Nokia Restructures IT Operations

In an attempt to streamline its IT operations, Nokia Corporation (NOK - Analyst Report) is downsizing its employee strength in the IT sector. This move is part of the Finnish handset manufacturer’s broader restructuring strategy to cut operating costs and improve profitability.

Nokia is reducing its headcount from the IT department by 300 and outsourcing 820 IT jobs to its Indian strategic partners – HCL Technologies and Tata Consultancy Services. Most of the employees that are getting affected are based in Finland.

Nokia has lost its significant market share in a crowded smartphone market, now being dominated by Apple Inc.’s (AAPL - Analyst Report) iPhone and other smartphone manufacturers, which runs on Google Inc.’s (GOOG - Analyst Report) Android platform. The company lost its title as the world’s largest cell phone manufacturer to Samsung Electronics with its credit rating being downgraded to junk status.

To counter this difficult situation, Nokia initiated a restructuring effort in June last year. The Espoo, Finland-based company decided to retrench 10,000 employees, shutting down its production and research unit as well as divesting 90% stake in its premium handset division Vertu. Additionally, the company is also offloading some of its non core patents, from its impressive basket of 30,000 patents. The company expects to reduce $2 billon in cost by the end of 2013 through these restructuring efforts.

It seems now that its restructuring plan is yielding positive results for the company as it now expects a negative 2% operating margin (+/-4 percentage points) for its Device and Service business, far better than the previous estimate of a negative operating margin of 6% (+/-4 percentage points).

The company’s decision to join hands with Microsoft Corporation (MSFT - Analyst Report) has started to show positive signs as the latest Lumia 920 is attracting more customers and is expected to deliver a sequential gain of 52%. Nokia’s low-range smartphone – Asha has also performed better than expected, reporting a sequential growth of 43%.

Significantly, the company declared that the IT job cut is the last anticipated job reduction of its broader restructuring strategy. However, we expect Nokia to lay off some more of its resources until its Lumia series of smartphones is able to generate consistent increase in sales and establish a significant mindshare in the smartphone market.

The 2013 Zacks Consensus Estimate for Nokia Corporation is pegged at 3 cents with a growth rate estimate of 109.69%. Currently, it holds a short-term Zacks Rank #1 (Strong Buy).