Nokia expected to fall deeper into the red

HELSINKI Wed Jul 11, 2012 7:05pm IST

A visitor plays with a Nokia smartphone at the Windows Phone section at the Microsoft booth during the 2012 Computex exhibition at the TWTC Nangang exhibition hall in Taipei June 6, 2012. REUTERS/Yi-ting Chung/Files

A visitor plays with a Nokia smartphone at the Windows Phone section at the Microsoft booth during the 2012 Computex exhibition at the TWTC Nangang exhibition hall in Taipei June 6, 2012.

Credit: Reuters/Yi-ting Chung/Files

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HELSINKI (Reuters) - Nokia (NOK1V.HE) is expected to have tumbled deeper into the red when it reports quarterly results next week, with sales of the Microsoft-based (MSFT.O) smartphones that it hopes will save the company unlikely to pick up until later in the year.

The world's second-largest cellphone maker was late to the smartphone war in which Apple (AAPL.O) and Samsung (005930.KS) have gained dominance. It is fighting back with phones called Lumia, which use Microsoft's Windows software.

The phones have won some good reviews, but have had relatively little success among consumers and slow sales have so far thwarted Nokia's recovery efforts.

In the three months to June, all three major credit ratings agencies cut Nokia bonds to "junk", the company warned twice on profits and said it planned to cut one in five jobs.

Microsoft dealt Nokia another blow when it said the current Lumia phones will not run its new software, rendering them obsolete. Analysts said sales of Lumia phones will be limited until Nokia launches newer versions in the fourth quarter.

"The question is: how bad will be the third quarter? How deep will it go," said Pohjola analyst Hannu Rauhala.

Nokia is expected to report a second-quarter operating loss of 236 million euros from its handset business, almost double the 127 million loss in the previous quarter, according to a Reuters poll of 38 analysts.

Analysts expect a rollout of new, basic phones to help lower the phone business' operating loss in the third quarter to 149 million euros.

They forecast the group's net loss to shrink to 557 million euros from 706 million in the second quarter.

Nokia shares fell below 1.50 euros this week for the first time since 1996, down over 60 percent from three months ago.

PAINFUL QUARTER

Ratings agencies are worried Nokia is tearing through its cash reserves at an unsustainable rate. With the cost of Nokia's debt rising, the most bearish of analysts say the company could even be at risk of default in 2014.

Over the past five quarters, the one-time darling of mobile telcoms has eroded its cash pile by 2.1 billion euros - a rate that could wipe out its entire 4.9 billion euros reserves in a couple of years.

Analysts on average expect the company will burn through 1.9 billion euros more in just three quarters, while the most bearish see the company wiping out its 4.9 billion euros net cash buffer completely next year, the poll showed.

On average, they expect Nokia's net cash position to drop to 3.7 billion euros at the end of second quarter and to 3.2 billion at the end of third quarter.

In addition to losses from operations, Nokia paid out more than 700 million euros as dividends during the second quarter and the results will likely include also massive restructuring charges from the 10,000 job cuts.

WINDOWS QUESTION

Nokia is widely expected to unveil models using the new version of Windows software in September, and these, coupled with typically stronger holiday sales should fuel an uptick in the fourth quarter.

However, there is no certainty another version of the Microsoft software would help.

Despite Nokia's strong focus on Microsoft, the platform had only a 2 percent market share in the first quarter of 2012 having failed to win a meaningful share for more than ten years. This compares with 23 percent share for Apple and 56 percent share for Google.

In the near-term, analysts said Microsoft's software upgrade could hurt Nokia's more expensive smartphones - and the firm might have to write down the value of its inventory - while the cheapest Lumia 610 model could fare better as it will not compete directly with high-end models running new software.

"Nokia's near-term fortunes now largely depend on the lower priced Lumia 610, rather than the Lumia 800 and 900 which will be a tough sell given the looming launch of Windows Phone 8," said Ben Wood, head of research at CCS Insight.

Analysts forecast Nokia's second-quarter sales of Windows phones to roughly double from the previous quarter to 3.8 million units, helped by the rollout on new markets and the Lumia 610. They expected sales to rise further to 5.1 million in the third quarter.

(Editing by Erica Billingham)

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