Shares in Nokia Corp dipped after the mobile handset goliath warned that its operating margin targets for the next couple of years would decline, thanks to its increased exposure in the lower-margin network infrastructure business.
Speaking at an analyst and investor event in Amsterdam, the Espoo, Finland-based equipment vendor warned that its operating margin target of 17% for the next one to two years, would be reduced to 15%. It blamed the start of operations (scheduled for January 2007) of Nokia Siemens Networks, which was created back in June when Nokia and Siemens AG merged their fixed and mobile network infrastructure businesses in a 50-50 joint venture.
That decision was taken in reaction to the consolidation of the industry such as Alcatel merging with Lucent, as well as the rise of low-cost Chinese competitors such as Huawei Technologies Co Ltd and ZTE Corp.
In response, Siemens and Nokia agreed to combine their fixed and mobile network infrastructure businesses, which had combined sales of 15.8bn euros ($19.9bn) in 2005, a move which instantly created the number-three player in a market behind the likes of Alcatel/Lucent and Ericsson. Nokia also said that the joint network venture has an operating margin target of 10% plus during the next one to two years.
At the same time Nokia also took the opportunity to trim its operating margin for its mobile and multimedia division to 17% during the next one to two years, down from earlier guidance of 17% to 18%.
Yet the Finnish giant tried to strike a positive note, saying that for the overall industry, it expects mobile-phone unit shipments to increase by up to 10% in 2007 from the 970 million units it estimates will be sold in 2006.
Nokia said this rise would be driven by growth in Asia Pacific, China, Middle East and Africa. But it warned that the more saturated European, North American and Latin American markets would likely grow by less than 10%.
Nokia said the number of global mobile-phone subscribers would reach 3 billion in 2007, instead of in 2008 as forecast previously. But it also warned that ASPs (average selling prices) of handsets would decline, due to the increasing impact of the emerging markets and competitive factors in general.
Nokia’s boss meanwhile pointed to the increasing importance of the internet to mobile users. With an estimated 850 million Nokia device users out there, we are positioned to connect more people to the internet than any other company in the world, chief executive Olli-Pekka Kallasvuo told analysts during his presentation.
Nokia also unveiled four new models of handsets during the presentation.
We are in pole position to combine two trends that will have major impact on the modern position, said Kallasvuo. The internet and mobility. There is a lot of possibilities and potential here and we are actively aligning our strategy in pursuit of this major business opportunity.
Kallasvuo also insisted that the market had not reach saturation point yet. There is a lot of possibilities left in this business to differentiate from design, innovation and by adding value, he said, pointing out that imaging, music, and location-based services will feature prominently in its mid range phones.
I am very optimistic when it comes to our line up in 2007 and feel confident in every product we are launching in 2007, he added in his closing remarks.
The Finnish company also said it expects to meet its previously stated target of reducing overall R&D spending to between 9% and 10% of sales by the end of this year.
Nokia’s American depositary shares fell 1.1% to $20.07 on the New York Stock Exchange following the news.