22 April 2010

NOK: Income Statement Analysis for the March 2010 Quarter

Nokia Corp. (NYSE: NOK) earned 0.09 per diluted share, as determined in accordance with International Financial Reporting Standards, in the first quarter of 2010, which ended on 31 March.  Earnings by this measure tripled the €0.03 made by Nokia in the same quarter of 2009.

On an non-IFRS basis, Nokia's earnings per share increased from €0.10 to €0.14.  Non-IFRS results exclude special items and accounting expenses such as intangible asset amortization.

This post examines Nokia's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings fell short of the €0.13 per share we had forecast by €0.04 per share.

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.

Headquartered in Espoo, Finland, Nokia shipped 432 million mobile phones in 2009.  The company's hand-held product line runs the gamut from modest entry-level devices to high-end smartphones.   Nokia also sells network infrastructure.  Additional 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.

Revenue increased 2.7 percent, from €9.27 billion in the first quarter of 2009 to €9.52 billion in the latest period.  However, Revenue was 1.8 percent less than the €9.7 billion we had expected.

Sales were flat in Europe, which is (by far) Nokia's largest market.  First-quarter Sales grew the fastest in Latin America (18 percent) and Greater China (13 percent).  Sales in North America were down 15 percent and were less than 5 percent of total sales.  One would think that a company with Nokia's global scale would want to be more successful in the large North American market.

The Devices and Services business segment had Revenue of €6.66 billion, which was slightly below the midpoint of the €6.5 billion to €7.0 billion guidance issued with the previous quarter's results.  D&S revenue increased 7.9 percent over the year-earlier amount, or 7 percent when currency changes are removed.  Nokia shipped 107.8 million mobile devices in the quarter, 16 percent more than in the March 2009 period.  The average selling price of these devices slipped from €66 to €62.  (Higher-price smartphones do not seem to be selling well enough to combat price erosion on the lower end of the product line.)

Nokia estimated that it achieved a 33 percent share of the global mobile device market in the latest quarter, which compares to a 32 percent share in the first quarter 2009 and a 35 percent share in the fourth quarter 2009.  The market share percentages must be much larger if North America is excluded from the calculation.

Revenue from Nokia Siemens Networks was €2.7 billion, down from €3.0 billion in last year's first quarter.  The latest amount was near the middle of the company's €2.6 billion and €2.9 billion guidance.

Sales at the smaller NAVTEQ increased an impressive 43 percent to €189 million.  Nokia attributed the rise to more mobile devices being sold and to "improved conditions in the automotive industry."

The Cost of Goods Sold was 67.7 percent of Revenue in the quarter, which translates into a Gross Margin of 32.3 percent.  This margin was 100 basis points more lucrative than its year-earlier value of 31.3 percent.  It was a relatively minor 20 basis points less than our 32.5-percent target.

Nokia spent €1.43 billion on Research and Development, which was 4.5 percent less than in the same period of last year.  The R&D expense was just 2.4 percent more than our €1.4 billion estimate.  As a percentage of Revenue, R&D expenses decreased from 16.2 percent in March 2009 to 15.0 percent in the latest quarter.

Sales, General, and Administrative expenses of €1.19 billion were down 3.9 percent, and they decreased from 13.4 percent of Revenue to 12.5 percent.  SG&A expenses were 8.5 percent more than our €1.1 billion estimate.

Other operating income and expenses resulted in a net gain of €37 million.  We had assumed a net loss of €50 million.

Subtracting these operating expenses from Revenue yields Operating Income of €488 million, which certainly compares favorably to the minuscule €55 million in the challenging first quarter of 2009.  However, Operating Income fell short of our €600 million estimate by a substantial 18.7 percent.  Much of the shortfall can be attributed to lower-than-expected Revenue, but some higher-than-expected expenses didn't help.

Non-operating items, mostly financial income and expenses, resulted in a net expense of €77. Nokia's share of results of associated companies, normally a small source of income, turned into a small loss for a reason we haven't yet been able to discern.

The effective income tax rate, which has been oddly erratic from quarter to quarter, was a massive 57.4 percent in the latest period.  Nokia stated that its taxes were "unfavorably impacted by Nokia Siemens Networks." (Nokia said that its "estimated long-term tax rate" is 26 percent.  We were looking for a 20-percent tax rate in the latest quarter). 

Putting aside a €174 million loss that is attributable to non-controlling interests (Siemens?), leaves €349 million (€0.09 per share) as the bottom-line Net Income "attributable to equity holders of the parent."  Net Income on this basis was 186 percent more than in the 2009's first quarter. However, it missed our estimate by 30 percent.

In summary, Nokia's first quarter of 2010 was certainly better than the weak first quarter of 2009.  However, we had expected a better set of results, especially on the top line.  Unusual tax matters exacerbated to the apparent weakness.  Nokia recapped the situation soberly:

 "We continue to face tough competition with respect to the high end of our mobile device portfolio, as well as challenging market conditions on the infrastructure side."

Full disclosure: Long NOK at time of writing.

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