Nokia presentation aug26

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Nokia- a significantly under-valued turnaround 1 Private & Confidential

description

Nokia is a significantly undervalued turnaround story & will see significant upside over the next 12 - 24 months in its' stock price.

Transcript of Nokia presentation aug26

Page 1: Nokia presentation aug26

           

Nokia- a significantly under-valued turnaround

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Private & Confidential

Page 2: Nokia presentation aug26

A"er  twelve  years  in  European  Equi4es  in  London  &  NYC,  realizing  the  trough  of  the  US  housing  market  had  been  reached,  I  le"  finance  in  Q2  2012  to  create  and  deploy  a  Limited  Partnership  purchasing,  renova4ng  &  leasing  out  distressed  houses  in  the  South  East  US.  During  this  4me  outside  the  mainstream  world  of  finance,  I  have  developed  a  strong  framework  to  extract  value  added  insight  and  ideas  from  non-­‐mainstream  resources.  The  growth  of  big  data  &  social  media  has  led  to  the  con4nuous  flow  of  remarkable  insight  &  informa4on  flow  as  pertains  to  all  industries  &  businesses.      The  scope  to  leverage  these  non-­‐mainstream  resources  to  add  value  to  stock  market  investors  is  fascina4ng  in  its’  poten4al.  It  was  through  looking  at  certain  social  media  metrics,  I  no4ced  a  strong  up4ck  in  indicators  of  consumer  trac4on  of  the  Nokia  Lumia  range.  Combining  my  background  in  equi4es  with  non-­‐mainstream  resources  ,  I  did  a  deep  dive  into  the  investment  case  which  is  presented  here.  Nokia  is  significantly  undervalued  &  mis-­‐understood  as  evidence  of  the  turnaround  in  smart  phones  is  growing.  The  August  22nd,    2013  announcement  that  Delta  is  conver4ng  its’  en4re  fleet’s  air  aUendants  to  use  Lumia  820  in-­‐flight  is  the  4p  of  the  iceberg  for  the  enterprise  segment.    I  am  invested  in  Nokia.    Please  feel  free  to  contact  me  directly  at  [email protected]  or  on  +1  646  509  6316  to  discuss  this  or  other  ideas  have  developed.  

   Shyam  Kumar,  August  22nd,  2013   2  

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LEGAL DISCLAIMER •  THIS IS NOT AN OFFERING OR THE SOLICITATION OF AN OFFER TO PURCHASE AN

INTEREST IN GENESIS HOUSING FUND, L.P. (THE “FUND”). ANY SUCH OFFER OR SOLICITATION WILL ONLY BE MADE TO QUALIFIED INVESTORS BY MEANS OF A CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (THE “MEMORANDUM”) AND ONLY IN THOSE JURISDICTIONS WHERE PERMITTED BY LAW. AN INVESTMENT SHOULD ONLY BE MADE AFTER CAREFUL REVIEW OF THE FUND’S MEMORANDUM. THE INFORMATION HEREIN IS QUALIFIED IN ITS ENTIRETY BY THE INFORMATION IN THE MEMORANDUM.

•  AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. OPPORTUNITIES FOR WITHDRAWAL, REDEMPTION AND TRANSFERABILITY OF INTERESTS ARE RESTRICTED, SO INVESTORS MAY NOT HAVE ACCESS TO CAPITAL WHEN IT IS NEEDED. THERE IS NO SECONDARY MARKET FOR THE INTERESTS AND NONE IS EXPECTED TO DEVELOP. NO ASSURANCE CAN BE GIVEN THAT THE INVESTMENT OBJECTIVE WILL BE ACHIEVED OR THAT AN INVESTOR WILL RECEIVE A RETURN OF ALL OR ANY PORTION OF HIS OR HER INVESTMENT IN THE FUND. INVESTMENT RESULTS MAY VARY SUBSTANTIALLY OVER ANY GIVEN TIME PERIOD.

•  CERTAIN DATA CONTAINED HEREIN IS BASED ON INFORMATION OBTAINED FROM SOURCES BELIEVED TO BE ACCURATE, BUT WE CANNOT GUARANTEE THE ACCURACY OF SUCH INFORMATION.

•  REFERENCES TO SPECIFIC GEOGRAPHIC LOCATIONS AND PROPERTIES LOCATED THEREIN ARE PRESENTED TO ILLUSTRATE THE APPLICATION OF OUR INVESTMENT PHILOSOPHY ONLY AND ARE NOT INTENDED TO BE CONSIDERED RECOMMENDATIONS BY SHYAM REAL ESTATE, LLC. THE SPECIFIC LOCATIONS AND PROPERTIES IDENTIFIED AND DESCRIBED IN THIS PRESENTATION DO NOT REPRESENT PROPERTIES ACTUALLY PURCHASED, SOLD OR RECOMMENDED FOR THE FUND, AND IT SHOULD NOT BE ASSUMED THAT INVESTMENTS IN THE PROPERTIES IDENTIFIED WILL BE PROFITABLE.

