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DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
30 September 2013
Europe
Equity Research
Telecommunications Equipment
Global Telecom Equipment COMMENT
Nokia strategic review in focus
■ Strategic review in focus; reiterate OP. According to the Financial Times (FT),
Nokia’s Board have commenced a series of board meetings to discuss the future
direction of the company post the Microsoft deal. The report suggests that Nokia
is centering around NSN and Advanced Technologies (IPR business) as its core
businesses, with HERE segment (mapping) being less core. Additionally, other
widespread news reports suggest that Nokia could be interested in striking a
deal with ALU to strengthen its wireless infrastructure business. We continue to
believe that Nokia is worth €6.0 per share at least on SOTP basis (with IPR
business worth €2.3 per share) and reiterate our Outperform rating.
■ Maps – strategic value may be much more. We currently value HERE
(mapping business) using an EV/sales of 1.0x which gives us €0.25 per share in
Nokia's valuation. However, with the FT suggesting HERE being less core to
Nokia group, we believe the strategic value of this asset could be at a premium
given it is one of the few assets available globally in this area and has a strong
offering in the area of mapping and location based services.
■ NSN's interest in ALU's wireless asset – strategically makes sense but may
be complex with execution risks… With NSN now being the core business
within Nokia group, Reuters, Bloomberg and the Wall Street Journal suggested NSN could be potentially interested in acquiring ALU's wireless
business to increase its scale. While theoretically, it makes sense as it would
propel NSN to a clear #2 position in wireless infra market with 25% share
(Ericsson at 40%, Huawei at ~15%), we would also note technical complexities
with such a deal (merging of two different RAN platforms and cost associated
with the swap out) as we saw with Nokia and Siemens JV in 2007, and Alcatel,
Lucent and Nortel merger in 2006.
■ …so it may all come down to price; we think Nokia should not pay more
than €1bn (0.25x EV/sales) excluding 'post acquisition cash costs'. If we
were to assume 0.25x EV/sales for ALU's wireless business (€1.03bn of EV
which Nokia pays to ALU), plus cash restructuring (€700mn) and cost of RAN
swap out in the US (€800mn), we believe the total cost of transaction for NSN
may be around €2.5bn. If NSN were to be successful in bringing ALU's wireless
unit from being loss making to around 7% OMs post restructuring, we believe the
combined entity may have sales of €15bn with 7% OMs, which at 0.60x EV/sales
would imply an EV of €9.1bn (~€2.5bn higher than what we currently assume for
NSN in our Nokia SOTP analysis), something we show in Figure 7 in the note.
■ Good for ALU (Neutral rated) if it happens as it alleviates balance sheet
concerns. We believe that disposal of wireless business (€4.1bn of sales but
loss making, we think around 5% OM loss) may drive group OMs for ALU to
close to 6% in 2014. In addition, if we were to assume 0.25x EV/sales for this
asset, it would provide ALU with €1.03bn of cash, thereby alleviating some
concerns of its balance sheet as the company is trying to lower its gross debt by
€2bn (from €5.7bn currently) to get to a healthier balance sheet position.
Research Analysts
Kulbinder Garcha
212 325 4795
Achal Sultania
44 20 7883 6884
Talal Khan, CFA
212 325 8603
Matthew Cabral
212 538 6260
Ray Bao
212 325 1227
Andrew Ruben
212 325 4798
30 September 2013
Global Telecom Equipment 2
Strategic review in focus According to the Financial Times (FT), Nokia’s Board have commenced a series of board
meetings to discuss the future direction that the company may take post the Microsoft deal
around its D&S business. According to the FT, while discussions are still at an early stage,
it appears that the company is centering around NSN (Nokia Solutions & Networks) and
Advanced Technologies (its newly created licensing business) as its core businesses, with
the third segment, HERE (provider of mapping and location based services) being less
core. Additionally, recent press reports from Reuters, Bloomberg and Wall Street Journal
all seem to imply that Nokia could be interested in striking a deal with Alcatel-Lucent to
strengthen its telecom infrastructure business. As such, in this note, we look in some detail
as to what could be the break-even point for Nokia in terms of valuation if it were to buy
Alcatel-Lucent's wireless business. We continue to believe that Nokia is worth €6.0 per
share at least on SOTP basis and reiterate our Outperform rating.
