Skip to main content

The Globe and Mail

Nokia: The world's biggest cellphone maker stumbles

These are stories Report on Business is following Tuesday, May 31. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

Follow Michael Babad and Globe top business news on Twitter

Nokia cuts outlook Nokia Corp. shares slumped today as it slashed its outlook for second-quarter sales and said it wouldn't provide 2011 targets, citing price pressures and a hotly competitive market.

Story continues below advertisement

The cellphone giant, the world's biggest by volume, said in a statement that "multiple factors" are hitting its devices and services business harder than it had expected. Among the reasons:

  • "Competitive dynamics and market trends," notably in China and Europe.
  • A shift in its product mix toward lower-price phones.
  • "Pricing tactics" by Nokia and some of its rivals.

Net sales in the devices and services business will now be "substantially below" the earlier projection of €6.1-billion to €6.6-billion, Nokia said, largely because of lower prices and volumes.

"They are forced to discount a lot," Lee Simpson, an analyst at Jefferies International Ltd. in London, told Bloomberg. "No-one wants these handsets. This is the real terrible year for these guys."

Operating margins in the business are also projected now to be markedly below the earlier forecast of 6 per cent to 9 per cent.

"Given the unexpected change in our outlook for the second quarter, Nokia believes it is no longer apprpriate to provide annual targets for 2011," the company said, adding it is taking "imediate action" to solve its troubles.

"Strategy transitions are difficult," said chief executive officer Stephen Elop. "We recognize the need to deliver great mobile products, and therefore we must accelerate the pace of our transition. Our teams are aligned, and we have increased confidence that we will ship our first Nokia product with Windows Phone in the fourth quarter 2011."

There is intense competition in the market among companies such as Nokia, the iPhone king Apple Inc. and BlackBerry maker Research In Motion Ltd. . Nokia's decline pulled RIM shares along for the ride, David Berman reports in our Market Blog.

Story continues below advertisement

Nokia reports second-quarter results July 21, and, analysts said, markets should pay heed.

"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 it is acting to improve its fortunes, including investing in its Symbian line, taking "price actions" on its smart phones, and boosting its focus on marketing. It added it "remains pleased" with its Windows Phone strategy and is confident that the first phone in that line will ship in the fourth quarter of the year.

In April, Nokia posted better-than-expected quarterly results, and did point to a more challenging second quarter. Nokia reported profit of €344-million in the quarter to the end of March, a drop of only 1.4 per cent from the same quarter a year earlier.

Carney holds the line The Bank of Canada held its key overnight rate steady at 1 per cent again today, citing global troubles and the impact of the stronger Canadian dollar . But it began preparing markets for a rate hike later this year.

Observers believe Governor Mark Carney will begin to raise rates again in September.

Story continues below advertisement

"This statement can be interpreted as laying the groundwork to laying the groundwork for a rate increase," said Mark Chandler, chief of Canada fixed income and currency strategy at RBC Dominion Securities in Toronto.

"If things unfold as expected, the bank should be a little less coy when they present their [Monetary Policy Report]and update their rate statement in July - not because of an explicit change in the forecast, but simply because time and slack would have elapsed as the economy moves towards expected full capacity in mid-2012. Standing back, a move in September still makes sense as a time when the BoC gets back on track after 75 basis points of moves from June through September last year."

A change in the last paragraph of the Bank of Canada's statement clearly got markets thinking, pushing up the Canadian dollar on anticipation of higher rates.

"To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target," the central bank said.

The loonie had already been up on a weaker U.S. dollar, but the announcement added to that, as it climbed to $103.50 U.S. from $102.80, said Scotia Capital currency strategist Camilla Sutton.

"A few words in a press release, 'eventually,' can impact the bottom line of so many importers and exporters," added Rahim Madhavji of Knightsbridge Foreign Exchange.

"Today, importers are jumping in joy as the BoC has moved forward, albeit slightly, to indicate that the markets should expect rate hikes if the economy continues to progress as expected."

Today's decision by the central bank's rate-setting panel comes a day after Statistics Canada reported strong first-quarter expansion, of 3.9 per cent on an annual basis, but with signs that point to slower growth as consumers cut back amid hefty debts and higher prices.

