After a dismal start to 2004, Nokia (NYSE: NOK) is finally reasserting its dominance in the cell-phone market, proving, once again, why it's good to be the top dog in your industry.
We've thoroughly chronicled Nokia's difficult year here at the Fool (see below). It appeared the Finnish giant was a victim of hubris when management admitted in early April that market share had shrunk in the fourth quarter of 2003 and that earnings would be lower than anticipated for 2004. In a fit of honesty uncommon in today's business world, Nokia admitted it had missed the boat on camera phones and was losing share to "cooler" phones from Motorola (NYSE: MOT) and Ericsson (Nasdaq: ERICY). A summer of disappointment drove the stock down to a multiyear low of $11.
Fast forward to December 2004, and sentiment has reversed. Nokia's market share is again rising, having fallen below 30% mid-year. Total worldwide mobile phone sales were up 26% in the third quarter to 167 million units, with Nokia capturing 31% of this market, thanks to the introduction of several new camera phone models. The company's still well short of its 40% market share goal, but in the short term Nokia CEO Jorma Ollila expects a solid fourth quarter.
As often happens in competitive industries, market share has come at the expense of pricing power. Slashing prices on its phones has helped Nokia boost share again, but it's also eaten into the company's gross margin, which is down from 40.5% in the first nine months of 2003 to just 38.4% in 2004. The falling dollar hasn't helped any, either, knocking seven percentage points off the company's third-quarter sales.
Margin contraction is likely to continue as the global cell phone market stays competitive. While the landscape has changed this year, competition is more ferocious than ever. The emergence of Samsung as a truly global electronic powerhouse is one of the big stories this year, and, according to Gartner Group, the Korean company passed Motorola to become the second-largest cell-phone maker in the third quarter, with a 13.8% market share.
Although Nokia lost out to Ericsson, Lucent (NYSE: LU), and Siemens (NYSE: SI) for the contract to roll out Cingular's 3G network, investors should be pleased that the company's network and multimedia units generated positive operating profits through the first nine months of this year. While mobile phones will continue to generate cash for the company, price cuts and margin contraction will force other business units to drive both top-line and bottom-line growth going forward.
For more on Nokia's ups and downs in 2004, see:
Fool contributor
Chris Mallon
owns shares of Nokia through his private investment partnership but none of the other companies mentioned.
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