By Michal Lev-Ram
With Motorola (MOT) splitting up and last month’s profit warning from Sony Ericsson, investors are looking to Nokia (NOK) for some much-needed reassurance on the cell phone front.
The world’s largest phonemaker will report its first-quarter earnings this Thursday morning, amidst worries that declining consumer spending in the United States and Europe is having a negative impact on the wireless business. But while the Finnish company isn’t completely immune to economic downturns, it has a secret weapon that other phonemakers don’t – a dominant presence in fast-growing emerging markets.
With about 40% worldwide cell phone market share, Nokia is top dog across the globe. In many developing regions – like India, China and parts of Africa and the Middle East, its piece of the pie is even larger (above 50% in some countries). Assuming the company can successfully retain the strong brand it has in these areas even as other phonemakers (including Korean companies LG Electronics and Samsung) are aggressively trying to encroach on its territory, that may help it offset any declines it’s experiencing in higher-end markets like Europe and the United States.
It’s already got a significant head start: In 2007, 56% of Nokia’s net sales came from countries in Asia, Latin America, the Middle East and Africa, while Europe and the United States accounted for 39% and 5%, respectively. This quarter, that gap will probably widen even more, with the volume of handsets sold in developing regions growing at a much faster pace than in more mature markets.
“Nokia’s current limited exposure to the U.S. reduces near-term risks and offers an opportunity for share gains through 2008,” Oppenheimer analyst Ittai Kidron said in a recent report. “…Its strong position in the low end and emerging markets, the market’s strongest growth regions, offers upside.”
To help retain its “strong position,” Nokia has developed a wide range of barebones mobile phones for countries like India, where millions of people buy their first handset each month. Earlier this month the company came out with four new entry-level devices, including the Nokia 1680 “classic” — its cheapest cameraphone yet at about $80. The hope is that, as consumers in these countries buy up, they’ll keep buying Nokia.
That doesn’t mean that Europe and the United States — where there’s more of an appetite for pricey multimedia devices with large profit margins — aren’t important markets for Nokia. While Nokia sells a much higher volume of phones in emerging markets, its single most profit- and revenue-generating region is still Europe.
Last month, when chipmaker Texas Instruments trimmed its financial forecast due to weakening demand for high-end and third-generation phones, shares of Nokia tumbled 17%. Some analysts now worry that the company’s NSeries of multimedia devices is “tiring” and that the phonemaker has yet to come out with an iPhone competitor for the U.S. and European markets — rivals LG, Samsung and Sony Ericsson unveiled theirs at the CTIA wireless trade show earlier this month.
But despite these challenges, Nokia is standing by its guidance for near 10% global unit volume growth in 2008. One thing’s for sure — it will take a lot of cheap handsets to make up for slowing growth on the mid- and high-end market.
Analysts on average are expecting Nokia to report first quarter earnings of 57 cents a share on $19.9 billion in sales, compared to tk from the year-ago quarter.