Tuesday, 17 April 2012

Nokia’s mounting troubles provide opening for rivals

Nokia’s mounting troubles provide opening for rivals

Michael Lewis  April 12, 2012.
The dramatic decline of former mobile handset leader Nokia Corp. may present an opportunity for rivals jostling for position in a global market dominated by Samsung Electronics Co. and Apple Inc.
Woes at Helsinki’s Nokia, which has bled market share since its surprise decision in 2011 to drop the popular Symbian mobile operating system, deepened last Wednesday after the company warned of operating losses and said its cash pile had dwindled.

Experts pick fast growing and nimble Asia manufacturers HTC Corp. and Huawei Technologies Co. Ltd. as most likely to overtake Nokia for third spot in smartphone shipments after Samsung and Apple, citing cost advantages as they roll out new handsets in emerging markets led by China.
Canada’s RIM, another potential contender, “is in the position Nokia was a year ago,” with no clear path to recovery, said Town Hall Investment Research analyst Jamie Townsend.
The Waterloo-based company, which has lost 75 per cent of its share value over the past year as it ceded BlackBerry sales in North America, is reportedly considering hiring investment bankers to explore options that could include a sale.
RIM finished 2011 as the fourth-largest smartphone vendor with 10.4 per cent of the market after Nokia, with 15.7 per cent and Samsung and Apple’s combined 41 per cent, says research firm IDC.
But RIM posted annual growth of only 4.7 per cent compared to fifth-placed HTC, which expanded by more than 100 per cent as its share of the global market rose while RIM’s declined. Sales of Seoul-based Samsung surged 310 per cent in 2011 compared to a 23 per cent decline for Nokia.
HTC’s march on the third spot did encounter a setback when its profit in the last quarter of fiscal 2012 dropped 70 per cent on competition from Apple’s iPhone 4s launched in October and the Galaxy Nexus and Galaxy Note smartphones Samsung unveiled in late 2011.
While HTC and Huawei may be poised to take advantage of Nokia’s stumble, Townsend said he believes the pieces are in place for a gradual rebound at Nokia, which introduced its first Windows phones, the Lumia 800 and Nokia Lumia 710, in early October.
In the immediate term, however, Nokia is facing what some analysts call a struggle for survival.
Nokia warned Wednesday of possible red ink through the first half of the year and said it is burning through cash months after partnering with Microsoft Corp. and its Windows OS.
Nokia credit-default swaps, which insure the phone maker’s obligations, spiked after warnings from analysts that Nokia could run out of cash if it fails to radically restructure.
“The cost of financial distress would bring the company down,” said Helsinki-based analyst Horace Dediu in a web post.
On Monday, Moody’s ratings agency downgraded Nokia’s nearly $7 billion in long-term debt to a notch above junk status with a negative outlook, citing a sharp decline in first-quarter cellphone sales that led to a 35 per cent fall in revenue.
Nokia dropped its Symbian architecture after it lost ground to the Android platform and Apple’s OS, but Windows phone sales have not been enough to offset the decline in Symbian revenue that has been steeper that forecast.
Moody’s in a report noted that Nokia’s cellphone volumes dropped 16 per cent in the first quarter due to increasing competition from makers of low-end phones or new phone promotions by Chinese carriers.
“While volatility by quarters is not uncommon, Moody’s believes that the structural challenges facing Nokia’s mobile phones segment may not be easy to address,” the agency said.
Nokia in a statement defended its cash position, saying it had gross cash balances at the end of March of 9.8 billion euros and a net cash position of 4.9 billion euros, though that’s down from 5.6 billion euros at the close of 2011.
Nokia’s ratio of total debt-to-earnings before taxes, depreciation and amortization ranks higher than 80 per cent of its peers, while Bloomberg data shows its current “burn rate” would exhaust its cash holdings by the end of 2013.
As well, a report last week said Nokia may have ceded its 14-year reign as the world’s top handset maker to Samsung, which it said shipped about 92 million units, including smartphones and feature phones, in the first quarter of 2012.
Nokia shipped 83 million units — 12 million smartphones and 71 million low-end or feature models — during the same period.
“Samsung is displacing Nokia fast. Nokia, with no competitiveness in smartphones, will keep losing ground,” NH Investments and Securities analyst Lee Sun Tae said in the report.
Chief financial officer Timo Ihamuotila in a statement said Nokia “will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position.”
And in comments reminiscent of RIM chief executive Thorsten Heins’ remarks late last month, Nokia CEO Stephen Elop said he’s reviewing options including asset sales and vowed to take “significant structural actions if and when necessary.”
RIM, like Nokia, is struggling to remain relevant in a smartphone universe dominated by Apple and Samsung, but unlike Nokia it is doing so with no long-term debt and stable cash flow.
Elop said Nokia is “emphasizing certain product opportunities over others” and would not rule out selling non core assets to shore up cash.

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