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Nokia: Severely Undervalued Turnaround

•  Nokia  Devices  &  Services  &  Patent  Por5olio  trades  for  ZERO  VALUE  in  current  Nokia  market  cap  of  E11bn  

•  Excessively  bearish  senAment  towards  company  due  to  significant  historic  under-­‐performance  

•  Market  not  recognizing  huge  opAonality  embedded  in  Nokia’s  Device  business  becoming  a  credible  player  in  Smart  Phones  from  current  low  3.3%  global  m/s  

•  It  is  already  happening:  Lumia  520  is  tracking  as  a  blockbuster  product.  Lumia  1020  has  the  best  smartphone  camera  technology  &  augmented  reality  mapping  on  the  market.    

•  Windows  Phone  eco-­‐system  had  only  3.9%  of  Global  Smart  Phone  Market  Share  in  Q2  according  to  IDC.  Huge  opportunity  to  gain  market  share  as  Windows  Phone  OS  catches  up  &  Nokia  drives  hardware  performance    

•  Global  Smart  Phones  Volumes  in  Q2  +50%,  growth  is  in  low  to  mid  end  and  emerging  markets,  Nokia’s  key  foot  print.    

•  Microso[  has  installed  base  of  1.5bn  customers,  Nokia  1.3bn;  Required  conversion  rates  of  exisAng  installed  base  to  Windows  Phone  OS  to  gain  meaningful  market  share  is  very  low  

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Nokia: Severely Undervalued Turnaround

   •  Nokia’s  Main  Businesses  Under-­‐Appreciated  &  Undervalued  •  NSN:  Siemens  50%  stake  bought  at  E1.7bn  a  steal.  Valuing  NSN  at  0.7x  EV/  Sales  

E8.5bn.    •  Ericsson  has  E30bn  mkt  cap  &  only  twice  sales  base  as  NSN,  similar  Q2  margin  •  HERE:  Mapping  is  new  growth  area  &  is  increasingly  embedded  into  search.  It  is  

point  of  differenAaAon  between  operaAng  systems.    •  HERE  business  created  by  $8.1bn  Navteq  Deal  in  2007.  Very  low  profit  margins  as  

spending  90%  of  Sales  on  R&D.    •  R&D  spend  is  a  GOOD  thing  given  scope  for  HERE  to  forge  ahead  in  mapping  

segment.  Nokia  HERE  augmented  reality  mapping  available  through  its  City  Lens  app  is  amazing  &  an  under-­‐appreciated  technological  breakthrough.  At  Lumia  1020  presentaAon,  a[er  camera  its  mapping  was  next  most  focused  on  differenAator  by    CEO  Elop.  

•   HERE  is  one  of  3  global  mapping  libraries  at  a  Ame  when  mapping  is  growing  as  point  of  differenAaAon.  Waze  a  start  up  just  purchased  for  $1bn  by  Google.  Yet  sell  side  SOTP  only  values  HERE  at  a  paltry  E0.5bn.    

•  Patents:  Nokia  spent  E4bn  on  R&D  last  year,  15%  of  sales.  One  of  Largest  Global  R&D  spenders  in  any  industry  

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Nokia: Severely Undervalued Turnaround

•  Patent  porMolio,  under  appreciated.  Nokia  has  significant  patent  por5olio  with  average  life  of  13.8  years  earning  at  present  E500m+  per  annum.  

•  Envision  IP  esAmates  20,000  internaAonal  patents,  16,000  US  Patents  •  ConservaAve  EsAmated  value  E4bn  +.  Nortel  Networks  Patents  sold  for  $4.5bn,  

Motorola  Mobility  arguably  patent  driven  deal  at  $12bn      •  Cash:  Q2  13  E4.1bn  net  cash,  post  NSN  compleAon  &  extra  cash  burn  esAmate  

E2bn  at  Q3  13  •  Devices  &  Services:  E11bn  sales,  at  0.3x  Sales  =  E3.3bn.  ValuaAon  for  Devices  set  

to  EXPLODE  as  Nokia  gains  share  in  Smart  phone  in  next  12  –  18  months.  •  Xiaomi,  Chinese  android  smart  phone  maker  valued  $10bn  yet  forecast  sell  20m  

units  in  2013  only,  3  years  old  &  China  centric.  

