09 December 2009

NOK: Look Ahead to December 2009 Quarterly Results

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.

In October, we examined Nokia's Income Statement for the third quarter and compared the entries on each line to our "look-ahead" estimates.  We later performed a financial gauge analysis.

We have now modeled Nokia's Income Statement for the quarter that will end on 31 December 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company will announce in January 2010.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we present some background information.

Headquartered in Espoo, Finland, Nokia has been a leading global producer of mobile phones since 1998.  The company also sells the network infrastructure that supports these phones.  Nokia shipped 468 million mobile devices in 2008, which they estimate was about 39 percent of units sold worldwide.  The market for these devices is highly competitive, and product development cycles are short.

Nokia's hand-held product line runs the gamut from modest entry-level devices to high-end smartphones.  The latter, more profitable category includes Apple's (NASDAQ: AAPL) iPhone, Research in Motion's (NASDAQ: RIMM) Blackberry, Palm's (NASDAQ: PALM) Pre, and Nokia's N97Samsung (SEO: 005930), Motorola (NYSE: MOT), LG Electronics (SEO: 066570) and Sony Ericsson are also potent competitors.

As phones morph into computers, software becomes increasingly and a potential differentiator.  Nokia and some other companies have long used the Symbian operating system, and Nokia has more recently developed MaemoAndroid, an open source operating system based on Linux and supported by Google (NASDAQ: GOOG), is likely to become popular.

The new Ovi service for selling handset software is Nokia's counterpoint to Apple's iPhone App store.

Although a global powerhouse, Nokia has only a limited share of the North American market.  The company has not reached an agreement with a U.S. carrier to promote its high-end models.

To better compete in the network infrastructure market, Nokia and Siemens (NYSE: SI) formed a 50/50 partnership in April 2007.  The new company was named, with little imagination, NokiaSiemens Networks.  NSN had sales of €15.3 billion in 2008 (about 30 percent of Nokia's total annual revenue), and NSN's results are fully consolidated into Nokia's financial statements.  This presents a comparability challenge because Nokia's financial statements before April 2007 don't include the businesses the German powerhouse contributed to the partnership.

We're now ready to look ahead to Nokia's results.

Nokia, when it reported results for the third quarter of 2009, also described its outlook for the industry and for the company.  The outlook does not include specific Revenue or Earnings guidance, but the information nevertheless helps us understand management's expectations for the operating environment and how well the company's different businesses will perform in it.
  • Nokia expects industry mobile device volumes in the fourth quarter 2009 to be up sequentially.
  • Nokia expects its mobile device market share in the fourth quarter 2009 to be approximately at the same level sequentially.
  • Nokia expects industry mobile device volumes to be approximately 1.12 billion units in 2009, down approximately 7% from approximately 1.21 billion units Nokia estimated for 2008. This is an update to Nokia’s earlier estimate of industry mobile device volumes declining approximately 10% in 2009 from 2008 levels.
  • Nokia expects its non-IFRS operating margin in Devices & Services in the fourth quarter 2009 to be up by one percentage point or more sequentially.
  • Nokia and Nokia Siemens Networks now expect the mobile infrastructure and fixed infrastructure and related services market to decline approximately 5% in Euro terms in 2009, from 2008 levels. This is an update to Nokia and Nokia Siemens Networks earlier expected decline of approximately 10%.
  • Nokia and Nokia Siemens Networks also now expect that Nokia Siemens Networks market share will decline by more than previously expected in 2009, compared with 2008. This is an update to Nokia and Nokia Siemens Networks earlier expected moderate decline. Nokia and Nokia Siemens Networks continue to see strong performance in its Services business unit expected to be offset by declines in certain product businesses.

Roughly speaking, about 2/3 of Nokia's Revenue is from the Devices and Services segment and the remaining third is from NokiaSiemens Networks. (NAVTEQ contributes about 1.5 percent of Revenue.)

To estimate Revenue from Devices and Services, we consider the number of mobile devices sold and the average selling price (ASP).  Nokia believes more mobile devices will be sold in the fourth quarter than the third -- we would hope so in the holiday period -- and it expects to hold its share of the market.

We are assuming the number of devices sold in the fourth quarter of 2009 will be 15 percent more than in third.  We are also assuming the ASP will not change from €62.  Therefore, since Devices and Services Revenue in the third quarter was €6.9 billion, our estimate for this segment's Revenue in the fourth quarter is €6.9 billion * (1.15) * (62/62) = €7.935 billion.

We assume NokiaSiemens Networks' Revenue in the fourth quarter will be 3 percent less than the third quarter's €2.76 billion, or €2.68 billion.

After making a small adjustment for NAVTEQ, we come up with an overall Revenue target for the fourth quarter of €10.8 billion, which is 15 percent less than in the fourth quarter of 2008.

Nokia's Gross Margin has averaged about 32 percent in the last four quarters, and we are assuming a one point improvement in the fourth quarter.  Therefore, we estimate the Cost of Goods Sold in the quarter at (1 - 0.33) * €10.8 billion = €7.24 billion.

We are assuming Research and Development expenses in the fourth quarter will be about the same as the third quarter's €1.4 billion.  However, we are assuming Sales, General and Administrative expenses increase to €1.3 billion.

It's hard to predict what other operating items (e.g., restructuring charges, workforce reduction expenses, asset impairment) Nokia might report in the fourth quarter.  Our €100 million estimate is intended to be conservative.

With these figures, our estimate for Operating Income is €764 million.  This value is 55 percent more than the value in the same period of last year.

For Non-operating items (e.g., interest), our target of a €50 million net expense is based on the results of the first three quarters of the year.

Nokia's effective tax rate has been erratic from quarter to quarter.  Our 25 percent estimate for the fourth quarter is a wag.  If we also assume €80 million for Minority Interests, our prediction for Net Income is €616 million (€0.17/share).  This estimate is up 7 percent from the year-earlier quarter.

Please click here to see a full-sized, normalized depiction of the projected results next to Nokia's 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.

Full disclosure: Long NOK at time of writing.

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