Moody’s this morning cut its rating on long-term senior unsecured debt from Nokia Corp. (NYSE: NOK) from Ba1 to Ba3. Short-term unsecured ratings of Not-Prime (NP) were affirmed and the ratings outlook remained “negative.” In a nutshell:
Today’s rating action reflects our view that Nokia’s transition in the smartphone business will cause deeper operating losses and consequently cash consumption in the coming quarters than we had previously assumed. … A return to profitability in the Devices & Services (D&S) segment on the back of smartphones with the Windows Phone 8 mobile operating systems is by no means assured.
The company’s adoption of the Windows Phone operating system from Microsoft Corp. (NASDAQ: MSFT) is a plus, but not a slam-dunk:
If the devices are launched and first units shipped in Q4 2012 and find immediate traction, it might still take until mid-2013, before volumes and margins reach a level of sustainable profitability. Given further rather modest profitability in the Mobile Phone business and at Nokia Siemens Networks, Moody’s now expect a return to profitability only in the second half 2013. Such a long period of operating losses, though backed by strong liquidity and the expectation of an eventual turnaround is more commensurate with a Ba3 rating.
Nokia starts in a big hole compared with market leaders Apple Inc. (NASDAQ: AAPL), Google Inc. (NASDAQ: GOOG) and Samsung Electronics, and the company essentially killed sales of its Lumia 900 phone when it announced that the phone would not be upgradeable to Windows Phone 8, the new version of the operating system due later this year.
For its part, Nokia made this response:
While we are disappointed with Moody’s decision, its impact on the company is limited. We are quickly taking action to position Nokia for future growth and success. Nokia will continue to focus on lowering the company’s cost structure rapidly, improving cash flow and maintaining a strong financial position.
Nokia notes its strong cash balance of €9.4 billion and €1.5 billion credit facility, but Moody’s did not overlook these either:
Yet, in Moody’s view a very strong cash position cannot offset operating challenges and losses in the core business for an extended period of time.
Nokia’s shares are down nearly 3% at $1.66 in premarket trading. The 52-week range is $1.63 to $7.38.
Paul Ausick
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