Lower Fair Value, Higher Uncertainty for Nokia

We are cutting our fair value estimate for  Nokia (NOK) to $13 from $15 after the company announced early Tuesday that second quarter revenues and margins would come in well below management's guidance, and that the company was no longer providing any guidance for the full year. This reverses the increase to $15 from $13 that we made after the company announced first quarter results.

Our expectation is now for revenues to contract by 3% in 2011, rather than increase by 3% as per our prior model. We also think that gross margins are likely to contract a bit more than we expected on the shift toward lower-model phones and on the margin deterioration across the entire product portfolio. Based on management's comments about sales channel issues in China, we are modeling for higher inventories for the year. This adds up to operating margins of about 1% and negative free cash flows for the full year.

We are also boosting our uncertainty rating to very high from high. We've had a negative view of the Symbian line for a couple of years, but based on management's comments this morning it is clear that the Symbian line is falling more quickly than we had expected. This makes the end-of-year launch of Nokia's Windows Phone line even more critical than it appeared when the transition was announced during the first quarter. However, since very little is known about the handsets themselves or the exact timing of the launch, it is difficult to say exactly how successful those phones will be.

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