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Nokia lowers sales outlook

The cell phone giant warns that sales will drop in the second quarter because of slower-than-expected demand for its handsets.

Cell phone giant Nokia warned Tuesday that sales would drop in the second quarter because of slower-than-expected demand for its handsets.

The Helsinki, Finland-based company said it now expects to see mobile phone sales to increase between 0 percent and 4 percent in the quarter, instead of the previously expected 5 percent to 10 percent. Nokia also said sales at its networking division are expected to drop 20 percent to 25 percent, far greater than earlier guidance of a 5 percent to 10 percent decline.

The company expects earnings per share for the quarter to be between 17 cents to 19 cents.

Analysts had been expecting a somewhat disappointing update from the company, which will formally report quarterly results on July 18. But the numbers weren't as bad as some analysts had feared.

"It is clearly evident that Nokia has had tremendous success in manipulating its supplier chain to generate consistently strong margins through the current telecom downturn," wrote Wells Fargo Securities analyst Kevin Dede in a research note.

Nokia said it expects its share of the mobile phone market to grow to 38 percent during the quarter, with volume increasing more than 10 percent year over year. The company estimates overall mobile phone market volume to grow about 5 percent in the second quarter.

But the average price of those phones is dropping because of the influence of cheaper models, such as those aimed at the teenage market. Company executives said that average selling prices were down both year-on-year and sequentially, although they didn't give specific numbers.

The company said it expects average selling prices to rise toward the end of the year, as sales of more gadget-laden phones are expected to pick up.

The drop in network sales is likely tied to a significant decline in capital spending by telecom carriers, said Mark McKechnie, an analyst at Banc of America Securities, who added that there was "no visibility on a recovery."

Worries about Nokia's quarter surfaced after RF Micro Devices, which makes cell phone chips, issued its own warning last week. Shipments to Nokia represent more than half the company's revenue, according to an RFMD representative.

RFMD said last week that a handset maker was delaying the launch of a "handful" of new cell phones that were supposed to be released around June, a company representative said. RFMD did not identify the vendor. The representative declined further comment.

However, Ed Snyder, a wireless analyst with JP Morgan H&Q, pegged Nokia as the culprit. He wrote in a note to investors that Nokia was having trouble adding new RFMD equipment to its cell phones. The fault rested with Nokia, Snyder wrote, because other companies using RFMD's new chips were not reporting problems or delays.

A Nokia representative declined to comment on the RFMD issue.

Nokia has had a series of cell phone mishaps in the past two years. Last April, the handset maker acknowledged that it was working to fix a software glitch that could cause connection problems for up to 10 percent of all cell phones sold in the United States.

Some Nokia handsets sold last October that had faulty screens continue to show up in the United States and elsewhere, a Nokia representative said. The phones' screens eventually fade to black, making it nearly impossible to use them.

News.com's Ben Charny contributed to this report.