•  NSN  +  HERE  +  Net  Cash=  E11.5bn  or  current  NOKIA  market  cap  

Patent  PorMolio  &  Devices  business  in  there  for  ZERO  Market  is  pricing  Nokia  &  Windows  Phones  as  all  out  failure,  when  in  fact  it  will  be  posAng  100%+  YoY  volume  growth  in  Lumia  smart  phones  in  H2   6  

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Device & Services: The Big Delta

•  The  mulA-­‐billion  dollar  quesAon  is  whether  the  Nokia  -­‐  Microso[  Partnership  can  establish  themselves  as  scalable  third  alternaAve  eco-­‐system  in  the  mobility  space.    

•  At  Q2  2013,  79%  of  all  Smartphones  shipped  were  Google’s  Android,  13%  Apple’s  IOS  and  3.9%  Windows  Phone  

•  Nokia  is  commined  to  Windows  Phone  OS  All  2016,  85%  of  Windows  Phones  sold  are  Nokia.  

•  Nokia  is  criUcal  to  MicrosoW’s  plans  to  build  out  its’  Eco-­‐System  between  PCs,  Tablets,  Xbox  &  Smartphones.  MicrosoW  has  to  gain  a  foothold  in  Mobility.  

•  Nokia  has  a  $300bn  market  cap  company  in  Microso[  totally  behind  them  &  needing  Windows  Phone  Eco-­‐system  to  succeed  

•  SymbioAc  relaAonship  between  Microso[  and  Nokia  given  co-­‐dependence.    •  To  understand  Nokia’s  prospects  of  resurgence  in  Smartphones  need  to  

understand  the  prospects  for  Windows  Phone  OS  as  a  credible  &  growing  third  alternaAve  OperaAng  System  for  consumers  &  business  

   

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Windows Phone OS: Network Economics

•  Network  economics  very  much  at  work    as  explained  by  the  recent  paper  

‘Developer  Economics  Q3:  State  of  the  Developer  NaAon’    ‘Android  and  iOS  have  grown  on  the  back  of  strong  network  effects,  whereby  they  grow  stronger  with  each  user  and  developer  added  to  the  ecosystem.  Users  drive  demand  for  apps  and  hence  developers.  Developers  and  apps  drive  user  adop4on’.    •  Nokia  &  Windows  Phone  are  seeking  to  catalyze  the  posiAve  dynamic  of  the  ‘  

network  effect.’      •  Volume  growth  is  key  to  reach  ‘Apping  point’  for  the  eco-­‐system  whereby  user  

growth  drives  app  development  drives  consumer  appeal  drives  user  growth…    •  Focus  should  be  on  market  share  &  not  ST  profits  as  seeking  to  reach  ‘Apping  

point’  for  eco-­‐system  &  propel  network  effects.  

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Windows Phone OS

 •  April  2011:  Nokia  under  Elop  abandoned  Nokia’s  own  Symbian  proprietary  system                Symbian  sales  purposefully  collapsed  from  7m  in  Q2  12  to  Zero  in  Q2  13.  •  Windows  Phone  7  OS  launched  &  ramped  to  sell  4m  Nokia  Smartphones  in  Q2  12  •  June  2012:  Windows  Phone  8  OS  announced,  however  not  backward  compaAble  

to  WP7  devices.  •  Lack  of  compaAbility  stalted  growth  of  Nokia  Lumia  Devices  to  2.9m  in  Q312  

before  WP8  OS  launched  Q4  2012  •  Nokia  sold  4.4m  Lumia  in  Q412,  5.6m  Q1  13,  7.4m  Q2  13:  AcceleraAng  volume  

growth  

In  last  2  years,  Nokia  has  transiAoned  through  2  problemaAc  OS,  has  it  finally  turned  the  corner  with  WP8….  

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Windows Phone OS

•  Huge  symbiosis  between  Hardware  &  So[ware:  Nokia  Lumia  hardware  needs  to  have  an  OperaAng  System  that  not  obviously  lacking  vs..  compeAtors  

•  Windows  Phone  8  OS  seen  as  ‘mixed’  by  customers  &  industry  analysts.    •  PercepAon  is  that  Microso[  as  a  so[ware  partner  is  lagging  Nokia  as  hardware  

partner  •  Main  Issue  quoted  by  customers  and  carrier  sales  reps  is  lack  of  Apps  vs..  Android  

&  IOS;  WP8  has  170,000  Apps  vs.  near  1m  on  rivals  OS  •  WP8  not  support  quad-­‐core  processors,  1080p  hardware  (high  resoluAon  screens)  

or  VPNs  (Virtual  Private  Networks).    •  CompeAng  with  more  developed  eco-­‐systems,  with  already  large  installed  base  of  

customers,  some  degree  of  ‘lock-­‐in.’  •  Other  ecosystems  have  developer  ‘mind  share’    

