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More Bad News for Nokia

{complink 3847|Nokia Corp.} is getting kicked while it's down. The latest blow from corporate ratings firm {complink 7155|Moody's Investors Service} deepens investor concerns about the company and may force it to begin considering strategic alliances to boost its cash position and shore up critical operations.

Moody's on Friday slashed Nokia's debt rating to “junk” status and confirmed it would maintain a “negative” outlook on the company until its operating conditions improved. The downgrade impacted about $4.5 billion (€3.6 billion) of Nokia debts, Moody's said. The company reported total debt of approximately €4.9 billion at the end of the March quarter, which means Moody's action would affect substantially more than half all of its outstanding financial obligations.

Moody's did note in its research report (available only to subscribers) that it “regards Nokia's commitment to decisive restructuring as positive and necessary to return the group to profitability.”

The path to profitability remains stormy for Nokia, though, and it may be quite a while before it starts to benefit from the restructuring actions, all of which will drain it of much needed cash as it compensates employees being laid off. Nokia is facing tough competitive pressures, and despite the recent cost-cutting actions and the introduction of its newest phone (the Lumia), the company hasn't posted the kind of positive improvements analysts have said it needs to improve its profile. In fact, Nokia's stock price weakened even further after the 10,000 job cuts it announced last week on concerns sales were dropping faster than expected. (See: Nokia to Cut 10,000 Jobs, Divest Assets and Nokia Job Cuts Don’t & Won’t Impress Anyone.)

Wolfgang Draack, a Moody's senior vice president and lead analyst for Nokia, said in the report:

    Today's rating action reflects our view that Nokia's far-reaching restructuring plan — which involves drastically downsizing its infrastructure by focusing its direct marketing on fewer markets, streamlining support functions and reducing investments in certain R&D projects in order to realize additional fixed cost savings of up to EUR1.3 billion by the end of 2013 — delineates a scale of earnings pressure and cash consumption that is larger than we had previously assumed.

Moody's reasons for downgrading Nokia's debt rating and its general outlook for the company are worth restating here. They point to some of the challenges facing the company and the viability of its long-term competitive position. While Moody's analysts believe the company is on the right track with the reorganization actions and efforts to spark sales of its devices, they were also concerned about the lack of visibility into demand for its products and the declining “future net cash flows.” Here are further comments from the Moody's report, including the ratings firm's conditions for, in the future, changing Nokia's ratings up or down:

    Given that the rating outlook is negative, there is currently limited potential for an upgrade of Nokia's ratings. However, Moody's could upgrade the rating to investment grade if (i) Windows devices make meaningful gains in the smartphone market; (ii) Nokia's revenues start to grow again and it achieves an operating margin (-4.0% for the last 12 months to March 2012, as adjusted by Moody's) in the mid-single digits in percentage terms; and (iii) the group maintains an adjusted net cash position (approximately EUR2.4 billion as per the end of March 2011, as adjusted by Moody's).

    Moody's would stabilise Nokia's outlook if (i) the Lumia family of devices gains meaningful market share and the Smart Devices segment returns to non-IFRS operating profit; (ii) the sales volumes of Mobile Phones segment at least stabilises and its margin contribution returns to the double digits in percentage terms; and (iii) the group's cash consumption falls to marginal levels.

    Moody's would consider downgrading Nokia's rating further if (i) there is evidence that the Lumia product family is failing to gain momentum, due, for instance, to a slowdown in customer take-up; (ii) the non-IFRS operating margin of the group's Devices & Services segment declines further below -5% and fails to improve in the second half of 2012; or (iii) Nokia's cash consumption remains high, and is not materially reduced over the coming quarters such that the group's reported level of net cash does not trend below EUR3.0 billion (EUR4.9 billion at end of March 2012).

