Introduction of Nokia

Nokia, one of the leading brands in mobile phones, was started by a mining engineer, Fredrik Idestam, in 1865 by making paper from wood pulp mill; a second paper mill was built on Nokianvirta river that gave birth to the present name of this company-Nokia.

The company then started different business and mergers and then finally started mobiles business in 1968. Its head office is in Espoo, Finland and currently has almost 132,000 employees worldwide. Its main products (mobile phones, smartphones, mobile computers, Networks) and services (Maps & Navigation, media software solutions, music, messaging) are in the field of Telecommunication, Internet & computer software. Nokia is selling its products to almost 150 countries globally with annual revenue of over 42 billion euro with 2 billion operating profits and global market share of nearly 35% in 2010. (nokia.com)

Nokia did many innovations and has credit to be the world’s No 1. in many of its products and services e.g. world’s first portable NMT car telephone (Nordic Mobile Telephone-NMT) built by Nokia, GSM call, Nokia Tunes, satellite call, brings Internet on mobile. It introduces First 3g Phone, digital hand portable phones supporting data, fax and the Short Message Service, integrated wireless payphone, dual mode AMPS/TDMA phone, high-speed data terminal for wireless networks, WAP handset, introduced the industry first multimedia messaging solution, first 3GPP compliant WCDMA/GSM dual mode phone, first TDMA handsets with full-color displays, mobile handset with a 4GB hard disk which can store up to 3000 tracks, Nokia N95 was the world’s first device combining GPS and wireless broadband (HSDPA/WLAN). From January 2010, high-end car and pedestrian navigation is available for free on Nokia smartphones. (Zacks research, 2011)

One can imagine its success and popularity from the fact that till 2005, 2 billion mobiles were sold worldwide and Nokia alone sold its billionth phone in that year.

According to Nokia Corporation, ‘Nokia’s story continues with 3G, mobile multiplayer gaming, multimedia devices and a look to the future…’ (nokia.com) and “Nokia’s mission is simple; Connecting People. Our strategic intent is to build great mobile products. Our job is to enable billions of people everywhere to get more of life’s opportunities through mobile.” (nokia.com)

Currently, with the invention of many smart & android phones, Nokia is facing stiff competition in mobiles market as its sales figures are moving downward. But they are now making changes in their structure and operations that is depicted by their statement, “Nokia has recently outlined its new strategic direction, including changes in leadership and operational structure to accelerate the company’s speed of execution in a dynamic competitive environment.” (nokia.com)

Critical Discussion of Recent Past Performance – Financial Ratio Analysis

Financial analysis helps in establishing a relation between various financial statements’ elements which can then be compared with other information about the business. This also determines the future prospects of the company and the area that needs improvement. The basic purpose is to analyze the current financial position & performance of the company according to which a judgement can be made regarding future performance of the business. (Dyson. J.R, 2007)

Financial analysis from the point of view of an investor is mostly concerned with the profitability of the company and also the returns what the company pay to their stock holders in the form of dividends and/or right shares and increase in the stock value. (CIMA, 2000)

One has to look carefully to the annual accounts of the company and the yearly growth trend in terms of revenues, profit and its market share. For the analysis purpose, consolidated accounts of Nokia i.e. Income Statement, Balance Sheet, Cash Flow Statement for the last four years from 2007 to 2010 is taken into account and theses figures obtained from the company’s website are given below:

Consolidated Income Statement of Nokia for the Year Ended (EURm)

2007 2008 2009 2010

Net Sales/ Revenues51,058 50,710 40,984 42,446

Cost of Sales33,781 33,337 27,720 29,629

Gross Profit 17,277 17,373 13,264 12,817

Res & Dev5,6365,9685,909 5,288

Sell& Ad Exp 5,5445,6645,0784,529

Other Inc2,312 420338 507

Other Exp424 1,195 51056

Op Profit7,9854,9661,1972,070

Profit Bef Tax 8,2684,970 962 1,786

Tax1,5221,081 702 443

Net Profit 6,7463,889 260 1,343

(nokia.com)

From this income statement, it is observed that Sales are having a decreasing trend from 2007 to 2009 but shows a slightly increase in 2010 and cost of sales, operating profit, earnings per share and the net profit has also the same trends. It means that profitability of Nokia was much better in 2007 that is 6.7 billion euro as compared to 260 million euro in 2009, but it again shows signs of improvement in 2010 and net profit become 1.3 billion euro.

