Moody's Investors Services downgraded Nokia's debt rating by a notch to B1, meaning that the Finnish handset manufacturer has slipped further into junk territory on the back of cash flow concerns.
"We have downgraded Nokia's CFR [corporate family rating] mainly because we believe that the company continues to face challenges returning to sustainable profitability in its core smartphone and mobile phone operations and because we believe that it is unlikely to reach break-even on a cash flow basis before well into 2014, at the earliest," Roberto Pozzi, Moody's vice president and lead analyst on Nokia, said in a statement.
Moody's added that the outlook on all Nokia's ratings is negative, and said the action concludes a review for downgrade that incorporates the company's recent results and the financing arranged for the €1.7 billion ($2.27 billion) acquisition of a 50 per cent stake in Nokia Solutions and Networks.
In the second quarter of 2013, Nokia's group net sales were down 24 per cent year-over-year at €5.69 billion, while revenue for the first half of the year dropped 22 per cent to €11.54 billion. The company's net loss narrowed to €227 million from €1.4 billion a year earlier.
Nokia's challenges are reflected in the ongoing negative operating margins and free cash flows in the first half of 2013, Moody's said. Although the agency noted there is some evidence that Nokia's Lumia-branded Windows Phone are finding traction in Microsoft's efforts to establish themselves as a third mobile operating system behind Google's Android and Apple's iOS, Nokia has not yet achieved the volume of sales that would allow it to break even.
"In the second quarter of 2013, the smartphone business was still losing €14 for every €100 of sales," Moody's observed, also noting that it expects Nokia to become even more reliant on its smartphone business as its traditional stronghold in mobile phones, especially in emerging markets, reduces over time.
The report comes as Nokia is rumoured to be planning the launch of a new range of large-screen mobile devices, or "phablets," to revamp its Lumia smartphone line-up and take on market leader Samsung Electronics. Reuters reported that, according to unnamed sources, announce such devices at an event in New York in late September.
According to Bloomberg, Bernstein Research analyst Pierre Ferragu has questioned whether Nokia's focus on high-end models, such as the Lumia 925, 928 and 1020, will pay off, and is forecasting a weak third quarter.
"This is a risky bet, as high-end smartphones are slowing overall, competition is intense, and ... Windows has had limited traction in the high end," Ferragu said in a research note. "Nokia appears to be heading for a disastrous September quarter."
Moody's sounded more positive note on the impact of NSN, saying that if the current turnaround at NSN continues, Nokia's credit profile could actually benefit from retaining a less volatile and potentially more profitable business such as mobile networks. The outlook on NSN's B2 rating is positive.
Nokia issued a response to the rating decision, saying its target is to return its Devices & Services business to sustainable cash generation as soon as possible. The company added that it had gross cash of €9.5 billion and net cash of €4.1 billion at the end of the second quarter, and also has access to additional liquidity via a revolving credit facility of €1.5 billion, which is entirely undrawn and available to the company through March 2016.
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