Nokia Corporation (NOK), the phone maker from Finland, has announced that it would buy half of its joint venture network operations owned by Siemens for $2.2 billion. The transaction will be completed in the third quarter of 2013 at which time Nokia Siemens Networks will become a fully owned subsidiary. The agreement has been expected ever since an agreement binding the two companies expired in April, and Siemens has reportedly been talking to private equity firms about the sale of its stake. Nokia Siemens has been steadily improving in its business and now claims to have a 20% market share for the latest generation of wireless networks commonly known as Long-Term Evolution, or LTE. The venture showed a pro forma profit of 822 million euros last year, a growth of 145% from the previous year, and ended the year with a cash balance of around 1.3 billion euros. Nokia, which had about 10 billion euros in cash as of March 31, is expected to finance that the deal with the help of a bridge loan.
Nokia and the Budget Smartphone Market
Nokia has introduced Asha 501 in Pakistan and Thailand and the budget smartphone will cost $99 before taxes. Many subscribers in emerging markets, research has shown, cannot afford to pay more than $150 and according to a market research report, low-cost smartphone shipments are expected to double every year between 2010 and 2016. In the fourth quarter, Nokia's sales grew because the Asha phones were competitive against the low-cost Android smartphones, and it should be noted that Nokia still has 23% of the market in India. The company has launched several phones in this range to cater to social networking, games, and apps and inexpensive Internet access. The Nokia Asha 510 will shortly be launched in Europe, the Middle East, and Africa.
Nokia Lumia 925
The smartphone market is growing rapidly and it is estimated that sales this year will be 958 million compared to 722 million last year. Nokia has had to concentrate on cheap phones in order to survive the cutthroat competition and is now introducing a series of budget Lumia phones. These phones, priced at $150, should do well in emerging markets where customers are highly price sensitive. They have a number of innovations such as advanced technology for lenses, state-of-the-art imaging software, and a new Nokia Smart Camera. In the first quarter, Nokia reported that it had sold 5.6 million Lumias compared to 4.4 million in the preceding quarter and has sold a total of almost 20 million units since it first launched its Windows-based phones. This compares well with the figure of 6 million reported by BlackBerry (BBRY) for its first quarter. It is launching the Lumia 925 in Europe with Vodafone and is offering Vodafone customers exclusive access to a 32GB version. Windows Phone has just gone ahead of BlackBerry in global market share to become the No. 3 platform largely because of increasing Lumia volumes, which account for 80% of all Windows Phones sold.
Smartphone Operating Systems
Android from Google (GOOG) accounts for 75% of the market, up from 59%, and shipments of phones using this operating system increased sharply from 90 million in the first quarter of 2012 to 162 million in the first quarter of 2013. Apple's share dropped from 23% in the first quarter of 2012 to just over 17% in the first quarter of 2013. The drop was because of the disappointing iPhone 5 upgrade (which wasn't viewed as revolutionary) and the delay in the iPhone 6 upgrade. The iPhone 6 is due to come out later this year with the prospect of a cheaper iPhone for price-sensitive emerging markets. Nokia has been gathering market share in the U.S. and in the world, and is on course to acquire 5% of the global market by the end of 2013. Microsoft will also benefit from Nokia's gains in market share and it is not inconceivable that they would seriously consider an acquisition if they decide to make their own smartphones.
One year ago there was great concern of Nokia defaulting due to a steep drop in sales coupled with high cash burn. However, these fears have subsided, which is evidenced in the credit markets. The company's bonds have recovered and the spread on a five-year CDS contract has been approximately halved within the last year.
While first-quarter results exhibited a steeper drop in sales than expected, there were positives takeaways. Increasing Lumia sales and a larger-than-expected cash position provide indications that the company is stabilizing. The pace at which product launches has increased has also improved investors outlook, with the company saying it takes only 11 months to launch a product now compared with 22 months three years ago.
Looking further at the sentiment of Nokia, analysts have a mean EPS estimate of ($0.02) in the second quarter of 2013 compared with a loss of ($0.10) in the second quarter of 2012, and the company becoming profitable in the third quarter of 2013 with an EPS estimate of $0.01. For full-year 2013, the average analyst EPS estimate is $0.04 on revenue of $35 billion vs. a loss of ($0.22) in the previous year's period.
The Bottom Line
In my opinion, there can only be one turnaround story in the smartphone market and it is not likely to be BlackBerry based on the latest earnings announcement. It is a little early to tell, but Nokia may have well turned the corner. Watch the developments in the company closely with a view to buying the shares if the favorable trend persists.