Nokia Corporation Interim report October 26, 2017 at 08:00
(CET +1)
Nokia Corporation Financial Report for Q3 and
January-September 2017
Strong earnings driven by Nokia Technologies This is a
summary of the Nokia Corporation financial report for Q3 and
January-September 2017 published today. The complete financial
report for Q3 and January-September 2017 with tables is available
at www.nokia.com/financials. Investors should not rely on summaries
of our financial reports only, but should review the complete
reports with tables.
FINANCIAL HIGHLIGHTS
- Non-IFRS net sales in Q3 2017 of EUR 5.5bn (EUR 6.0bn in Q3
2016). Reported net sales in Q3 2017 of EUR 5.5bn (EUR 5.9bn in Q3
2016). 7% year-on-year net sales decrease (4% decrease on a
constant currency basis) in Q3 2017, on both a non-IFRS and
reported basis.
- Strong non-IFRS gross margin of 42.7% (40.0% in Q3 2016), and
non-IFRS operating margin of 12.1% (9.3% in Q3 2016), driven by
Nokia Technologies and resilience in Nokia's Networks business.
Reported gross margin of 39.7% (37.9% in Q3 2016) and reported
operating margin of negative 4.2% (positive 0.9% in Q3 2016).
- Non-IFRS diluted EPS in Q3 2017 of EUR 0.09 (EUR 0.04 in Q3
2016) benefited from a lower than expected non-IFRS tax rate of
15%. Reported diluted EPS in Q3 2017 of negative EUR 0.03 (negative
EUR 0.02 in Q3 2016).
- Given the strong year-on-year group-level performance with both
gross and operating margins up significantly and continued momentum
in the execution of our strategy, Nokia's Board of Directors plans
to propose a dividend of EUR 0.19 per share for 2017 (EUR 0.17 for
2016).
Nokia's Networks business
- 9% year-on-year net sales decrease (6% decrease on a constant
currency basis) in Q3 2017, primarily due to Ultra Broadband
Networks, reflecting challenges related to market conditions and
certain projects in Mobile Networks, primarily in North America and
Greater China.
- In Q3 2017, on a constant currency basis, the year-on-year net
sales performance in IP Networks and Applications and Global
Services improved, when compared to the year-on-year performance in
Q2 2017. On a constant currency basis, year-on-year net sales grew
by 2% in both Global Services and IP Routing.
- Solid Q3 2017 gross margin of 38.6% supported by continued
operational discipline. Operating margin of 6.9% reflected weak
results in Ultra Broadband Networks, which was partially offset by
improved year-on-year performance in Global Services and IP
Networks and Applications.
Nokia Technologies
- 37% year-on-year net sales increase and 73% year-on-year
operating profit increase in Q3 2017, primarily related to a
settled arbitration in the third quarter 2017. Approximately EUR
180 million of the net sales were non-recurring in nature and
related to catch-up net sales for prior periods. With fast and
effective execution against our patent licensing strategy, we have
approximately doubled our recurring license revenue from EUR 578
million in 2014.
