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Nokia Corporation: Connecting the Next Billion to the Internet

September 20, 2013 | About:
REDMOND, Washington and ESPOO, Finland – Microsoft Corporation and Nokia Corporation today announced that the Boards of Directors for both companies have decided to enter into a transaction whereby Microsoft will purchase substantially all of Nokia’s Devices & Services business, license Nokia’s patents, and license and use Nokia’s mapping services. — Nokia Official Press Release Sept. 3, 2013

From its founding in 1871, Nokia (NOK) has twice undergone a major business segment divestiture that has resulted in a new and improved company: once in 1967 when it shed its industrial companies to focus exclusively on mobile phones, and now in 2013 when it sold its mobile phones unit (transaction complete first quarter 2014) to focus exclusively on mobile broadband networks and location-based services business.

Since 2008 it has become ever clearer to the layman that Nokia must take some drastic action to turn around falling profit margins and net losses. There has been plenty of chatter about the potential sale of Nokia on the blogs for the last several years. What I think 95% of laymen and professionals missed (including me) is the fact that Nokia has been planning the sale of handset and related business for a few years and fully intended to transform into a global mobile Internet powerhouse, supplying both the mobility networks and software solutions to the end user.

Nokia followed the wisdom of Sun Tzu when the board approved the selection of Stephen Elop as CEO and the exclusive acceptance of Windows operating system. Chapter 11 of "Art of War" says “On the ground of intersecting highways, join hands with your allies.” By joining hands with Microsoft the company secured not only the eventual sale of phones unit, flooding their coffers with cash, but guaranteed an alliance that will last far into the future. Is it the European company benefiting more from the alliance with Microsoft or the American from allying with Nokia? Time will tell as both companies now have a new stratagem to forge profits together from the emerging markets. A win-win arrangement.

With the announcement that Microsoft will buy Nokia’s mobile phone division and license their patents for a hefty 5.44 billion, the stock has come back to life, rising 72% in half a month’s time. This is likely dumb money as the company’s two remaining units have been less profitable than the phones segment for a number of years. This little price gain is a sugar lollipop treat to reward the company for making a drastic move in the right direction. Once the high wears off, there is much serious work to be done analyzing the company’s direction into the future, albeit with a vastly improved supply of ammunition.

The fact is Nokia’s remaining businesses have reported losses since 2007. Nokia Siemens Networks has been unprofitable since 2007 and Location & Commerce has lost money since 2008. The recent per share price gain is most likely Wall Street salivating at all that cash adding to the balance sheet. The real test will come once that cash has been officially booked and questions begin to swirl about what the company will do with it.

To use an analogy from nature: The snake (Nokia) has shed its skin (mobile phones unit) and now the company can enjoy the next phase of its growth. Nokia sold its phones and rented its patents to Microsoft. Now it has the cash to build its grand plan for the future.

What exactly is that plan?

Those who want to understand the future of Nokia must try to understand the future of the Internet in the developing markets. Because the company has as its stated goal “to connect the next billion to the Internet,” Smart appliances in smart homes hooked up to the smart grid in the West. Smart phones and devices hooked up to Nokia’s mobile networks in the developing South and East. Nokia networks and location-based services to the rescue.

Nokia has been planning for this exact strategy since at least 2010. A company the caliber of Nokia does not hire on a CEO from Microsoft without knowing in advance that the phones unit will be sold to the software giant from Redmond eventually. Three years later it is done. A company like Nokia, with its long track record, enormous brand recognition and world-class connections lays plans very carefully while having the luxury of access to and utilization of the best intelligence available. The fact they are invited to Bilderberg is also a confirmation of their connection to the highest levels of the status quo and a sign they will not go quietly into the night.

Beginning in 2011, Nokia went public with its new strategy and operating structures. Location & Commerce (now termed HERE) consolidated and Networks (then Nokia Siemens Networks now Nokia Network Solutions) forged ahead strongly with its sharp focus on developing global mobile broadband to power the intelligent Internet.

