As a result of the announcement, Nokia's share price has dropped by 15% to €4.90, its lowest level for 13 years. In addition to revising its Q2 outlook, Nokia has withdrawn its forecast for 2011 as a whole, noting that "given the unexpected change in our outlook for the second quarter, Nokia believes it is no longer appropriate to provide annual targets for 2011".
In a conference call Nokia's CEO, Stephen Elop, noted:
"Earlier this year we announced a shift to a new strategy. Those changes were introduced because of the competitive challenges we face. Today's news is a reflection of those challenges we face."
Nokia outlined a number of factors that have contributed towards the downgraded forecast. In general, competitive dynamics and markets trends have resulted in a downwards pressure on prices, especially in China and Europe.
In China, factors include high levels of inventory going into Q1, which was caused by mis-management (now corrected); competition from other platforms, most notably Android; and changing market dynamics, which include an increased share for CDMA devices (of which Nokia have none). In Europe, the factors are primarily around the lack of competitiveness of Symbian products, which has resulted in downward pressure on prices from operators looking to range the Nokia smartphone product portfolio.
During the conference call, Stephen Elop noted that there were pressures on both the smartphone and featurephone portfolios. Timo Ihamuotila, Nokia's CFO, went on to indicate that the smartphone side was the bigger contributor to the downgraded forecasts.
Striking a more positive note, Stephen Elop noted that the company has increased confidence that the first Nokia product with Windows Phone will ship in the fourth quarter and that the shipping of new Symbian devices (E6 and X7) and the arrival of Symbian Anna (which will be "available very shortly after the E6 and X7 ship") are all expected to make positive contributions in Q3 and beyond.
The transition from Symbian to Windows Phone in smartphones was always expected to be tough. However, it would appear the challenges, combined with pressure from white box phone manufacturers in the feature phone space, have been greater than Nokia originally anticipated. Nokia now faces a brutal set of Q2 results on July 21st, which will be accompanied by more bruising media coverage. For Nokia it seems likely that it will get worse, before it gets better.
In the smartphone portfolio the failure to deliver major updates to the Symbian^3 software in a timely manner are partly responsible, but the lack of high end products, comparative to other manufacturers, remains the major underlying cause.
The news, while serious, should be seen in the context of Nokia's strategy change. Given that the company has already announced a strategy shift, moving away from the cause of the current malaise, the opportunities for Nokia in the future remain undiminished and a course for recovery has clearly been laid out.
Nonetheless, the announcements today do underline the need for Nokia to swiftly deliver on its new strategy around Windows Phone devices and reinvestment in Series 40. There will be some concern that continued market share decline will negatively impact upon Nokia's ability to sell in its Windows Phone product portfolio in 2012, but given the timescale of such processes and the clear difference in product it does seem unlikely to have a significant impact.
There's growing confidence in a Q4 shipment for the first Nokia Windows Phone product. Although this is not an absolute commitment, it will now be a surprise and a serious set back for the company if it fails to deliver such a product this year. As such, the Q4 shipment is the first major milestone with which to judge the execution of Nokia's new strategy.
Nokia's updated outlook in full
Updated outlook for Devices & Services for the second quarter 2011:
- Nokia now expects Devices & Services net sales to be substantially below its previously expected range of EUR 6.1 billion to EUR 6.6 billion for the second quarter 2011. This update is primarily due to lower than previously expected average selling prices and mobile device volumes.
- Nokia now expects Devices & Services non-IFRS operating margin to be substantially below its previously expected range of 6% to 9% for the second quarter 2011. This update is primarily due to lower than previously expected net sales. While visibility is very limited, Nokia's current view is that second quarter 2011 Devices & Services non-IFRS operating margin could be around breakeven.
Updated outlook for Devices & Services for the full year 2011:
- Given the unexpected change in our outlook for the second quarter, Nokia believes it is no longer appropriate to provide annual targets for 2011. However, Nokia expects to continue to provide short-term quarterly forecasts in its interim reports as well as annual targets when circumstances allow it to do so.
- Nokia's previous targets for the third quarter, fourth quarter, and full year 2011 were: 1) Net sales in Devices & Services to be at approximately the same level in the third quarter 2011 as in the second quarter 2011, and seasonally higher in the fourth quarter 2011, compared to the third quarter 2011; 2) Devices & Services non-IFRS operating margin to be between 6% and 9% in 2011. These targets are no longer valid.
More details are available in this Nokia press release.