31 March 2008

NOK: Look Ahead to 2008 First Quarter Results

Our analysis of Nokia (NOK) through the fourth quarter of 2007 produced a disappointing Overall gauge score of 28 points out 100 possible points. The Growth and Profitability gauge scores were good, and the Cash Management gauge score was OK, but the double-weighted Value gauge contributed only 1 of 25 possible points.

The Value gauge was weak because the price of Nokia ADRs advanced from $20.32 to $38.39, a gain of 89 percent, over the course of 2007. Revenue and Net Income grew smartly during this period, but they they were outpaced by the soaring stock price. The weak dollar undoubtedly added to the ADR price rise. (Nokia's results are expressed in Euros.)

The creation in April 2007 of Nokia Siemens Networks, a 50/50 partnership with the German powerhouse, has made it difficult to compare Nokia's current and past results. Recent financial statements fully consolidate the operations of the partnership. However, previous results, including the relevant year-earlier periods, do not include data for the businesses Siemens contributed to the partnership. This is a significant difference since the partnership would, by itself, be considered a large-cap company.

On 17 April 2008, Nokia will report its results for the first quarter of 2008. The company, in January, provided some qualitative guidance about expected business conditions and anticipated sales volumes. However, we have to make many material assumptions to forecast the first quarter Income Statement.

Given the strong Revenue growth Nokia has been achieving recently, we can expect Revenue in the first quarter of 2008 to be significantly greater than the €9.9 billion figure in the March 2007 quarter. However, Revenue will almost certainly be less than the €15.7 billion racked up in the December 2007 quarter. Sales in the first quarter are traditionally weaker than those in the holiday-focused fourth quarter of the previous year.

Our working estimate for first quarter Revenue is €12 billion. Professional analysts are a little more optimistic: their average estimate for Nokia's first quarter Revenue is $19.94 billion (€12.64 billion at the current exchange rate ). Our estimate translates into year-over-year Revenue growth of 28 percent; it would also be 22 percent greater than the €9.9 billion in the first quarter of 2007.

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 emphasizing increased market share, we're not going to look for a significant improvement in profitability in the first quarter. Matching the 33 percent figure with our Revenue projection, our expectation for Costs of Goods Sold in the quarter is €8.04 billion.

Research and Development and Sales, General and Administrative expenses have each been between 10 and 11 percent of Revenue recently. We will split the difference and use an estimate of 10.5 percent of Revenue for each expense. With these figures, our estimate for Operating Income works out to be €1.44 billion.

Investment and interest income/expenses are tough to predict because they vary greatly from quarter to quarter. For the record, we're assuming €60 million net non-operating income. If we subtract €420 million for income taxes, assuming an effective 28 percent tax rate, the prediction for Net Income is €1.08 billion (€0.28/share). The analyst consensus estimate is $0.57 (€0.36) per share.


March 2008
March 2007
Op expenses

CGS (8040)

R&D (1260)

SG&A (1260) (962)

Other 0

Other income


Interest, etc.
Pretax income

Income tax

Net Income


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