Fitch Ratings, one of the handful of companies that people pay attention to when it comes to investment advice, has downgraded Nokia’s credit rating to junk status. What does this mean? When Nokia wants to borrow money to do things like build a factory or make a large order from a component supplier, the interest that they’ll be paying back on their loan will be ridiculously high. How much cash does Nokia have in the bank? About 4.9 billion Euros, which isn’t a lot compared to Apple, Google, or Microsoft. Much more important however is the rate at which Nokia’s bank account is shrinking. If you compare Q1 2012 with Q1 2011, Nokia has 24% less cash. If you compared Q4 2011 to Q1 2012, Nokia has 13% less cash. Here’s what Fitch has to say about the situation:
In order to avoid further negative rating action, Nokia needs to demonstrate substantial improvements over Q312, Q412 and 2013. Fitch believes that Nokia needs to stabilise revenues and be capable of generating low-single digit non-IFRS operating profit margins and positive pre-dividend free cash flow, if Fitch is to affirm the rating at the ‘BB+’ rating level. Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months.
Nokia currently has gross cash of EUR9.8bn and a net cash position of EUR4.9bn as at Q112. Although this net cash position is currently strong, this could be depleted over the next 18 months by substantial restructuring charges and the potentially negative operating cash flow that could persist unless the company’s operating performance improves.
So 18 months, divide that by 3 months per quarter, equals 6 quarters for the Finnish handset maker to get their shit together before they’re broke. Will Windows Phone 7.5 do that? Nope. Will Windows Phone 8? Maybe, which means all eyes will be on Microsoft over the new few months.