Nokia: Strong Q3, But Plunging Margins Pressure Stock; Bad News for TI?

Includes: NOK, TXN
by: Eric Savitz

Nokia (NYSE:NOK) earlier today reported a solid third quarter financial report, but spooked the Street with a sharp slide in average selling prices and gross margins.

Revenue of 10.1 billion Euros was above the consensus view, and profits of 23 Euros per share were about in line. But there were problems elsewhere. While unit volumes of cell phones were above expectations at 88.5 million - the consensus was for 82 million - average selling prices tumbled to 93 Euros from 102 Euros.

Sandeep Malhotra, an analyst with Merrill Lynch, explained in a research note that “ASPs collapsed as a result of higher [sales at the] low-end to emerging markets, especially India and China and from pricing pressures and lower shipments in the high end.” In other words, they sold too many cheap phones, while expensive phones were falling in price and not moving off the shelves fast enough.

That’s not good news for the cell phone business, particularly in the wake of the disappointing financial report earlier this week from Motorola (MOT), which reported lower-than-expected unit volume from its cell phone business.

Nokia’s gross margins for mobile phones fell 220 basis points sequentially to 27.4%, which Malhotra says was “totally unexpected.” He also noted that margins on multimedia phones fell below 40% for the first time, to 37.5%.

Nokia said it expects 15% sequential mobile phone growth in the fourth quarter. The company expects worldwide mobile device sales of 970 million, compared to 795 million in 2005.

Nokia shares are down 58 cents to $19.29.

The weak reports from both Motorola and Nokia will create great scrutiny on Texas Instruments (NYSE:TXN) earnings. The chipmaker, a major supplier to the cell phone companies, will report results on Monday. Today, TI shares are down 8 cents to $31.49.

Related: Nokia Q3 2006 Earnings Call Transcript