Nokia Is Back on Track

The sale of Nokia's devices segment has generated a lot of cash and is now enabling the company to focus on its networking solutions. It already has the market leadership in 4G LTE and is also ahead in 5G research.

May 29, 2014 at 10:05AM

The sale of its struggling devices segment has returned Nokia (NYSE:NOK) to profitability, and the company has tax shields of around $11 billion to protect its profits. From a long-term perspective, the differentiated position of Nokia in networks and its presence in the high-growth navigation business make it a promising candidate for future growth.

Nokia(NYSE:NOK)is now predominantly a telecommunication equipment provider after the sale of its devices business to Microsoft (NASDAQ:MSFT). It's focused on its network business and is also involved in the development of mapping and location services. Its advanced technology segment is involved in researching and developing concept products and managing patent portfolios and intellectual property. The company generates more than 85% of its revenue from networks, around 7% from HERE, its mapping and location unit, and around 5% from advanced technologies.

The company's customer base includes telecom giants like China Mobile, Verizon, Vodafone, Deutsche Telekom, NTT DoCoMo, Softbank, Sprint, and Telefónica. This means that around 4 billion subscribers use Nokia's communication network. Nokia's differentiating factors are its LTE and voice-over-LTE capabilities, its Telco Cloud efforts, and its efforts relating to next-gen telecom technologies such as 5G.

LTE networks are currently being deployed by many telecom service providers, and it is now quite clear that they will dominate, at least for the next four to five years. Nokia has around 141 commercial references for delivering LTE, and China Mobile chose Nokia to deploy its TD-LTE network recently.

Gartner puts Nokia in the "Leaders" quadrant for LTE network infrastructure, noting that the company's rate of gaining customers was among the fastest in the past 12 months. As the LTE infrastructure is expected to grow at a compound annual rate, or CAGR, of 41.8% during 2013-2017, Nokia will also grow because of its dominating position in the market.

Mobile TeleSystems recently completed its first VoLTE call on a Telco Cloud using Nokia's technology. According to Infonetics, VoLTE subscribers are expected to increase at a CAGR of 145% from 2012-2017. Although a bold projection, it does give us an indication of where VoLTE is headed. Growth in VoLTE is expected because of superior call quality, improvements in battery life, and OPEX savings for the carriers. Nokia is expected to benefit  from its comprehensive VoLTE capabilities.

Fifth-generation technologies
Nokia demonstrated the dynamic access of the unutilized spectrum, i.e. authorized share access, last year. It also has several research collaborations, including an agreement with CMRI and a more recent association with NTT DoCoMo regarding 5G research. The initial focus will be on exploring the potential of millimeter wave technologies at the 70GHz band spectrum. Note that Nokia has successfully collaborated with DoCoMo in the past on 3G and 4G technologies -- a collaboration that could be fruitful.

Nokia HERE
Nokia's mapping service has growth potential going forward, mainly because of the increased adoption of connected devices. Currently four out of five cars with integrated navigation in North America and Europe feature Nokia HERE, and it was shipped with 10 million new cars in 2013. Nokia's offline navigation adds more strength to its product offerings, and it is set to grow in this segment as car-connected navigation is becoming more important.

Changing capital structure and investment value
The $7 billion that Nokia received from Microsoft has made it a cash-rich company, and it now has cash at its disposal for R&D and restructuring. These funds will certainly help in network R&D, and reorganizing the capital structure will help the company reduce its cost of capital going forward.

Nokia is planning a $6.8 billion restructuring plan that will include a proposal for dividends and the authorization of a share buyback program. Standard & Poor's and Moody's upgraded Nokia's credit rating, and David Einhorn's Greenlight bought the stock. All these developments are indicative of a very healthy investment going forward.

Bottom line
The sale of the devices business and increased focus on networks and mapping services has put Nokia in a position to grow in the long run. Cash acquired from the sale, along with tax shields, will help the short-term cause, while changes in the capital structure will result in stock appreciation. All in all, Nokia is a complete long-term investment package.

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Muhammad Saeed has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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