Stephen Elop's honeymoon at Nokia Corp. is over.
Nokia's Canadian chief executive officer delivered a profit warning on Tuesday that showed the Finnish company's products are being squeezed at both the high- and low-ends of the price spectrum. The warning sent the shares down more than 14 per cent on the New York Stock Exchange, as investors took the view that any turnaround will be much slower than expected, if it comes at all.
The plummet means Nokia, still the top mobile phone company in the world by number of units sold, has lost 43 per cent of its value in the last year. In 2007, when it almost owned the global handset market, Nokia shares traded at more than €25. They're now worth €4.75, a 13-year low.
Analysts, a few of whom became bullish on the shares after Mr. Elop took control of the company last September, are turning exceedingly bearish. Some now worry that Nokia's plump dividend - Tuesday's decline raised the yield to 6.9 per cent - is no longer safe, especially because the company will have to keep dropping prices to stem the rapid loss of market share.
"Given the internal turmoil that will be generated by this news, it is increasingly difficult to see that Nokia can leapfrog one handset generation and be on par with the competition in early 2012," WestLB analyst Thomas Langer told Reuters. "Investors should be more than concerned about the dividend possibility."
Nokia said sales in its core devices and services division in the second quarter will be "substantially below" its previous estimate of €6.1-billion to €6.6-billion. The division's operating margin, as a result, will dip well below the 6 per cent to 9 per cent that it had expected, possibly reaching "break even." Nokia is no longer providing full-year targets.
Nokia has been losing ground in the market for smart phones - the Internet-enabled, multimedia devices that come with fat profit margins - since Apple introduced the iPhone in 2007. The launch of phones equipped with Google's Android operating software has only accelerated Nokia's deterioration in the smart phone market.
But Tuesday's profit warning showed that Nokia's sales are under pressure in the low-priced end of the market, where it has traditionally been powerhouse, especially in the developing world, (where "Nokia" is often shorthand for any mobile phone). In its statement, the company in part blamed its profit warning on "competitive dynamics and market trends across multiple price categories, particularly in China and Europe."
Mr. Elop has replaced Nokia's management team in China, where, he said, the surge of Android devices are putting pricing pressure on Nokia phones.
Nokia's overall market share has been falling steadily. Research firm Gartner calculated two months ago that Nokia held 25 per cent of the worldwide market for mobile phones in the first quarter. A year ago, the figure was 31 per cent.
In an effort to reinvent Nokia, Mr. Elop in February unveiled a broad-based strategy with Microsoft that will see the Finnish company phase out its outdated workhorse, the Symbian operating system, in favour of Microsoft's Windows Phone 7 system. Eventually all Nokia phones will equipped with Windows.
Although Nokia plans to launch the first Microsoft phones late this year, Mr. Elop conceded that the radical corporate overhaul has not been easy. "Strategy transitions are difficult," he said. "We recognize the need to deliver great mobile products, and therefore we must accelerate the pace of our transition."
The share sell-off indicates that investors are having doubts about the Microsoft strategy. One former senior executive of Microsoft, who did not want to be named, said it was probably a mistake for Nokia to pin its entire future on Microsoft, which has always been weak in mobile devices. He said Nokia should have "hedged its bets" by adopting both the Microsoft and Google systems.
The pricing pressure facing Nokia as competitors come on strong in all product areas is not unique to the Finnish company. On Tuesday, shares of BlackBerry maker Research In Motion fell 4.37 per cent, to $41.35, in Toronto trading, taking the shares to a new 52-week low. RIM has lost about a third of is value in the last year.
RIM issued a profit warning in late April and blamed the lower outlook on its sales mix. A growing percentage of its sales are lower-priced devices, which sell well overseas but are not as profitable.
Eric Reguly