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Windows Phone OS  However  Windows  Phone  operaAng  system  is  maturing  rapidly  to  catch  up  with  Android  &  IOS  which  moved  several  years  ahead  of  Microso[  •  Windows  Phone  only  2  cycles  so  far  WP7  &  WP8  •  Shi[  from  WP7  to  WP8  saw  much  bener  consumer  tracAon  •  GDR2  being  rolled  out  currently  &  GDR3  expected  Q4  13  will  enable  Windows  

Phones  to  support  quad-­‐core  &  1080p.  •  WP  8.1/  Blue:  Much  anAcipated  third  version  of  the  WP  OS  expected  start  2014  •  WP8.1  will  further  strengthen  enterprise  funcAonality  &  likely  spur  rapid  adopAon  

of  WP8.1  based  Smart  phones  &  tablets  by  business    •  Desktop  /  Laptop  funcAonality  on  tablets  &  smart  phones  powerful  for  enterprise  

segment  as  users  can  do  ‘real  work’  on  them.    Help  grow  the  Microso[  eco-­‐system  

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Windows Phone OS: Apps

•  Apps  are  area  of  shor5all  given  gap  between  WP  &  Android  &  IOS.    •  WP  170,000  apps  vs.  iOS  800,000,  Android  1m.  Largest  barrier  to  adopAon  for  WP    •  Most  concern  is  centered  around  missing  a  few  of  the  most  popular  ones,  such  as  

Instagram  &  lite  versions  of  other  apps.  •  Issue  is  one  of  maturity  &  scale;  once  enough  Windows  Phone  users  incenAve  for  

developers  to  develop  Apps  for  WP.  At  present  incenAves  lead  to    lags  of  popular  apps  to  WP  

•  Chicken  and  egg:  Larger  Windows  Phone  installed  base  =  greater  app  developer  interest  =  greater  customer  appeal  =  larger  installed  base…  

•  PercepAon  in  Microso[  needs  to  ‘step  it  up’  in  geung  developers  onto  the  WP  pla5orm.  Even  Nokia  head  of  sales  quoted  this  as  major  issue  

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Smart  Phone  OS  Installed  Base  –  WP  low,  needs  to  grow  to  anract  apps  

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Windows Phone OS: Apps

•  Contrary  to  popular  percepAon  Microso[  is  not  siung  on  its’  hands  •  Rate  of  App  development  for  WP  increased  from  100  per  day  start  2013  to  

currently  320  per  day  •  Microso[  providing  financial  incenAves  for  developers  to  create  Apps  for  WP  

pla5orm  •  Microso[  making  programming  easier  for  developers  to  create  apps  for  WP  •  Easing  barriers  for  customers  to  purchase  apps:  30  carriers  across  20  markets  so  

far  will  bill  app  purchases  direct  to  carrier  bill.  In  China  customers  can  pay  with  Aliplay  (similar  to  paypal)  

•  There  are  sAll  170,000  Apps  for  WP  customers,  however  key  is  to  get  major  apps  across  to  WP  pla5orm.    

•  UlAmately  developers  will  be  incenAvized  when  see  a  large  &  growing  pool  of  WP  smartphones  and  customers.  Reaching  that  ‘criUcal  mass’  or  ‘Upping  point’  is  crucial  for  virtuous  cycle  to  kick  in.      

•  Market  share  growth  is  crucial  to  get  app  developers  on  board.  

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Developers  Intent  Share  bodes  well  for  Windows  Phone  OS  

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Developer  Revenue  per  OS:  WP  in  the  ball  park  of  iOS,  Android  

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Windows Phone OS: Huge Potential •  Considerable  potenAal  in  the  WP  pla5orm  which  Nokia  has  aligned  itself  •  Microso[  HAS  to  make  it  in  mobility:  Microso[  reorg  July  2013  reshaped  

organizaAon  to  have  4  divisions  to  help  capture  mobility  opportunity  •  Microso[  a  gorilla  in  the  tech  space  with  $70bn  cash  pile  will  make  mobility  

success  happen  as  crucial  to  own  survival  •  Windows  Eco-­‐system  is  very  powerful  one  for  Nokia  to  be  aligned  on  as  principal  

smart  phone  partner  •  Windows  comprises  of  1.5bn  Windows  users  globally,  embedded  in  97%  of  

business  organizaAons,  with  X-­‐box  One  the  eco-­‐system  will  stretch  deeper  into  consumer’s  living  rooms.    

•  Mobility  namely  Tablets  &  smartphones  weak  spot  for  Windows  OS  &  hence  major  focus  for  Microso[.  

