Nokia CEO Rajeev Suri has insisted the outlook for intellectual property licensing has not weakened amid investor concern about a sharp fall in operating margins at the Nokia Technologies business during the October-to-December quarter.
"I don't believe there has been a weakening in the IP licensing environment," Suri told analysts on today's earnings call after being asked if intellectual property monetization had become more challenging. "I think there is good medium- and long-term potential."
While Nokia Corp. (NYSE: NOK) reported a strong set of results earlier today, its share price had dipped by more than 4% in trading in Helsinki by late afternoon, and analysts seem chiefly worried about the prospects for Nokia Technologies, the part of the Nokia business that licenses its technology to other players. (See Nokia Ends 2014 on a High.)
Although Technologies accounted for just 4.5% of Nokia's overall sales in 2014, Suri has previously suggested it could become a driver of revenue growth through a mixture of arbitration, litigation and negotiation. (See Nokia Ups Guidance But Investors Take Fright.)
In the final quarter, however, the unit's operating profits fell to €77 million ($87 million), from €81 million ($92 million) in the same part of 2013, while its operating margin shrank from nearly 67% to just 52% over the same period.
Nokia does not expect any kind of margin improvement this year either. In its financial report, the company said that operating expenses would increase "meaningfully" in 2015 and be "approximately in line with the fourth quarter 2014 level."
Clearly, the investments it is making in licensable technologies are squeezing its earnings in the short term. Costs associated with the November launch of the N1 tablet, made by Taiwan's Foxconn Electronics Inc. using Nokia technology, appear to have dragged down earnings in the fourth quarter, but Nokia executives defended the investment strategy as a long-term play. (See Did Nokia Really Just Launch a Tablet?)
"You have to build a position for the future," said Timo Ihamuotila, Nokia's CFO. "It's not easy to build it up from scratch but for companies like ourselves, which are investing a lot in R&D, it's a real opportunity that has not deteriorated."
Currently, Nokia Technologies generates the bulk of its revenues from a licensing deal with Microsoft Corp. (Nasdaq: MSFT) -- the software giant that acquired Nokia's devices business in a $7.2 billion deal in September 2013 -- but Suri believes he can target a broad range of international players. (See Microsoft Officially Closes Nokia Buy and Nokia: It's Really Happening.)
"There are targets beyond Apple and Samsung and some of the Chinese players, as they go global, will be longer-term targets," he said.
The Chinese market itself could be a tough nut to crack. Chinese technology companies have long been accused of ripping off their Western peers and showing scant regard for intellectual property rights, and the legal framework is thought to offer little protection. Even here, though, Nokia is optimistic.
"I think there have been developments lately in China and India, which indicate those markets could become more receptive to IP holders both locally but also at a global level," said Ihamuotila. "My intuitive thinking is that as Chinese companies create more intellectual property they will come into line, but at the moment it's certainly a more difficult market for us."
According to Suri, the N1 tablet has been well received since going on sale, offering a "taste of the long-term potential of the brand licensing model."
— Iain Morris, , News Editor, Light Reading