Business Watch: Time runs out for Nokia as shares tumble again


Dominic White argues that Nokia’s problems look set to continue, and questions whether CEO Stephen Elop will remain in the top job for much longer 

Stephen Elop must be odds-on favourite to become the shortest serving chief executive in Nokia’s prestigious history.

The Finnish handset maker must be wondering whether it would be performing better right now if it had stuck to its roots and was still selling paper and rubber boots as it did when it began life in 1865.

By the time you read this Elop (pictured) will have reported Nokia’s latest results but it is likely there will have been few surprises.

Elop had already got the nasty shocks out of the way a week earlier by issuing a profit warning that sent the firm’s shares reeling by more than 20 per cent to their lowest levels since 1996.

He warned last week that Nokia would make a loss on its once cash-generative phone business in both the first and second quarters.

Sadly for investors, who have seen their investment shrink in value by 50 per cent this year alone, there do not appear to be any quick fixes.

At their most base level the problems are twofold.

Nokia’s feature phones division, which contributes 30 per cent of group sales, is getting hammered by cheaper Chinese handset makers such as Huawei and ZTE.

Sales in that business fell by a whopping 35 per cent to €2.3 billion in the first quarter.

Then there’s the problem of the smartphones business, which is ostensibly sexier but is currently proving to be not very sexy at all.

When Elop, a former Microsoft executive, took up the role less than 18 months ago, he made a bold decision to phase out Nokia phones that are based on the company’s own Symbian operating system.

Instead, all of the company’s future smartphones would be based on Microsoft’s Windows Phone operating system.

It was always clear that such an ambitious turnaround strategy would take time. But time is not a luxury Elop can a ord when Apple and Samsung are so rampant in smartphones.

Unsurprisingly, not many people are buying Nokia phones that still use Symbian – why would they?

That wouldn’t be such an issue if punters were snapping up bucketloads of Windows phones, but they are not.

Nokia shifted just two million Windows devices in the first quarter, well short of the fi gures analysts were hoping for.

That’s also miles behind Apple, which is expected to have shipped 31 million iPhones, according to a Reuters poll of analysts, and Samsung, which is expected to sell 37 million smartphones.

The Microsoft tie-up met with scepticism from the beginning. Microsoft has failed, despite more than a decade of trying, to replicate its dominance of PCs in the world of smartphones.

And while Nokia’s new Lumia handsets, based on Windows, impressed analysts at the Consumer Electronics Show in Las Vegas and the Mobile World Congress in Barcelona, there’s an enormous amount now riding on their success.

Software glitches with the latest model haven’t helped matters either.

Causes for pessimism

Part of Nokia’s problem is application developers are fighting shy of the Windows platform.

There are less than 100,000 apps that run on Windows phones, while there are half a billion on iPhones and Android phones. How Elop solves that is anyone’s guess.

In another morale-sapping development, Nokia also looks set to have lost its jealously guarded crown as the world’s biggest handset maker, which it had held for 14 years.

Analysts calculate Samsung sold 88 million phones in total – smartphones and feature phones – in the January-March period. Nokia sold 83 million.

Then credit rating agency Moody’s decided to put the boot in this week, too. It cut Nokia’s long-term credit rating to Baa3, one level above junk, sending the shares below the €3 barrier.

The ratings agency blamed the “severe decline” in Nokia’s mobile phone sales and revenue in the first quarter for the downgrade.

It 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.”

And it added: “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.”

It’s always telling when a company bothers to respond to one of these credit ratings announcements because if it does it normally means they are in a bit of a pickle.

Sure enough Nokia leapt to its defence, pointing out that there is no reason to believe it will run out of cash.

Timo Ihamuotila, the chief financial officer, issued a statement, saying: “Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position.”

He’s right: Nokia is slashing annual costs in its phones business by €1 billion, having cut 4,000 jobs in February.

And it does have impressive cash balances, which it says are €9.8 billion gross and €4.9 billion net of debt.

Ihamuotila’s bind is that at the current rate Nokia is burning through its cash pile rather too quickly.

Around €700 million of cash flowed out of the business in the first quarter and in the second quarter it is due to spend €750 million on dividends, which could increase the outflow.

It’s little surprise that some analysts are speculating the dividend may take a haircut.

Some are even speculating that Elop’s position will come under pressure if there is not a dramatic turnaround this year.

Elop off the head?

He has continued to stress that the company is in transition and, to be fair to the CEO, he was dealt a tough hand when he took over the role.

Last week, Elop stressed he was “quickly taking action” to the tackle the problems underlying the profit warning, by pushing for increased Lumia sales while slashing costs.

“We are continuing to increase the clock speed of the company,” as he put it.

Whether he stays around long enough to see the transition through remains to be seen.

At these share price levels Nokia is worth less than a 10th of its 1997 peak before Apple launched the iPhone and is looking vulnerable to takeover.

The question is, would Microsoft be bold enough to buy its new mobile phone partner?