- BofA/Merrill's Kai Korschelt and Canaccord's Mike Walkley have each downgraded Nokia (NOK -12.4%) to neutral ratings after the company disclosed a Samsung patent arbitration ruling (good through the end of 2018) that involves smaller-than-expected royalty payments (press release). Both Nokia and merger partner Alcatel-Lucent (ALU -11.9%) continue seeing double-digit declines.
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Korschelt: 'As a result of the increase in recurring payments Nokia is guiding to a [Nokia Technologies] recurring revenue runrate of E800m (800 million euro), below consensus of E900m (900 million euro) for 2016 and below the [BofA] estimate of E986m ... Growth in the high-margin Technologies division was meant to be a major driver of earnings/EBIT and in our view has helped the stock trade at a material premium to Ericsson. We now believe that the risk is that this premium narrows as investors may feel less confident in Nokia achieving EPS of ~E0.6 by 2018."
- He qualifies his remarks by adding Samsung "likely received volume discounts" from Nokia, and that higher rates might be received from other OEMs. "LG is already in arbitration and we believe the licensing agreement with Apple will expire this summer. Further the arbitration only covers standard-essential patents and we continue to believe that Nokia should be able to incrementally monetize its implementation patents as well. Having said all of that, the arbitration decision was meant to be a major catalyst for the stock..."
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Walkley: "Following the award with Samsung, Nokia’s annualized Technologies division revenue run rate is approximately €800M or well below our €1.2B expectation ...While we remain positive the now-closed Alcatel-Lucent acquisition can deliver its €900M cost synergy target by 2019, these assumptions are included in our updated model. However, due to our materially reduced licensing forecasts, we are lowering our estimates, resulting in our price target decreasing to $6.50."
- Nokia still "expects to receive at least approximately EUR 1.3 billion of cash during years 2016-2018 related to its settled and ongoing arbitrations [for] Nokia Technologies, including [the Samsung] award." Both Nokia and Alcatel's Q4 reports arrive on Feb. 11.