30 January 2010

NOK: Income Statement Analysis for the December 2009 Quarter

Nokia Corp. (NYSE: NOK) earned €0.26 per diluted share in the fourth quarter of 2009, which ended on 31 December, up from €0.15 in the same quarter of 2008.

This post examines Nokia's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Our Net Income target had been only €0.17 per share, a substantial €0.09 less than the reported amount.

Our principal sources for the income statement analysis were the earnings announcement [pdf], the conference call presentation [pdf], and the transcript (available from Seeking Alpha). 

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.

Nokia has been a leading global producer of mobile phones since 1998, but it is facing increasing competition from companies such as Apple (NASDAQ: AAPL) in the marketplace (and courtroom) for smartphones.  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.

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).  The currency used in these statements the Euro (€).

Fourth-quarter Revenue of almost €12.0 billion was 5.3 percent less than in the same period of 2008. However, Revenue bested most expectations, and it exceeded of our €10.8 billion estimate by 11 percent.

Nokia shipped 17 percent more mobile devices than in the preceding quarter (September 2009), which surpassed than the 15 percent increase we had assumed when making our Revenue estimate.  Nokia reported that its share of the global mobile device market increased from 38 to 39 percent. 

The average selling price of these devices rose about 2 percent to €63 (we expected ASP to be unchanged).  The ASP increase was probably the result of a greater proportion of smartphones sold, relative to simpler, less expensive models.  Nokia indicated that the ASP for the company's five best-selling mobile phones ranged from under €15 to over €150 -- a change in the sales mix can greatly affect the overall sales numbers. 

To boost sales of the profitable smartphones, a market with fierce competition, Nokia recently announced "free walk and drive navigation."

The company remarked that component availability constraints earlier in the quarter eased by the end, relative to forecasts of product demand.

Revenue from Nokia Siemens Networks was 16 percent less than in the previous year's fourth quarter.  However, NSN's Revenue soared 31 percent compared to the third quarter of 2009.   We were caught off guard by NSN's quarter-to-quarter sales rebound, and this failure explains much of the error in our Revenue estimate for the quarter.

NSN's accomplishments in the fourth quarter included ten new contracts involving third-generation networks for serving mobile subscribers.  The company claims to have the most 3G customers.

Nokia's overall sales were down 22 percent and 15 percent in Latin America and Europe, respectively, but up 21 percent in the "Greater China" region.  Sales in North America rose modestly, but remained only 5 percent of total sales.

The Cost of Goods Sold was 66 percent of Revenue in the quarter, which translates into a Gross Margin of 34 percent.  We had estimated the Gross Margin would be a less profitable 33 percent.  An "infrequent," "large royalty rate related inflow" explains 80 of the 100 basis point difference.

The Gross Margin was 32.1 percent in the fourth quarter of 2008.

Nokia spent 9.6 percent less on Research and Development than in the same period of last year.  The R&D expense was 11.8 percent more than our €1.4 billion estimate; the difference was almost entirely due to €161 million of special charges for restructuring and amortization of acquired intangible assets.

As a percentage of Revenue, R&D expenses decreased from 13.7 percent of Revenue in December 2008 to 13.1 percent in the latest quarter.

Sales, General, and Administrative (SG&A) expenses fell 17.8 percent, decreasing from 12.9 percent of Revenue to 11.2 percent.  These expenses were just 3 percent more than our €1.3 billion estimate.

Other operating items resulted in a net charge of €25 million.  We had assumed special charges of €100 million.

These various operating items resulted in Operating Income of €1.14 billion, which was 132 percent more than in 2008's fourth quarter. Operating Income surpassed our €764 million estimate by 49 percent. Much better-than-expected Revenue a lower-than-expected other expenses outweighed the special R&D expenses.

We were a little too optimistic on the non-operating items (i.e., results of associated companies and financial income and expenses). Financial expenses increased, probably because more interest was paid on higher debt levels.

The effective income tax rate, which has been oddly erratic from quarter to quarter, was only 17 percent in the fourth.  We had guessed 25 percent, and this error widened the gap between Nokia's actual results and our estimate.

The portion of the profit attributable to minority interests was €66 million, leaving €948 million (€0.26 per share) as the bottom-line Net Income "attributable to equity holders of the parent." Net Income was 65 percent more than in the 2008's fourth quarter. It surpassed our estimate by 54 percent.

In summary,  Nokia bounced back from a tough beginning to 2009 with a stronger fourth quarter.  Revenue, while lower, was much better that we had expected.  Sales at Nokia Siemens Networks surprised us the most.  Margins also improved, and many costs were lower.  A relatively low tax rate added some icing to the cake.

Full disclosure: Long NOK at time of writing.

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