Nokia stock plummets on warning

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Nokia stock plummets on warning

Weak euro and painful smartphone transition will weigh on Q2 sales and profit

By CAROLINE GABRIEL

Published: 17 June, 2010

READ MORE: Financial | Nokia | Handset | Symbian

Nokia's stock nosedived as it issued a profit warning for its second quarter, blaming the "competitive environment, particularly at the high end of the market". The continuing struggle to maintain position in smartphones, exacerbated by the wait for the new Symbian operating system, is seen as the main element in Nokia's situation, and will result in net sales "at the lower end of, or slightly below, its previously expected range of €6.7bn to €7.2bn ($8.2bn to $8.8bn)". Nokia also said its Q2 operating margin would be at the low end or below its previous prediction of 9% to 12%. Its share price sank by 9.8% to €7.14 on the announcement, continuing a downward trajectory since its Q1 report on April 21.

Samsung also warned of a "very difficult" Q2 (see separate item), though its main concern is with the economic turmoil in Europe, a key market for it as well as Nokia. Nokia said it had not changed its expectations of flat volume growth for the full year while overall market growth was expected to be 10% over 2009, but it excepts its handset market share to be "slightly lower in 2010, compared to 2009", when it was about 37%.

Companies of this scale go through ups and downs created by many factors, from international currency movements to supply chain issues, and Nokia retains impressive market share and a proven ability to rework its business radically if required. But the warning is important because it points to broader issues that it is fully capable of addressing, but which will take more than one or two quarters to resolve, a hiatus coinciding with global economic depression.

Most important is the battle to produce a next generation smartphone software platform to regain the initiative from Apple and Android. And even if Nokia executes as well as possible - not a foregone conclusion at all, given its track record in software - this will not be an overnight process. The N8, the firm's most feature packed smartphone to date, will be Nokia's first to run Symbian^3, but new platforms usually require a year or so to gain confidence and developer mass (as Android did).

The transformation of Symbian OS to open source is a huge task, as Hal Steger, VP of marketing at open source cloud/sync software house Funambol, pointed out to TotalTelecom. "Symbian is a great platform, but it's also huge. It's the Titanic of mobile operating systems," he said. "It can be really hard for a company to go open source if it hasn't been from the start." This is an issue that the Symbian Foundation, which runs the OS, has highlighted from the start, pointing to the process of converting not just code and developer behavior, but existing licensing deals.

So the rest of the year looks set to remain a period of hiatus. Nokia's CFO Timo Ihamuotila said "the third quarter is expected to remain challenging" as the company goes through a "painful transition" in smartphones and faces pressure on profit from the depreciation of the euro. "The majority of our sales are outside the euro area so that's obviously having an effect," Ihamuotila said. Nokia's growing balance of business in emerging economies like India and China, where it has huge market share, is strong for its future growth, but while the euro remains destabilized, will have near term effects that caused several analysts to predict the profit warning last week. However, the low price of Nokia shares did lure legendary US investor George Soros to open a position in the Finnish firm.

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