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Nokia profits continue to slide

Under pressure from the iPhone and Android devices, the company suffers a 21 percent drop in earnings for the fourth quarter. New CEO Stephen Elop says Nokia needs to "change faster."

Nokia's headquarters in Espoo, Finland.
Nokia's headquarters in Espoo, Finland.

Buffeted by ever more intense competition, Nokia saw its earnings fall for the final quarter of 2010, an ongoing downturn that has prompted the company to announce a major shift in strategy.

Net profit for the quarter ended December 31 declined 21 percent to 745 million euros ($1.02 billion), compared with 950 million euros in the year-ago quarter. Sales were on the upswing, though, reaching 12.6 billion euros ($17.2 billion), a gain of 6 percent from 2009's final quarter.

Nokia attributed the downturn to the heated competition in the mobile phone market as well as to various component shortages and challenges meeting supply and demand. The company has been facing a rough climate in the high-end smartphone market as it sheds share to rival players such as Apple and Samsung. But it's also been losing out on the low end to mobile phone makers in China and other emerging countries.

For the quarter, Nokia said that its global slice of the mobile phone market dropped to 31 percent, a decline from its 35 percent share in 2009's fourth quarter but a slight gain from a 30 percent share in the third quarter of 2010. The company sold a total of 123.7 million mobile devices in the fourth quarter, down 3 percent from the prior year, but up 12 percent from the third quarter thanks to increased demand over the holidays. Sales volume for converged mobile devices (smartphones and mobile computers) reached 28.3 million units, a jump of 36 percent from a year ago.

Overall, sales for the Devices & Services segment hit 8.5 billion euros, up from 8.1 billion euros a year earlier. Sales for Nokia Siemens Networks, the network equipment unit co-owned by Nokia and Siemens, rose 9 percent to 4 billion euros, a healthy gain for NSN, which has struggled to eke out a profit since its inception in 2007.

The fourth-quarter results also managed to handily beat the forecasts of analysts polled by Dow Jones Newswires, who were anticipating a 45 percent decline in earnings and only a 3 percent gain in sales.

"In Q4 we delivered solid performance across all three of our businesses, and generated outstanding cash flow," CEO Stephen Elop said in the company's earnings report. "Additionally, growth trends in the mobile devices market continue to be encouraging. Yet, Nokia faces some significant challenges in our competitiveness and our execution. In short, the industry changed, and now it's time for Nokia to change faster."

In response to its weaker financial and business performance, Elop revealed during today's earnings conference call that a major change in strategy is coming. Though full details are due to be revealed at a strategy and financial briefing on February 11, the CEO did provide a few bits of information.

"The game has changed from a battle of devices to a war of ecosystems," Elop said, "and competitive ecosystems are gaining momentum and share."

In referring to ecosystems, Elop pointed to the convergence of mobile, computing, and services industries, saying that successful companies in both the midrange and high-end mobile marketplace are able to deliver great hardware and user interfaces as well as satisfy the demand for social networking, location-based services, entertainment, and communications.

But Elop also stressed the need to compete in the area of low-end to midrange devices by using less expensive components and manufacturing processes. Successful companies are also able to compete on such factors as design and brand loyalty and can get their products to the market quickly, said Elop.

"It is on this basis of ecosystems that Nokia must now compete," Elop said.

The CEO also acknowledged that there are challenges specific to Nokia, noting that the company is not competitive in all markets, a reference to Nokia's weak market performance in the U.S. and other regions, compared with its stronger showing in Europe.

"Whatever the strategy is we outline on February 11," he said, the company will be "very clearly ensuring that it will give us the opportunity to reopen markets such as the U.S. and some others, where we have not recently been present."

Nokia's profitability was hit hard in 2009, a year when the overall industry was feeling the effects of the global recession. Since then, Nokia has tried to battle back through cost cuts, a reorganization, and layoffs.