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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:
Nokia Solutions and Networks (NSN)
- NSN's Wireless Infrastructure Market Share: NSN's 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. This caused NSN's market share to decline from over 20% in 2011 to an estimated 16% in 2013. We expect the declines to continue, albeit at a moderate pace, to about 15% by the end of Trefis forecast period. However, NSN's market share decline could be much faster if the ongoing 4G LTE transition in many parts of the world sees aggressive competitors such as Huawei and ZTE gain further ground. There could be a downside of about 8% to the Trefis price estimate if NSN's wireless market share declines to around 10% by the end of Trefis forecast period in 2019. 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 back up to 20%.
- NSN EBITDA Margin: NSN's Wireless EBITDA margins have increased sharply from about 8.2% in 2009 to 15% in 2013 as a result of a restructuring program that will help cut costs by about EUR 1.5 billion by the end of the year. However, with a bulk of the restructuring done, we expect margins to remain largely stable from here on. However, if fierce competition from Chinese rivals such as Huawei and ZTE forces Nokia to reduce its prices and take a big cut on margins, NSN's EBITDA margins could trend downwards going forward. There could be a downside of over 12% to the Trefis price estimate, if its margins decrease to 10% by the end of the Trefis forecast period.
- Licensing Revenues: Nokia's licensing revenues have increased from around EUR 100 million in 2010 to EUR 520 million in 2013, primarily due to a royalty agreement signed with Apple in 2011. Going forward, we conservatively expect the licensing revenues to hold steady in the absence of any certainty around the royalty terms and the timeline for future licensing deals. 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 triple its royalties by the end of the forecast period, 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 will now officially be transferred to Microsoft after shareholders recently approved a deal that will give Nokia about EUR 5 billion in cash. The company's erstwhile networking joint venture with Siemens, which has been renamed Nokia Solutions and Networks (NSN) following Siemens' exit in 2013, is now its most valuable division. 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. The company also licenses its patents to handset manufacturers, bringing in recurring and steady high-margin revenues.
Stabilizing NSN Operating Margins
NSN's EBITDA margins have improved from about 8% in 2009 to 15% in 2013 on the back of a restructuring program that is estimated to cut about EUR 1.5 billion in operating costs by the end of 2013. 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.
Huge Potential In Licensing Revenues
We have forecast conservative growth in licensing revenues, expecting it to mostly hold steady through the end of our forecast period. This is because, although the company has filed several infringement cases against handset vendors, it usually takes a long time to settle such lawsuits and the final payouts are very uncertain and difficult to determine in advance. However, a significant upside to our estimate exists if Nokia manages to more efficiently leverage its robust patent portfolio - only about 10% of which is being monetized currently. Nokia has kept the bulk of its licenses exclusive for its devices business so far. Considering that Nokia no longer has phones to sell following the Microsoft deal, and therefore faces less danger of being counter-sued, it should have greater bargaining power in setting patent licensing terms going forward.
NSN's Increasing Focus On the U.S. Market
As part of NSN's recent restructuring efforts, the company has become more focused on profitability than market share. Consequently, NSN has exited many of its low-margin contracts in recent quarters which has led to a sharp slide in its market share. In order to offset the top-line impact in coming years, NSN 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 NSN's revenues, but the mix is gradually improving with recent contract wins at T-Mobile and US Cellular. When long-time customer Softbank picked up a majority 78% stake in Sprint, NSN took the opportunity to displace Ericsson in a newly signed LTE deployment contract with Sprint. The carrier plans to use its recently acquired spectrum from Clearwire and Softbank's cash to build out a faster TD-LTE network covering around 100 million PoPs by the end of 2014.
T-Mobile's recent merger with MetroPCS should also help NSN increase its U.S. market share. T-Mobile currently sources its equipment from Ericsson and NSN, while MetroPCS does the same from Ericsson and Samsung. As the carriers look to consolidate suppliers, NSN has an opportunity to displace Samsung owing to its relationship with the bigger T-Mobile.
LTE Transition in China
Carriers around the world are making the transition to 4G LTE, as surging data demand puts additional pressure on older networks. In the coming years, China will increasingly drive the LTE market, after the government awarded TD-LTE licenses to carriers at the end of 2013. In preparation, Chinese carriers have already given out multi-billion dollar LTE deployment contracts. While local Chinese vendors accounted for the bulk of the contracts, NSN grabbed the biggest share among foreign vendors of a $3.3 billion LTE contract with China Mobile, China's largest wireless carrier. NSN will supply about 11% of the initial LTE gear according to the contract, along with a further single-digit share from selling through resellers.
However, Huawei and ZTE's dominance in the Chinese market means that NSN's market share will continue to face pressure in the coming years.
More Flexibility In Licensing Deals
Nokia's sale of the handset division to Microsoft gives it additional flexibility in licensing its patents. The company will no longer have to worry about being counter-sued by handset rivals, which should increase its bargaining power during patent negotiations. It also gives Nokia the flexibility to monetize a greater part of its patent portfolio. Currently, Nokia monetizes only about 10% of its patent portfolio, which is standard-essential and anyway required by regulatory bodies to be fairly licensed out. The remaining 90% is held as exclusive property of its handset division. With the jettisoning of the handset division, Nokia is free to license out the bulk of its patent portfolio and generate additional cash flows.
Below are the main sources of risk to our price estimate for Nokia's stock:
- NSN Wireless Market Share: NSN's share in the wireless infrastructure market has been falling rapidly over the last several quarters as a result of a focused strategy to enhance profitability, which saw the company avoid as well as exit some of its low-margin contracts. We currently expect the declines to moderate going forward, as most of the restructuring drive is complete and the company realizes the benefits of its recent contract wins in the U.S., Europe and China. However, an increasing proportion of carrier spending in the coming years is expected to come from China, which is planning a massive-scale LTE transition. Huawei's and ZTE's strength in these markets could see NSN lose market share to a greater extent than we expect if it is unable to mitigate the impact with share gains in the U.S. and Europe.
- NSN EBITDA Margin: NSN's margins have improved significantly from around 8% in 2009 to 15% in 2013. We expect the company to hold on its margin gains going forward as the company pursues higher margin deals in the U.S. and Europe. However, increasing competition from Chinese rivals Huawei and ZTE could cause NSN to lower its prices and take a hit on margins going forward.
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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