Nokia Vs. Apple

Last month, Nokia (NYSE:NOK), the world’s biggest mobile phone maker with annual revenue of €50.7 billion, reported a bleak third quarter as it swung to a loss for the first time in its history. And in a dramatic turn of events, it is suing Apple for infringing on its patents. Let’s take a closer look.

The lawsuit claims that Nokia made “various offers” to Apple for licensing agreements for the disputed patents – both singly and in a portfolio – but that Apple rejected its offers. Nokia says that by refusing to agree appropriate terms for its intellectual property, Apple is trying to get “a free ride on the back of Nokia’s innovation.

Nokia said that Apple has infringed on 10 of its patents involving wireless data, speech coding, security, and encryption. The patents relate to data transmission in a radio telephone network as well as a mobile telephone network, speech transmission, speech synthesizers, measurement report transmission, backlight modules, ciphering data transmission, integrity checks, reporting cell measurement, and encryption systems.

Nokia is seeking royalties on the 33.7 million iPhones sold since the phone’s launch in 2007, which could amount to about $6 to $12 per phone or $200 million to $400 million. An agreement with Apple would be a boon for Nokia that could offset the latter’s declining sales. Apple, in its 10-K filing, said that it intends to defend the case vigorously. A response to the complaint filed on October 22 is not yet due. Nokia has an enormous treasure of patents, and there is a real possibility that Apple is infringing on them. Apple could defend itself by saying that it has bought the components from a licensed supplier. Whatever the particulars of its argument, Apple defending the case vigorously means that this battle will last at least a couple of years.

As for its financials, Nokia’s Q3 revenue was down 20% and 1% q-o-q to €9.8 billion, slightly ahead of the Street estimate. For the first time since 1996, Nokia reported an unexpected operating loss of €426 million compared with an operating profit of €1.5 billion in the third quarter 2008.

By segment, Nokia Siemens Networks revenue was down 21% y-o-y and 17% q-o-q to €2.8 billion. Nokia Siemens Networks this week announced that it is reorganizing its business and may cut 9% of its workforce to reduce costs and increase profitability. NAVTEQ had net sales of €166 million, up 6% y-o-y and 12% q-o-q.

Devices & Services revenue was €6.9 billion, down 20% y-o-y and up 5% q-o-q on shipment of 108.5 million mobile devices, down 8% y-o-y and up 5% q-o-q. Device ASP was €62, same as last quarter and gross margin was 30.9%, down from 34% last quarter. Within this segment, smartphones and mobile computer solutions accounted for €3.1 billion or 45% revenue, consistent with the previous quarter, while the ASP increased to €190 from €182 in Q2. Mobile phones and embedded services accounted for €3.8 billion or 55% revenue vs. €3.5 billion in Q2 while ASP was consistent at €41.

Smartphone volumes on the whole declined to 16.4 million compared to 16.9 million in Q2 because sales were somewhat constrained by component shortages. Nokia shipped 4.5 million Nokia Nseries and 4.4 million Nokia Eseries devices during the third quarter 2009, down from a combined 9.3 million Nseries and Eseries devices shipped in Q2. Shipments of the company’s flagship model, N97, were 1.8 million units compared to Apple’s 7.4 million iPhones in the recent quarter. The N97 does not have a carrier partner in the United States and sells for $571 while the iPhone 3G sells for just $99.

Nokia will soon be shipping four new touchscreen products, the Maemo-based N900 mobile computer, the streamlined N97 mini, the capacitive touch X6, and the 5230. However, there is also a slew of Android phones to be released soon, which should heat up competition in the smartphone market. I earlier suggested that Nokia should acquire Palm, which would help it to gain foothold in the U.S. market.

As for acquisitions, Nokia acquired three companies during the third quarter: Cellity, a mobile software company that has developed a solution for aggregating address book data; Plum Ventures, which develops and operates a cloud-based social media sharing and messaging service; and Dopplr, a mobile service provider for international travelers. The company ended the quarter with total cash of €7.4 billion and net cash of €2.1 billion.

Nokia expects its market share in Q4 to be flat. The stock is currently trading around $13 with market cap of about $47 billion. It was downgraded prior to its earnings results by HSBC securities from Overweight to Neutral.

is losing out on the momentum in the U.S. market by not having carriers for its flagship modelNokiaAs I pointed out earlier,