A Boost to Nokia - at last

Nokia Corp. (NOK - Analyst Report) finds something to celebrate at last. The beleaguered mobile phone manufacturer, who was the undisputed global market leader in this field just a couple of years ago, announced yesterday that it has settled all its patent related legal disputes with Apple Inc. (AAPL - Analyst Report), the iconic iPhone maker.

Nokia and Apple are fighting with each other for nearly 2 years for patents related to several key features for high-end smartphone. These include touchscreen technology, multitasking operating systems, data synchronization, positioning, call quality and the use of Bluetooth accessories. According to the new agreement, both the companies will withdraw their respective lawsuit filed with the International Trade Commission. Apple will make a one-time payment to Nokia and will also pay regular royalties to Nokia.

Although the financial terms of the agreement were not disclosed, several analysts have opined that Nokia will get a handsome payment from Apple. Industry researchers predicted that one-time payment may go up in the range of $600 million - $650 million and the rate of royalty on iPhone revenue may vary from 1%-2%. Nokia already declared that the legal settlement will positively impact its revised guidance for second quarter of 2011, which the company issued in the previous week.

We believe Nokia will benefit from several ways through this settlement:

(1) It proves the dominance of Nokia intellectual property rights. According to Nokia, the company spent more than $62 billion in the last two decades to develop the wireless industry's strongest and broadest IPR portfolios, consisting of more than 10,000 patents. So far the company has entered into patent licensing agreements with around 40 mobile device makers to use its patents. A giant like Apple will soon join the queue.

(2) Having successfully settled litigations with Apple, Nokia can now turn its eyes on Google Inc. (GOOG - Analyst Report) developed Android operating system, which is quickly capturing the number one spot in the global mobile phone software market. iOS, the operating system of iPhone and Android, have several technological similarities. Nokia may now try more aggressively to defend its patent portfolio from important Android-based smartphone makers such as Motorola Mobility Holdings Inc. (MMI), Samsung, and HTC.

(3) The confirmation of the superiority of its patent portfolio will enable Nokia to give more emphasis in revamping its sagging core business of mobile devices. The company is currently in a state of mess. We believe the legacy Symbian operating system is completely out dated now, facing rejection from all the corners of global markets. At present, Nokia’s future is contingent upon its success of the Microsoft Corp. (MSFT - Analyst Report) developed Windows Phone 7 software-based smartphones. The first Windows Phone 7-based smartphone from Nokia is expected in the fourth quarter of 2011.

(4) Legal settlement with Apple will stop recurring cash drain from Nokia’s exchequer. Recently, the company significantly lowered its ensuing second-quarter 2011 revenue and operating margin guidance. Moreover, Apple’s settlement may restrict further downslide of the operating margin.

Recommendation

We reaffirm our long-term Neutral recommendation on Nokia. Currently, it holds a short-term Zacks #4 (Sell) on the stock.