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Investment Overview for Nokia (NYSE:NOK)
- Nokia's merger with Alcatel-Lucent is finally complete
The merger of the two companies is finally complete and the results of the first three quarters of fiscal 2016 were reported for the combined company. Henceforth, the Networks segment includes wireless infrastructure revenues from Nokia and Alcatel, and the Licensing segment includes revenues from the newly reported segment-Group Common and other.
- Re-entry into the smartphone space
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.
- Acquisition of Withings
Nokia completed the acquisition of Withings SA, a digital health products company based in France. This acquisition marks the formation of the digital health business unit of Nokia, which will be led by Cedric Hutchings, former CEO of Withings. This business unit will combine the employees of Withings and the preventive health and patient care teams in Nokia Technologies. And it will offer a wide range of digital health products.
- Acquisition of Gainspeed
Nokia announced that it will be acquiring Gainspeed, a US-based start-up specializing in DAA (Distributed Access Architecture) solutions for the cable industry via its Virtual CCAP (Converged Cable Access Platform) product line. Gainspeed is widely regarded as the industry leader in DAA, which the cable industry has adopted as its next generation solution to address increasing capacity requirements. Through this acquisition, Nokia is looking to diversify its product portfolio for cable access customers and expand its footprint in this market. As cable operators work towards upgrading their infrastructure to compete better with telecom companies, Gainspeed will equip Nokia to meet this demand from the cable industry and provide growth opportunities to its networks segment.
- Collaboration with HUS
After the acquisition of Withings, Nokia announced a collaboration with HUS/Helsinki University Hospital and the University of Helsinki Faculty of Medicine both to create innovative solutions for outpatient care, and to foster mutual research and development. The first project under this collaboration will launch this quarter, with Nokia Technologies and HUS working to develop remote patient monitoring solutions. The collaboration is a first for Nokia Technologies, reflecting the company’s intent to enter the regulated healthcare space.
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 16.5% in 2013. However, in 2014, wireless infrastructure market share rebounded to 17.2%, 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. In 2015, the share fell again to an estimated 14.4%.
However, we expect a sharp jump this year with the Nokia-Alcatel Lucent merger complete and thereafter, we expect a marginal increase over the next five-six years due to a mixed impact of expansion of 5G and IoT, and sluggish carrier spending and fierce competition from Ericsson and Huawei. There could be a downside of about 5% to the Trefis price estimate if Nokia's wireless market share declines to around 23.5% by the end of the Trefis forecast period from an expected 28% this year. 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 32%.
- 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. Margins declined to 15.2% in 2015 on account of lower broadband margins resulting from higher R&D and SG&A expenses and unfavorable sales mix. This year, EBITDA margin is expected to fall notably on account of the Nokia-Alcatel Lucent merger and thereafter, the intensity of decline could come down. 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. There could be a downside of about 5% to the Trefis price estimate, if margins decrease at a slightly faster than expected pace.
- 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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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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