On September 21, 2010, Nokia (NOK) introduced Stephen Elop as its President and Chief Executive Officer. On that date, Nokia closed out the trading session at $8.60. On July 18, 2013, Nokia shares changed hands at $4.03 - for a 53% loss with Elop at the helm for nearly three years. Yes, executive performance is a measure of long-term shareholder performance, which may be measured in terms of decades. However, Nokia beneath Elop, is meandering about without a clear and defined direction into the future. This corporation is rudderless and the buck stops at the top.
At this junction in time, Nokia is similar to a middling 9-7 Chicago Bears team that keeps fans just excited enough - to get blown out in the first round of the NFC Playoffs. Elop, rather than playing the middle of the road, will ultimately be forced to show his hand. Nokia must either take great risks to transform itself towards the spearhead of technological change, or shut down any attempts to effectively compete against the Google (GOOG) Android - Apple (AAPL) iOS duopoly and deliver itself to Microsoft (MSFT).
I am a Mac. I am a PC.
Apple's timeless Get a Mac advertising campaign, which aired between 2006 and 2009, still defines the consumer electronics and technology market. These series of advertisements personify the Apple Corporation as a chic, yet eager-to-please and helpful hipster. Alternatively, Microsoft is juxtaposed against Apple, as an office park relic in a tweed suit - who demands help simply to stay out of his own way. Apple is art, while Microsoft is staid functionality. Today, John Hodgman, the then stand in actor who spoofed the Windows brand, might as well have transformed into Stephen Elop, former Microsoft man. At supposedly gala smartphone launch events, Stephen Elop is known to show up wearing a sack suit and a buzz cut.
The Microsoft - Nokia alliance is scrambling to keep pace with the closed and integrated Apple iOS ecosystem for telecommunications, computing, and entertainment. Besides Apple, Google Android is an open network, for original equipment makers and a near infinite army of independent software developers. Elop, instead of creating software and systems in-house, has hitched his company's wagon to the deep pockets of copycat Microsoft. To return the favor, Microsoft ultimately struck deals with Samsung (GM:SSNLF) and Huawei Technologies to also manufacture Windows phones. Yes, Microsoft, yet again, has proven its willingness to close deals that throw its own partners beneath the bus and into competition with themselves. Stephen Elop has failed to see the writing on the wall and steer the Nokia ship accordingly.
For growth, Elop should either at least entertain deals with Android, or make a bold statement through innovative product, in a similar vein as Google Glass or Apple iWatch. If shrewd deal making is not Elop's forte, then the man should have promptly sold off real estate, terminated workers, aggressively slashed debt, and packaged this company up into a little bow - to be acquired by Microsoft at a premium. Stephen Elop has done neither and is effectively a lame duck CEO, unless a miracle breakthrough helps him to remake the smartphone market. No business can thrive off "hope."
The Smartphone Market
On April 27, 2012, research firm Strategy Analytics announced that Samsung shipped 93.5 million handset units, compared with 82.7 million handset units shipped from Nokia. This data is quite significant, as it marks the official changing of the guard. Last year, Samsung put an end to Nokia's fourteen-year run as the world's leading handset maker, in terms of units sold. Today, Nokia, alongside BlackBerry (BBRY), is merely fighting for survival beneath the dominant Google Android and Apple iOS duopoly. Over the past several years, all alleged Apple iPhone and Samsung Galaxy killers, including each edition of the Lumia, have ultimately been banished to the mark down bin. Speculators have been selling off stock after each quarterly earnings disappointment out of both Nokia and BlackBerry in this space. Dreams of a viable third wheel platform alongside Google Android and Apple iOS will fail to materialize. Stephen Elop manages as if he refuses to acknowledge the obvious writing on the wall.
On June 28, 2013, research firm comScore released its report for May 2013 smartphone subscriber market share. This report presents averages of sales figures spanning the three-month period between February 2013 and May 2013. The Microsoft Windows platform now powers a meager 3% of the smartphone market. BlackBerry and Microsoft actually lost a near combined 1% share at the hands of the Google Android - Apple iOS duopoly during this past quarter. Taken together, Android and iOS now control slightly more than 91% of the smartphone market. On the handset side of the ledger, Apple and Samsung are now one and two as original equipment makers with respective 39% and 23% market shares.
Stephen Elop, it seems, has made some gross miscalculations. Most notably, his decisions to shut down the in-house Symbian operating system while also refusing to integrate Android have all but destroyed his bargaining power versus Microsoft.
The Bottom Line
On June 19, 2013, The Wall Street Journal reported that "people familiar with the matter" claimed that Microsoft held "advanced talks" with Nokia about buying its handset business. Talks allegedly broke down over price at the eleventh hour at the negotiating table. Apparently, Microsoft is not willing to pay much of a premium above Nokia's now $15 billion in market capitalization. If Elop refuses to make bold moves, Microsoft can simply stand pat, do nothing, and scoop up parts of Nokia on the cheap at a later date - as a creditor. Yes, Nokia is on the road to bankruptcy, especially if Microsoft were to withdraw its implicit financial backing. Regulatory filings document that Microsoft pays $250 million per quarter to Nokia in "platform support payments." Nokia now owes net $650 million to Microsoft.
On July 18, 2013, Nokia released its interim report for its second quarterly and semi-annual period ended June 30, 2013. Despite the $250 million in payments from Microsoft, Nokia still posted $365 million in losses for the quarter. Nokia closed out its Q2 2013 with $35 billion in assets above $18 billion in liabilities on the balance sheet - for $17 billion, or $4.58 per share worth of intangible net worth. Nokia stock now trades for $4, which indicates that traders also expect this business to continue bleeding cash and net worth. Last year, in 2012, Nokia and Stephen Elop plowed a total of $11.7 billion of cash into research and development, sales and marketing, and administrative and general expenses, largely on behalf of the Windows - Lumia platform. Instead of effectively blowing cash on the roll out of non-competitive phones, portions of this money may have been better spent towards paying off the now $4.4 billion in long-term liabilities on the balance sheet to sweeten the deal - in anticipation of a Microsoft takeover. For Q2 2013, Nokia reported a 27% year-over-year decline in total mobile device unit sales volume.
Nokia now carries $6.3 billion in goodwill, $485 million in other intangible assets, and $1.8 billion in property, plant, and equipment on the $35 billion balance sheet. At worst, these $8.6 billion in assets will depreciate towards zero, if Nokia does not turn a profit over the next year. Elop must also calculate that cash cow Microsoft could always allocate capital towards building out its own smartphone infrastructure in house, before picking up whatever remains of Nokia are available atop the inevitable bankruptcy scrap heap. Right now, Stephen Elop's only saving grace may be the near equal levels of befuddlement coming out of Redmond, Washington.
On July 19, 2013, traders dumped Microsoft stock to $31.40 - for an 11% loss in reaction to disappointing quarterly results and a lackluster Windows platform. Stephen Elop still has time to clear his name, make a bold statement, and avoid disaster, if he were to strike first and effectively ditch Microsoft. Instead of waiting on Elop, Nokia shareholders should consider selling out now, and avoiding further losses.
Desperate times call for desperate measures.