At the close of business yesterday in Helsinki, Rule Maker Nokia (NYSE: NOK) issued its first-quarter earnings report, and once again, this company is en fuego.
Nokia's numbers have been consistently so good that I'm almost fighting to find something new to say about what they are doing from a financial perspective. Matt (TMFVerve) and I were looking at the quarterly numbers and their parabolic rise on sales, and we both remarked that we would be pretty pleased with a company that showed that type of growth on a year-to-year basis. But no, our company is showing 15% plus growth each quarter over the one before. That makes the annual comparisons, well, it makes me dizzy just thinking about them.
Income Statement in millions of Euros Q1 2000 Q1 1999 Change Sales 6,537 3,870 68.9% COGS 4,012 2,329 72.3% Net Income 891 505 76.4% Gross Margins 38.6% 39.8% -1.2pp Net Margins 13.6% 13.0% +0.6pp Net Cash 3236 1856 74.4% Fool Flow Ratio 1.05 1.22 -13.9% Days Sales Out. 76 86 -11.7% Days Invent. Out. 45 58 -22.9% Days Payables Out. 48 35 38.7% Cash Conversion Cycle 73 110 -33.5%
The first thing to note is that, for U.S. investors (or those who own Nokia through U.S. ADRs), we have been on the wrong side of some currency risk here, so we can't just take the straight comparison from last year. The dollar has gone from being worth 0.95 Euros to a current level of 1.10 Euros to the dollar. In other words, the dollar has gotten stronger and the Euro weaker. This means that where Nokia has outperformed at a straight level of 68% improvement in Europe, it has actually only improved by 58% in the U.S. Just something to note when you're looking at the numbers -- you are not looking at dollars. Rather you are looking at a currency that floats against the dollar, and right now that float rate hampers our ability to derive all of the benefit from Nokia's operations.
I know that many people who have bought into more speculative companies are accustomed to seeing really rapid sales growth, so maybe a 68% increase does not seem like a lot by comparison. But remember, Nokia is already starting from a huge sales base, and growing that by another two-thirds. This is not a start-up, but its sales are ramping up as if it were one.
To compare, using the current dollar exchange rate, Nokia had sales of $5.9 billion for the quarter, which is 25% more than Cisco's (Nasdaq: CSCO) current quarterly sales of $4.4 billion. And the growth rates? Nokia comes in at 58% (exchange rate adjusted), Cisco, 52%. Yowza. Obviously, there are many other factors that go into proper valuation of a company; for example, Cisco's gross margin is significantly higher than Nokia's. Still, for a company of this size, to compare favorably in such important areas to a world-beating firm like Cisco is pretty spectacular.
(See, I told you that it's getting difficult to say new things about Nokia's financial performance -- I just looked back and realized that last quarter I used Cisco to make a similar comparison. Well, if you're comparing, you might as well compare with the best.)
Nokia has improved in some other areas that are important to Rule Makers. Its Flow Ratio has dropped to 1.05, which is down from 1.19 in the fourth quarter of 1999. This means that the company, as it grows, is managing its payables and receivables even better than it had in the past. This is a big problem that companies with spectacular sales growth often come up against, as they concentrate so much on sales growth that their efforts to get cash in the door start to slip. Not in this case. Note that drop in days sales outstanding (the amount of time it takes customers to pay Nokia) and increase in payables outstanding (the average length of time they wait to pay a vendor). Good stuff.
The strangest thing about Nokia's earnings report is that its operating cash flow actually took a dip, which is particularly odd given its increase in net profits (71% growth in Euros, 62% in dollars), increased operating margin, and its improving Flow Ratio. I'm frankly a little confounded as to what caused the operating cash flow to decrease. As I get more time to delve into the financials and speak with Nokia's investor relations, I'm sure to get a better idea of why this is. It's not a huge worry, but it is something to note, the proverbial "scratch on the Ferrari."
Still, all in all a very solid quarter for Nokia. I would encourage each of you, especially those who own Nokia, to take a listen to the conference call, presented by Nokia CEO Jorma Ollila. It is a great chance to hear about the new developments taking place at the company. In a market as fluid as cellular technology, it's pretty crucial to the shareholder that they keep up on this.
A final note: Last month, I wrote about Yahoo! (Nasdaq: YHOO) having to apply for an S-1 exemption from the Securities and Exchange Commission (SEC) so that it would not be regulated as a mutual fund. I've obtained a report from the SEC saying that they have granted Yahoo! the exemption. This keeps Yahoo! from having to comply with the strictures of the Investment Company Act of 1940. I covered some of these limitations in the earlier article, for those who are interested.
Bill Mann, TMFOtter on the Fool discussion boards