Nokia (NOK) is a truly ever changing entity, changing its line of business on consistent basis. It looks like the company is going to stay true to the tradition and change the core focus of the business once more. The debate is going on where the company should spend the cash that it will receive from Microsoft (MSFT) for the sale of its mobile business. The majority seems to think that the company will pour that cash into the networking business, which I too believe will be a correct decision. However, the question is that how should Nokia invest in the networking business. Here I take a look at the possible options for Nokia.
Expand into the 4G Market
The most obvious option for Nokia is to expand into the 4G technology. The reasons for the choice are simple: it is the most attractive and high-margin segment of the market at the moment. Nokia Solutions and Networks, previously known as Nokia Siemens, is already making extremely impressive progress in the 4G market. The company is working with some of the biggest telecom services providers of Asia, Europe and South America. Nokia launched Vodafone's (VOD) 4G services in New Zealand and also became the supplier to the first LTE network in Chile. Furthermore, the company has helped Saudi Telecom to establish a 4G-LTE network in the western regions of the country. India's Videocon Mobile has announced that the telecom services provider will launch its 4G network with NSN in 10-12 months - the contract is not signed yet, but it shows that the company is growing rapidly in the 4G segment of the market.
NSN's networking equipment manufacturing business is facing severe competition from Huawei Technologies and ZTE Corp. So, a foray into the high-margin, less competitive market of 4G is a logical decision. Organic growth in this segment can be complemented by acquisition - Alcatel-Lucent (ALU) and Nokia can help each other by doing a single deal. Alcatel-Lucent is trying to decrease costs and sell selected assets in order to focus on IP and ultra-high speed broadband (please read this article for details). The company has developed vectoring techniques to get faster speeds from old copper networks. ALU's wireless business can give NSN a strong foothold in the U.S. market, which is one of the fastest growing 4G-LTE markets in the world at the moment. On the other hand, it will allow ALU to decrease expenses and bring in much needed cash - the company is currently trying to reduce debt and the cash can also be used toward the reduction of long-term debt.
Will the Metrics Improve?
Nokia Solutions and Networks will now contribute about 90% of the total sales of the company. The growing revenue should allow the company to have better metrics. At the moment, Nokia's enterprise value is 0.48 times the revenue of the remaining businesses compared to 1.03 times for Ericsson (ERIC). Furthermore, NSN has the best sales per employee figures in the sector - NSN has sales per employee of $313,500 compared to $305,000 for Ericsson and $257,000 for Alcatel-Lucent. NSN has cut more than 20,000 jobs in order to get a leaner and more efficient workforce. Increasing revenues from the 4G-LTE services and efficient workforce is bound to deliver better operational metrics for the company.
New Nokia will not be a rapidly growing company, but it will have a reasonable stability for its business. It should be kept in mind that although the 4G-LTE segment is growing rapidly and margins are very high, it is still a segment of the networking industry. Most of the other segments of the industry are either approaching maturity or are already on the decline. In addition, network equipment manufacturing business is extremely competitive and Chinese manufacturers are posing a massive threat to their European counterparts. Moreover, Ericsson is still the largest player in the European market based on market share. Nonetheless, new Nokia is an extremely attractive investment option and I expect the company to show solid growth over the next 3-5 years.