Nokia’s put all its chips on the Windows Phone table, and so far, the bet doesn’t seem to be paying off. Today, the company slashed its earnings forecast for the second time this year and announced it will be “streamlining” several areas of its business, resulting in the closure of three facilities and up to 10,000 layoffs by the end of 2013. The executive management team also underwent significant reshuffling.
“These planned reductions are a difficult consequence of the intended actions we believe we must take to ensure Nokia’s long-term competitive strength,” CEO Stephen Elop said in the press release.
Bloomberg reports that Nokia’s plummeting stock plummeted even further after the news. Nokia, the king of the feature phone market, has floundered in the smartphone arena in the wake of Apple and Android’s success. The company still has fairly healthy cash reserves, but that safety cushion is being depleted at a phenomenally fast rate after four straight losing quarters and is expected to run dry in 2014. The cost reductions announced today buy Elop more time to patch up the leaking Nokia ship.
Nokia will concentrate its efforts on location-based services and technology that helps to differentiate the Lumia line to make it more attractive to would-be users. Along those lines, Nokia announced it will be ” broadening the price range of Lumia” and acquiring assets from Scalado to improve its image technology portfolio.
The full press release is embedded below.
Espoo, Finland – Nokia today outlined a range of planned actions aimed at sharpening its strategy, improving its operating model and returning the company to profitable growth. While planning to significantly reduce its operating expenses, Nokia remains focused on the unique experiences offered by its smartphones and feature phones, including an increased emphasis on location-based services.
Nokia’s strategy is about delivering great mobile products that sense the world. Nokia plans to:
- Invest strongly in products and experiences that make Lumia smartphones stand out and available to more consumers;
- Invest in location-based services as an area of competitive differentiation for Nokia products and extend its location-based platform to new industries; and
- Improve the competitiveness and profitability of its feature phone business.
To execute this strategy, Nokia is making changes to its management team by tapping into the strong leadership bench at the company.
To support this period of transition, Nokia intends to improve its operating model by significantly reducing its Device & Services operating expenses, substantially reducing its headcount and reducing its factory footprint. As a result, Nokia intends to return to sustainable non-IFRS operating profitability in Devices & Services as soon as possible.
“We are increasing our focus on the products and services that our consumers value most while continuing to invest in the innovation that has always defined Nokia,” said Stephen Elop, Nokia president and CEO. “We intend to pursue an even more focused effort on Lumia, continued innovation around our feature phones, while placing increased emphasis on our location-based services. However, we must re-shape our operating model and ensure that we create a structure that can support our competitive ambitions.”
In Smart Devices, Nokia plans to extend its strategy by broadening the price range of Lumia and continuing to differentiate with the Windows Phone platform, new materials, new technologies and location-based services. In line with this strategy, Nokia today announced the planned acquisition of assets from Sweden-based Scalado, which currently has imaging technology on more than 1 billion devices. This acquisition is aimed at strengthening Nokia’s imaging assets.
Nokia’s location-based platform is expected to be another principal area of investment as Nokia plans to differentiate its portfolio of Lumia smartphones with leading location-based services including navigation and visual search applications such as the recently announced Nokia City Lens. Additionally, the company plans to extend its mapping technology to multiple industries to strengthen the platform and generate new revenue.
In Mobile Phones, Nokia intends to improve its competitiveness and profitability. Nokia aims to further develop its Series 40 and Series 30 devices, and invest in key feature phone technologies like the Nokia Browser, aiming to be the world’s most data efficient mobile browser. Early results of this innovation can be found in Nokia’s latest Asha feature phones which offer a full-touch screen experience at lower prices.
Operational changes and updated cost reduction target
Balancing its investment priorities, Nokia plans to rescale the company by making additional reductions in Devices & Services. Nokia plans to pursue a range of planned measures including:
- Reductions within certain research and development projects, resulting in the planned closure of its facilities in Ulm, Germany and Burnaby, Canada;
- Consolidation of certain manufacturing operations, resulting in the planned closure of its manufacturing facility in Salo, Finland. Research and Development efforts in Salo to continue;
- Focusing of marketing and sales activities, including prioritizing key markets;
- Streamlining of IT, corporate and support functions; and
- Reductions related to non-core assets, including possible divestments.
As a result of the planned changes announced today, Nokia plans to reduce up to 10,000 positions globally by the end of 2013. Nokia is beginning the process of engaging with employee representatives in accordance with country-specific legal requirements.