•  BestBuy  partnership  whereby  Microso[  products  will  be  showcased  in  store  within  store  in  600  BestBuy  shops  evidence  of  Microso[  ‘stepping’  up  

•  Carriers  want  a  credible  third  alternaAve  ecosystem  to  regain  bargaining  power:  All  3  Russian  Operators  have  stopped  selling  Apple,  Telefonica  geung  behind  WP  

•  IDC  reported  in  August  2013  that  WP,  2nd  most  popular  eco-­‐system  in  Latam  17  

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Windows Phone OS •  Enterprise  (Corporate)  Segment  is  major  potenAal  opportunity  for  Windows  Phone  

OS  •  MS  office  and  exchange  mail  built  in.    •  IT  departments  can  integrate  Windows  Phones  into  Microso[  products  that  power  

their  business  computers  seamlessly.      •  Windows  8.1/  Blue  update  will  deepen  features  suitable  for  enterprise  such  as  

VPN    •  Examples  of  recent  enterprise  switches  to  Lumia  include  Britvic,  Tef  Germany,  

Miele,  Mall  of  Americas.    •  Delta  Airline  Deal  announced  August  2013:  every  one  of  19,000  Flight  Anendants  

will  use  a  WP    Nokia  Lumia  820  in-­‐flight  to  enhance  producAvity  &  customer  service.    

•  Delta  Deal  is  a  huge  Ack  in  the  box  &  highlights  potenAal  of  WP  OS  to  penetrate  enterprise  segment  given  Microso[  is  part  of  DNA  of  virtually  all  businesses.  

•  Use  of  smart  phones  by  business  to  enhance  producAvity  is  early  in  its’  adopAon.  Windows  Phone  &  Nokia  set  to  benefit  from  this  boon  in  adopAon  by  enterprise  

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Nokia Lumia- Key to recovery •  Nokia  Lumia  range  encompasses  every  price  point  from  low  to  high  end  •  InnovaUon  within  Lumia  range  has  been  exemplary  and  Ame  to  bring  to  market  

products  from  concepAon  is  6  months  •  MulAple  Lumia  products  launches  in  2013  •  Lumia  520  range:  Q2  13  launched  Retails  $100  -­‐  $150,  entry  level  smartphone  with  

high  end  features.  Blockbuster  product  •  Lumia  620:  Mid-­‐Range,  $249  at  launch  Q1.  Asia,  Europe,  Middle  East  •  Lumia  720:  Mid  Range,  $329,  Asia  launch  at  first  Q1  •  Lumia  925:  High  End  Smartphone.  Launched  June  2013,  925  retails  T-­‐Mobile  US,  

Aug  13  came  to  India  at  price  of  $560.    •  Lumia  928:  High  end  solely  Verizon  in  US:  Similar  to  925  as  part  of  92x  pla5orm  •  Lumia  1020:  Flagship  just  launched  July  16th,  only  in  US  on  AT&T,  $650  retail.  Best  

camera  on  smartphone  by  far.    •  Lumia  625:  Announced  July  2013,  4.7  inch  screen  big  screen,  4G,  successor  to  

Lumia  620  

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Nokia Lumia – Key to Recovery •  Smartphone  market  saw  volume  growth  of  50%  Q2  2013,  forecast  to  near  1bn  

volumes  in  2013.    •  1.2bn  installed  base  of  smart  phones  2012,  Ericsson  forecast  to  grow  to  4.5bn  in  

2018,  CAGR  20%+    

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Mobile  Subs  Growth  focused  in  Emerging  Markets  where  Nokia’s          footprint  strong  

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Nokia  Lumia-­‐  Key  to  Recovery  

•  Globally  +130m  net  mobile  subscripAons  growth  in  Q1,  mostly  outside  US,  Europe.  China  accounted  for  25%  of  net  addiAons.    

•  50%  of  mobile  phones  sold  in  Q1  13  were  smart  phones  vs.  40%  in  2012.  •  Smart  phones  account  for  20  –  25%  of  all  subscripAons  (Ericsson  June  Mobility  

report),  scope  for  penetraAon  to  increase  significantly  •  Nokia  large  emerging  markets  footprint  (65%  of  sales),  where  smartphone  

penetraAon  low  but  growing  rapidly  •  Nokia  has  an  installed  base  of  1.3bn  customers,  significant  number  in  emerging  

markets  where  scope  to  upgrade  them  to  smart  phone  is  significant  •  Nokia  has  a  strong  product  offering  in  the  low  to  mid  range,  segment  expect  

highest  growth  rates  going  forward.    •  $100  -­‐  $200  range  smartphone  market  volumes  to  double  in  2013.    Lumia  52x  

range  is  in  the  sweet  spot  of  the  smartphone  market  &  is  tracking  like  a  blockbuster  product  

•  Nokia  focused  on  connecAng  the  ‘  Next  Billion’  Smart  phone  users,  which  plays  into  emerging  market  footprint  &  asp  range  

