NOK: Analysis through Dec 2006

Nokia, this morning, reported financial results for the 4th quarter and 2006 annual results. We analyzed the financial statements in our usual way. In addition, we checked to see how Nokia's performance in the 4th quarter measured up against certain critical parameters, which we identified in advance.

Our Cash Management gauge for Nokia now displays 16 (up from 7!) out of 25 total points. The Current Ratio inched up to 1.83. Long-Term Debt to Equity remains inconsequential at 1 percent. In a dramatic improvement, completely reversing an earlier troubling trend, Inventory was cut to a record low level of 20 days (measured by Cost of Goods Sold). The Inventory level was 31 days at the end of the 3rd quarter and 27 days on 31 December 2006. We can now see that Nokia built up its inventory in anticipation of strong holiday sales, and then exceeded these expectations. Unfortunately, Nokia does not identify the proportion of inventory made up of Finished Goods; the missing information would give us more insight. Accounts Receivable were 52 days of Revenue; this parameter continues to be stable.

The Growth gauge now shows a strong 20 points (up from 16). Revenue growth reached 20 percent year over year for the first time in more than 6 years. Net Income growth increased to 19 percent, a considerable improvement over the year-earlier 13 percent. Cash Flow from Operations (CFO) was up a modest 8 percent, but any CFO growth is still a step in the right direction. Revenue/Assets, now at 1.82, edged down from 1.84 last quarter, but it still outclasses last year's 1. 53 by a wide margin.

Profitability held at 11 of 25 points. The Return on Invested Capital (ROIC) is an impressive 39 percent, up from the year-earlier 31 percent. Free Cash Flow (FCF) to Equity grew from 29 percent to 32 percent. With increased competition, Gross Margin has been trending down from percent values in the upper 30's to today's 33 percent. The company has, by and large, compensated for this by cutting R&D or other operating expenditures. These Operating Expenses as a proportion of Revenue have stayed in the 86-87 percent range for the last two years. The failure to increase CFO as much as Net Income has pushed up the Accrual Ratio, which hit +2 percent from zero the previous year. This potentially signifies lower-quality earnings.

The Value gauge reads a tepid, but improving, 7 points. The Price/Earnings ratio at the end of December was 19. The P/E is a little lower than it had been, but not enough to get more than a point in our scoring system. The P/E ratio was an 18 percent premium to the market as represented by the S&P 500. The premium hasn't come down enough to merit significant value points. The PEG ratio is just under 1.0, which is a sign of good value. The story is basically the same for the Price/Revenues ratio, stable at 2.0.

Rolling up all of the above, the Overall gauge displays a score of 45 out of 100 points. It was only 33 after the September quarter, and the current score is the highest it has been in 3 years. The first signs of an upswing are becoming apparent.

Before the 4th quarter results were published, we said we would look for the following:

Revenue: Did holiday sales cause a noticeable bounce in sales? Absolutely. Revenue growth was 13 percent over the December 2005 quarter. The Wall Street estimate was 11.2 billion Euro for the most recent quarter. Our model predicted a more modest 10.6 billion Euro. At 11.7 billion Euro, actual results substantially exceeded both estimates.

Gross Margin: We were hoping to see a Gross Margin of 35 percent or more as a sign the company has regained pricing power. However, the Gross Margin fell short at 33 percent. Instead of regaining pricing power, we now conclude that the company has (at long last) adapted to the more competitive environment.

Net Income: The market estimate was 0.26 Euro per share for the quarter. Our estimate was 0.25 Euro. The actual value was a strong 32 Euro cents.

Inventory: We hoped merely to see Inventory/CGS drop to 27 days. Instead, it was cut all the way to 20 days, far exceeding our most optimistic expectations.

CFO: We wanted to see positive CFO growth (it came in at +8 percent) on par with Net Income (it wasn't).