Many investors today don't know if Nokia (NOK) is coming or going, whether it is nearing its swan song or if it is a phoenix, poised to rise from the ashes of its former self. If you are in the first camp, then you might have already said "Bye, bye, Nokia!" However, if you believe the once giant of the mobile phone industry is on its way up again, then you are probably yelling, "Buy, buy, Nokia!"
Those who feel Nokia is on its last legs probably feel this way because they are comparing the current, struggling, Nokia to that powerhouse of ten years ago the once-dominant, cash cow Nokia. In this sense, it is understandable that you would feel Nokia is in critical condition and not worth resuscitating.
Those, however, that see the Nokia of today as a new entity that has reduced, revamped and revitalized itself, aren't looking to the past as a guide to what the Finnish company can do in the future. They are looking to what it has done recently to position itself for potential success in the coming years.
In this article, I will compare these two perspectives, the "fallen" Nokia to the "new" Nokia; the once-mighty Nokia that has fallen on hard times versus Nokia as if it were a newcomer, not chained to its storied past. In this, I will examine six areas that are crucial to Nokia's success and that any investor should consider before purchasing Nokia stock: cash/debt; patents; its Nokia Siemens Networks division; its Devices and Services division; its Location and Commerce division; and the environment it is competing in. This examination will hopefully help people determine if they should be saying "Bye" or "Buy" to Nokia.
Nokia ended 2012 with gross cash of EUR 9.9B and net cash of EUR 4.4B. That means, free and clear of all debt, they have over four billion Euros in the bank. In starting this analysis and analogy of looking at Nokia as a brand-new company, we can consider this as how much cash the company raised to fund it going forward. In that viewpoint, I don't think any potential investor would be dissatisfied with such an amount of seed or venture capital as a starting point.
Now, those who look to Nokia's past will say that in 2012 the company lost EUR 1.2B in net cash, meaning it was hemorrhaging money and 4.4B Euros won't last long. While it is true that Nokia lost a lot of money last year, as I have detailed in previous articles, much of that was directly related to restructuring activities (EUR 1.5B in cash outflows) and an ill-advised dividend payment (EUR 750M). But what must be understood is that those restructuring activities are what is severing Nokia of the present/future from Nokia of the past, and this can be seen in the company's Q4 2012 results where it increased its net cash versus Q3 2012 by EUR 800M and had an operating profit of EUR 439M. With most of the restructuring activities out of the way, this means that Nokia has indeed almost entirely removed itself from its bloated past and transitioned into a leaner and profitable company going forward.
Whether you think Nokia is heading towards failure or is on the rise, no one disputes the strength of its patent portfolio. Between 2001 and 2011, Nokia spent over US$ 64B on research and development, far surpassing Google (GOOG) and Apple (AAPL) and estimates put the value of Nokia's patent portfolio in the US$ 4.0B to 7.5B range with annual royalties exceeding half a billion Euros.
Now, the investor who looks to Nokia's past will say that this was money largely wasted. While that could be true, as Nokia has not seen a lot for what it put into R&D, the investor who looks to the future doesn't care what Nokia spent in the past, only that the new Nokia is bringing in a lot of money from patents and is in good shape to increase those yearly royalties, as evidenced by a recent settlement with Research in Motion (BBRY). As well, having a strong patent portfolio allows Nokia to more easily navigate the murky waters of the current "smartphone patent wars" (something that can be seen in Apple's 2011 settlement with Nokia over a number of patents). Arguably, Nokia has one of the strongest patent portfolios in the mobile phone and telecommunication industry.
Nokia Siemens Networks
Nokia Siemens Networks (NSN), the network and telecommunication equipment joint venture formed from Nokia's Network business group and Siemens' (SI) Communications division in 2007, has incurred operating losses every year of its existence, totaling just over EUR 5.0B. This is particularly disconcerting since in the two years prior to the merger, Nokia's Network business group had operating profits of EUR 808M and EUR 855M respectively. As a result of these mounting losses, NSN announced in November 2011 that it would cut 23% of its 74,000 workers with the goal of saving approximately EUR 1.0B a year in costs.