Third quarter and January-September 2017 non-IFRS
results. Refer to note 1, "Basis of Preparation", in the Financial
statement information section for further details 1 |
EUR
million (except for EPS in EUR) |
Q3'17 |
Q3'16 |
YoY change |
Q2'17 |
QoQ change |
Q1-Q3'17 |
Q1-Q3'16 |
YoY change |
Net sales - constant
currency (non-IFRS) |
|
|
(4)% |
|
2% |
|
|
(4)% |
Net sales
(non-IFRS) |
5
537 |
5
956 |
(7)% |
5
629 |
(2)% |
16
555 |
17
241 |
(4)% |
Nokia's Networks
business |
4
823 |
5
329 |
(9)% |
4
971 |
(3)% |
14
696 |
15
744 |
(7)% |
Ultra Broadband Networks |
2
099 |
2
519 |
(17)% |
2
165 |
(3)% |
6
500 |
7
171 |
(9)% |
Global Services |
1
359 |
1
389 |
(2)% |
1
448 |
(6)% |
4
168 |
4
277 |
(3)% |
IP
Networks and Applications |
1
365 |
1
421 |
(4)% |
1
358 |
1% |
4
028 |
4
295 |
(6)% |
Nokia
Technologies |
483 |
353 |
37% |
369 |
31% |
1
099 |
745 |
48% |
Group Common and
Other |
251 |
297 |
(15)% |
307 |
(18)% |
812 |
803 |
1% |
Gross profit
(non-IFRS) |
2
365 |
2
381 |
(1)% |
2
350 |
1% |
6
911 |
6
814 |
1% |
Gross margin %
(non-IFRS) |
42.7% |
40.0% |
270bps |
41.7% |
100bps |
41.7% |
39.5% |
220bps |
Operating profit
(non-IFRS) |
668 |
556 |
20% |
574 |
16% |
1
583 |
1
233 |
28% |
Nokia's Networks
business |
334 |
435 |
(23)% |
406 |
(18)% |
1
064 |
1
085 |
(2)% |
Ultra Broadband Networks |
78 |
278 |
(72)% |
191 |
(59)% |
514 |
589 |
(13)% |
Global Services |
110 |
39 |
182% |
123 |
(11)% |
289 |
175 |
65% |
IP
Networks and Applications |
146 |
119 |
23% |
91 |
60% |
260 |
321 |
(19)% |
Nokia
Technologies |
390 |
226 |
73% |
230 |
70% |
736 |
421 |
75% |
Group Common and
Other |
(56) |
(105) |
(47)% |
(62) |
(10)% |
(217) |
(274) |
(21)% |
Operating margin %
(non-IFRS) |
12.1% |
9.3% |
280bps |
10.2% |
190bps |
9.6% |
7.2% |
240bps |
Financial income and
expenses (non-IFRS) |
(63) |
(78) |
(19)% |
(63) |
0% |
(207) |
(174) |
19% |
Taxes (non-IFRS) |
(90) |
(216) |
(58)% |
(74) |
22% |
(211) |
(491) |
(57)% |
Profit (non-IFRS) |
516 |
264 |
95% |
441 |
17% |
1
159 |
574 |
102% |
Profit attributable to the equity holders of the parent
(non-IFRS) |
514 |
258 |
99% |
449 |
14% |
1
160 |
605 |
92% |
Non-controlling interests (non-IFRS) |
2 |
6 |
(67)% |
(9) |
|
0 |
(31) |
(100)% |
EPS, EUR
diluted (non-IFRS) |
0.09 |
0.04 |
125% |
0.08 |
12% |
0.20 |
0.11 |
82% |
Third quarter and January-September 2017 reported
results. Refer to note 1, "Basis of Preparation", in the Financial
statement information section for further details 1 |
EUR
million (except for EPS in EUR) |
Q3'17 |
Q3'16 |
YoY change |
Q2'17 |
QoQ change |
Q1-Q3'17 |
Q1-Q3'16 |
YoY change |
Net Sales - constant
currency |
|
|
(4)% |
|
2% |
|
|
(3)% |
Net sales |
5
500 |
5
896 |
(7)% |
5
619 |
(2)% |
16
496 |
16
984 |
(3)% |
Nokia's Networks
business |
4
823 |
5
329 |
(9)% |
4
971 |
(3)% |
14
696 |
15
744 |
(7)% |
Ultra Broadband Networks |
2
099 |
2
519 |
(17)% |
2
165 |
(3)% |
6
500 |
7
171 |
(9)% |
Global Services |
1
359 |
1
389 |
(2)% |
1
448 |
(6)% |
4
168 |
4
277 |
(3)% |
IP
Networks and Applications |
1
365 |
1
421 |
(4)% |
1
358 |
1% |
4
028 |
4
295 |
(6)% |
Nokia
Technologies |
483 |
353 |
37% |
369 |
31% |
