Hope, Despair and More

Rajat is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

All is not well at “Nokia House” these days. The once champion of the cell phone industry now strives for survival. Rising competition, widening loses and dwindling sales has been the way for Nokia (NYSE: NOK) for the past couple of quarters and it seems that the worst is far from over. Despite its colossal effort to put things back on track, the result seems shy.

When the Going Gets Tough  

After ruling the cell phone market for so long, Nokia has put itself in an awkward situation. The year 2012 has thrown open a world of uncertainty around the Finnish giant. To begin with, Nokia has been late to recognize the full potential of smart phone technology as admitted by its CEO. While its more contemporary rivals like Apple (NASDAQ: AAPL) and Samsung (OTC Markets) were innovating and developing new technologies and even newer designs, Nokia was still banking on its traditional symbian based models to see it through. However, it is amply clear from the abysmal figures in Nokia’s quarterly reports that it made an error of judgment (and a costly one).

Nokia has been dethroned by its Korean rival (Samsung) which now commands 32.5% of the global Smartphone market, followed by Apple, which has captured a shade below 14% as per the third quarter results of 2012. These two mobile makers together rule around 50% of the world’s smart phone market, with Samsung creating history each quarter and selling record number of smart phones. Nokia, the market leader of 14 years (from 1998-2011) today occupies a neglected 7th place in smart phone sales and 2nd largest in overall terms. Nokia has been unable to book profits for the last 5 quarters on the trot. For the third quarter of 2012, its net sales tumbled 19% on a year on year basis and its operating losses magnified from $93 million to $752 million for the same period.

Even the markets have not shied away from displaying their discontent. Nokia’s share price has nosedived from a high of $40 to under $4 in a span of 5 years, with prices tumbling as low as $1.63. In the same period its market capitalization took a plunge from $110 billion to $14.1 billion. Clearly, investors are not impressed with Nokia’s present strategy and want it to come out with a more concrete and credible plan. A group of Nokia investors were forced to file a class action against it on the face of continued disappointing performance. Nokia’s troubles compounded further when it’s bonds were downgraded to junk status with a negative outlook by three prominent credit rating agencies i.e. S&P, Fitch and Moody’s Financial Services, making it difficult for Nokia to raise cash and fund its survival. The two year transition phase as forecasted by it CEO Stephen Elop is also fast approaching its expiry date.

The Tough Get Going

Amid all the speculations, Nokia is determined to regain lost ground. In a bid to turnaround, in 2011 Nokia decided to abandon its much successful symbian operating system and take a plunge into the more attractive smart phones market in partnership with Microsoft. Since then Nokia has launched a completely new range of smartphones (Lumia) powered by the untried Window’s operating system. Though the Lumia range has been able to create ripples, it is far from posing a threat to the well established markets of either Samsung (operated by Google’s android) or Apple (operated by iOS).

Nokia’s more difficult decisions include handing out pink slips to around 10,000 workers recently to reign in its ballooning negative operating cash flow (which stood at -$560 million in 3Q 2012), or being forced to sell and subsequently lease back its headquarter “Nokia House” for 170 million Euros ($221million). In an attempt to tap the vast Chinese market, Nokia has entered into an alliance with China’s largest mobile operator, China Mobile (NYSE: CHL), in December 2012, to sell an exclusive Chinese variant of its high end Smartphone Lumia 920 as Lumia 920T. In the same month, Nokia has cashed in, on its long drawn patent’s dispute, with Blackberry maker Research in Motion (RIM) for an undisclosed amount.

The Final Word

Though Nokia has shown resilience, it is still too early to decide its fate. All will depend upon its ability to innovate and satisfy customer demand, especially in China. Nokia’s new association with China Mobile, if successful, may help it to regain lost recognition and prevent possible extinction. With the 4th quarter of 2012 coming to an end it is advisable to wait and watch even though much is not expected to change soon.

rajatz1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and China Mobile. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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