Is Nokia Corporation (ADR) (NOK) Bailing on Smartphones?

Nokia Corporation (ADR) (NYSE:NOK) just made a rather curious move. The Finnish smartphone maker recently announced that it would be acquiring Siemens AG (ADR) (NYSE:SI)‘s  50% stake of the pair’s Nokia Siemens Networks, or NSN, joint venture. The total price tag is expected to be 1.7 billion euros and should close this quarter. That will make it a wholly owned subsidiary.

Nokia Corporation (ADR) (NYSE:NOK)

As Nokia Corporation (ADR) (NYSE:NOK) has been in the midst of its turnaround, investors have been keeping a close eye on its cash position and cash burn rates. Nokia’s numerous rounds of layoffs have been in pursuit of cash savings, and Nokia’s debt rating was cut into junk territory a year ago. At the end of the first quarter, Nokia was sitting on a net cash position of 4.5 billion euros. Nokia has secured bank financing for 1.2 billion euros, and Siemens AG (ADR) (NYSE:SI) is spotting Nokia the remaining 500 million euros.

Nokia estimates that it closed the second quarter with 3.7 billion to 4.2 billion euros in net cash, down 300 million to 800 million euros sequentially.

For a company that should be thrifty given its current financial standing, Nokia Corporation (ADR) (NYSE:NOK) just spent a big chunk of change. That’s renewed some speculation that the company could be preparing to sell off the smartphone segment, even as Lumia unit volumes are on the rise. JPMorgan Chase & Co. (NYSE:JPM) analyst Sandeep Deshpande thinks the NSN move could indicate that Nokia is thinking about selling off the handset segment, although it’s far from conclusive.

The NSN segment is more profitable than the devices and services business, with an adjusted operating margin of 7%. In contrast, the devices and services segment barely broke even in operations on an adjusted basis at just 0.1% last quarter. Nokia Corporation (ADR) (NYSE:NOK) has been targeting the lower-end and less profitable segment of the market with its Asha lineup, which could put further pressure on margins. Instead of dealing with fickle consumers, Nokia may prefer to deal with fickle carriers buying network equipment.

Of course, you can’t discuss Nokia Corporation (ADR) (NYSE:NOK) exiting the smartphone business without talking about Microsoft Corproration (NASDAQ:MSFT) entering the cutthroat market. The software giant has high hopes of further expanding into first-party mobile hardware following the launch of Surface last year. Microkia rumors have never come to fruition thus far, but that doesn’t mean they won’t eventually.

With Surface, Microsoft simply tapped a contract manufacturer (Pegatron) to make the device. Why wouldn’t the company do likewise with its expected Surface Phone? First, Nokia Corporation (ADR) (NYSE:NOK) has a broad patent portfolio that would come in handy. Second, buying in could facilitate a faster design cycle since Microsoft has no (known) experience designing smartphone hardware. Third, Nokia currently ships 80% of all Windows Phones. Fourth, Microsoft Corproration (NASDAQ:MSFT) likes to blow money on huge acquisitions.

With Nokia’s buyout of NSN expected to put even more pressure on its cash position by taking on more debt, one potential solution to relieve some of that pressure would be to bail on smartphones.

The article Is Nokia Bailing on Smartphones? originally appeared on Fool.com and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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