Moody’s has downgraded Nokia’s credit status further, amidst fears its losses will continue to rise.
The rating agency has dropped Nokia’s credit rating two points from Ba3 to Ba1, with a negative outlook – junk status.
The company reported another round of poor results last week, and its outlook for the year remains dicey.
Nokia’s credit rating is already at junk status with the other two major credit rating agencies, Standard and Poor’s and Fitch’s, who rate it at BBB-.
"Today’s rating action reflects our view that Nokia’s transition in the smartphone business will cause deeper operating losses and consequently cash consumption in the coming quarters than we had previously assumed. A return to profitability in the Devices & Services (D&S) segment on the back of smartphones with the Windows Phone 8 mobile operating systems is by no means assured," says Moody’s Senior Vice President Wolfgang Draack.
More worryingly for the mobile phone giant, Moody’s believes that worse is to come. It estimates that discounts and inventory writedowns may follow beyond €500m, based around the poor sales of the new Lumia smartphone range, which has failed to find a market. See CBRs review of the Nokia Lumia 800 here.
Nokia’s CEO Stephen Elop has bet the company on the Windows Phone platform, which sold just 4 million units in the last quarter. It now has to wait until the launch of Windows Phone 8 in October to attempt to try again, as Microsoft announced that current generation models of Lumia devices will be incompatible with Microsoft’s next OS.
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Moody’s is predicting that the next generation of Nokia’s smartphones, running on Windows Phone 8 architecture, will find it challenging ‘to achieve a level of differentiation and market penetration to become a meaningful income generator in the first few quarters after launch’.
If these devices are launched on time (Q4 2012) and do start taking off, Moody’s still believes it will be mid-2013 ‘before volumes and margins reach a level of sustainable profitability.’
"Such a long period of operating losses, though backed by strong liquidity and the expectation of an eventual turnaround is more commensurate with a Ba3 rating."
Moody’s has said it will only consider raising Nokia’s credit rating if the next gen Lumias take off, Nokia’s revenues start to grow again and margins grow again and the company maintains a solid cash reserve, of more than €1.8 billion.
