TelecomFinance’s Jason Rainbow talks to Timo Ihamuotila, CFO of Finnish vendor Nokia, as the group embarks upon a renewed battle with its smartphone rivals. Ihamuotila discusses his company’s approach to raising finance amidst the eurozone crisis,…
TelecomFinance’s Jason Rainbow talks to Timo Ihamuotila, CFO of Finnish vendor Nokia, as the group embarks upon a renewed battle with its smartphone rivals. Ihamuotila discusses his company’s approach to raising finance amidst the eurozone crisis, and how the telecoms patent wars are influencing its M&A strategy.
Jason Rainbow: With Nokia’s first Windows phone about to hit the shelves, how is your company gearing itself up to compete with Apple and Google in the global smartphone sector?
TI: Naturally, with great new products, we’re very proud of the big step forward that we’ve taken with the new Symbian Belle Products and in particular with the new Lumia family of products based on Windows Phone. There is a real sense of increased clock speed at Nokia given that we launched our first two products on the new platform just six months after we formally signed the partnership agreement with Microsoft. Historically, getting a product from drawing board to shelf has taken quite a bit longer. The increased speed also owes to changes that we’ve made inside Nokia – especially around how we create and get innovations into the product. This is crucial as we continue to execute and increase our competitiveness. This year we have been reorganising our R&D organisation, including ensuring that our product development teams share the same premises and same clear focus on great products. We have already seen some early positive results of this approach, such as in Ulm in Germany where our engineers and developers have done some very cool work in mobile phones. We now have four major R&D sites for smartphones and three for mobile phones and there is a clear focus in each. We’re fortunate to have many of the brightest minds in the industry at Nokia and we want to give them the right tools and the freedom to do great work.
JR: Your latest quarterly results showed smartphone sales up 1% on the quarter. With your Q3 results ahead of analyst expectations, is Nokia finally on the road to recovery?
TI: We are pleased with our Q3 results which were well in line with our expectations. Our mobile phones business in particular had a good quarter, and we had strong sequential volume growth for example in India and China. But we have only just started our journey. The new products we announced at Nokia World after Q3 are one significant step forward and we are encouraged by the feedback we have received from partners, consumers and operators.
JR: How important is the smartphone business to Nokia today, compared with its low-end devices? Where does the group see room for growth?
TI: Both areas are very important. A lot of the consumer and media buzz is around smartphones, and consequently the mobile phone business often gets overlooked. In Q3, more than half of revenues in our handset business came from mobile phones. We sold 90 million of them. So, there is huge potential in both mobile phones and smartphones. At the same time, I think the historical dichotomy between mobile phones and smartphones is one that will fade over time. In terms of innovation, there is a great deal happening in the lower-priced portion of the market. Our mobile phones are becoming much more smartphone-like in terms of capabilities, with Ghz processors, 3G, fast browsers and so on. Most people in the world cannot afford a fully functional smartphone, but that doesn’t mean they don’t aspire to having a smartphone-like experience.
JR: Could Nokia’s partnership with US tech giant Microsoft grow in the future with further tie ups, or even a merger?
TI: There are simply no such discussions, but I would say that the framework of our partnership with Microsoft gives us the tools we need to strengthen our position in smartphones over the long-term. We aim to have a partnership which is very beneficial for both parties.
JR: Would Nokia consider selling part or all of its business if the opportunity was made available?
TI: We have a clear strategy of making great mobile products. And by executing that strategy with speed and dedication we aim for long-term growth and improved financial performance. That is where our focus is.
JR: Why was Nokia and Siemens’ search for an outside investor for their infrastructure JV NSN unsuccessful?
TI: There was some unsolicited interest towards NSN from private equity investors and it made sense to discuss and evaluate their views on that business. After those talks Nokia and Siemens agreed that they in fact are in the best position to further enhance the value NSN.
JR: Without another investor, could NSN be disbanded in 2013 as some reports have suggested?
