The iPhone Is Coming to Nokia's Rescue
(Bloomberg Gadfly) -- For a company that no longer makes mobile phones, it’s odd that Nokia Oyj is making almost all of its money from them.
The world's biggest mobile phone maker before the iPhone came along in 2007, the Finnish company's main business is now communications networks – in theory. That business was responsible for some 88 percent of revenue in the first quarter.
But even though it sold its cellphone business to Microsoft Corp. in 2013, Nokia retains a lot of the intellectual property that’s essential for connecting devices to cellular networks. It licenses this know-how through its Nokia Technologies business. The division generated six times more operating profit in the three months through March than the networks arm.
Last year it struck a series of licensing agreements with Apple Inc., Huawei Technologies Co. and Xiaomi Corp. It gets royalties too from LG Electronics Inc. and Samsung Electronics Co. Ltd. Revenue at the division jumped by half and operating profit more than doubled to 274 million euros ($334 million).
HMD Global Oy, based opposite Nokia's Espoo headquarters, is also paying to license the name for a series of Nokia-branded smartphones. HMD has introduced four handsets this year and is largely bankrolled by an affiliate of Foxconn Technology Group, the Chinese company best known for making Apple’s iPhone.
Unfortunately, the technologies unit's gain is really just the one bright spot for Nokia. The relative strength of its profit reflects the weakness of the main business, which is stuck in a dire fallow period as it waits for carriers to start upgrading networks to 5G. On a group level, first-quarter sales missed estimates, while the operating margin at the core business was a pitiful 0.9 percent. The stock fell 9 percent at one point on Thursday.
Both Nokia and rival Ericsson AB have struggled to find revenue sources to stabilize earnings in those spells between network upgrades. Ericsson has done a bit better of late, but that’s from a low base as it gets a handle on costs.
With its licensing business, Nokia does at least seem to have found one way of propping up earnings, and it’s expanding the offering into connected cars and other devices. CEO Rajeev Suri expects network sales to recover in the second half of this year as 5G installations start to ramp up, hitting their stride in 2020.
But that really needs to happen if Nokia doesn’t want to be dependent on a business it quit five years ago.
Alex Webb is a Bloomberg Gadfly columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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