"The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets," the Bank of Canada said in the statement announcing its rate decision.

"Growth in Europe is maintaining momentum, although the risks related to peripheral economies have increased. The disasters that struck Japan in March are severely affecting its economic activity and causing temporary supply chain disruptions in advanced economies. Commodity prices have declined recently but are expected to remain at elevated levels, supported by tight global supply and very strong demand from emerging markets. These high prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures. Despite the challenges that weigh on the global outlook, financial conditions remain very stimulative."

Canada's recovery is proceeding as expected, the central bank said, though it cited supply chain troubles that will restrain growth "sharply" this quarter, though will be unwound later in the year.

Higher energy prices, coupled with the introduction of the HST, will keep inflation above 3 per cent

"The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation," the bank added.

"On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices."

The central bank did say that eventually rates will have to rise, which everyone knows, but which economists said suggests a greater chance of a September increase.

"Our reading of the communiqué is that the bank is focused on the near-term risks to the global economy and has adopted a 'wait-and-see' approach to monetary policy," said chief economist Craig Alexander of Toronto-Dominion Bank.

"There is no sense of urgency to raise rates. At the same time, the bank acknowledges that it will eventually have to move interest rates higher ... There is no question that interest rates are ultimately headed higher. The debate is on the timing of when the tightening begins and how high rates will reach."

U.S. home prices sink again The U.S. real estate remains as depressed as ever, and could slump further still.

The widely-watched S&P/Case-Shiller home price index of 20 cities fell again in March, now down by 3.6 per cent from a year earlier and its lowest in many years.

"The year-on year decline, the largest since November 2009, leaves the index at its lowest level since 2003, confirming other signs that the housing sector is still deeply mired in recession, with a wave of foreclosed property sales likely to weigh further on prices in coming months," said CIBC World Markets economist Peter Buchanan.

"Our latest estimates suggest prices could still have a further 3 per cent to 5 per cent to fall."

Prices fell in March in 19 of the 20 cities measured.

"March's Case-Shiller index decline is a vivid reminder of the grim conditions of the U.S. housing market," said economist Martin Schwerdtfeger of Toronto-Dominion Bank.

"... The U.S. housing market will remain in fragile conditions for many quarters. It will take several months of robust job creation to bring more potential buyers back into the market."

Scotiabank profit climbs Bank of Nova Scotia wrapped up second-quarter results among Canada's major banks with a hefty profit increase today, pumped up by its international banking and wealth management units, and a significant accounting change.

Scotiabank earned $1.54-billion or $1.36 a share in the quarter, up from $1.1-billion or $1.02 a year earlier. Provisions for credit losses fell to $262-million from $338-million, and revenue climbed to $4.5-billion from $3.9-billion, Globe and Mail banking writer Grant Robertson reports.

The bank said its bottom line was boosted by gains $286-million, related to two acquisitions, under new accounting standards that require such deals to be recorded at "fair value." That included the takeover of DundeeWealth Inc., and meant a gain of 26 cents a share, without which earnings per share would have been $1.10.

"This was a solid quarter with good performance across our four business lines, with record revenues even without the one-time gains," said chief executive officer Rick Waugh.

"... With net income of $444-million, Canadian banking had a good quarter. Strong competitive pricing pressures impacted margins but we were successful at offsetting these with volume and market share increases in our key products. Scotiabank experienced market share gains in residential mortgages, small business, personal deposits and sales of mutual funds through our delivery channels."

Rogers calls for 'level playing field' The president of Rogers Communications Inc. , Rob Bruce, is urging Canada's new industry minister to promote a "level playing field" in the telecommunications sector as several key policy decisions loom before the new Conservative majority, Globe and Mail telecom writer Iain Marlow reports.

In a keynote address at the Canadian Telecom Summit in Toronto, Mr. Bruce said it's time for the government to stop favouring new, smaller wireless companies such as Wind Mobile as it designs policy for the loosening of foreign ownership restrictions in the sector and rules governing a coming auction of new wireless licences.

As Christian Paradis inherits the industry portfolio from Tony Clement, the country's biggest wireless players are trying to ensure they're not handicapped going into the next wireless spectrum licence auction like they were in 2008.

