15 October 2009

NOK: Income Statement Analysis for the September 2009 Quarter

Nokia Corp. (NYSE: NOK) lost €0.15 per share in the third quarter of 2009, down from earnings of €0.29 last year.  If Nokia had not written off €900 million of intangible assets, the company would have earned €0.17 per share.

This post examines the Income Statement and compares the entries on each line to our "look-ahead" estimates.   The earnings announcement [pdf] was our principal source for this analysis.

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 various financial metrics we use to analyze 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 the look-ahead.

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.

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.

The 19.8 percent decline in third-quarter Revenue was nearly identical to our 19.9 percent estimate. 

When compared to the second quarter, the number of mobile devices sold increased 5 percent (better than we expected), the average selling price did not change (matching expectations), and Revenue from Nokia Siemens Networks was down 14 percent (much worse than expected).

Sales were down between 19 and 31 percent in every geographic area, relative to last year, except the "Greater China" region.

The Cost of Goods Sold was 68.8 percent of Revenue in the quarter, which translates into a Gross Margin of 31.2 percent.  This margin is 1.4 percent less profitable than our 32.6-percent estimate, and it is more than four percent weaker than the margin in last year's second quarter.

Research and Development (R&D) expenses were 14.1 percent of Revenue, and the actual value exceeded our estimate by about 7 percent.

On the other hand, Sales, General, and Administrative (SG&A) expenses were within 1 percent of our estimate.  These expenses amounted to 12.1 percent of Revenue. 

Nokia reported a staggering €908 million intangible-asset impairment charge related to Nokia Siemens Networks.  The company vaguely described the charge as a consequence of "challenging competitive factors and market conditions in the infrastructure and related services business."

The massive charge knocked Operating Income down to a €426 million loss, whereas we expected a gain of €595 million.  Excluding the charge, Operating Income would have been €482 million, 19 percent below our target.

The non-operating figures were relatively minor.  We had expected a somewhat higher interest expense because Nokia has taken on more debt.

The asset impairment charge was not tax deductible, which resulted in Nokia recording a substantial provision for income taxes despite negative pretax income.  The amount recorded seems more burdensome than it ought to be.

At the bottom line, the Net Income"attributable to equity holders of the parent" was a €559 million loss.

In summary, while the quarter's results were dominated by the €900 million charge, which knocked earnings from the black and into the red, the quarter was disappointing in other aspects as well.

Full disclosure: Long NOK at time of writing.

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