A Diagnosis of Nokia's Financial IllnessVW Staff
Nokia Corporation (NYSE:NOK) has been diagnosed with multiple financial illnesses from its statement of comprehensive expenses, all the way down to its statement of cash flow, and sadly, all medical examinations administered seem to be provoking a null response. All this began in 2011, when the newly appointed CEO, Stephen Elop was followed shortly by a change of strategy, which included overhauling the company’s own Symbian O.S, in favor of Microsoft Corporation (NASDAQ:MSFT)’s Windows phone, which now also runs in its Nokia Lumia 920 phones.
Someone would think, what kind of dose could have knocked out the former industry giant so expeditiously from the pack, and to the mid-level, then now, to a point where Nokia Corporation (NYSE:NOK) is almost struggling to survive. Nonetheless, the answers can be derived from its books, which used to be so impressive to peruse, though not so for now, as they display the image of what a country buddy buddy would call ” the last kicks of a dying horse”; but the big question is, can Nokia still receive financial salvation?
The Finnish based mobile phone maker has a complicated portfolio, following its acquisitions in Siemens, the partnership now known as Nokia Siemens Network, and the Location & Commerce company, called NAVTEQ. Nokia has not recorded a positive EBITDA since 2010, and has even failed to Break Even. The good news is, it has probably escaped the wrath of Corporation tax, while everything else, is all bad news to Nokia Corporation (NYSE:NOK).
Nokia Corporation (NYSE:NOK)’s non EBITDA sales have hit a snug over the last twelve months and analysts from Evli Bank Plc research division expect the figure to be negative for the calender year 2012. This is mainly because of lackluster sales figures following the abandonment of Symbian O.S.
The analysts claim that the adopted Windows Phone O.S has not been able to fill the gap, thereby leading to a decline in revenues. However, the analysts expect the company to begin recovery from 2013 onward, as Windows Phone OS is expected to gain popularity with time.
The EBITDA percentage of Net sales has fallen from about 17% in 2007 and 2008, to below 0% in 2012, while last year, it stood at about 7%. The analysts expect this rate to grow to about 3% in 2013, and 7% in 2014, albeit a slower growth in net sales. This means that the EBITDA growth will be highly influenced by implementation of some aggressive cost cutting measures.
Additionally, the sales figure also faces stiff challenge from current market dictators, Apple Inc. (NASDAQ:AAPL), and Samsung Electronics Co. Ltd. The analysts also claim that Nokia Corporation (NYSE:NOK)’s new Lumia phones have received better consumer reviews, as compared to Apple’s new iPhone 5. However, this is only so in the Nordic Countries, as recent surveys in U.S have indicated just the opposite. You cannot topple a market leader by claiming huge local market share, Nokia needs to replicate this globally, as does Apple iDevices, in order to start dreaming.
Nokia Corporation (NYSE:NOK)’s cash reserves have been tasked with supporting the company since 2011, which has resulted in declines, as is well illustrated in the chart above, left. The analysts indicate that cash, which had been garnered during the happy times of the mobile phone leader from the early 21st century, has now declined to just over EUR 4 billion as per Q2 results. Nokia is expected to have less than EUR 2 billion by the end of 2012, although from 2013 onward, just as earlier mentioned, there should be steady marginal growth.
Consequently, Nokia Corporation (NYSE:NOK) is expected to get some additional finances,as it still struggles to recoup itself out of the red zone. It is expected to get some bank loans to the tune of EUR 750 million in 2013, while in 2014, the mobile phone maker will get about EUR 1.2 billion worth of bonds for its credit needs. In total, 2014 will require a total funding of about EUR 1.8 billion including R&D Loan.
The year 2012 is probably the worst for Nokia Corporation (NYSE:NOK), as far as Net Debt to EBITDA ratio is concerned, as it is expected to stand at a historical high of more than 8.0 times, as compared to the other periods which boast an expected or actual below zero ratio. On the other hand, EBITDA to Interest expense has not been all that stable; the year 2011 recorded the best at 25 times, but the figure, just as expected, has plunged to negative territory in 2012, due to declining sales.
The analysts expect Nokia Corporation (NYSE:NOK) to report Free cash flows of about EUR 700 million in 2013, and EUR 1.3 billion in the full year 2014. Additionally, they recommend a credit rating BB for the struggling company, and cite increased competition and cannibalizing strategy choices, as major contributors to Nokia’s current status. However, they do believe that cost cuts, along with introduction of new product ranges, are likely to have a huge impact on the company; this time around, a positive impact, come 2013.
In my opinion, Nokia’s fixed costs are the biggest impediments as the reduction in sales units should not be affecting the company so adversely as witnessed, if it did not have, for instance, EUR 5.35 billion in fixed costs in 2011.
At the time of this writing, Nokia Corporation (NYSE:NOK), was trading at $2.61, down $0.10 per share , or 3.52% decline from the previous close.