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Sunil Shah
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A fund manager who cut his cloth in Schroders London. He joined Coronation South Africa in 1998, running the Smaller Companies Fund which had the best 5-yr record in the sector during his tenure. In 2005 he left Coronation to pursue his passion in writing (and invest without constraints). He... More
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  • Nokia: An (Incomplete) List Of Recent Blunders

    Over the past year Nokia (NYSE:NOK) has made significant progress. There are however, some major missteps that just boggle the mind. I list five, two operational, and three with regard to their investor communication.

    Let me start by saying I'm long Nokia and have mounting conviction in their earnings recovery. (See article can-nokia-earn-1-euro-1-30-us-per-share-in-2014-absolutely ). But despite their progress, there appear to be some fundamental flaws in their strategy, flaws which they simply cannot afford in their current perilous state.

    Operational Blunders

    A shelf-life of Lumia 920 of 3 months?

    As readers on Seekingalpha are well aware, the company has recently revamped its entire smartphone range to operate on the new Windows Phone 8 operating system by Microsoft ($MSFT). There's an impressive range, from a budget Lumia 520 for the cost-conscious to their new flagship Lumia 925, which vies for the high-end segment.

    I was horrified to learn that one model, the Lumia 920 - which was introduced not longer than a quarter ago- is already being discounted. In India - a major new opportunity for Nokia in smartphones - the price of the Lumia 920 has just been slashed by 15%, having hit retailer shelves as recently as January. If one considers the time and money, the design hours, the research cost, the capital in tooling and configuring assembly lines, this is plain idiotic. I realize the move is intended to create space for the newer version (Lumia 925), but a company that configures its product roadmap in a such a shortsighted fashion deserves to be grilled. I look forward to their rationale, if any.

    The new factory in Vietnam to manufacture mostly feature phones not smartphones?

    In the first quarter of 2103, Nokia registered a vertiginous decline of 30% in global sales of feature phones (i.e. dumb phones), from 79.6m units in the December 2012 quarter to 55.8m in March 2013 (see link of transcript here). This was a major disappointment in an otherwise encouraging set of results, and the commentary suggests the outlook of feature phones remains anemic due to intense cheap Chinese competition.

    Then why would a spanking new factory be built for more feature phones? This makes no sense, even if it's a partial focus! This is from page 57 of their 2012 annual report:

    "Nokia is planning to establish a new manufacturing facility near Hanoi in northern Vietnam. The targeted opening of the facility is the second half of 2013. The new manufacturing site is being established to produce our most affordable smartphones and feature phones."

    If they successfully built 80m units in 4Q 2102 and demand has dropped to a current 60m units (and forecasts assume further weakness) , why in the world would they build a new feature phone factory?

    This is all the more galling as there are various reports showing Nokia is not producing enough high-end Lumias to meet current demand. There are numerous stories of being sold out, particularly in the US and Europe. I can't see any sense in this, can anyone?

    Financial Reporting/Communication Blunders

    The Big Mystery of Intellectual Royalty Payments (IPR)

    Since an earlier article urging Nokia to improve their transparency,there has been some progress regarding the mystery of Intellectual Royalty Payments, including those from and to Microsoft ($MSFT) made in separate release in March 2013. Crucially within this statement:

    "Within Devices & Services Other, we estimate that our current annual IPR income run-rate is approximately EUR 0.5 billion (US$ 0.65 billion)."

    "Our agreement with Microsoft includes platform support payments from Microsoft to us as well as software royalty payments from us to Microsoft. Under the terms of the agreement governing the platform support payments, the amount of each quarterly platform support payment is USD 250 million. We have a competitive software royalty structure, which includes annual minimum software royalty commitments that vary over the life of the agreement. Software royalty payments, with minimum commitments are paid quarterly. Over the life of the agreement, both the platform support payments and the minimum software royalty commitments are expected to measure in the billions of US dollars. Over the life of the agreement the total amount of the platform support payments is expected to slightly exceed the total amount of the minimum software royalty commitment payments. As of the end of 2012, the amount of platform support payments received by Nokia has exceeded the amount of minimum software royalty commitment payments made to Microsoft, thus the net cash flows have been in our favor. As a result, the remaining minimum software royalty commitment payments are expected to exceed the remaining platform support payments by a total of approximately EUR 0.5 billion over the remaining life of the agreement. However, in 2013 the amount of the platform support payments is expected to slightly exceed the total amount of the minimum software royalty commitment payments, thus the net cash flows are still expected to be slightly in our favor."