1
099 |
745 |
48% |
Group Common and
Other |
251 |
297 |
(15)% |
307 |
(18)% |
812 |
803 |
1% |
Non-IFRS
exclusions |
(38) |
(60) |
(37)% |
(11) |
245% |
(59) |
(258) |
(77)% |
Gross profit |
2
185 |
2
233 |
(2)% |
2
236 |
(2)% |
6
546 |
5
841 |
12% |
Gross margin % |
39.7% |
37.9% |
180bps |
39.8% |
(10)bps |
39.7% |
34.4% |
530bps |
Operating
(loss)/profit |
(230) |
55 |
|
(45) |
411% |
(403) |
(1
417) |
(72)% |
Nokia's Networks
business |
334 |
435 |
(23)% |
406 |
(18)% |
1
064 |
1
085 |
(2)% |
Ultra Broadband Networks |
78 |
278 |
(72)% |
191 |
(59)% |
514 |
589 |
(13)% |
Global Services |
110 |
39 |
182% |
123 |
(11)% |
289 |
175 |
65% |
IP
Networks and Applications |
146 |
119 |
23% |
91 |
60% |
260 |
321 |
(19)% |
Nokia
Technologies |
390 |
226 |
73% |
230 |
70% |
736 |
421 |
75% |
Group Common and
Other |
(56) |
(105) |
(47)% |
(62) |
(10)% |
(217) |
(274) |
(21)% |
Non-IFRS
exclusions |
(898) |
(501) |
79% |
(620) |
45% |
(1
986) |
(2
650) |
(25)% |
Operating margin % |
(4.2)% |
0.9% |
(510)bps |
(0.8)% |
(340)bps |
(2.4)% |
(8.3)% |
590bps |
Financial income and
expenses |
(63) |
(80) |
(21)% |
(218) |
(71)% |
(427) |
(215) |
99% |
Taxes |
102 |
(111) |
|
(172) |
|
(223) |
56 |
|
(Loss)/Profit |
(190) |
(133) |
43% |
(433) |
(56)% |
(1
058) |
(1
570) |
(33)% |
(Loss)/Profit attributable to the equity holders of the parent |
(192) |
(119) |
61% |
(423) |
(55)% |
(1
088) |
(1
410) |
(23)% |
Non-controlling interests |
2 |
(14) |
|
(9) |
|
30 |
(161) |
|
EPS, EUR diluted |
(0.03) |
(0.02) |
50% |
(0.07) |
(57)% |
(0.19) |
(0.25) |
(24)% |
Net cash
and other liquid assets |
2 731 |
5 539 |
(51)% |
3 964 |
(31)% |
2 731 |
5 539 |
(51)% |
1 Results
are as reported unless otherwise specified. The financial
information in this report is unaudited. Non-IFRS results exclude
costs related to the acquisition of Alcatel-Lucent and related
integration, goodwill impairment charges, intangible asset
amortization and other purchase price fair value adjustments,
restructuring and associated charges and certain other items that
may not be indicative of Nokia's underlying business performance.
For details, please refer to the non-IFRS exclusions section
included in discussions of both the quarterly and year to date
performance and note 2, "Non-IFRS to reported reconciliation", in
the notes in the Financial statement information in this report.
Change in net sales at constant currency excludes the impact of
changes in exchange rates in comparison to euro, our reporting
currency. For more information on currency exposures, please refer
to note 1, "Basis of Preparation", in the Financial statement
information section in this report. |
|
Dividend and capital structure update
Nokia's Board of Directors plans to propose a dividend of EUR
0.19 per share for 2017. The dividend is Nokia's principal method
of distributing earnings to shareholders, and Nokia targets to
deliver an earnings-based growing dividend. Over the long term,
Nokia targets to grow the dividend by distributing approximately
40% to 70% of non-IFRS EPS, taking into account Nokia's cash
position and expected cash flow generation.
