Nokia Q1 Earnings Summary by 123jump
This summary is based on the first quarter of fiscal 2006 earnings call conducted by Nokia, Inc. (NOK) on April 20, 2006
>> Nokia First Quarter Earnings Call Summary
Rayna Hristova
123jump.com
May 04 2006
123jump.com
Nokia sold 75.1 million mobile units in the first quarter, up 40% from a year ago, increasing its global market share to 35%. Sales in the U.S. market almost doubled to €8.4 million. The management expects the global mobile market to continue to grow in the second quarter but with no change in Nokia’s share. The company saw a decline in its average selling prices as a result from an increased proportion of cheaper phones sold in the emerging markets.
Key Investors Issues
• Net sales in Q1 were €9.5 billion, up from €7.3 billion from a year ago
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• EPS in the first quarter were €0.25, compared to €0.19 from a year ago.
• Device average selling price in the first quarter was €103, up €4 sequentially.
• Nokia device volumes in Q1 were 75.1 million units, up 40% from a year ago.
Second Quarter Outlook
• Industry mobile devices volumes in the Q2 2006 are expected to be up sequentially
• Nokia’s device market share is expected to be at the same level sequentially
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• Sales in Nokia networks business are expected to develop according to normal seasonality in Q2 2006.
• Mobile device market volume is expected to grow by 15% in fiscal 2006 from the company’s estimate of 795 million units in fiscal 2005.
Fiscal 2006 Outlook
The management expects the device industry to experience value growth in fiscal 2006, but expects some decline in industry average selling prices (ASPs), primarily reflecting the increasing impact of the emerging markets and competitive factors in general. Nokia continues to expect moderate growth in the mobile infrastructure market in Euro terms in fiscal 2006. Nokia continues to target an increase in its fiscal 2006 market share in mobile devices and in infrastructure.
The management expects specific financial items for fiscal 2006. Tax rate is expected to be 27%. Capital expenditure is anticipated to be €800 million and depreciation and amortization is expected to total €800 million.
First Quarter Financial Highlights
• First quarter estimated device market share was 35%, up both sequentially and year-on-year.
• The Wideband CDMA market was up 25% sequential to 19 million units.
• Preliminary estimates the first quarter mobile device market was 215 million units representing a year-on-year volume growth of 27% and a sequential decline of 12%.
First quarter results were impacted by several special items:
• €14 million initial restructuring charge for the CDMA business in Mobile Phones;
• € 8 million restructuring charge in Enterprise Solutions;
Both of these charges impacted operating profit but their net impact on the first quarter EPS was negligible.
Nokia first quarter device ASP was €103 up 4% sequentially.
The management estimates that this high first quarter ASP was impacted by a lower than expected proportion of lower priced entry level products and also to a lesser degree an increased proportion of higher end products in Nokia device sales like the Nokia N70.
Gross margins were down sequentially 20 basis points to 33.9%.
The decrease was driven by the sequential decline in Networks gross margin, which is predictable given the typical seasonal drop in net sales. Gross margins from Mobile Phones, Multimedia, and Enterprise Solutions were all up sequentially.
Group operating margins were up 120 basis points sequentially to 14.4%.
Excluding special items operating margins were 14.6%. The improvement in the margin was driven by Mobile Phones and Multimedia, which had a combined operating margin including the special items of 18.5% that’s up 190 basis points sequentially.
Marketing expense was down 140 basis points.
This decrease in marketing was primarily caused by delayed spending on some programs associated with new product launches and targeted savings in efficiencies in Nokia planned spend. The majority of these marketing programs have been pushed into the second quarter and as a result the management expects a material sequential increase in marketing both in the absolute and as a percentage of sales in the second quarter.
Most of the increase is expected in Multimedia as they launch campaigns around the new products like the Nokia N80 and Nokia N91. Mobile phones are expected to see an increase in marketing as it launches a number of new important products like the Nokia 3250 music phone and the Nokia 6131 SlimCam clamshell product.
Market Share Dynamics of Nokia Device businesses by Geography
• Global device market share grew to an estimated 35% in the quarter, up 1% sequentially and 3 % year-on-year.
