Shake that junk

Shake that junk

Stephen Elop, Nokia’s CEO

Stephen Elop, Nokia’s CEO, still smiling

In the space of a few weeks Nokia had its dirty laundry, consisting of rather pathetic-looking first quarter results, aired out in public, its business subsequently downgraded by the top three ratings companies to ‘junk’ status, and a backlash against the firm as its share price dropped to a 15 year low and beyond. Heather McLean takes a look at what is happening to this Finnish fish out of water…

Nokia is having a hard time. The Finnish firm’s recent first quarter financial results gave the rest of the industry the impression this whale was beached, and desperately trying to cover its modesty.

Nokia said its losses of 29% year on year for the quarter, plus a fat 26% drop from the fourth quarter 2011, were due to greater than expected competitive challenges and seasonality, plus from charges related to restructuring activities. Sales in its devices and services business plummeted by 40% year on year, with smart device net sales down 52% year on year (down 38% quarter on quarter), and mobile phone net sales down 32% year on year (down 24% quarter on quarter).


Nokia net sales in the first quarter of 2012 hit Euro 7.4 billion, down from Euro 10.4 billion in the same period last year, a drop of nearly one third. Operating profit was minus Euro 1.3 billion from plus Euro 439 million in the same quarter 2011.


Competitive challenges

Stephen Elop, Nokia CEO, commented: “We are navigating through a significant company transition in an industry environment that continues to evolve and shift quickly. Over the last year we have made progress on our new strategy, but we have faced greater than expected competitive challenges.

“We have launched four Lumia devices ahead of schedule to encouraging awards and popular acclaim. The actual sales results have been mixed. We exceeded expectations in markets including the United States, but establishing momentum in certain markets including the UK has been more challenging,” Elop continued.

Whatever the cause, Nokia’s share price plummeted on the news; by 4 May shares in the group, which had already fallen to a 15 year low on the results release, hit a mere Euro 2.39. At the end of April, Moody’s downgraded Nokia’s financial status to one point above ‘junk’, followed by Standard and Poor’s and the Fitch ratings agency that both awarded Nokia with ‘junk’ status.

Commenting on the Fitch rating, Timo Ihamuotila, Nokia’s executive vice president and chief financial officer, stated: “We are quickly taking action to position Nokia for future growth and success. Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position.”

Ihamuotila later stated on the 27 April about the rating announcement from Standard & Poor’s: “…Nokia is in the middle of a transformation programme which encompasses every aspect of our business. We are implementing a decisive action plan to position our company for future growth and success. The main focus of these actions is on lowering the company’s costs, improving cash flow and maintaining a strong financial position, while bringing attractive new products to market.”

Yet Nokia’s financial position remains strong, Ihamuotila claimed. As of 31 March 2012, Nokia had gross cash balances of Euro 9.8 billion, and a net cash position of Euro 4.9 billion.


Fall from grace

However, for a company that once led the mobile field and set the standard that others were measured by and aimed to achieve, the fall from grace for Nokia has been outstandingly steep, and swift.

The problem for Nokia appears to have been its recalcitrance to get on the software and smartphone boat. While others were busy innovating and experimenting, Nokia failed to let its people be caught up in the Zeitgeist of the moment; much like other former market leaders, now back of the pack followers, such as RIM. It seems that those formerly at the top of the mobile pile thought they were impervious to changes going on all around them. A big mistake to make in these technology-fuelled days, where consumers drive the industry as much as the manufacturers.

Research firm Ovum’s Tony Cripps, commented that a Reuters’ report highlighting a possible lack of faith among European mobile operators in Nokia’s new Windows Phone smartphones characterises the products as not good enough to compete with established market leaders from Apple and Samsung in particular. In his blog, Cripps commented that such beliefs are widespread, and that the beleaguered Finnish handset maker’s latest financial results appear to bear this theory out.

However, Cripps added: “But they are also missing the point. There’s little objectively wrong with many of the products competing with Apple, Samsung and Google/Android that greater customer awareness and a big budget marketing drive could not cure. And that’s something European carriers need to do a great deal more to assist the underdogs with if they aren’t to be the engineers of their own self-fulfilling prophecy of handing all power over their subscribers to the duopoly of Apple and Google.”


Bye bye luxuries

In a bid to make some money, Nokia is now rumoured to be looking into selling its luxury mobile phone subsidiary, Vertu. If sold, it could make around £161 million (Euro 200 million) from the off-load, which would see Vertu devices, which retail for around Euro 200,000 each, in the hands of a more successful owner.

The company has also decided to attempt to seek revenge on the world for its poor performance by suing all its rivals in a frenzy of litigation. RIM, HTC and ViewSonic are all being hit by the lawyers as Nokia claims the companies have been treading on the toes of its inventions for phones and tablets; the argument focuses on 45 patents in total. HTC and ViewSonic are being sued in federal court in the US, and all the companies have been named in German courts.

“Nokia is a leader in many technologies needed for great mobile products,” said Louise Pentland, chief legal officer at Nokia. “We have already licensed our standards essential patents to more than 40 companies. Though we’d prefer to avoid litigation, Nokia had to file these actions to end the unauthorised use of our proprietary innovations and technologies, which have not been widely licensed.”

Given Nokia’s lack of general income [see results info above], it is trying to make as much cash from its patent portfolio as possible; according to Nokia’s Ihamuotila, the company is set to make around £403 million (Euro 500 million) in royalties from its patents this year.

And so the downward slide of Nokia continues. Elop said in his statement on the company’s first quarter results that things can be turned around. He commented: “We have a clear sense of urgency to move our strategy forward even faster…We are confident in our strategy and focused on responding urgently in the short term and creating value for our shareholders in the long term.”

The world waits to see how Nokia shakes its junk, with interest…

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