Lower prices hurt Nokia’s profit

Nokia reported a 20 percent jump in net sales for its third quarter, but increased sales of entry-level phones caused a sharp drop in average selling prices and reduced the company’s profit.

Net sales for the quarter were €10.1 billion ($12.8 billion as of Sept. 30, the last day of the period reported), up 20 percent from €8.4 billion in the same quarter a year earlier. Net profit was €845 million, down 4 percent from €881 million a year earlier, Nokia said Thursday.

The company sold 88.5 million devices in the quarter, up 33 percent from the same quarter a year earlier. That helped to boost Nokia’s share of the market to 36 percent of all devices sold, from 34 percent in the second quarter of this year, it said.

The average selling price of its phones dropped sharply, however, to €93, down from €102 in the second quarter, continuing a trend from the past several quarters. The lower prices were due to “a significantly higher proportion of entry-level device sales,” the company said.

Nokia also sold fewer high-end devices as a proportion of its total sales, due to slow take-up of wideband CDMA (Code Division Multiple Access) products across the industry, Olli-Pekka Kallasvuo, Nokia’s president and chief executive officer, said in a conference call.

“This was an impressive quarter in many respects,” he said. “However, the quarter was not all positive, and we have more work to do.”

Average selling prices are dropping in part due to the quick growth of emerging markets. In China, where the company has partnered with China Mobile Communications to penetrate rural markets, device sales increased 62 percent from a year ago. Sales also grew strongly in southeast Asia, the Middle East and Africa and Latin America.

The emerging markets represent a double-edged sword for phone makers: They can sell more devices there, but they have to sell them at prices people can afford, which can eat into profits. Kallasvuo suggested that Nokia may be willing to absorb the lower prices rather than yield market share to competitors.

“We’ll not walk away from this good business,” he said of the emerging markets. “We’ll take advantage of future upgrades as they come.”

Operating profit from Nokia’s mobile phone group dropped 11 percent to €779 million, even though net sales from the group climbed 14 percent to €5.9 billion. Along with the lower selling prices, profits were also reduced by a charge of €128 million, related to the restructuring of Nokia’s CDMA business.

The company’s enterprise solutions group, which sells its Eseries devices, reported an operating loss of €65 million, compared to a loss of €37 million a year earlier. The increased loss was due primarily to increased marketing spending, the company said.

Unit sales of the Eseries devices increased 60 percent, however, and the company expects even higher sales in the fourth quarter. That, along with increasing sales of its Nseries multimedia phones, could help lift average selling prices and improve profits, said Rick Simonson, Nokia’s chief financial officer.

This past quarter, net sales from its multimedia phones division climbed 45 percent to €2.1 billion, while operating profit grew 49 percent to €366 million.

Despite the fall in net income, diluted earnings per share at the phone maker increased to €0.21, up 5 percent from the same quarter a year earlier.