18 November 2008

NOK: Look Ahead to December 2008 Quarterly Results

The GCFR Overall gauge of Nokia registered a score of 51 of the 100 possible points -- down just 2 points -- in the third quarter.  The evaluation was explained fully in this analysis report.  

The Cash Management, Growth, and Profitability scores were all down, but the Value gauge almost made up the slack.  The Value score was lifted, seesaw fashion, by a 24 percent drop in the price of Nokia  ADRs during the third quarter.  The contrarian Value gauge, which is the largest contributor to the Overall score, tends to move in the opposite direction of the share price.  Nokia ADRs have fallen much further in the first 6 weeks of the fourth quarter, so the Value gauge score would be much higher if recalculated today.

To look ahead, we've modeled Nokia's Income Statement for the fourth quarter of 2008.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that Nokia will announce on 22 January 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management. 

Nokia Corp. (NYSE: NOK), headquartered in Espoo, Finland, sells mobile phones and network infrastructure.  Nokia's portfolio of hand-held devices ranges from modest phones with tight profit margins to units that are stylish, feature-laden, and expensive.  In this competitive market, with short product development cycles, the relative strength of each manufacturer can change quickly and dramatically.  Nokia's share of the cellular market is presently close to 40 percent, far surpassing rivals Samsung (SEO: 005930), Motorola (NYSE: MOT), LG Electronics (SEO: 066570) and Sony Ericsson.

At the high end, Nokia also faces competition from Apple's (NASDAQ: AAPL) iPhone and Research in Motion's (NASDAQ: RIMM) Blackberry.  Nokia responded to Apple by establishing its own online music service.

To better compete in the network infrastructure market, Nokia and Siemens (NYSE: SI) formed a 50/50 partnership.  The new company, established April 2007, was named, not-so-imaginatively, NokiaSiemens Networks.  NSN has annual sales of €13.4 billion, and its results 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.

Nokia, in October's report on the third quarter, described its fourth-quarter outlook for the industry and for the company.  Later, on 14 November, Nokia provided an update on the quarter, and it related its expectations for 2009.  The company reported that the global economic slowdown "has resulted in a sharp pull back in global consumer spending" and that the market for mobile devices has been impacted by this weakness.  Nokia also observed that the "limited availability of credit" is affecting some of its customers.

For the December 2008 quarter, Nokia estimated that the mobile device industry will sell 1.24 billion units.  This is an 8.8 percent increase over the 1.14 billion unit estimate of industry volume in the fourth quarter of 2007.  (Nokia's original guidance was to expect industry sales of 1.26 billion units.)  Nokia also indicated that it expects its market share to be steady or up slightly.  Unfortunately, we have no data on how economic conditions, currency exchange fluctuations, and changes in the product mix will affect the average sales price per mobile unit.  However, we know the "average selling price" declined by 12.2 percent, from €82 to €72, between the third quarters of 2007 and 2008.

To estimate Nokia's Revenue in the fourth quarter of 2008, we will start with the €15.7 billion of Revenue in Nokia's fourth quarter of 2007, multiply it by 1.088 to account for volume growth, and multiply this by (1 - 0.122) the reflect lower unit prices.  This calculation produces a Revenue estimate of €15.0 billion, down 4.5 percent from the year-earlier quarter.

Nokia's Gross Margin averaged 35.4 percent in the last year.  However, since competitive forces will have a negative effect on the margin, our target for the fourth quarter is only 34 percent.  Therefore, our estimate for Costs of Goods Sold in the quarter is (1 - 0.34) * €15.0 billion = €9.9 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 amount at 0.105 * €15.0 billion = €1.6 billion. 

Net Other Operating Income (Expense) is extremely volatile.  We will assume, rather arbitrarily, a €100 million charge in the fourth quarter. 

With these figures, our estimate for Operating Income works out to be €1.85 billion. This value is 26 percent less than Operating Income in the fourth quarter of 2007.

Investment and interest income/expenses are tough to predict because they vary greatly from quarter to quarter.  We've used averages for the four previous quarters to come up with an estimate of  €54 million net non-operating income.  If we assume an effective 27.0 percent tax rate, our prediction for Net Income is €1.4 billion (€0.38/share).  This estimate is down 24 percent from the year-earlier quarter.

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.

(€M) December 2008
December 2007
Revenue 15,000 15,717
Op expenses
CGS (9,900) (10,017)
R&D (1,575) (1,620)
SG&A (1,575) (1,652)
Other (100)
1,850 2,492
Other income
Investments 34 56
Interest, etc. 20
Pretax income 1,904 2,612
Income tax (514) (777)
Net Income 1,390 1,835
€0.38/sh €0.47/sh
Shares outstanding 3,700 3,886

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