Nokia (NYSE:NOK) responded to a credit rating downgrade by Moody's Investors Service, arguing it remains in a strong financial position and is taking steps to turn its business around. The downgrade came less than a week after Nokia cut its financial outlook for the first and second quarters.
Moody's cut its rating on Nokia's debt to Baa3 from Baa2, and maintained a negative outlook, meaning that Nokia could be downgraded by Moody's to "junk" status. Moody's said it was worried by Nokia burning through cash and its deteriorating feature phone business. "Moody's believes that the structural change facing Nokia's Mobile Phones segment may not be easy to address, such as the market share gains recorded by makers of very low-end phones or new promotions by Chinese carriers," Moody's analyst Wolfgang Draack said in a statement.
In its response, Nokia noted that it still had an investment grade rating from Moody's and that, as of March 31, it had gross cash balances of $12.7 billion and a net cash position of $6.4 billion. In a statement, Nokia CFO Timo Ihamuotila said the company "is quickly taking action. Nokia will continue to increase its focus on lowering the company's cost structure, improving cash flow and maintaining a strong financial position."
Last week Nokia indicated that its key non-IFRS Devices & Services operating margin would be around negative 3 percent in the first quarter, compared with the previously expected range of "around breakeven, ranging either above or below by approximately 2 percentage points." For the second quarter, Nokia said it expects its Devices & Services operating margin to be similar to or below the level of the first quarter.
Nokia has been transitioning to using Microsoft's (NASDAQ:MSFT) Windows Phone platform for all of its high-end phones, but its sales of Symbian-based phones have fallen off more sharply than it expected. Nokia said last week it is "taking tactical pricing actions" in the near term--i.e. cutting prices--and that it plans to bring new products to market in the second quarter of 2012. Nokia also said it will accelerate planned cost reductions and might look at "additional significant structural actions if and when necessary."
According to a number of estimates, Samsung Electronics will sell more handsets--a mix of both smartphones and feature phones--during the first quarter than Nokia will. According to Bloomberg estimates, Samsung will ship 92 million mobile phones during the first quarter. A separate report from Reuters pegged Samsung's quarterly shipments at 88 million. Nokia has said it expects to ship around 83 million phones.
If the forecasts are correct, it would mean that Nokia will lose its position as the world's largest maker of mobile devices, a position the Finnish manufacturer has held for more than a dozen years.
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