Nokia Lumia 1020 (Photo credit: Janitors)
Following the early September announcement that Microsoft was buying the handset device segment of Nokia, NOK surged from under $4 to $5 almost immediately. Doubters and naysayers jumped ship at that first bounce never expecting the strong performance that has ensued. Now the stock is over $7 and still moving north. Nokia World is being held in Abu Dhabi starting 10/22 and will be followed on 10/29 with Q3 earnings. Then the shareholder vote will occur on the Microsoft transaction in the Helsinki Ice Hall on November 19. Those are lots of opportunities for good news to flow.
Suddenly, the about to be reconstituted Nokia faces a vastly different future bereft of its handset division. How it will fare as the leader in Windows mobile devices will become the deep pocketed Microsoft's problem going forward. This is not the first time that Nokia has totally recast itself and gone into new directions. It sold off its industrial activities decades ago to pursue mobile communications. There are many uncertainties but going from being very cash poor to being very cash rich is not going to be one of them.
It's hard to understand why anyone would vote against this deal. It saves NOK from the issues of having a bloated, indecisive partner in Microsoft that doesn't understand the word 'Urgency' that Elop has enforced on Nokia as its CEO. Actually, as a former Microsoft executive, one wonders where Elop learned the concept. Surely not there in the land of 'um, let's think this over yet again.' One presumes Elop will take that sense of urgency with him as he spins himself out of NOK with the division either as the continuing head of mobile devices at Microsoft or as the possible successor to Steve Ballmer as CEO of the whole company. He's been rumored for weeks to be on that short list.
Elop didn't mince words when he arrived three years ago about the issues he inherited from earlier management that allowed NOK to miss not just one but about three cycles in handsets pushing it from the dominant player in the industry in terms of handsets sold to a total also ran. Nokia fell from a huge market share to about 3% of late. From the sub basement, it was working hard to rebuild even as its cash was dwindling away. What Nokia knows how to do well, and Apple appears to not do at all, is make a highly reliable device for a cheap price and actually turn a profit on volume. Apple's model is the obverse. Fewer phones, glitzy gadgets that are easily broken but have cache and are coveted as a status symbol.
As mobility becomes commoditized globally, many manufacturers are stumbling and falling by the wayside. Motorola is almost invisible since it was acquired by Google for its patent portfolio. In the U.S., just watch what has happened to Blackberry as it missed a product cycle or two. It is on the auction block now and for sale as its sales decline. Blackberry's best product line is its business networking capability which many don't want to see fall into foreign hands for security reasons. Think about the promise in the Softbank acquisition of Sprint that it would not use Huawei equipment in its national network to assuage Congressional concerns about security from Chinese designs.
Globally, Google's Android system is most dominant with 187 million units shipped in Q2, or 79% of the total, by multiple suppliers. Even within that operating system, Samsung is eating HTC's lunch. HTC reported dismal results in the latest quarter and a huge loss. Apple sits in the middle of this competitive landscape with just a 13% share having sold 31.2 million units in Q2, a gain of just over 13% but at prices in some cases six times that of its competitors like Nokia. The interesting problem for Apple is that as the developed world is well saturated with high end devices, it just tried an experiment with a lower end phone in the U.S. with its new 5c. Verizon reported last week that its Q3 results were constrained by not having enough 5S devices to sell. It seems that volume demand was twice for the expensive 5s what it was for the 5c. If that trend goes global, then Apple will not be able to effectively compete in Asia and India with lower priced devices. The Nokia 520 is now accounting for about a third of NOK's sales which only represent about a 4% market share, That particular phone sells for less than $100. That compares with Apple out-negotiating Sprint into paying more than $600 per unit even as Apple was peaking in 2012.
This week Apple will be announcing its new iPad. I have no special insight but if the 5s is any indication, it will be an evolution, not a completely newly redesigned device that will force anyone into the store to replace what they have. On October 22, 2013, Nokia World is going to see the rumored launch of a new Lumia 1520 with a 6 inch screen and more RAM, a 20 Megapixel camera, and with 16 GB and 32GB options. New phones, new phablets and a net tablet are also expected to be unveiled. The implication is that Nokia is alive and breathing, if not yet thriving. What it is not lacking is innovation after years without any.
What remains of Nokia has interesting options for its path forward. On the financial side, it will go from being very cash poor to being very cash rich. It will have full control of NSN , Nokia Siemens Networks, formerly a joint effort, just at a time that the world is rebuilding its wireless infrastructure. NOK will be in a position to restore its dividend which it was forced to discontinue to preserve cash. It could validate the rumors that it might buy some or all of Alcatel Lucent to embellish its competitive position with NSN. It can optimize the value of its mapping activities. It could take itself into an entirely new direction as it did years ago when it entered cellular telephony. And, it can figure out money making options for its very strong patent portfolio if it does so quickly. With the current pace of change, patents lose their luster faster than before. Eastman Kodak was too slow to act on its patent portfolio to maximize its value before it went under.
Joan E. Lappin CFA Gramercy Capital Mgt. Mrs. Lappin, Gramercy Capital and its clients own shares in Nokia at this time of the companies mentioned in this article.For information about our firm: info@gramercycapital.com. to follow Mrs. Lappin on Forbes click on the button at the top of this article. To follow her on twitter: @joanlappin
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