• Nokia markets share in Latin America was up, both sequentially and year-on-year, driven by improvements in the company’s midrange product portfolio.
• According to the management estimates Nokia market share in China is 12 % higher than the first quarter of last year.
• The management estimates that year-on-year the company strengthened its position in Asia-Pacific region, driven by its strong share in India.
According to the management estimates the company is number one in the fastest growing markets of the world like India, Russia, Middle East and Africa and Southeast Asia Pacific.
US volumes grew by over 100% year-on-year in the first quarter.
This resulted in significant market share gains and Nokia market share in the U.S. of over 20% in the first quarter. Nokia 6101 clamshell phone was the best selling phone in the U.S. in the first quarter. Based on the success of this product and other Nokia products the management estimates Nokia was number one in market share in the US GSM market during the first quarter.
Middle East and Africa share was up sequentially.
The company is in the process of completely revamping its underdeveloped distribution system in Middle East and Africa, modeling it after the success it has had in China and India. Nokia is shipping directly to 58 countries in this region, opening Nokia offices and hiring Nokia people for retail.
First Quarter Product Highlights
Multimedia business group net sales growth in the first quarter was 55% reaching its highest ever operating margin of 18.4%. This increase was driven by the successful Nokia N70, the company’s highest revenue and margin device for the first quarter. According to the management Nokia N70 was the world’s number one selling Wideband CDMA device, capturing about 10% global Wideband CDMA market share.
There were renewals of the company’s entry-level product portfolio. The combined volumes of Nokia 1110 and Nokia1600 surpassed the volumes of Nokia1100 for all of the first quarter.
The company expanded its mid-range product portfolio. For most of last year, Nokia had one major mid-range product, Nokia 6230i, which has been expanded in the fourth quarter with the introduction of the clamshell phone Nokia 6101. During the first quarter, there were volume growth in two additional mid-range devices, Nokia 6111 and the Wideband CDMA 6280 slide phones. The combined volumes of the new Nokia 6101, Nokia 6111, and Nokia 6280 were three times that of the Nokia 6230i.
Nokia’s Fashion Collection is estimated to be a successful according to the management over the last several quarters. Three new phones from the L''Amour Collection started volume shipments in the first quarter. Driven by these new phones, the fashion collection volumes were up 70% sequentially, reaching 1 million of units. The management estimates that the stainless steel Nokia 8800 slide phone did comparatively low volumes by Nokia standards, though it is in Nokia’s top 5 devices in profits. The company introduced a black version and an exclusive version of the phone available for £800 pounds sterling.
The company is actively launching Nokia Flagship Stores in the best retail locations in high traffic, urban settings in major markets worldwide. The first flagship store was opened in Moscow on December 9, 2005 and it is exceeding the expectations of the management across all metrics. This year, the company plan to open 5 or 6 more flagship stores throughout the world including in Helsinki and New York.
Device Product Line-up for the Second Quarter
The management expects high volume in the second quarter from Nokia 1110 and Nokia 1600 families with Nokia 1100 family continuing to have big volumes but ramping down as planned.
In the mid range, the management expects that Nokia 6230i, Nokia 6101, Nokia 6111, and Nokia 6280 will continue to sell in high volumes. During the next quarter the company will start shipping Nokia 6233 family of midrange Wideband CDMA phones, the slim Nokia 6131 clam shell and the slim Nokia 6126 clam shell for the US market.
In high-end and smart phones the significant products are expected to be the Nokia N70, Nokia 6630, and Nokia 8800 and the recently introduced Nokia N80. For enterprise the company has begun initial deliveries of Nokia E-series with the Nokia E60, Nokia E61, and Nokia E70 all expected to start ramp ups during the quarter.
First Quarter Business Highlights of the Nokia Networks
• During Q1 Nokia won a major managed services contract with Hutchison Essar.
• The company secured a $190 million managed services network equipment agreement with “du” in the United Arab Emirates.
The management estimates that these wins reinforced Nokia’s leadership credentials in the fast-growing managed services segment where Nokia now has 39 references in 30 countries.
• During the quarter Nokia''s 3G customers Wataniya in Kuwait and T-Mobile in Germany opened their commercial HSDPA networks.
