Nokia’s 28% Sales Growth Underscores Strong Execution

In this post, I will look at recent developments in Nokia (NOK) and Motorola (MOT). Earlier posts were featured in the iPhone series are available here and here. For the record, I own Nokia in my portfolio, as part of my convergence device bet along with Research in Motion (RIMM), which I just bought as well.

Nokia reported Q3 net sales of EUR 12.9 billion, a 28% y-o-y increase. Diluted EPS, excluding special items was EUR 0.40, up 74% y-o-y and 25% sequentially.

Per IDC, Nokia’s device market share grew to 38.6% up from 37% in Q2 2007 and up from 34.8% in Q3 2006. Nokia’s device volumes were 111.7 million units, up 26% y-o-y and 11% sequentially. ASP however declined EUR 8 sequentially and EUR 11 y-o-y to EUR 82, mainly due to a higher proportion of entry-level sales (especially in the under EUR 30 segment where Nokia leads the market thanks to its brand marketing, distribution, scalability, and low-cost structure).

Segment-wise, Mobile phones net sales grew 3% y-o-y to EUR 6.1 billion. Multimedia net sales grew 23% y-o-y to EUR 2.6 billion, driven by high volumes of Nokia Nseries multimedia computers, especially the Nokia N70, Nokia N73 and Nokia N95. Enterprise Solutions net sales grew 105% y-o-y to EUR 526 million driven by strong demand for the Nokia E90. It faced some component issues in the quarter that somewhat constrained its supply. Nokia Siemens Networks net sales were EUR 3.7 billion, up 7% sequentially.

In July, Nokia acquired Twango, which provides a comprehensive media sharing solution. In October, it acquired Enpocket, a global leader in mobile advertising. It recently announced its plans to acquire NAVTEQ, a leading provider of mapping applications, in an acknowledgment of the emerging trend of GIS information being available of phones, yet another convergence move.

Major contract wins include a $900 million end-to-end network expansion with Bharti Airtel in India; a EUR 180 million GSM/EDGE deal with Henan MCC in China; a multi-vendor IP network maintenance agreement with Deutsche Telekom in Germany; and a EUR 61.5 million 3G network expansion agreement with Taiwan’s Chunghwa Telecom. It recently closed a deal with ST Micro for licensing and supply of 3G chipsets, and the squabble with Qualcomm (QCOM) continues over royalties.

Nokia’s monumental 80% market share in India has dropped this year, although not unexpectedly. 80% is a very high share for any brand to maintain over the long-term in the world’s largest growth market for cellular phones. It currently stands at 53%.

Nokia is currently trading around $38.18 after hitting a 52-week high of $42.22 on November 7. Its market cap is around $146 billion. If you are looking for an entry into the stock, that may be now.

click to enlarge

Compare this to its traditional rival Motorola, Inc., which lost its number two position to Samsung in the last quarter. In the third quarter, it continued to lose market share which is now down to 12.9% from 13% in Q2 and 21.1% last year. It is still at No.3 behind Samsung which increased its market share to 14.7%. Although Motorola lost market share, it increased its shipment in the quarter to 37.2 million, up 4.7% sequentially and down 30.7% y-o-y (an improvement over the last quarter when it posted a 21.8% sequential decline in shipments). Its ASP also saw slight increase sequentially to $121. Contributing to this marginal improvement was the release of Motorola U9, and two new Z6 devices as well as the success of RAZR 2.

During the quarter, it also launched Moto Magix, its Linux mobile platform and MotoDevSuite Studio with multiplatform tools for developers. In early October, it bought a 50% stake in UIQ Technologies from Sony Ericsson, as part of its strategy to build an open software development environment and ecosystem for mobile devices.

Overall, Motorola performed better in the third quarter over the last quarter. Sales were $8.8 billion, up 1% sequentially and down 17% y-o-y. GAAP earnings from continuing operations were $0.02 per share compared to $0.29 per share last year. It bought back approximately 7 million shares for $115 million.

Segment-wise, sales in Mobile Devices were $4.5 billion (down 36% y-o-y). Home and Networks Mobility sales were $2.4 billion, up 6% y-o-y. Sales in Enterprise Mobility Solutions were $2.0 billion, up 47 % y-o-y.

In the Home and Networks Mobility segment, it acquired Leapstone Systems, Modulus Video, and Terayon Communications. It is also divesting the embedded communications computing business for $350 million.

For Q4, Motorola expects EPS to be in the range of $0.12 to $0.14. Its stock is trading around $16 after hitting a 52-week low of $15.11 on November 23. Its market cap is around $36 billion. By and large, I am not thrilled with Motorola’s leadership/execution track-record.

click to enlarge