The Starting Line: Nokia goes gadget-happy to boost sales

Nokia's game plan is clear: Raise the technology bar for its wireless phones to entice skittish consumers to upgrade. And on the side, the company hopes to sell the network infrastructure needed to handle advanced wireless services.

"Nokia's latest phones make a technological statement," said Gartner analyst Ken Dulaney. "Technologically, there's everything but the kitchen sink. It's a gadget freak's delight."

There's good reason to try to entice people with new gizmos. For one, consumers are not replacing phones fast enough to maintain the heady sales growth found in 2000 at Nokia, Motorola and Ericsson. Lehman Brothers on Tuesday said it would cut its 2002 handset estimates from 450 million units to 440 million, citing slower global subscription rates.

In addition, the rollout of 3G, or third-generation, services hasn't caught on as quickly as many analysts had predicted.

Analysts are optimistic about 2002, however, especially for the second half. They note that although Nokia's next-generation handsets aren't likely to sell to the masses immediately, they do provide a glimpse of what's to come. The wireless giant is also expected to detail more of its product plans Tuesday in New York when it holds its analysts meeting, which industry watchers expect to be an upbeat affair.

Nokia shares are up more than 70 percent from Sept. 10, the day before the terrorist attacks on the World Trade Center and the Pentagon. The disaster highlighted the importance of wireless communications as phone networks around the New York area were disabled, and the Finnish company has worked to keep its momentum with an aggressive product schedule.

It pays to be aggressive. The company's earnings depend on the number of units it ships and on its market share. According to SG Cowen Securities, Nokia garners an extra penny per share in earnings for every additional 10 million units shipped or for an extra 0.5 percent of market share it gains.

With the stakes high, Nokia is going all out with the product launches:

• On Monday, Nokia launched its 7650 phone, which includes a digital camera, multimedia messaging features and a color display. Nokia also made a statement with software, noting that its latest high-end phone uses the Symbian operating system and supports Java and Bluetooth along with other standards. The company intends to ship the phones for about $480 apiece in Europe and Asia in the second quarter of 2002.

• Also on Monday, the company introduced two lower-end phones, the 5210 and 6510. Nokia hopes to target active users with a cell phone that features a new design, a thermometer and a digital clock. Another includes an FM radio. Though prices have not been set, the phones are due to ship in the first quarter.

• Last month, Nokia launched its 5510 phone, which includes a digital music player, a stereo FM radio, games and enhanced messaging capabilities. Turned on their sides, the phones have a full keyboard. They feature 64MB of memory, which can store up to two hours of music.

In addition, by the end of 2002 Nokia said it expects to offer messaging services on half its phones and, analysts said, color screens on about 20 percent of them.

Reason to upgrade
Simply put, Nokia is striving to give customers a reason to swap their old phones for jazzier ones.

"History has proven that advances in the way we communicate can give rise to entirely new communication cultures," Nokia CEO Jorma Ollila said at a conference in Barcelona, Spain, this week. "Much like the transition from radio to TV, the evolution from text messaging to multimedia messaging marks a whole new era of mobile communications."

Meanwhile, efforts such as "Club Nokia," a Web service that allows subscribers to download new ring tones and games, will eventually give Nokia and service providers recurring revenue.

Mark McKechnie, an analyst at Banc of America Securities, said he expects a "full update and business model discussion" about Club Nokia at the Tuesday meeting.

Efforts like Club Nokia and new wireless phone features should also help the other side of Nokia's business: Nokia Networks, which provides infrastructure to wireless carriers. Photos, messaging and data can only boost network traffic and the markets Nokia can target, analysts said.

Scott Searle, an analyst at SG Cowen, said he expects Nokia executives at the meeting to talk about how the company is gaining share in the infrastructure market as companies such as AT&T and Cingular Wireless migrate to GSM (Global System for Mobile Communications) networks.

"New opportunities in North America and Latin America offer an opportunity for Nokia to grow share," Searle said.

In Nokia's third quarter, the company derived 23.5 percent of its sales from network infrastructure, with the remainder coming from handset sales.

First-half hiccup?
While analysts are chipper about Nokia's prospects for the second half of 2002, they are a bit worried about the company's first-half outlook.

The biggest problem is that Nokia's new phones won't help the company's sales until the second quarter at the earliest. That means Nokia still has to weather a rocky first half before things get better.

"Although we remain extremely positive regarding the long-term prospects of the company, we believe that the near-term environment will continue to be challenging through mid-2002," Searle said.

Many analysts said they wouldn't be surprised if Nokia cuts its earnings projection and current target for 20 percent revenue growth for the fourth quarter. The company has a quarterly update conference call scheduled for Dec. 11. According to First Call, Nokia is expected to report a profit of 17 cents a share for the fourth quarter.

"While we are cautious relative to guidance about December, we see a second-half recovery driven by a general economic recovery and a massive new product cycle," McKechnie said.