Mapping non-core? Could it have strategic value?
Nokia's HERE business has a strong offering in the area of mapping and location based
services, and is one of the few assets available globally in this area. Interestingly enough
recent press stories indicate that Microsoft was interested in this asset (along with the deal
for Nokia's D&S business), however the two companies could not agree on valuation for
the maps business. We continue to believe that the mapping asset could be of strategic
interest to a number of players in the industry and provide differentiation to companies like
Apple, Samsung, Facebook and Amazon to name a few.
What does HERE actually offer? Within its HERE business, Nokia's efforts are focused
around development of content, platform and applications around mapping. For example,
■ Content – Nokia has a map database of the physical world with details around roads,
points of interest and collection of data generated from user activities. In addition, it
has also been working on 3D maps along with real time capture and processing
technologies;
■ Platform – It also offers other companies the underlying map infrastructure and
development tools to create applications on top of it. For example, in 2012 Amazon
signed a license agreement for Nokia maps, and the company already license maps to
Microsoft and Yahoo.
■ Applications – Nokia also offer a number of location applications including HERE
Maps (access to nearly 200 country maps with 3D landmarks, real time traffic
services), HERE Drive (in-car navigation services with voice-guide support in multiple
languages for over 100 countries), HERE Transport (mobile application for offering
underground, tram, metro trains and bus directions for more than 500 cities in 46
countries), and HERE City Lens (augmented reality application which turns
smartphone camera viewfinder into a way to find local restaurants, shops, hotels, etc.).
Strategic value of mapping, although difficult to assign specific value. Given the value of
maps in mobile devices, automobile industry and Internet based services, we believe that
Nokia's HERE business (formerly called Location & Commerce) also has a strategic value
in the industry as mapping is key to offering location based services. Some of its key
existing customers are Audi, BMW, Chrysler, Fiat, Ford, General Motors, Hyundai, Kia,
Nissan, Toyota, Renault, Mercedes, Volkswagen (all automotive), Microsoft, Yahoo,
Amazon and Oracle (all Internet service providers). With Google and more recently Apple
continuing to look for ways to strengthen their location assets and capabilities through both
organic and inorganic means, we believe that Nokia's mapping asset can be of material
strategic value in the automotive and wireless industry.
We assume value of €0.25 per share in Nokia's SOTP based on EV/sales of 1.0x. While
we currently value HERE business on fundamentals using an EV/sales of 1.0x, which
30 September 2013
Global Telecom Equipment 3
gives us €915mn of EV or €0.25 per share in Nokia's valuation (Figure 8), we believe
strategically this asset could be priced at a premium. Additionally, we believe that if Nokia
do decide to keep this asset internally, there is scope to increase licensing to a range of
consumer electronics, handset, automotive and technology companies going forward.
Further, with an OPEX to sales base of 65% in 2012 and 75% in 1H13, we would argue for
material scope for cost rationalization, which could potentially improve profitability in this
segment going forward.
NSN considering ALU's wireless assets? We believe it comes down to price
Alcatel-Lucent has around 8% share in wireless infrastructure market globally, but clearly
has an attractive customer base in the US with close alignment to Verizon, AT&T and
Sprint. In fact, US accounted for around 37% of Alcatel-Lucent's group sales in 2012. In
addition, Europe is another 26% of group revenues (with 23% coming from Western
Europe). Also post the 'Shift Plan' announced in June 2013 by incoming CEO (Michel
Combes), one would argue that the Access business (Wireless resides within this
segment) for Alcatel-Lucent is becoming non-core to the company, as the management
have noted its plan to manage this segment for cash going forward, with increasing focus
on its Core Networking segment.
Figure 1: ALU sales by region (2012) Figure 2: NSN sales by region (2012)
Western Europe, 23%
Rest of Europe, 3%
USA, 37%
Other Americas,
12%
Asia Pacific, 17%
Rest of World, 7%
Europe28%
Middle East & Africa
9%
Greater China
9%
Asia-Pacific32%
North America
10%
Latin America
12%
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates
Theoretically makes sense by catapulting NSN to 25% global share, and clear #2 position.
