1) Evaluate Nokia’s strategy and historical operating performance.
Nokia, the global leader in mobile communications, competes in a fast moving and highly competitive mobile phone industry. Threatened by intense competition from iPhone, Android phones on the high end and rival products in the larger, lower-priced segment as well, Nokia’s strategic plan is to partner with Microsoft to build a new ecosystem with Windows Phone (WP) serving as Nokia’s primary smartphone platform while its own Symbian platform phasing out gradually and a combined approach to capture the next billion in emerging growth markets.
Operating performance has been weaker in the past five years (2007-2011). Sales decreased from 51 billion to 39 billion, gross profit margin from 34% from 29%, net profit margin from 19% to -3%, ROE from 42% to -8%, EPS from 1.83 to -0.31 per share. Its asset turnover was trending down, showing less efficient asset utilization. Compared to its peers, Nokia’s has the lowest net profit margin and second to lowest EPS.
2) Nokia estimates it may need EUR4.3 billion in external funds by 2013 under the downside scenario. What are the key drivers of these funding needs?
For D&S, key drivers of these funding needs are as below, though part of them would be offset by savings from restructuring efforts and Microsoft’s support for R&D and marketing functions:
• Continued significant loss of Symbian and overall Nokia market share
• Competitive price pressure
• Royalty payments to Microsoft
• Aggressive pricing of Nokia phones to capture market share
For NSN, key drivers are near-term restructuring charges and a phase-out of less-profitable operations.
3) For the debt and equity financing alternatives, calculate the pro forma EPS, EBIT interest coverage, and book value leverage ratios for the downside scenario.
See Exhibit 14. Based on the pro forma impact on the