Nokia: Investors Cheer Mixed Results

(page 2 of 2)

Faster growth in emerging markets does carry one downside: The prices customers there pay for phones tend to be lower. That's one reason Nokia's closely watched average sales price slipped slightly in the quarter—to €72 ($96.90), from €74 in this year's second quarter—as its product mix tilted more toward cheaper models. But compared with previous downward lurches, the drop left analysts unconcerned. "It was actually moderate," says Geoff Blaber, an analyst with mobile market consultancy CCI Insight in Britain.

Nokia admitted in its Sept. 5 market warning that it faced stiff price competition from rivals, but insisted it had opted out of a profit-killing price war at the low end of the market in favor of maintaining decent profits. Analysts now say that in the context of the current stock market, Nokia's strategy looks pretty smart.

After all, with investors ready to pounce on any sign of balance sheet weakness, it's more important these days to maintain or increase profits than to grab money-losing market share. Industry insiders say the most aggressive discounters have been Korea's Samsung Electronics and Swedish-Japanese joint venture Sony Ericsson. When they report results in upcoming days and weeks the damage to their bottom lines may be visible.

Demand in Emerging Markets

Nokia, on the other hand, spun out €1.3 billion ($1.75 billion) in cash during the third quarter and enjoys operating margins nearly twice those of its nearest competitor. Much of this is due to its sheer size and scale, which afford massive purchasing power and manufacturing efficiency. But the company also enjoys the benefit of being the world's fifth-most-valuable brand and huge research and development resources that allow for a constant stream of product launches.

Those advantages won't protect even giant Nokia if the global economy goes into the tank and consumers freeze up. The company may indeed be set for a rough patch in the West: Analyst Blaber says the weak third-quarter results in Europe and the U.S. "underline the fact that renewals are slowing," because consumers are scaling back on discretionary upgrades to new phones.

But even as developed economies head into recession, the surging prices for food and energy that depressed mobile-phone sales in poorer countries last year have receded, reopening demand in those markets from aspirational buyers with more disposable income. As Kallasvuo took pains to note in a conference call with financial analysts, "This is not a one-size-fits-all situation."

Still, he added, referring to the continued financial crisis: "We would be naïve if we ignored what is happening in the macroeconomic environment in many markets. We are fully prepared and are acting accordingly. In this time of economic uncertainty, I like our relative position."

Reinhardt is Europe channel editor for BusinessWeek.com.