On October 29, 2015, after Nokia's Board of Directors conducted
a thorough analysis of Nokia's potential long-term capital
structure requirements, Nokia announced a EUR 7 billion program to
optimize the efficiency of its capital structure. This program
consists of approximately EUR 4 billion in shareholder
distributions and approximately EUR 3 billion of
de-leveraging. As of the end of the third quarter 2017,
approximately EUR 6.9 billion of our capital structure optimization
program had been completed. The remaining amount of approximately
EUR 0.1 billion relates to planned share repurchases, and is
expected to be completed by the end of 2017. Following the
completion of this program, and factoring in our targeted dividend
for 2017, Nokia is confident that it will have a strong and
efficient capital structure.
Non-IFRS results provide meaningful supplemental information
regarding underlying business performance
In addition to information on our reported IFRS results, we
provide certain information on a non-IFRS, or underlying business
performance, basis. We believe that our non-IFRS results provide
meaningful supplemental information to both management and
investors regarding Nokia's underlying business performance by
excluding the below-described items that may not be indicative of
Nokia's business operating results. These non-IFRS financial
measures should not be viewed in isolation or as substitutes to the
equivalent IFRS measure(s), but should be used in conjunction with
the most directly comparable IFRS measure(s) in the reported
results.
Non-IFRS results exclude costs related to the acquisition of
Alcatel-Lucent and related integration, goodwill impairment
charges, intangible asset amortization and purchase price related
items, restructuring and associated charges, and certain other
items that may not be indicative of Nokia's underlying business
performance. The non-IFRS exclusions are not allocated to the
segments, and hence they are reported only at the Nokia
consolidated level.
Financial discussion
The financial discussion included in this financial report of
Nokia's results comprises the results of Nokia's businesses -
Nokia's Networks business and Nokia Technologies, as well as Group
Common and Other. For more information on our reportable segments,
please refer to note 3, "Segment information", in the Financial
statement information section in this report.
CEO STATEMENT
Nokia delivered excellent non-IFRS earnings-per-share in the
third quarter of EUR 0.09; strong year-on-year group-level
performance, with both gross and operating margins up
significantly; and continued momentum in the execution of our
strategy. Given this good progress, Nokia's Board of Directors
plans to propose a dividend of 19 euro cents for 2017, up 2 cents
from one year ago.
The performance of our patent licensing business was the clear
highlight of the quarter. We reached a favorable arbitration
outcome with LG and have since reached agreement with them on a
license for a longer term than what was set out in the arbitration.
With this fast and effective execution against our patent licensing
strategy, we have approximately doubled our recurring licensing
revenue from EUR 578 million in 2014. I am also particularly
pleased that in 2017 the growth in patent licensing has helped to
offset the sales decline on the Networks side. We have excellent
momentum and considerable opportunity to further develop the
business in 2018 and beyond.
We also saw strength in many parts of our Networks business in
the quarter. On the sales side, we saw constant currency
year-on-year growth in Global Services and IP Routing as well as
our Middle East and Africa, and Asia-Pacific regions. Orders were
up in many areas, including Applications & Analytics, which
logged its fifth consecutive quarter of order growth in Q3, showing
the progress we are making in our strategy to build a strong,
stand-alone software business.
On the profitability side, the overall Networks gross margin of
38.6% was up compared to one year ago, a remarkable achievement in
the context of a market that remains challenging. In addition,
Global Services and IP Networks and Applications delivered
significant improvements in operating margin compared to Q3 2016,
at 8.1% and 10.7%, respectively.
We continued to build momentum in our strategy to expand our
customer base beyond communication service providers. Across the
adjacent segments that we are targeting, year-to-date orders were
up by double-digit percentages and sales were up by 8%, excluding
the former Alcatel-Lucent third-party integration business that we
are currently winding down.
We also added more than 60 new customers in these adjacent
segments so far this year, including China Pacific Insurance
Company, the first large enterprise win for our Nuage business in
China. With cable operators, we won the first customer - WOW! in
the United States - for our new products coming from the
acquisition of Gainspeed, which we are also trialing with almost a
dozen customers, including some of the industry's largest
players.