By acquiring Alcatel-Lucent's wireless business, NSN could boost its market share
theoretically to around 25% in the wireless infrastructure market globally, placing it as a
clear #2 ahead of Huawei (which has around 15% share) and behind Ericsson (which
remains the leader with around 40% share), and thereby creating a very concentrated
industry. This suggests to us that the industrial logic behind such a deal may seem solid,
especially if NSN were to be able to replicate its 'margin improvement' success with
Alcatel-Lucent's struggling wireless business.
Figure 3: Acquiring ALU's wireless unit will propel NSN to a clear #2 with 25% share
Overall share (%) 2006 2007 2008 2009 2010 2011 2012
Ericsson 31% 33% 34% 33% 36% 40% 40%
Nokia Siemens 24% 20% 19% 17% 16% 19% 17%
Alcatel-Lucent 13% 12% 10% 9% 10% 9% 8%
Huawei 4% 8% 9% 12% 14% 14% 15%
ZTE 2% 4% 4% 6% 7% 6% 6%
Motorola 10% 10% 8% 7% 6% 0% 0%
Nortel 6% 7% 6% 4% 0% 0% 0%
Samsung 1% 2% 1% 3% 3% 3% 3%
LG 0% 0% 1% 1% 1% 1% 1%
Others 7% 6% 7% 9% 8% 9% 9%
Global 100% 100% 100% 100% 100% 100% 100%
Source: Company data, Infonetics, Credit Suisse estimates
30 September 2013
Global Telecom Equipment 4
….but such mergers haven’t worked in practice in the past, so execution risks remain and
it all comes down to price. However, we believe Alcatel-Lucent's wireless unit is a loss
making entity, and in practice, the challenge of running two different RAN platforms, or
merging them into one is a costly business, as we have seen with Nokia and Siemens JV
in 2007 and also with the 3-way merger of Alcatel, Lucent and Nortel in 2006. Given such
complexities and risks around execution, we believe a deal between NSN and ALU
ultimately comes down to the price, and an EV/sales of 0.25x or lower makes the deal
potentially attractive given other associated costs for NSN like restructuring and swap out
of existing RAN installed base, something we discuss below in detail.
Figure 4: We estimate ALU losing around 5% at OM level in its Wireless business in € millions, unless otherwise stated
2012 2013E 2014E
ALU group sales 14,449 14,587 14,756
ALU Wireless sales 4,069 4,142 4,101
ALU excl. Wireless sales (€ mn) 10,380 10,445 10,655
ALU group operating profit -263 168 438
OM (%) -1.8% 1.1% 3.0%
ALU Wireless operating profit -203 -166 -164
OM (%) -5.0% -4.0% -4.0%
ALU excl. Wireless operating profit (€ mn) -60 333 602
OM (%) -0.6% 3.2% 5.6%
Source: Company data, Credit Suisse estimates
NSN may also need to spend on restructuring ALU's wireless business, we assume
around €700mn. One of the key issues with Alcatel-Lucent over the last few years has
been its opex base at the group level, which has been running between 32% and 34% of
sales between 2007 and 2012, which is significantly higher than 25% levels seen at
Ericsson and NSN in 2012. This would suggest that one would need to do significant
levels of restructuring to drive Alcatel-Lucent's wireless business back to profitability,
something which NSN has successfully managed to do internally over the last 2 years. In
fact, NSN has managed to bring down its headcount from a peak of 75K employees in
Q311 to slightly over 50K in Q213 (Figure 5). As such, we believe NSN may have to do
similar kind of restructuring program if it were to buy Alcatel-Lucent's wireless business to
make it profitable longer term. This in our view may cost NSN around €700mn in cash
restructuring charges to drive ALU's wireless business towards 7% margins.
