Nokia Expects 20% Profit Margin, Shares Drop

Nokia said on Tuesday it expects to reach an operating profit margin of around 20 percent over the next one to two years from its cellphone and services business.

Shares in Nokia fell more than 4 percent on the news as many investors had expected a more upbeat profit forecast for the Finnish firm's key business, which has reached a margin of 19 percent so far this year.

"Their new margin targets weren't as good as needed -- they're already on those levels," said SEB analyst Leif Pettersson.

But other analysts said the company prefers to exceed its own forecasts than surprise the market with negative news later.

"Nokia is being conservative," Emeka Obiodu, from Global Insight, told "European Closing Bell."

"Yes, their expectancy is to grow and improve but they don't want to get the market too buoyant about that," Obiodu added.

The world's top cellphone maker, which makes more phones than its three closest rivals combined, said it sees all vendors together selling around 10 percent more phones in 2008 than this year.

Samsung Electronics, the world's No. 2 cellphone maker, last week forecast 12 percent growth for the market. Most other forecasters have been more modest with their estimates.

Nokia's affordable phones are very popular in developing countries where demand is high because fixed-line telephony penetration is much lower than in developed countries.

"For us, high growth in emerging markets… is a good thing to drive margins," Nokia CFO Rick Simonson told "Worldwide Exchange."

Aims to Raise Market Share

Nokia said it aims to raise its market share to more than the 39 percent it reached in the last quarter.

Nokia dominates the low end of the cellphone market where it benefits from economies of scale. Most other vendors are not able to offer attractive cellphones for prices below 30 euros ($44).

The Finnish firm raised its group level operating profit target to 16-17 percent in one to two years from a previous target of 15 percent. Analysts have forecast an average 15.2 percent margin in 2008 and 15.7 percent in 2009, according to Reuters Estimates.

Nokia will also make efforts to increase market share in the U.S., Simonson said.

"In the U.S. we are underweight," Nokia's CFO told "Worldwide Exchange."

"We really refined our strategy on how to deal with the four major operators (in the U.S.)," he added.

Nokia said it saw very slight growth in the infrastructure gear market next year, and shares in Swedish Ericsson fell close to 2 percent in Stockholm.

Nokia shares have risen 78 percent so far this year, compared with almost unchanged DJ Stoxx European technology index, lifted by forecast-beating results and a new growth strategy focusing on mobile Internet services.

Bet on Free Music

Nokia also said it had signed a deal with the world's biggest music group, Universal, owned by French media giant Vivendi, to offer all of Universal's music free for 12 months to buyers of new music phones starting from the second half of 2008.

At the end of the offer, consumers can keep all the music they have downloaded, the companies said. Nokia said it was in talks over similar deals with all major labels.

"Nokia is trying to move away from its reliance on shipping handsets," Obiodu said. "It's trying to get back again into the data services market."

Nokia will open new music phones stores in 2008, Simonson said.

"You buy your Nokia phone and with the purchase price, comes one year of music. We think that's an innovative model. We'll open that up in more markets next year," he told "Worldwide Exchange."

The free access to new music is set to hurt peer-to-peer networking, while Nokia's foray into the digital music retail business will also raise pressure on Apple.

"It seems the record labels have decided to bet on Nokia as a means to add competition to Apple's dominant position in digital music," said Paolo Pescatore, analyst at research firm CCS Insight.

"With Nokia poised to sell well in excess of 120 million phones in this quarter, it's a partner that record labels can't ignore," Pescatore said.