Nokia Signals Slowdown in Phones

Nokia’s third-quarter sales and profits fell from a year ago, hit by weaker mobile phone demand in its European markets, but the world’s top handset maker soothed growing fears about the fourth quarter.

Handset makers have started to feel the pinch from slowing economies, but so far booming demand from emerging markets has outweighed weakness in developed markets.

Nokia’s (NYSE: NOK) third-quarter earnings per share fell to 0.29 euros from 0.40 euros a year ago, missing the average forecast of 0.31 euros in a Reuters poll of 37 analysts.

Nokia shares closed down 4.2 percent in Helsinki at 11.30 euros after hitting the lowest level in more than 4 years earlier in the day. Its U.S. shares closed up 9.7 percent at $16.57 as nervous investors were relieved at the outlook and results.

“People are pleased with the results relative to expectations and the outlook was better than some had feared,” said Piper Jaffray analyst Michael Walkley, who noted that U.S. stock markets had also improved in the afternoon.

Nokia said it expected industry volumes to rise 10.5 percent to 1.26 billion phones in 2008, slightly above the market consensus. This implies 13.5 percent quarter-on-quarter growth in the typically strong fourth quarter, slightly weaker than in recent years, but reassuring for analysts.

“There will be a sequential and year-on-year growth in the fourth quarter but more muted, somewhat less than in the previous years,” Nokia CFO Rick Simonson told Reuters in an interview.

“That is a reflection that some markets have slowed and they will have a little slower Christmas, but I don’t think it was canceled,” Simonson said.

Nokia said it expected its market share in the fourth quarter to stay at the 38 percent level reached in the third quarter, or to improve slightly.

“There were some worries that the wheels would fall off the business in the fourth quarter. Clearly that is not going to be the case,” said Nomura analyst Richard Windsor.

European worries

Having reported volume sales growth in excess of 20 percent for several quarters, this time Nokia managed only a rise of 5 percent to 117.8 million phones as sales fell in Europe — by more than 5 percent — and in North America.

“Nokia’s year-on-year volume drop in Europe raises concerns that the credit crunch maybe is affecting consumer demand for mobile phones in this region,” said analyst Geoff Blaber of UK-based research firm CCS Insight.

Gartner analyst Carolina Milanesi said the market in Western Europe would fall significantly this year. The research firm had previously forecast a roughly flat market.

“We are definitely seeing the economic environment impacting the phone market,” she said, adding that a lack of new, attractive models was also holding back demand.

Nokia’s group sales in the third quarter fell 5 percent from a year ago, hurt by the strong euro, to 12.24 billion euros ($16.49 billion), missing all forecasts in the Reuters poll.

Nokia CEO Olli-Pekka Kallasvuo told analysts it would expand its “Comes with Music” service, with British operator 3 UK starting to sell a phone with the bundle next month, giving customers unlimited song downloads.

Nokia said it did not plan to continue its share buyback program this year as it aimed to build a cash position in the midst of an “unprecedented disruption” in the financial markets.

“We are going to make sure that we actually build back up our cash position, since we have done the Navteq acquisition, we have the Symbian acquisition to do, we have the payment to Qualcomm,” Simonson said in the interview.

Nokia also said it would make a one-off payment of 1.7 billion euros to mobile chipmaker Qualcomm as part its patent agreement.

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