Figure 5: NSN's headcount down by ~35% from its peak Figure 6: ALU's headcount by division over time
60,5
46
60,9
83
63,9
43
63,9
27
64
,31
9
65,2
51
66,0
90
66,1
60
66,2
29
74,8
87
74,9
54
73,6
86
68,5
95
63
,32
8
60
,63
5
58,4
11
56
,67
0
50,4
76
30,000
40,000
50,000
60,000
70,000
80,000
Q1
09
Q3
09
Q1
10
Q3
10
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
Nu
mb
er
of
em
plo
ye
es
at
NS
N
34,753 33,359 32,159
38,23636,095 35,269
3,9643,833 3,855
78,139 74,366 72,344
0
20,000
40,000
60,000
80,000
2010 2011 2012
Other Enterprise Software, Services & Solutions Networks
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
What is the cost of swapping out ALU's base stations at least in the US? €800mn in our
view. One of the biggest complexities we believe in such a deal will arise from the fact that
NSN may have to consider migrating to one RAN platform over time instead of trying to
30 September 2013
Global Telecom Equipment 5
run two separate platforms – one from NSN and one from ALU. We believe this will be
even more important in the US market where ALU have a significant installed base as it is
a primary supplier to Verizon, AT&T and Sprint. As such, we have looked at the cost of
swapping out ALU's installed base stations in the US if such a deal were to take place.
There are around 115,000 cell towers for Verizon and AT&T combined in the US with each
having around 2 base stations on an average, and we estimate Alcatel-Lucent have
around 35% share of installed base. This would imply around 80,000 base stations to be
swapped out over the next couple of years. Then if it were to cost NSN €10,000 to swap
one of them, it would mean €800mn for swap out cost in the US over the next 2-3 years.
For other regions, we believe that the swap out costs may be less given Alcatel-Lucent
has not been that strong in terms of installed base.
Total cost to NSN of around €2.5bn – €1.03bn to ALU for asset sale plus post acquisition
cash costs. If we were to look at the total cost of buying ALU's wireless asset for NSN, our
view is that it may come to a total of €2.5bn based on following components:
■ €1.03bn for buying the asset based on 0.25x EV/sales (based on €4.1bn of sales);
■ €700mn for cash restructuring to drive Alcatel-Lucent's wireless business to around
7% OMs (up from 5% OM loss we current estimate); and
■ €800mn for swapping out Alcatel-Lucent's installed base in the US assuming NSN
pays for the whole of it).
At what price can it create value for NSN? €1.03bn or less for ALU's wireless asset in our
view, or 0.25x EV/sales. The next question is how much value such a potential deal can
create for NSN, and what is the price which we think NSN may be willing to consider for
such a transaction. For 2014, we currently assume NSN on its own has around €11.1bn of
sales with slightly over 7% OMs. For ALU's wireless business if we assume that it has
sales of €4.1bn in 2014, and if it were to turn around to 7% OMs post restructuring (for
simplicity we assume in 2014), then the combined entity will have around €15.1bn of sales
with 7% OMs. Putting it on 0.60x EV/sales would mean EV of €9.1bn (or €2.5bn higher
than our current valuation as we show in Figure 7), which implies €2.4 per share. So if the
total cost of acquiring Alcatel-Lucent's wireless unit for NSN is less than €1.03bn (plus the
cost of restructuring and swapping out installed base in the US which combined may be
€1.5bn), and NSN is able to successfully restructure this business from being loss making
to 7% OMs, then it could potentially create value for NSN. This would imply that the
EV/sales for such a deal will have to be around 0.25x EV/sales or lower to result in a total
cost of the deal for NSN to be below €2.5bn.
Figure 7: ALU's wireless deal may add €2.5bn of value for NSN if it can successfully restructure that business to close
to 7% OMs; we think that for the deal to be accretive NSN should pay around €1.03bn or less given other costs involved
Sales OP OM (%) EV/sales EV EV/share (€)
NSN 11,052 780 7.1% 0.60 6,631 1.79
ALU's wireless 4,101 287 7.0%
Combined entity 15,152 1,068 7.0% 0.60 9,091 2.45
Increase in value for NSN post deal 2,460
ALU's Wireless sales (in 2014E) 4,101
EV/sales (assumed) 0.25
EV for ALU's wireless business (€ mn) (A) 1,025
Cash restructuring (€ mn) (B) 700
Swap out costs in the US (€ mn) (C) 800
Total cost for NSN (A + B + C) 2,525
Source: Company data, Credit Suisse estimates
30 September 2013
Global Telecom Equipment 6
SOTP of €6.00 at least for Nokia
We believe that based upon keeping the existing assets, Nokia is worth €6.00 per share,
with the IPR business (now called Advanced Technologies) having significant value of
€2.3 per share. However, we note that the asset allocation decisions around HERE and
NSN have the potential to raise this further, as we discuss above.
