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Nokia (NOK): What Is Left Now For Investors?

 July 10, 2012 02:28 PM

(By Mani) As the handset unit is waning by each day, investors should now focus on Nokia Corp.'s (NYSE:NOK) other aspects of businesses such as Nokia Siemens Networks (NSN), Navteq, patent portfolio and net cash.

On the device front, Nokia may need to write down its inventories of Lumia 800/900 devices as these phones running Windows 7.5, while upgradeable to 7.8, will thereafter reach end-of-life as customers seeking Windows 8 will need to buy a new phone due to non-compatibility of these devices with Microsoft's (NASDAQ:MSFT) latest software upgrade.

Samsung and Apple continue to account for the lion's share of the smartphone industry's profits. While Windows may be seeing better absorption rates overseas compared to the US, Android and iOS continue to reign in the US.

[Related -Microsoft Corporation (MSFT) Earnings Preview: What To Watch In Q2 Results?]

Google's (NASDAQ:GOOG) Android has captured about 24 percent of the Mobile OS market, while Windows-OS stands at a disappointing 2.4 percent. At the low end, aggressive price-action from white-box manufacturers running Android is impacting Nokia's profitability.

Moreover, Microsoft has further become vocal about diversifying its partner-base, which reduces Nokia's level of exclusivity with this supposed all-in partner.

[Related -Microsoft Corporation (MSFT): Good Buy or Good-Bye?]

As a result, investors should turn in to other parts of Nokia's business, which are still valuable in their own aspects.
(see: Nokia (Nok): Can Restructuring Stem Falling Sales Amid Bleak Outlook?)

Nokia Siemens Network comes first in the list.

Nokia Siemens Networks is a joint venture between Nokia of Finland and Siemens of Germany. It is the fourth-largest largest telecoms equipment manufacturer after Ericsson, Huawei and Alcatel-Lucent.

NSN serves evolving needs of network operators from GSM to LTE wireless standards, a base of over 600 customers in over 150 countries serving over 2.5 billion subscribers. The company's global customer base includes network operators such as Bharti Airtel, China Mobile, Deutsche Telekom, France Telecom, Softbank, Telefonica O2, Verizon and Vodafone. In 2011, NSN generated sales of 14 billion euros, an increase of 11 percent from 2010.

"We believe NSN may be worth a multiple of 0.10x forward revenues considering that its operating margin profile is low, while the execution has been inconsistent, in our opinion," RBC analyst Mark Sue wrote in a note to clients.

The company has an expansive patent portfolio, and that there is a steady stream of payments to Nokia for the use of its patents to the tune of 500 million euros per year. Nokia owns over 10,000 patent families after investing more than 45 billion euros.

Nokia has one of the strongest and broadest patent portfolios in the industry, extending across all major cellular and mobile communications standards, software and services, hardware and user interface features and functionalities.

"We believe Nokia's patent portfolio could conceivably be worth as much as €6B to an Amazon or a Microsoft," Sue noted.

Another key asset of Nokia is Navteq, which it acquired for $8.1 billion in 2008, and comes under the location and commerce segment. Location & Commerce net sales increased 26 percent to 1.09 billion euros in 2011.

Navteq, which is a 75 percent plus gross margin business, may be the most pricey from a multiple point of view, in our opinion, and Sue assigns a multiplier of 3.0 times to forward revenues or approximately 3.9 billion euros.

Meanwhile, cash remains the tricky part and how the cash/share may look in the future. At the end of the first quarter, Nokia has gross cash of 9.8 billion euros and a net cash position of 4.9 billion euros.



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