Nokia Knocked Down Again

By Stephen D. Simpson, CFA | April 11, 2012 AAA


Turnarounds are hard, particular when there are vibrant competitors doing most things right. In the case of Nokia (NYSE:NOK), though, investors have to not only digest the relative superiority of competitors like Apple (Nasdaq:AAPL) and Samsung, but what also looks to be a lot of self-inflicted wounds. With yet another downward guide and some troubling operational errors, it is harder and harder to support the idea of Nokia as a deep-value turnaround.

SEE: How To Avoid 3 Common Cell Phone Scams.

Ugly Guidance
Nokia warned the Street on Wednesday that its financial results for the first and second quarters were going to be dismal. Whereas the Street was looking for Device and Services revenue of about 4.88 billion euros in the first quarter, the company announced that the number would be around 4.2 billion euros.

Nokia announced that it shipped considerably fewer Lumia smartphones than expected - about 2 million versus an average expectation of about 3 million. Interestingly, the company lowered its smartphone revenue outlook by only about 20% (relatively to estimates), so it's not a complete disaster. That said, the company appears to be losing share across the board now.

Also troubling is the company's profit outlook. Gross margin outlook stayed consistent with analyst expectations, but instead of the expected slim profit, the company warned that Device and Services operating margin would be negative.

SEE: Easy Ways to Save on your Wireless Bill.

Serious Questions About Execution
I am frankly troubled by how the company has rolled out the Lumia 900 in the U.S. The company decided to launch it on April 8 - Easter Sunday. To quote Norm Macdonald, "wait, what?" Nokia decided to launch the product that's supposed to revive its fortunes on a day that all but guaranteed that some stores would be closed entirely, while store and mall traffic would be lower than normal.

Also troubling was an apparent lack of support from launch partner AT&T (NYSE:T). AT&T sponsored the Master's golf tournament, but there was apparently no mention of the new phone in any of its promotions.

You would think that three veteran companies - Nokia, Microsoft (Nasdaq:MSFT) and AT&T - could have handled this with a great deal more skill. At a minimum, somebody from Microsoft or AT&T could have pointed out that an Easter Sunday launch made no sense.

Limited Collateral Damage
There are some knock-on effects of Nokia's warning. Texas Instruments (NYSE:TXN) had already warned about its first quarter (and some of that was almost certainly from Nokia), but it's getting out of Nokia-influenced business. Qualcomm (Nasdaq:QCOM) and RF Micro Devices (Nasdaq:RFMD) also have chip exposure to Nokia - RFMD is a meaningful supplier to Nokia generally, and the Lumia 900 features a lot of Qualcomm content. If there's an upside here, it's that Nokia has been faltering for so long now that further failures should have limited incremental impact.

SEE: How To Protect Your Smartphone From Identity Theft.

The Bottom Line
At this point, I don't see how an investor can have any faith in Nokia. They managed to develop a good phone in partnership with Microsoft, and then botched the launch. While the problems at Nokia and Research In Motion (Nasdaq:RIMM) are certainly different, both are rapidly becoming irrelevant in the face of the many fewer mistakes at Apple, Samsung and HTC.

Maybe the Lumia 900 will be a roaring success, maybe earnings will recover and maybe Nokia still has value left in it. Turnarounds are hard, though, and I just cannot muster much enthusiasm for buying into a stock where management is still making sloppy mistakes.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.


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