- Nokia's shares are down 5% YTD, however the company's recent initiatives should drive long-term growth.
- Nokia is also well positioned to benefit from the 4G LTE segment.
- The recent acquisition of Desti will boost Nokia's HERE maps business.
After selling off its devices business to Microsoft (NASDAQ:MSFT), Nokia (NYSE:NOK) is now a more focused company. Nokia is now on track to benefit from opportunities such as the growing usage of LTE and licensing. However, the stock's performance has been patchy so far this year, as Nokia has lost almost 5% of its value so far in 2014. But, is this an opportunity for investors to buy more shares? Let's find out.
Nokia's three important segments are Nokia Solutions and Networks, HERE, and the advanced technology segment. NSN reported total revenue of $3.22 billion in the previous quarter, down 17% year-over-year. However, operating profit increased 10% year-over-year. HERE's total revenue came in at around $290 million, down 3% year-over-year, while the adjusted operating profit was $138 million against a negative $7 million in the prior-year quarter. The AT segment posted revenue of $181 million, up 7% year-over-year with adjusted operating profit of $119 million, up 18% year-over-year.
Improvement in the cards
While NSN's revenue was down in the previous quarter, it could improve going forward. Recently, NSN signed a deal with Algerie Telecom, in which it will deploy the first commercial LTE network in North Africa. It has also recently signed another five-year deal with Telenor, under which NSN will provide equipment and services for radio access network so as to grow their 2G, 3G and 4G networks in Asia and Europe.
While the company signed a contract with Russia's third-largest telecom services provider to provide equipment and services to expand their 4G presence in southern and central Russia, it also renewed its contract with Chunghwa Telecom for the expansion of the HSPA+ network in Taiwan. With a 20% market share in the telecom equipment and services industry, it is believed that as Nokia hands over its smartphone segment to Microsoft for about $7.5 billion, it will have an increased probability of getting a bigger share in this industry.
With the robust growth in smartphone sales globally, Nokia will encounter a significant transition from 3G to 4G over the next five years, which indicates the growing demand of telecom equipment. It holds a solid position in the 4G-LTE segment, and this should allow it to get better going forward.
Licensing growth and more
The company's IPR licensing business is another segment where it already has proved its mettle, and has a successful business strategy that it will continue to build on. This includes the collaboration agreement with HTC, which is making payments to Nokia and helping to strengthen its licensing offering via its LTE patent portfolio.
Nokia gets most of its revenue from the wireless-network equipment. However, it plans to make its maps unit a stronger competitor against rivals. For example, Nokia bought analytics firm Medio Systems to bolster it's HERE mapping unit. This technology allows users of Nokia's maps to access customized data that match their interests and habits. This purchase will help Nokia to provide personalized maps and services using predictive data. Nokia provides map data to Amazon.com (NASDAQ:AMZN), Microsoft , Yahoo (NASDAQ:YHOO) and four car-navigation systems.
Last month, Nokia acquired Desti, which uses language-processing technology to provide personal recommendations for travelers, to boost its HERE mapping business. Desti is a by-product from research institute SRI International, which was used in Apple's very successful Siri voice-recognition software.
As a part of the acquisition, Desti will be temporarily shut down for about 90 days. The app has already been pulled down from Apple's App Store and Nokia is planning to slot in Desti's technology into its HERE platform. According to Don Zereski, VP of search and discovery at HERE, this acquisition will boost Nokia by taking it into areas way beyond mapping. He said,
"Desti technology goes way beyond maps. Desti has done a terrific job mining the web to collect data about places. It allows users to discover them using the way we speak about them. It lets users discover information in a more intuitive way. It will allow consumers to book hotels and restaurants from our products."
The integration of Desti will have several benefits as pointed out by analyst Neil Shah. He stated the following points about the acquisition,
· It beefs up HERE platform as a much smarter contextual search engine.
· Integrating Desti engine also helps integrating AI capabilities into HERE LiveSight for richer search experiences.
· Desti also brings a powerful Natural Language engine which when integration would be a significant boost for HERE platform's in-vehicle search & navigation experiences.
· Desti will add a more personalized recommendations to the searches to provide more accurate and highly relevant location-based results.
· When integrated well it will allow HERE platform to build a whole new class of intelligent location-based services not just limited to travel but different verticals.
· This will eventually build a huge database (Big Data) for HERE platform to learn further about user-location-context which can be in future transformed into Big Information & actionable insights to build newer products, services and features to further enhance user experiences.
Nokia is now a leaner and more focused company. It made the right move by selling off its devices business to Microsoft, and it can now use that money to bolster its other segments. Maps and telecom equipment might turn out to be the next big growth drivers for Nokia. Moreover, the stock trades at a forward P/E of just 20, which makes the stock a cheap buy at current levels.