Consolidated Balance Sheet of Nokia for the Year Ended (EURm)

2007 2008 2009 2010

Assets

Cash & Eqv 11,992 7,8549,20212,653

A/Rec 11,356 9,5457,9957,609

Inventory 2,8762,5331,8652,523

Other C/A 3,0704,4444,5514,360

Tot C/A 29,294 24,470 23,613 27,145

Plant P&E 1,7581,9851,8221,856

Goodwill1,3846,2575,1715,723

Tot Assets 37,599 39,582 35,738 39,123

Liabilities

A/Pay 7,0745,2254,9506,101

Tot C/L 18,976 20,355 15,188 17,540

Oth/L 1,2852,7175,8015,352

Tot/Liab 20,261 23,072 20,989 22,892

Equity 17,338 16,510 14,749 16,231

Tot Lib & Eq 37,599 39,582 35,738 39,123

(nokia.com)

The balance sheet gives an idea to investor that how much business is invested by the shareholder’s equity and how much debt is owed. (Dyson. J.R, 2007)

It is depicted from these balance sheets of Nokia that approximately 45% business is financed by the equity in 2007 but for the next three years this figure is reduced to around 41%. This shows that company owes more in 2010 as compared to 2007 and its financial position was much better in 2007 compared with 2010.

Consolidated Cash Flow Statements of Nokia for the Year Ended (EURm)

2007 2008 2009 2010

Net Income 6,7463,889 260 1,343

Depreciation 1,2061,6171,7841,771

Cash from Op Act7,8823,1973,2474,774

Cash from Invest -710-2,905 -2,148 -2,421

Cash from Finance-3,832 -1,545 -696 -911

Net Change in Cash 3,325-1,302378 1,666

(nokia.com)

The analysis of Cash flow statement gives true information about profit of a company as it relies on real cash transactions. Income statement can sometime mislead because of insufficient cash flows figures showing on the statement. Investors are mostly interested in cash flow statements before making decision to have a clear picture of the company’s cash transactions. The company’s with plenty of cash availability mostly have fewer problems for expansions or investments for growth, paying off debts or to buy back their own stocks.

This cash flow statement shows that Nokia has good position as regard to the cash flow during the year 2007, but it comes to negative figure in 2008 because of losses from investments and finances, but it recovers again in 2009 and makes good progress in 2010. It overall shows that although Nokia had a hard time in 2008 but it picked up again in the subsequent years.

Financial Ratios

Some financial ratios are calculated as regard to profitability, asset turnover, short term and long term liquidity ratios based on the figures outlined in the Income Statement and balance sheets given above for four years from 2007 to 2010. These ratios and their explanations are given as under:

Profitability Ratios:

Gross Profit Margin 33.84%34.26%32.36%30.20%

Op Profit Margin 16.19%9.80% 2.34% 4.21%

Net Profit Margin 13.24%7.63% 0.63% 3.21%

Profitability ratios compare components of income with sales and provide an idea of what makes a business’s income and is expressed as a portion of each sales unit i.e. euro in case of Nokia. These profit margin ratios are different only in terms of numerators and reflect and evaluate performance of different aspects of the company. These all profitability ratios explain the Nokia’s ability to generate the earnings and coverage of its expenses and other costs for the same period (Dyson. J.R, 2007)

For Nokia, we observe that Gross profit margin (Gross Profit/ Sales) remains almost equal (30.2% to 34.2%) for the four years in observation, but the operating profit and Net profit margin shows a great fluctuations ( 2.3% to 16.1% in case of op profit and 0.6% to 13.2% for net profit). This means that Nokia has more operating expenses i.e. selling, marketing, R&D and administration expenses. Secondly, if we see vertically, in year 2007, the difference between Gross profit and net profit is less (33.84%-13.24%= 20.6%) as compared to subsequent years e.g. in year 2009, the difference is 32.63%-0.63%= 31.73; this shows that in this year there is more operating expenses. But this situation improves a little in 2010 and net profit becomes again 3.21%.

