Nokia today issued a profit warning for the current quarter and the rest of year saying operations will probably be around break-even.
- Nokia now expects Devices & Services net sales to be substantially below its previously expected range of EUR 6.1 billion to EUR 6.6 billion for the second quarter 2011. This update is primarily due to lower than previously expected average selling prices and mobile device volumes.
- Nokia now expects Devices & Services non-IFRS operating margin to be substantially below its previously expected range of 6% to 9% for the second quarter 2011. This update is primarily due to lower than previously expected net sales. While visibility is very limited, Nokia’s current view is that second quarter 2011 Devices & Services non-IFRS operating margin could be around breakeven.
Translation: E7 and N8 sales are poor, IFRS net income will show a loss and we have no idea what is going to happen towards the end of the year. I am not surprised at all by the weak sales of the high end; why would anyone commit to a dying platform over buying Galaxy S II, HTC Sensation, iPhone 4 or any of the other high-end phones?
You might recall that my initial take on Nokia’s Q1 was decidedly more negative than that of the so called analysts. Then, I continued to rail against them when Elop announced his plans to reorganize the company here. What worries me is that the first thing they state as means to avert crisis is to invest more into Symbian. This is not going to end well and the drop in the share price gives good indication. It plunged on massive volume and there wasn’t even an attempt to buy the dip.
Nokia stock closed at €4.75 in Helsinki trading, down 17,53 per cent from yesterday’s closing price. Nokia is now worth around 17.8 billion euros. Equity per share is approximately 3.8 euros, so markets do not see much value in Nokia’s operations and I agree with them.
Back when Nokia was trading at 12€ the last time, I not only sold my shares at a nice profit, but also made the call that I would not buy Nokia before it was trading at 5€ or below. Perhaps I should have actually traded that call. Nonetheless, the news that have come out since have pushed my estimate of Nokia’s fair value downwards. I just don’t see value in Nokia anymore.
Symbian’s long tail
Remember the picture above. The very long tail of Symbian that will produce 150 million in sales over the next couple of years. Yeah, it’s not going to happen. You would think that at Nokia there would be someone that understands that when you announce the imminent death of an entire technology platform in a rapidly evolving industry where the platform itself has become the critical competitive factor, your sales are going to tank. Be it one way or the another, it took an actual steep sales drop to convince Nokia execs of that very fact.
A month ago Nokia announced its restructuring plan including outsourcing Symbian workforce to Accenture and reducing personnel by additional 4000. They also said they would decrease their Devices & Services non-IFRS operating costs by 1 billion euros by 2013 compared to 2010. The plan itself had few big problems, but given that it took less than 2 months for the shit to hit the fan for Nokia, I am now expecting additional restructuring program to be announced before the end of the year possibly in a panic atmosphere, but that really depends on what happens with the market shares of Symbian and especially WP7.
Market shares dropping
I discussed the market share development among smartphones here. Essentially, Symbian’s market share is plunging and they are about to jump on board with a platform that has 1 per cent market share and with a company that has 3.5 per cent market share. WP7 did not catch on despite the rather successful roll-out of several phones internationally with a new exiting OS that garnered positive reviews on many fronts, and this is becoming a problem for Nokia. This is what I wrote in April:
Expect the market share to continue to drop. Now, this is not a big issue for Microsoft, but to Nokia its probably crucial. If Microsoft does not deliver in the next 12-18 months it might be time for Nokia to drop smartphones and concentrate on cost leadership with some Meego initiatives on the side.
1.6 million sold devices in the first quarter and most likely less this quarter looks really bad. If this trend continues Nokia might be holding some emergency meetings in few months. To their benefit Nokia is strongly capitalized so it has time and resources to reinvent itself.
Losing contract with Microsoft
Between the time Elop came to Nokia and the announcement of the definitive agreement between the companies that Nokia would use WP platform on its smartphones, there was quite a bit speculation. I held the position that Nokia’s negotiation power was vast and they were at good position to create a partnership contract that would shift a lot of value from Microsoft to Nokia and I still hold that view. This is because WP7 would have died off completely if Nokia would have gone ahead with Android.
The details of the agreement are not public, but it is known that Nokia will pay license fees just like HTC and MS will use some of the Navteq assets in its offering. This was and still is a losing contract for Nokia. Nokia should have at least demanded the following:
- WP platform as a crucial element in MS overall strategy
- WP representation in company executive board
- Guaranteed significant marketing support from MS
- Guaranteed annual major software releases for the next 10 years
- Short-term exclusivity to new software releases
- Further concentrate the R&D function geographically and on projects that are actually related to smartphones.
- Shutdown production in Finland, there is no reason to give huge advantage to competitors on this point as no one cares were the products are made
- Fire Esko Aho and Jorma Ollila and get rid of the idea that one should hire idiots so that one can look relatively better. Ollila already tried this by driving Alahuhta to Kone and picking Kallasvuo as CEO.
- Spin-off Nokia-Siemens
- Start developing something that will positively differentiate the products from other WP handsets as I don’t think the brand will do it anymore.
- To be honest, its down to hope at this point.