Cautious view on analysts' expectations on corporate earnings (page 3 of 3)

SAP's 1Q figures came in below expectations at the top line partly due to an adverse currency impact, but tight cost control led to better than expected results at the bottom line. Total revenue was EUR 1.52bn, operating profit EUR 298m and EPS EUR 0.60 (CSFB forecast EUR 0.53). Margins were the key positive which came in at 20%. The market was pleased especially with the positive developments in its US division and the licence revenue, which came in better than expected at EUR 352m representing a 12% decline (4% in constant exchange rates), but still impressive compared to the competition, which saw declines of 50% yoy. SAP reiterated its full year earnings guidance of EUR 3.45-3.60 and licence revenue of around EUR 2.2bn.

Given the fact that the stock has run up substantially in the last two weeks, we believe that the upside from here is likely limited and we would use lower levels as entries for long-term exposure. The two forces driving the story are the installed base and the dominant market position. The catalyst on a 12-18 months view is that according to a recent study from Deutsche Bank around 40% of the installed bases need to be upgraded. Usually in this process, new functionality will be added, which should be a major licence revenue driver going ahead.

Nokia (NOK1V FH; EUR 14.76) reported 1Q results on Thursday. However, following the mid-quarter update in which Nokia narrowed its 1Q guidance towards the lower end of the range, few surprises were expected in terms of headline numbers and continued strong operating cash flow. Revenue came in in line with expectations (EUR 6.77bn, down 3% vs 1Q 02) and EPS at EUR 0.18 (EUR 0.17 stripping out capital gains, down 10.5% yoy) at the upper end of the downward revised range. The outlook for the mobile division remains favourable and Nokia expects the overall market to expand 10% this year. Mobile phones sale grew by 1% yoy in the 1Q and for the 2Q mobile phones sales are expected to grow between 4 and 12% yoy backed by its broad and competitive product range including a growing share of compelling colour and multimedia models. The outlook for the network division, on the other hand, remains cloudy. Nokia expects the overall market to decline 15% this year. Nokia had to book a net loss of EUR 127m in the 1Q and will take a restructuring charge in the 2Q of EUR 350-400m. This expense will take off around 5-6 cents of the 2Q EPS, which is expected to be in a range of EUR 0.13-0.16. We remain neutral on Nokia and would like to see a pick-up in the network business before we become more positive.

Another stock we like and is also on our recommendation list is Adecco (ADEN VX; CHF 49.6). Adecco was a star performer in yesterday's session increasing by 15%. The results were well ahead of market estimates. Net income fell by only 4.5% to EUR 65m, versus CSFB's forecast of EUR 41m (consensus range EUR 34-51m). A third of the outperformance stemmed from higher gross margin and the other two thirds from lower SG&A (fell by 10.6%yoy), related to the accelerated branch closures in Q4 last year. Adecco seems to have outperformed the market in each region, for instance in, Adecco Staffing North America revenues rose by 9% against a market up less than 4%. While cost seem to be under control, the revenue outlook remains uncertain. However, the stringent cost control reduces the downside risk to numbers and we believe Adecco offers material upside potential on a 12-month view especially when economic data starts to improve.