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Emerging Markets Help Boost Nokia Profit by 90%

Robust demand for cheaper phones boosted third-quarter earnings at Nokia, the world's biggest maker of mobile phones, with the better than expected result sending its shares sharply higher Thursday.

Source: nokia.com

Although phone prices fell, volume sales were up and profit margins improved thanks to tight cost controls, analysts said.

Nokia CEO Olli-Pekka Kallasvuo told "Power Lunch Europe" that the company has had a lot of success at the low and high ends of the market.

"The sub-30-euro segment has grown dramatically," Kallasvuo said. "I'm pretty happy with the number."

But he stressed the company did not focus solely on the low end of the market.

"As a market leader, we have to be competitive in all ends of the market," Kallasvuo said.

The company said its earnings per share for the three months rose to 0.40 euros from 0.21 euros in the same period of 2006. Analysts polled by Reuters had forecast earnings in a range of 0.27 euros to 0.38 euros per share.

"Nokia's phone business is a well-oiled machine. It is clearly exploiting its leadership in supply chain, manufacturing, distribution and brand," said Ben Wood, head of reasearch at CCS.

Other analysts said the market leader had to look out for what the competition is doing, particularly Apple and Research in Motion .

"The really good thing today was that the margins in the low end were very good," Anders Elgemyr, telecom analyst at Glitnir, told "European Closing Bell." But, he added, "the spring may be tougher for Nokia."

Prices Coming Down

Shares in Nokia were 4 percent higher at 26.65 euros by 1136 GMT, when the DJ Stoxx European technology sector index was up 0.3 percent.

Nokia sold 112 million phones in the quarter, more than its three closest rivals combined, and estimated its market share at 39 percent, in line with analysts' forecasts of 38.9 percent.

The Finnish company has a strong lead in emerging markets including China and India, which it has been fiercely defending.

The average selling price (ASP) of phones in the third quarter fell to 82 euros, from 90 euros in the second quarter and below 89 euros forecast by analysts.

"We see the industry's ASPs coming down," Kallasvuo said. "We also see good progress in the other end, the high end."

At the same time the operating profit margin for the key mobile phones division rose to 22.6 percent, well ahead of analysts' average forecast of 20.4 percent. Division sales were up 3 percent at 6.1 billion euros, just short of the average forecast of 6.25 billion.

"Nokia's profitability is very strong. It weighs more than falling ASPs," said Handelsbanken analyst Karri Rinta.

Overall, Nokia's group global sales rose 28 percent to 12.9 billion euros ($18.4 billion), below the average of analysts' forecasts of 13.2 billion euros.

A Shadow Over Ericsson

The stunning results come two days after Ericsson, the world's biggest maker of mobile networks equipment, reported a surprise drop in its third-quarter results due to weaker demand in its networks upgrade business, shocking investors and sending its share price plummetting.

But Nokia's shares were barely affected on Tuesday whereas Ericsson's stock fell 24 percent to 20.10 Swedish crowns. The shares were down 3.6 percent on Thursday at 19.06 crowns.

Kallasvuo said the market remained difficult but that Nokia has worked on restructuring and this has improved its margins.

"We have been experiencing a tough market place for some time... but we have not seen a change since the second quarter," he told "Power Lunch Europe."

He added that the company aimed to expand its services: "we are also in discussions with mobile operators to operate in the Internet as well. That is a great opportunity."

While the two Nordic firms have a similar history on the stock market only 25 percent of Nokia's own sales come from network equipment and Ericsson's handset business has been spun off into the Sony Ericsson joint venture.

Nokia's own network unit, now joint-ventured as Nokia Siemens Networks, reported an operating loss of 120 million euros in the quarter.

This was better than expected by analysts whose forecasts ranged widely between a loss of 135 million and 399 million euros as the company progresses with the new venture's restructuring involving 9,000 job cuts.

Excluding restructuring and accounting charges, the unit was in the black in the quarter. Nokia repeated it expects to see very slight growth in infrastructure market this year.

"This shows even more that Ericsson's problems are company specific. If Nokia Siemens had given a bad outlook you could have said Ericsson's problems were problems for the whole sector," said Cheuvreux analyst David Hallden.

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