By Kate Boehme
The Nokia Corporation (NYSE:NOK), a multinational Finnish communications giant specializing in the production of mobile telephones and other IT devices, actually comes from far more humble origins almost 150 years ago. Nokia's climb to international success began in 1865 in the small Finnish town of Tampere, when the mining engineer Fredrik Idestam established a groundwood pulp mill on the banks of the Tammerkoski Rapids and started manufacturing paper. A few years later he and his partner Leo Mechelin transformed the company into a shareholding entity called the Nokia Company. The company has gone through several stages in its one-and-a-half-century history. In this article, I look at the company's past and present, and suggest directions for the future.
Nokia as it now exists truly began in 1967 with the acquisition of the Finnish Cable Works, a telegraph and telephone cable company. At this time, Nokia was involved in a diverse range of manufacturing activities, including rubber products such as footwear and tires. With the acquisition of Finnish Cable Works, Nokia began integrating into its range of products a variety of communications devices, including televisions, communication cables, and personal computers. Most notably, this period witnessed the advent of Nokia's mobile communication devices manufacturing.
Its first foray into the development of mobile communications technology came in the form of radio telephones for army personnel and emergency response units. In 1964, in cooperation with SaloraOy, Nokia created the first VHF radio. This first effort represented the beginning of a long-lasting partnership between the two companies that culminated in a merger in 1984, creating Nokia-MobiraOy.
From this very early stage, Nokia was a pioneer in the mobile telephone industry. Its first car phone, the Mobira Senator, was introduced in 1982, followed by the MobiraTalkman, the company's first portable car phone, in 1984. Then, in 1987, Nokia introduced its first handheld mobile phone, the MobiraCityman, at the time weighing an astoundingly light 1.7 pounds. These early projects led Nokia to decide in 1992 to focus its energies exclusively on the production of mobile phones and telecommunication infrastructures so, by the end of the decade, it would be considered the world leader in the mobile phone industry.
In the last couple years, however, Nokia has been facing increasing pressure from its chief competitors: namely Apple (NASDAQ:AAPL), producer of the iPhone, and Samsung (OTC:SSNLF), as well as other manufacturers of Android smartphones. In October 2009, Nokia posted its first losses in more than a decade, and in response, Nokia made former Microsoft (NASDAQ:MSFT) executive Stephen Elop its new Chief Executive in 2010. Elop has since developed a strategic partnership between Nokia and Microsoft, leading to the release of Nokia's first phone based on the Window's operating system, the Lumia. Yet despite such efforts, Samsung has still managed to overtake Nokia as the world's largest mobile phone manufacturer, and in 2012, Nokia announced 4,000 job cuts with 10,000 more to follow in 2013.
The past few years have represented a constant struggle for Nokia to regain its footing in the mobile phone industry, and to compete with Apple and manufacturers of Android phones. In an effort to win back a portion of the market, Nokia abandoned its own Symbian platform in favor of a Windows operating system. It has also been implementing widespread cuts and outsourcing certain jobs to providers in India.
Perhaps as a result of such measures, during Q4 of 2012, the Nokia Group reported underlying operating profitability, with a non-IFRS operating margin of 7.9 percent. The company also further strengthened its position with improving net cash reports of EUR 800 million (approximately $1.07 billion), with more than 80 percent of that number generated by Nokia Siemens Networks. The Nokia Siemens Networks non-IFRS operating margin also improved both quarter-on-quarter and year-on-year, rising to 14 percent during the fourth quarter of 2012; this level represented the highest underlying operating profitability since the formation of Nokia Siemens in April 2007. However, much of this result can be directly attributed to a general increase in the gross margin.
Nokia has similarly reported overall positive results for the entirety of 2012, pointing to gross cash levels of EUR 9.9 billion ($13.238 billion) and net cash amounts of EUR 4.4 billion ($5.895 billion) as evidence. All this followed cash outflows (mainly related to restructuring) in the amount of approximately EUR 1.5 billion ($2.005 billion) and an earlier dividend payment of EUR 750 million ($1.004 billion). However, in order to maintain its current liquidity levels, Nokia has announced plans to forgo a dividend payment for 2012.
Despite somewhat mixed reviews for the Lumia, Nokia's first Windows phone, better-than-expected sales have had a positive impact on the company. BBC News reported that Nokia shares have risen dramatically following the sale of 86.3 million devices during the fourth quarter of 2012, totaling EUR 3.9 billion ($5.2 billion). In January 2013, Nokia shares closed up 11 percent in Helsinki and up 18.7 percent in New York.
As of February 14, 2013, Nokia shares stood at ~$4.00. The stock has a wide 52-week trading range between $1.63 and $5.43. As expected, its beta of 1.57 is higher than the average stock in the market. While the annual return is negative, the stock returned almost 50% in the last quarter.
Such results certainly represent an expectation of improvement for the struggling Nokia. Yet the company is still significantly behind its chief competitors. Analysts have noted that such results indicate that though the success of the Lumia has certainly given Nokia a much needed boost, it is still far too early to claim any kind of rebound. Nokia has a market cap of about $15 billion. Apple has a market cap of more than $400 billion, whereas Samsung's market cap hovers around $200 billion.
Despite intense competition and an increasingly clogged mobile technologies market, Nokia remains hopeful for the future, reporting expectations for growth in 2013. However, much of this growth is still predicated on the success of its new Lumia smartphones, as well as continued consumer demand for its Asha phones.
Encouragingly - especially given the somewhat lackluster reviews received for Lumia's Window's platform - Nokia also remains open to new lines of innovation, not ruling out any possibilities that could help improve its value. In particular, Nokia management has noted in interviews the possibility of entering the tablet technology market, as well as its unwillingness to rule out alternate mobile phone platforms, such as the extremely popular Android system.
Yet perhaps the most shocking prediction has come from Forbes, which has suggested that Nokia will actually sell off its mobile phone business to Huawei in order to focus exclusively on its software and services sectors. This would likely be accompanied by the sale of the company's Windows-powered smartphone group to Microsoft.
Regardless, it seems as though the only thing that is certain is that 2013 will be a decisive year for Nokia. While analysts are all in agreement that it would take some considerable shift for Nokia to make a full recovery, most also agree that such a dramatic change is entirely possible. Nokia's determination and willingness to make changes and innovate has long been the source of its success, and could very well pave the way for a future rebound.