Nokia Corp. (NYSE: NOK and HEL:NOK1V) earned €0.14 per diluted share on an IFRS basis in 2010's third quarter, up from a loss of €0.15 per share in the same quarter of 2009. Both quarters ended on 30 September of their respective years.
The loss in the year-earlier quarter was primarily the result of Nokia writing off €900 million of intangible assets.
On a non-IFRS basis, which excludes special items, third-quarter earnings fell from €0.17 to €0.14 per share.
This post examines Nokia's Income Statement for the most recent quarter and compares the entries on each line to our "look-ahead" estimates. For a variety of reasons discussed below, reported earnings doubled the €0.07 per share we had forecast for earnings 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. The company also sells the network infrastructure that supports these phones.
overall profit attributable to Nokia shareholders fell to €891 million
in 2009, from €4.0 billion in 2008 and €7.2 billion in 2007. Net Sales
dropped from €50.7 billion in 2008 to €41.0 billion in 2009. Global
economic weakness certainly had a negative effect. However, Nokia's
most visible problem has been its inability to stem the success of Apple's (NASDAQ: AAPL) iPhone, which was first introduced in 2007. The Blackberry product line sold by Research in Motion (NASDAQ: RIMM) and, more recently, smartphones based on the Android architecture promoted by Google (NASDAQ: GOOG) have also become popular at Nokia's expense.
In the latest and most dramatic attempt to regain its competitive position, Nokia announced on 10 September 2010 that it would replace its Chief Executive Officer with Mr. Steven Elop, formerly of Microsoft (NASDAQ: MSFT).
Among other things, the company hopes Mr. Elop, a Canadian citizen, will be able to resolve its long-standing difficulties in North America. Only 3 percent of the mobile devices Nokia sold in 2009 and only 5 percent of Nokia's net sales in 2009 were in North America.
The price of Nokia ADRs is down about 70 percent from a $41 peak in late 2007. The company's market value is now roughly $40 billion.
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 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.
In the September quarter, Nokia's Revenue
rose 4.7 percent, from €9.81 billion last year to €10.3 billion in the
last three months. Revenue was 1.7 percent more than our €10.1 billion
target for the quarter.
Excluding the impact of changes in Euro exchange rates, Nokia's third-quarter Revenue declined 2 percent from 2009 to 2010.
increased 28 percent North America and 27 percent in Latin America,
which are the two regions where Nokia has the least sales. In Europe,
Nokia's largest market, Revenue decreased 5.2 percent.
Devices and Services business segment had Revenue of €7.17 billion,
which was at the upper end of the company's guidance to expect sales
between €6.7 billion to €7.2 billion. D&S revenue increased 3.7
percent when compared to sales of €6.9 billion in the September 2009
On a constant-currency basis, D&S revenue declined 5 percent.
shipped 110.4 million mobile devices in the quarter, 1.8 percent more
than last year. The volume increase was led by a 20-percent rise in the
number of devices sold in Latin America.
Nokia's market share
fell because the total number of mobile devices sold across the industry
grew at a robust 14 percent. The company's preliminary estimate is
that its market share declined from 34 percent in the third quarter of
2009 to 30 percent in the third quarter of 2010.
Nokia noted that
"industry-wide shortages of certain components, particularly in the low
end of the market where Nokia’s position is strong, during the third
quarter 2010" had a negative effect on the number of devices it was able
It would be interesting to learn how much the market
share would rise if North America, where Nokia sold only 3.2 million
devices in the September quarter, were to be excluded.
trend, the average selling price of these devices rose from €64 to €65.
The ASP rise was the result of higher-priced smartphones comprising a greater percentage of the sales mix. Changes in currency exchange rates also lifted the Euro-denominated ASP.
Revenue from Nokia Siemens Networks was €2.94 billion, up 6.6 percent from €2.76 billion in last year's third quarter. NSN's
reported revenue was near the midpoint of the €2.7 billion to €3.1
billion range in the company’s guidance. The revenue increase was
primarily due to "increased sales of 3G network
infrastructure as well as network planning and optimization services
and network operations activities." The company was also able to
complete some sales in India, which had been delayed by an
"industry-wide issue related to security clearances."
Sales at the smaller NAVTEQ
increased an impressive 52 percent to €252 million. Nokia attributed
the rise to "improved sales of map licenses to mobile device customers
as well as improved demand and higher navigation uptake rates in the
The Cost of Goods Sold in the quarter was €7.33 billion, or 71.4 percent of Revenue. This ratio translates into a Gross Margin
of 28.6 percent, a substantial 260 basis points less profitable than
the 31.2-percent Gross Margin in last year's third quarter.
Nokia's Gross Margin also fell 210 basis points short of the 30.7-percent target we established for the third quarter.
Nokia's spending on Research and Development
added up to €1.41 billion, essentially flat relative to the same period
of 2009. The R&D expense was 7.4 percent less than our €1.52
billion estimate. As a percentage of Revenue, the R&D expense was reduced from 14.1 percent in September 2009 to 13.7 percent in the latest quarter.
The Sales, General, and Administrative
expense of €1.18 billion was also about the same as last year, but this
amount decreased from 12.1 percent of Revenue to 11.5 percent. The
amount spent on SG&A was 8.8 percent less than our €1.3 billion estimate.
operating items (€131 million in income, €82 million in expense)
resulted in income of €49 million, an unusually strong result.
Subtracting the various operating expenses from Revenue yields Operating Income
of €403 million, which was €111 million more than our €292 million
estimate. The difference between the actual results and our estimate is
mostly explained by lower-than-anticipated R&D and SG&A spending, plus unanticipated other operating income.
In last year's third quarter, a €914 million special charge resulted in an Operating loss of €426 million.
items, mostly financial income and expenses, resulted in a net expense
of €82 million. We had expected €75 million.
income tax rate has tended to fluctuate widely from quarter to quarter,
and this experience was repeated with the third quarter's near-zero tax
rate. Nokia reported that the third quarter quarter tax rate benefited
from a "dividend withholding tax legislation changes in certain
jurisdictions." This one-time benefit more than offset negative tax
issues associated with Nokia Siemens Networks deferred tax items.
We expected a 20 percent tax rate.
exclusion of a hefty €207 million after-tax loss attributable to
non-controlling interests (Siemens?) leaves €529 million (€0.14 per
share) as the bottom-line Net Income "attributable to equity holders of the parent."
Our estimate for the latest quarter was €274 million (€0.07 per share).
summary, Nokia reported much stronger-than-expected earnings in the
third quarter of 2010. In some ways, factors outside of the company's
control made the results appear more favorable than they might have
otherwise. For example, the company would have reported a two-percent
sales decline, instead of a nearly five-percent gain, had the Euro
remained constant relative to other currencies.
expenses were probably also lifted by the currency changes, it is not
obvious how the the currency changes affected net income. The source of
$131 million (€0.035 per share) in "Other Income," which boosted the
operating results, also wasn't immediately clear.
It is known
that earnings per share were boosted by approximately €0.02 because
one-time factors allowed the company to avoid a provision for income
It is also apparent that Nokia's Gross Margin fell below
30 percent of the first time in several years, and the company's share
of the market for mobile devices fell.
Full disclosure: Long NOK at time of writing.