Will Nokia's Siemens Venture Buyout Spell Profits?

TheStreet.com

NEW YORK (TheStreet) -- I've held no punches expressing my frustrations with beleaguered phone giant Nokia . It's always been hard for me to grasp how a company can still be a global leader in a growing mobile devices market and still be grossly irrelevant at the same time.

I've taken issue with the company's management and its failure to seize exploitable ways to grow market share in developing countries. They've instead opted to go on a drastic cost-cutting exercise that yielded nothing in terms of shareholder value.

Complicating matters, management remains joined at the hip with Microsoft insisting on mortgaging Nokia's future on a Windows platform that forever struggles against Apple's iOS and Google's dominant Android operating system. Essentially, as much as I've wanted to like Nokia, the company has shown no interest in making it possible -- until now.

What probably shouldn't have come as a surprise certainly stunned investors this morning. On Monday, Nokia said that it will spend 1.7 billion euro ($2.22 billion), to buyout Siemens' 50% share of their joint network operations venture established in 2007 called NSN (Nokia Siemens Network). The deal is expected to close in the third quarter, upon which Nokia will own 100% of the business.

This is good news for Nokia, which continues to hemorrhage market share in the highly competitive devices market. But I do question how effective the new wholly owned network business (NSN) is now going to perform. Management has shown some flaws. After NSN posted revenue growth of 5% and 14% in the preceding two quarterly results, NSN suffered a surprising 5% drop in first-quarter sales (reported in April). Even more stunning was the 30% sequential decline.

On more than one occasion I raised this issue to investors -- asking how can there be any confidence in the stock with new struggles in NSN, which was the only business that was keeping Nokia's head above water? This means despite the decent strides that management had made towards profitability, Nokia had suddenly taken a step backwards.

I'm not discounting that Siemens was at fault here, either. The fact that Siemens had made it known that it wanted out of the partnership could have had an adverse affect on the first-quarter numbers. Given the uncertainty it's possible that customers were unwilling to commit. As I indicated above, until the first-quarter reversal NSN had turned itself into a worthwhile threat against the likes of Ericsson and Huawei.

There were even discussions about splitting-off NSN into an initial public offering -- creating a separate entity. But the uncertainty is now over. And I believe that Nokia's decision just raised its profile. As much as I've beaten up management for past failures there is now cause for optimism, especially given the high margin capabilities of the network business. Nokia has a better path towards long-term profitability.

Investors have to rejoice that Nokia's long-term success doesn't have to be so heavily weighted on the device business, which is not getting any better in terms of market share. But I do applaud the company for turning devices into a profitable business -- growing gross margin by 70 basis points in the recent quarter and reversing last year's loss.

Plus, with carrier spending expected to rebound, Nokia's NSN, which is already a leader in LTE (long-term evolution) networks, is poised to capitalize on the recovery. Interestingly, though, in one decision Nokia has now justified its highly criticized cost-cutting measures. This deal probably would not have been possible without an improved cash-flow environment.

It still remains to be seen, though, what Nokia ultimately does with NSN. From an investment perspective, it's premature to speculate how much value NSN will bring to Nokia absent clear operating strategies by management. But no matter how you look at it, Nokia's prospects and value have just improved given the many options it now has at its disposal, including selling NSN.

In the meantime, though, I'm still not ready to jump into this stock. But I'm no longer convinced that it's an absolute sell, either. It's taken 21 months into his tenure as Nokia's CEO, but I believe Stephen Elop has finally earned my respect. It's a good day for Nokia's investors.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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