- Licensing Revenues: Nokia's licensing revenues have grown rapidly from from EUR 100 million in 2010, to EUR 1 billion in 2015, with the biggest jump coming in 2015. We forecast another jump in 2016 since we have combined the newly reported group Common and Other segment with Licensing. Thereafter, we expect the growth to continue going forward, thanks to Nokia’s huge patent portfolio and its licensing re-entry into the smartphone segment. However, there could be significant upside to our price estimate if Nokia manages to more efficiently leverage its robust patent portfolio. Around 90% of the company's patent portfolio is not licensed out currently and is instead held exclusive for the purposes of its handset business, which it can now use, thanks to its deal with HMD. If Nokia manages to increase its licensing and group Common and Other revenue to $3 billion in the long run, there could be an upside of more than 5% 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 transferred to Microsoft in 2014, which at that point made Networks its most valuable segment. However, now with the licensing re-entry into the smartphone business, Licensing is the most important segment for the company. Last year, Nokia announced its merger with Alcatel-Lucent worth $16.6 billion, and with the recent completion of the merger, Nokia has become one of the biggest players in the telecom gear industry. Nokia sold-off its third segment, HERE maps unit, to German car makers for $3 billion in 2015.
Significant market share gain
At the end of 2015, Nokia's share in the wireless network infrastructure market stood at 14.4% following a trend of notable declines. However, this year, the value is expected to jump to 28% as the Nokia-Alcatel Lucent merger has been completed. Post 2016, we expect the declining trend to continue to diminish in intensity thanks to Alcatel-Lucent's strong presence and contracts in the U.S.
Huge profits from licensing business
The licensing division of Nokia contributes just 8% to the company's revenues but still is the most valuable segment as per our estimates. This can be attributed to the fact that this business is extremely profitable, given its nature, having EBITDA margins in the range of 70% as opposed to the networks business, where EBITDA margins are around 15%. Also, with the recent licensing deal for smartphones that would allow Nokia to license a huge portion of its patent portfolio, the licensing business appears to have a better growth potential.
Huge cash pool
Nokia is a cash rich company, deriving almost 25% of its value from cash. As of Q1 fiscal 2016, the company had a net cash balance of over $9 billion.
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's revenues, but the mix is gradually improving with several network expansion/upgrade contract wins. At the end of 2015, North America contributed about 13% to Nokia Networks' overall sales. It could be near 25% this year, with Alcatel becoming a part of Nokia.
Nokia Alcatel-Lucent Merger
In 2015, Nokia announced the $16.6 billion merger with Alcatel-Lucent, and the deal has now closed. 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 the second largest share in the global service provider router market after 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.
Re-entry into the smartphone market
Earlier this year, Nokia 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.
The move makes sense due to two reasons: 1) the global growth in smartphone sales is strong; and, 2) 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 letting its licensing partner 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 billion 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, 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 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 onward. 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.
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