Nokia chief on the ropes as profits collapse again

The phone maker's failure to compete at the top end could signal the end of the line for its CEO

The scars of a difficult year were visible for all to see at Nokia yesterday, as profits tumbled 31 per cent between April and June. Yet the results underlined a longer term malaise that has increased speculation that the company will imminently dispense with its chief executive as it struggles to innovate in the smartphone market and the shares remain in the doldrums.

The Finnish firm reported operating profits of €660m (£558m) in the three months to the end of June, down from €775m in the second quarter of 2009 – despite a slight year-on-year rise in sales to €10bn. Profits were also 40 per cent lower than in the previous quarter. The results follow a profit warning in June, its second in as many months, which sent the shares down 11 per cent. Geoff Blaber, an analyst at CCS Insight, said: "These are a very challenging set of results. It underlines the problems at the heart of the company's devices and services business."

Although the shares closed slightly up at €7.17, they are down almost 75 per cent from their most recent peak in 2007. During the tech bubble the shares reached almost €65. Yesterday's fall in profits increases the pressure on Olli-Pekka Kallasvuo, the group chief executive since 2006. Earlier this week, reports emerged that the company has begun searching for a successor to the lifelong Nokia employee, sending the share price 5 per cent after higher. Mr Kallasvuo yesterday called for an end to the uncertainty, although he failed to confirm his position was secure.

"There has been a lot of speculation on my position, on myself, during the last couple of weeks and that is not good for Nokia," he told CNBC. "I feel it needs to be brought to an end one way or the other."

Carolina Milanesi, an analyst at Gartner, said Mr Kallasvuo's departure had been rumoured for months, but conceded that a shake-up at the top was likely. "If the Nokia shares go up so much when the market thinks he is going, what will they do if Nokia announces he's staying?"

Yet there was no obvious replacement, she said. "It's not easy. Investors are unlikely to be happy with someone internal. They want real change, not just a reshuffle."

Mr Kallasvuo had been positive over the results. He said that despite the continuing challenges at the group, the second quarter had highlighted "several reasons to be optimistic about our future". He said the global handset market had grown at a healthy pace, adding he was satisfied with the sales of affordable mobile phones. Nokia dominates the market in devices between €50 and €150, Ms Milanesi said, highlighting the BlackBerry-style C3, as well as the 5230 and 5800, as particularly strong sellers. "That is where their strength is," she added.

Nokia's real weakness is its failure to compete effectively in the high end smartphone market – where handsets are usually above $300 – against companies such as Apple and the BlackBerry maker Research in Motion, or with devices running Google's Android operating system. It has invested billions of euros in building competing services as well as introducing a new strategy to focus on the high-end devices, but it has so far failed to secure a dominant position. At the time of its profit warning, analysts at UBS said the main issue behind the disclosure "has been increased pricing pressure in the high end due to lack of competitive product". The group has said it is determined to get back into smartphones, as it wants to boost "value over volume".

The group launched its N95 in 2007, shortly before Apple's first iPhone hit the shelves. While that device found some success, subsequent models failed to corner market share. "They haven't had a strong product since the N95. It was a revolutionary device but the problem was around usability," Ms Milanesi said. Mr Blaber of CCS agreed. "Nokia was caught off guard by Apple and the shift to touchscreen, which wasn't seen as a priority," he said.

Mr Kallasvuo issued a war cry yesterday: "In smartphones, we continue to renew our portfolio. We believe that the Nokia N8, the first of our Symbian^3 devices, will have a user experience superior to that of any smartphone Nokia has created."

Symbian^3 is the group's latest operating system. After the N8 it will launch more smartphones that "we are confident will give the platform broader appeal and reach, and kick-start Nokia's fightback at the higher end of the market". The group is also developing Symbian^4 but earlier this year pushed the release back from the start of 2011 to at least the summer. The analysts see further challenges for the company, which can trace its history back more than 140 years. "There is little sign of developments down the line that will improve their prospects in devices," Mr Blaber said, adding: "The suggestion is it'll be at least mid-2011 before there's any real recovery."

Nokia in numbers

€400bn Net sales in 2009, a drop of 19 per cent from the previous year.

111.1m Number of mobile devices Nokia sold in the second quarter of 2010.

75 per cent Share price decline since November 2007, with the onset of the credit crunch.

€1.9bn Sales last year in the UK, its third largest market behind India and China.

€900m Pre-tax profits last year, marking a staggering 81 per cent fall from 2008.

129,746 The total number of employees working for Nokia at the end of June.

€7.9m Chief executive Olli-Pekka Kallasvuo's total remuneration package for 2009.

10 per cent The rise Nokia predicts for the number of mobile phones sold across the industry this year.