Nokia Corp. (NYSE: NOK) earned €0.06 per diluted share on an IFRS basis in the 2010's second quarter, which ended on 30 June. This EPS amount was 40 percent less than the €0.10 Nokia made in the same quarter of 2009.
On a non-IFRS basis, which excludes items such as restructuring charges and intangible asset amortization, second-quarter earnings fell from €0.15 to €0.11 per share.
This post examines Nokia's Income Statement for the latest quarter and compares the entries on each line to our revised "look-ahead" estimates. Reported earnings fell short of the €0.07 per share we had forecast by €0.01 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.
Before getting into the details, we will take one step back to introduce the subject of today's analysis.
A Finnish company with a rich history, Nokia Corporation has been the leading global producer of mobile phones since 1998. Nokia also sells the network infrastructure
that supports these phones. The company has three business segments:
Devices and Services (D&S), Nokia Siemens Networks (NSN), and
NAVTEQ. Despite a substantial head start, Nokia has been losing market share to upstarts such as Apple's (NASDAQ: AAPL) iPhone
in the smartphone product category. Additional background information
about Nokia and the business environment in which it is currently
operating can be found in 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
In the June quarter, Nokia's Revenue
rose 0.9 percent, from €9.91 billion last year to €10.0 billion in the
last three months. Revenue was 1.0 percent less than the €10.1 billion
target we established after Nokia lowered expectations for its Devices and Services unit.
decreased 2.5 percent in Europe, which is (by far) Nokia's largest
market. The bright spots were Latin America and “Greater China,” where
second-quarter sales soared 25 percent and 16 percent, respectively.
Sales in North America were down 4 percent and were only 5.1 percent of
total sales. (Nokia's long-standing difficulties in the U.S. have been well chronicled.)
Devices and Services business segment had Revenue of €6.8 billion,
which was consistent with the company's warning on 16 June 2010 to
expect sales "at the lower end of, or slightly below" the €6.7 billion
to €7.2 billion range it had defined in April. D&S revenue increased
3.2 percent when compared to the amount in the June 2009 quarter.
shipped 111.1 million mobile devices in the quarter, 8 percent more
than last year as economic conditions improved modestly. The volume
increase was led by a 26-percent rise in the number of devices sold in
Latin America. Continuing a trend, the average selling price of these
devices slipped from €64 to €61. The price of Nokia’s higher-price
smartphones has been falling due to stiff competition, and it is not
selling enough of them to counteract the inexorable 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, down from a 35 percent share in the second quarter of 2009. It
would be interesting to learn how much the market share would rise if
North America, where Nokia sold only 2.6 million devices in the June
quarter, is excluded.
Revenue from Nokia Siemens Networks was
€3.04 billion, down 5 percent from €3.2 billion in last year's second
quarter. The decline was a steeper 11 percent when measured on a
constant-currency basis. NSN's reported revenue was below the €3.1
billion to €3.4 billion range in the company’s guidance. The revenue
decrease was primarily due to sales-completion delays in India because
of new requirements related to product security. Component shortages
also had a negative effect on sales.
Sales at the smaller NAVTEQ
increased an impressive 71 percent to €252 million. Nokia attributed
the rise to "improved conditions in the automotive industry and growth
in mobile device sales."
The Cost of Goods Sold in the quarter was €6.93 billion, or 69.3 percent of Revenue. This ratio translates into a Gross Margin
of 30.7 percent, a substantial 190 basis points less profitable than
the 32.6-percent Gross Margin in last year's second quarter.
Nokia's Gross Margin also fell 50 basis points short of the 31.2-percent target we established for the second quarter.
Nokia's spending on Research and Development
added up to €1.48 billion, essentially flat relative to the same period
of 2009. The R&D expense was 4.3 percent less than our €1.55
billion estimate. As a percentage of Revenue, the R&D expense inched up from 14.7 percent in June 2009 to 14.8 percent in the latest quarter.
Sales, General, and Administrative
expenses of €1.29 billion were also about the same as last year, and
they decreased from 13.2 percent of Revenue to 12.9 percent. The amount
spent on SG&A nearly matched our €1.3 billion estimate.
Other operating items resulted in a net expense of €2 million.
Subtracting the various operating expenses from Revenue yields Operating Income of €295 million. Operating Income sank 31 percent when compared to €427 million in last year's second quarter.
Income was only €5 million less than our €300 million estimate. Less
R&D spending balanced lower-than-expected Revenue.
items, mostly financial income and expenses, resulted in a net expense
of €74 million. We had expected €70 million.
income tax rate has tended to fluctuate widely from quarter to quarter,
and this experience was repeated in the second quarter. The tax rate
was a steep 52.9 percent, compared to 24.5 percent in last year's second
quarter. Nokia stated that its taxes were “unfavorably impacted”
because “no tax benefits are recognized for certain Nokia Siemens
Networks deferred tax items.
We were optimistic in expecting a 20 percent tax rate.
exclusion of a €123 million after-tax loss attributable to
non-controlling interests (Siemens?) leaves €227 million (€0.06 per
share) as the bottom-line Net Income
"attributable to equity holders of the parent." Net Income on this
basis was 40 percent less than in the 2009's second quarter. Our
estimate for the latest quarter was €269 million (€0.07 per share).
Full disclosure: Long NOK at time of writing.