Nokia warns on Q3 as price war bites, share drop

The Nokia Research and Development Centre is seen in Helsinki April 11, 2008.

HELSINKI (Reuters) - Top cellphone maker Nokia Oyj (NOK1V.HE) said it had sacrificed market share in the third quarter to defend profits in the midst of a price war, sending its shares as much as 14 percent lower on Friday.

As the global economic slowdown bites and the cost of basic items like food rises, consumers in many countries are cutting their spending on gadgets, hurting phone manufacturers.

Nokia warned its third-quarter market share would fall from the 40 percent notched up in the second, compared with a steady market share it forecast earlier.

It said it expected the mobile device market in 2008 to be hit by weak consumer confidence in many markets and also cited tough competition in developing markets, its stronghold. It said it would ramp up one mid-range model more slowly than planned.

"Most alarming for me is that they're saying they're seeing more pressure in the low end of the market. That really defines their profits, volumes; they get a lot of their economies of scale out of it. They really dominate that area," said analyst Neil Mawston at Strategy Analytics.

Analyst Richard Windsor at Nomura said: "I suspect it's largely the smaller Chinese handset makers who are cutting prices and may gain some share."

Due to the confluence of negative factors, Nokia said margins at its Devices & Services unit would fall below 20 percent in the third quarter.

"In certain markets and in certain areas, including in some of the low end, we are meeting certain aggressive pricing that we believe may not be sustainable," Nokia Chief Financial Officer Rick Simonson told a conference call.

"So it really is not margins. What we're talking about is units here," he added.

HIGHER MARGINS

Even below 20 percent, Nokia's phones operating profit margin could still be superior to rivals -- margins at Samsung and LG were below 15 percent in the second quarter, while Sony Ericsson and Motorola are struggling to make profits.

Shares in the Finnish handset maker were down 11 percent to 13.95 euros by 1435 GMT, dragging down the DJ Stoxx European technology index .SX8P more than 5 percent. Shares troughed at 13.51 euros, their lowest since October 2005.

"I think the share reaction is a bit much," said analyst Greger Johansson at market researchers Redeye. "It seems to be their own decisions to a large extent."

Nokia stuck to its forecast of overall market volume growth of at least 10 percent and said it still targeted an increase in its device market share over 2008 as a whole.

Samsung Electronics (005930.KS) and Nokia itself have cut phone prices over the summer months and analysts said most of the vendors were involved in price battle.

"There's been chronic oversupply in the market for the last couple of years now. If Nokia can't weather the competition then it does raise question marks over the other vendors in the market as well," said Strategy's Mawston.

Shares in Ericsson (ERICb.ST) were 3.4 percent lower, while Motorola Inc MOT.N was down more than 2 percent.

Nokia's gloomy comments followed recent cautious comments on the cellphone market from wireless chipmakers Qualcomm Inc (QCOM.O) and Texas Instruments Inc TXN.N earlier this week.

Qualcomm Chief Executive Paul Jacobs told a TV interview consumers in developed markets were taking longer to replace their cellphones, while Texas Instruments finance chief Kevin March called the mobile market uninspiring.

Nokia has turned its attention over the last year to a broader range of offerings than just its core business of cellphones, branching out into music deals and trying to establish its own social networks.

Nokia will report third-quarter results on October 16.

(Additional reporting by Georgina Prodhan in London with Sakari Suoninen and Tarmo Virki in Helsinki; Editing by Will Waterman and David Holmes)