These results reflect the power of our disciplined operating
model and the advantages of our end-to-end portfolio. In a market
where competition remains robust, operational discipline is a must,
and it is a core strength of Nokia. Furthermore, as the market
transitions to 5G, I believe that the benefits of our portfolio
will become even more apparent given that 5G is about much more
than Radio. It requires Cloud core, IP routing, transport of many
kinds, fixed wireless access, Software-Defined Networking and more
- and Nokia is one of the very few companies that is able to meet
all those needs.
Despite the progress we made in the quarter, we experienced some
challenges in our Mobile Networks business and see a continued
decline in our primary addressable market in 2018. That decline,
which we estimate to be in the range of 2% to 5%, is the result of
the multiple technology transitions underway; robust competition in
China; and near-term headwinds from potential operator
consolidation in a handful of countries.
In terms of the issues we are facing in Mobile Networks, I have
noted in previous quarters that the R&D team in this business
group has faced an extraordinarily high workload. Given this
situation, we have seen some issues with the time taken to converge
some products that have, unfortunately, impacted a small number of
customers. As a result, Mobile Networks has experienced both
revenue pressure and an increase in expected network equipment swap
costs.
My team is fully committed to getting these things back on track
and we are already seeing meaningful improvements. Field
deployments of our new AirScale products were ramping up in all our
geographies, including with key North American customers. These
products help improve operator competitiveness, not just by
addressing cost challenges, but also by setting a new standard for
performance and flexibility. We also saw a meaningful increase in
customer satisfaction scores.
I would also note that despite some additional investment
required in Mobile Networks to maintain product leadership, we are
committed to our EUR 1.2 billion cost savings plan in full-year
2018. These savings come at a slightly higher cost than previously
expected, and we continue to assess opportunities to deliver
further savings in the area of cost-of-goods sold.
Regarding our cash position, I am not satisfied with our
performance in the third quarter and we are redoubling our efforts
in this area. Maintaining our strong balance sheet is a clear
priority.
In short, Q3 was a period in which we faced some challenges, but
delivered good performance in many areas as well as momentum in the
execution of our strategy.
Rajeev Suri President and CEO
NOKIA IN Q3 2017 - NON-IFRS
Non-IFRS net sales and non-IFRS operating profit
Nokia non-IFRS net sales decreased 7% year-on-year and decreased
2% sequentially. On a constant currency basis, Nokia non-IFRS net
sales would have decreased 4% year-on-year and increased 2%
sequentially.
A discussion of our results within Nokia's Networks business,
Nokia Technologies and Group Common and Other is included in the
sections "Nokia's Networks business", "Nokia Technologies" and
"Group Common and Other" below.
Year-on-year changes
EUR
million, non-IFRS |
Net sales |
% change |
Gross profit |
(R&D) |
(SG&A) |
Other income and (expenses) |
Operating profit |
Change in operating margin % |
|
Networks business |
(506) |
(9)% |
(138) |
(17) |
11 |
43 |
(101) |
(130)bps |
|
Nokia Technologies |
130 |
37% |
132 |
7 |
25 |
0 |
164 |
1 670bps |
|
Group Common and
Other |
(46) |
(15)% |
(10) |
11 |
15 |
31 |
49 |
1 310bps |
|
Eliminations |
2 |
|
0 |
0 |
0 |
0 |
0 |
|
|
Nokia |
(419) |
(7)% |
(16) |
3 |
51 |
75 |
112 |
280bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a year-on-year basis, foreign exchange fluctuations had a
negative impact on non-IFRS gross profit, a slightly positive
impact on non-IFRS operating expenses and a slightly positive net
impact on non-IFRS operating profit in the third quarter 2017.
