Nokia (NYSE: NOK and HEL:NOK1V) warned on 16 June 2010 that its Devices and Services (D&S) unit, which is the company's most important business, would have lower sales and profits than it had forecast in April after the first quarter of 2010. Nokia blamed the shortfall on competition, the product mix, and the Euro's (€) depreciation.
This post shows how
Nokia's latest announcement changes our model of the company's Income
Statement for 2010's second quarter, which will end on 30 June 2010.
The model was described in detail in our Look Ahead to Nokia's June 2010 Quarterly Results, posted
3 June 2010.
Instead of expecting D&S net sales between
€6.7 billion and €7.2 billion in the second quarter, Nokia now projects
sales "at the lower end of, or slightly below"
this range. We had assumed the midpoint of the range when calculating a
€10.4 billion estimate for the company's overall Revenue for the second
quarter. The change in guidance justifies a €300
million reduction in the Revenue estimate, to €10.1 billion.
lower revenue, Nokia won't need to spend as much on the parts and
assemblies that make up its products. However, the reduction in the
Cost of Goods Sold won't be as great as the Revenue decline because
Nokia reported that its margins have been lower than expected.
earlier forecast for the D&S non-IFRS operating margin was 9 to 12
percent. When combined with the original revenue guidance, it
established an expectation for non-IFRS D&S operating expenses of
roughly (1 - 0.105) * €6.95 billion = €6.22 billion.
now believes the margin will be "at the lower end
of, or slightly below" the 9-to-12 percent
range. This changes the non-IFRS D&S
operating expenses expectation to about (1 - 0.09) * €6.7 billion = €6.10
Although we have reduced the
Revenue estimate by €300 million,
we're only projecting a €100 million
reduction in the Cost of Goods Sold, from €7.05
billion to €6.95 billion.
changes reduce our estimate of Nokia's second-quarter Net Income from €429
million (€0.12/share) to €269 million (€0.07/share).
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
Full disclosure: Long NOK at time