Ratings agency Fitch has dealt another significant blow to Nokia. Back in April, the company downgraded Nokia’s stock to junk status, and on Friday further downgraded Nokia’s outlook to “BB-” from “BB+” based on continued poor financial performance from the company. Fitch has previously indicated that they would downgrade Nokia should they fail to produce at least some operating margin in its Devices category, something Fitch now doesn’t determine to be possible for the foreseeable future.
“The company is currently not near this position and Fitch is not convinced that this can be attained anytime soon. [We believe] that the company does not have products in its current portfolio that can stem the recent losses.” - Fitch
Nokia’s operating margin was -9.1% in Q2 2012, down significantly from Q1 and from Q2 2011 due to tepid sales ahead of Windows Phone 8. Fitch agrees that Windows Phone 8 is the one chance Nokia has to get their mojo back, though the agency believes it’ll be a challenge amid both increased competition in the smartphone market and restructuring charges the company faces.
“The release of a Windows 8 suite of products now appears crucial. However, the degree of competition in the industry would suggest that it is going to be difficult to re-establish a significant presence in the smartphone market. Numerous handset makers have issued profit warnings recently. For Nokia, an adjusted gross margin profile of around 16% in its Smart Devices division is unlikely to support a profitable smartphone business and Fitch remains unconvinced of Nokia’s ability to improve pricing in this segment. Furthermore, the announcement that the current batch of Lumia devices will not be able to upgrade to Windows 8 is likely to put additional pressures on Nokia in the coming quarters.” - Fitch
The outlook is increasingly bleak for Nokia, and it’s growing ever clearer that the company needs to see large successes with Windows Phone 8 if it is to remain in business. The company is rumored to be pursuing exclusive deals with carriers to build up interest in upcoming Windows Phone 8 Lumia devices, though the move has been met with significant amounts of doubt and skepticism that such a strategy will work. Time will tell if Nokia’s rather large bet on Windows phone will pay off.