Figure 8: Our SOTP analysis suggests FV of at least €6.00 for Nokia, with IPR being as much as €2.3 per share
SOTP Details:
NSN: €1.8 per share based on an EV/sales of 0.60x. While we believe that NSN is likely to see top-line pressures, OMs can stabilize at 7% levels LT given our view around a pick-up in capex spend and improving business mix.
HERE: €0.25 per share based on an EV/sales of 1.0x. We see OM sustainable at 5% LT and believe an EV/revenue of 1.0x is fair, also could be conservative given strategic value of mapping asset.
Advanced Technologies: €2.3 per share based on LT DCF. One of the strongest IPR portfolio in wireless/CE and can continue to expand from pursuing handset vendors in China and licensing other parts of IPR (only 10% is licensed today). It also has significant strategic value to vendors like Apple, Qualcomm, Samsung, and Intel.
Excess cash: €1.6 per share. Post the MSFT deal we believe Nokia will distribute up to €1.25-1.6 per share probably in a special dividend, which is 25% and 35% of today’s share price.
Net Deferred tax assets: €0.1 per share. Adjusted for the taxes paid on MSFT deal, €800mn write back of DT assets, and potential losses before the MSFT deal closes.
NEW SOTP Key FY14 Financials Valuation
EV/ EV/ Value Per Value Per
Segments Sales OP D&A EBITDA Sales EBITDA Share (in €) Share (in $)
NSN 11,052 780 231 1,011 0.6 6.6 6,631 1.8 2.3
HERE 943 28 30 58 1.0 15.7 915 0.2 0.3
Advanced technology 670 590 30 620 12.5 13.6 8,405 2.3 2.9
Excess Net cash 5,800 1.6 2.0
Net Deferred tax assets 457 0.1 0.2
Total 22,207 6.0 7.8
EV
Source: Company data, Credit Suisse estimates
A good deal for Alcatel-Lucent alleviating some of the balance sheet concerns
ALU's wireless business is loss making in our view. Alcatel-Lucent's wireless business
accounted for €4.1bn of sales in 2012, which was some 28% of group sales. While the
company does not disclose profitability for this business, we know GMs in its wireless
business have declined from a peak of ~45% in 2011 to around low 30% levels currently.
This GM pressure was driven by decline of its highly profitable CDMA business in the mix.
The company had an OPEX to sales ratio of 32% in 2012 at the group level, and our view
is that OPEX to sales ratio would be higher in its wireless business as compared to some
of the other segments like Wireline, Optics and Services. This would imply that its wireless
business currently is loss making (our estimate is in the range of 5% loss, which would
imply €200mn operating loss).
30 September 2013
Global Telecom Equipment 7
Figure 9: Post the disposal of wireless business, ALU's OMs may expand to 5.5% to 6%
2012 2013E 2014E
ALU group sales 14,449 14,587 14,756
ALU Wireless sales 4,069 4,142 4,101
ALU excl. Wireless sales (€ mn) 10,380 10,445 10,655
ALU group operating profit -263 168 438
OM (%) -1.8% 1.1% 3.0%
ALU Wireless operating profit -203 -166 -164
OM (%) -5.0% -4.0% -4.0%
ALU excl. Wireless operating profit (€ mn) -60 333 602
OM (%) -0.6% 3.2% 5.6%
Source: Company data, Credit Suisse estimates
Sale of Wireless business may drive OMs to close to 6% in 2014. Given our view that the
wireless business for Alcatel-Lucent is currently loss making (around 5% OM loss) which
we assume may decline to 4% in 2014. This would imply that the Alcatel-Lucent group
post the divestment of wireless asset could be generating sales of €10.7bn in 2014 with
operating profits of around €600mn (5.6% margin) as we show in Figure 9.
