Nokia Faces Long, Painful, & Uncertain Recovery

Nokia Corp. (NYSE: NOK) investors should expect a long and arduous recovery for the entity that once led the mobile phone market for much of the last decade. They should also expect the near certainty that the company will emerge from the ongoing restructuring painfully smaller and possibly less profitable.

My personal opinion is that Stephen Elop, president and CEO of Nokia, will not be around long enough to see the company's turnaround when (and hopefully, not if) it finally begins to climb out of the current doldrums.

That may seem like a harsh conclusion, but it is not so improbable considering the forces arrayed against the company. This includes the history and dynamics of the industry's leadership changes, and the outcome of the first round of cost-cutting and other reorganization measures implemented since Elop took over management control of the company last May. Today, Nokia announced in a statement that it slashed the first quarter forecast and said it "expects its non-IFRS Devices & Services operating margin in the second quarter 2012 to be similar to or below the first quarter 2012 level."

In other words, Nokia hasn't yet stemmed the slide in the sales of its core mobile phone products and sees the decline extending through the second quarter. Sales in the devices and services division are now estimated at $5.5 billion (4.2 billion euro) for the first quarter with operating margins at "approximately negative 3 percent, compared to the previously expected range of 'around breakeven, ranging either above or below by approximately 2 percentage points.'"

The company attributed the poor performance in the first quarter and decline expected in the current quarter to the following reasons:

• Competitive industry dynamics, which negatively affected net sales in the Mobile Phones and Smart Devices business units, particularly in India, the Middle East and Africa and China; and
• Gross margin declines, particularly in the Smart Devices business unit.
• Competitive industry dynamics continuing to negatively affect the Smart Devices and Mobile Phones business units;
• Timing, ramp-up, and consumer demand related to new products; and
• The macroeconomic environment.

Here's how Elop explained the situation and what he believes is ahead for Nokia:

Our disappointing Devices & Services first quarter 2012 financial results and outlook for the second quarter 2012 illustrates that our Devices & Services business continues to be in the midst of transition.

Within our Smart Devices business unit, we have established early momentum with Lumia, and we are increasing our investments in Lumia to achieve market success. Our operator and distributor partners are providing solid support for Windows Phone as a third ecosystem, as evidenced most recently by the launch of the Lumia 900 by AT&T in the United States.

We are continuing to increase the clock speed of the company. The change is tangible, and we are proud of the way Nokia employees are quickly responding to the needs of consumers and partners.

That's only part of the story. Nokia is stuck in a swamp and the company is obviously taking drastic steps to get itself back on track. Here's the problem: Nokia waited too long to start reorganizing its operations even as rivals like Apple Inc. (Nasdaq: AAPL) and Samsung Electronics Co. Ltd. (Korea: SEC) were steadily encroaching upon its turf. Like Motorola Mobility Inc. (NYSE: MMI), another ex-No. 1 in the mobile handset market, Nokia rested too long on its laurels and failed to provide the innovation the market needed. In the consumer electronics industry, that's a major mistake.

The challenges Nokia faces today began years ago and slowly developed into a full-disease. It's similarly going to take years to pull the company out of the downward spiral. Observers knew Nokia was headed for a nasty experience more than four years ago. In 2008, for instance, Junko Yoshida, editor in chief at EBN sister publication EE Times, observed: "Nokia's biggest enemy is Nokia itself. And it's about time for the world's largest mobile phone vendor to address the issue." (See: Opinion: Nokia vs. Nokia.) Also, see: Will Nokia Rise Again? and The Nokia Era Is Over.)

Elop has only compounded Nokia's problems, at least for the immediate future. Nobody should be surprised that the company's sales in developing economies "particularly in India, the Middle East and Africa and China," as Nokia puts it, fell in the recently ended quarter. Its decision to adopt Microsoft Windows operating system and dump Symbian placed consumers on notice not to buy Nokia products, at least until non-Symbian products were introduced. (See: Nok-Win a No-Win Combination.) By the time Nokia eventually introduced its Lumia smartphone, Apple and Samsung had cornered that segment of the market. This was predictable.

So the fact is that Elop may not be around long enough to celebrate a triumphant return by Nokia, if it ever happens. The best he can hope for is that he puts the company on a sound enough footing to sell it in the future to a deep pocketed player, similar to the decision by Google (Nasdaq: GOOG) to purchase Motorola Mobility, which despite major reorganization efforts, never quite recovered enough to reclaim the top spot in the market.

I don't expect a major reversal in Nokia's fortune. The Lumia is reportedly a fine product, but it lacks the draw of Apple's iPhone. The buzz around what the next iPhone will look like and the features Apple should pack in the device is already so strong the competition will be left only to pick up the market crumbs. (See: Forget The iPad, The Next iPhone Will Be Apple's Biggest Launch Ever.)

Market leadership in the electronics industry is not easily attained, and once lost, it's even more difficult to regain. Nothing I've seen tells me Nokia's case will be different. Please let me know if you believe Nokia has a good chance of retaking leadership of the mobile phone market.