Nokia reports Q2 earnings down 40 percent

Flat sales contribute to downturn in second quarter

Nokia reported flat sales for the second quarter, with a 40 percent year-on-year drop in earnings. The company is still seeing customers shun its high-end smartphones.

However, CEO and President Olli-Pekka Kallasvuo sees several reasons to be optimistic.

"I am confident Nokia will make a come-back in the high end of the smartphone market," he said in a conference call with analysts.

Sales for the quarter totalled €10 billion (US$12.21 billion as of June 30, the last day of the period reported), up less than 1 percent on a year earlier, and slightly lower than analysts' expectations of $12.87 billion, according to a consensus poll conducted by Thomson Financial Network.

The analysts had become much more gloomy about Nokia's profitability over the last three months, but not gloomy enough. Although they cut their estimates of the company's earnings by up to a third as the end of the quarter approached, to $0.15 per share, the company reported earnings of only €0.06 ($0.073) per share, for a net profit of €227 million, down from €380 million a year earlier.

In the second quarter, Nokia sold 111.1 million phones. That's at the low end of what Gartner research vice president Carolina Milanesi expected.

"Low-end phones are selling OK, but the high end is getting weaker," with pressure on average selling prices increasing, she said. "Competitors have made huge improvements in their smartphone portfolios since last year, while Nokia has not."

Nokia is backing two software platforms for its future smartphones.

Meego will be used in the company's high-end phones to deliver "a mobile computing experience beyond current smartphones," said Kallasvuo. He has ordered the Meego development team to give priority to the needs of the North American market, he said.

The other platform is a new version of Nokia's Symbian OS, S^3, which Kallasvuo said is intended to cover a "broader market footprint" than Meego.

S^3 will first appear in the N8, a mid-to-high-end smartphone due to ship towards the end of the third quarter.

"The N8 will have a user experience superior to that of any smartphone Nokia has produced," Kallasvuo said, and will be followed by a range of other phones running the same software.

"It will be much easier for external developers to make an application work across our family of Symbian devices," he said, adding that the company expects to ship over 50 million S^3 devices.

"Delivering the N8 with a high-quality user experience will mark the beginning of our renewal," he said.

Milanesi was skeptical about the prospects for the N8. "It is much better than what they have done so far but that does not necessarily mean a lot," she said.

Nokia confirmed analysts' expectations that there is little hope for revenue improvements this year.

It said it expects sales of mobile phones to grow by 10 percent this year, but that its share of the number of phones sold will remain unchanged.

On the other hand, Nokia said it expects its share of the value of those phones to dip, indicating that its sales mix will continue shifting towards the cheaper end of the market. The company has so far failed to find a strong response to Apple's iPhone and handsets running Google's Android operating system, which are taking an increasing share of the high-end mobile phone market.

Second-quarter sales of phones and related services, which account for around two-thirds of Nokia's revenue, grew 3 percent, while sales fell 5 percent at its network infrastructure joint venture, Nokia Siemens Networks, which accounts for most of the remaining third. Navteq, the company's mapping and navigation data subsidiary, saw revenue grow 71 percent, but at €253 million it represents about one-fortieth of Nokia's total revenue.

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