Nokia
Lex 2010-04-23

Nokia is, at least, predictably unpredictable. Each of its past four earnings updates have sparked a 10 per cent or so rise or fall in its share price. Yesterday was no different: just minutes after its first-quarter release, Nokia had lost about a seventh of its market value.

This volatility is a testament to

the market's inability to predict Nokia's wildly fluctuating margins. Management struggles too. Just four months into the year, the company has reduced its operating margin forecast by a percentage point, in tacit recognition that it is failing to compete in the high-end smartphone market. Nokia's operating system is just not as good as Apple's or Google's, making its high-end phones hard to shift without slashing prices.

Along with a changing product mix, that contributed to an alarming 17 per cent quarter-on-quarter drop in its smartphones' average selling price, to about €155. Apple sells the iPhone for three times that.

Why worry? Smartphones only accounted for about 15 per cent of global handset sales last year, while Nokia still dominates in developing countries that – Credit Suisse forecasts – will account for 70 per cent of handset demand by 2015. But top-of-the-range handsets are the ones that generate serious profits. Nokia's gross margin has swung between about 32 and 38 per cent over the past five years; every time it hit the top of that range, it was selling a successful high-end phone.

Investors can barely remember what that feels like. Nokia's long-promised operating system revamp, which it says will catapult it back into the race, has just been delayed by several months. Meanwhile, competitors such as Apple will have refreshed their systems yet again. Shareholders are being told to be patient. Predictable, for once, but hardly reassuring.