Return Ratios:

Return on Assets17.94%9.82% 1.00% 3.90%

Return on Capital 54.8% 27.2% 6.7% 7.02%

Return on Equity 53.9% 27.5% 6.5% 8.67%

Return ratios are also important profitability ratios. These measures the efficiency with which a business employed its assets, capital and equity for profit generation i.e. amount of profit in relation to investment of total assets.

For Nokia, these ratios show that assets are employed more efficiently in the year 2007 and then it has a decreasing trend till 2009 and shows a better position for 2010 as compared to 2009.

Activity Ratios:

Tot Asset TO 1.4x 1.3x1.1x1.1x

Fix Asst TO 29.0x25.5x 22.5x 23.1x

Inventory TO 17.8x20.0x 22.0x 16.8x

Activity ratios measures how well the business assets are used i.e. the benefit produced by the company’s assets or how effectively the business investment is being used. The greater the turnover, more effectively the assets are being used (Dyson. J. R, 2007)

Liquidity Ratios or Credit Ratios:

Current Ratio 1.5:11.2:1 1.5:11.5:1

Acid Test Ratio 1.23:1 0.86:1 1.13:1 1.15:1

These two liquidity or credit ratios measure whether a business can pay off debts or bills from its resources over the next twelve months. Acid test ratio (current assets-inventories/current liabilities) gives a clearer picture than current ratio (current assets-current liabilities) because it shows that business is capable to pay off its current liabilities without selling the inventory because sometimes it becomes difficult to sell the inventory at the time of solvency.

Nokia has a good result for these ratios, and shows that the business can easily pay its debts in case there arise any problem.

Long Term Solvency

Debt/Equity Ratio 1.17 1.39 1.42 1.41

This debt equity ratio is greater than one, means that Nokia’s most assets are mainly financed by debt than shareholder’s equity (Dyson. J. R, 2007)

This ratio shows that how much Nokia is relying on debt. From these figures, it reveals that Nokia is depending more on debt as compared to the equity and this has an increasing trend from 2007 onwards.

Share Holder’s Ratio:

Earning /share 1.85 1.07 0.24 0.50

The investors have a keen interest in this ratio as this shows that how much business earns in terms of share of stock because if the business earns more, then it can give more to their shareholders.

Nokia’s earning per share is 1.85 in 2007 which decreases to 0.24 in 2009 but again shows a good performance in 2010 therefore E/Share increased to 0.50.

Other Issues to be Considered in Pursuit of a Potential Investor

A potential investor has to do a full market research about the company and the trends of its growth, market reputation, its competition, development & growth within the company and within the industry along with the complete examination of the financial statements because an investor not only needs a return on the investment but also wants safety of its funds invested. For financial analysis, one has to consider the revenue generation, operating income from operations, net income, return on equity, balance sheet strength and the competitive advantage over a period of years and also its trend along with the trend of the industry.

As far as Nokia Corporation (NOK) is concerned, it is the largest manufacturer of the mobile phones in the world and is the market leader in most of its innovations since 1990’s.

But due to the significant increase in the use of smartphones and android phones in the past recent years, Nokia is facing some difficulties for maintaining its same market share as it was before.

