06 January 2008

NOK: Look Ahead to December 2007 Results

Nokia's (NOK) results through the third quarter of 2007 were outstanding. Net Income was up an impressive 62 percent year-over-year, and Cash Flow from Operations rose a powerful 76 percent over this period. Revenue increased 18 percent.

In dollar terms, the stock soared at an even faster pace. From 31 December 2006 through 31 December 2007, Nokia American Depository Receipts (ADRs) advanced from $20.32 to $38.39, or 89 percent. Our austere Value Gauge, however, isn't one to celebrate when share prices rise by rates greater than earnings, causing multiples to expand. In our analysis results after the third quarter, the Overall Gauge score for Nokia dropped to 25 out of 100 possible points because of the valuation concerns.

We also expressed some questions about how much of the growth was due the formation of the Nokia Siemens Networks partnership in the second quarter, tax changes, and the weakening of the dollar. (Nokia's results are expressed in Euros.)

On 24 January, Nokia will report its fourth quarter and full year results for 2007. The additional data should give us better visibility into company performance.

Because Revenue has been accelerating, we believe it is possible that Nokia's sales were around €14.0 billion in the fourth quarter. This figure would constitute year-over-year growth of 20 percent; coincidentally, it would also be 20 percent greater than the €11.7 billion revenue in the fourth quarter of 2006. Collectively, professional analysts are a little more optimistic than we are: their average estimate for fourth quarter revenue is $21.13 billion (€14.3 billion at the current exchange rate )

Nokia's Gross Margin has been around 33 percent of Revenue, give or take a couple of points, for the last couple of years. Since the company seems to be emphasizing increased market share, we're not going to look for a significant improvement in profitability in the fourth quarter. Matching the 33 percent figure with our Revenue projection, our expectation for Costs of Goods Sold in the quarter is €9.4 billion.

Research and Development and Sales, General and Administrative expenses have each been about 10 percent of Revenue recently, although they have been edging upward. We will assume these percentages hold true in the second quarter. Therefore, we're estimating these expenses at €1.4 billion each in the fourth quarter. If we assume another €25 million in miscellaneous operating charges, the estimate for Operating Income turns out to be €1.8 billion.

Investment and interest income/expenses are tough to predict because they vary greatly from quarter to quarter. For the record, we're assuming €67 million net non-operating income. If we subtract €480 million for income taxes, using the company's guidance for an effective 26 percent tax rate, the prediction for Net Income is €1.4 billion (€0.35/share). The analyst estimate is $0.61 (€0.41) per share


Dec 2007
Dec 2006
Op expenses

CGS 9380

R&D 1400

SG&A 1400 1189

Other 25

Other income


Interest, etc.
Pretax income

Income tax

Net Income


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