Sequential changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
million, non-IFRS |
Net Sales |
% change |
Gross profit |
(R&D) |
(SG&A) |
Other income and (expenses) |
Operating profit |
Change in operating margin % |
|
Networks business |
(148) |
(3)% |
(85) |
(2) |
6 |
8 |
(72) |
(130)bps |
|
Nokia Technologies |
114 |
31% |
121 |
2 |
25 |
12 |
160 |
1 840bps |
|
Group Common and
Other |
(56) |
(18)% |
(22) |
7 |
3 |
17 |
6 |
(210)bps |
|
Eliminations |
(2) |
|
0 |
0 |
0 |
0 |
0 |
|
|
Nokia |
(92) |
(2)% |
15 |
7 |
34 |
37 |
94 |
190bps |
|
On a sequential basis, foreign exchange fluctuations had a
negative impact on non-IFRS gross profit, a slightly positive
impact on non-IFRS operating expenses and a slightly positive net
impact on non-IFRS operating profit in the third quarter 2017.
Non-IFRS profit attributable to the equity holders of the
parent
Year-on-year changes
EUR
million, non-IFRS |
Operating profit |
Financial income and expenses |
Taxes |
Profit |
Non-controlling interests |
Profit attributable to the equity holders of the parent |
Nokia |
112 |
15 |
126 |
252 |
4 |
256 |
Non-IFRS taxes
Nokia's regional profit mix in the third quarter 2017 resulted
in an unexpectedly low non-IFRS tax rate of 15%.
Non-IFRS financial income and expenses
The net positive fluctuation in financial income and expenses
was primarily due to gains from venture fund investments, partially
offset by an impairment charge related to the performance of
certain private funds investing in intellectual property rights
("IPR").
Sequential changes
EUR
million, non-IFRS |
Operating profit |
Financial income and expenses |
Taxes |
Profit |
Non-controlling interests |
Profit attributable to the equity holders of the parent |
Nokia |
94 |
0 |
(16) |
75 |
(11) |
65 |
Non-IFRS taxes
Nokia's regional profit mix in the third quarter 2017 resulted
in an unexpectedly low non-IFRS tax rate of 15%.
Non-IFRS financial income and expenses
The flat financial income and expenses were primarily due to
income related to gains from venture fund investments and foreign
exchange fluctuations, fully offset by an impairment charge related
to the performance of certain private funds investing in IPR.
NOKIA IN Q3 2017 - REPORTED
FINANCIAL DISCUSSION
Net sales
Nokia net sales decreased 7% year-on-year and decreased 2%
sequentially. On a constant currency basis, Nokia net sales would
have decreased 4% year-on-year and would have increased 2%
sequentially.
Year-on-year discussion
The year-on-year decrease in net sales in the third quarter 2017
was primarily due to Nokia's Networks business and Group Common and
Other, partially offset by Nokia Technologies and lower non-IFRS
exclusions related to a purchase price allocation adjustment
related to a reduced valuation of deferred revenue that existed on
Alcatel-Lucent's balance sheet at the time of the acquisition.
Sequential discussion
The sequential decrease in Nokia net sales in the third quarter
2017 was primarily due to Nokia's Networks business, Group Common
and Other and higher non-IFRS exclusions related to product
portfolio strategy costs, partially offset by Nokia
Technologies.
Operating profit
Year-on-year discussion
In the third quarter 2017, Nokia recorded an operating loss
compared to an operating profit in the third quarter 2016. The
change was primarily due to a net negative fluctuation in other
income and expenses and lower gross profit, partially offset by
lower selling, general and administrative ("SG&A")
expenses.
The decrease in gross profit was primarily due to lower gross
profit in Nokia's Networks business, higher non-IFRS exclusions and
lower gross profit in Group Common and Other, partially offset by
Nokia Technologies.
The decrease in SG&A expenses was primarily due to Nokia
Technologies, Group Common and Other and Nokia's Networks
business.
The net negative fluctuation in Nokia's other income and
expenses was primarily related to higher non-IFRS exclusions
attributable to higher restructuring and associated charges and an
impairment charge, partially offset by Nokia's Networks business
and Group Common and Other.
