Last Updated: April 17, 2008: 3:05 PM EDT
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Nokia's results fail to dazzle

The world's largest mobile phone maker's sub-stellar performance shows that a booming business in developing markets fails to outweigh heavy competition.

By Scott Moritz, writer

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NEW YORK (Fortune) -- Nokia isn't immune from the economic slowdown, but on the flip side, the company says it's not seeing the U.S. spending pullback invading Europe.

The No.1 mobile phone maker's shares fell 13% in the wake of its first-quarter earnings report Thursday. Analysts and investors saw the performance and the company's outlook as a rare stumble by the big Finnish tech shop.

Nokia's results, while solidly in-line, failed to deliver the dazzle that people would expect from the dominant player in a robust market. Instead, the company said it lost market share, saw a drop in the average phone price and warned that the value of the market - as measured in Euros - fell due to the weak dollar. To cap it off, Nokia (NOK) said it remains cautious about the spread of the U.S. economic slowdown to Europe.

On a conference call with analysts Thursday, CFO Rick Simonson said Nokia was "less affected than others," by the declining consumer spending in the United States, but added that the company is keeping a "heads up for a possible slowdown in Europe."

The prudent outlook had pretty much the same effect on investors that Cisco (CSCO, Fortune 500) had when CEO John Chambers told analysts in early February that big customers in Europe were "increasingly cautious." Cisco shares are down 12% for the year on concerns that global reach doesn't provide enough distance from the drag of the U.S. spending slump.

"People are worried about the economic slowdown hitting handsets sales," says Charter Equity Research analyst Ed Snyder. "There was a little indication of that, especially in the U.S. and Europe, but it's more concern than reality at this point."

Having raised the slow-down warning flag, however, Nokia executives spent a fair portion of the earnings conference call backing away from any prediction of where Europe was headed.

"We are not trying to say ... slowdown in Europe," CEO Olli-Pekka Kallasvuo said on the call. We are "seeing a normal market, no reason to make that call."

Finance chief Simonson tried to flesh it out a bit by saying Europe is comprised of many markets. "Some markets are ahead, some are on and there are a few where it's a bit off," he said, referring to general business health. "We try to call it as we see it."

But while the macro economic issues continue to sort out, one thing is suddenly clear: Nokia isn't as well positioned as people hoped.

Relatively stale product line

The sub-stellar performance shows that any advantage of having a booming cheap phone business in developing markets fails to outweigh heavy competition from Sony Ericsson, Samsung (SSGFF) and LG in the prime European and Asian markets.

Nokia's average selling price per phone fell to $126 in the first quarter from $132 in the prior quarter. This points to a higher volume of cheaper phones and probably a sign of a price war.

Nokia is particularly vulnerable in the expensive phone category, where it has yet to deliver ultrathin touchscreen phones. Having no answer to Apple's (AAPLE) iPhone has opened up a gaping hole in Nokia's strategy to branch into advanced services like navigation and e-mail. Without a popular smart phone, the application strength will be squandered.

Nokia promised to use its "flexibility" in Europe to win back the 1 percentage point of marketshare it lost in the first quarter. The flexibility is a range of levers like marketing, pricing, telco negotiations, supplier squeezing and distribution that a dominant player has at its disposal.

But Nokia doesn't expect to have any enticing new phones to offer until the third quarter, so all that flexibility will have to be spent on pushing a relatively stale product lineup at a potentially thriftier consumer.

Nokia says it has hit bottom in the U.S. market. Shipments fell by nearly half from year-ago levels in the United States as the company stopped selling its own phones to Verizon and Sprint. Nokia has outsourced those so-called CDMA phones to another manufacturer and expects to start seeing increased sales to those companies in the second quarter.

Nokia may try to blame a weak dollar or a looming slowdown for a lackluster performance, but as Motorola's (MOT, Fortune 500) collapse has proven, it takes popular phones to succeed in this business. To top of page

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