What could it be worth? Maybe 0.25x EV/sales. Although Alcatel-Lucent's wireless
business is loss making in our view, we believe given its installed base and strong
presence in the US, it could be worth 0.25x EV/sales which would imply an EV of slightly
over €1bn (based on sales of €4.1bn we assume for 2014E). In our view, this may be the
most NSN may be willing to pay for acquiring this asset.
Figure 10: Wireless RAN market share in NA (2011) Figure 11: Wireless RAN market share in NA (2012)
Ericsson57%
Huawei3%
NSN10%
Alcatel-Lucent21%
ZTE0%
Samsung3%
Others6%
Ericsson55%
Huawei2%
NSN16%
Alcatel-Lucent17%
ZTE0%
Samsung4%
Others6%
Source: Infonetics, Credit Suisse research Source: Infonetics, Credit Suisse research
What does it mean for ALU valuation? ALU shares are currently trading on an EV/sales of
0.47x on our 2013/2014 sales estimates (Figure 12). Assuming the company divests its
wireless asset, this would result in meaningful decline in group sales but equally would
improve OM levels to close to 6%, and also improve its net cash position. In that scenario,
shares would be trading at around 0.55x as we show in Figure 13.
Figure 12: ALU currently trading on EV/sales of 0.47x Figure 13: Excluding Wireless asset, EV/sales is 0.55x
EV/sales calculation:
2013 sales (€ mn) 14,587
2014 sales (€ mn) 14,756
Net cash (Q2 2013) (€ mn) (794)
Share count (mn) 2,271
Current share price (€) 2.68
Market cap (€ mn) 6,087
EV (€ mn) 6,881
EV/sales (2013) 0.47
EV/sales (2014) 0.47
EV/sales calculation:
2013 sales excl Wireless (€ mn) 10,445
2014 sales excl Wireless (€ mn) 10,655
Net cash (if NSN deal were to happen) (€ mn) 231
Share count (mn) 2,271
Current share price (€) 2.68
Market cap (€ mn) 6,087
EV (€ mn) 5,856
EV/sales (2013) 0.56
EV/sales (2014) 0.55
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
30 September 2013
Global Telecom Equipment 8
Also alleviates some of the balance sheet concerns. While we believe that Alcatel-Lucent's
gross cash was around €4.2bn (excluding trapped cash) in Q213, we see this to decline to
€3.3bn by 2014 and €2.9bn by 2015. While this may prove enough for day to day
operations, we equally see it having a gross debt of over €5bn even in 2015, something
which we believe is not sustainable longer term. Even the company in its 'Shift Plan' in
June 2013 highlighted that it wants to lower its gross debt by around €2bn to return to
healthier balance sheet position. This will be done mainly by asset disposals. While earlier
the focus was on its Submarine and Enterprise businesses for disposals, we now see
Wireless asset also added to that list based on recent press reports. If Alcatel-Lucent can
manage to sell its Wireless business for €1.03bn to NSN, then it alleviates some of the
balance sheet concerns for the company and also improves its operating margin profile at
the group level.
