Nokia’s Take on the Microsoft Deal

April 25th, 2011 by Trefis Team
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Nokia (NYSE:NOK) recently announced its Q1 2011 earnings and provided some detail on its Microsoft (NASDAQ:MSFT) partnership. The company believes this will bring about product differentiation and large cost savings, [1] which we highlighted was a key item to watch for in our earnings preview (see Nokia Earnings Around the Corner – What Investors Should Watch). In the past, Nokia has struggled to compete with Apple (NASDAQ:AAPL), Research in Motion (NASDAQ:RIMM), Motorola Mobility (NYSE:MMI) and Samsung in the mobile phone market, and in particular with smartphones.

Can this partnership provide the much needed lift for Nokia? We believe it might, and we highlight some of management’s comments below from the earnings call and maintain our $11.18 price estimate for Nokia stock, which is roughly 30% above market price.

Nokia-Microsoft Deal to Boost Operating Margins for Nokia

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During the conference call, management indicated that the partnership with Microsoft is intended to reduce Nokia’s devices and services expenses by 1 billion Euros by 2013 from 5.65 billion Euros in 2010. This will help boost the operating margin, which we have included below. [1]

How Does This Partnership Bring Synergies?

During the call, Nokia management explained how it views this agreement.

These include four broad areas of: 1) a combination of the unique ‘ecosystems’ that includes search and advertising for Nokia, 2) Nokia will pay royalties to Microsoft for its OS at rates which Nokia believes are quite competitive, 3) the two companies created mechanisms for sharing intellectual property, for which Nokia ‘will receive substantial payments,’ and 4) Nokia will receive sums in the ‘billions of Dollar’ for its commitment to the Windows phone. [1]

While financial specifics were not revealed regarding this deal, Nokia is making it very clear that it will receive hefty payments from Microsoft for its participation in this deal. Given Microsoft and Nokia’s difficulties in the smartphone market to date, this partnership could offer some compelling benefits for both companies.

See our full analysis and $11.18 price estimate for Nokia

Notes:
  1. Nokia Q1 2011 earnings conference call transcript, April 21st 2011 [↩] [↩] [↩]