    This provides some clarity on the quantum. However there is still much ambiguity on its timing. In the March quarter transcript the company was asked (link above) specifically about this:


    Our next question comes from the line of Gareth Jenkins with UBS.

    Gareth Jenkins - UBS

    "…And secondly, just a follow-up on what Kai mentioned. I just wonder, if you give us the run rate of your intellectual property revenues in terms of royalties and what the run rate in the quarter was...Thanks."

    Timo Ihamuotila - Executive Vice President and Chief Financial Officer

    "Okay, thanks Gareth…And then, what comes to the IP royalty question, so we have said that we expect to have approximately EUR500 million of annual IPR income on our Devices & Services business, so that is really what we have said on the topic, and I have nothing further to add on that."

    I have spent many hours digging into the 1Q 2103 results, and am firmly convinced there was a hole in IPR revenue when compared to the previous quarter. Yet I can't prove it.

    Here, the CFO was given a perfect opportunity to disclose more detail regarding its timing, but declined. This kind of opacity can only lead to share price volatility, as results diverge from forecasts. And this will merely increase frustration with shareholders.

    What do they mean by Contribution Margin in phones?

    Within the detailed disclosure of the phones segments, Nokia mentions a 'contribution margin'. In normal financial parlance, a contribution margin would represent the marginal gross contribution of the marginal phone sold. However they state the smartphone division has a margin contribution of -16.2% in 1Q 2013. It seems inconceivable that a scalable manufacturing business has a negative contribution margin, but there is no explanation of the term, even in the detailed notes.

    An investor considering Nokia today will want to make a careful assessment of how much profit will accrue if Nokia eventually gains 5% of the world smartphone market. What about 10%? This will probably be the biggest driver in his decision. Doubtless, he will need to input his own factors of some important variables but I'm convinced the information contained in Nokia's current financial statements makes this task impossible, especially if they misuse common financial parlance.

    Does anyone work at Nokia, Investor Relations (NYSE:IR)?

    If one browses through Seekingalpha articles, one will encounter many ardent Nokia fans, many of whom have emailed the IR department. Yes some information requests deserve to be ignored but I know of many questions that certainly have merit.

    I don't believe anyone has ever had a response. I certainly haven't, and very much doubt if an Investor Relations Department exists. Nokia, I believe you currently have 80,000 employees. Perhaps it would be a good idea if you transferred someone there.

    Disclosure: I am long NOK. 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.

    Additional disclosure: This is primarily about NOK but also has MSFT as a secondary ticker.

    Tags: NOK, long-ideas
    May 30 3:52 PM | Link | Comment!
  • Why Apple (AAPL) Should Suck Nokia (NOK) Onto Its Map

    Why Apple (NASDAQ:AAPL) should suck Nokia (NYSE:NOK) onto its map

    The recent fiasco on Apple's mapping software may possibly be the company's biggest blunder in the company's unchequered past over the last five years. Their current solution is to attempt to beef up maps in-house. This will take months. In my opinion a company with Apple's reputation for excellence in design, user-friendliness and innovation cannot afford to take months. Their supreme franchise, along with their unparalleled margins are at stake.

    There is a much better solution. Buy Nokia.

    First let's examine the intrinsic appeal of Nokia's mapping division, Navteq. It's currently installed as the GPS system on 4 of 5 new cars with a Global Positioning Satellite system. Not only does it use GPS co-ordinates for mobile telephony, but also refines its accuracy using cell masts to better locate a shop or restaurant in a large building. In other words, for a mobile experience, it's the best out there.

    In my opinion a smartphone has four essential functions, the non-negotiables: making calls & sms's, a camera, a browser facility and an accurate mapping function. The supplementary functions are bells and whistles, that are nice to have and clearly, Apple excels at them. However, for the world's best-selling, premium-priced phone not to possess one of the four essential legs is anathema, a grave risk to their dominance and ascent.

    As for price, Nokia purchased Navteq for $12bn about two years ago. The entire market cap of Nokia currently stands at $10bn with $4bn net cash on Nokia's balance sheet. Simplistically all else cancelling out, Aapl would bag it for $6bn at today's price. Even if AAPL paid a 100% premium for Nokia, maps (along with a lot else - see below) would be theirs for a net $16bn, net of Nokia's cash.

