Troubled Nokia Lowers its Market Outlook

Close on the heels of announcing its cost-cutting measures and decision to lay off employees, Nokia said Tuesday multiple factors are negatively impacting its Devices & Services business.

The company updated its second quarter and full year 2011 outlook for Devices & Services. Among the worrying factors is the competitive dynamics and market trends across multiple price categories, particularly in China and Europe.

Moreover, the company believes that a product mix shift towards devices with lower average selling prices and lower gross margins besides pricing tactics by its competitors have forced it to lower its market expectations.

Recently, Nokia announced its plans to reduce its global workforce by about 4,000 employees by the end of 2012, with the majority of reductions in Denmark, Finland and the UK. (Read: Nokia to Lay Off 4,000 Workers to Cut Costs)

It is also taking other steps to regain its market standing. For example, Nokia joined hands with CNN for a multi-level international collaboration where Nokia becomes a key part of CNN’s roster of mapping providers, delivering its mapping services to the international news network. (Read: CNN News to Get Nokia Mapping Support)

It 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.

It 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.

Given the unexpected change in the outlook for the second quarter, Nokia believes it is no longer appropriate to provide annual targets for 2011. However, it 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.

The company’s previous targets for the third quarter, fourth quarter, and full year 2011 were: 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; and Devices & Services non-IFRS operating margin to be between 6% and 9% in 2011.  These targets are no longer valid, it says.

Nokia is taking immediate action to address the issues that are impacting its Devices & Services business. It is continuing to invest to bring new capabilities to its Symbian line up. In addition, Nokia has taken price actions on its current smartphone portfolio, and it is intensifying its focus on retail point-of-sales marketing. It started shipping its new dual-SIM devices last week.

Nokia remains pleased with its progress on its Windows Phone strategy, and has increased confidence that the first Nokia product with Windows Phone will ship in the fourth quarter 2011.

Moreover, it remains committed to its target to reduce its Devices & Services non-IFRS operating expenses by EUR 1 billion for the full year 2013, compared to the full year 2010, and plans to implement these reductions as quickly and effectively as possible.

After the transition, Nokia continues to target Devices & Services net sales to grow faster than the market and Devices & Services non-IFRS operating margin to be 10% or more.

“Strategy transitions are difficult. We recognize the need to deliver great mobile products, and therefore we must accelerate the pace of our transition,” said Stephen Elop (pictured above), president and CEO of Nokia.

“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.”

Nokia will provide its second quarter results and more details when it reports its Q2 2011 results on July 21, 2011.