Citi Research Comments NOK Post Q4 Earnings ...
>> Nokia Corporation (ADR)(NOK) Looking For A Fresh Start In 2014
ValueWalk
February 09, 2014
valuewalk.com
Citi Research analysts Ehud Gelblum, Amit B Harchandani and Stanley Kovler maintain a Buy rating for Nokia Corporation (NYSE:NOK/HEL:NOK1V) as the cellphone maker turns over a new leaf after fourth quarter earnings.
Nokia’s NSN segment misses estimates
Following Q4’13 results by all 3 major Euro Wireless Infrastructure suppliers – Nokia, Alcatel Lucent SA (NYSE:ALU/EPA:ALU), and Ericsson (NASDAQ:ERIC), we now have more confidence in a more benign competitive landscape and thereby sustainable margins. To recap, Nokia Corporation's SN segment missed our topline ests by a hair at €3,105M vs our €3,198M est and op margin of 11.2% was shy of 12% guidance and our 11.7% est. However, adding back the 1-time ~€16-18M legal reserve and VAT expense not in original guidance, we would argue that NSN in fact posted a near 12% op margin in Q4, hitting our 11.7% estimate after all.
But given the fact that Alcatel Lucent SA and Ericsson’s Q4’13 results were characterized by somewhat weak topline but solid margins, we believe NSN’s equally weak topline is not the result of share loss or a devolving competitive environment implying that NSN’s FY14 op margin guidance of the “high-end of the 5-10% range” appears achievable.
As we have previously written, we have increased confidence in Nokia Corporation ’s ability and the willingness of the board / management to reinstate a dividend. We believe the company realizes it has excess cash following the close of the Devices and Services sale to Microsoft Corporation (NASDAQ:MSFT) and should be able to return several billion Euros in cash to shareholders but is still deciding on the optimal format and mix, between repurchases, special dividend, and ordinary dividends.
Potential upside from Nokia Advanced Technologies
We continue to believe that the potential upside from Advanced Technologies is not able to be read from the 2014 run rate as only a partial year of the €165M/ yr licensing payment from Microsoft is included in the €600M runrate guide, while the incremental received from Microsoft Corporation (NASDAQ:MSFT) in 2014 vs what Microsoft had been paying Nokia Corporation previously is likely far smaller than the full €165M. In addition, we now believe Nokia may not be accruing any revenue from Samsung in 2014 as opposed to our prior belief that Nokia was likely accruing Samsung at the same level in 2014 as it had in 2013. This is based on comparing the situation to the Nokia/Qualcomm dispute of 2006/07 when QUALCOMM, Inc. (NASDAQ:QCOM) did not accrue any revenue until the dispute was settled. Together, these two datapoints imply that the non-Microsoft, non-Samsung portion of Advanced Technologies may actually be up y/y in 2014 on a like-for-like basis. Including Samsung back into the runrate at some point in 2015 therefore, we would not be surprised to see Nokia’s IPR run rate getting to well in excess of €700M once a new Samsung agreement is signed.
Longer-term, while Nokia Corporation may still be interested in Alcatel Lucent SA ’s wireless business (as per recent press reports) and its strong relationships with Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T), we do not expect any deal to occur for many years leaving Nokia’s cash intact for returning to shareholders. ###
- Eric - |