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Nokia  Lumia  –  Key  to  Recovery  •  Nokia  Lumia  range  is  85%  of  Windows  Phones  Sales,  the  main  driver  of  growth  of  

WP  OS  

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Nokia  Lumia-­‐Key  to  Recovery  

•  Q2  2013  Lumia,  saw  32%  volume  grow  QoQ    to  7.4m  units  with  fall  in  ASPs  to  E157  from  E191  given  low  to  mid  range  growth  and  price  aggressiveness  

•  Nokia  focused  on  building  market  share  with  Lumia  range,  rather  than  short  term  profit  maximizing.  Network  economics  at  play  

•  Growth  in  the  Windows  Phone  eco-­‐system  likely  to  be  linear  unAl  a  ‘criAcal  mass’  or  ‘Upping  point’  is  reached  whereby  growth  can  go  parabolic.    

•  Virtuous  cycle:  WP  Eco-­‐system  needs  to  grow  its’  installed  base  to  trigger  virtuous  cycle.  Greater  installed  base  leads  to  greater  developer  interest,  more  apps,  anract  more  consumers,  anracts  more  apps  and  so  on.    

•  Market  share  Upping  point  whereby  Windows  WP  comes  a  very  credible  third  OS,  and  that  is  the  ‘Apping  point’  for  sales.  At  present  WP  OS  has  3.9%  m/s  Q2  13  of  Smart  Phone,  Nokia  3.3%  of  hardware  volumes.    

•  Tipping  point  likely  at  8  –  10%  m/s,  likely  in  2014:    •  As  investor  support    Nokia  focusing  on  market  share  growth  to  reach  Apping  point  

&  grow  LT  value  rather  than  short  term  profits  

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 Smart  phone  market  shares  volaAle:  Scope  to  swing  back  

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Microso[  WP  m/s  is  low  but  scope  to  catch  up  significant  

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Nokia Lumia- Key to recovery

•  Lumia  1020:  July  16th,  2013  Launch  •  Showcase  of  technological  ability  of  Nokia;  arguably  just  made  the  most  advanced  

smartphone  in  the  space  with  41  Megapixel  camera  on  the  phone.  Very  good  reviews  from  tech  community  

•  Bodes  very  well  for  future  Lumia  releases  as  camera  technology  will  cascade  down  into  low  &  mid  range  launches  

•  Augmented  Reality  mapping  is  very  innovaAve  feature    •  September  2013:  Nokia  analyst  days  in  NYC  to  launch  further  products:  Phablet  

Tablet?  •  Pace  of  innovaAon  and  product  launches  been  quite  remarkable  at  Nokia  &  

momentum  to  conAnue  into  H2.    •  Nokia  moved  from  product  laggard  to  product  leader  

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Lumia  1020  Example  Shot  

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Nokia Lumia- Key to recovery •  Constraints  to  Lumia  AdopAon  need  to  be  tackled    •  Brand  recogniUon  with  consumer    •  Carrier  sales  forces  are  accustomed  to  selling  Android  and  I-­‐Phone  by  the  millions  

inclined  to  ‘sell’  potenAal  customers  on  those  OS  •  Need  to  raise  knowledge  about  hardware  and  so[ware  capabiliAes  with  sales  

forces  &  consumers  •  FuncAon  of  adverAsing,  brand  support,  educaAon  and  incenAvizaAon  of  carrier  

sales  forces.  Product  is  great,  consumers  need  to  hear  about  it.    •  Get  over  the  ‘App’  hump,  most  common  push  back  for  switching  to  WP  BUT    •  Encouragingly  seeing  ad  support  for  Lumia  1020  from  Microso[,  Nokia  &  AT&T  •  Anecdotal  evidence  of  tracAon  of  Lumia  range  is  wide  &  encouraging    •  Nokia  is  focused  &  execuAng  and  innovaAng  well  

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Lumia 520 Blockbuster •  Amazon.com:  Lumia  520  &  521  best  sellers  at  August  9,  2013  for  no-­‐contract  

phones  

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Amazon  China:  Lumia  520  top  smart  phone    

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Lumia  521:  T-­‐Mobile  Best  Seller:  Aug  9th,  2013  

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Lumia  1020:  AT&T  best  sellers  on  Amazon  

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NSN-­‐  Key  Value  Driver  •  Nokia  SoluAons  Network:  Mobile  communicaAon  infrastructure  &  enabler  of  

mobile  broadband  •  18%  of  global  telco  infrastructure  market  •  Key  player  in  LTE  technology,  iniAally  being  rolled  out.  Q1  13  LTE  market  $2.7bn,  

