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What the Future Hold for Nokia After Selling Its Devices Division to Microsoft

November 18, 2013 | About:
James Well

James Well

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Nokia (NOK) was once a behemoth manufacturer of cell phones and high-end telecoms devices. Between 1998 and 2012, Nokia was regarded as the largest vendor of mobile phones. That was when Nokia brand was loved by many customers and value investors scrambled to own its shares. However, when Nokia started to lose its market share to Apple (AAPL)'s and Samsung’s superior mobile devices, its devices division became an albatross that weighed down on its financials from quarter to quarter.

When the share price of Nokia took a plunge such that a unit was valued for paltry sums less than $2 in mid-2012, many analysts reasoned that Nokia will recover as soon as possible if Microsoft (MSFT) offers a life line to the tech company in whatever form including an outright purchase of its loss-making hardware unit based on the relationship that had existed between the two companies since 2011. Microsoft has eventually placed a cash bid of $7.2 billion for Nokia’s devices division, and it is hoped that the transaction will be completed before the first quarter of 2014. So, after Nokia’s smartphone and feature phone divisions must have been transferred to Microsoft upon the completion of the ongoing purchase bid, would Nokia be able to excite the interest of the investing public with the financial performances of its remaining divisions? Would Nokia once again become the darling of the investing public?

A Look at the Segments Microsoft Did and Didn’t Acquire from Nokia

Microsoft’s $7.2 billion bid for Nokia was for Nokia’s smartphone and feature phone business unit. The whole hog that Microsoft is acquiring from Nokia includes its entire devices unit that comprises design, manufacturing, distribution, sales, operations, marketing and services units together with about 32,000 employees and Nokia’s talents involved with the devices and services units. Microsoft also bought the rights to use Nokia’s brand on feature phones and license about 8,500 of Nokia’s patent portfolio for 10 years in each case. In addition, Nokia will surrender to Microsoft its patent licensing contracts with IBM, Apple, LG, Nortel, Kodak, Google’s Motorola Mobility, Motorola Solutions and its big patent agreement with Qualcomm, the notable chipmaker.

Other segments like HERE Maps, Nokia’s robust patent portfolio or intellectual property (IP) outside the specific ones listed above, and its recently wholly owned subsidiary, Nokia Solutions Networks (NSN) – formerly known as Nokia Siemens Networks – will remain with Nokia. These segments will form the new Nokia as a separate company with rights to its brand and management outside of Microsoft.

A Glimpse into Nokia’s Financials and Profitability Without Its Devices Unit

As at the moment, Nokia Solution Networks (NSN), a global provider of mobile broadband solutions, and HERE Maps will be the main drivers of Nokia’s financials after parting with its devices and services divisions to Microsoft. According to Nokia’s third quarter 2013 results released before the bell on Oct. 29, the financials of NSN and HERE for the quarter were negatively affected by seasonality, currency headwinds and restructuring. The third quarter result reported by NSN was impacted by a reduction in global wireless deployment activity during the quarter while the third quarter result released by HERE was affected by lower sales to vehicle customers due to a challenging operating season. However, the quarterly reports from the two units show that Nokia could be profitable and offer value to its shareholders without its phone business.

NSN reported net sales of EUR 2.6 billion for the third quarter of 2013 fiscal year. Its operating margin for the quarter before considering specific items came in at 8.4% and it exceeded analysts’ consensus estimates by 1.4%. The gross margin of NSN during the quarter, which is a measure of how efficient the subsidiary was managed during the quarter, came in at 36.6% before specific items and that was the second highest in the history of NSN.

HERE achieved net sales of EUR 0. 2 billion during the quarter and it reported a highly efficient operating margin of 9.5%. NSN contributed EUR 2.7 billion to Nokia Group’s gross revenues during the quarter and EUR 1.5 billion in net cash showing that it could be the cash cow for the new Nokia after discontinuing with its Devices and Services business.

While presenting NSN’s third quarter 2013 results, Rajeev Suri, the CEO of NSN, expressed satisfaction with NSN’s performance during the quarter with a promise to improve on it in the coming quarters in the following words:

‘’I’m delighted with NSN’s continued strong performance in profitability and cash generation. In 2014, we will focus on strengthening our topline performance, with a particular focus on growth in LTE and Global Services.’’

In fact, the strong performances of NSN and HERE were the main drivers behind the improved third quarter 2013 financials reported by Nokia Group recently and the following words quoted from the Additional Information subheading of Nokia’s Q3 2013 results confirms this position:

‘’If Nokia Group would have reported substantially all of its Devices & Services business as discontinued operations in the third quarter 2013 the net sales of its continuing operations would have been EUR 2.9 billion, which is EUR 2.8 billion lower than Nokia Group net sales of EUR 5.7 billion. However, Nokia Group’s non-IFRS operating margin of its continuing operations would have been 11.5%, which is 7.7 percentage points higher than the third quarter 2013 non-IFRS operating margin of 3.8%.’’

Conclusion

Nokia’s future outlook without its Devices and Services business appears promising with the facts stated above. In fact, I’m optimistic that Nokia will once again become the darling of the investing public. NSN and HERE will dictate the pace for the new Nokia. NSN is already gaining traction in the U.S. NSN recently secured a contract for Sprint (S)'s large-scale TDD Long Term Evolution (LTE) roll-out in addition to the deals previously secured from T-Mobile (TMUS) and U.S. Cellular (USM). In addition, NSN’s 5G innovation could be a game changer for the new Nokia in the foreseeable future. Nokia announced skipping paying a dividend for the first time in about 143 years when it reported a seventh straight drop in quarterly revenues on Jan. 14, 2013, but the company will start to make dividend payouts to its shareholders in the coming quarters once it is done away with its handset unit and returns to profitability. Nokia is a BUY!

About the author:

James Well
James Banjo has a real fascination with stocks and investment in the capital market. He’s got huge experience in finance having been a successful stock trader, stock analyst and financial writer of over 10 years. He is well sought after as a writer by several individuals and websites. He has written hundreds of stock, tech and financial articles. He holds a bachelor’s degree in mathematics.

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