So this has proven to be the itch that can't get scratched and with the greatest effort to not be annoying I'm going to argue for Nokia's value in hopes of further discussion.
I'll preface everything with, the overall business is declining and currently mobile phone sales offer limited comfort. This is a business left for dead and from surface level, rightly so. Margins and sales are decaying in mobile phones, NAVTEQ is still losing money, has little impact on overall sales(245M MRQ), and Nokia-Siemens Networks (NSN) isn't exactly making it rain. All told Nokia is perceived as even worse than RIMM, MSFT, and CSCO.
I don't believe that Nokia is going the way of the dodo though for multiple reasons. Through my research I believe Nokia has an exceptionally strong intellectual property (IP) platform, a cash rich partner willing to throw any amount of money towards a source of revenue (MSFT) and multiple dysfunctional inputs (mobile phones, NAVTEQ etc) that will allow new management to unleash better future shareholder returns. In other words oodles of pessimism creating a diamond in the rough.
Stephen Elop has started off with a solid precedent in my opinion. If we examine the MSFT/NOK JV we can see some ways that Nokia is going to benefit and ultimately differentiate itself. First and foremost it was in talks with both Google and Microsoft but ultimately settled on softy for several reasons. First was the ability to differentiate itself. Having an Android OS would ultimately mean just another Android phone to kick around. With Microsoft they were able to cement in a leading position.
There is potential for alternative MSFT phones but with Microsoft paying for the marketing and development (Nokia only pays royalties on the software) this to me is as close to an "all in" for MSFT as it gets. This allows us to address Robert's valid point on how to "forget" the Symbian OS. There will be limited development to the Symbian OS (my guess would be almost none). Microsoft though will pay royalties on the use of NAVTEQ, which Nokia can use to counter Google Maps (another reason not to pair with GOOG). NAVTEQ is far superior to most products and is incorporated into numerous leading GPS products (1) (cross compatibility perhaps?). Now you have phones using NAVTEQ and Bing, making both more symbiotic and Google like.
Nokia spends tremendous amounts of money on R&D, ~7.5B USD TTM. With us forgetting Symbian and hopefully Nokia does too (job cuts were announced and have started) we can free up some portion of R&D to either directly benefit shareholders, or be placed into pertinent research.
That pertinent research to me represents the hidden jewel within Nokia that hasn't been recognized. One part is NSN, a 50/50 joint venture with Siemens (who wanted to shed the program but has since withdrawn that). NSN purchased some of Motorola's infrastructure assets for $925M (2). This isn't IP but grants NSN a much better foothold with Sprint, Verizon, Vodafone, China Mobile, Clearwire, KDDI (Japan). In other words, infrastructure that a lot of future customers are going to have access to. It is in my opinion that the discount (originally the buying price was 1.2B) is a low cost way for Nokia to have a leverage point into the infrastructure of the worlds 4g customers.
There's two parts to wireless situations, there is the infrastructure and there is the actual wireless part, phones and such. This is a hotly contested area. A little company named Qualcomm did all right by securing a couple of patents (ok 1000's) around CDMA and then charging a couple of percent for every phone sold that contained its technology. Right now the race to become 4g essential is heating up and represents a critical concern for some well known companies.
Several companies have felt quite a bit of unexpected financial pain due to a poor IP portfolio. Google had weak IP around their Android OS system and now smaller suppliers are paying MSFT some substantial monies to use Android(3). There are two sides to this, Google could either say too bad to the suppliers and gradually the suppliers would abandon Android. Or Google could secure a stronger IP portfolio for the future and negate this. Enter Interdigital.
Interdigital is a company I have followed for a bit, a very strong telecommunications researcher. They have been considered a leader in 4g IP but have had low modest valuations by most standards. Recently the stock has exploded for two reasons. First and foremost was the Nortel IP sale. A consortium of companies (including MSFT and RIMM) bought the 6000 patents for $4.3B. Interdigital's portfolio is widely considered stronger and much better than Nortel (4, 5).
