Not quite panic yet but Nokia is slowly getting there

Nokia today announced some additional measures to “align its workforce and operations”.

Espoo, Finland – Nokia today announced plans to take additional actions to align its workforce and operations. The measures support both the execution of the company’s strategy and the savings target the company announced earlier this year, and also target to bring efficiencies and speed to the organization.

Earlier this year, Nokia announced changes primarily focused on aligning its R&D operations in Smart Devices and Mobile Phones. Today, the company announced the next phase of operational alignment, which includes plans for reductions in manufacturing, the Location & Commerce business, and supporting functions.

About 3500 employees impacted and several production sites will be under review. At the end of June, they had almost 140k employees so this is still approximately nothing.

The planned closure of the Cluj factory combined with adjustments to supply chain operations is estimated to impact approximately 2,200 employees. The planned changes in the Location & Commerce business are estimated to impact approximately 1,300 employees. These personnel reductions are in addition to the measures announced in April and are expected to take effect by the end of 2012.

This is what Elop had to say:

We are seeing solid progress against our strategy, and with these planned changes we will emerge as a more dynamic, nimble and efficient challenger. We must take painful, yet necessary, steps to align our workforce and operations with our path forward.

Back in May when Nokia issued a profit warning, I penned the following:


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.

The cost structure is still pretty heavy for a firm in decline and I would not be surprised to see more alignment actions, especially so if Windows Phones don’t catch up as well as they think.

Next up, Nokia will announce 3rd quarter results on 20th October and they will have this year’s Nokia World on the 26th where they are expected to show some WP Mango handsets.

The Nokia N9 will start shipping in couple of weeks, but it is rather irrelevant as Nokia has seemingly been doing everything to destroy its success. The WP handsets will presumably start shipping in early November at the earliest, but Nokia has had a track record of missing launches.

Quite a few new WP devices have already been announced by other manufacturers that have already had MS products on sale and have good carriers relations so Nokia is going to have a tough time meeting goals.

Even if we take a rather optimistic scenario where MS captures 10 per cent of smartphone market on the 4th quarter and Nokia somehow gets half of that, their outlook is none too bright, because higher-end Symbian handsets are in the gutter even with significant discounts to launch prices.

Nokia having troubles selling anything?

Not sure when this has happened, but I noticed that the biggest electronics retailers have cut Nokia high-end model prices quite a bit. is selling Nokia E7 and Nokia N8 for 349€ and Gigantti is selling them for 319€.

Even then Samsung Galaxy S II beats them in sales although costing 200+ euros more.

And these are normal full prices off-contract.

Let’s see, if Gigantti charges 319€ for Nokia E7, the VAT is at 23 per cent and the retailer’s margin is 10 per cent for example.

  • Consumer pays 319€
  • VAT totals 59.65€
  • Retailer is left with 259.35€
  • And Nokia gets 235.77€ per unit
VAT from purchases is deductible so they might get a bit more, but then again retailer margin could be higher. Though, the exact figures are not important.

On top of this, the Nokia E7 is manufactured in Finland, with exceptionally high production costs compared to iPhone 4 for example which is manufactured by Foxconn in China and it is easily the most expensive to produce Nokia product on the market. Also, the production volumes clearly are not exceptionally high, which keeps unit costs higher. Now, I don’t know what the actual production cost is, but I doubt Nokia is getting much margin from this considering the product came to market with 600€ price tag.

Worse yet is the fact that high-end products are the part of product portfolio where the big profits should come from and as I have pointed out before, Nokia has a pretty heavy cost structure with R&D budgets beyond disastrous for their shareholders.

Against this backdrop, it is amusing to read Kauppalehti promote sell side analysts raising their Nokia price targets. But then again their number 1 news currently is that Krugman thinks the probability of recession is now 50 per cent…

Nokia reports Q2 results: 492 million euro net loss, sales down 7 per cent y/y, EPS -0.10

Nokia today reported its Q2 earnings and the net loss came in at 492 million euros. Profit before taxes -544 million. Sales collapsing in North America and Greater China. These results look a bit worse than I thought. Finnish financial press trying hard to spin this as positive. Stock up 6.5 per cent – for now. Smartphone volume down to 16.7 million; Nokia now behind Apple and Samsung – next up HTC.


