Is Nokia Bailing on Smartphones?

Nokia (NYSE: NOK  ) just made a rather curious move. The Finnish smartphone maker recently announced that it would be acquiring Siemens' (NASDAQOTH: SIEGY  ) 50% stake of the pair's Nokia Siemens Networks, or NSN, joint venture. The total price tag is expected to be 1.7 billion euros and should close this quarter. That will make it a wholly owned subsidiary.

As Nokia has been in the midst of its turnaround, investors have been keeping a close eye on its cash position and cash burn rates. Nokia's numerous rounds of layoffs have been in pursuit of cash savings, and Nokia's debt rating was cut into junk territory a year ago. At the end of the first quarter, Nokia was sitting on a net cash position of 4.5 billion euros. Nokia has secured bank financing for 1.2 billion euros, and Siemens is spotting Nokia the remaining 500 million euros.

Nokia estimates that it closed the second quarter with 3.7 billion to 4.2 billion euros in net cash, down 300 million to 800 million euros sequentially.

For a company that should be thrifty given its current financial standing, Nokia just spent a big chunk of change. That's renewed some speculation that the company could be preparing to sell off the smartphone segment, even as Lumia unit volumes are on the rise. J.P. Morgan analyst Sandeep Deshpande thinks the NSN move could indicate that Nokia is thinking about selling off the handset segment, although it's far from conclusive.

The NSN segment is more profitable than the devices and services business, with an adjusted operating margin of 7%. In contrast, the devices and services segment barely broke even in operations on an adjusted basis at just 0.1% last quarter. Nokia has been targeting the lower-end and less profitable segment of the market with its Asha lineup, which could put further pressure on margins. Instead of dealing with fickle consumers, Nokia may prefer to deal with fickle carriers buying network equipment.

Of course, you can't discuss Nokia exiting the smartphone business without talking about Microsoft (NASDAQ: MSFT  ) entering the cutthroat market. The software giant has high hopes of further expanding into first-party mobile hardware following the launch of Surface last year. Microkia rumors have never come to fruition thus far, but that doesn't mean they won't eventually.

With Surface, Microsoft simply tapped a contract manufacturer (Pegatron) to make the device. Why wouldn't the company do likewise with its expected Surface Phone? First, Nokia has a broad patent portfolio that would come in handy. Second, buying in could facilitate a faster design cycle since Microsoft has no (known) experience designing smartphone hardware. Third, Nokia currently ships 80% of all Windows Phones. Fourth, Microsoft likes to blow money on huge acquisitions.

With Nokia's buyout of NSN expected to put even more pressure on its cash position by taking on more debt, one potential solution to relieve some of that pressure would be to bail on smartphones.

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  • Report this Comment On July 04, 2013, at 1:13 AM, Mjpbfool wrote:

    Another unsurprising, poorly researched piece on MF. Why would a Nokia purchase of the rest of NSN be curious? They paid 2.3B for almost half of a company that most analysts say has an enterprise value of at least $6B. They didn't have to reach into much of their cash stockpile, since they financed most of the purchase, and the business itself is great for cash flow. Their options now are either 1) keep making tons of cash as the world shifts to 4G (at 250m a quarter, that helps finance a bunch of other aspects of Nokia: 2) sell NSN to either PE or a competitor for a premium: or 3) IPO the thing. All have pluses and minuses but offer a lot of upside.

    And I don't know where this implies Nokia is bailing on smartphones - Nokia unveiled 3 new low cost phones TODAY, is announcing the EOS in a week, and has been aggressively reaching all price points with their smartphone line-up over the last year. As easy as it is to assume Microsoft can just buy its way into hardware, the company has been a hardware disaster at pretty much everything except for Xbox.

  • Report this Comment On July 04, 2013, at 11:35 AM, jayralez wrote:

    Hard to believe this article is written by a so called CFA unless CFA stands for something along the lines of Crap Fantastic Analyst.

  • Report this Comment On July 04, 2013, at 4:19 PM, ramaus wrote:

    "Microkia rumors have never come to fruition thus far, but that doesn't mean they won't eventually."

    Evan hasn't written an intelligent article on Nokia so far, but that doesn't mean he won't eventually.

    "With Nokia's buyout of NSN expected to put even more pressure on its cash position by taking on more debt, one potential solution to relieve some of that pressure would be to bail on smartphones."

    - Or or strangle stupid writers like Evan.

  • Report this Comment On July 04, 2013, at 7:55 PM, ctyank99 wrote:

    Nokia has made some great moves of late. The Lumia line of WPs is starting to sell. Things are looking up, Nokia will be a success. I can't see them selling the Smartphone business. That is their core business. If they work a deal with MS, it'll most likely be for less that 50% of the business, as they did with Seimans. New Smartphone coming out July 11th and earnings on July 18th. That should tell us how many phones they've been selling, among other things. The future is bright. The stock price will reflect that eventually!

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