Global mobile phone sales totalled 269.1 million units in 1st qtr of 2009, decreased 8.8% from 1st qtr of 2008. Smartphone sales were 36.4 million units, an increase of 12.7% from the same time last year. Nokia continued to lead the mobile phone market, but its market share dropped from 39.1% to 36.2% in the 1st qtr of 2008 to 1st qtr of 2009. Smartphones sales are 13.5% of all the mobile devices sold in 2009. (Gartner, May 2009)

5 Year Stock Charts for Nokia Corporation- US (NOK) ( As on 22-04-2011)

Source: Businessweek.com

Industry Analysis-Year to Date (As on 22-04-2011)

Nokia (NOK)

Source: Businessweek.com

As the consumers are using more smartphones and android phones now a days, therefore its market share are increasing and also the future expectations to use these phones, as is shown in the figures below:

Smart Phone Market Share with OS (March, 2011)

Source: The Nielson Company (http://tech.fortune.cnn.com)

Next Desired Operating System (Consumers planning on getting a new smartphone in the next year)

Source: The Nielson Company (http://tech.fortune.cnn.com)

Nokia has lost its market share in profitable smartphone segment because of Apple’s iphone and Google’s android phone. In the last few years consumers are moving towards most modern Android phones from Samsung, HTC and prefer less to use the old symbian platform used by Nokia. The Gartner, one research firm expects that android will replace Symbian, and will become the world’s most widely used smartphone this year. Its global market share is expected to be 38.5% as compared to symbian 19.2%. (The Wall Street Journal, Apr 2011)

According to Gartner “By the end of 2011, Android will move to become the most popular operating system (OS) worldwide and will build on its strength to account for 49 percent of the smartphone market by 2012” ( Gartner, Apr 2011)

Their prediction table is given below:

Worldwide Mobile Communications Device Open OS (Operating System) Sales to End Users by OS ( Thounds of Units)

Source: Gartner (April, 2011)

In pursuit of fierce competition from other companies like Samsung, Motorola, Apple, Google, HTC and others, some recent developments made by Nokia:

Nokia has entered in a fifty-fifty joint venture with Siemens AG after receiving Chinese regulatory clearance in acquiring the wireless network infrastructure assets of Motorolla Solutions Inc. Nokia started using Windows Mobile 7 software in all of its smartphones. (Zack research, 2011) Nokia made a definitive agreement with Microsoft Corp for the development of a smartphone ecosystem. (BBC, 2011) In the first quarter 2011, net revenue was $14,214 million that is increased by 9% year over year. This increase was due to the stronger demand, average selling prices and higher volume sales in most of the regions. (Zack research, 2011)

Gartner says, that after Nokia replacing symbian with Microsoft Windows phone operating system, it will not only be able to cut operating cost but also proving better products & services to its customers. In 1st qtr of 2011, Nokia’s smartphone share in the global market fell down to 26% from 41% one year ago. The company is also expecting that its 2nd year will also be challenging, but because of the deal with Microsoft ‘there is less uncertainty for investors about the company’s future prospects’ (The Wall Street Journal, Apr 2011). This deal will also help Nokia in clearing the hurdles in the way of commercializing the new Windows smartphones as quickly as possible.

In the 1st quarter 2011, Nokia’s quarterly revenue was up 9% year over year. The increase was attributable to higher volumes in most regions driven by stronger demand and higher average selling price (ASP). However, gross margin was 29.1% compared with 32% in the last quarter. (Zack Research, Apr 2011) Also Hudson securities said (Apr 2011) that Nokia reported strong results for its 1st quarter 2011 with revenue & earning per share more than expectations.

According to International human press newswire, Nokia’s global presence is still significant as 1.3 billion people using the Nokia’s phone for connecting every day. The Nokia’s deal with Microsoft seemed to be another “Blockbuster”, its sales will increase and the prices could go back to 2007. (ITHP, Feb 2011)

Conclusion

Nokia (NOK), a Finland based multinational company, is the biggest name in the mobile communication technology. Earlier it was involved in many businesses but from 1992 it concentrated on its communication segment and soon became the market leader in many of its innovations. Nokia’s phones are loved by every sector of the consumers, not only because of their reliability but also because that it is providing the cheapest mobiles with most basic functions and also high quality phones with all the latest functions. Its market share remains above 40% globally till last few years. In 2005, 2 billion mobiles were sold worldwide and alone Nokia sold its billionth mobile in that year.

