Unfortunately, this article comes a few days before Nokia reports its Q4 1999 results, so the financial results that we're going to have to go on are not so fresh. But Nokia CEO Jorma Ollila gave pretty strong guidance, announcing late last year that the company's rate of growth for 1999 would exceed 40%. Nokia is the leader in wireless communications, with an $18 billion per year business in mobile phones, switching networks, base stations, and software. Nokia's revenues comprise nearly 30% of the total annual wireless market, not just in handsets but also in network equipment. More importantly, Nokia is growing its business not only in net and gross revenues, but also on an overall percentage basis. "Nokia" has become synonymous with mobile phone in several parts of the world, as it has increasingly dominated the industry.
Nokia has been aptly described as the "arms dealer" of the wireless communications business. Even though Nokia was one of the three early proponents of the GSM (Global System for Mobile) protocol, it has still produced handsets and networking equipment that handles any and all of the other competing standards: CDMA, Amps, TDMA, and PCS. In so doing, Nokia has prevented itself from being "betamaxed" into obscurity. Nokia has thus far avoided the engineering mistake of backing a standard because it is superior, choosing instead to sidestep the marketing and political considerations that will inevitably skew the debate and provide equipment regardless of the eventual victor(s).
Over the past decade, Nokia has transformed itself from a convoluted, confused conglomerate that manufactured everything from toilet paper to televisions into a powerhouse with a laser-beam focus on the wireless telecommunications industry.
At the end of this report I will make the recommendation from the three companies I have profiled. We also have had recent profiles of JDS Uniphase (Nasdaq: JDSU) and Home Depot (NYSE: HD) as potential Makers. After reading Phil's JDS Uniphase analysis, I felt a little stupid for not considering it as a telecom company to start with, but nonetheless, it is a viable candidate for which an equally strong case can be made for inclusion as those I have profiled. The selected company(ies) will be announced as soon as we have all digested the reports and done our own analyses.
D'accord. On with the 10 point analysis of Nokia. This company has been covered much more heavily on the boards and in recent articles, so I am going to link to those where appropriate. The most recent Rule Maker Ranker analysis for Nokia was done by panhale, who gave the company a swaggering score of 50, firmly in the top tier.
1. Dominant Brand -- Think about this: Early in the 1990s, Nokia's CEO put up a trial balloon to Ericcson (Nasdaq: ERICY), it's Swedish rival, to see if they would be interested in buying Nokia. No thank you, came the reply. Big mistake. Nokia controls 30% of the mobile handset market and is in danger of having itself completely marginalized in some places where handphones are known simply as "Nokias."
2. Repeat Business Purchases -- According to an industry report, 90% of all Nokia owners in the U.S. would only buy another Nokia. Cellular and mobile technology is exploding, both in existing products and new wireless applications (PDAs, G3, other WAP uses). Cellphones are not the best repeat business model; they are currently replaced about once every 18 months. Still, within the business, Nokia has the best track record of its major competitors.
3. Convenience -- This depends. Certain service providers (the drivers of cell phone purchase in many markets) provide support only for certain brands -- more often than not Nokia tops the list, but not always. Sprint PCS (NYSE: PCS), for example, has a promotional agreement with Motorola (NYSE: MOT) and thus favors that company's products.
4. Expanding Possibilities -- Pardon me whilst I drool. The potential for wireless application protocol (WAP) is almost limitless. Just of cellular phones, industry wags expect usage to surpass 1 billion in 2003. Also, in many regions where there is no landline infrastructure, the cheapest way to increase reach is to go straight to cellular. Thus, many of the most rapidly growing telecom markets are also installing Nokia network equipment and have spiraling handset sales. Moreover, the topology of these markets is different, where in developed countries the local access is provided by mobile but the long-haul portion is provided by landline, in many places the relay all the way to and from the central office is all cellular.
