Nokia: Out Of Devices, But Not Out Of Options

| About: Nokia Corporation (NOK)


Nokia now owns 100% of a business that is producing significant cash flow.

There are several options Nokia can take, including buying growth through acquisitions.

Given Nokia's strong mapping platform, a company like Facebook may become interested.

Nokia (NYSE:NOK) just reported first-quarter earnings, which -- according to some -- were broadly unimpressive. While the numbers weren't necessarily bad, no one is going to applaud in-line results. Given Nokia's recent history and the company's struggles against Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), that was the expected reaction.

But the stock still reacted favorably, up 5% following the announcement. The reason; Nokia offered a nice glimpse into its future - one that is without former CEO Stephen Elop. Now, before we get deeper into Nokia's results, let's address a few things regarding Elop, who Nokia investors can't decide whether he was good for the company or the cause of its decline.

Note, Elop just received a bigger-than-expected parachute of €24.2m from Nokia. Recall, back in September, the rumored pay-off was believed to be around €18.8m. This prompted both Finish prime minister and finance minister to call the figure "outrageous." In fact, they went even further, calling it "a threat to social harmony." Clearly, Nokia's board disagreed.

While it's possible Nokia was fulfilling its contractual obligations to Elop, I can't help but recall how grossly incompetent he appeared. Under Elop, Nokia experienced dramatic declines in revenues, profits and market cap. Not to mention a 70% decline in operating profit since he took over the company in the third quarter of 2010, causing the company to lose $17 billion in value.

Now Elop walks away even richer than some believe he was entitled. Why? Because he did what Nokia's board hired him to do; dispose of the handset business, which was sold to Microsoft (NASDAQ:MSFT) last year. The deal, which included Nokia's strong patent estate, was for 5.44 billion euros ($7.2 billion). Some investors were stunned. But this deal was in the works for more than two years. The two companies received regulatory approval and the deal closed last week.

After having brokered the deal, Elop now heads Microsoft's devices business. Recall, he was executive at Microsoft before joining Nokia. From my vantage point, he was placed at Nokia by both companies to strategically make this deal happen. Should Nokia investors be offended or even care?

Since the deal was struck last September, interestingly on Elop's three-year anniversary at Nokia, Nokia's stock has surged more than 75%. Even then, the shares are still down roughly 25% from where they were prior to Elop's arrival. But I believe it's only a matter of time before the shares regain their value.

After closing the handset deal, Nokia, which will now be lead by new CEO Rajeev Suri, appears leaner. During the earnings call, they said it will be structured around three primary operating segments: Networks, Technologies, and its mapping segment called HERE. The company also announced plans to return $3 billion to shareholders.

For Nokia, the company has seen a faster-than-expected turnaround. Although some were quick to criticize Nokia for seemingly "giving up" on a growing mobile market, Nokia was looking to transform itself. And following the company's earnings results, Nokia no longer resembles the same fragmented hardware company that ignored the usability of its software.

First-quarter revenue declined 15% year over year to 2.66 billion euros. This was due to a significant decline in network revenue, which was impacted because of lower services sales. Not to mention, currency fluctuations and divestments. While this is the 12th consecutive quarter of declining revenue, it's nonetheless encouraging that a new Nokia has emerged.

Net income, excluding the business sold to Microsoft, were 108 million euros, compared with a loss a year earlier. CEO Suri has reduced Nokia's headcount by more than 25,000, which helped the company to turn a profit. Nokia has been in an extensive cost-cutting mode in an attempt to clean up its books. Suri is in the midst of turning around a company, which many are still skeptical can emerge as a viable business without its handset.

But as I pointed out recently, after spending $2.22 billion to buy the remaining portion of its joint venture with Siemens (SI), called Nokia Siemens Network, Nokia now owns 100% of a business that is producing significant cash flow. Recall, NSN kept Nokia afloat as it tried to fix its phone business. Plus, there are several options Nokia can take, including buying growth through acquisitions. Names like Juniper (NYSE:JNPR) and Alcatel-Lucent (ALU) have been mentioned.

The good news is, Suri seems focused and committed to getting Nokia back to prominence. To the extent that he can get the three new business back to profitability, investors will be rewarded long-term, if not through Nokia's own performance, certainly Nokia would also become the subject of an acquisition. Don't forget, Nokia has a strong mapping platform. And a company like Facebook (NASDAQ:FB) may become interested. It's going to take time for Nokia to buildup its value, investors can feel good, at least, in knowing that more value won't be eroded by Elop.

Disclosure: I am long AAPL.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.

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