Thursday, January 26, 2012

Analysis of Nokia 4Q 2011 results

Results Summary
21% Year on year decline in revenue, 155% decline in earnings per share (IFRS), and 8% decline in mobile device volumes. Things certainly dont look too good for Nokia, especially considering these are Q4 results (the Christmas quarter). As the interim report states...

"On a year-on-year basis, the decline in our total Devices & Services volumes in the fourth quarter 2011 was driven by significantly lower Smart Devices volumes. Mobile Phones volumes were approximately flat year-on-year. "


Specifically, "Devices & Services" business saw a 29% decline in net sales, 11% decline in operating margins. The decrease in margins are quite likely due to the shift to Windows Phones OS, which increases the BOM if each phone (licensing royalties to Microsoft). At least I see no other explanation, as gross margin is very simply revenue - cost of goods sold.

Revenue & Net Profit Trend
I tracked Nokia’s revenues & profits over the last 3 years, and the chart below shows the trend from 2009 to 2011.
Nokia 2009 to 2011
The two peaks in the blue revenue line shows the seasonal phenomenon in the electronics/computer industry where Q4 sales are always much higher than previous quarters. It is interesting to see that there was a good peak in Q4 2010, but it was followed by a quick decline in Q1 2011 onwards. This is most likely due to the 11-Feb-2011 announcement of moving away from Symbian, which reduced the demand for Symbian smartphones overnight. As Nokia says...
"Following the announcement of our strategic partnership with Microsoft in February 2011, our strategy included the expectation to sell approximately 150 million more Symbian devices in the years to come. However, changing market conditions are putting increased pressure on Symbian. In certain markets, there has been an acceleration of the anticipated trend towards lower-priced smartphones with specifications that are different from Symbians traditional strengths, which has contributed to a faster decline of our Symbian volumes than we anticipated."
While the revenue is increasing sequentially (i.e. increasing from Q3 2011 to Q4 2011) it falls short of what Nokia was selling in 2010, and even in 2009. This is probably quite serious for the company... it’s performing worse than it was 2 years back.

No Goodwill
The quarterly loss of about 1 billion euro was attributed to the impairment of goodwill in the Location & Commerce business (quite likely a revaluation of Navteq). While the word "Goodwill" sounds fancy it is easily explained... say Nokia payed ’Y’ million euros to acquire Navteq. The total asset value of Navteq, when you added everything on their balance sheet, came up to a lesser number ’X’ million euros. The difference ’Y-X’ is treated as an intangible asset arising from strategic importance of acquiring the company and potential synergies between acquirer and acquiree, and is called "Goodwill". IFRS guidelines mandate when a company should re-look on the value of these intangible synergies, and book a loss if the value of the Goodwill has decreased. Nokia reports both the IFRS and non-IFRS results, and with the non-IFRS Nokia would have made a profit of 274 million instead of a loss of 1.076 billion euros. However, IFRS is a international financial standard, which has controls on when something can be recognized as a profit or a loss. The adherance to a financial reporting standard makes it simpler to compare company performance with industry peers, and I personally feel it makes much more sense to give the general public a more realistic view of the financial state of the company (for e.g. the rules of recognizing goodwill impairment).

Oh Symbian, Where Art Thou!
Nokia sold 19.6 million smartphones, consisting of Windows Phone, Meego (N9) and Symbian devices. Of these, the Windows Phone based Lumia handsets sold about 1 million. While the Meego volumes are not mentioned, I would expect them to be approximately similar to WP. In fact, it would have sold a great deal better than WP if it was available in prime markets, but it was not. So with an estimated 2 million WP and Meego smartphones, leaves 17.6 million Symbian devices still. This is interesting, even after 4 quarters of decreasing demand (due to Feb 11th announcements of abandoning Symbian), it is still the best selling smartphone Nokia can produce! For WP to take it’s place, it would need to grow 1760% over the next year! Lesson... dont kill your cash cow before you are sure you have a replacement.

No comments: