Microsoft + Nokia

Microsoft has entered into an agreement to purchase Nokia’s devices and services business. Let that sink in for a little bit.

 

 

 

 

Okay, so every tech behemoth seems to have their own vertically integrated software and hardware stack these days, so why not us, right? With all of the ongoing talk of a shift towards devices and services as a company, at Microsoft, the acquisition of Nokia’s business makes sense, comes with a very reasonable price tag (unfortunately, for my Nokia holdings I’m very sad to say), and integrates together what are already two very linked teams. There will no doubt be countless calls of conspiracy, with Stephen Elop rejoining Microsoft, albeit now as part of a devices group, as opposed to the Office team he used to run. I, for one, am very excited about these developments.

There were also a few interesting nuggets of information in the Strategic Rationale, which accompanied the acquisition announcement.

  • As a licensor of the Windows Phone software, Microsoft’s gross margins on each Nokia smartphone is <$10
  • As a manufacturer of Windows Phones, Microsoft’s gross margins would be >$40
  • Operating income breakeven arrives at ~50 million smartphones. Last quarter Nokia sold 7.4 million Windows Phones, up from 5.6 million the previous quarter. Could breakeven come in FY15?
  • The acquisition becomes accretive to earnings only in FY2016. Based on the non-GAAP FY2015 estimate of $0.00 impact, my guess is, as above, we expect to sell ~50 million phones.
  • We expect 1.7 billion smartphones to be sold by 2018 – we also expect to claim 15% of that market
  • That is expected to translate in $45 billion in revenue, or approximately $176 ASP. Nokia’s most recent quarter’s Lumia ASP was $207.
  • Even with 15% market share, the smartphone business will be a very lucrative business
  • Microsoft combines its patent portfolio and deals with those Nokia has signed with competitive ecosystem OEMs into a heck of a licensing powerhouse and protective fortress

More thoughts as things develop.

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