18 March 2010

NOK: Look Ahead to March 2010 Quarterly Results

This post describes our model of Nokia's (NYSE: NOK) Income Statement for the quarter that will end on 31 March 2010.  GCFR estimates are derived from guidance provided by company management, when available, and the company's historical financial results.

The intent of our look-ahead exercises is to produce a baseline for identifying surprises, positive or negative, in the reported data. 

First, we present some background information about Nokia and the business environment in which it is currently operating.

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 432 million mobile devices in 2009, down 8 percent from the year earlier.  The company estimated its share of the mobile device market at 38 percent. 

The market for mobile 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 important and a potential differentiator.  For example, the popularity of the iPhone operating system has certainly benefited Apple.  Nokia devices have long used the Symbian operating system, but the company also uses Maemo, a Linux derivative, in some newer products.

Other newer mobile operating systems include Android (used by Google in the Nexus One) and Windows Phone.  Nokia is now working with Intel (NASDAQ: INTC) to combine the Maemo and Moblin mobile operating systems into MeeGo, which

"will support multiple hardware architectures across the broadest range of device segments, including pocketable mobile computers, netbooks, tablets, mediaphones, connected TVs and in-vehicle infotainment systems."

The new Ovi service for selling handset software is Nokia's counterpoint to Apple's iPhone App store.  There is also an Ovi Music Service and a recently announced Ovi Map service with free navigation capabilities.

Although a global powerhouse, Nokia has only a limited share of the North American market.  It was considered newsworthy when T-Mobile USA agreed to carry the Nokia Nuron.

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 €12.6 billion in 2009 (down 18 percent from 2008).  NSN's results are fully consolidated into Nokia's financial statements, which presents a comparability challenge because Nokia's financial statements before April 2007 don't include the businesses the German powerhouse contributed to the partnership.

Nokia 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.  Last year was a tough one for Nokia, but signs of recovery were seen in the final 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.

We're now ready to look ahead to Nokia's results for the March 2010 quarter.
Nokia, when it reported results for last year's fourth quarter, also described its outlook for the industry and the company.  The outlook is more specific than it had been after previous quarters, and we're grateful for the additional details.


  • Nokia expects Devices & Services net sales to be between EUR 6.5 billion and EUR 7.0 billion in the first quarter 2010.
  • Nokia expects its non-IFRS operating margin in Devices & Services in the first quarter 2010 to be negatively impacted by seasonality and to be at the lower end of the range of its full year 2010 target, which continues to be 12% to 14%.
  • Nokia and Nokia Siemens Networks expect Nokia Siemens Networks' net sales to be between EUR 2.6 billion and EUR 2.9 billion in the first quarter 2010.
  • Nokia and Nokia Siemens Networks expect the non-IFRS operating margin in Nokia Siemens Networks in the first quarter 2010 to be negatively impacted by seasonality and to be below the full year 2010 target, which continues to be breakeven to 2%.
  • Nokia continues to expect industry mobile device volumes to be up approximately 10% in 2010, compared to 2009.
  • Nokia continues to target its mobile device volume market share to be flat in 2010, compared to 2009.
  • Nokia continues to target to increase its mobile device value market share slightly in 2010, compared to 2009.
  • Nokia continues to target non-IFRS operating expenses in Devices & Services of approximately EUR 5.7 billion in 2010.
  • Nokia and Nokia Siemens Networks continue to expect a flat market in euro terms for the mobile and fixed infrastructure and related services market in 2010, compared to 2009.
  • Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks to grow faster than the market in 2010.
  • Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks to reduce its non-IFRS annualized operating expenses and production overheads by EUR 500 million by the end of 2011, compared to the end of 2009.
Nokia has three business segments:  Devices and Services, Nokia Siemens Networks, and the much smaller NAVTEQ.  The guidance above indicates that Nokia expects Revenue from the first two segments between €9.1 billion and €9.9 billion.  We are taking the €9.5 billion midpoint of this range, and adding €200 million for NAVTEQ, to come up with our €9.7 billion estimate for overall first quarter Revenue.

The operating margin cited in the guidance is segment operating profit divided by segment Revenue.  The "non-IFRS" qualifier indicates that some operating expenses reported in accordance with accounting standards are excluded.  We would have preferred that the guidance had addressed the Gross Margin, which identifies the relationship between sales and the cost of the goods sold.

If Devices and Services Revenue is €6.75 billion (midpoint of the guidance), and the operating margin is 12 percent (lower end of the guidance range), non-IFRS operating expenses for Devices and Services would be about €5.94 billion.  Similarly, if Revenue at Nokia Siemens Networks is €2.75 billion, and the operating margin is 1 percent, then non-IFRS operating expenses for Nokia Siemens Networks would be about €2.72 billion.  If we assume that NAVTEQ has a 20 percent operating margin, its operating expenses would be about €160 million.

The figures add up to operating expenses of €8.82 billion. 

Using historical data as a guide, we are partitioning this amount of non-IFRS operating expenses as €6.5 billion for Cost of Goods Sold, €1.25 billion for Research and Development expenses, and €1.07 billion for Sales, General and Administrative expenses.  (Nokia divides the latter category into Selling & Marketing and Administrative & General.) 

The reported expenses will be higher than the non-IFRS figures.  We're adding €50 million to Cost of Goods Sold, €150 million to R&D, and €30 million to produce estimates for the reported, IFRS values.

It's hard to predict what other operating items (e.g., restructuring charges, workforce reduction expenses, asset impairment) Nokia might report in the first quarter.  Our estimate of €50 million estimate is a rough guess.

With these figures, our estimate for Operating Income is €600 million.  This value is 40 percent more than the value in the same period of last year.

For Non-operating items (e.g., interest), our target of a €70 million net expense.

Nokia's effective tax rate has been erratic from quarter to quarter.  Our 20 percent estimate for the first quarter is a wag.  If we also assume €75 million for Minority Interests, our prediction for Net Income is €499 million (€0.13/share).  This estimate is up 31 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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