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Falling handset prices and the weak dollar hit Nokia's results, leading to a 5% decline in third quarter sales, although net income climbed 35% year-on-year and the company remained strong in market share and margins.

The company reported net income of €823m, up 35% from a year ago when profit was curbed by a €306m charge related to bad debt. Stripping out that charge and other exceptional items, Nokia's net profit would have slipped 2%. Sales were down 5% to €6.87bn.

Nokia's shares, which have boomed since it announced its recent reorganisation, dropped back 3.5% on the results announcement. As usual, the market was focusing on the short term, something that increasingly frustrates CEO Jorma Ollila, who has threatened to curtail his company's mid-quarter updates to leave his executives more free to focus on the strategic.

In the next two quarters, Nokia will be pressurised by falling prices and currency fluctuations, but longer term, its reorganisation demonstrated a company positioning itself strongly to succeed in a changed market, and it has the most detailed and creative product roadmap of any of the handset makers bar, perhaps, Samsung.

Lower average phone prices are no surprise to anyone, especially as Nokia is seeing increasing proportions of sales from India, China and other developing markets, where model prices are low. However, we have to remember that the Finnish giant is specifically targeting these territories and is creating low cost ranges for them that will preserve respectable margins, while spinning the high end smartphones and digital media gadgets into a separate division that will look for maximum profit.

Investors reacted strangely as always, getting highly excited about Sony Ericsson's turnaround, even though the company warned that next quarter would be hit by the release of a larger number of cheap phones; but slamming Nokia, which has well documented plans for increasing its margins – through more sophisticated models at the high end and even more efficient production cycles at the low end.

However, Nokia's massive dependence on handsets, which are over 80% of its revenue, is always a cause for concern, and one reason for its recent restructuring. Not that it has any problems with market share - its unit shipments rose 23% in Q3 to 45.5m, which equates to almost 40% share, but prices fell 19% year-on-year. Ollila said about half of this fallback was because of the dollar and said that, combined with the launch of new models, he was "confident that we can have double digit revenue growth in a matter of quarters". A confident prediction from a notoriously cautious CEO.

Nokia predicted that mobile phone sales would be flat or slightly up year-on-year in the current fourth quarter and that group earnings would be flat or up to 10% down. The ailing Networks division made a small profit but Olilla believes turnaround will be long term in this unit. "I think we can get into reasonable margins in the next two to three years," he said.

©Copyright Rethink Research Associates 2003

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