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Nokia Corp.'s Return to Mobile Is Spot-On

By Tim Brugger - May 24, 2016 at 11:20AM

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The networking king will reenter the mobile-device fray, but with much less risk than its last, ultimately unsuccessful effort.

It's been a busy 2016 for Nokia (NOK 1.08%) with the assimilation of its former rival Alcatel-Lucent and an Internet of Things (IoT) deal with one of Russia's leading telecoms, to name but a couple of recent events. But the news that really caught investors' attention was Nokia's decision to reenter the world of mobile devices.

In the second quarter of 2010, Nokia was on top of the global mobile-phone sales heap, well ahead of "upstarts" including the iEverything maker and every other manufacturer. But as consumers ditched their old-school mobile phones for smartphones, Nokia took a beating which resulted in the now infamous $7.9 billion sale of its phone business to strategic partner Microsoft (MSFT 1.07%).

The deal with Microsoft was the end of the Nokia phone story, until CEO Rajeev Suri's announcement that it's back in the mobile mix, albeit in a different -- and better -- way than before.

Image source: Nokia.

The deal

Nokia's latest foray into mobile devices began with the recent formation of Finland-based HMD Global, which has been granted an "exclusive global license to create Nokia-branded mobile phones and tablets for the next ten years." In return for the use of the Nokia brand and intellectual property from its industry-leading patent portfolio, HMD will make royalty payments for each device sold.

Microsoft once again enters the Nokia mobile picture. Microsoft has agreed to sell what remains of its feature-phone unit to FIH Mobile, a subsidiary of Foxconn (NASDAQOTH: FXCOF), for $350 million. In return, Foxconn acquires Microsoft's manufacturing, some design rights, and the software king's extensive distribution and sales networks.

In conjunction with the Microsoft sale, HMD and Nokia Technologies have inked a deal with Foxconn -- financial terms weren't disclosed -- to collaborate on the "building of a global business" utilizing assets from its $350 million acquisition.

What it means

When rumors began swirling last year that Suri was planning a return to mobile, there was a collective groan from many Nokia investors and pundits. After years of losing both market share and money, the notion of Nokia making the same mistake again was a head-scratcher.

However, the arrangement that Nokia has put together with the parties involved -- including Microsoft divesting itself from the mobile-phone market -- is ideal. With low- and mid-tier feature phones, targeting one of the few regions that still offers some growth potential -- emerging markets -- is a solid plan, though one reason some of the big mobile-device hitters have avoided emerging markets is the razor-thin margins of lower-end units.

But outsourcing the manufacturing of feature phones and tablets that bear the Nokia name, a still-popular global brand, gives Nokia a revenue opportunity without the risk associated with building the devices. And let's not forget further monetizing Nokia's valuable patents. One estimate suggests Nokia's patent portfolio is worth between $4.48 billion and $11.2 billion. And with the assimilation of Alcatel-Lucent with its own laundry list of patents, Nokia's intellectual property is likely on the high end of industry valuations.

The opportunity to offer emerging markets low-cost mobile devices without the manufacturing hurdles is an arrangement that can only help Nokia. And additional sales from its non-networking technologies unit will be ancillary revenue that can only help boost Nokia's topline. That said, the arrangement with HMD and Foxconn won't miraculously change Nokia's reliance on connecting the world via its suite of networking solutions.

Of Nokia's $6.28 billion in total revenue in the first quarter of 2016, nearly 93% was derived from its networking division, with the balance split between technologies and other sales. But any step to further diversify revenue sources is a step in the right direction, especially with so little downside. Priced at just 15 times future earnings and sporting a 5.75% dividend yield, Nokia's stock may now get the shot in the arm it needs from mobile.

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