30 comments on “More Bad News for Nokia

  1. Houngbo_Hospice
    June 18, 2012

    @Anna,

    strategic alliances to boost its cash position

    Nokia has yet to find those strategic partners that will be able to help stop its downfall. Who do you think is ready to enter into a stratetegic partnership with Nokia? So far the experience with Microsoft hasn't worked out well, why should we think that other partners will do any better?

  2. Johnny
    June 18, 2012

    @Hospice_Houngbo, I'm still giving Microsoft a chance here.

    @Anna, I've been monitoring Nokia for quite some time, and thanks to the analyst service I'm using I've kept my distance from them. But today in the early morning I received an alert regarding some special instability in Nokia's today. I don't think they were talking about the +2% movement.

    All in all — backed by my some professionals' reports, I'm inclined to believe that Nokia will really surprise us tonight. So inclined, that I bought some shares in the beginning of today's trade + a few more shares in the last 10 minutes.

    (p.s. for more details, write me)

  3. Ariella
    June 18, 2012

    @Anna difficult to find more than the slightest hint of a glimmer of light for Nokia in this — not even an actual glimmer. 

  4. bolaji ojo
    June 18, 2012

    Ariella, What bothers me is that we've seen this before. RIM is going through it right now but others have had similar experiences, including Motorola. And, it's amazing how the strategy for climbing out are always so similar (and the results, by now, so predictable.) Why not try something other actions?

  5. Ariella
    June 18, 2012

    @Bolaji ah, to break out of the old paradigm box and try something really innovative? What are the odds of that happening?

  6. Barbara Jorgensen
    June 18, 2012

    I hope some of the readers that still have faith in Nokia are correct and the company will be able to pull out of the nosedive. But if Nokia has to finance it's palns, the junk status is going to hurt its efforts. Maybe Microsoft's pocket and dig a little deeper?

  7. Anna Young
    June 18, 2012

    @Johnny, I applaud your risk taking steps.  I'm sure you've read about Nokia' stock price concerns. By the way,why would you suggest that Nokia will surprise us tonight? When by all accounts, it's been a disappointing news from the management.

  8. Anna Young
    June 18, 2012

     @Hospice_Houngbo, It's clear the partnership between Microsoft and Nokia hasn't taken off on a good start as anticipated. But I still think Nokia needs Microsoft. All hopes are pinned on Windows 8. But having said that, I don't think Nokia will benefit from a different partner as it stands. What's your thought?

  9. Wale Bakare
    June 18, 2012

    Thank you Ariella. I'm in the same boat with you. Until something unique and different happen especially around its operating application – microsoft OS for me would not help Nokia out now or later. Besides, fine some shareholders may still want to keep hoping but they need to claw back and re-install Nokia's previous years confidence and credibility in mobile phone users.

  10. Anna Young
    June 18, 2012

    @Ariella, Absolutely. It's partnership with Microsoft hasn't yielded much fruits. It's financial outlooks is depressing. Its laying off 10,000 of its workers. It's been one bad news after the other. There's definitely not going to be a sudden turnaround for Nokia.

  11. Wale Bakare
    June 18, 2012

    @Anna of course Nokia needs partnership, i agree with that. I would prefer Microsoft & facebook partner Nokia, but now design alliance is of priority to competing well with others. I do sincerely i hope windows 8 could do what 7 has failed to achieve.

  12. bolaji ojo
    June 18, 2012

    Wale, Would you buy a Microsoft tablet PC, though? The company just rolled out its first tablet PC today. See: Microsoft Windows 8 Surface Tablets: Big Hardware Play.

  13. mfbertozzi
    June 19, 2012

    Anna, speaking for myself, it looks like an incredible story; considering how things are going on for RIM, apart Apple, who is the real competitor for Nokia? Feeling is they are doing wrong by themselves…have you a different opinion about?

  14. Anna Young
    June 19, 2012

    @Wale, I agree design alliance is highly required. Like you I do hope Windows 8 brings a glimmer of hope ….success for both Nokia and Microsoft.