Figure 14: Gross cash to continue to decline Figure 15: Financial sustainability plan from the company
4,280
3,888 3,913 3,915
2,672
3,619
4,594
4,852
4,448
3,964
3,549
4,645
3,549
3,138
2,754
3,399
4,415
4,212
3,8893,980
4,184
3,281
2,999
-1,500
-500
500
1,500
2,500
3,500
4,500
5,500
Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 2013E2014E2015E
Cas
h (
€m
n)
Gross cash (excl trapped cash) Net cash (incl trapped cash)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
3
0 S
ep
tem
ber 2
013
Glo
ba
l Te
leco
m E
qu
ipm
en
t 9
Figure 16: While liquidity may not be an issue for ALU in the medium term, asset sales are needed to return it to a healthier balance sheet position in € millions, unless otherwise stated
CS estimates (€ mn) 2009 2010 2011 2012 2013E 2014E 2015E 2016E
Revenue 15,157 15,996 15,327 14,449 14,587 14,756 14,756 14,756
Gross Profit 5,111 5,571 5,361 4,341 4,537 4,658 4,722 4,722
Gross Margin (%) 33.7% 34.8% 35.0% 30.0% 31.1% 31.6% 32.0% 32.0%
R&D (2,372) (2,503) (2,315) (2,332) (2,363) (2,331) (2,287) (2,287)
as % of sales 15.6% 15.6% 15.1% 16.1% 16.2% 15.8% 15.5% 15.5%
SG&A (2,795) (2,781) (2,526) (2,272) (2,006) (1,889) (1,844) (1,844)
as % of sales 18.4% 17.4% 16.5% 15.7% 13.8% 12.8% 12.5% 12.5%
Operating profit (56) 287 520 (262) 168 438 590 590
Operating Margin (%) -0.4% 1.8% 3.4% -1.8% 1.1% 3.0% 4.0% 4.0%
D&A (excl. PPA) 700 707 627
Share based payments 58 37 28
Other non-cash adjustments (130) (54) 82
EBITDA 572 978 1,257 641 968 1,238 1,390 1,390
EBITDA Margin (%) 3.8% 6.1% 8.2% 4.4% 6.6% 8.4% 9.4% 9.4%
Capex (691) (692) (558) (582) (500) (480) (472) (472)
Interest received 72 48 57 72 61 56 47 41
Interest expense (244) (305) (310) (275) (320) (282) (238) (212)
Taxes (89) (117) (55) (57) (80) (90) (100) (100)
Cash contribution to pension & OPEB (226) (226) (185) (190) (180) (175) (175) (175)
Restructuring cash outlays (561) (377) (344) (340) (675) (750) (450) (148)
Changes in WC 471 (127) (335) 50 (300) 0 0 0
Free Cash Flow (696) (818) (473) (681) (1,026) (483) 2 324
Net debt calculations 2009 2010 2011 2012 2013E 2014E 2015E 2016E
(-) Debt due in the year 197 420 284 879
(+) New debt issued 2,669
(-) Debt purchased back 1,419
Cash and cash equivalents 3,576 5,040 3,534 3,401 3,078 2,675 2,893 2,338
Marketable securities (short term) 1,993 649 939 1,528 1,878 1,378 878 878
Gross Cash 5,569 5,689 4,473 4,929 4,956 4,053 3,771 3,216
Cash trapped at subsidiaries 718 908 1,074 949 772 772 772 772
Gross Cash ex locked up amount 4,851 4,781 3,399 3,980 4,184 3,281 2,999 2,444
Bonds and notes issued 4,084 4,037 4,152 3,727 5,048 4,603 4,194 3,315
Short-term portion of long-term borrowing 576 1,266 329 851 600 625 750 750
Other long-term debt 95 75 138 227 210 210 210 210
Gross Debt 4,755 5,378 4,619 4,805 5,858 5,438 5,154 4,275
Net derivative positions/others 88 51 115 23 (100) 0 0 0
Net cash / (debt) 902 362 (31) 147 (1,002) (1,385) (1,383) (1,059)
Net cash / (debt) ex locked up cash 184 (546) (1,105) (802) (1,774) (2,157) (2,155) (1,831)
800 800 800903 800
1
2
3
1) Looking for OMs to improve to
3%/4% in 2014/2015. Althoughthe company seems to be targetingOMs of at least 7% by 2015, webelieve those targets may proveoptimistic. We assume OMs toimprove to 3%/4% in 2014/2015driving EBITDA of €1.2bn/€1.4bnrespectively.
2) Cash burn to continue till 2014 at
least, only reaching breakeven
levels in 2015. Given our viewaround top-line and OM trends, webelieve ALU will continue to see cashburn till 2014, before it reachesbreakeven levels in 2015 when itreaches around 4% OM.
3) But liquidity not an issue
anymore. With access to €2bn ofsecured debt and some recent re-profiling, we believe ALU will havegross cash of €3bn by 2015 (excl.trapped cash) even if it pays all ofnear term maturities. As such, webelieve the company has any liquidityissues through 2015. Note this doesnot include €1.0-1.5bn of potentialcash from asset sale.