There is a fierce competition in the mobile communication market. Main competitors are Nokia, Apple, Samsung, Google and HTC. All suppliers are making innovations and trying to provide new & extra functions or services in the mobiles therefore expectations of the consumers are increasing day by day and in this race many companies are providing new & innovative mobiles periodically.

From the financial statements of Nokia and the ration analysis, it is examined that Revenues, operating income, profit margin, return on equity, earning per share from 2007 has a decreasing trend till 2009 but all these shows positive developments again from 2010. Current ratio, Quick ratio is also in favour of Nokia. Also, in first quarter 2011, Nokia did very well and more than expectations. Although its overall market share is somewhat decreasing due to the Apple’s iphone and Google’s android phone. But as Nokia did a deal with Microsoft recently for using its windows 7 and producing an ecosystem in mobiles, and also it is doing re-organization of the company, it is expected that it will be able to gain its market share again, still 1.3 billion people are using Nokia worldwide. Therefore, one can invest in Nokia but also need to keep an eye on the growth and development it is making with the passage of time.

References BBC News, “Nokia and Microsoft form partnership“. 11 Feb 2011, online, assessed on April 20,2011, available from http://www.bbc.co.uk/news/business-12427680 Business week, April 22, 2011, ‘Information Technology Sector, Communications Equipment Industry’, online, assessed on April 22, 2011, available from http://investing.businessweek.com/businessweek/research/stocks/earnings/earnings.asp?ticker=NOK:US CIMA. (2000) Management Accounting Official Terminology. London: The Chartered Institute of Management Accountants Dyson, J.R. (2007) Accounting for Non-Accounting Students. Seventh Edition, England: FT Prentice Hall Fortune, CNNmoney.com, ‘Nielsen: Android gains, iPhone slips’ April 26, 2011, online, assessed on Apr 26, 2011, available from http://tech.fortune.cnn.com/2011/04/26/nielsen-android-gains-iphone-slips/

6.Gartner Research, May 20, 2009, ‘Gartner Says Worldwide Mobile Phone Sales Declined 8.6 Per Cent and Smartphones Grew 12.7 Per Cent in First Quarter of 2009’, online assessed on Apr 26, 2011, available from http://www.gartner.com/it/page.jsp?id=985912

Gartner Research, April 7, 2011 ‘Gartner Says Android to Command Nearly Half of Worldwide Smartphone Operating System Market by Year-End 2012’, online, assessed on Apr 26,2011, available from http://www.gartner.com/it/page.jsp?id=1622614

8. ‘Hudson Securities Reports Strong 1Q11 Results For Nokia’ April 21, 2011, online assessed on Apr 27, 2011, available from

http://origin.benzinga.com/analyst-ratings/analyst-color/11/04/1023585/hudson-securities-reports-strong-1q11-results-for-nokia

ITHP, International human press newswire, ‘Invest in Nokia?, Feb 2011, online, assessed on Apr 26, 2011, available from http://www.ithp.org/articles/nokia.html Nokia website, online, assessed on April 15, 2011, available from http://www.nokia.com Reisinger. D, Cnet news, April 26, 2011, ‘ Nielsen: Android gains, iPhone slips’, online, assessed on April 26, 2011, available from http://news.cnet.com/8301-13506_3-20057445-17.html The Wall Street Journal, 21 Apr, 2011, ‘Nokia Lifts Itself Out of the Doldrums’, online, assessed on Apr 26, 2011 available from http://money.uk.msn.com/wall-street-journal.aspx?cp-documentid=157142938 Zacks Research, Business News, ‘Nokia Surprises in 1Q11’ 21-02-2011, online, assessed on April 17, 2011, available from http://www.favstocks.com/nokia-surprises-in-1q11/2148356/