TI: Saying that NSN would be disbanded at any time is simply wrong. NSN is a clear innovation leader in mobile broadband with, for example, most 4G contracts in the market. As shareholders, Nokia and Siemens will continue to support the NSN operative management in further improving NSN’s competitiveness and financial performance.
JR: Does Nokia’s future lie in handsets or infrastructure?
TI: We are committed to driving long-term sustainable performance in both. In handsets, there are good growth opportunities in both smart phones as well as in feature phones. When it comes to infrastructure, we have been open about the fact that we want NSN to evolve towards more of a standalone entity and by that we mean that we of course want NSN to continue to improve its competitiveness and financial performance. Doing so will create more opportunities for NSN, for example, in terms of capital markets access.
JR: How is Nokia dealing with the current difficult market conditions in the eurozone and around the world?
TI: Needless to say, there is uncertainty and we are of course watching the situation closely. Of course our strong balance sheet gives us flexibility to execute our plans in a tough environment. I would also say that while of course not immune to economic trends, the handset business tends to be quite resilient. A mobile phone is a necessity that does not have too high a unit price. So, in the case of Nokia’s handset business, I believe the more salient factor is related to our new strategy and upcoming launches.
On the networks side, we said that in our Q4 guidance for NSN we have taken into account possible economic uncertainty – particularly in Europe. But amid any macroeconomic uncertainty, the key is to focus full speed on your execution, and simultaneously have a nimble enough structure so you can react if need be.
JR: Is it easy for Nokia to raise debt in current markets? Does it plan to tap banks in the near future?
TI: In general, we want to be in a position where we have access to capital markets at all times, naturally taking into account prevailing market conditions. There is a lot of interest towards Nokia at the moment from both debt and equity investors.
JR: In October, Iraqi mobile operator Asiacell secured a US$24m medium-term facility with HSBC to finance NSN equipment, with the facility being backed by German export credit agency Euler Hermes Kreditversicherungs. How has Nokia traditionally engaged in export credit, and how is this likely to change in the future?
TI: Export credit agencies are important partners for Nokia and NSN. They help in many cases in country or counterparty risk mitigation and in raising the funding for the investments, and in that sense play an important part in particular in mobile infrastructure projects. We see that they continue to play an important role also in the future.
JR: In February you announced a new three pillar strategy, and one of those pillars is investments in areas of potential future disruption. Does this include acquisitions and if so, what type?
TI: We are continuously evaluating make or buy opportunities, and if a technology from another company can help us get to where we want to be then we will also consider that route. So it’s a very pragmatic way to look at this. Having said that, there’s no shortage of interesting technology we’re exploring and developing in-house already. We’ve got a team of around 500 scientists, engineers and developers who have contributed to almost half of all of Nokia’s standard essential patents.
JR: Is Nokia in discussions with any potential targets?
TI: Over the years we have made a number of different-sized acquisitions whilst managing our balance sheet conservatively, though I can’t of course comment on any future plans.
JR: How is the wave of recent patent disputes, particularly in the US, affecting your M&A strategy?
TI: Nokia has one of the largest and broadest portfolios in our industry, built on more than two decades investment in R&D (over €45bn). Our ongoing R&D generates more than 1,000 patentable inventions every year and, as we manage our portfolio of around 10,000 patent families, we regularly monetise our portfolio in other ways. For example, we have made more than 20 divestments in the last five years. IP continues to be an important business for us, but, apart from the spotlight it has thrown on the value of intellectual property, the current disputes have not affected our M&A strategy.
JR: What’s your view on so-called patent trolls?
“Troll” is more about a behaviour than a type of company. Of course, as a leader in intellectual property in our industry, we recognise that the owners of IP have the right to be fairly compensated for the use of valid patents. However, we have seen some companies, particularly non-practising entities, adopting aggressive tactics in pursuing potential licensees, often over-estimating the true value of the patents, or seeking remedies such as injunctions which are at odds with commitments made to standards setting bodies when declaring such patents as essential to the standards.