Source: Company data, Credit Suisse estimates
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Global Telecom Equipment 10
Companies Mentioned (Price as of 29-Sep-2013)
AT&T (T.N, $33.98) Alcatel-Lucent (ALUA.PA, €2.68, NEUTRAL[V], TP €1.9) Ericsson (ERICb.ST, Skr87.3) Microsoft Corporation (MSFT.OQ, $33.29) Nokia (NOK1V.HE, €4.91, OUTPERFORM[V], TP €6.0) Sprint Nextel Corp (S.N, $6.16) Verizon Communications Inc (VZ.N, $47.0) ZTE Corporation (0763.HK, HK$15.92)
Disclosure Appendix
Important Global Disclosures
Kulbinder Garcha and Achal Sultania, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Alcatel-Lucent (ALUA.PA)
ALUA.PA Closing Price Target Price
Date (€) (€) Rating
18-Nov-10 2.16 2.00 U
21-Feb-11 3.52 3.00
10-May-11 4.38 3.25
29-Jul-11 2.76 2.50
08-Nov-11 1.53 1.50
05-Jan-12 1.23 1.25
14-Feb-12 1.75 1.60
27-Apr-12 1.20 1.20
18-Jul-12 0.90 0.90
27-Jul-12 0.83 0.75
05-Nov-12 0.79 0.70
14-Dec-12 0.91 R
17-Dec-12 0.97 0.70 U
03-Jan-13 1.16 1.25 N
31-Jul-13 1.90 1.90
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
REST RICT ED
N EU T RA L
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Global Telecom Equipment 11
3-Year Price and Rating History for Nokia (NOK1V.HE)
NOK1V.HE Closing Price Target Price
Date (€) (€) Rating
22-Oct-10 8.00 7.00 U
14-Feb-11 6.63 6.00
26-Apr-11 5.96 5.50
01-Jun-11 4.71 4.00
21-Jun-11 4.21 3.50
19-Sep-11 4.27 3.75
25-Oct-11 4.83 4.00
05-Jan-12 4.16 6.00 O
12-Apr-12 3.04 4.50
15-Jun-12 1.93 2.00 N
01-Oct-12 2.09 1.60 U
19-Oct-12 2.10 1.85
23-Oct-12 2.05 R
07-Nov-12 2.05 1.85 U
11-Jan-13 3.40 2.50
19-Apr-13 2.31 2.25
03-Sep-13 3.97 4.80 N
18-Sep-13 4.95 6.00 O
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
O U T PERFO RM
N EU T RA L
REST RICT ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a st ock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stoc k’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the rele vant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Global Telecom Equipment 12
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (55% banking clients)
Neutral/Hold* 40% (49% banking clients)
Underperform/Sell* 15% (40% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individua l factors.
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Price Target: (12 months) for Alcatel-Lucent (ALUA.PA)
Method: Alcatel Lucent's target price of 1.90 EUR is based on applying a 2014 EV/sales of 0.35x to our estimates, which we believe is fair given our operating margin assumptions for the company.
Risk: The risks that may impede achievement of 1.90 EUR price target are: (1) pricing pressure within the mobile infrastructure increases further and (2) we see continued deceleration in spending by carriers.
Price Target: (12 months) for Nokia (NOK1V.HE)
Method: Our TP of €6.00 is based on SOTP analysis for Nokia, which assumes an EV/sales multiple of 0.60x for NSN, 1.0x for HERE, DCF for
Advanced Technologies (Licensing) and adding back net cash and DTA €1.77 per share (proforma net cash post Microsoft and Siemens
transactions if these deals were to be already completed in Q114).
Risk: Key risks we'd highlight for our EUR6.0 target price for Nokia include challenging environment for NSN business, resulting in decline in top-line and margin levels, and slowdown in licensing activities.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (ALUA.PA, NOK1V.HE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (ALUA.PA, NOK1V.HE) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (ALUA.PA, NOK1V.HE) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (ALUA.PA, NOK1V.HE) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ALUA.PA, NOK1V.HE) within the next 3 months.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ALUA.PA, NOK1V.HE) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
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Global Telecom Equipment 13
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (ALUA.PA, NOK1V.HE).
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse Securities (Europe) Limited ......................................................................................................................................... Achal Sultania
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
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Global Telecom Equipment 14
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NOK_ALU note.doc
