How would you like to be a Nokia employee? Last week the bosses came up with more bad news: In order to cut 3B€ (about $3.8B) in expenses by the end of 2013, another 10,000 employees will be shown the door -- this after earlier cutting payroll by 4,000 people. The news came couched in corporate doublespeak: Nokia sharpens strategy and provides updates to its targets and outlook, with a shamefully misleading first subtitle:
Company announces targeted investments in key growth areas, operational changes and significantly increased cost reduction target
Followed by a second one, finally hinting at the bad news:
Company lowers Devices & Services outlook for the second quarter 2012
In the opaque 2900-word release, management concedes business is worse than expected, with no immediate hope of improvement:
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%.
In English: ‘Our smartphone business sucks, it lost money last quarter, it will lose even more money for the current quarter ending in June, probably in the 5% operating loss range, and we’ll experience similar bleeding for the foreseeable future.’
Bond-rating agencies took note and promptly downgraded Nokia’s debt to junk status, another worrisome development. Reading Nokia’s Q1 2012 numbers, we see Net Cash at 4.8B€ (approx. $6B), 24% less than a year ago, 13% less than the immediately preceding quarter. With accelerating losses, the cash drain is likely to do the same. This puts Nokia in a dangerous squeeze: It could have to borrow money at unfavorable rates, or be prevented from doing so, or be forced into liquidation.
This is how: We know Nokia has already borrowed money, about 4.9B€ (approx. $6.3B), but we don’t know what the small print on those bonds say. Creditors often put conditions (covenants) giving them the option to demand immediate repayment if the debtor’s business deteriorates too much.
Nokia’s management is worried, it shows in little signs such as the length of precautions taken in what is known as Forward-Looking Statements. These consist in lawyerly language telling us everything we have heard or read could be nullified by a number of changes in the weather, the price of pork bellies or crop failures. The practice, as often, stared with the best of intentions: Management should be free to share their views of the future without being held too strictly to their description of inherently fragile circumstances.
In February 2011, Nokia’s cautious language about 255 words. Last week, attorneys in charge of covering the backs of Nokia execs needed more than 1,400 words, listing precautions from A to K, and from 1 to 39.
Put simply, this betrays is a growing fear of lawsuits.
In the meantime, Nokia’s CEO, Stephen Elop, is “opening the second envelope”, that is firing members of his exec team, including one who imprudently followed him from Microsoft. Next time, it’ll be his turn -- and too late to save the company.
Many blame Elop, but what about the Board of Directors? In 2010, when the fact Nokia was on the way down became too obscenely obvious for the Board to ignore, they fired the CEO, OPK (Olli-Pekka Kallasvuo), an accountant cum lawyer, and doubled down by hiring Elop, a Microsoft exec with zero smartphone experience and a record of job-hopping. The new CEO soon said one very true thing, ‘This is a battle of ecosystems’ and did a terrible one: He osborned Nokia’s existing Symbian-based products as he committed to a distant collaboration with Microsoft and its unproven Windows Phone system software. What did the Board do? Directors approved the move. Willfully or stupidly, it doesn’t matter, they supported Elop’s imprudent move.
Nokia, once the emperor of mobile phones, shipping more than 100 million devices per quarter, is now in a tailspin, probably irrecoverable, taking its employees into the ground.
And there is Nokia’s chosen partner, Microsoft. What will Nokia’s failure do to its future? Ballmer knows Microsoft can’t be relegated to a inconsequential role in the smartphone wars. Will this lead to Microsoft going “vertical”, that is buying Nokia’s smartphone business and become an vertically player, as it already is in its Xbox business?