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Optical/IP

Nokia Lays an Egg & Scrambles It Too!

Ah, where to begin!

By know you’ve seen the headlines, maybe read the press release, or listened to their conference call, and you know if you own Nokia’s stock you’re a tad poorer once again. Nokia Corp. (NYSE: NOK) laid an egg in the second quarter, and there would appear to be more “breakfast” on tap in the near future as well.

Let’s just start with the basics. Revenue in the quarter was €9.91 billion (down 25 percent for the year, up 7 percent for the quarter) and International Financial Reporting Standards (IFRS) earnings per share were €0.10 or, excluding restructuring charges (i.e. pro forma), earnings were €0.15. In essence the revenue figure was “light,” whereas the pro forma earnings per share were ahead of expectations. But “beating consensus” on cost controls won’t take you very far in the current investment environment. Gross margin appears to have stabilized at 32.6 percent, whereas the operating margin was 4.3 percent, down significantly from last year but up a very solid 370 basis points from the prior quarter as they start to benefit from restructuring. (See Device Depression for Nokia, Sony Ericsson and Services Now 45% of NSN Revenues.)

Far too many investors ignore are the balance sheet and cash flow statement, though they are in many ways more important than a P&L. Nokia’s cash and equivalents fell about €1.2 billion to €7.4 billion, and there were no stock repurchases. Part of that was due to a very weak quarter from a cash generation perspective. Net cash from operations plummeted to only €62 million, versus €1.3 billion a year ago and more than €900 million last quarter. That may help explain why they opted to arrange for €2.0 billion in financing during the period. Accounts receivable declined €200 million, and their days-sales-outstanding declined by eight days to 79 days. That drop is nice to see, but it’s still a far cry from the 50-60 day levels that Nokia maintained a couple of years ago. Inventories are another big area of concern for any company. Nokia’s inventories declined €300 million with days-of-inventory down five days to 27 days. These are good numbers by almost any benchmark. Of equal importance is that channel inventories were described as being in the four-to-five-weeks range or flat with the prior quarter and “comfortable” from management’s perspective.

Nokia’s operations consist of two major business segments: Devices & Services (DS), which represents about two thirds of revenue; and Nokia Siemens Networks (NSN), the communications infrastructure operations comprising roughly the other third of revenue.

The handset business may have bottomed from management’s perspective, but it continues to struggle. Devices & Services revenue was €6.59 billion, down 28 percent from last year. Handset units were 103 million, down 15 percent from the year-ago period and in-line with most expectations. The company believes it regained some market share in the period. Nokia’s average selling price (ASP) was €62 versus €74 a year ago and €65 last quarter. This is a direct result of the company’s emphasis on penetrating emerging markets in recent years.

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