• Vodafone selected Nokia as a preferred IP Multimedia Subsystem or IMS supplier.
• In new growth markets, Nokia won $170 million GSM expansion deal with Henan MCC in China, an MSC Server System contract with Telefónica Móviles in Ecuador, and a GSM/EDGE network deal with Astelit in Ukraine.
• Nokia announced contracts with four new customers: Cable and Wireless, “du”, Telefónica Móviles Ecuador, and Finland’s Aina Group.
• At 3GSM in Barcelona, a number of new frequency variants were announced for Nokia’s small, innovative and modular ‘Flexi’ Wideband CDMA Base Station.
Q&A: Key Questions and Answers
Why don’t you raise your medium-term margin targets for the devices business?
These targets were set as medium-term targets a couple of years ago. They were 2-year to 3-year targets then. The management updated them in the capital markets in December. The management is running the business to both increase its scale and brand recognition. In terms of margin, the management estimates that the first quarter results have proven it is possible to do both of those things. The management estimates that there is no need to update the targets. The management is looking for stability in its target setting and has them truly as medium term targets. There is no need to jump up and down on a quarterly basis.
What is Nokia strategy for intellectual property?
Nokia has a number of patent license agreements for a number of standards with varying terms, conditions and expiration dates for different mobile technologies. The terms and conditions of these agreements vary. There are existing payment obligations that will expire within the next 2 years counting from July of last year and obviously making much of reference to April 9 of 2007. The management believes that its negotiation position will be stronger than it has been in the past. The investments made not only in GSM but also in CDMA, in TD-SCDMA, in Wideband CDMA and in number of other technologies than these that have been mentioned, have been significant. Nokia patent portfolio put the company in a position, much better than was the case when some of these earlier agreements had been negotiated. The management is committed to licensing the Nokia Intellectual Property Rights (IPR) on Fair, Reasonable and Non-discriminatory (FRAN) terms. Nokia respects other people’s IPR and the management is ready to participate in accessing rights to such IPR and the company expects others to respect the similar principals. Nokia does not provide any pass-through rights to its patents.
Are you expecting the market to slow down in second half of the fiscal year?
Managed services and services in general, are becoming increasing percentage of Nokia Networks, as it is in the industry. The management expects 40% of the revenues on the year to come from services overall, up from 30% a year ago. In terms of quarter seasonality, in fourth quarter to first quarter there is down seasonality and the company would experience that and that has an impact on the markets.
Would you comment on your 3G market forecast for fiscal 2006? What is the expected sequential change in 3G units?
The management expects 3G market to be doubled from what it has been in fiscal 2005. It will approach 100 million units this year. The management is satisfied with success of Nokia N70 and expects Nokia 6280 and a few other products really to come on-stream in volume in second and third quarter. Thus the company will cover all the key price points from low-mid to high-end. Nokia has about 100 million share of that total. Nokia chipset and the cost advantage that the company has there enable the company to leverage in addressing the markets through the different segments.
Would you comment on the 30% decline in Europe relative to the 20% decline by market?
The management estimates that the most important is the sell out and where the inventory channels are in Europe. GFK reported that Nokia was up in share. According to the management, the company enters the second quarter in good shape. Nokia has been having increasing success in France and in Italy, compared from a year ago. In the UK and Germany, Nokia is going to have new products coming into those markets.
Would you explain why the inventory was up in the first quarter?
According to the management inventory levels depend on how the product introductions are to happen. If there is a pipeline, which is fuller than normal of new products to be launched as was the case at this point of time then inventory goes up.
Why previous years second quarter sales and marketing expenses have bounced up considerably relative to levels in the other quarters of the year?
According to the management, the key point is the effectiveness of sales versus marketing expense. If the company spends $2.2 million in country X on three products or if it does brand advertising in order to get brand recognition and preference up in a region and does certain type of spending of $3.3 million, the management knows what to expect. The company has built a database on this historical learning, everything is carefully planned and the plans are strictly followed. In the second quarter sales and marketing are expected to be higher than they were in the first quarter, because there are lot of new products which are in their early stage of being lunched.
