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Investment Overview for Nokia (NYSE:NOK)
Below are key drivers of Nokia's value that present opportunities for upside or downside to the current Trefis price estimate for Nokia:
- Networks Wireless Infrastructure Market Share: Nokia's Networks wireless infrastructure market share has declined sharply in recent years as the company executed on its turnaround strategy of enhancing profitability by exiting some of its low-margin contracts in EMEA and Latin America. This caused Networks' market share to decline from over 20% in 2011 to an estimated 16.4% in 2013. However, in 2014, wireless infrastructure market share rebounded to 18.3%, driven by an increase in carrier spending across geographies, aggressive LTE network deployment by Sprint in the U.S., soaring mobile broadband sales and some crucial contract wins for Nokia. Going forward however, we expect Networks' wireless market share to increase slightly in the near term and stabilize thereafter. While increase in carrier spending on 4G, 5G and IoT expansion and Alcatel Lucent deal will drive market share upwards, growing competition from Ericsson and Huawei will have an offsetting impact. There could be a downside of about 8% to the Trefis price estimate if NSN's wireless market share declines to around 15% by the end of Trefis forecast period. However, there could also be a similar upside to our price estimate if the company is able to leverage the LTE transition to win more contracts in regions such as the U.S. and Europe, and thereby increase its market share to about 24%.
- Networks EBITDA Margin: Networks' Wireless EBITDA margins have increased sharply from about 8.2% in 2009 to 17.5% in 2014 as a result of a restructuring program that helped it cut expenses significantly. However, with a bulk of the restructuring done, we expect margins to remain largely stable from here on. In fact, they are likely to decline slightly this year on account of lower mobile broadband margins resulting from higher R&D and SG&A expenses, and unfavorable sales mix. Even the company has provided a lackluster guidance for the year.
Looking ahead, fierce competition from Chinese rivals such as Huawei and ZTE can force Nokia to reduce its prices and take a hit on margins. Also, certain strategic deals, such as those in China, can impact profitability in the near term. Hence, we believe that Networks' EBITDA margins will decline slightly going forward. However, there could be a downside of over 10% to the Trefis price estimate, if its margins decrease to around 13% by the end of the Trefis forecast period.
- Licensing Revenues: Nokia's licensing revenues have grown steadily from EUR 100 million in 2010 to EUR 560 million 2014, with a spike in growth to EUR 840 million in 2011, thanks to a settlement with Apple. While Nokia’s licensing revenues have increased at a CAGR of just 4% since 2012 – after the settlement of the Apple lawsuit – we expect the growth to pick up going forward. Nokia’s huge patent portfolio, the sale of its smartphone business, which had earlier limited the number of patents it licensed to other companies, and its aggressive stance over patent infringement are likely to drive the division’s growth going forward. However, there could be significant upside to our price estimate if Nokia manages to more efficiently leverage its robust patent portfolio - around 90% of which has not been licensed out currently and was instead held exclusive for the purposes of its handset business. If Nokia manages to increase its licensing income to $1.2 billion in the long run, there could be an upside of about 10% to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Nokia at the top of the page.
Finland-based Nokia was once the largest mobile phone manufacturer globally. However, the handset business was officially be transferred to Microsoft in 2014, which made networks its most valuable segment. After Siemens' exit from the joint venture in 2013, Nokia named the segment Nokia Solutions and Networks (NSN), which has been renamed as Networks. NSN was a large provider of both wireless and landline telecom infrastructure equipment to service providers around the world, but has become more of a specialist in mobile broadband after restructuring. This year, Nokia announced its merger with Alcatel-Lucent worth $16.6 billion, which will make Nokia one of the biggest player in the telecom gear industry. Nokia also licenses its patents to handset manufacturers, bringing in recurring and steady high-margin revenues. The Finnish company is even looking to re-enter the smartphone business through a licensee partner, which would take care of manufacturing, sales & marketing and customer service, while Nokia would provide design, technology and its brand name. Nokia sold its HERE maps unit to German car makers for $3 billion in 2014.
Stabilizing Networks Margins
Nokia Networks' EBITDA margins have improved from about 8% in 2009 to 17.5% in 2014 on the back of a restructuring program that helped it cut significant costs. Going forward, we expect the company's increasing focus on profitability to help it defend its margins as it pursues higher-margin contracts in the U.S. and Europe, while avoiding less profitable contracts elsewhere. Nokia's ongoing eight strategic initiatives aimed at improving productivity, efficiency and cost intensity, and streamlining site strategy, supply chain transformation, headcount control and IT operations progressing well. However, with the contribution of low margin contracts in China, sluggish software sales and challenging environment in the telecom gear industry, the segment can face a downward pressure on margins going forward.
