04 July 2007

NOK: Looking Ahead to 2Q Results

We saw some good in Nokia's financial results for the first quarter of 2007. However, a more substantial increase in the stock price had driven the Value gauge down to a single point, which depressed the Overall gauge score into the mid-30's. We concluded at the time that Nokia should be put aside until a market correction made the valuation more appealing.

That was a mistake. During the second quarter, Nokia ADR's shot up from $22.92 to $28.11. As was the case for Intel, which we discussed a few days ago, the market perceived that business conditions at Nokia had passed through an inflection point this Spring, and rosier times were ahead. The company stoked these feelings with an announcement that its share of the mobile phone market was increasing. Alas, our gauges can't detect these inflections until after they are visible in the financial statements. However, once this has occurred, we can measure the extent of the break from historical precedent and assess whether the stock price fairly reflects the new circumstances.

In early August, Nokia will report its second quarter results. Revenue projections are difficult because their quarter-to-quarter revenue pattern has been somewhat erratic, and they don't issue any revenue guidance. We're leaning towards €11.29 billion, which would be 15 percent higher than the year-earlier quarter. It would also equate to 13 percent year-over-year revenue growth. Analysts are expecting the second quarter revenue figure to be $16.64 billion (€12.2 billion).

Tougher competition has been steadily eating at Nokia's gross margin for the last several years. We're assuming improving market conditions will cause the figure to bounce back, but we don't see more than a slight improvement because the company seems to be emphasizing market share over profitability. Our estimate is, therefore, 34 percent. Matching this with our revenue projection, we're looking at a cost of goods sold of €7.451 billion.

R&D and SG&A expenses have each been about 10 percent of revenue recently, and we will assume these percentages hold true in the second quarter. Therefore, we're estimating them at €1.129 billion each in the second quarter. If we assume another €10 million in miscellaneous operating charges, the estimate for operating income turns out to be €1.571 billion.

Investment and interest income/expenses are tough to predict, but the figures are not especially material for Nokia. For the record, we're assuming 55 million net non-operating income. If we subtract €406 million for income taxes, assuming an effective 25 percent tax rate, the prediction for net income is €1.219 billion (€0.30/share).



Op expenses

CGS 7451

R&D 1129

SG&A 1129 1019

Other 10
Op income

Other income


Interest, etc.
Pretax income

Income tax

Net income



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