+108%  YoY.  NSN  doing  well  in  Japan,  Korea&  Australia  •  Recent  4G  contract  wins  T-­‐Mobile  US,  Megafon  &  MTS  in  Russia  •  Japan  &  NA  30%  of  NSN  group  sales  •  Mobile  Infra  Market  Globally  $9.8bn  Q1  13  •  Successful  restructuring:  OperaAng  Margin  moved  from  1%  in  2010  to  11.8%  non-­‐

IFRS  EBIT  margin  Q2  13.  Generated  E1.4bn  FCF  2012  from  slight  negaAve  in  2011  •  Shedding  contracts,  &  exiAng  unprofitable  regions.  Sales  declined  18%  YoY  in  Q2,  

however  underlying  growth.  •  NSN  guides  to  7%  EBIT  margins,  scope  to  outperform  •  Sustainable  high  FCF  generator  •  Nokia  bought  Siemens  50%  stake  for  E1.7bn.  A  steal,  puung  on  0.7x  Sales,  NSN  

worth  E8.5bn  34  

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NSN-­‐  Key  Value  Driver  

•  Mobile  Broadband  45%  group  sales,  Global  Services  over  50%  •  NSN  30%  of  Services  market  amongst  top  4  vendors  •  Forecast  NSN  to  generate  cumulaAve  E2bn  +  of  FCF  13/14/15  •  Seen  even  bear  of  Nok  forecast  NSN  to  have  E3.5bn  net  cash  by  2015  •  Ericsson  June  2013  Mobility  Report  points  to  very  strong  drivers  of  mobile  

broadband  –  Mobile  broadband  subscripAons  grew  45%  YoY  in  Q1  to  1.7bn  –  Mobile  Data  traffic  doubled  YoY  –  Mobile  Data  expected  to  grow  at  50%  CAGR  2012  –  2018,  Twelve  fold  increase  –  LTE  roll  out  to  take  global  populaAon  coverage  from  10%  to  60%  by  2018    NSN  delivers  the  Telco  infrastructure  needed  to  deliver  this  data  growth  

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Mobile  Data  Growth  ExponenAal  

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Feature  Phones  

•  Feature  Phones:  Source  of  risk  •  Q4  12  vols:  80m  phones,  Q1  13  55m,  Q2  13  53.7m.    •  ASP  from  E31  (Q412)  to  E28.5  (Q113)    to  E26.2  (Q213)  •  Hard  to  compete  with  Asian  manufacturers  in  volume  sector  but  Nokia  is  trying  to  

move  up  value  chain  as  well  as  producing  cheap  feature  phones  e.g.  105  costs  $20,    •  Asha  501  launched  end  Q2  2013.  PotenAal  winner  as  sits  at  smart  phone/  feature  

phone  divide  •  Risk  is  if  need  further  downsizing  &  further  restructuring  charges  •  Feature  Phones  EBIT  E205m  in  H1  12  fell  to  E91m  in  H1  13  •  Key  is  to  manage  decline  in  feature  phones  as  smart  phones  division  ramps  up    

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Nokia  Feature  Phones  &  Smart  Phones  ASP    

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HERE: Mapping Business

Mapping  business:  Overpaid  for  Navteq  $8.1bn  2007  however  •  Mapping  is  growth  area:  HERE  saw  19%  YoY  sales  in  external  mapping  in  Q2  13  •  Mapping  is  growing  source  of  differenUaUon  between  smart  phone  eco-­‐systems  

&  is  integrated  increasingly  into  search  •  Technology  driving  increased  uses  for  mapping  such  as  monitoring  traffic  flows  •  Google’s  $1bn  acquisiAon  of  Waze  highlights  growing  value  of  mapping  assets  •  HERE  is  one  of  three  global  map  libraries;  Google  Maps  &  TomTom  others  •  Barriers  to  entry  for  building  global  map  database  is  very  high  •  Sell  side  value  HERE  at  E0.5bn  as  very  low  profits.  3.4%  margin  Q2  13,  however  

R&D/  Sales  raUo  is  90%!  InvesAng  significantly  in  mapping  technology  as  recognizes  future  value  of  segment  

•  HERE  Augmented  Reality  maps  are  awesome!      

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HERE:  Augmented  Reality  Map  

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Nokia  Devices  &  Services:  Key  figures  •  Devices  &  Services:  Q2  saw  6%  QoQ  decline  in  revs  to  E2.7bn.  •  D&S  Q2  13:  -­‐E33m  loss,  -­‐1.2%  margin.  Smart  phones  –E164m  EBIT,  -­‐  14%  margin.  •  Q3  D&S  guidance  is  for  -­‐2%  margin,  +/-­‐  400  basis  points.  Expect  lower  end  of  

guidance  with  losses  of  -­‐100m  –  150m    –  1)  Support  for  Lumia  roll  outs  –   2)  Price  aggressive  to  drive  market  share.  Will  sacrifice  GM  for  market  share  –   3)  Feature  Phones  ‘managed  decline’  

