Nokia's market share troubles to hit profits

A shopper talking on a mobile phone passes an advert for the new Nokia N8 on Oxford Street in London, September 30, 2010.

HELSINKI (Reuters) - Nokia is expected to report its third profit fall in a row as the mobile phone company struggles to compete against high-end smartphones of Apple and Samsung, while also losing share at the cheaper end of the market.

Stephen Elop, who took over as Nokia's chief executive last September, is expected to report a 24 percent drop in underlying earnings per share for the October-to-December quarter to 0.19 euros.

The phone market has recovered from a slump in 2009 when the global economic slowdown dampened demand for the latest gadgets. Demand this year has surged for new smartphones like iPhone 4 and Samsung's Galaxy S.

Apple said late on Tuesday it sold 16.2 million iPhones in the December quarter, 86 percent more than a year ago and its highest ever quarterly sales, and said it saw strong demand continuing.

"Another stellar quarter for the iPhone is a clear sign of demand but Apple's strength will undoubtedly have had repercussions for others struggling to gain traction in an extremely competitive and over supplied high-tier segment," said CCS Insight analyst Geoff Blaber.

Nokia has lacked a hit smartphone since the N95, which was launched in 2006, before Apple entered the cellphone market.

"The N95 was a big hit. Ever since they have struggled," said Canaccord analyst Michael Walkley. "The new CEO is getting challenged on both ends. They are very much pressured in the low end of the market."

Nokia's market share in India has halved in just few quarters. The company controls around 30 percent of this vast market, according to research firm Gartner, compared with around 60 percent market share in the previous year.

"We remain concerned about market share issues in the low-end due to local competition in emerging markets such as India and Middle East and Africa," said UBS analysts in a note.

One of Nokia's key rivals in the lower end of the market, China's ZTE Corp, saw its phone sales rising 34 percent last year. In stark contrast, Nokia's sales of basic cellphones slipped slightly in January-September last year from a year earlier.

WEAKER Q1, OLLILA SUCCESSOR?

Globally, Nokia is expected to have sold 130 million phones in the quarter, only 2 percent more than a year ago, losing market share to Samsung and Apple.

But despite shrinking market share, Nokia's newer models have seen good demand in the quarter, analysts said, forecasting on average underlying operating profit margin at Nokia's phone unit to rise to 11.3 percent, in line with company's 10-12 percent target range.

"Most importantly we see that Nokia's new devices are facing a very robust demand including the C3 and the N8," said Swedbank analyst Jari Honko, who noted component shortages still hindered Nokia's shipments in the quarter.

"We expect the short supply of components to even get worse in the first quarter," Honko said.

On average, analysts expect Nokia's phone unit's underlying operating profit margin to dip to 10.2 percent in the March quarter, while market share is seen slipping to 32.2 percent from an expected 32.6 percent in the fourth quarter.

"While fourth quarter results may prove solid, we believe that first quarter guidance may disappoint," said Nomura analysts in a research note.

Nokia will next week also announce possible proposals for changes to its board.

After Elop was appointed, Chairman Jorma Ollila had said he would step down shortly but be available until 2012 shareholders meeting.

If Ollila's successor is from outside the company he is likely to be named to the board a year before taking over the chairmanship, analysts said.

(Editing by Jane Merriman)