But first, a mea culpa. As Matt pointed out in Monday's RM article (also on Nokia -- geez, we go years between articles on T. Rowe Price), there was an error in my calculations of Nokia's Flow ratio last week. The actual number is 1.16, not 1.85 as I reported. The culprit for my error was clerical -- I used the reciprocal of the liabilities. Thank you to the Fools who pointed out my error on the Nokia message board. At any rate, we now have a fresher set of numbers, so we can recalculate all of our numbers for the most recent quarter as well as the full year of 1999.
At the bottom of this article is a link to Nokia's conference call. I highly recommend that you take the time to listen to it, as the hour you invest in doing so will give you a much better feel for the company and its operations. For long-term investors, there's not much to be gained from tracking the daily movements of any company, but the quarterly results are quite a different story. They are important, and unless you are willing to familiarize yourself with the financials of every company you hold, you would likely be better off in an index fund. In fact, this basic truth works as a sell signal for me -- if I have more quarterly analysis than I care to do, it means that I am holding too many companies in my portfolio. The first one to go is the one that I am least interested in analyzing further. Each person is different, but I find that I can handle 15 companies and no more.
Back to Nokia. Here are some of the numbers released by the company comparing fiscal 1999 to fiscal 1998:
(In EUR Million) 1999 1998 Change% Net sales 19772 13326 48 Operating profit 3908 2489 57 Profit before tax and minority interests 3845 2456 57 Profit from continuing operations 2577 1680 53 Net profit 2577 1750 47 EPS from continuing operations, EUR, split adjusted 2.24 1.48 51 Proposed dividend, EUR 0.80 0.48 67
In a word: Wow.
For conversion's sake, the Euro currently trades at 1.03 to the dollar. The numbers are quite stunning. Total 1999 sales of better than $19 billion marked an increase of 48% from an already substantial base. To compare, Rule Maker investment Cisco Systems (Nasdaq: CSCO) had 1999 sales of $12 billion. These are not start-up companies or start-up type numbers we are talking about. Whereas for a company with $100,000 in sales to grow by 48% requires that management figure out a way to add only $48,000, it is a much more difficult prospect to add $6 billion to an annual sales figure. Moreover, in the conference call, Jorma Olilla, CEO of Nokia, projected that net revenues for 2000 would grow by another 30-40%.
So we have great sales growth, that's part of the formula, but what about profits? Well, I'm glad you asked. Operating profit margins grew from 18.6% (and chastened by my earlier boo-boo, please rest assured I am going to be very sure of these numbers) to 19.7%, while net margins stayed almost perfectly static, dropping ever so slightly from 13.1% to 13.0%.
These are great numbers. But we have seen many growth businesses that have lost control of their purse strings, allowing receivables and inventory to increase faster than sales. In Nokia's case, they do not seem to have padded their sales numbers with accounts receivables -- these increased 33%, but decreased as a function of gross revenues by 45%. Additionally, Nokia's inventory levels also decreased as a percentage of revenues by 29%.
These components -- receivables and inventory -- are the numerator for the company's Flow Ratio. The fact that they are lower bodes well for the flowie, which, if you recall is the non-cash portion of current assets divided by the current liabilities (less the current portion of short- and long-term debt). For Nokia, the Q4 flow ratio came in at 1.19, down from 1.33 in 1998. This number is a bit higher than the one from the third quarter, but not by much. Besides, the year-over-year flow ratio comparison is much more meaningful, and from that perspective, Nokia's working capital management is heading in the right direction.
Nokia's conference call offered shareholders a few more points of interest. First, the company reported that more than 40% of its handset sales were "upgrades," or repeat purchases. Understand what this number is telling you -- not that 40% of the people who bought a Nokia would buy another, but rather that, in a year, 40% of all sales were repeat customers, and this at a company enjoying 48% growth. Further, Nokia's stated goal is for repeat customers to exceed 50% of sales. This lays to rest any questions the Rule Maker would have about its Repeat Business criteria. Such customer loyalty has helped give Nokia, according to Interbrand, the 11th most valuable brand in the world.
One additional area that is crucial for companies, particularly those in the most competitive markets, is Research & Development (R&D). Nokia currently has 13,000 employees in R&D, and devoted 1.8 billion Euros, or 8.9% of total revenues to development of new product lines. CEO Olilla said that the percentage of sales dedicated to R&D would rise to about 9%.
Finally, Nokia's board of directors approved a few things that will make current shareholders very happy. First is a buyback of up to 2 million outstanding shares, which would then be retired. This has the effect of increasing the amount of earnings per outstanding share, a tax-free dividend to the shareholders. Next was an increase in the annual dividend to shareholders to 0.80 Euros per share, up from 0.48. Finally, Nokia announced that the company will split its shares 4-for-1. This is an event that is non-accretive to shareholders (meaning it does nothing to increase the company value), but it should have the effect of adding liquidity to the company.
All and all, a stellar earnings report, one that is probably already reflected in current share pricing, but nonetheless plenty to get excited about for Nokia shareholders.
Finally tonight, now that it's February, you've probably received your W-2. Need help with your taxes? We've got it. Just head over to our Tools for Taxpayers.
Bill Mann, TMFOtter on the boards
Nokia Earnings Report
Nokia Conference Call for 4Q 1999