Huge Potential In Licensing Revenues
The Licensing division's revenues grew steadily from 2010 to 2014 (EUR 100 million to EUR 560 million), with a spike in growth to EUR 840 million in 2011, thanks to a settlement with Apple (NASDA:AAPL). While Nokia’s licensing revenues have increased at a CAGR of just 4% since 2012 – after the settlement of the Apple lawsuit – we expect the growth to pick up going forward. Nokia’s huge patent portfolio, the sale of its smartphone business, which had earlier limited the number of patents it licensed to other companies, and its aggressive stance over patent infringement are likely to drive the division’s growth going forward. Nokia has approximately 4,000 patent families across various wireless standards including 3G and 4G LTE, as well as device design, which it licenses to other vendors for recurring income. However, while operating its own smartphone business, the company licensed out only 10% of its patent portfolio, keeping the remaining ones exclusive for its own devices. With the divestiture of its smartphone business, Nokia can increase the number of patents available for licenses, thus ensuring accelerated growth in royalty income.Nokia has also had a good run with patent infringement lawsuits in the past. One such example is the settlement of a patent infringement case it filed against Apple in 2011, which played a pivotal role in a 730% increase in licensing revenues that year. With so many patented technologies, there is the potential for additional one-time settlements that could support growth in Nokia’s licensing revenues.
Nokia's Increasing Focus On the U.S. Market
Nokia Networks has increased its focus on more lucrative contracts in regions such as the U.S., where Chinese manufacturers such as Huawei and ZTE have been blacklisted amid security concerns. North America has historically accounted for less than 10% of Nokia revenues, but the mix is gradually improving with several network expansion/upgrade contract wins. At the end of Q3 2015, North America contributed 13% to Nokia Networks' overall sales. Lately, however, the segment has struggled in North America due to carriers' sluggish spending.
Nokia Alcatel-Lucent Merger
Earlier this year, Nokia announced the $16.6 billion merger with Alcatel-Lucent, and the deal is expected to close in the first half of next year. By Merging with ALU, the Finnish company will be able to expand in the domain of optical transmission and IP routers and switches, which are important components for building a network. A comprehensive product line with advanced research capabilities for the development for future technologies such as SDN and cloud computing will give Nokia an edge over Ericsson, which currently only offers wireless networking equipment and services.
Also, the deal offers certain geographical benefits to Nokia, positioning it strongly in the U.S., China and Europe. Alcatel-Lucent has long standing contracts with Verizon and AT&T in the U.S., and it even holds second largest share in the global service provider router market Cisco, and both these factors bode well for Nokia. On the financial front, Nokia expects operating synergies of 900 million Euros by 2019 and 200 million Euros in expense reduction by 2017. The deal is expected to close in the second half of 2016.
Nokia Planning To Re-enter The Smartphone Business
Nokia is reportedly looking for a hardware partner to re-enter the smartphone business through brand and technology licensing just two years after it exited the business. While this seems a surprising move given the highly competitive nature of the smartphone market, it makes some sense due to three reasons: 1) there has been a shift in Microsoft’s focus from handset business to developing an ecosystem; 2) the global growth in smartphone sales is strong; and, 3) strong customer response to its N1 tablet might have encouraged Nokia to reconsider its opportunities in the market. However, realizing that competition from leading smartphone vendors Apple and Samsung and low-cost manufacturers will not allow either easy entry or growth in the market, Nokia is planning to only provide design and technology, and it is searching for a partner to do all the “heavy lifting”.
Internet Of Things Domain Warming Up
The IoT domain includes computing devices other than PCs, tablets and smartphones. According to Mckinsey, it is the networking of physical objects through the use of embedded sensors, actuators, and other devices that can collect or transmit information about the objects. The main factors that have contributed to the growing interconnectedness of objects are: 1) The emergence of the cloud platform, which enables the storage of large amounts of data to be transmitted and received via wired or wireless devices, and 2) The declining cost of manufacturing semiconductors, which makes their installation on frequently used unconnected devices economically feasible. Cisco estimates that the IoT market will be worth $19 trillion over the next decade, representing a $1.7 trillion market for service providers. McKinsey estimates that the impact of IoT on the global economy could be as high as $6.2 trillion by 2025. The installed base for IoT devices is estimated to grow from around 10 billion connected devices today to as many as 30 billion devices (or 50 as per some estimates) by 2020. While these estimates may vary, they are in agreement regarding the huge potential of the market. Clearly there is a lot of growth potential for network infrastructure players, in addition to semiconductor companies.
Nokia Working on Narrow Band LTE
Nokia, along with Ericsson and Intel, it is looking to develop and launch pertinent products for the commercialization of NB-LTE synchronized with the market demand. The company believes that NB-LTE technology is well suited for the IoT domain, since it is easy to use, power efficient and has a low cost of implementation. NB-LTE networks allow data to be transmitted and received via the 200KHz channels, which means that reframed GSM bands can be used for the technology. However, it can even be used in shared spectrum with existing LTE networks. In fact, this feature gives Nokia’s NB-LTE an advantage over the Huawei’s NB-CIoT technology. According to experts, NB-CIoT isn’t compatible with LTE networks older than Release 13, and they even require new chipsets. NB-LTE, on the other hand, does not require any overlay network and can be easily integrated with existing LTE networks. By utilizing the existing network infrastructure, NB-LTE can provide better economies of scale. Working with Nokia and Intel, Ericsson is looking to accelerate IoT adoption by driving the existing ecosystem and ensuring a strong global foundation across verticals such as consumer, industry and government for the launch of IoT applications. Intel will play a support role for the technology’s commercial roll-out with NB-LTE chipsets and product upgrades from 2016 onwards. Nokia and Ericsson will provide the network upgrades required to support and extend existing LTE networks with optimized NB-LTE low power machine-to-machine communication.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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