The second catalyst for IDCC was the company who wanted the Nortel patents (Google) is rumored to be after Interdigital. In my eyes this offers two firm values for IDCC's portfolio as judged by outside consulting firms and by a company considering purchase. Apple is rumored to be bidding for IDCC as well(6).
Clearly both are rumors but the one thing that Apple and Google have in common is their (relatively) poor IP stance in the world of wireless. One example of Apple needing/wanting more IP is the ending of a lawsuit with...Nokia.
Nokia just finished a two year old lawsuit with Apple getting $600M USD and theres talk of ongoing royalties for each iPhone sold.(7) Referencing back to (5) we can see that an outside consulting firm believes Nokia's IP to be almost as essential to 4g as Interdigital and NSN constituting another 2% of essential LTE patents. Other consulting firms place Nokia's patents at different values, but have a few conflicts of interest in my eyes.(8,9) A good couple of reads. Regardless I will discount the last study but I feel confident that Nokia's LTE portfolio can be judged to be worth somewhere between 30%-100% of IDCC's. At current valuations that puts Nokia's LTE IP at $1B-3.1B. This makes no account for the wider audience Nokia is reaching as IDCC seems to be much more North America bound (I can't find the source currently for this, I will do my best to retrieve it.)
Now I fully believe IDCC's IP is worth a lot more than current valuations but time will tell. In my eyes though this is only half the story. Nokia, in a way, has seen validation of the value behind their IP with IDCC suing them, and attempting to block ZTE, Huawei and Nokia from entering the US picture. A clear attempt to boost the value of their portfolio but clearly IDCC looks at Nokia as a threat.
The value placed above for Nokia's IP only includes the simple math version. If the patents become essential over time Nokia will be paying less and less royalties than say Google or Apple. From a 10,000 foot view we can see that Nokia (NSN) has positioned itself strongly in the infrastructure realm of things and also has the IP to potentially collect royalties/pay little royalities. With an enterprise value of 13.5B (gurufocus, yahoo finance) you get a company that is priced for failure that generates 62.5B in sales TTM and is experiencing a lot of temporary(hopefully) pains. Right now I see a solid floor being created, limiting the downside to any investment. In return you are getting a free call on all of the IP that Nokia has and its primary(royalties), and secondary(synergies, higher profit margins) effects on the business. I hope from the above analysis someone will argue with me and a clearer picture can be gained.
There are multiple other lawsuits that Nokia is engaged in for patent infringement, I will try to follow up with more information concerning them. I will use the disclaimer that I'm not a telecom expert, have read way too much LTE technical info and welcome any criticism that saves me money.
Cheers,
So today (8/15) Google decided to buy out Motorola Mobility for 12.5B, a nice premium to Fridays closing MC of 7.27B. This is roughly 1x P/S, and 4x EBITDA. The question becomes what did they see? The hardware business is a tough sell on any level. Why would a company with 64% gross margins buy a commoditized company with gross margins <26%? Not only that but they alienate all the other Android supporting phone makers, HTC, LG etc.
I suspect there was only a little bit of attention paid to the hardware business, likely Google was after MMI's IP portfolio which Carl Ichan hoped to capitalize on only a few weeks ago (causing a nice little 10% intraday pop in shares). Although we can't place a firm value on Google's valuation of MMI's portfolio it is reasonable to assume that Nokia's IP is worth what MMI's portfolio is, if not 3-4x more. We can also say confidently, based on multiple sources below, that Motorola's IP was worth more than Nortels IP. Nortels sold for 4.5B. I would estimate MMI's to have been valued at 4-7B. Meaning Nokia's could be valued anywhere between 4-16B depending on how everything rolls out. Right now you're getting a company with normalized cash flows of 1.4B USD, for an EV of 14B USD. 10x normalized FCF for a terrible, no good, rotten phone business. And a ton of IP. IP that could be worth billions more than the market is accounting for. I have initiated a small tracking position in my PA. Long NOK