While the investor looking to Nokia's past might be suffering chest pains as a result of Nokia's NSN money pit, the investor regarding the Nokia of the present/future only sees the results of the restructuring efforts started a year and a half ago-and those efforts have paid off. In Q3 2012, NSN had a EUR 182M operating profits, which was followed up with a EUR 251M profit in Q4 2012. Not only is the venture (which Nokia runs and is responsible for any profit/loss, while Siemens has only a non-controlling ownership stake) making money, but in April 2013 a six-year old shareholders agreement between the two companies ends, which means they are able to consider selling the unit, spinning it off with its own IPO, or at least reducing their stake in it. Any of these options would bolster Nokia's balance sheet and provide more value to its shareholders.
Devices and Services
Nokia spent more than a decade as the top seller of mobile phones, topping over 400 million units sold per year from 2007-2011. In 2012, however, Nokia was dethroned, dropping from 30% of all sales in 2011 to second place, behind Samsung (GM:SSNLF) with only 24% of sales. And, not only did Nokia lose overall sales, it lost more lucrative smartphone sales, with the decrease in Symbian sales not being made up for in Windows Phone sales. Nokia had 16% of all smartphone sales in 2011, but only 5% in 2012, falling further behind Samsung and Apple. These reductions meant that the Devices and Services business division lost EUR 1.1B in 2012, after posting a EUR 884M operating profit in 2011 and EUR 3.3B in profit in each of 2010 and 2009. I believe this business unit is where most people point to when they reference Nokia's fall from dominance and where perceptions of Nokia's current-state and future are most often formed. But are those perceptions entirely warranted?
While it is true that Nokia's total sales and market share have both plummeted, it is still the second highest selling mobile phone manufacturer in the world, selling 334 million devices in 2012 (behind Samsung's approximately 385 million and ahead of Apple's 130 million). And while Windows based-phones haven't replaced Symbian in total sales, Nokia did sell 4.4 million Lumia devices in Q4 2012, over four times the amount they sold one year earlier (1 million in Q4 2011) when they launched their new Windows Phone line. In addition, the average selling price of Nokia's smartphones rose from EUR 140 each in 2011 to EUR 155 each in 2012, meaning the average Windows Phone device is selling for more than the average Symbian device did. Nokia also saw its full-touch Asha (feature phone) line rise in sales from 6.5 million in Q3 2012 to 9.3 million in Q4 2012. Yes, they aren't the high profit margin item that true smartphones are, but it is another area that Nokia saw growth. To top it off, in Q4 2012, Nokia's Devices and Services unit made a EUR 276M operating profit, ending three quarters of losses. These losses are a combination of the increased Lumia sales (and selling price), but also largely due to the restructuring efforts Nokia undertook over the last year. This means that even with (relatively) low phone sales, Nokia was able to make a profit. The future looking investor will be glad to know that even in troubling times, Nokia can make money. There is also an ace up Nokia's sleeve: If Windows Phone fails (or fails to take them higher), Nokia can always switch to Android (or even just release Android versions of their phones as well). Many people have salivated at the idea of the Lumia 920 running Android. Pride won't get in Nokia's way if it is clear Windows Phone isn't going to push them to greater heights. Even CEO Stephen Elop's pride might get in the way, Nokia's board and/or shareholders won't let it.
Location and Commerce
Nokia purchased NAVTEQ (since merged into Nokia and rebranded as the Location and Commerce division) for US$ 8.1B in 2008 and since then, similar to NSN, the division has had racked up operating losses every year to the tune of almost EUR 3.0B. A large chunk of that loss, however, was from goodwill and restructuring charges, so while the purchase has so far not been a profitable one for Nokia, things might not be as bad as they seem. This can also be seen in the unit's rising net sales, which in 2008 were only EUR 361M but have climbed to EUR 1.1B in 2012.
