Evercore analysts Mark McKechnie Zachary Amsel take a look at Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V), noting that with their MWC event, the company’s outlook remains relatively unchanged.
Nokia expanded presence in IP routers
We maintain our EW rating on Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) following a fairly uneventful MWC press event on Sunday night. The one standout comment (and of course first question) from the event was Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)‘s plans for an expanded presence in IP (i.e. routers). When asked, NSN management said that simply it currently has a partnership with Juniper Networks, Inc. (NYSE:JNPR) (JNPR, $28, EW) and is looking for a way to expand its business with them. This follows publicly circulated speculation that Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) was mulling an acquisition of Juniper Networks, Inc. (NYSE:JNPR) late last week. (Reuters 2/20/14)
No strategic updates / nor talk of new CEO pending approval of the MSFT transaction
NSN led off the meeting indicating that it was not in a position to update its strategic outlook as it still had not received all the regulatory approvals for the sale of its handset division to Microsoft Corporation (NASDAQ:MSFT), which it still expects to receive during the current quarter. Following the deal, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will consist of three distinct entities including 1) NSN, 2) Here/ Location, and 3) Advanced Technologies / IP royalties.
Nokia flattish industry outlook for CY14
While Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)‘s guide extends to just Q1’14, management expects flat to modest industry growth for CY14 as the US coverage programs pause and China/ Europe begin to ramp. No change to the company’s guide for ~ 5-10% long-term operating margins. This compares to our CY14 and CY15 growth estimates of 1% and 3%, respectively, and 9.5% and 10.3% margins for NSN.
#2 in services?
NSN claimed it is the #2 player in Telco services revenue. We note this does not line up with our discussions with senior management from Huawei which suggest ERIC is the market leader, with Huawei a close second (25K employees) and the rest well below. We note that Huawei does not report its services businesses separately, thus could be splitting hairs as the #2 player in services based on reported revenues. For reference, ERIC reported SEK 97.4B (~ 10.85B) in services revenue in CY13 at 8.4% margins versus Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) at 5.75B at 12% margins.
PT & Risks
Our $7PT is based on 17x our CY15 EPS of $0.42, and also corresponds to 10x plus an estimated 8B or $2.76 per share in net cash. This would correspond to 0.85x EV/Sales for CY14, in-range with comps ERIC, ALU, and ZTE which range from 0.6x (ALU) to 0.9x (ERIC). Our $7 PT also ‘back-checks’ with an SOP analysis of 1) $2.76 in net cash at CY14-end, 2) $3.30 for NSN, 3) $0.14 for HERE, and 4) $0.83 for Advanced Tech. Risks include 1) NSN’s performance in the highly competitive wireless infrastructure space, 2) NSN’s major US and Japanese projects are nearing completion, and 3) the Microsoft Corporation (NASDAQ:MSFT) deal could fall through despite the $750M termination fee.
