Nokia Corp. (NOK), headquartered in Espoo, Finland, is a global producer of mobile phones and the supporting network infrastructure.
Nokia's product portfolio ranges from low-end phones with tight profit margins to more capable and expensive devices that satisfy consumer preferences for more stylistic designs and greater technical features. The short time required to introduce a new generation of improved phones has led to rapid and dramatic changes in the relative competitive position and profitability among the various manufacturers. Nokia's share of the cellular market has been about 40 percent for the last few quarters, far surpassing rivals Samsung and Motorola. Nokia responded to the challenge of Apple's (AAPL) iPhone by establishing an online music service.
In April 2007, NokiaSiemens Networks was formed. This company, which has annual sales of €13.4 billion, is a 50/50 partnership with the German powerhouse. The June 2008 quarter is Nokia's first that includes comparable results for NokiaSiemens in both the current and year-earlier periods.
Nokia's financial reporting differs from companies based in the U.S. Financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), rather than U.S. Generally Accepted Accounting Principles (GAAP), and the Euro(€) is the currency used in these statements. Also, Nokia isn't required to file 10-Q and 10-K reports with the SEC.
Our analysis of Nokia's results from 2008's first quarter produced a Overall gauge score of 37 points of 100 possible points, which was a substantial improvement over the 28-point score through the end of 2007. Of the four individual gauges that fed into the first quarter's composite result, the Growth and Profitability scores were 14 and 15 points, respectively, and the Cash Management score was only 7 points; however, the double-weighted Value gauge contributed only 5 of 25 possible points.
Now, with the data from the June 2008 quarter, and subject to the comparability limitations identified above, our gauges display the following scores:
- Cash Management: 8 of 25 (up from 7 in the first quarter)
- Growth: 16 of 25 (up from 14)
- Profitability: 19 of 25 (up from 15)
- Value: 13 of 25 (up from 5)
- Overall: 57 of 100 (up from 37)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously announced expectations. Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats and terminology. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| (€M) | | June 2008 (actual) | June 2008 (predicted) | June 2007 (actual) |
| Revenue | | 13151 | 13200 | 12587 |
| Op expenses | | | | |
| | CGS | (8727) | (8580) | (8671) |
| | R&D | (1396) | (1452) | (1716) |
| | SG&A | (1328) | (1452) | (1669) |
| | Other | (226) | 0 | (1828) |
| Operating Income | | 1474 | 1716 | 2359 |
| Other income | | | | |
| | Investments | 20 | 10 | 453 |
| | Interest, etc. | 3 | 65 | 60 |
| Pretax income | | 1497 | 1791 | 2872 |
| Income tax | | (394) | (493) | (44) |
| Net Income | | 1103 | 1299 | 2828 |
| | | €0.29/sh | €0.34/sh | 0.72/sh |
| Shares outstanding | | 3788 | 3850 | 3946 |
Revenue was a scant 0.4 percent below our estimate. We expected Revenue would be 5 percent greater than in the very strong year-earlier quarter, and the actual increase was 4.5 percent. Revenue growth on a year-over-year (i.e., trailing four quarters) basis was 23 percent. However, it is important to recognize that the increase was inflated by the formation of the NokiaSiemens Networks partnership.
We thought the Gross Margin in the quarter would be 35 percent of Revenue, and the actual value was somewhat less at 33.6 percent. This margin translates into a Cost of Goods Sold (CGS) of 66.4 percent of Revenue.
Research and Development (R&D) expenses were 10.6 percent of Revenue, slightly less than our 11.0 percent estimate. Similarly, Sales, General, and Administrative (SG&A) expenses were 10.1 percent of Revenue, more significantly less than our forecast of 10.5 percent.
We didn't anticipate subtantial "special" operating charges that were due to a plant closure and restructuring. These charges were the main reason Operating Income was 14 percent below the forecast value.
Hard-to-predict Non-operating income was €52 million below expectation. On the other hand, the Income Tax Rate was only 26.3 percent, instead of the predicted 27.5 percent. Net Income, including the special charges, fell short of our prediction by 15.1 percent (13.7 percent on a per-share basis).
Cash Management. This gauge increased from 7 points in March to 8 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.4 | 1.6 | 1.5 |
| LTD/Equity | 1.4% | 1.2% | 0.9% |
| Debt/CFO | 0.2 yrs | 0.2 yrs | 0.1 yrs |
| Inventory/CGS | 28.0 days | 22.6 days | 27.0 days |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 66.0 days | 55.0 days | 57.2 days |
| Working Capital/Market Capitalization | 7.8% | 8.0% | 6.9% |
| Cash Conversion Cycle Time | 33.9 days | 30.5 days | 29.6 days |
It's too bad Nokia doesn't identify the proportion of Inventory made up of Finished Goods. The one day increase in Inventory/CGS from the same time last year (avoiding seasonal factors) isn't, by itself, enough to cause concern. But, if we knew the Finished Goods ratio had also increased, we might worry that sales will slip in the future. The increase in the Cash Conversion Cycle Time suggests weakening cash efficiency.
Growth. This gauge increased from 14 points in March to 16 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 23.0% | 29.9% | 16.3% |
| Revenue/Assets | 161% | 151% | 141% |
| CFO growth | 19.4% | 35.8% | 39.6% |
| Net Income growth | -3.4% | 75.8% | 43.0% |
The drop in Net Income is more the result of last year's accounting for the formation of the Nokia Siemens Networks partnership, which led to a huge, tax-free gain in the prior period. We find the improvements to the other measures, especially Revenue/Assets, to be more telling.
Profitability. This gauge increased from 15 points in March to 19 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 85.9% | 87.9% | 89.3% |
| ROIC | 71.0% | 62.8% | 41.4% |
| FCF/Equity | 51.4% | 43.1% | 41.1% |
| Accrual Ratio | -3.6% | -2.9% | +0.5% |
It is rare to see such high ROIC and FCF/Equity figures and to see them increasing. The declining Accrual Ratio is also a positive as it signifies that earnings quality was improving.
Value. The price of Nokia ADRs, which fell from $31.83 to $24.50 in the second quarter, continued the big retreat that began in the first quarter. The combination of strong operating performance and a falling share price pushed up this gauge from 5 points in March to 13 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 16.2 | 16.5 | 18.7 |
| P/E to S&P 500 average P/E | 95% | 96% | 114% |
| Price/Revenue | 1.7 | 2.3 | 2.5 |
| Enterprise Value/Cash Flow | 12.5 | 16.3 | 17.8 |
The 57-point Overall gauge score is the highest we've seen for Nokia since 2003. Operating performance is very good, and the shares have come back to reasonable levels after a surge in 2007.
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