“These planned reductions are a difficult consequence of the intended actions we believe we must take to ensure Nokia’s long-term competitive strength,” added Elop. “We do not make plans that may impact our employees lightly, and as a company we will work tirelessly to ensure that those at risk are offered the support, options and advice necessary to find new opportunities.”
Taking into account these planned measures the company now targets to reduce its Devices & Services non-IFRS operating expenses to an annualized run rate of approximately EUR 3.0 billion by the end of 2013. This is an update to Nokia’s target to reduce Devices & Services non-IFRS operating expenses by more than EUR 1.0 billion for the full year 2013, compared to the full year 2010 Devices & Services non-IFRS operating expenses of EUR 5.35 billion. This means that in addition to the already achieved annualized run rate saving of approximately EUR 700 million at the end of first quarter 2012, the company targets to implement approximately EUR 1.6 billion of additional cost reductions by the end of 2013.
As part of these planned changes, Nokia will closely assess the future of certain non-core assets. In line with this, Nokia today announced plans to divest Vertu, its luxury mobile phones business to EQT VI, a European private equity firm.
Renewed leadership team
Nokia also announced today in a separate press release a number of changes to its senior leadership. Nokia announced that it has appointed Juha Putkiranta as executive vice president of Operations; Timo Toikkanen as executive vice president of Mobile Phones; Chris Weber as executive vice president of Sales and Marketing; Tuula Rytila as senior vice president of Marketing and Chief Marketing Officer; and Susan Sheehan as senior vice president of Communications. Putkiranta, Toikkanen and Weber will join the Nokia Leadership Team effective July 1, 2012.
Jerri DeVard steps down as chief marketing officer; Mary McDowell steps down as executive vice president of Mobile Phones; and Niklas Savander steps down as executive vice president of Markets. DeVard, McDowell and Savander will all continue in advisory roles through the transition of their roles; however, they step down from the Nokia Leadership Team effective June 30, 2012.
Financial impact and outlook for Devices & Services
Nokia expects further charges of approximately EUR 1.0 billion relating to restructuring activities in Devices & Services by the end of 2013 in connection with its updated Devices & Services operating expense target. This is in addition to cumulative charges of approximately EUR 900 million recognized as of the end of first quarter 2012 in connection with previously announced restructuring activities. By the end of the first quarter 2012, Nokia had cumulative restructuring related cash outflows of approximately EUR 450 million. From the second quarter 2012 onwards, Nokia expects restructuring related cash outflows to be approximately EUR 650 million in 2012 and approximately EUR 600 million in 2013. Out of the total expected charges relating to restructuring activities of EUR 1.9 billion, Nokia expects non-cash charges to be approximately EUR 200 million.
These cost reduction measures are designed to return Nokia’s Devices & Services business to sustainable non-IFRS operating profitability as soon as possible.
During the second quarter 2012, competitive industry dynamics are negatively affecting the Smart Devices business unit to a somewhat greater extent than previously expected. Furthermore, while visibility remains limited, Nokia expects competitive industry dynamics to continue to negatively impact Devices & Services in the third quarter 2012. Nokia now expects its non-IFRS Devices & Services operating margin in the second quarter 2012 to be below the first quarter 2012 level of negative 3.0%. This compares to the previous outlook of similar to or below the first quarter level of negative 3.0%.
“Nokia is significantly increasing its cost reduction target for Devices & Services in support of the streamlined strategy announced today,” said Timo Ihamuotila, executive vice president and CFO. “With these planned actions, we believe our Devices & Services business has a clear path to profitability. Nokia intends to maintain its strong financial position while proceeding aggressively with actions aimed at creating shareholder value.”
Nokia will be hosting a conference call today at 13:00 UK time (8:00 EST). The dial-in number for media (listen only – the question and answer session will be limited to financial analysts and investors only) is +1 706 634 5012. Conference ID: 90228970.
The dial-in number for financial analysts and investors is US: +1 888 636 1561. Conference ID: 90228970. UK: +44 1452 560 299. Conference ID: 90489609.
A replay of the call will be available soon after the call completion. The replay number is US: +1 800 585 8367. Conference ID: 90228970 . UK: +44 1452 550 000. Conference ID: 90489609.
Nokia will provide full second quarter results and more details when it reports its second quarter 2012 results on July 19, 2012.