact that Nokia sold 93.2 million handsets in the first quarter, down 19% year-over-year and 18% from the previous quarter, Mark Sue, analyst at RBC Capital Markets, echoed other industry observers in maintaining hope for the handset maker. He said that 2009’s first quarter represents the bottom for devices’ operating margins and that, while the outlook is still challenging, the rate of decline appears to be slowing and the demand picture is more predictable for the second quarter.

“Scale and distribution remains Nokia's strength,” Sue said in a research note. “Cash from operations was a healthy 276 million euros. Nokia is expanding Ovi and application support, making progress with smartphones while maintaining op ex discipline.”

Nokia’s CEO Olli-Pekka Kallasvuo attributed the poor quarter to operators and distributors plowing through their inventories but said they have since used the majority of their reserve devices, which will lead to lower volatility in the second quarter. While projections of end demand remain unclear, he said, he is encouraged that the market is no longer falling in an uncontrolled manner.

“The utility that handsets provide has not disappeared; it has caused some to trade down,” Kallasvuo said on today’s earnings call. “With our portfolio of lower-end devices, Nokia can meet this need in a way some of our competitors cannot. Also, Internet services are improving the experience at the high-end of the market…Nokia is starting to make great progress in delivering solutions that consumers like.”

Most importantly, Kallasvuo added, Nokia is starting to get good at combining handsets with services. With the launch of Ovi on the N97 in June, it will be able to drive its device and services combo strategy across its handsets with a focus on adding a social dimension to the Internet, he said.

“[The N97] will be a meaningful contribution to the top and bottom line in Q2 as well,” Kallasvuo said. “The product will be in full volumes in Q3. Can it reach the million mark for monthly volumes? Yes, of course, because of the pricing. We have maximized the net sales and bottom-line impact.”

Along the services vein, Nokia also outlined the innovation it has brought to location-based services through Navteq, which had sales of 132 million euros ($174 million), down 36% from the previous quarter. In the first quarter, Nokia introduced Point & Find, which combines image recognition with GPS to let users point their phone at physical objects and pull up related information and services on the Internet.

Rick Simonson, Nokia executive vice president and CFO, said that for the foreseeable future, with the declines in handset sales, Nokia’s services are linked to the handsets as a competitive advantage. But, as it brings out more qwerty and touch smartphones across its portfolio, Nokia plans to use services as a revenue driver.

Nokia has struggled with its smartphone business, especially in the US, where its Nseries hasn’t caught on, but the global handset leader recently inked a carrier smartphone deal with AT&T – its first since 2006, and is pushing forward with its Ovi services strategy. While Nokia’s average selling price fell to 65 euros ($86), down 6% from 71 euros in last year’s fourth quarter and the Nseries delivered lower volumes than Nokia expected in the first quarter, Kallasvuo said he’s confident the platform is moving in the right direction. In the second quarter, the handset maker plans to introduce seven new smartphones across all tiers, with a focus on touch screens, qwerty devices or a combination of both.

The 5800 xpressMusic, Nokia’s first touch-screen device equipped with its unlimited music downloading service Comes With Music, was a bright spot in Nokia’s handset sales, passing the 2.5 million sold milestone in the first quarter. Kallasvuo said it is now selling 5800s at a rate of 1 million per month. Nokia also shipped a record 3.3 million Eseries devices in the quarter, representing 85% year-over-year growth.