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June 14, 2012

Nokia frantically slashing, burning and selling to preserve profitability [updated]

Nokia has issued yet another profit warning for the year – it is now looking to sack 10,000 staff members and sell of a number of its assets in an attempt to return to profitability by 2013.

By Allan Swann

2012 has not been kind to Nokia so far. It started the year refusing to offer any outlook for financial year 2012 at its full year announcement in January, and in April issued a profit warning for the first two quarters of 2012. The news has got worse.

It has announced that it will be firing 10,000 staff, including several key executive members, closing factories and selling divisions in order to return its Devices and Services division to profitability as soon as possible, despite projecting ‘competitive industry dynamics’ to negatively impact sales in third quarter 2012.

Nokia CEO and President Stephen Elop
Nokia President and CEO Stephen Elop

In April Nokia estimated that its operating margin in the first quarter 2012 would be approximately negative 3%, a drop from previous estimates of breaking even or "ranging either above or below by approximately 2 percentage points". Nokia now expects this operating margin to be even lower than this.

Nokia’s Devices and Services division is the culprit, as its low end feature phones are squeezed out of emerging markets by cheaper Asian manufacturers such as Huawei and ZTE, and its high end smartphone products, the Lumia range, struggling against the iPhone and Android smartphone manufacturers. [update: Nokia has also announced that it will consider selling some of its IP if the price is right]

It is also in the midst of a painful transition from its Symbian OS, to Microsoft’s Windows Phone, which has not been a success.

The company announced that it is shutting facilities in Ulm, Germany and Burnaby, Canada, which were utilised for R&D. It is also closing its manufacturing facility in Salo, Finland, which will now be used for R&D only.

It has also announced that it has sold off its luxury phone subsidiary, Vertu, to EQT VI a private equity group. The terms of the deal remain confidential, and will close by year end. Nokia will retain a 10% shareholding in Vertu. Vertu devices currently run Symbian.

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"These planned reductions are a difficult consequence of the intended actions we believe we must take to ensure Nokia’s long-term competitive strength," said Nokia CEO and President Stephen Elop.

"We do not make plans that may impact our employees lightly, and as a company we will work tirelessly to ensure that those at risk are offered the support, options and advice necessary to find new opportunities."

[update]: Nokia’s CFO Timo Ihamuotila told journalists during today’s conference call that the company is even considering selling some parts of its huge patents portfolio. It consists of 30,000 patents and around 10,000 patented innovations. In the first quarter the company stated that revenue from its IP totals around €500m.

As well as cutting costs, this allows the company to purchase Scalado AB, which has worked with the company on its imaging software for the past ten years.

"This transaction would enable us to combine our leadership in camera devices with their expertise in imaging, helping people move beyond taking pictures to capturing moments and emotions and then reliving them in many different ways," said Jo Harlow, executive vice president, Smart Devices at Nokia.

The long term goal is to reduce its operating expenditure in Devices & Services to around €3.0 billion annually, compared to FY 2010’s €5.35bn. The company had initially planned to cut this by just €1bn.

In addition to the already achieved savings of approximately €700 million at the end of first quarter 2012, Nokia will now look to cut a further €1.6 billion by the end of FY 2012.

Alongside the 10,000 general staff that are to be made redundant by the end of 2013, Elop has also overhauled the executive. Jerri DeVard, executive vice president and chief marketing officer is out, as is Mary McDowell, executive vice president of Mobile Phones and Niklas Savander, executive vice president of Markets.

These staff members oversaw the disappointing launch of the Lumia series of smartphones, which were widely considered to be poorly marketed.

Nokia claims it sold more than 2 million Lumia devices in the first quarter, at an average selling price of approximately €220. As of April, its Lumia range sold a grand total of 3 million since the Lumia 800’s launch in November (see CBRs review of the device here). This remains a drop in the water compared to Apple’s 37 million over a similar period.

These members will be replaced by Juha Putkiranta, as executive vice president of operations, Timo Toikkanen as executive vice president of Mobile Phones, Chris Weber as executive vice president of sales and marketing, Tuula Rytila as senior vice president and chief marketing officer and Susan Sheehan as senior vice president of communications. The changes are effective July 1.

The company expects charges of €1bn for its restructuring, on top of the €900m from earlier restructuring activities.

Nokia expects to boost its cashflow from €450m to €650 million in 2012 and approximately €600 million in 2013.

Nokia’s shares had fallen by 13.6% at the time of print, to just $2.42. This time last year it was worth ~$9.



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