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Nokia May Need Another Restructuring To Steady The Ship

 April 20, 2012 03:17 PM
 


(By Mani) In an industry that continues to evolve and shift quickly, Finnish mobile phone company Nokia Corp. (NYSE:NOK) may need another restructuring to save costs as the company is struggling in its transition phase.

Although Nokia is progressing on its new strategy, it has faced greater than expected competitive challenges as Symbian devices are falling off precipitously while Nokia is seeing stiff competition at the low-end from entry level Android.

Meanwhile, rating agency Moody's recently downgraded Nokia's long term debt-grade by a notch to Baa3. This is just one step away from non-investment grade, indicating the vulnerability for its debt instruments rating to be lowered to junk.

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Nokia had about 9.8 billion euros from cash and investments, which is about twice that of its reported debt at the close of the March quarter. However, the concern is that the company consumed close to 700 Euros while generating a little more than 500 million euros in the quarter. The burn rate is what has investors and Moody's worried. If the company struggles to maintain its cash and marketable securities, it could land find  itself in junk status.

As a result, without another major restructuring, the company may be in a difficult situation of operating at a loss  which makes funding its transition to Windows more difficult.

"In our assessment, Nokia must now consider reducing its headcount by ~10% while also protecting its cash position which is now ~$1.70/share," RBC Capital Markets analyst Mark Sue wrote in a note to clients.

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As of March 31, 2012, Nokia employed 122, 148 people, lower than 130, 951 people in the same period last year. According to the Sue's estimate, Nokia should consider cutting about 12,000 jobs.

Nokia is planning to cut costs by more than 1 billion euros in its Devices & Services unit for the full year 2013, compared to the full year 2010 operating expenses of 5.35 billion euros.

"Nokia plans to accelerate and substantially deepen Devices & Services cost savings, consistent with its strategic focus. Nokia will share further details as quickly as possible," the company said in a statement.

Nokia, led by Stephen Elop, has already announced several restructuring initiatives. To allow products to reach markets faster, Nokia disclosed in February that it would trim another 4000 jobs and shift the device assembly plant to Asia, where most of the component suppliers are based. Since Elop took the helm in September 2010, Nokia has trimmed more than 25,000 jobs.

Nokia shares have dropped 56 percent in the last year and is between the devil and deep sea. Its smartphone segment is lagging behind the likes of Apple, Inc. (NASDAQ:AAPL) and Samsung. In order to regain its lost market share in the smartphone segment, Nokia ditched its in-house Symbian operating system and adopted Microsoft's Windows OS to power its next-gen smartphones, which is a lucrative category offering high margins.

However, the company is facing a backlash in emerging markets, which has been its bread and butter of late. Normally, emerging markets such as India and China have been strong footholds for Nokia.

However,emerging markets' consumer demand dynamics have shifted from feature phones to cheaper Android smartphones offered by Chinese vendors such as ZTE and Huawei, posing further troubles for Nokia. Nokia launched its Series 40 Asha devices in those markets, but its acceptance has been slow as these Chinese rivals have already gained the early mover advantage in this markets.

For the first quarter, Nokia reported a hefty loss of 929 million euros, weighed down by charges and a sharp decline in sales, amid a customer shift to less expensive smart phones. In the year-ago period, Nokia reported a profit of 344 million euros.

Mobile devices units dropped 24 percent to 83 million, which is comprised of 70.8 million mobile phones and 11.9 million smartphones. Devices & Services revenues came in at $4.25 billion, a 40 percent decline from last year. Operating margins were negative 3.0 percent. Separately, the company said its sales chief is leaving for personal reasons.

For the second quarter, Sue expects units to decline sequentially to 80 million from 83 million as any uptake in Windows may be offset by declines in Symbian. The analyst estimates that gross margins on devices are not likely to improve anytime soon from 24 percent and peak levels of 40 percent.

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