Nokia lowers Devices and Services outlook for Q2

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Nokia today issued a press release downgrading its outlook for Q2 2010 in the critical Devices and Services area. Nokia now expects both its net sales and margins to be at the lower end or slightly below earlier predicted ranges (6.7-7.2 billion and 9-12%). It says this is due to competitive environment, especially at the high end of the market, a shift in product mix to lower margin devices and the recent depreciation of the Euro. Nokia will issue full Q2 results on July 22nd.

Nokia also updated its outlook for 2010 as a whole. Nokia now expects it Devices and Services margins to be at the lower end or below its 11%-13% prediction. It also expects its mobile device value share to be slightly lower in 2010 than in 2009 as opposed to previous prediction of it being slightly higher. However Nokia continues to expect its mobile device volume market share to be flat in 2010 compared to 2009. This means Nokia will keep its market share, but will be selling each phone for proportionally less than last year, when compared to the market as a whole. 

While economic factors have played a part, most notably the weakening of the Euro on the last few months, the primary cause it greater than expected competition at the high end of the market. The primary source of this additional competition is from Android devices, which have ramped up faster than expected in 2010. While the iPhone remains an important competitor its impact has been largely in line with expectations (i.e. its impact had already been included in Nokia's estimates). It is worth noting than the numbers involved in the downgraded outlook are the equivalent of less than 1 million sales of a high end product (assuming a price of €400) .

Nokia's high-end problem comes as no real surprise. There is something of a product gap for Nokia in its Nseries range this year. The last major launch was the N97; this contrasts with previous years where there were a greater number of product releases. While the N8 has now been announced, it will arrive in retail channels more than a year after the N97. At the same time there has been a significant increase in the number of competing devices - and it this factor, which being harder to predict, that has been the primary cause of the downgraded forecast. Nokia's overall smartphone performance remains strong (maintaining a leading market share of around 40%), thanks to dominant sales of lower priced smartphones.

Looking forward there will be little respite in the high-end for Nokia in Q3 (July, August, September), as the N8 retail launch will come too late to have a significant impact. The situation should improve into Q4 with the availability of multiple Symbian^3 devices and the first MeeGo device. Nokia's strong mid-tier performance is likely to continue through out the year with continued sales of mid-tier touch devices (5230) and the retail launch of the Cseries (C5, C6). Indicative of this is Nokia's statement that it expects margins in Q4 to be above those expected for the full year 2010.

Going into 2011 the picture is more positive as sales of Symbian^3, Meego and, later, Symbian^4 devices are likely to accelerate. The devices themselves should be significantly more competitive - Nokia will seek to squeeze the iPhone and high end Android devices between MeeGo and Symbian. Nokia have already made significant changes to its software and developer strategies, which should help solve a number of strategic issues, but their impact has yet to be felt. However the market generally makes judgements on short term performance, which explains why Nokia's share price has fallen approximately 10% today.