Recent reports on Microsoft Corporation (MSFT) and Apple Inc. (AAPL) generated such strong feedback that a Nokia Corporation (NOK) stockholder shared with us an article about how Nokia gets €8 in royalties per iPhone sold due to a patent dispute that was settled last year. After reading that article contributed to us, we think that we have the ideal two-step solution to increase shareholder value for Nokia's long-suffering shareholders.
Step 1, Fire the CEO Stephen Elop!
Step 2, Sell or Close all of Nokia operations with the exception for the entity that owns the patent that generates royalties from the Apple iPhone.
In H1 2012, Nokia has seen Apple sell 61.1M of its widely popular, cutting-edge iPhone smartphone devices. Nokia operates on a calendar year fiscal year and Apple's fiscal year ends on September 30th. For the six-month period ending June 30th, Nokia has received €488.8M from Apple due to patent license fees based on iPhone sales. Nokia received €280.5 from Apple in its Q1 2012 period and €208.3M in its Q2 2012 period.
When we consider the fact that Nokia generated only €93M in device revenue in North America for Q1 2012 and €128M for Q2 2012, we see that the €221M in North American device revenue pales in comparison to the nearly €489M in patent revenues it received from Apple. We can also see that the patent revenue it received from Apple generates a much higher gross margin than the revenue from its proprietary devices, since there are no marginal costs of goods sold associated with collecting royalty revenue from Apple, unlike with the production and distribution of Nokia's devices.
We also see that there are no marginal operating expenses associated with collecting royalty revenue from Apple, unlike with the production and distribution of Nokia's devices.
The reason why Nokia needs to sell off its ailing business units to stronger firms is because Nokia is losing tremendous money operating these businesses. While Nokia bulls plead that Nokia was free cash flow positive in the second quarter, we have to roll our eyes back and say "That weak, whack argument is the best you can come up?!"
Nokia generated €102M in Operating Cash Flows during the quarter, spent €115M in CapEx and salvaged €35M from the disposal of business assets. We're going be generous and calculate its annualized cash flow/equity ratio using ending period equity balances but even so, Nokia's annualized cash flow/equity ratio is maybe 1.2%. We used to think that Nokia's stakeholders could do better than 1.2% annually, but now we're not so sure.
Since Nokia can only eke out €23M in free cash flows per quarter and since Nokia can only do this by cutting its capital expenditures by 27% and by selling off assets, we think that it would be prudent for Nokia's CEO Steve Elop to realize his limitations and to begin salvaging what he can for Nokia's long-suffering shareholders.
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