Surprising Loss for Nokia

July 21, 2011
Only the second quarterly loss since the company became world leader in 1998.

The world's top mobile phone maker Nokia reported a sharp quarterly switch into loss on July 21. The company posted a net loss of 368 million euros (US$520.5 million) compared to the 227-million-euro net profit it posted in the second quarter of 2010.

The outcome was far worse than expectations of analysts polled by Dow Jones Newswires who had estimated a loss of 104 million euros.

Sales slipped 7.3% to 9.3 billion euros from 10 billion euros for the same period last year.

"The challenges we are facing during our strategic transformation manifested in a greater than expected way in Q2 2011," said chief executive Stephen Elop. But he said that massive re-structuring had already begun to have a "positive impact on the underlying health" of the company.

The upheaval follows a radical shake-up launched by Elop in February, when he announced that Nokia, facing stark competition in the vital smartphone market from iPhone, Blackberry and Google, would abandon its own mobile operating system and start using one designed by Microsoft instead.

This strategy was coupled with plans to cut 4,000 jobs and outsource another 3,000 to Accenture, as part of a massive effort to slash operating expenses by one billion euros in 2013 compared with 2010 -- a target Nokia said it planned to exceed.

But Nordea Group analyst Sami Sarkamies said that Nokia had not yet hit bottom. "The third quarter is going to be even worse compared to the second quarter," he said, adding that cost-cutting measures were not expected to take effect until the end of the year.

Nokia declined to issue any guidance on third quarter-sales expectations, and offered what Sarkamies considered an "unusually wide target range" for its non-IFRS operating margin, which in a nutshell would be around or slightly above break-even.

The company hoped that the ramp-up of dual-SIM mobiles, an aggressive marketing campaign as well as a generally better global economy would help third quarter sales.

"We are making better-than expected progress toward our strategic goals," said Elop.

Sarkamies said that Nokia is still struggling with its pricing policy, by trying to sell high-end Symbian smartphones at a time when consumers largely feel that Symbian is a dead-end technology. "After February, there were fears that Nokia would have to sell its Symbian phones really cheaply in order to keep ahold of what market share they could until the Windows phones were ready, and it looks like this is exactly what's happening," he said.

Even the sleek and seemingly competitive new N9 smartphone will most likely only have a "marginal effect", said Sarkamies, because many consumers "won't dare get on board" even if they like the product.

As a result, Nokia continues to hemorrhage market share to its competitors, and while the company did not give on any estimates for how low its share had sunk, Sarkamies says that analysts' consensus put it at about 23%, down from 33% for the second quarter of 2010.

Nokia's gamble on dumping the struggling Symbian platform is an effort to stop the downhill trend of its market share, which has plummeted from the 40 % the company held in the first half of 2008.

This year Nokia shares have dropped sharply, recently hitting a low point of just 3.80 euros per share, a level not seen since 1997, and two-thirds less than the price in April 2010. Although still the world's top mobile phone maker, Nokia's market value has plummeted to 14.2 billion euros from nearly 100 billion euros in November 2007.

Copyright Agence France-Presse, 2011

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