MKM stays neutral but states the merger could close by year end. Frankly I believe that while it is prudent to keep a conservative outlook regarding the merger risks, I would not be too cautious, Rajeev seems to be very proactive on this front, so I would expect some bumps, but not high risks:

 

Alcatel-Lucent, Nokia Deal Could Close by Year End.

 The upcoming transaction has positives, but there are enough integration risks to keep the rating on Nokia at Neutral.

July 31, 2015 11:09 a.m. ET

 

MKM Partners

Alcatel-Lucent and Nokia have secured regulatory approval for the proposed merger in a number of key jurisdictions including the U.S. and Europe.

Integration plans are moving along and Nokia (ticker: NOK ) is developing a target operating and organizational model that is focused on limiting disruption and preventing market share loss. Given the progress thus far, the companies believe that the deal may close in the early part of the first half of 2016 or even by year end.

We think Nokia is doing a good job executing on its sales opportunities and keeping expenses under control. However, the global telecom-equipment market is tough for large vendors due to the overall flat-to-down capital-expenditure environment and tough competitive landscape. We are moderately positive on the upcoming Alcatel-Lucent ( ALU) deal, but there are enough integration risks to keep our rating at Neutral.

Our Nokia fair-value estimate of $7.50 is based on 1.6 times enterprise value to estimated 2016 sales.

Three months ago, Nokia reported strong revenue but weak gross margins for the first quarter, and the stock traded down significantly. Thursday, the company reported slightly light revenue for the second quarter but strong gross margins, and the shares are trading up nicely. Second-quarter gross margins improved 410 basis points quarter-over-quarter and 270 basis points year-over-year to 46.7%, beating our estimate by 350 basis points and consensus by 440 basis points. Better second-quarter gross margins were driven by a reversal of the trends that hurt the first quarter. Namely, Software sales increased within the Mobile Broadband mix and Global Services sales increased within Networks.

Overall second-quarter revenue came in at 3.21 billion euros (down 1% year-over-year at constant currency), missing our estimate by 90 million euros. Networks sales at 2.73 billion euros were 130 million euros shy of our forecast due to some sequential weakness in North America and Asia Pacific, partially offset by strength in Europe, the Middle East and Africa and Latin America. HERE [location-services unit] revenue of 291 million euros and Technologies sales of 193 million euros each came in solidly ahead of our forecasts.

Nokia turned in strong 46.7% gross margins in the second quarter, as previously mentioned. In addition, operating expenses came in below expectations. Second-quarter operating margins were strong at 16.2%, compared to our 10.5% estimate, and earnings before interest and taxes of 521 million euros beat our 347 million euros forecast. Nokia reported non-International Financial Reporting Standards second-quarter earnings per share of nine euro cents, versus our/consensus estimates at seven euro cents/five euro cents, respectively.

Management reiterated almost all of its full-year 2015 guidance which includes, among other targets, year-over-year growth in all three of its operating segments. The only minor adjustment was to the expected quarterly operating expenses run rate for Nokia Technologies. For the remainder of 2015, management now expects operating expenses for the segment to be approximately in line with the second-quarter level (about 79 million euros), up from in line with the fourth-quarter 2014 (about 69 million euros) level, previously.

-- Michael Genovese 
-- Michael Brockway

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