Within a week time, Nokia Corp. (NOK), globally the largest mobile handset manufacturer, suffered double blow for its credit ratings from the two largest rating agency of the world. Yesterday, Moody’s Investors Service has downgraded its credit rating due to the company’s gradual loss of market share and financial impact following its transition from proprietary Symbian software to Microsoft Corp. (MSFT) developed Windows Mobile 7 software as its basic operating system for all future smartphones.
Moody’s downgraded Nokia’s senior debt rating from “A2” to “A3” and its short-term borrowing rating from “Prime-1” to “Prime-2”. The rating agency also downgraded Nokia’s debt outlook from “Under Review” to “Negative”. Moody’s believes the diminished profit margin and reduced funds from operations for Nokia are primarily attributable to an inflexible smartphone operating system, slowness in introducing new phone models, launch of more innovative smartphones by competitors, and increasing price competition for the company’s low-end devices.
Earlier, Standard & Poor’s Rating Services (S&P) downgraded the credit rating of Nokia citing almost the same reasons. Though S&P downgraded Nokia’s credit rating from “A” to “A-“ it maintained a stable outlook for the company.S&P expects Nokia to generate flat revenue and weak operating margin in the near term, and encounter significant price pressure for its Symbian-based products.
The key growth area of Nokia is the emerging markets. However, price elasticity of demand is considerably high in these markets due to low per capita income and the existence of several low-cost Asian phone manufacturers such as Samsung, LG Electronics, and HTC etc.
The lucrative smartphone market is the weakest spot for Nokia. None of its upgraded Symbian 3-based smartphones contain any feature, which is unique in the market. The Symbian software is gradually losing charm among next-generation mobile phone users and is recognized as an out-of-date technology. In 2010, Nokia’s global market share of mobile devices segment went down to just 28.9% from 36.4% in 2009.
Nokia provided a weak financial outlook for the ensuing first quarter of 2011. The company estimated an adjusted operating margin of 7%-10% in its core Devices & Services segment, significantly below 12.5% in the prior-year quarter. Though we remain cautiously optimistic regarding Nokia’s strategic decision to adopt Windows 7 software as its smartphone operating system, we believe the first Windows Mobile 7 based Nokia smartphone may not come to the market before 2012. In the meantime, Nokia’s nightmare is expected to continue.
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