Difficult calls

How many times can Nokia shock the market? A new warning on margins follows a similar upset in April, and another jolt in May 2011. The mobile-phone maker was caught napping by the smartphone revolution. It has now lost about three-quarters of its market value, or roughly euro 20 billion in absolute terms, since turnaround Chief Executive Stephen Elop took the helm in September 2010. At least, he is taking action. But success still looks far from guaranteed.

Elop staked Nokia’s future on smartphones that rely on the mobile operating system of his former employer, Microsoft. To its credit, Nokia has never pretended the transition would be quick or smooth. But the onslaught from cheap competitors running Google’s Android, coupled with high-end pressure from Apple’s iPhone, has been relentless.

At an operating profit level, Nokia is already losing three cents on every euro of sales made in its phone business. Nokia now warns this will worsen this quarter. Hence the fresh fall in Nokia shares, returning these to levels last seen 16 years ago. There was no mention of revenue on June 14 but it is presumably under pressure too.

The overhaul underscores how much slimmer even a successful Nokia needs to be. That comes with a sizeable human cost. A further 10,000 job cuts means personnel, excluding its networking joint venture with Siemens, will now be a third lower in 2013 than 2010. Among the casualties are some experienced managers. But in financial terms, operating costs should fall to euro 3 billion at the core phone unit, a 44 per cent drop from 2010, though the move also entails euro 1 billion of new restructuring costs.

Shares shed 11 per cent on June 14. Nokia’s continuing power to shock may lead investors to ask if there’s a Plan B, perhaps with a new boss. But Nokia has little to gain, at this late stage, by reversing course and adopting Android. The obvious sell-off would be Nokia Siemens Networks, but the joint venture has big problems of its own. And a bid for Nokia looks implausible, as does a full-on break-up, even if TomTom’s recent Apple tie-up highlights the attractions of Nokia’s own mapping business. For investors, buying Nokia stock looks like a brave call, even at these prices.