I’m not doing a full analysis of Nokia Q2 2012 results here. Very briefly, Nokia group revenues were 7.5 billion EUR with a loss of 1.53 billion EUR. A billion plus euro loss cannot be very rosy, of course, but maybe investors expected worse, as the stock price spiked up briefly after the announcements of the results on Thursday, 19 July.
Revenue & Profitability has taken a hit for the last one year, when the strategy of shifting from Symbian & Meego OS’es to Windows Phone has gone disastrously wrong for the company. A very detailed analysis of this strategy gone wrong can be found on Tomi Ahonen’s communities-dominate blog. As for this current post, the chart below tracking Nokia revenues is enough to describe the problem.
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| Nokia revenues - falling since 2011. |
But in this post I try to delve into some of the revelations in the Q2 earnings release.
4 Billion EUR Lighter Balance Sheet
If we take a look at the balance sheet on Nokia's Q2 earnings release, there is a reduction of assets of about 4 billion EUR between Q2 2011 and 2012. About 1.4 billion EUR of this comes from impairment of Goodwill & amortization of intangible assets. This is also explained in a discussion on the operating results in the Q2 2012 interim report.
"During the second quarter 2012, based on a combination of factors, including the decline in our market capitalization, credit rating downgrades as well as our operating results, we concluded that there were sufficient indicators to require Nokia Group to perform an interim goodwill impairment analysis as of June 30, 2012. "
This explains the 1.4 billion reduction in goodwill and intangible assets. But what else did to reach this 4 billion EUR figure?
"In the second quarter 2012, Nokia recognized EUR 800 million in valuation allowances related to its Finnish deferred tax assets in accordance with accounting standards "
Deferred tax assets is when a loss making company expects to make profits in the future, and sets aside a portion of their losses as tax credits to take advantage of, when they return to profitability. But this is allowed, in Finnish and International accounting laws, only if there is sufficient indication of the company returning to profitability. Deferred tax assets sits on the balance sheet as a current asset, and this accounts for another 800 million of the total 4 billion reduction in assets.
The rest of the 4 billion is made of lower accounts receivable (amounts due to the company), and prepaid expenses.
Now, I may be reading a bit too much into this, but cleaning up the balance sheet of intangibles, and deferred tax assets may be to make it more palatable to a buyer. Even though Nokia is currently valued low (it's currently valued lower than what Motorola was picked up for), most buyers would not be convinced by intangibles & goodwill on the balance sheet. Goodwill comes up when a company acquires another company, and pays more than the net asset valuation of the acquired company. The excess amount paid is not treated as a loss, but projected as an asset, which is the intangible valuation of expected synergies from the acquisition. Goodwill appears on the Nokia balance sheet because of the past acquisitions of Navteq, and others.
