Nokia Needs Some Good News

Will the sun shine brightly in Espoo, Finland, again? Ordinary, folks at the headquarters of Nokia Corp. (NYSE: NOK) must be wondering why the news about their once brightly-shining corporate neighbor seems to be all doom and gloom these days, following reports yesterday that Moody's Investor Service downgraded a portion of the company's bond to near-junk bond status. The ratings agency further slapped "a negative outlook" rating on the wireless handset-maker.

The Moody's downgrade was anticlimactic in the sense that it had been expected, but it still knocked the stuffing out of Nokia's market value. The company's stock price fell during intra-day trading today to $4.07, down 58 percent from the 52-week high of $9.42. Nokia's market value at the current capitalization of approximately $15 billion has dropped so much over the last several years that a major rival (did someone say "Apple"?) could offer to buy the company at a large premium and still be able to write the check from available cash and short-term securities.

I've said in a previous blog that Nokia should opt for a permanent relationship via acquisition with Microsoft, even before the company decided to adopt Windows operating system and drop its own Symbian OS. (See: Why Microsoft Should Buy Nokia.) I don't support the decision to ditch Symbian, but a tie-up with Microsoft could really set up Nokia as a major third competitor in the handset market by giving it the financial stability to compete against Apple iOS and Google Android. Nokia, in my opinion, is an even more affordable acquisition target for Microsoft and other players, although the list of potential buyers is skimpy, and even fewer CEOs and boards of directors have the mojo to take on such a large deal -- not with Apple rampaging through the market, anyway.

But I digress, so let's get back to the Moody's downgrade. The ratings firm highlighted the challenges facing the company and why Nokia is right now at a critical junction in its history. First, Nokia is becoming more reliant on the smartphone segment for a chunk of its revenue at a point when the newly-introduced Lumia device is still slowly ramping. The transition from Symbian operating system, which Nokia dumped last year, to Microsoft Windows OS has taken a toll on the company: Sales of Symbian devices are falling, while handsets based on Windows OS are not exactly catching fire in the market.

Here are the main comments from Moody's on Nokia's financial status:

While volatility by quarters is not uncommon, Moody's believes that the structural challenges facing Nokia's Mobile Phones segment may not be easy to address, such as the market share gains recorded by makers of very low-end phones or new phone promotions by Chinese carriers.

In addition to the pressure on its own operations, Nokia may have to contribute additional capital or funding to Nokia Siemens Networks (NSN), its communications equipment partnership with Siemens (rated A1/ positive), if the company's restructuring cost starts to exceed cash flow from operations.

Nokia isn't keeping quiet. The company fought back in a statement in which it noted Moody's downgrade was only half the story. The ratings firm also observed "Nokia's strong liquidity position and capital structure," adding that "cash conservation remains a priority for Nokia in the current transition."

I agree, but just to be clear: Nokia isn't a basket case. The company has a ton of cash (9.8 billion euro as at the end of March), and its debt is moderate. But its cashflow could come under pressure in coming months if sales don't start picking up. Plus, the Moody's rating downgrade will jack up the company's borrowing cost. This company can use some good news right now. It's just not in anybody's forecast.