Business Watch: Third downgrade this year adds to Nokia’s woes

0
634

Dominic White says analysts now have serious doubts over whether Nokia can return to profit after handset manufacturer’s credit ratings are downgraded again

Nokia is at risk of drowning in red ink, and some analysts fear that its once-prized handset business may never return to profit.

Moody’s has downgraded the Finnish handset manufacturer’s credit ratings for the third time this year after its second-quarter results showed an alarming slide in operating margins.

Nokia’s debt ratings have already been slashed to junk levels by all three of the leading rating agencies this year because of tumbling sales and ballooning losses.

News of the latest downgrade sent shares falling once again, close to a sixteen-year low.

Chief executive Stephen Elop (pictured) has thrown all of Nokia’s eggs in one basket by partnering with Microsoft and its Windows operating system to power all of Nokia’s future smartphones.

But under his watch Nokia has lost its 14-year crown as the world’s biggest handset maker to South Korea’s Samsung.

Investors are not happy and some are predicting Elop could be for the chop unless he turns the company’s fortunes around somehow before the end of the year.

That is one hell of an ask when one considers that Moody’s says the Windows phones are loss-making for Nokia and only predicts a return to profitability in the second half of 2013.

Sales of the Lumia-branded phones produced so far have been okay, doubling in the
second quarter to four million.

But that is tiny compared to Apple’s expected sales of 30 million iPhones and Samsung’s 50 million.

“Nokia’s transition in the smartphone business will cause deeper operating losses and consequently cash consumption in the coming quarters than we had previously assumed,” the ratings agency said in a statement, adding that its outlook on all of Nokia’s ratings remained negative.

Windows 8 doubts
Moody’s also stressed there was no guarantee Nokia’s hotly anticipated Windows Phone 8, set to launch later this year, would help it return to the black.

“A return to profitability in the Devices & Services segment on the back of smartphones with the Windows 8 mobile operating systems is by no means assured,” analysts at the agency wrote.

The Financial Times has now reported that Elop is considering another controversial strategy in an effort to build anticipation for the upcoming Windows phones.

Nokia has nearly always relied on a carpet bombing approach with its handsets releases, offering them to as many operators as possible in order to maximise sales.

But given the erosion in the value of the Nokia brand in the face of more futuristic phones from Apple, Samsung and others, it perhaps makes sense that the company is considering an exclusive launch arrangement.

The FT report points to a possible exclusive UK launch by Everything Everywhere, joint-owned by France Telecom’s Orange and Deutsche Telekom’s T-Mobile.

Many operators want to prevent Apple and Samsung’s dominance taking hold for good in the industry.

That virtual duopoly gives them the power to make almost all the profit from handset sales, whereas a greater spread of competition would give the operators back some power.

So the networks will do all they can to help Nokia – but only if it can come up with a convincing answer to Apple’s iPhone and Samsung’s Galaxy series.

Nokia has some time to prove that before its huge cash pile runs out – but it is still burning through the green stuff at a startling rate.

Prior to the Moody’s downgrade, Nokia told the market it was not losing cash as fast as many investors feared it was.

At the end of the second quarter, alongside a loss that nearly quadrupled to €1.53 billion, Nokia said it had net cash of €4.2 billion, compared with a market estimate of
€3.7 billion.

That sent the shares bouncing 18 per cent on the day in what looked like a “bear squeeze”, whereby short sellers rush to cover their positions, sending the shares higher without there being real demand in the market from buyers.

Sales of Lumia phones are failing to make up for the slump in phones based on its old Symbian system, which, let’s face it, are moribund and only really a collector’s item now everyone knows they are being phased out.

Eurozone misery
Vodafone is in a far better position but it is feeling the effects of the prolonged economic misery in Europe, as its latest quarterly results show.

The UK, in particular, was a poor performer in the three months to June. Sales here fell by 0.8 per cent, down from growth of 1.1 per cent in the previous quarter.

It is the first negative quarterly result for Vodafone UK for more than a year and it came despite a slight softening to the impact of termination rate cuts, leaving underlying growth at 2.2 per cent, versus 4.5 per cent in the previous quarter and 5.3 per cent in the same period a year earlier.

“Contract net adds in the quarter were quite solid, helped by a welcome decline in churn (from 18 per cent to 16 per cent) after several quarters of rising churn, but growth was likely suppressed by the follow-through effects of weaker contract net adds in the March quarter combined with slightly weaker pricing,” wrote James Barford at Enders Analysis.

Across most of Europe Vodafone customers are making fewer calls and being more careful about what they spend. Predictably, Spain is doing it most, with revenues down by 10 per cent.

India and Turkey are still performing well in revenue terms, with sales up by 16.2 per cent and 18.7 per cent.

But despite solid results in the US and Germany – the only European country to register a gain – group service revenues grew by just 0.6 per cent in the first quarter to £10 billion.

That’s a big slowdown on the 2.3 per cent growth of the previous quarter.

As Barford pointed out, since the end of 2010 Vodafone Europe’s underlying service revenue growth has fallen roughly in step with the drop in European GDP growth.

Its key European operations are now big and mature enough to be slaves to economic conditions.

NO COMMENTS

LEAVE A REPLY