Why Nokia’s Licensing Revenue Growth Can Accelerate Going Forward
Nokia‘s (NYSE:NOK) licensing division, which accounts for about 22% of the company’s value as per our estimates, generates revenues through royalties paid by other companies for the use of its intellectual property. From 2010 to 2014, the segment’s revenues grew steadily from 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. The company is also reportedly searching for a smartphone hardware partner to re-enter the smartphone business.
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.
Our $8 price estimate for Nokia is around 10% higher than the current market price.
See our complete analysis for Nokia here
Huge Portfolio Of Patents
Nokia has a strong patent portfolio comprised of over 4,000 patent families with around 11,000 individual patents and patent applications across various technologies. The company’s intellectual property portfolio includes high-quality standard essential patents (SEPs), patent applications declared to the European Telecommunications Standards Institute, and several other organizations that are essential to standards including LTE, WCDMA, GSM, etc. Even in terms of quality, Nokia’s patents stand out. In a 2011 review of the 3000+ patents considered essential to 4G LTE technology, Thomson Reuters and Article-one found that Nokia held close to 19% of the standard essential LTE patents and was the LTE leader by a substantial margin. Qualcomm, the dominant mobile chipset manufacturer, trailed Nokia with a share of about 12.5% of the LTE patents deemed the most essential. [1] Nokia’s patent portfolio is also diverse and well-protected, which can help it maintain a steady stream of recurring revenues.
Increased Licensing Flexibility With Smartphone Business Sale
Nokia sold its smartphone business to Microsoft (NASDAQ:MSFT) in 2014, and as a result it faces less danger of countersuits. It should now have greater bargaining power in setting patent licensing terms going forward. It will also be more flexible in licensing out its patent portfolio, only about 10% of which was being monetized before the smartphone unit was sold off. Nokia had kept a bulk of its patents exclusive for its devices business, and it is now free to license those out to other companies. Interestingly, Nokia is searching for a partner to re-enter the smartphone business through a brand-licensing model. According to the company, the partner will take care of manufacturing, sales, advertising and customer support, while Nokia will provide design and technology through patent licenses. Furthermore, its 4G LTE patents are likely to become even more valuable with time as carriers around the world transition to the new wireless standard and a greater number of handsets support 4G.
Getting Aggressive With Patent Lawsuits
With its diverse intellectual property portfolio, Nokia has seen a good amount of alleged infringement. Besides Apple, the company has filed several patent lawsuits against other manufacturers. In a preliminary ruling issued in September 2013, a U.S. ITC judge found HTC’s mobile devices to have infringed on two of Nokia’s wireless patents. By January 2014, Nokia had won four lawsuits against HTC in Germany. [2] Soon after, HTC announced that it had signed an out-of-court settlement with Nokia to end all pending litigation on patent infringement. [3] With BlackBerry, Nokia struck an out-of-court settlement in 2012, which provided the latter with a one-time sum of $65 million in addition to recurring royalty payments. [4] Though the value of this settlement likely diminished over the past couple of years with BlackBerry’s sales plummeting, Nokia has bigger patent licenses with Apple that should more than make up for any loss in royalties from BlackBerry.
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Notes:- Article One Partners and Thomson Reuters Study Shows LTE Patent Leadership Essential for Future of Smartphone Market, Reuters, Feb 20 2012 [↩]
- Nokia wins fourth German patent lawsuit against HTC, Foss Patents, Jan 31 2014 [↩]
- HTC, Nokia reach settlement on patent lawsuits, NDTV, Feb 8 2014 [↩]
- RIM paid Nokia $65 million as part of settlement, Phonera, Dec 26 2012 [↩]