16 June 2010

Nokia's Reduced Expectations

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. 

With 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.

Nokia's 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.

Nokia 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 billion.

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.

These 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 comparisons.

Full disclosure: Long NOK at time of writing.

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