Nokia (NYSE:NOK) has been an ever changing company that has evolved with time. The company has agreed to sell the mobile unit to Microsoft (NASDAQ:MSFT) - however, the deal has been delayed due to the regulatory issues from Chinese government as well as some tax issues with the Indian government. The issues coming from China are mainly related to the patents of the company - Chinese authorities are under pressure from other businesses to ensure that licensing fees do not go up after the sale. On the other hand, Nokia intends to fully monetize its patent portfolio. Both the parties are in discussion and the sale has been pushed into April. We believe Nokia's patent portfolio will contribute heavily towards its revenues as well as cash flows. In this article, we will mainly focus on the patents portfolio and some of the regulatory issues faced by the company.
The Patent Leverage
Nokia's smartphone business was a drag on the bottom-line and the sale will allow the company to come back to profitability. After the sale, the networking business, Nokia Solutions and Networks, will be the major contributor towards the revenues of the company. However, its huge patent portfolio presents great potential for the company's growth. When in the smartphone business, the company leased its patents to other manufacturers and the company paid other companies to use its patents. After the sale of the smartphones business, the company will have greater leverage when it comes to the licensing fees. Afraid of this monopolistic power, Google (NASDAQ:GOOG) and Samsung (OTC:SSNLF) have requested the Chinese government to make sure the licensing fees do not rise.
Currently Nokia charges 0.2% royalty fee for leasing its patents, which are used by most of the mobile manufacturers worldwide. This patent fee is considerably below Qualcomm's (NASDAQ:QCOM) patent fee of 3.3%. Currently, Nokia only licenses 40 patents, which accounts for a small percentage of its total portfolio. After the sale of the handsets business, we expect the company to increase its efforts to fully monetize the patents portfolio. At the moment, the revenues from the patents portfolio are considerably below the true potential of the segment.
The decision has been approved by the U.S. state and the European Union. Whatever the decision of the Chinese authorities, the patents business will become an important segment of the company over the next 2-3 years. Even if the company does not increase its licensing fees; it will continue to get about $600 million from the 40 patents it currently leases, and the lease of other patents will certainly add to the already established revenue stream from this segment.
Issue From India
Nokia is currently fighting the Indian government regarding some tax issues - the Tamil Nadu government slapped the company with a tax bill of $414 million - the company was already asked by the Supreme Court to deposit a guarantee of $571 million before transferring the factory to Microsoft. The state of Tamil Nadu is claiming that the handsets manufactured in the factory are not being exported but instead these handsets are being sold in the Indian market. As a result, these handsets are not exempt from tax. The company has filed a writ with the Madras high court and said the claims were absurd and against the domestic tax laws.
The situation represents some serious challenges for the company. Nokia will not want to shut down the plant in the country as it will have an impact on the deal, and Microsoft will also not want to lose an important market like India. Furthermore, there is also pressure from the employees - Nokia's plant employees 8,000 Indians and the union has also issued an ultimatum that they intend to fight the layoffs.
There is certainly substantial potential for Nokia to increase its revenue and cash flows from the patents portfolio. However, the company will need some time to fully monetize its patents. Furthermore, the ongoing discussions with the Chinese authorities indicate that the existing licensing agreements will likely remain unchanged and the company will have to supplement revenue from the other patents in the portfolio. Nonetheless, the sale of the handsets business will make Nokia a leaner organization, which will be able to create better value for the shareholders. The margins in the networking business remain low due to the intense competition - as a result, the patent portfolio will become even more important over the next few years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.