Deal in works for Greece Reports from Athens and Berlin today suggest European officials are moving closer to the next aid package for Greece as Germany softens its demands.

Jean-Claude Juncker, who heads up the euro zone's group of finance ministers, said yesterday that EU leaders will make a final decision by the end of June and, most importantly, aren't looking at a full-scale debt restructuring, and there is clearly an even more optimistic tone today.

Today's reports helped buoy the euro, the currency shared by the 17 members of the monetary union.

"The root of the move is in a press report that Germany was considering dropping its push for early restructuring of Greek debt to facilitate aid for Greece," said Adam Cole, the global head of foreign exchange strategy at RBC in London.

"The report is certainly not definitive evidence that the next disbursement of support is now in the bag, but a deal looks increasingly likely."

Inflation dips in Europe Inflation in the euro has dipped ever so slightly, but still tops the European Central Bank's price target.

Today's flash estimate by Eurostat puts the annual inflation rate at 2.7 per cent for May, down from 2.8 per cent.

Eurostat also reported today that the jobless rate in the euro zone held at 9.9 per cent in April, though the jobless level over the entire 27 countries of the European Union dipped to 9.4 per cent from 9.5 per cent.

More than 22.5 million people are without work in the EU, some 15.5 million of them in the euro area.

The youth unemployment rate is at about 20 per cent across Europe

Japan's economy begins to recover Japan's economy is beginning to recover from the mid-March devastation of the earthquake and tsunami, though ever so slightly.

Industrial production in Japan climbed 1 per cent in April, well below what observers had expected but still a rebound from the 15.5-per-cent hit a month earlier.

"Over all, conditions remain very difficult in Japan, but the slow move towards returning to pre-quake activity levels has begun," said BMO Nesbitt Burns economist Benjamin Reitzes.

"Many industries won't be running at full steam until around year end, but reconstruction efforts should mean second half growth will be solid."

Also today, Moody's warned it could downgrade Japan's debt.

TD downbeat on Yellow Media Toronto-Dominion Bank is taking a dimmer view on shares of Yellow Media Inc. , citing several reasons.

TD Newcrest analyst Scott Cuthbertson cut his 12-month price target on the stock to $4 from $4.75, and kept his recommendation at "hold," pointing to some events deemed negative for the phone directories company.

"Recent negative events and pressure on comparative companies have caused us to revisit our target multiple and price on Yellow Media," he said. "... The trend for directory stocks continues to be negative and visibility is poor on a turnaround."

Coffee prices to remain high Feeling the effects not of caffeine, but of the higher cost of getting that jolt?

Coffee prices have been rising, and, BMO Nesbitt Burns said today, and are expected to remain high.

"Some observers believe that speculators have played a major role in this sharp run-up, but the jury is still out on the issue of speculation in commodity markets in general," said economist Kenrick Jordan, noting that prices have more than doubled in the past year, using Brazilian coffee as a benchmark, prompting coffee shops to hike their prices.

"It is clear, however, that fundamentals are at work, with global coffee stocks at meagre levels," he added. "Though coffee prices have eased since early May, from a fundamental standpoint, it is very likely that they will remain high for a while. Moreover, any supply-side issue (e.g., bad weather) could give the rally new life."

(For a look at prices and stocks, see the accompanying infographic or click here.)

In Economy Lab today

Ottawa estimates that the budget balance for the fiscal year 2010-11 will come in below what had been projected, and well below the deficit of 2009-10. It was expected and hoped that the budget balance would improve as the economy did, but there's less room for optimism than might be suggested by these reports, Stephen Gordon writes.

In International Business today

The meltdown at Japan's Fukushima power station unleashed a wave that threatens to swamp the nuclear industry's much-hyped global renaissance, although many governments insist nuclear remains a favoured option as they face hard choices over future energy supply. The Globe and Mail's Shawn McCarthy and Richard Blackwell report.

In Personal Finance today

We feel pressured to buy now to avoid higher costs tomorrow, Rob Carrick writes. But what about affordability?

Many high-school grads are ill prepared to manage their spending, Dakshana Bascaramurty reports.

Saving up to pay in cash is the cheaper, faster way to make a big purchase. Preet Banerjee explains how to do it.

From today's Report on Business

Report an error
About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.