Business Watch: Is Nokia profit warning beginning of the end?

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Dominic White says analysts are worried that Nokia’s recent huge profit warning is just the start of a sharp downward spiral

Another shocker from Nokia this week. Shares in the world’s biggest handset maker by volume plunged 18 per cent on Tuesday, after the company stunned the market by issuing a monster of a profit warning.

Nokia stock tumbled again on Wednesday morning, by almost 10 per cent, after analysts slashed their valuations for the company and raised questions that it would ever recapture its lost market-share.

Nokia said that because of lower-than-expected volumes and prices, its second-quarter sales and operating margins would be “substantially below” its previous guidance.

It’s the latest piece of bad news to hit the Finnish giant, which is losing out in the smartphone war to Apple’s iPhone and phones that use Google’s Android operating system. It’s already lost its position as the biggest mobile maker by revenue to Apple, an incredible success by the Californian tech giant given its late entry to the market.

At the cheaper end of the market, Nokia is also getting squeezed by cheaper models put out by some of its Asian rivals.

Chief executive Stephen Elop (pictured) pointed to weakness in both Europe and China as the driving forces behind the warning.

Android was making “significant” progress in China and forcing Nokia to drop prices, he said. It’s only six weeks since Nokia issued weaker-than-expected guidance for the rest of the year.

Now it has further lowered its second-quarter operating margin target from six-to-nine per cent to “around break-even”, and – perhaps most worryingly of all – said that the outlook was too uncertain to provide new full-year estimates.

Little surprise the shares are trading at their lowest level for 13 years, having fallen by a third in the last six months.

Avoid the stock
Elop, who is very new to the job, is already under significant pressure because of widespread scepticism over his controversial decision to move to Microsoft Windows Phone software from its own Symbian platform, as part of his overhaul of the handset business.

But it is worth remembering that he inherited most of the problems Nokia is facing right now. It has simply been out-manoeuvred in the smartphone market.

Analysts now say their main worry is that Nokia might not be able to recapture much share, even after it starts flogging new phones based on Microsoft software and stops selling phones based on its own Symbian software.

“We would continue to avoid the stock, as Symbian smartphone sales are falling off faster than expected and we are sceptical that new Windows Phone models will be able to replace lost profits,” Gleacher analyst Stephen Patel told Reuters.

Meanwhile, Nomura’s global technology specialist Richard Windsor wrote in a chilling note for investors: “We are concerned that the erosion the company has suffered in Q2 is just the beginning, and that there could be worse to follow.

“Nokia’s potential release of a Windows Phone in Q4 is irrelevant, in our view,” he added, noting that it would be a highend device unlikely to shift high volumes. Unsurprisingly, given that bleak view, Nomura is telling its clients to sell the shares.

JP Morgan also cut its price target on the shares to €4.25 from €5, but was marginally more hopeful: “We see the earliest possible timing for the beginnings of a turnaround as the launch of new Windows products, which we expect at the end of this year,” JP Morgan analyst Rod Hall said in a note.

Some analysts think Nokia now faces the same fate that affected Motorola, which once dominated the industry but saw its own share of the market plunge after it lost its way to the competition.

They note that Nokia is no safer in emerging markets than it is in mature ones, because of the rise of cheap Chinese handset suppliers that can undercut it due to their lower manufacturing costs.

Scary times.

TalkTalk’s best growth behind it?
It’s the question investors might feel entitled to ask, after Charles Dunstone’s broadband provider lost 25,000 users in the fourth quarter.

TalkTalk, spun out of Carphone Warehouse in March 2010 shed a similar number of punters in the previous three months, as it suffered a slew of customer complaints.

The main problem has been the difficult integration of both the Tiscali and AOL UK customer bases.

There has been a high level of unhappiness among Tiscali UK customers who have suffered problems with their bills during the integration.

As a result TalkTalk also had to shell out £2.5 million in payments to the customers.

As a further result, TalkTalk shed 50,000 punters in the first half, whereas its original guidance had forecast flat net adds for the first half and net adds of between 140,000 and 180,000 for the full year.

Despite this, the company said it had delivered an overall strong performance in a period of major change.

“We are confident that we are now making major progress in improving the experience for our customers, which will lead to lower churn,” said chief executive Dido Harding.

Analysts at stockbroker Jeffries said the company’s three per cent miss against fourth-quarter revenue forecasts highlighted the competitive challenges TalkTalk faces in what is a slowing, mature broadband market.

But on the plus-side they were pleased TalkTalk has promised its investors higher dividends and still managed to lift its underlying profits by 25 per cent to £276 million as it moves more customers onto its own network from that of BT.

As were analysts at RBS, who said the company is “currently the master of its own destiny” because it achieved profit growth due to efficiency savings, despite falling customer numbers.

T-Mobile USA takeover could be blocked
Finally, a bitter regulatory battle has started in earnest in the US, after Sprint Nextel formally asked regulators to block AT&T’s proposed £24 billion takeover of T-Mobile USA.

Sprint says the deal “has no public interest benefit” and would harm competition even if it comes with conditions.

Sprint has the most to lose from the deal, which would put it a distant third behind numbertwo player Verizon Wireless, part-owned by Vodafone.

Vodafone investors will be watching closely.

2 COMMENTS

  1. Nokia have only got themselves to blame. they should of got on the Anroid bandwagon.The N8 should have been launched on the Android OS. Their Symbian OS is shocking and always has been. Every N series phone that has ever come out has always had issues with it. When i worked in sales we used to have loads of returns and the other extreme was availability. they were never in stock !!!

    The irony is that Nokia were plugging the "Pocket PC" every early on way before the iPhone. On paper Nokia smart phones had all the features but the OS let them down, Thats why ive always been a huge fan of Sony Ericcson. but i dont think at the time a lot of people werent ready for the smart phone. Just goes to show that sometimes its all about timing.

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