In the 1990s, as cell phones were barely entering most homes, Nokia (NOK) ran an advertisement campaign where the company's catchphrase was "Nokia: Connecting People." While the new Nokia will stop building mobile phones for a while (at least until 2015), it continues to connect people as it helps mobile carriers with installing, maintaining, servicing and upgrading mobile networks and infrastructure around the world.
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Now that Nokia's sale of its mobile devices business to Microsoft (MSFT) is finalized, the company has a new mission and a new vision. As the world becomes more connected and we have more connected devices per person than ever in history, there is a huge demand for network infrastructure. Just about 5-6 years ago, the only connected devices were laptops with wireless adapters and cell phones. Today, from cars to music players, from tablets to handheld gaming systems, from cameras to TV sets, everything is connected. Basically, if it beeps it connects. Just about 10 years ago, each person had one "connected" device, today each person, on average, has 7 "connected" devices (by the way, have you guys seen the fridges and ovens that come with Twitter apps?). This number is expected to get close to 20 by the end of the decade. In a connected world like this, new Nokia's role will be massive.
There are many different kinds of tools that are being used to make sure that we are connected at all times. There are radio towers, cables, wires, receivers, software, hardware and new Nokia provides all the tools and services a mobile carrier needs in order to offer uninterrupted high quality connection service around the world.
Nokia's hardware/software/infrastructure business will be called Mobile Broadband (in fact, it is already called that). As the name implies, this business unit will be responsible from installing infrastructure, powering it with the compatible software and making sure that mobile carriers offer people the best service for their money. Nokia's software package includes network management tools which can help mobile carriers monitor their network usage and see if there are any areas with performance issues. Regardless of where you are in the world and what brand of a phone you use, there is a very high chance that your connection quality will highly depend on Nokia's hardware and software.
Apart from the hardware/software/infrastructure business, the new Nokia also enjoys a global service business unit. This business unit offers a variety of services such as consulting, troubleshooting, repairs, maintenance, customer care, network care, implementation, optimization and other related services. Nokia will be utilizing its huge expertise which took many years of intensive research to build in order to help its clients across the world.
More than 3 million base stations (and the number increases each day) built by Nokia connect people in more than 150 countries. The company provides 4G (LTE) services to about 80 carriers around the world and it will be offering this to many more carriers as they feel ready to upgrade to 4G. While many countries in the developing world were slow to adopt the 4G technology, they are catching up and Nokia is one of the biggest players in this space.
So, now that I explained why Nokia is so important to the global connectivity, I should explain Nokia's ability to actually monetize its capabilities. Last year, Nokia's network business (it was known as Nokia Siemens Networks) generated $17.42 billion in revenues, $1.07 billion in operating profit (excluding one-time items like restructuring costs), 30.7% in gross margin (the highest in the industry), and $1.7 billion in positive cash flow. In the first 9 months of the year, Nokia's networking business generated $10.49 billion in revenues, $982 million in operating profits. Compared to last year, Nokia's networking business will probably report flat or lower revenues but higher profits. This is because Nokia had to break a bunch of contracts last year as it didn't see promise in these contracts. As a result, (after paying the fees related to breaking certain contracts) the company's revenues fell a little but, its margins improved as it kept more of high-margin contracts and less of low-margin contracts. Nokia exited some countries entirely because the margins were prohibitively low in those countries and the company wanted to focus on locations where it can get a better return on investment.
One such example is Optical Networks. Nokia discontinued its optical networks business unit because it wasn't profitable. Last may, this loss generating business unit was sold to Marlin Equity Partners where the latter gained access to optical networks' product portfolio, services offering and existing customer contracts. As a result of this transaction, Nokia received $50 million and it wrote off $152 million as a loss, which should result in a tax benefit of $40-50 million. More importantly, Nokia got rid of a business unit that was losing money.
In conclusion, Nokia will continue to play a major role in the world of connectedness. Even though the company won't be making mobile phones anymore (at least for a while), it will continue to connect people.
By the way, I still didn't get back in Nokia because the current price action of the company still doesn't fit my investment goals. Prior to Microsoft's acquisition of Nokia's mobile devices business, I was regularly writing covered calls on my shares and generating an additional return of 2-3% every month. Currently, Nokia's call premiums are so low that it doesn't make sense to write covered calls on these cares. Last time I checked, even writing on the money calls would generate about 1% or less per month. I am waiting for Nokia's option premiums to go a little higher before getting back in the company. This doesn't mean you should do the same as me though. Everybody has different goals and different strategies to accomplish those goals, so you can always get in or out independent of how the options market behaves in the short term.
Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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