(By Mani) Nokia Corp. (NYSE:NOK) announced the widely anticipated move, and put the axe on up to 10,000 jobs to boost its operating margins. The company plans to implement the cuts globally by the end of 2013.
iStock had already reported about the potential move on its April 20 story "Nokia May Need Another Restructuring To Steady The Ship." (http://www.istockanalyst.com/finance/story/5793226/nokia-may-need-another-restructuring-to-steady-the-ship )
The latest slew of job cuts, the second this year, represents 8 percent of its workforce as Finnish mobile phone company employed 122,148 people as of March 31, 2012. In February, the company said it would trim another 4000 jobs, and shift the device assembly plant to Asia where most of the component suppliers are based.
Nokia, led by Stephen Elop, has already announced several restructuring initiatives. Since Elop took the helm in September 2010, Nokia has trimmed more than 25,000 jobs.
As part of the restructuring, the Finnish company plans to close its facilities in Ulm, Germany and Burnaby, Canada. The company would also close its manufacturing facility in Salo, Finland, while the research and development efforts in Salo would continue.
Consequently, Nokia is now planning to cut costs by about 3 billion euros in its Devices & Services unit by the end of 2013, compared to its previous target of savings of more than 1 billion euros and full year 2010 operating expenses of 5.35 billion euros. This means, the company targets to save about 1.6 billion euros by the end of 2013.
Though, Nokia has been intense to cut costs, it would simply be a stop gap measure. A company saving expenses is a good sign, but when it comes amid declining sales, it would put the organization in an awkward situation. Nokia is a clear case of this thesis.
Nokia has been trying everything to revive its past glory from cutting costs to shifting to Windows OS. The recent cost cutting would definitely improve operating margins and help in its transition to Windows operating system. 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, a cost cutting strategy will not improve sales as it can help only boost the margins. The basic theme for any business is higher sales equals higher profit, but Nokia's sales have fallen for the past four of out of five quarters.
If Nokia needs to gain investor confidence, it needs to show improved sales growth. The company is betting big on its Lumia branded smartphones, which runs on Microsoft's Windows OS.
Nokia said it would invest heavily in imaging and location-based services to differentiate its Lumia products. In line with this strategy, Nokia said it would acquire assets from Sweden-based Scalado, which currently has imaging technology on more than 1 billion devices. The move would help Nokia churn out better camera phones. Nokia launched its 41 megapixel camera phone Nokia 808 PureView in February.
Nokia, once a darling of investors in the technology space, is incurring significant market share losses in smartphones and feature phones. The company is finding it tough to cope with the likes of the iPhone and other Android-based smartphones both in the U.S. and emerging markets.
The consumer dynamics in the emerging markets, which used to be Nokia's forte, have shifted from feature phones to cheaper Android smartphones offered by Chinese vendors such as ZTE and Huawei. 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 these markets.
For the first quarter, Nokia reported a hefty loss of 929 million euros, weighed down by charges and a sharp decline in sales. 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.
As part of its transformation strategy, Nokia plans to sell its noncore assets, and said it would sell its luxury phone unit Vertu to EQT VI, a European private equity firm. The potential sale, which could fetch about $265 million, is part of Nokia's stated strategy to get rid of its noncore assets as it is transforming itself to the demands of the market.
The next few quarters would be tough for Nokia given the strong demand for iPhone and Android-based smartphones. Nokia has slashed its second-quarter operating margin forecast for devices and services segment, citing competitive industry dynamics.
Nokia now expects its non-IFRS devices & services operating margin in the second quarter 2012 to be below the first quarter 2012 level of negative 3 percent. This compares to the earlier forecast of similar to or below the first quarter level of negative 3 percent.
Cash Burn – A Concern
At the end of the first quarter, Nokia has gross cash of 9.8 billion euros and a net cash position of 4.9 billion euros. Though this cash position looks comfortable at the outset, it could be drained over the next 18 months as Nokia could be recording substantial restructuring charges over job cuts.
Nokia expects further charges of about 1 billion euros by the end of 2013. This is, in addition to, cumulative charges of approximately 900 million euros recognized as of the end of the first quarter 2012. By the end of the first quarter 2012, Nokia had cumulative restructuring related cash outflows of about 450 million euros.
From the second quarter 2012 onwards, Nokia expects restructuring related cash outflows to be approximately 650 euros million in 2012 and about 600 million euros in 2013. Out of the total expected charges relating to restructuring activities of 1.9 billion euros, Nokia expects noncash charges to be about 200 million euros.
Investors are concerned with the burn rate, and if the company struggles to maintain its cash and marketable securities, its balance sheet could land itself into more mess. In addition, the potentially negative operating cash flow could persist unless the company's operating performance improves. Meanwhile, all the three major rating agencies – S&P, Fitch and Moodys – have downgraded Nokia's debt ratings, with two of them being junk.
Nokia shares have dropped 55 percent in the last year and lost 44 percent in the past three months. They have fallen 62 percent from its 52-week high, and trailed the S&P 500, which gained 2 percent in the last one year.