(NOK) Nokia Sells Modem Unit to Renesas

The world’s largest mobile phone manufacturer, Nokia Corp. (NOK) announced plans to sell its wireless modem business to Renesas Electronics of Japan for $200 million with the intention of forming a strategic alliance to further develop modem technologies. The deal is expected to be completed in the fourth quarter of 2010.

Faced with competition from China, Nokia’s modem business has been running into losses. This division comprises technologies for LTE, HSPA and GSM standards, together with related patents and about 1,100 Nokia R&D staffers, mostly in Finland, India, the U.K. and Denmark.

Earlier in 2009, Nokia had also entered into similar partnerships with Microsoft Corp. (MSFT) and Intel Corp. (INTC) to beat competition from Apple Inc. (AAPL), Research in Motion Ltd. (RIMM) and Google Inc. (GOOG) in the smartphone market.

We believe the deal will enable Nokia to focus more on its core businesses. However, we remain skeptical about Nokia’s long-drawn strategy of launching price-effective mobile devices. Lack of penetration in the high-margin, lucrative smartphone market will put pressure on the company’s bottom line. Smartphone market is becoming intensely competitive, thereby compelling Nokia to cut down its average selling price (ASP) that will hurt its profit margin in 2H10.

On June 16, 2010, Nokia slashed its second quarter and full year 2010 outlook for its Devices & Services segment. Intense competition in the high-end mobile phone segment, a shift in its product mix toward low-margin devices and the recent depreciation of the Euro were the primary reasons for the revised outlook. The company is also facing competitive threats at the lower and mid-range of the market from its Korean rivals, especially Samsung, the second largest mobile phone maker by shipments.

We maintain our Underperform recommendation on Nokia. Currently, it is a Zacks #5 Rank (Strong Sell) stock.

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