How did you manage to improve your gross margin and ASP sequentially despite Europe falling off?
According to the management Europe didn’t fall away. Nokia sell-in figures in Europe were on the low side but the sell-out represented by GFK or other market research, Nokia share was flat sequentially. According to the management, there was positive impact from the other markets outside Europe on the ASP, that offset the lack of growth in the traditional European market.
Would you comment on the market share progress in China, India, Russia and Southeast Asia? How would you expect these markets to shape up through the year?
China continues with 11 quarters of uninterrupted market share growth for Nokia and widening the gap to everybody else. In China, 8 out of the top 10 products are Nokia phones. The company continues to push out the distribution and to build the brand. At Asia Pacific overall, the momentum has continued. India is disproportionate, in terms of the entire region. The emerging market had huge market growth year-on-year and Nokia kept its share there.
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Nokia Corporation (NOK) Q1 2006 Earnings Conference Call Transcript
seekingalpha.com
Jorma on Intellectual Property (excerpt from above, with emphasis on pass-through)
>> Tim Long (Banc of America): Thank you. Just a question on the intellectual property front. Obviously you had the press release out today, and Qualcomm had something in their Q. I’m sure you can’t talk specifically about that arrangement, but if you could just highlight us on what Nokia’s strategy is for intellectual property? We’re aware that there’s a lot of patents in WCDMA that Nokia owns. Could you just talk a little bit about the leverage with other handset OEMs that maybe do not have the same intellectual property position? Also if you can touch on any leverage one way or the other with chipset vendors broadly and just maybe give us a sense how this could potentially be amortized for Nokia.
Jorma Ollila: Yes, Tim, I think this is obviously a big issue, and there are both industry practice as well as our non-disclosure agreements which make us a bit restricted on our comments on a very specific basis, but let me make just a couple of observations which sort of will help you out, but I’m sure it will not be exhaustive, because this is a big topic, and merits a real long discussion.
If you remember last summer, in July, in a conference call I did make some comments which, I note, not very many people noticed. It was sort of flown by, to my surprise, and I think the key comments were that, first, the observation that we have a number of patent license agreements for a number of standards with varying terms, conditions, and expiration dates for different mobile technologies. The terms and conditions of this agreements vary; however they are confidential as noted.
When we look at those agreements in total, the case was in summer of 2005, and is the case today that we are a net payer. I also said that when we look at the existing payment obligations that will expire within the next two years, counting from July of last year, and obviously making much of that reference was to the April 9, 2007; we believed last year, we believe even stronger today that our negotiation position will be stronger than it has been in the past.
The investments that we have made not only in GSM but also in CDMA, in TD-SCDMA, in Wideband CDMA, a number of other technologies have been mentioned, have been very significant in our operating portfolio, our intellectual property rights that we have in our possession put us in a pretty nice position, much better than was the case when some of these earlier agreements have been negotiated. So we feel pretty good on where we are.
If we then look at how do we approach it, our position very clearly is that this position that we have built, we are a leader in many areas, we are very committed to licensing our IPR on very reasonable and non-discriminatory returns, the plan terms. We respect other people’s IPR, and we are ready to reciprocate to participate in accessing the rights to such IPR, and we expect others to respect the similar principles.
If you then look at how we have been able to approach all of this, we have also not only been much more active during the last three or four years particularly, but also much more efficient in supporting our rights, and one example being that a lot of discussion has been going around on pass-through rights.
Nokia does not provide any pass-through rights to its patents. So, as an example, when we had in January of this year Kyocera joining a growing list of the CDMA manufacturers who have taken royalty-bearing agreements with Nokia, just as an example of how we have been put into a better position, something that we would not have been positioned to look into in the same way seven or eight years ago.
When you then ask, how do we monetize all that, it’s really through the OpEx that in our P&L the monetization of our IPR does flow. I think that’s about it. We obviously expect that IPR, having increasing importance, will probably continue to increase in importance, but we are also working very hard to make sure that it’s dealt with in a healthy way and actually with increased innovation, not make things tougher in terms of new players entering with their innovative potential in our industry.
So if you look at our role on what it has been, it’s been our role to underline a constructive approach in this industry. <<
- Eric - |
