Nokia Cuts Guidance


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It was revealed on Wednesday that Nokia's (NYSE: NOK ) stock is taking a beating after it reported guidance that predicts an operating loss in its devices and services unit for the first quarter. It was previously though that the unit would break even but, apparently, recent math is working against the company.

Evidently, Nokia is struggling to keep up with its rivals, particularly due to competitive industry dynamics in areas like India, the Middle East, Africa and China. Following the release of the cut guidance, Nokia's stock fell 11% in pre-market trading.

A press release confirms the above, as well as the fact that the company has been hit by gross margin declines, particularly in the Smart Devices business unit.

Apparently, Nokia's estimates see its non-IFRS Devices & Services operating margin for 1Q12 at roughly negative 3%. What's more, it is expecting guidance for the second quarter to be similar to the first. This horrible outlook reflects the fact that the first quarter 2012 benefit related to lower warranty costs is expected to be non-recurring. In addition, the numbers reflect expectations regarding competitive industry dymanics, which continue to negatively affect the Smart Devices and Mobile Phones business unit. Also, timing, ramp-up, and consumer demand related to new products. Finally, the macroeconomic environment also plays a part.

"Our disappointing Devices & Services first quarter 2012 financial results and outlook for the second quarter 2012 illustrates that our Devices & Services business continues to be in the midst of transition," said Stephen Elop, President and CEO of Nokia. "Within our Smart Devices business unit, we have established early momentum with Lumia, and we are increasing our investments in Lumia to achieve market success. Our operator and distributor partners are providing solid support for Windows Phone as a third ecosystem, as evidenced most recently by the launch of the Lumia 900 by AT&T in the United States."

It's enough to make one wonder - why was the math so off the first time around? Current estimates from Nokia have the Devices & Services net sales for 1Q12 at 4.2 billion euros, but who knows when that figure will change.

So what is Nokia doing to turn things around? Well, it is increasing investments in Lumia to bring more products to more consumers in more markets. In the Mobile Phones business unit, Nokia is taking tactical pricing actions in the near term and plans to bring new products to market in the second quarter 2012. Finally, Nokia will accelerate planned cost reductions and will pursue additional significant structural actions if and when necessary.

Elop says that he is proud of the way in which NOK employees are quickly responding to the needs of consumers and partners, and that is great. Confidence in your employees is vital. But you have to wonder if it is enough to turn these numbers around.

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