10 September 2008

NOK: Look Ahead to September 2008 Quarterly Results

Nokia's Overall gauge score jumped from 37 to 57, of 100 possible, points when we analyzed the company's second-quarter results last July.

The newer score would have been three points less had a recent refinement to our scoring algorithms been in effect.  No matter, the 54 points would still have been Nokia's highest score since 2003. 

The Profitability gauge, at 19 of 25 points, and the Value gauge, at 14 of 25 points, led the composite score higher.  The Value gauge's rise can be attributed to Nokia's strong operating performance, coupled with the price of Nokia ADRs falling 23 percent during the second quarter.

Nokia Corp. (NYSE: NOK), headquartered in Espoo, Finland, is a global producer of mobile phones and the supporting network infrastructure.  Nokia's product portfolio ranges from low-end phones with tight profit margins to more capable and expensive devices that satisfy consumer preferences for stylish designs and new technical features.  The relative competitive position and profitability of the various phone manufacturers is subject to change after each new and improved generation of phones is brought to market.  Nokia's share of the cellular market has been about 40 percent for the last few quarters, far surpassing rivals Samsung (SEO: 005930) and Motorola (NYSE: MOT).  Nokia responded to the challenge of Apple's (NASDAQ: AAPL) iPhone by establishing its own online music service.

In April 2007, Nokia and Siemens (NYSE: SI) formed a 50/50 partnership.  The results of NokiaSiemens Networks, which has annual sales of €13.4 billion, are fully consolidated into Nokia's financial statements.  This presents an comparability challenge because Nokia's financial statements before April 2007 don't include the businesses the German powerhouse contributed to the partnership.  This is a significant difference because NSN would, by itself, be considered a large-cap company.

On 5 September 2008, Nokia announced that its share of the mobile device market will be lower in 2008's third quarter than in second quarter.  Nokia had told investors that it expected the market share to remain about the same.  Instead, the company sacrificed some market share by not matching the price cuts implemented by some competitors in response to the slowing economy.

Nokia will announce its results for 2008's third quarter on 16 October.  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 July, provided some qualitative guidance about expected business conditions and anticipated sales volumes.

Given the company's market share warning, we expect that Revenue in the third quarter will be a scant 4 percent greater than the €12.9 billion figure in the September 2007 quarter.  The target figure, €13.4 billion, would slash year-over-year Revenue growth from 23 to 17 percent.  Professional analysts are a little more optimistic:  their average estimate for Nokia's third quarter Revenue is $19.2 billion (€13.8 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.  While the margin has been at the high end of the range recently, we're assuming that competitive forces will squeeze the margin in the third quarter.  We believe that 32 percent is a reasonable forecast for the third quarter.  Therefore, our expectation for Costs of Goods Sold in the quarter is (1 - 0.32) * €13.4 billion = €9.1 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 and estimate each expense at 0.105 * €13.4 billion = €1.4 billion. 

Net Other Operating Income (Expense) is extremely volatile.  We will assume that the third quarter value will be the average of the values in the first two quarters of this year, which has been a €250 million expense. 

With these figures, our estimate for Operating Income works out to be €1.2 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 €340 million for income taxes, assuming an effective 26.5 percent tax rate, the prediction for Net Income is €944 million (€0.25/share).  The analyst consensus estimate is $0.52 (€0.37) per share.


September 2008
September 2007
Op expenses

CGS (9,112)

R&D (1,407)

SG&A (1,407) (1,277)

Other (250)

1,224 1,862
Other income


Interest, etc.
Pretax income

Income tax

Net Income

Shares outstanding


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