30 May 2008

NOK: Look Ahead to June 2008 Results

Our analysis of Nokia through March 2008 determined that the Overall gauge increased from 28 to 37 points, out of 100 possible points. The Growth and Profitability gauge scores were solid, at 14 to 15 points each, and the double-weighted Value gauge showed some signs of life by rising from 1 to 5 points, a still weak result given that 25 points is the maximum score for this gauge.

The Value gauge was soft because the price of Nokia ADRs advanced from $20.32 to $38.39, a gain of 89 percent, in 2007. The weak dollar undoubtedly added to the ADR price rise. Revenue and Net Income grew smartly in 2007, but they they were outpaced by the soaring stock price. The ADRs weakened somewhat in early 2008, which, from our point of view, made the company a tad more attractive.

Nokia Corp. (NOK), headquartered in Espoo, Finland, is a global seller of cellular phones and the equipment for mobile phone networks. In April 2007, the company and Siemens formed Nokia Siemens Networks, a 50/50 partnership. The June 2008 quarter will be the first one that includes comparable results for NokiaSiemens, with its annual sales of €13.4 billion, in both the current and year-earlier periods. In the previous four quarters, the financial statements were not strictly comparable with historical results.

Nokia will reports its results for 2008's second quarter on 17 July. In anticipation of this report, we've modeled Nokia's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

The company, in April, provided some qualitative guidance about expected business conditions and anticipated sales volumes.

Given the strong Revenue growth Nokia has been achieving recently, we can expect Revenue in the second quarter to be greater than the €12.6 billion figure in the June 2007 quarter. However, the earlier period was particularly strong, so we would expect some moderation of the growth rate. With this in mind, our working estimate for second quarter Revenue is €13.2 billion. This value is only 5 percent greater than year-earlier Revenue, but it equates to year-over-year Revenue growth of 23 percent. Professional analysts are a little less optimistic: their average estimate for Nokia's first quarter Revenue is $20.1 billion (€13.0 billion at the current exchange rate ).

Nokia's Gross Margin has been 31 to 36 percent of Revenue in each quarter for the last couple of years. But, it has been at the high end of the range recently. This leads us to believe that 35 percent is achievable in the second quarter. Therefore, our expectation for Costs of Goods Sold in the quarter is (1 - 0.35) * €13.2 billion = €8.6 billion.

Research and Development and Sales, General and Administrative expenses have each been between 10 and 11 percent of Revenue recently. We will assume the higher figure and estimate each of these expense at 0.11 * €13.2 billion = €1.5 billion.

In the June 2007 quarter, net other Operating Income was a monumental €1.8 billion. However, this was entirely due to the formation of NokiaSiemens Networks. We have no reason to believe there will be extraordinary income or expenses in the June 2008 quarter.

With these figures, our estimate for Operating Income works out to be €1.7 billion.

Investment and interest income/expenses are tough to predict because they vary greatly from quarter to quarter. For the record, we're assuming €75 million net non-operating income. If we subtract €490 million for income taxes, assuming an effective 27.5 percent tax rate, the prediction for Net Income is €1.3 billion (€0.34/share). The analyst consensus estimate is $0.57 (€0.37) per share.


March 2008
March 2007
Op expenses

CGS (8580)

R&D (1452)

SG&A (1452) (1669)

Other 0

Other income


Interest, etc.
Pretax income

Income tax

Net Income

Shares outstanding


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