QD maker Nokia reports disappointing financials

Last week, Nokia stirred the game-industry pot with cheery news of an updated N-Gage, the N-Gage QD. But news out of Finland later in the week was anything but upbeat. Still feeling the effects of a major reorganization the handset giant had begun in January, Nokia reported first-quarter results far below expectations. The numbers were below most analysts' expectations--and even lower than the company's revised forecast.

Net profit for the first quarter was 16 percent lower than in the previous quarter. The company also reported a decrease in market share to 35 percent from 37 percent at the end of 2003 and admitted to having "certain gaps in its product portfolio." Nokia is facing stiff competition from rival companies such as Samsung, who reported an increase in net profit of nearly 300 percent over its pervious quarter.

Hardest hit by the downturn at Nokia was the mobile phones division, which reported a decrease of 15 percent in net sales. One of the few bright spots for the company was the networks division, which reported a 16 percent increase in net sales.

In spite of the disappointing results, chairman and chief executive Jorma Ollila was optimistic about the future, adding that the structural reorganization that slowed the company recently will be completed in "a matter of weeks." However, Ollila warned that second-quarter forecasts for the company will be down as product prices across the board are cut in an effort to maintain the company's current market share, saying: "Market share is critical in our business." Nokia is sticking by its goal of achieving a 40 percent market share, despite the first-quarter decrease.

Notwithstanding the poor first-quarter showing, Nokia remains the world leader in mobile phone manufacturing by a wide margin, with overall mobile device sales reaching 44.7 million units. Ollila expects the company to rebound strongly later in 2004 when it rolls out new products based on the clamshell architecture that has become more popular among consumers and begins offering more customization options for its existing products. Ollila was also optimistic about the future of the handset market as a whole, predicting unit sales growth in the mid to high teens, up from a previous company estimate of only 10 percent.

The jury remains out on whether the QD will help Nokia recover some from the original N-Gage's disastrous launch last October. In a review last week, the San Jose Mercury News indicated the QD could face a difficult challenge ahead. "The convergence of gadgetry--phone service, game choices, e-mail capability, and organizer functions," one reporter wrote, "makes it far more complicated for consumers to assess the N-Gage's value compared with other devices."

Industry analyst Bill Pidgeon, with Zelos Group, was slightly more optimistic about the new QD, but still found a few pre-launch flaws. "I was pleasantly surprised by the new model, if not by the name, which lacks panache." Pidgeon said. "However, the QD corrects major design flaws in the first N-Gage, and has a far better physical feel than the first device. And the QD will benefit from Nokia's attention to three essential features of handheld game devices: longer battery life, cheaper pricing and a library of good exclusive games."