Nokia Comments on Declining Prices

Oct.19.06 | About: Nokia Corporation (NOK)

In Nokia's quarterly earnings call, a large part of the discussion was focused on ASP weakness. Some highlights are excerpted below, from CEO Olli-Pekka Kallasvuo's and CFO Rick Simonson's prepared comments and from one of the answers provided to the analysts (emphasis added):

Olli-Pekka Kallasvuo, CEO However, as you know, the quarter was not all positives and we have more work to do. ASPs were down significantly sequentially. This, of course, reflected our big entry level volumes due to both continued industry growth in the entry level and not as strong sales gains in emerging markets. I think also it was a reflection of a lower proportion of sales in higher end products related in part to slower take up of WCDMA products industry wide. The decrease in gross margins was also significant which we'll address shortly.

Rick Simonson, CFO: Most significant potential negative drivers for device gross margins, aggressive pricing tactics by the competition as some players seek to gain a meaningful market share. We'll be as competitive as we need to be in all of these markets including emerging markets. And we need to have an ever more competitive product portfolio. Another important balancing factor for device gross margins is that we continue to see a shift in the market toward the higher growth emerging markets.

[...]We continue to expect the device industry to experience value growth in 2006 but expect some decline in industry ASPs primarily reflecting the increasing impact of the emerging markets and competitive factors in general. Nokia continues to expect moderate growth in the mobile infrastructure market in Euro terms in 2006 and we continue to target an increase in our 2006 market share in both mobile devices and infrastructure.

Tim Long - Banc of America Securities

Thank you. Just a question and clarification on ASP. I hear the comments about mix in the September quarter. I'm just curious given that Europe, Western Europe looked pretty strong sequentially and even the U.S. was okay, are we to understand that the mix within those markets was unfavorable as well and then if you could just give us your sense of your comments in the report talk about lower ASPs for the industry.

Is that a comment for Q4 as well? If you could just give us an outlook whether or not the new products coming will help stabilize or increase that ASP as we look into the fourth quarter. Thank you.

Olli-Pekka Kallasvuo

Okay. Olli-Pekka here. So, if you look at the overall dynamics of the market in the third quarter, so definitely we have many times said that the emerging markets were strong and had an impact on the ASPs. I made some other comments on that a moment ago. At the same time, what we have seen happening in the European markets, and especially in the European markets, there's been softness in wideband CDMA. Basically not pushing wideband CDMA in the way we were expecting in the third quarter. So, it has been slow in that way.

Of course, the dynamics going forward then will decide on what will happen in that front. This has meant, in fact, that also in the European markets, the mix between low risk and mid tier and high end, that has been shifted a bit lower.

So, on one hand, we have been seeing very good progress in our Multimedia division including the European markets, but then there's been some shift in the so-called lower end wideband CDMA to upper end CSM. This has had an impact on the ASPs so it's a combination of the emerging markets being very strong and then what I would call wideband CDMA softness in the European market.

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