Nokia warns on key phone unit, shares drop 10 percent

HELSINKI Wed Jun 16, 2010 1:34pm EDT

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HELSINKI (Reuters) - Nokia (NOK1V.HE) warned on Wednesday second-quarter sales and profits at its key phones unit would be weaker than expected as it struggles to compete against Apple's (AAPL.O) iPhone.

Apple said it has sold more than 600,000 iPhones after just a day of pre-orders, underlining Nokia's ailing position in the smartphone market.

The second profit warning in less than two months is further increasing pressure on Nokia's Chief Executive Olli-Pekka Kallasvuo, who has been heavily criticised by shareholders.

Shares in the world's top cellphone maker -- which also said 2010 profit margin at the phone business would be weaker -- fell to their lowest level since March 2009, and were 10.7 percent lower in U.S. trading (NOK.N) at 1720 GMT.

"Investors are worried about Nokia's long-term market position. Nokia loses market shares at the high-end, the mix worsens and margins go down. At the high-end, Nokia loses mainly against Apple," said Inge Heydorn, asset manager at Sentat Asset Management.

Nokia shares have dropped around 20 percent so far this year, strongly underperforming the STOXX 600 European Technology Index .SX8P, which is up 9 percent.

"Nokia has, considering the competition, one of its weakest product portfolios ever," said Swedbank analyst Jari Honko.

Nokia said profit margins at its key cellphone unit would be at the lower-end of its forecasts, or below, in the second quarter and in 2010, citing tougher competition, particularly at the high-end of the market as well as and shifts in product mix toward somewhat lower gross margin products.

The firm had previously predicted the unit's operating margin would be 9-12 percent in the second quarter and 11-13 percent for the full year.

Nokia also said it expected its share of the global cellphone markets in terms of value to fall this year, when it previously had targeted a slight increase year-on-year.

"In addition, the recent depreciation of the euro affects Nokia's cost of goods sold, operating expenses and global pricing tactics," Nokia said.

The euro has weakened 9 percent versus the U.S. dollar since start of the second quarter.

TOUGH TIMES TO CONTINUE

Analysts said Nokia's position could weaken further in coming months.

"We have been waiting for a come-back in 2010, now we are talking about 2011," said Gartner analyst Carolina Milanesi.

Timo Ihamuotila, Nokia's chief financial officer, said also the third quarter would be challenging for the company, but forecast for a seasonal upswing in the holiday-sales-fueled fourth quarter.

Nokia's market value has dropped by 17 billion euros ($21 billion) -- roughly equal to Jamaica's or Senegal gross domestic product -- since start of the quarter.

Ihamuotila said the overall cellphone market continued to be healthy in the second quarter so far, but said Nokia's N-series smartphones have suffered under increasing pressure from rivals.

The multimedia-focused N-series series was Nokia's crown jewel before Apple's iPhone stormed the smartphone market after its 2007 launch.

Apple said on Wednesday it sold more than 600,000 units of its newest iPhone after just a day of preorders, surpassing some analysts' expectations and sending its shares up.

Nokia sold around 3 million N-series phones in total in the first three months of 2010, analysts estimate.

Kallasvuo, who has been with the company more than half of his life, has been under increasing criticism as Nokia's share price has missed the market recovery and the company has not been able to build a formidable rival to the iPhone in more than three years.

Nokia's last hit smartphone model, the N95, was unveiled in 2006, the year when Kallasvuo, a long time company lawyer, took over at the helms of the firm.

Its iPhone-challenger, the N8 model, is due to reach the market next quarter.

(Reporting by Terhi Kinnunen and Brett Young in Helsinki, Sinead Carew in New York, Blaise Robinson in Paris, Simon Johnson, Olof Swahnberg and Jens Hansegard in Stockholm; Writing by Tarmo Virki; Editing by Mike Nesbit and Jon Loades-Carter)

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