  • -  Nokia targets Nokia Group net cash and other liquid assets at the end of 2011 to be above the EUR 3.9 billion balance at the end of the second quarter 2011.
  • -  Due to limited visibility, Nokia is providing a wider than normal range for its Devices & Services non-IFRS operating margin outlook for the third quarter 2011. Nokia expects its non-IFRS Devices & Services operating margin in the third quarter 2011 to be slightly above breakeven, ranging either above or below this level by approximately 2 percentage points. This outlook is based on our expectations regarding a number of factors, including:
    • -  Competitive industry dynamics;
    • -  Nokia’s actions to intensify its focus on retail sales marketing to drive net sales;
    • -  Improved competitiveness in our Mobile Phones unit due to the ramp up of Dual SIM devices;
    • -  Timing of our new product shipments; and
    • -  The macroeconomic environment.
  • -  Nokia is accelerating its plans to reduce its Devices & Services non-IFRS operating expenses and Nokia now targets to exceed its previous Devices & Services non-IFRS operating expense reduction target of EUR 1 billion for the full year 2013, compared to the full year 2010 Devices & Services non-IFRS operating expenses of EUR 5.65 billion.
  • -  Nokia and Nokia Siemens Networks expect Nokia Siemens Networks net sales to be between EUR 3.2 billion and EUR 3.5 billion in the third quarter 2011.
  • -  Nokia and Nokia Siemens Networks expect the non-IFRS operating margin in Nokia Siemens Networks to be between -3% and breakeven in the third quarter 2011.
  • -  Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks net sales to grow faster than the market in 2011.
  • -  Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks non-IFRS operating margin to be above breakeven in 2011.
  • -  Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks to reduce its non-IFRS annualized operating expenses and production overheads by EUR 500 million by the end of 2011, compared to the end of 2009.
  • -  The outlook relating to Nokia Siemens Networks includes the impact of the acquisition of Motorola Solutions’ networks assets. This is an update to the previous outlook that did not include the impact of the acquisition of Motorola Solutions’ networks assets.
CEO Elop:

The challenges we are facing during our strategic transformation manifested in a greater than expected way in Q2 2011. However, even within the quarter, I believe our actions to mitigate the impact of these challenges have started to have a positive impact on the underlying health of our business. Most importantly, we are making better-than- expected progress toward our strategic goals.

In Q2, our immediate action to manage unexpected sales and inventory patterns enabled us to create healthier sales channel dynamics, which led to greater business stability in the latter weeks of the quarter.

  • -  Most notably we took action in China and Europe to address an inventory build-up that occurred in the first quarter of 2011.
  • -  We took a more responsive approach to product pricing around the world.
  • -  We have shifted our sales focus and marketing resources more towards retail interactions with consumers.
  • -  We made changes in certain critical sales management.During this time of transition, we expect competitive pressures to continue. However, we have a clear strategy to address the concerns about our product competitiveness. In Q2, both our Smart Devices and Mobile Phones business units moved forward on their plans.
    • -  In Smart Devices, those who already have viewed our early Windows Phone work are very optimistic about the devices Nokia will bring to market and about the long-term opportunities. Step by step, beginning this year, we plan to have a sequence of concentrated product launches in specific countries, systematically increasing the number of countries and launch partners.
    • -  In Mobile Phones, early results of the Dual SIM product launches are very encouraging, and we are on track to deliver more products this year.

Here’s a chart giving some perspective. The drop looks worrisome and Q3 is the real problem as no new handsets coming and Nokia N9 is taking even more current buyers out of E7 and N8.

HTC reports record Q2 results

HTC today reported record revenue and net income for the second quarter. Net income came in at $608 million. Android strategy seems to be working just fine and with devices like HTC Sensation and competitor failures like Nokia, who just started cutting prices, HTC will continue to beat its own records. More from Bloomberg.

Taoyuan, Taiwan–July 6, 2011–HTC Corporation (TWSE: 2498), a global leader in smartphone innovation and design, today announces unaudited consolidated results for 2Q 2011. For the second quarter of 2011, total revenues reached NT$124,398 million with 104.06% year-on-year growth. Unaudited operating income was NT$19,244 million, net income before tax was NT$19,970 million, net income after tax was NT$17,517 million, and unaudited earnings per share after tax were NT$21.68 based on 807,867 thousand weighted average number of shares before ex-rights. Unaudited earnings per share after tax were NT$20.63 based on 848,965 thousand weighted average number of shares after ex-rights.

Finnish pension funds in Q1 and the extent of their Nokia losses

Q1 performance and total assets

Looking at the recent quarterly statements from the Finnish pension funds, Q1 was not that successful and Q2 is turning out to be even worse. Average return under 1 per cent and total investment assets at somewhere around €130 billion. While the return was dismal, the amount of assets do give some comfort. At 130 billion they are close to Finland’s gross domestic product, which essentially means Finland will never lose AAA credit rating.

Nokia losses

The table above is from Nokia’s 2010 financial statement notes and details the largest registered shareholders at the end of 2010. Among the 10 largest shareholders we have 5 Finnish pension funds who collectively hold 117 393 000 shares. I am sure that the remaining pension funds, Tapiola, Keva and Veritas also hold significant stakes in Nokia, but this is bad enough.

At that time, Nokia was trading at around €8.3 a share, 4 euros higher than today. That translates into €500 million in Nokia related losses for this year assuming no significant changes in ownership. If we look at just Q2, the losses are currently at around €250 million. Looking at the broader decline in the equity market that I believe is going to be extended, it is looking like a pretty bad quarter for Finnish pension funds.

Moreover, I hope this is enough to dampen the calls for Finnish pension funds to invest heavily into Finland, because we would discussing pension cuts now if that would have happened few years ago. Pension assets need to invested based on the best risk-adjusted return, not based on nationality.


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