16 July 2009

NOK: 2009-2Q Income Analysis

Nokia Corp. (NYSE: NOK) earned €0.10 per share in the second quarter of 2009, down from €0.29 last year. 

This post examines the Income Statement and compares its entries to our "look-ahead" estimates.  In a second article, we will report Nokia's scores as measured by the GCFR Financial Gauges.  The follow-up post will also provide the latest figures for the financial metrics we use to analyze Nokia's Cash Management, Growth, Profitability and Value.

Some background information about Nokia and the business environment in which it is currently operating can be found in the beginning of our look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Nokia's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), rather than U.S. Generally Accepted Accounting Principles (GAAP).  The Euro (€) is the currency used in these statements.  Also, Nokia isn't required to file 10-Q and 10-K reports with the SEC

Revenue in the June 2009 quarter was 24.6 percent less than last year's second quarter. We had estimated a 23 percent decrease.  Our estimate had assumed a 13 percent decline in the number of handsets sold and a 12 percent decline in the average price per unit sold.  In actuality, we were too optimistic on both counts: the volume decline was 15 percent and the price-per-unit decline was 16 percent.

The Cost of Goods Sold was 67.4 percent of Revenue in the quarter, which translates into a Gross Margin of 32.6 percent. The actual Gross Margin was slightly better than our 32-percent estimate.  However, it was a full percentage point weaker than the 33.6 percent in last year's second quarter.

Research and Development (R&D) expenses were 16 percent greater than we expected.  Much of the difference can, however, be attributed to a €135 million charge for amortization of acquired intangible assets.  If the charge is excluded, R&D expenses were only 5.3 more than our target.

The situation was similar with Sales, General, and Administrative (SG&A) expenses, which were a very disappointing 9.4 percent more than our target.  However, the figure with special charges excluded almost exactly matched our target. 

"Other" operating expenses (e.g., restructuring charges, workforce reduction expenses, asset impairment) were half what we expected.  Our estimate was made by averaging the charges recorded in the last 10 quarters, excluding the highest and lowest values.

Operating Income was 71 percent lower than in last year's second quarter.  We had estimated that Operating Income would be 52.5 percent less.

The non-operating figures were better than our estimates.  For example, the net interest expense was only 60 percent of our €100 million target.  We were generous in our estimate because Nokia has taken on more debt.

Unlike the first quarter, Nokia actually had to make a provision of income taxes in the second quarter.  The 24.5 percent effective tax rate was less burdensome than our 26 percent estimate.

Minority interests contributed €68 more than our €25 million estimate.

The bottom line Net Income "attributable to equity holders of the parent" was 65.5 percent less than in June 2008 quarter.  We had expected a 57.5 percent decline.

In summary, it was widely expected that Nokia's second-quarter results would be worse than last year's, but the actual results were still disappointing.  The Revenue shortfall was relatively minor, and within the margin for error, but there's nothing comforting to be found in lower mobile device volumes, selling prices, and market share.

In the second quarter, only 5.4 percent of Nokia's sales were in North America.  Yet, this was the only region that showed a sales increase.

The silver lining, if there is one, is that the results of the second quarter were weighed down by substantial, non-cash charges that related to the formation of Nokia Siemens Networks and the acquisition of Navteq.

Full disclosure: Long NOK at time of writing.

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