Location & Commerce. As a natural next step in Nokia’s services journey, Nokia announced in June 2011 its new Location & Commerce business, which was formed by combining NAVTEQ with Nokia’s social location services operations from Devices & Services. The Location & Commerce business develops a new class of integrated social location products and services for consumers, as well as platform and local commerce services for device manufacturers, application developers, Internet services providers, merchants and advertisers. — Nokia 2011 Annual Report, p.3

Nokia Siemens Networks. Some of the main events regarding Nokia Siemens Networks during 2011 include the completion of Nokia Siemens Networks’ acquisition of Motorola Solutions’ Networks assets, which strengthened Nokia Siemens Networks’ position in key regions, particularly North America and Japan, as well as with some of the world’s major service providers. Further, in November 2011, Nokia Siemens Networks announced its strategy to focus on mobile broadband and services and the launch of an extensive global restructuring program. — Nokia 2011 Annual Report, p.3

In hindsight it is possible to see the company was preparing these two segments to eventually generate 100% of company revenue (and not only from N. America and Japan). This strategy was reiterated in the 2012 annual report:

STRATEGY AND RESTRUCTURING PROGRAM

In November 2011, Nokia Siemens Networks announced its strategy to focus on mobile broadband and services and the launch of an extensive global restructuring program. Nokia Siemens Networks continues to target to reduce its annualized operating expenses and production overheads, excluding special items and purchase price accounting related items, by more than EUR 1 billion by the end of 2013, compared to the end of 2011. While these savings are expected to come largely from organizational streamlining, it has also targeted areas such as real estate, information technology, product and service procurement costs, overall general and administrative expenses, and a significant reduction of suppliers in order to further lower costs and improve quality. During 2012, Nokia Siemens Networks recognized restructuring charges and other associated items of EUR 1.3 billion related to this restructuring program, resulting in cumulative charges of approximately EUR 1.3 billion [...]
— Nokia 2012 Annual Report, p.10

The final piece of Nokia’s new corporate identity before the divestiture of phones was completed with the purchase of Siemens’ stake in the Networks business, formerly a joint venture. This purchase was announced just two months before the announcement of the deal with Microsoft.

Espoo, Finland – Nokia has completed the acquisition of Siemens’ stake in Nokia Siemens Networks. The transaction was originally announced on July 1, 2013. In accordance with this transaction, the Siemens name is being phased out from Nokia Siemens Networks’ company name and branding. The new name and brand is Nokia Solutions and Networks, also referred to as NSN, which will be used also for financial reporting purposes. — Nokia Official Press Release August 7, 2013

Qui Bono? Nokia Networks.

The lion's share of future Nokia revenues will come from the emerging markets. This is where the growth is. The very infrastructure has not yet been built in many of these countries. The following is from the 2012 annual report:

Nokia Siemens Networks had a total of 77 LTE deals by the 2012 year end, with other mobile broadband deals including with: Bharti Airtel in India; Telkomsel in Indonesia; KT in Korea; Singapore’s StarHub; Tele2 in Estonia, Latvia and Lithuania; Hrvatski Telekom in Croatia; T Mobile and Orange in Poland; Polkomtel in Poland; Si.mobil in Slovenia; COTA and Wimax Online in Spain; Zain KSA in Saudi Arabia; TOT in Thailand; Optus in Australia; Mobile TeleSystems in Russia; O2 in the UK; Vodacom in South Africa. — Nokia 2012 Annual Report, p.12

A look at the international branch office locations also supports my thesis that Nokia is intently focused on emerging markets.

nokia_office_locatinos1.gif

Conclusion:

Nokia is a world-class blue-chip company that has once again reinvented itself in order to capitalize upon a market opportunity. Its reinvention comes at a time of severe share price depreciation and after years of consecutive losses in two out of three business segments with losses in mobile phones coming finally in 2012. The company has in the last few years put together a plan that positions Nokia and Microsoft as very close business allies. The sale of the phones and licensing of patents gives Nokia a vast sum of cash with which to execute on its vision to “connect the next billion to the Internet.” I believe Nokia will execute reasonably well on this strategy and along with its long operating history, financial strength, payment of dividends, world-class connections, strong positioning in the emerging markets and strong brand recognition, the company will represent good value to investors who are able to buy shares at cheap prices.

About the author:

Cornelius Chan
Individual investor.

Visit Cornelius Chan's Website


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