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Nokia Reports Current and Future Success


The monstrous margin improvements in the quarter will likely motivate analyst into revising their earnings forecast for 2008.

Nokia (NOK) reported solid numbers today. Its mobile phone operating margins reached levels we have not seen in years, achieved solely by tremendous operational leverage. In fact operating margins increased across all segments with the exception of the infrastructure business which is still going through restructuring on the hills of being merged with Siemens.

A somewhat important point of clarification, the media keeps reporting that NOK's sales increased 28%. This is 'factually' correct, however, that number is largely impacted by consolidation of Siemens' joint venture into the numbers, on operating basis (the one that really matters) sales were up 11.3%.

NOK is clearly taking market share from embattled Motorola (MOT), but its success is due to its laser focus on innovation and keen control over its own manufacturing (this is where it gets its tremendous operational leverage). The beauty of today's performance is that Nokia increased its global market share despite losing market share in the US. The US only accounts for a meager 4% of its sales volume.

The US market is a future upside. NOK announced its intentions to create cell phones just for the US. Unlike in the rest of the world where buying a cell phone and wireless plan are two independent decisions, cell phones in the US are heavily subsidized by wireless providers (i.e. AT&T (T) and Verizon (VZ)) and thus they are for the most part in control the cell phones they sell.

The monstrous margin improvements in the quarter that were achieved despite average selling prices falling will likely motivate analyst into revising their earnings forecast for 2008.

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Position in NOK

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