Nokia – Finnished with phones.

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Nokia is not about to start making phones again.

• The wires are full of the notion that Nokia is again about to plunge headlong into the mobile phone business but I think that this is very unlikely.
• What is far more likely is that Nokia licences out its brand name to a company that already makes mobile phones in order for it to win some volume in low end feature phones.
• Microsoft’s right to use the Nokia brand on its feature phones expires in 2016 giving the opportunity to monetise the brand back to Nokia.
• Although all of the attention is focused on smartphones, the feature phone market is still significant, shipping around 135m units per quarter.
• Against this backdrop, devices using Nokia’s brand still have around 20% market share and good recognition with users in those price tiers.
• Consequently, there is still value in the Nokia brand in the feature phone market, which I think Nokia is aiming monetise in 2016.
• For an EMS vendor like Foxconn this represents an opportunity to move up the value chain and increase its wafer thin margins by becoming an OEM and direct to consumers.
• Currently EMS vendors make their money by manufacturing phones on behalf of OEMs who then sell them onto to consumers.
• Selling directly to consumers will allow the EMS vendor to keep more profit but it will have to manage sales and distribution itself.
• The hope here is that by doing a deal with Nokia for its brand, sales and distribution will be much easier given the strength of the brand thereby making this strategy viable.
• Nokia’s exposure to this is likely to be nothing more than a brand royalty that I think could net an extra $50-$100m in revenues per year.
• This would be coming at almost 100% margins making it a no brainer from Nokia’s perspective.
• Consequently, I do not see Nokia blowing the cobwebs out from the old closed operations and turning the lights back on.
• This is simply zero risk monetisation of an asset that would otherwise go to waste.
• Nokia has done a good job at maximising the value from its operations for shareholders which combined with a potential sale of HERE and the licencing if its brand, looks set to continue.
• Consequently, I can still see upside in the Nokia share price but I remain nervous that this value will be consumed by the merger with Alcatel which is at risk of not living up to expectations.