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Global Credit Research - 26 Oct 2010
Approximately EUR5.9 billion senior debt affected
Frankfurt am Main, October 26, 2010 -- Moody's Investors Service today affirmed the A2 and Prime-1
ratings for senior debt of Nokia and changed the outlook for these ratings
to negative from stable.
The outlook change reflects Moody's concern that the commercial
launch of devices under the Symbian^3 platform and restructuring measures
to be developed and implemented under new management may turn out to be
insufficient to reverse Nokia's loss of market share in mobile phones
and converged devices and thus to return group operating margins to above
10%, one of Moody's rating criteria. Should
management prove unable to stem the erosion of its operating profit margin
(5.9% reported; 8.9% as adjusted by Nokia
for the LTM period to September 2010), the group's financial
metrics -- although strong today -- could be eroding over time.
At the same time, the A2 rating continues to reflect Nokia's
strong overall market share in mobile devices with a broad global offering
and entrenched position in certain dynamic emerging markets, as
well as management initiatives to strengthen the operating systems supporting
the smartphone segment by the continual upgrading of the leading Symbian
platform and the planned introduction of MeeGo in 2011. Moody's
also notes Nokia's solid financial strength with no net debt which
provides some time for the company to carry out its strategy.
Nokia's financial results in the third quarter 2010, usually
a challenging season, were relatively resilient with just a modest
sequential decline in non-IFRS operating margin, but the
company lost market share across its product range and sales declined
2% year-on-year on a constant currency basis.
Through the recent fiscal quarters, Nokia has continued to deliver
strong cash flows supported substantially by releases of working capital
and retained the cash generated, except for the dividend,
to add to the liquidity cushion, so that Moody's other quantitative
criteria for the A2 rating, a free cash flow above 1.0
billion and a positive balance of cash liquidity net of gross debt,
are currently met and likely to be maintained over the next couple of
quarters at least.
However, Nokia's ratings are gradually coming under pressure,
primarily because of its operating challenges to maintain its market dominance
and technological and operational leadership in the face of focused competition
and price pressure. Nokia expects its mobile device volume market
share to be down slightly in 2010 and experienced sub-industry
growth at the lower end in Q3, 2010 driven by component shortages,
so that total market share, as estimated by Nokia, declined
to 30%. Some of this development was due to a decline of
Nokia's inventory in the distribution channels and component shortages.
A successful turnaround particularly in the higher end segment depends
critically on market acceptance of its updated operating platforms Symbian^3,
for which devices like the N8 have just started shipping, and in
2011 the MeeGo platform developed jointly with Intel. Moody's
rating outlook will particularly monitor the traction that the new devices
may get in the market supported presumably by its attraction to application
developers and innovative designs. In addition, the rating
agency will focus on management's measures to improve time-to-market,
to update its operating platform strategy and to reduce cost in all functions
or improve productivity of R&D..
We would consider a rating downgrade if, over the coming quarters,
visibility of a recovery of the market position in high-end smartphones
and a turnaround of profitability to group operating margins above 10%
by 2011 dims, or free cash flow reduces below EUR1 billion per annum,
and not only temporarily, or additional capital spending or shareholder
distributions leading to a substantial net debt position.
At this stage, a rating upgrade is unlikely. A stabilization
of the rating outlook would require Nokia to regain sustained market share
above 33% across the product range and operating margins (at 7.8%
LTM including Moody's adjustments) advancing towards 10%
without a weakening of cash flows or the capital structure.
The principal methodology used in rating Nokia was Moody's rating methodology
for the Global Communication Equipment Industry, published in June
2008 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
The last rating action on Nokia was implemented on 16 October 2009 when
the long term rating was lowered to A2 with a stable outlook.
Nokia Oyj, headquartered in Espoo, Finland, is the world's
largest manufacturer of mobile communication devices with a share in the
thirties of the global market and also is a leading supplier of telecommunication
network systems. Net sales for the first nine months 2010 amounted
to about EUR29.8 billion.
Frankfurt am Main
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
Moody's changes outlook for Nokia's A2 rating to negative
An der Welle 5
Frankfurt am Main 60322
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