    In other words, for a paltry 3% of the company's market cap, Apple would solve their mapping fiasco immediately and definitively. There would be a number of other significant benefits . . .

    Why would this be a stroke of genius?

    What this would also do is eliminate a potential threat in the form of Nokia's resurgence. The Lumia series has received excellent technical reviews. Despite some marketing blunders and delays with Windows Phone 8, there is a very real threat that Nokia's new smartphone range will tarnish the IPhone's eminence. In one fell swoop, this threat would be eliminated.

    There would be another major coup: Microsoft's plans to develop into the third mobile ecosystem would be seriously scuppered. Nokia is a major partner in Microsoft's herculean effort to prevent their displacement, as the user shifts further and further away from the desktop to the smartphone as his/her preferred interface with the digital world. Without Nokia, Microsoft's efforts would be enormously hampered - Nokia is their preferred partner, and hey presto it disappears!

    Nokia has 30,000 cellphone-related patents developed and licensed over the last two decades. Apple's recent win over Samsung over patent infringement must mean that patent portfolio is very valuable. Can you imagine the other cellphone manufacturers quaking in their shoes if these patents now belonged to Apple, a company with the time and money to pursue them relentlessly? I certainly can.

    The Hurdles are not insurmountable

    This is not a simple transaction. Nokia has many divisions, 114,000 employees and there will be complications:

    Anti-trust Veto unlikely

    Remember Nokia's market share in smartphones has fallen to 2% recently, as they abandoned their Symbian operating system and transition to Windows Phone 8. This per se, would not pose a regulatory hurdle.

    As for their 'dumbphone' division (number 2 globally), that's not Apple's business and they can commit to divesting it in a year.

    What about the 114,000 employees?

    Divest the businesses or lay them off. Capital markets are not a branch of moral philosophy. It's not Apple's core business to manufacture low-margin products. A policy of a blanket redundancy program could be introduced, where each employee has to then prove they belong within their new parent. I'm willing to bet there are lots of engineers and design staff within Nokia that would have decent prospects at Apple. As for 'dumbphone' manufacture and the Nokia-Siemens-Network division: goodbye.

    One must also note that Nokia has already begun the path of restructuring (the pension is already fully funded and mostly of a defined-contribution nature). Yes there may be additional unforeseen costs, but I'm sure SA readers will point them out!

    Remember, it's location, location, location. Apple needs maps now.

    Disclosure: I am long Nokia and indifferent to Apple

    Disclosure: I am long NOK.

    Tags: NOK, AAPL
    Oct 10 1:25 PM | Link | 7 Comments
  • CRM At 40X Opertating Cash Flow, Price Target Of 101$. 40X Cash Is A Huge Multiple And Still Downside!

    Using real operating cash flow: excluding cash received for shares issued, and related tax effect; including deferred commission cashflow; subtracting real capex on servers, furniture etc (there's more for acquisitions but not a certain figure given a voracious acquisitive appetite):

    Here's my spreadsheet.

    Note fully diluted shares outstanding are now 149m, up by 14m in 1 year;

    Table lets you impute a cashflow multiple, add back net cash on balance sheet.

    I assume cashflow growth of 35% for f13 to jan13.

    Cashflow for yr to jan12 368  ""=591-229+6 excluding shares sold and tax effect
    less capex  91  capex ex acqtn    
    Net cashflow  277        
    Grow at 35%35% 373.95        
    What multiple?15X20X25X30X40X      
    Cash777777777777777cash + mkt securities less conv debtas at jan 2012  
    Total value6386.25825610125.7511995.515735      
    Per share           
    14942.955.46881106 for 2011 sh 136 m, then moved to 149m!! For f13 

    To summarise table below, a 40X operating cashflow multiple delivers a price target of 106$. 40x is ludicrously generous.

    I prefer a 30X and this delivers a price target is $81

    In other words, even after the slide on Thursday May 10th, there is ample downside risk once cloudy euphoric dreams are replaced with a dose of reality.

    Disc: short and relieved!!

    Disclosure: I am short CRM.

    Tags: CRM, short ideas
    May 11 3:03 AM | Link | 6 Comments
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