Microsoft / Nokia – Quick Win

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Synergies will be pretty easy to achieve.

  • With the Chinese finally signing off on the deal, Microsoft has finally managed to close its purchase of the Nokia handset business.
  • Now that handsets are now part of Microsoft, the focus will now move to profitability and how the $600m of synergies will be achieved before the end of 2015.
  • It is not obvious how Microsoft can wring synergies out Nokia by taking ownership but the answer lies in the nature of their relationship as separate entities.
  • As part of the original deal struck in 2011, Nokia agreed to pay Microsoft a licence fee for Windows Phone but actually got far more in return every time it shipped a handset.
  • RFM research suggests that Nokia was paying $10 per unit for the software but was receiving $20 per unit in terms of payments and marketing support.
  • This means that Microsoft was losing $10 every time Nokia shipped a device.
  • This created a disincentive for Microsoft to invest in Windows Phone and was one of the motivations for Microsoft to acquire the business.
  • Hence, in order to realise $600m of savings, Microsoft simply needs to reach a 60m unit annual run rate or 15m per quarter.
  • Even after adjusting forecasts downwards to reflect a weak Q1, I am still expecting Microsoft to hit 15m in quarterly shipments in Q4 this year.
  • Consequently, I fully expect Microsoft to announce that synergies have been achieved well ahead of target even if it does not really mean anything.
  • The real value in this acquisition will come from the fact that Microsoft now has an incentive to invest in this platform and push its appeal both far and wide.
  • Microsoft is still struggling to do this as most consumers are either unaware of the platform or have no clue why they should buy it.
  • With this hurdle out of the way and a new personality at the top, I have hope that this year will see these issues taken properly in hand.
  • Hence, I expect Windows Phone to gain steady share during 2014E and tablet PCs to gain some traction in H2 2014.
  • Both of these could add further increase expectations for Microsoft which should keep the current rally going.
  • Microsoft is up there with Yahoo! and Google as my favourite mobile ecosystem plays. 

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.