Nokia in Advanced Talks to Sell Security-Appliances Unit

Published on: 29th September 2008

Nokia is in advanced talks to sell its security-appliances business to a financial investor as it concentrates on consumer Internet services, such as push email.

The world's largest cellphone maker by unit sales also said it plans to stop developing its behind-the-firewall business mobility solutions and instead will seek to use applications from such software companies as Microsoft, International Business Machines Corp. (IBM) and Cisco Systems on its devices.

"We will also continue with our investment strategy to develop key consumer Internet services in areas such as music, games, media, messaging and context-based services," said Niklas Savander, head of the services and software division.

Nokia expects to hit its profit-margin targets this year, even after a third-quarter slowdown, but those goals look increasingly elusive as the global economy weakens and its competitors slash prices.

The company warned this month that price-cutting by competitors would slightly reduce its global market share on devices during the quarter ending Sept. 30. According to research firm Gartner, Nokia had a global market share of 40% of all cellphones at the end of the second quarter of this year.

But the company renewed the goals set in late 2007 to post a near-20% operating margin in its device and services business through 2009, up from its 2006 outlook that saw its device business - its former mobile-phones and multimedia units combined - target a margin of 17% through the end of this year. It said the price cuts announced by its competitors were "unsustainable."

"Certain price action by those who don't have certain core advantages might not be as long-lasting as they might think," Chief Financial Officer Rick Simonson said at a news conference in early September. Nokia wouldn't comment further.

But analysts say the Finland-based company will be hard-pressed to meet the optimistic projections as emerging-market and replacement sales slow. A weaker global economy, heightened competition and slowing sales of highly profitable smart phones will likely slice into earnings and force the company to scale down its outlook when it speaks to investors again on Dec. 4. "There's a disconnect," said Societe Generale analyst Andy Perkins. "Market expectations of Nokia are inflated."

Nokia's shares have lost a bit more than half their value this year to hit a three-year low of about $18.49. The company's American depositary receipts closed down 11% to $17.60 on Monday.

During the same period, the shares of South Korean rival Samsung Electronics are down 7%, LG Electronics shares are 5% lower and shares of Taiwan-based HTC have risen nearly 17%, boosted by hype around its latest touch-screen phone, which uses Google's new Android operating system.

But a recovery in sales and profit for Nokia may not be in the offing for some time, because expectations for next year don't seem to fully reflect the expected slowdown, analysts say.

Key to supporting earnings will be Nokia's ability to lift sales of smart phones-handsets that provide wireless Internet, audio and video capacity, and mapping applications. But sales of those high-tech phones aren't moving as quickly as in past quarters.

Gartner said this month that 32.2 million smart phones were sold in the second quarter, up 16% from a year earlier but much slower than the same quarter in 2007, when sales rose 55% from a year earlier.

Rival smart-phone developers, such as Apple with its iPhone, Samsung and Blackberry maker Research In Motion are part of a growing challenge to Nokia, which saw its smart-phone market share slip in the second quarter to 47.5% from 50.8% the previous year, according to Gartner.

Research In Motion, of Waterloo, Ontario, last week said its second-quarter revenue rose 88% from a year earlier on strong sales.

But sales of high-tech phones hinge on consumers with ample cash to spend on luxuries in a slowing economy. JPMorgan Chase predicts global sales for all cellphones will fall 3.9% to 1.2 billion handsets in 2009 from projected sales this year, reflecting an expected sharp decline in global gross domestic product and an extended replacement cycle.

Many of Nokia's competitors also have suffered from the downturn, but Nokia has been largely insulated. Unlike most rivals, whose sales are concentrated in developed markets such as Western Europe, Nokia also has dominated fast-growing emerging markets such as India. But as economic problems creep into these markets, Nokia's sales growth is also likely to taper.

Nokia is working to get new smart phones to the market and recently launched its new N96 model-which features more memory and a bigger screen for music and video-and is preparing to present its first touch-screen mobile phone on Oct. 2. Nokia's Mr. Simonson said new devices released ahead of the holiday shopping season should lift its market share, supporting margins.

-By Adam Ewing, The Wall Street Journal

(Kathy Shwiff contributed to this report)

(END) Dow Jones Newswires

 

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