Looking only at the past, one might cringe when they think of Nokia and NAVTEQ, but going forward, one sees a division that has a lot of potential, even if it won't rival NSN or Devices and Services in terms of sheer revenue. Location and Commerce is the group the runs HERE (formerly Nokia Maps) which over the last couple of years has signed numerous deals with companies around the world and is a dominant force in the industry. As more and more devices use geo-location and provide content related to the user's location, Nokia is positioned very well to continue building this division's revenues.
There is no doubt that we are now in the era of Apple and Android/Samsung. Together, Android (largely on the back of Samsung) and iOS accounted for 89.9% of all smartphone sales in Q3 2012. In its heydays, Nokia/Symbian was just as dominant, accounting for 63.5% of all smartphone sales in 2007. It is understandable for anyone, looking not only at Nokia's fall but at Apple's and Android/Samsung's rises, to think the future is bleak for the Finnish company.
However, looking forward one sees that the 2013 mobile phone market is expected to reach 1.9 billion units sold (that compares to 1.14 billion units sold in 2007 when Nokia was at the top of its game). So Nokia has an expanding market to sell to and has the fastest growing mobile operating system in 2012, Microsoft's (MSFT) Windows Phone, as its backbone (yes, Windows Phone didn't have much to build on, so growing quickly isn't difficult to do, but it is a sign of growth for Nokia after many quarters of declines). Nokia doesn't have the panache it once did, but it still has the ability to differentiate itself like almost none of its competitors can do (as evidenced by a plethora of awards in 2012).
NSN saw its position in the network and telecommunications industry eroded by China's Huawei and ZTE in past years, but recently has clawed its way back into the top three, behind industry-leader Ericsson (ERIC)-with its sights set on number two, Huawei. That might be a realistic goal considering the massive demand for 4G infrastructure that is occurring and expected in the coming years and the recent controversies surrounding Chinese telecom supplies.
Mobile device advertising is expected to grow at a phenomenal rate in the coming years, with geo-location advertising being a significant subset of that. Nokia's Location and Commerce division has been positioning itself to be ready to provide the maps and data that would form the backbone of many other companies' offerings in this industry. You won't always see Nokia's name on the end products, but those deals might just make Nokia's investment in NAVTEQ a prudent, and profitable, one.
In the last decade, Nokia's market share has fallen as badly as its market capitalization has fallen. It co-created an entity (NSN) that has drained billions of its cash and purchased an entity (NAVTEQ) that cost even more (and added to that cash drain). It switched from the once-top smartphone platform (Symbian) to an almost brand-new, and almost unused, platform (Windows Phone). It is entirely understandable that investors are both weary and wary of Nokia, and why so many of them said good-bye to the company. But the new investor does not care what Nokia did; they only care about what they can, and will, do. The billions spent on NAVTEQ, the billions spent on NSN, the billions lost in mobile phone sales have all already happened. Today, Nokia is profitable. Today, Nokia has positive net-cash. Today, Nokia is innovative. Today, Nokia has an incredible patent portfolio. The Nokia of yesterday is not the Nokia of today.
The reason I invested in Nokia is because I am in the camp the sees what Nokia is and what it can be. Yes, Nokia, still has an uphill battle ahead, but it has unshackled itself from its past and is ready for future success. If this was a brand-new company, I would have invested in it gladly. I believe that many have not invested in it, and many have derided it, because of how far it has fallen. If you are one of those, then you are only disparaging the past and blinding yourself to the present and the future of Nokia. It may never rise to the glory it once was, it may never challenge Apple or Samsung or Android, it may never be synonymous with "mobile phone" again, but that does not mean it can't be successful. Success is relative and that is the key here: Don't compare Nokia now with Nokia of the past, compare it to any new company you'd consider investing in. Ask yourself if you'd invest in an award-winning company that makes money, has billions in the bank, has an amazing patent portfolio, has the potential to spin-off parts of itself for more capital and is involved in multiple industries (mobile phones, telecommunications and networking, and geo-location) that are undergoing massive expansions right now. Who cares how that company got there? You should only care about where it is going.
Note: All Nokia financial data taken from Nokia's annual reports available here.