Nokia Corp. (NOK), headquartered in Espoo, Finland, is a global seller of cellular phones and the equipment for mobile phone networks. Cellular phones, especially lower-cost models, have become a commodity. More expensive devices compete both on style and technical features. The rapidity of new model introductions and changing consumer tastes leads to frequent alterations in the relative fortunes of the various manufacturers. Nokia had clearly been on an upswing, with their share of the cellular market increasing to 40 percent in the last quarter of 2007, far surpassing rivals Samsung and Motorola. Nokia's market share dropped one point to 39 percent device in the first quarter of 2008; it's not obvious that this change was meaningful.
A relatively recent challenge is Apple's (AAPL) iPhone. Nokia responded by establishing an online music service.
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.
The creation in April 2007 of Nokia Siemens Networks, a 50/50 partnership with the German powerhouse, has made it difficult to compare Nokia's current and past results. Recent financial statements fully consolidate the partnership. However, previous results, including the relevant year-earlier periods, do not include data for the businesses Siemens contributed. This is a significant difference since the partnership would, by itself, be considered a large-cap company.
Our analysis of Nokia's results from 2007's fourth quarter produced a disappointing Overall gauge score of 28 points of 100 possible points. Of the four individual gauges that fed into the composite result, the Growth and Profitability scores were good, and the Cash Management score was OK, but the double-weighted Value gauge contributed only 1 of 25 possible points. The Value gauge was weak because the price of Nokia ADRs advanced 89 percent over the course of 2007. The weak dollar undoubtedly added to the ADR price rise.
Now, with the data from the March 2008 quarter, and subject to the comparability limitations identified above, our gauges display the following scores:
- Cash Management: 7 of 25 (unchanged from 4Q-2007)
- Growth: 14 of 25 (down from 15)
- Profitability: 15 of 25 (up from 13)
- Value: 5 of 25 (up from 1)
- Overall: 37 of 100 (up from 28)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously announced expectations.
| (€M) | | March 2008 (actual) | March 2008 (predicted) | March 2007 (actual) |
| Revenue | | 12660 | 12000 | 9856 |
| Op expenses | | | | |
| | CGS | (8133) | (8040) | (6954) |
| | R&D | (1375) | (1260) | (925) |
| | SG&A | (1343) | (1260) | (962) |
| | Other | (278) | 0 | (103) |
| Operating Income | | 1531 | 1440 | 1272 |
| Other income | | | | |
| | Investments | 30 | 0 | (4) |
| | Interest, etc. | 68 | 60 | 48 |
| Pretax income | | 1629 | 1500 | 1316 |
| Income tax | | (407) | (420) | (337) |
| Net Income | | 1222 | 1080 | 979 |
| | | €0.32/sh | €0.28/sh | €0.25/sh |
| Shares outstanding | | 3864 | 3900 | 3979 |
Revenue was 5.5 percent above our estimate. We expected Revenue would be 21.8 percent greater than in the year-earlier quarter, and the actual increase was a stunning 28.4 percent. However, it is important to recognize that the increase was inflated by the formation of the Nokia Siemens Networks partnership. The Revenue growth rate of the core business was closer to 13 percent.
We thought the Gross Margin in the quarter would be 33 percent of Revenue, and the actual value was substantially better at 35.8 percent. This margin translates into a Cost of Goods Sold (CGS) of 64.2 percent of Revenue.
Research and Development (R&D) expenses were 10.9 percent of Revenue, slightly exceeding our 10.5 percent estimate. Similarly, Sales, General, and Administrative (SG&A) expenses were 10.6 percent of Revenue, nearly matching our forecast of 10.5 percent.
Although we didn't anticipate €278 million in operating charges due to impairments, pension charges, and restructuring, the greater-than-expected Revenue and the lower CGS led to Operating Income 6.3 percent above the forecast value.
Non-operating income was €38 million better than expected. Even more significant for the bottom line was that the Income Tax Rate was only 25 percent, instead of the predicted 28 percent. As a result, Net Income exceeded our prediction by 13.1 percent.
Cash Management. This gauge didn't change from 7 points in December.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.6 | 1.5 | 1.9 |
| LTD/Equity | 1.2% | 1.4% | 0.5% |
| Debt/CFO | 0.2 yrs | 0.2 yrs | 0.0 yrs |
| Inventory/CGS | 22.6 days | 24.0 days | 21.6 days |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 55.0 days | 61.1 days | 48.7 days |
| Working Capital/Market Capitalization | 8.0% | 6.9% | 9.5% |
| Cash Conversion Cycle Time | 30.5 days | 28.9 days | 21.4 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 might slip in the future. The increase in the Cash Conversion Cycle Time suggests weakening cash efficiency.
Growth. This gauge slipped 1 point from 15 points in December to 14 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 29.9% | 24.2% | 14.2% |
| Revenue/Assets | 151% | 136% | 182% |
| CFO growth | 35.8% | 76.0% | 36.9% |
| Net Income growth | 75.8% | 67.3% | 11.5% |
The growth rates are all superlative, but they benefited to a significant extent by the accounting of the Nokia Siemens Networks partnership. In addiion, Net Income in the last year was aided by a drop in the income tax rate from 24 to 18 percent. We assume that the partnership has also caused Revenue/Assets to be erratic.
Profitability. This gauge increased from 13 points in December to 15 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 87.9% | 88.1% | 86.9% |
| ROIC | 62.8% | 54.7% | 44.1% |
| FCF/Equity | 43.1% | 48.5% | 37.0% |
| Accrual Ratio | -2.9% | 0.1% | -1.4% |
It is rare to see such high ROIC and FCF/Equity figures. The decreasing Accrual Ratio signifies that the earnings were of the high-quality variety.
Value. The price of Nokia ADRs retreated during the first quarter from $38.39 to $31.83, which helped this gauge increase from 1 point in December to 5 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 16.5 | 20.7 | 21.5 |
| P/E to S&P 500 average P/E | 100% | 116% | 135% |
| Price/Revenue | 2.3 | 2.9 | 2.2 |
| Enterprise Value/Cash Flow (EV/CFO) | 16.3 | 17.6 | 16.0 |
Last year's surging share price made Nokia expensive, as measured by our Value gauge, despite the company's success in the marketplace. The shares corrected somewhat during the first quarter and even more so today. We will need more time to look digest the guidance to determine whether the punishment was excessive.
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