The announcement today by Nokia Corp. (NYSE: NOK), that it will eliminate one of every five jobs in its mobile handset division and remove three senior executives didn't impress investors. (See: Nokia to Cut 10,000 Jobs, Divest Assets.)
They promptly dumped the stock, driving down the company's market value by more than 15 percent in intraday trading.
CEO Stephen Elop might have meant to signal resolute leadership during an ongoing crisis at the wireless handset vendor, but nothing in today's announcement offers clarity about what the future holds for the company or whether it can right the ship. Investors have seen reorganizations like this before at other endangered companies, and they know where it's leading Nokia. By the end of this year, Nokia will be a much smaller company on a revenue and stock valuation basis, and its future will be even more in doubt, the modest success of its Lumia phone notwithstanding.
There's some disheartening history behind this tough assessment. Nokia's actions are eerily similar to steps taken by other enterprises that slowly diminished after dominating their market sectors. Nokia is unlikely to fall into technology's historical bin, but the job cuts, management changes, and other strategic initiatives implemented so far by Elop remind me of actions taken by Palm Inc., Motorola Inc., Nortel Networks, Lucent Technologies, and many other former tech giants that misread their markets and tumbled into oblivion. BlackBerry (Nasdaq: RIMM; Toronto: RIM) is in a similar funk, and its reorganization efforts have not paid off as expected.
If this assessment appears harsh, don't just follow the Nokia sales trajectory. Look more closely at more important factors -- why the company is where it is today, what is happening at its rivals (Apple, Samsung, HTC), the monumental changes occurring in its market, and what could make it competitive again. Also, consider the fact that, as Nokia cuts jobs and reorganizes operations (necessary actions if it is to survive), it is also demoralizing employees and sending mixed signals about its future to contractors, suppliers, and other third-party support companies it requires for future growth.
For instance, Nokia suppliers in the communications IC market recall how their profitability and long-term viability were horribly threatened as companies like Motorola declined. They know by now that they've got to pull up the stakes and throw operational and product support behind Nokia's rivals.
As the company totters, members of its ecosystem are feeling the heat and rushing for the exit. This means critical engineering employees will be firing off resumes to other companies. Application developers the company needs to support the rollout of services for the Lumia and other devices will devote more resources to rivals. The effect is already being felt at companies in the extended supply chain. The DSP chip vendor Ceva Inc. recently slashed its 2012 sales and earnings estimates because of declining sales at Nokia. What many suppliers see now is the possibility of getting crushed under the tottering giant.
Nokia is a fast fading shadow of its former self, and no amount of employee retrenchment and management reshuffling will send the market a different message. Today's announcement confirmed that the company is burning more money than it is making. It said in a press statement that it expects the "non-IFRS Devices & Services operating margin in the second quarter 2012 to be below the first quarter 2012 level of negative 3.0%. This compares to the previous outlook of similar to or below the first quarter level of negative 3.0%." The company also said it "expects competitive industry dynamics to continue to negatively impact Devices & Services in the third quarter 2012."
It should have added that the situation won't improve that much for the rest of the year. Before today's announcement, analysts had reduced their average revenue estimate for Nokia this year to €39 billion, or about $49.2 billion. (I think sales will be even lower.) The company posted €42 billion of sales for 2011 and €50.7 billion for 2008.
The job cuts will reduce the breakeven revenue target and relieve pressure on the balance sheet at a time when cash conservation is becoming a major priority. They won't cure what really ails Nokia: an inability to catch up with Apple and Samsung, combined with the unwise decision to abruptly terminate Symbian operating system-based products in favor of Windows OS. That move stopped Nokia cold, and for that Elop himself deserves the axe.