Can Nokia’s Return To The Mobile Phone Market Drive Its Revenues?

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Recently, Nokia (NYSE:NOK)  announced that it had signed a strategic agreement with a newly formed Finland based company called HMD to create Nokia- branded mobile phones and tablets for the next ten years.  HMD has been founded to provide a focused, independent home for a full range of Nokia branded feature phones, smartphones and tablets.  Nokia had sold its mobile phone business to Microsoft in 2014 and HMD will now acquire the right to use the Nokia brand on feature phones and certain related design rights from Microsoft. It also intends to invest over $500 million in the next three years to support the global marketing of Nokia branded mobile phones and tablets.  While Nokia was once a best-selling mobile company, it could not keep up with changing consumer demands and was unable to establish itself in the smartphone market. Mircosoft failed to adeuately monetize this business as well, as the iOS-Android jaugernaut conintued.  Now, via HMD, Nokia-branded feature- and smart phones will reenter the market, targeting secondary, lagging markets beyond those addressed by top-tier vendors such as Apple and Samsung.

See our complete analysis for Nokia stock here

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Licensing Model Can Work In Nokia’s Favour

Under its agreement with the newly formed company HMD, Nokia will receive royalty payments from HMD for sales of Nokia-branded mobile products, covering both brand and intellectual property rights and it will provide HMD with branding rights and patent licences.  HMD will be responsible for the “heavy lifting” which will include the hardware and manufacturing aspects. HMD will leverage Nokia’s branding and intellectual know how, which works well with Nokia’s licensing business model. Manufacturing was not a strong point for Nokia in the past and this arrangement should work in the company’s favour.

According to our estimates, the licensing segment accounts for nearly 40% of Nokia’s valuation and we expect its licensing revenues to increase from $1.08 billion in 2016 to nearly $1.5 billion by the end of our forecast period.

If the company’s mobile phone segment picks up and licensing revenues increase at a faster pace reaching $2 billion by the end of our forecast period, there can be a 10% upside to our price estimate.

High Demand For Feature Phone, Low Price Smartphones In Emerging Economies

While Nokia faces stiff competition from players such as Apple and Samsung in the smart phone space, it can capture a significant share in the feature phone market. While the feature phone market is declining, it still represents a significant portion of the total mobile phone market in emerging economies. In India, 144 million feature phones were shipped in 2015, a 17% decline from the 180 million figure for 2014, but still representing a significant portion of the total mobile phone market of nearly 240 million units in 2015. There is also a high demand for low priced smartphones in the region, a market where HMD an establish itself with Nokia-branded devices. Given, Nokia’s former popularity in the feature phone market (especially in India), HMD has a huge growth potential in this region in its second innings. Strong royalty revenue growth for Nokia could result.

Nokia appears to have got the mobile phone business model right this timewith this arms-length arrangement via HMD.  Whether the company’s former brand popularity will drive sales in the second innings remains to be seen.  The smartphone market has evolved in the recent years with innovation being the key driver for sales.  Competitors are far ahead of what Nokia can derive via this arrangemnet with HMD. Android powered phones will work to its advantage but capturing a decent share in the smartphone market might be a tough ask for the alliance, unless it is able to quickly catch up on innovations and get ahead of competition in this space.

 

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