Nokia and Ericsson: A Tale of Two Telcos

Like a one-two punch, the two Nordic giants of telecom equipment reported results on Apr. 22 and 23 that fell short of analyst estimates. Nokia’s first quarter revenues announced on Apr. 22 grew 3% from the same period a year earlier, to €9.5 billion (.7 billion), and net income nearly tripled from 2009′s tough first quarter, to €349 million (6 million). But the earnings were about €61 million shy of analyst estimates, and Nokia’s shares plunged 13.3% on Apr. 22 and another 2% on Apr. 23. It wasn’t so much the profit miss that spooked investors but falling average selling prices for phones, flat market share, and a slightly lowered forecast for operating margins this year.

Ericsson’s results announced Apr. 23 were in many ways worse. Revenue dropped 9% from the same quarter in 2009, to 45.1 billion Swedish kroner (.28 billion), about 3 billion kroner (8 million) short of analyst predictions. Net income fell 27%, to 1.26 billion kroner (4 million), nearly 38% (3 million) below analyst estimates. The company blamed tepid operator investment in network equipment and continued sharp price competition from rivals. Yet Ericsson shares soared 10.3% on Apr. 23, largely because its results included a near-doubling in North American sales.

Is there an illness at the heart of Nordic telecom? No question, the first quarter was a comedown from the results posted by both Nokia and Ericsson in the final quarter of 2009. But aside from that, the companies are facing quite different situations. While the reaction from investors in both cases may have been overdone, the basic direction of movement reflects diverging realities.

Nokia, whose shares have fallen 1.4% this year against a backdrop of generally rising telecom stocks, can’t seem to catch a break these days. Long the leader in mobile handsets, and still hanging on to one-third of the overall market, Nokia has been sent reeling by the success of the Apple iPhone. Sure, Nokia sold 21.5 million “converged mobile devices,” or smartphones and mobile computers, in the first quarter, up 57% from a year earlier. Apple, by comparison, sold just 8.75 million iPhones. But Apple snagged an average of 2 in product and service revenue for each iPhone, whereas Nokia’s devices sold for an average price of 7 (€155). Translation: Apple made 22% more revenue on 60% fewer units—and its profit margins were even more dominant.