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Nokia Hopes To Reinvent Itself With New CEO

Posted on Monday, Oct 25th 2010

Last month, Nokia (NYSE:NOK) hired its new CEO, Stephen Elop. Former president of Microsoft’s Business Division, Elop is Nokia’s first non-Finnish and North American CEO. Last week Nokia, under the leadership of its new CEO, reported a higher than expected profit and announced plans to restructure its smartphone business by cutting 1,800 jobs. Let’s take a closer look.

Nokia’s Financials
Nokia reported third quarter revenue of €10.3 billion ($14.3 billion), up 5% y-o-y and 3% q-o-q. Operating profit was €403 million ($561 million) compared to a loss of €426 million ($593 million) last year. The company ended the quarter with liquidity of €10.2 billion ($14.2 billion).

Mobile device unit shipments were up 2% y-o-y and down 1% q-o-q to 110.4 million and convergence device shipments were up 61% y-o-y and 10% q-o-q to 26.5 million. Converged mobile device ASP declined to €136 from €143 last quarter. Nokia is hopeful about its new Symbian 3 OS, which is expected to compete with the iPhone 4. It started shipping the N8, its first device on the OS, at the end of the third quarter. Most of the world, however, expects little from Symbian at this point.

Devices & Services net sales increased 4% to €7.2 billion. Devices & Services gross margin was 29%, down from 30.9% in Q3 2009 and 30.2% in Q2 2010. Shipments in North America increased by 3% y-o-y and 23% q-o-q, to 3.2 million. Latin America market showed double-digit growth of 20%, Europe grew 8%, and Greater China 9%, while Asia-Pacific declined 9% and the Middle East and Africa declined 6%.

IDC recently reported that Nokia’s market share in India, its second-largest market after China among the emerging markets, declined to 36% from 54% last year. This is alarming news for Nokia, which refuted such claims, mentioning that IDC did not count shipments from its Chennai factory. Nokia not only competes with Apple and RIM in the high-end market but also with local vendors in the low-end market. Nokia has also been slow to bring out popular features such as dual-SIM card phones and social networking apps.

For the fourth quarter, Nokia expects Devices & Services sales to be €8.2 billion to €8.7 billion. It is trading around $11 after hitting a 52-week low of $8 on June 29.

Chart forNokia Corporation (NOK)

Will a New CEO Herald Dramatic Change?
To revive Nokia, dramatic changes are expected from its new CEO, including a much-needed emphasis on the North American market. IDC reports that Nokia’s global smartphone market share slid from 40.3% last year to 38.1% in the second quarter. When the iPhone was first launched in 2007, Nokia was complacent and hasn’t been able to come up with any smartphone to live up to the tough competition that ensued.

There have been some significant management changes since Nokia hired its new CEO. Head of the smartphone division Anssi Vanjoki was the first to resign and has a six-month notice period. Vanjoki’s resignation was followed by that of chairman, Jorma Ollila, and the head of the new MeeGo mobile platform, Ari Jaaksi. It looks as though the Finnish management have pretty much revolted against the board’s decision to hire a North American CEO. This may not be a bad thing. A new, more North America– and emerging market–oriented management team will be needed to turn the company around, anyway.

Nokia also announced that it will “streamline operations” that will result in layoffs of up to 1,800 employees globally in devices and services and corporate functions.

At Nokia World last month, Stephen Elop reiterated that, like his former Microsoft boss Steve Ballmer, his credo of choice is “developers, developers, developers,” and he intends to establish this credo at Nokia. He hired Palm Pre designer Peter Skillman as the head of user experience and services for its new MeeGo mobile operating system.

Diana Ben-Aaron of Bloomberg reports that Nokia said its software platforms are Series 40, Symbian, and MeeGo, and it’s not planning to add others. Matthaus Krzykowski on Venture Beat earlier reported that there are rumors of Nokia’s embracing Microsoft Windows Phone 7 as an additional platform.

That would not be such a bad idea. Symbian’s market share is forecast to decline 18% to 32.9% in 2014 from 40.1% in 2010. Nokia needs to do away with Symbian altogether or reinvent itself. With a cleaner OS strategy, it should focus on the North American market, the pulse of the smartphone industry. Elop is its new ray of hope to achieve that. Since the launch of the iPhone, Nokia’s valuation has declined considerably. Its current market cap is about $41 billion. I recently suggested that RIM could be an attractive acquisition prospect for Microsoft. The smartphone industry is integrating vertically, with HP acquiring Palm. Nokia is another option for Microsoft. Elop could either work some magic in Nokia or lead it into the arms of Microsoft.

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