Nokia: Rays of Hope Amid the Gloom

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The unit, which has struggled amid lower capital spending by telcos and sharpened competition from Ericsson (ERIC), Alcatel-Lucent (ALU), and rising Chinese stars Huawei Technologies and ZTE, reported revenues of just €2.76 billion, down 13.7% from the previous quarter and a gruesome 21.2% from the year before.

Red Ink for Networks

All told, the unit posted an operating loss of €1.1 billion according to IFRS rules, which take into account all the writedowns charged against it. Analyst T. Michael Walkley of investment bank Piper Jaffray (PJC) notes that the third quarter is seasonally soft for network equipment sellers but lays much of the blame on aggressive price competition from Huawei and ZTE.

CEO Kallasvuo promised that Nokia will "continue to support Nokia Siemens Network's actions to improve its performance." But he couldn't offer much optimism. Although he now predicts that the wireless network equipment sector as a whole will shrink by only 5% in 2009, vs. an earlier estimate of 10%, he also cautions that NSN will lose more market share this year than expected.

Another trouble spot for Nokia is in so-called smartphones, which have more computing power than typical handsets and can run software programs downloaded over the air. Rivals such as Apple (AAPL) and BlackBerry-maker Research In Motion (RIMM) have stolen Nokia's limelight in this growing and profitable category. Although Nokia still outsells them both, it's losing momentum and market share. Sales of its high-end Nseries and Eseries devices fell in the third quarter, to 16.4 million units, down from 16.9 million the quarter before. That gave it an estimated market share of around 35%, vs. 41% in the second quarter.

It's worth noting that this is the first time in Nokia's history that its share in smartphones was lower than its overall handset market share; only a few years ago, its smartphones accounted for half of the market. Analysts and investors worry that the Finnish giant may never return to those glory days. "The only focus for investors now is the smartphone market-share slide," says analyst Tero Kuittinen with equity research house MKM Partners. He notes that early announcements of several new Nokia models shipping this month may have suppressed third-quarter sales. "If demand for those models is good, the fourth quarter could be solid," Kuittinen says.

While its results were mediocre, Nokia has bounced back from far worse crises. The company still enjoys unparalleled brand equity, distribution, and manufacturing prowess. If handset demand rises in the fourth quarter, Nokia could see a big jump in results for its devices and services unit because of its enormous leverage. But as long as Nokia Siemens Networks keeps bleeding, bottom-line results will continue to look ugly.

Reinhardt is Europe channel editor for BusinessWeek.com. Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

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