Nokia: Another Round Of Restructuring?

Sep.15.13 | About: Nokia Corporation (NOK)

In the last few years, Nokia (NYSE:NOK) saw restructuring after restructuring in its business. As people started to think that Nokia's restructuring was finally over, the company will enter into another round of restructuring, since it's selling its mobile phone business to Microsoft (NASDAQ:MSFT) and shifting its focus on its networks and mapping businesses.

Last week, Nokia's chairman Risto Siilasmaa talked about how Nokia will be reinventing itself and shifting its focus in the coming months. The new Nokia will have 56,000 employees with three lines of businesses: Nokia Solutions and Networks, HERE and Advanced Technologies. The first two lines of businesses already exist in the current company; however, Advanced Technologies will be formed in the next few months as the company keeps its patent portfolio even though its mobile phone division will be owned by Microsoft.

Regarding the Advanced Technologies business unit, Mr. Siilasmaa says:

Finally, we will form a new business, Advanced Technologies, building on most of the activities from the current CTO unit and the IP business team, while exploring new, strategically important topics. Our CTO organization has a strong track record in innovations that continue to shape the industry. In recent years, these have included the leading technologies for video and audio encoding, including H.264 and HD voice; low-power connectivity technologies such as Bluetooth LE (low energy) and imaging technologies which are now powering augmented reality apps such as HERE Live Sight. Nokia's investment in research and development also helped us build what we believe is the largest and strongest intellectual property portfolio in our industry, with around 10,000 carefully selected patent families. We've already established a successful patent and technology licensing operation, which we will expand to continue to drive revenue and profit for Nokia through the new Advanced Technologies business.

It looks like even though Nokia will not be building phones for a while, the company will continue to invest in technologies that are useful for improving the current smart phones. Added to the company's existing patent portfolio, these new inventions will allow Nokia to generate income by licensing its technologies. This will also facilitate a comeback for Nokia phones if the company decides to start making phones again (which I think will happen in the next couple years).

In its history of 150 years, Nokia jumped from one business model to another, from one product to another and continued to be a major player in Finnish economy. The company got engaged in many different industries such as timber and rubber. Changing its shift from building phones to building network infrastructure and technology should not be too tough for the company.

Nokia should probably keep an eye on the 32,000 employees that will transfer from the company to Microsoft. In the IT world, turnover is very common, and people tend to move from one company to another far more frequently than they do in most other industries. Eventually, some of those 32,000 employees will want to leave Microsoft, and Nokia should try to capture those employees before its competitors, such as Apple (NASDAQ:AAPL) and Samsung do. In the coming years, Nokia will need a lot of employees that have an understanding of the company's style of doing things in addition to expertise and experience in designing and building phones.

Nokia currently enjoys 30,000 utility patents and 8,500 design patents. These patents generate for the company close to $1 billion in net revenues. Until now, Nokia added patent revenues to its mobile phone revenues and used them in calculation of average sale prices. Now that the company will not be building phones anymore, it will probably announce its patent earnings separately. In addition to the recurring royalty payments, the company will be getting about $2 billion from Microsoft in order for the latter to have access to Nokia's patents for the next 10 years. This comes down to $200 million per year.

While Nokia's mapping business hasn't been and won't be profitable for a while, the company's network infrastructure and patent businesses will continue to have strong enough margins to support the company's mapping business. Nokia hasn't announced its business model for HERE (the mapping business), so we don't really know how exactly the business unit could reach profitability. As the Windows Phone continues to gain market share and Nokia-powered GPS systems become more common, Nokia should be more likely to profit from its mapping business. Currently, Nokia has partnerships with most major car companies, including but not limited to Ford (NYSE:F) and Toyota (NYSE:TM) for the navigation systems in the higher-end cars, but Nokia doesn't disclose how this affects the company's sales or profitability. In fact, Nokia discloses very little information about the finances of its mapping business. This is something I hope will improve in the future.

Meanwhile, there are some stories floating around saying that Nokia played around with the idea of creating a Lumia with the Android (NASDAQ:GOOG) operating system. The stories also say that Microsoft has always been well-aware of this and, some people think that this might have urged Microsoft to act quickly and purchase Nokia's phone business before it was too late. After all, Nokia phones account for 85% of all Windows Phone devices sold, and without Nokia, the Windows Phone project would have been pretty much dead.

I sold my Nokia shares after a spike last week for a nice profit, and I plan on initiating a new position in the near future once the dust settles and Nokia's new business plan becomes clear. After the acquisition transaction completes, Nokia will have about $10 billion of net cash and about $1-2 billion in annual earnings. The company still has plenty of upside, and there might be additional rewards, such as buybacks or dividends for the investors in the company. I enjoyed covering Nokia for the last year and half, and I kept telling my readers that the patient investors would be nicely rewarded. It looks like many of us got rewarded, but the story is still far from over.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.