•  Group  margin  forecast  3-­‐3.5%  Q3    from  5.3%  as  NSN  normalizes,  D&S  m/s  focus  •  Q3:  Key  is  market  share  and  Lumia  volumes:  I  expect  10m+  from  7.4m  in  Q2  13,  

2.9m  Q3  12.    •  Sell  side  forecast  6.5m  -­‐8m  Lumia  sold    in  Q3,  scope  to  beat    by  wide  margin    •  Short  term  focus  on  profit  metrics  WRONG  criteria  by  which  to  judge  Nokia  at  this  

stage  of  transformaAon;  volume  growth  of  Lumia  &  WP  installed  base  •  Q3:  Short  termist  bears  will  focus  on  quarterly  losses,  lower  GM  Vs.  Long  run  

investors  recognize  growth  of  market  share  as  the  KEY  as  embeds  eco-­‐system  with  consumers.  Network  economics  at  play,  larger  installed  base,  stronger  it  grows  

•  Q4  13  –  Q1  13:  When  expect  operaAonal  metrics  to  inflect  41  

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Nokia  Devices  &  Services:  Key  figures  

•  Market  share  in  smart  phones  is  key  in  order  to  reach  ‘the  Upping  point  whereby  growth  goes  from  linear  to  parabolic  

•  Apple  was  posAng  losses  end  2002/  early  2003  before  turnaround  

•  Balance  Sheet  –  Q2  net  cash  E4.1bn,  post  E1.7bn  for  NSN  and  assuming  similar  cash  burn  run  

rate  in  Q3  as  Q2,  net  cash  approximately  E2bn  Q3  –  Expect  Q3  13  net  cash  posiAon  as  trough  given  strong  Q4  &  conAnued  

recovery  in  2014  –  Sell  side  forecasts  seen  for  cash  flow  range  from  E1bn  +  ve  FCF  in  2014  to  

significant  cash  burn  in  2014  depending  on  if  assume  further  restructuring  charges  in  D&S.  

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Nokia: Cash Flow Considerations

•  Cash  flow:  NSN  acquisiAon  supports  cash  generaAon  •  Q213  operaAng  cash  flow  –E196m  including  E230m  of  restructuring  cash  ou5lows.  •  Q213  net  cash  posiAon  reduced  E417m  •  Q113  net  cash  increased  E120m  •  Bears  forecast  E600m+  cash  burn  in  2013,  assumes  approximately  E300m  in  H2.  •  Given  Q3  seeing  many  launches  likely  inventory  build,  market  share  focus,  expect  

similar  as  Q2  reducAon  in  net  cash..E400  –  E500m.  •  Q4  expect  swing  back  in  cash  generaAon  as  seasonal  effects  •  2014:  Restructuring  charges  for  NSN  declines  to  E200m,    D&S  declines  to  E50m  in  

2014  •  Risk  on  cash  flows  is  decline  in  Feature  phones  results  in  further  restructuring  •  2014  Forecasts  vary  widely  depending  on  view  of  WP  tracAon  &  need  for  

restructuring  charges  in  feature  phones  •  Assume  2014  D&S  turns  cash  flow  +ve  as  m/s  growth  hits  ‘Apping  point.’  

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Restructuring  Charges  to  drop  off  in  2014  

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Restructuring  Charges  to  drop  off  in  2014  

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Positioning & Catalysts    •  Short  Base:  14%  of  market  cap  •  Sell  Side  bearish:  NSN  put  at  0.4x  Sales,  ZERO  value  anributed  to  D&S  including  

patents,  assume  cash  burn  into  2014,  further  restructuring  costs,  negaAve  bias  •  Sell  side  bears  will  focus  on  near  term  negaAve  operaAonal  metrics  rather  than  

under  valuaAon  &  growing  eco-­‐system.    Even  Apple  was  loss  making  Q4  2002/  Q1  2003  as  transformed  business  

•  Catalysts  Q3  volumes  in  Lumia  will  be    strong.    Likely  hear  bear  chorus  on  fact  sacrificing  GM  to  drive  volumes  &  market  share,  strategy  as  an  investor  am  pleased  with  as  ‘network  economics’  crucial  

•  Q4  13  -­‐  H1  14:  ConAnued  progression  of  market  share  growth,  product  launches,  WP  updates,  growth  of  app  eco-­‐system,    enterprise  wins,  NSN  delivery  will  support  stock  price  

•  PotenAal  value  realizing  catalysts  include  lisAng  of  part  of  NSN,  acquisiAon  of  D&S  business  as  Microso[  &  Huawei  been  rumored,  profit  generaAon  from  D&S  

•  This  is  a  12  –  24  month  investment  case  not  a  trade  into  quarter  numbers  46