5. Your Familiarity and Interest -- I read a story a few weeks ago about a man golfing in Greenland. He was out by himself when he came across a local -- no one else for as far as the eye can see. The local walked by, ignoring him as he yapped into his cellphone. This technology IS the future of communications. Most likely you're familiar with it, if not interested.
6. Sales Growth of 10% Per Year -- From 1997 to 1999, Nokia has grown 49% per year on average, easily passing this test. Further, even though Nokia's sales are currently $18 billion annualized, the CEO still predicts that it will grow at a gaudy 40% clip.
7. Gross Margins of 50% -- Nokia's gross margins have remained fairly steady at 38%, below the level we look for in a Rule Maker. First chink in the armor.
8. Net Profit Margins of at Least 7% -- Much better. Nokia has gradually increased its net margins up to a current level of 12.9%, slightly below 1998's level but well above the level from the previous three years. This is especially impressive when you consider that of Nokia's 50,000 employees, over 15,000 are in research and development -- very crucial components but normally a drag on current margins.
9. Cash No Less Than 1.5x Total Debt -- Nokia currently has approximately 4 times more cash and equivalents than it does total debt. This easily meets our standard. It should be noted that Nokia uses International Accounting Standards, so some categories are different from those included in U.S. Generally Accepted Accounting Principles (GAAP). However, with 4x more cash than debt, any accounting differences are extremely unlikely to push Nokia below our threshold.
10. Efficient Use of Cash (Flow Ratio Below 1.25) -- Over the past few years, Nokia has made steady progress in tightening up its cash management. As of Q3 1999, Nokia's Flow Ratio had fallen to an eye-pleasing 1.16.
So, that's the end of my four part series on telecom companies. Each company, again, has all the attributes of a Rule Maker, though each also has flaws that need to be addressed. With Cable & Wireless, the company has a fair amount of debt as a result of its acquisition activity, but more troublesome for me was that we had such difficulty making a valid comparison due to the lack of financials using U.S. GAAP, or at a minimum International Accounting Standards (IAS). With AT&T, the big bugaboo is its debt structure and its historical slow rate of growth (recently changing, but there is plenty of opportunity to watch to see if the company continues on its current trajectory). So of the three, I'm going to give the nod to Nokia, but frankly, not by very much. All three bear close watching for addition into the Rule Maker portfolio, and should C&W continue the moves it is making (C&W Hong Kong Tel may merge with Singapore Telecom, for example), it may bear for inclusion very soon.
One last thing -- as I write this, the most recent Qualcomm (Nasdaq: QCOM) earnings have been released, with a warning that the company expects its chip sales will be lower for the next quarter due to seasonal considerations. You may remember that I rejected Qualcomm as a Rule Maker early this month (prior to its drop of nearly 40%) as a fine company that had a valuation so rich that the company had no room for error. Yesterday's announcement was case in point, as the company was executed on the market for a fairly benign statement in the midst of a spectacular earnings report.
There is absolutely no sign of a weakening in the overall business prospects for Qualcomm, but unreasonable expectations of growth have the unfortunate effect of amplifying minor missteps. And that's too bad, because those who were late to the parade (or those convinced by Walter Piecyk's analysis and price targets) now need as much as 60% gains to get back to even. How are Qualcomm's prospects any different? If anything, they're better, but that doesn't help those at the end of the momentum train who bought in at a price point that had every risk imaginable for the company priced into it.
That's it for now. On a lighter note, you've gotta take a peek at our brand spankin' new FoolMobile. It may be coming to a road near you. Be on the lookout.
- Fool on the Hill Nokia article 10/22/99
- Fool Plate Special on Qualcomm Earnings 1/26/00
- Nokia 3Q 1999 Earnings Report
- Telecommunications Rule Makers? 1/4/00
- Is Cable & Wireless the Telecom Rule Maker? 1/11/00
- AT&T: The Elephant Wakes Up 1/20/00
Bill Mann -- TMFOtter on the boards