  15. Wale Bakare
    June 19, 2012

    Thank you Bolaji. Ideally, buying Tablet computer not in my mind for some reasons but with Microsoft rolling out 2 different Tablets –  Windows 8 Pro (Intel); Windows 8 RT ( ARM) this, i may probably have a change of mind. Surely, ARM processing tablet!

    Why do i want to buy tablet?  Reason “the Surface serves as a good Skype device, Sinofsky pointed out. The Surface includes dual array microphones and speakers .”

  16. Himanshugupta
    June 19, 2012

    Moody's rating to degrade Nokia's shares to junk is in line with the sentiments of the inverstors. However, Moody give clear guidelines to Nokia about their (and market's) expectations so that Nokia could be taken as serious contender in the mobile segments. 

    However, do such rating really affect any company's strategy (short and long term)? Most of the time the ratings improve or downgrade well past the actual financial impact.

  17. Barbara Jorgensen
    June 19, 2012

    Hi Himan: I've seen companies pull up from downgrades, but not under the same circumstances. Global distributors Arrow and Avnet were both, at the same  time, downgraded pretty badly (not sure if it hit the 'junk' level) becuase of the debt they were carrying. Otherwise, their financials were sound. Both companies got that under control quickly and are cnow onsidered undervalued by the analysts that watch them.

  18. itguyphil
    June 19, 2012

    I agree. They've hedged their bets with MSFT so they might as well see it through and hope that something will pan out.

  19. Anna Young
    June 21, 2012

    @Pocharle, I agree. That's my thought as well. It'll be beneficial for Nokia as well Microsoft. I just  hope the union works.

  20. itguyphil
    June 23, 2012

    It better. Or else Nokia will be up a looong creek without a paddle!

  21. ahdand
    June 30, 2012

    Well I feel Nokia will ride on whatever the barriers they have to face because the brand name does have created a market for them. This is a major blow but not significant enough to drop them off from the ladder itself.

  22. itguyphil
    June 30, 2012

    It might be. In the US, I have not seen a Nokia-based device popular for a while now. If the new W8 mobile OS does not work out, what will they have to try next?

  23. ahdand
    July 6, 2012

    Yes in eurpoean contries its the Sony Ericsson which is more popular. Here in Asia I think Nokia, Smasung and Apple has some kind of a simillar maket which seems to be good for us.

  24. itguyphil
    July 22, 2012

    “Yes in eurpoean contries its the Sony Ericsson which is more popular.”

    Really?

    I thought the iPhone was the leader in that region as well? How far behind are they?

  25. Adeniji Kayode
    July 22, 2012

    @Anna, You aren right,for me I don,t know what to think of Nokia anymore because here, Nokia is lossing the market day by day.

    On the other hand, its risky not to take risks.

  26. Adeniji Kayode
    July 22, 2012

    In west Africa, Nokia is really lossing the market day by day to Tecno. Before now it used to be Nokia in the hand of everybody majorly because of the quality, durability and the battery life. Tecno came to offer all those for a very cheap price.

    Trust me, Consumers just changed their tastes immediately.

  27. bolaji ojo
    July 22, 2012

    Kayode, What is “Tecno”? Is that a Chinese made mobile phone? Can you post a picture or send a picture to me.

  28. Anna Young
    July 26, 2012

    Hi kayode. Yes, Nokia lost its grips on the smartphone market. The company has itself to blame for its misfortunes. But what's your view on its recent restructuring plans? Do you think it can fly again?

  29. Adeniji Kayode
    July 26, 2012

    @Anna,

    I believe Nokia can fly again but with much work. Nokia will have to do more than its doing now.Nokia still have a good history and reputation in the hearts of consumers except for the fact that it competitors are given people more options at cheaper price.

  30. Adeniji Kayode
    July 26, 2012

    @Anna,

    I believe Nokia can fly again but with much work. Nokia will have to do more than its doing now.Nokia still have a good history and reputation in the hearts of consumers except for the fact that it competitors are given people more options at cheaper price.

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