In the third quarter 2017, Nokia recorded a non-cash charge to
other income and expenses of EUR 141 million, due to the impairment
of goodwill related to its digital health business, which is part
of Nokia Technologies. Following third quarter 2017 results, Nokia
adjusted its long-term cash flow projections for its digital health
cash generating unit, and recorded an impairment charge. The
impairment charge was excluded from our non-IFRS results and
allocated to the carrying amount of goodwill held within the
digital health cash generating unit, which was reduced to zero.
Going forward, Nokia Technologies aims to have a larger impact with
consumers and the medical community through a more focused, more
agile digital health business.
Sequential discussion
In the third quarter 2017, the increase in operating loss was
primarily due to a net negative fluctuation in other income and
expenses and lower gross profit, partially offset by lower SG&A
expenses.
The decrease in gross profit was primarily due to lower gross
profit in Nokia's Networks business, higher non-IFRS exclusions
related to product portfolio strategy costs and lower gross profit
in Group Common and Other, partially offset by Nokia
Technologies.
The decrease in SG&A expenses was primarily due to Nokia
Technologies and lower non-IFRS exclusions primarily related to
transaction and integration costs.
The net negative fluctuation in Nokia's other income and
expenses was primarily due to higher non-IFRS exclusions
attributable to an impairment charge and higher restructuring and
associated charges, partially offset by Group Common and Other and
Nokia Technologies.
In the third quarter 2017, Nokia recorded a non-cash charge to
other income and expenses of EUR 141 million, due to the impairment
of goodwill related to its digital health business, which is part
of Nokia Technologies. Following third quarter 2017 results, Nokia
adjusted its long-term cash flow projections for its digital health
cash generating unit, and recorded an impairment charge. The
impairment charge was excluded from our non-IFRS results and
allocated to the carrying amount of goodwill held within the
digital health cash generating unit, which was reduced to zero.
Going forward, Nokia Technologies aims to have a larger impact with
consumers and the medical community through a more focused, more
agile digital health business.
Profit/(Loss) attributable to the equity holders of the
parent
Year-on-year discussion
In the third quarter 2017, the increase in loss attributable to
the equity holders of the parent was primarily due to operating
loss in the third quarter 2017 compared to an operating profit in
the third quarter 2016. This was partially offset by a tax benefit
in the third quarter 2017, compared to a tax expense in the third
quarter 2016, and, to a lesser extent, a net positive fluctuation
in financial income and expenses.
The net positive fluctuation in financial income and expenses
was primarily due to gains from venture fund investments, partially
offset by an impairment charge related to the performance of
certain private funds investing in IPR.
The change in taxes from an expense in the third quarter 2016 to
a benefit in the third quarter 2017 was primarily due to lower
taxes resulting from a change in Nokia's regional profit mix.
Sequential discussion
In the third quarter 2017, the decrease in loss attributable to
the equity holders of the parent was primarily due to a tax benefit
in the third quarter 2017, compared to a tax expense in the second
quarter 2017, and a net positive fluctuation in financial income
and expenses. This was partially offset by an increase in operating
loss.
The net positive fluctuation in financial income and expenses
was primarily due to the absence of non-IFRS exclusions related to
Nokia's tender offer to purchase the 6.50% notes due January 15,
2028, the 6.45% notes due March 15, 2029 and the 5.375% notes due
May 15, 2019, which negatively affected the second quarter 2017, as
well as higher gains related to venture fund investments. This was
partially offset by an impairment charge related to the performance
of certain private funds investing in IPR.
The change in taxes from an expense in the second quarter 2017,
to a benefit in the third quarter 2017, was primarily due to the
absence of both a non-recurring change to uncertain tax positions
and a non-recurring tax expense related to deferred tax valuation
allowance.
Description of non-IFRS exclusions in Q3 2017
Non-IFRS exclusions consist of costs related to the acquisition
of Alcatel-Lucent and related integration, goodwill impairment
charges, intangible asset amortization and purchase price related
items, restructuring and associated charges, and certain other
items that may not be indicative of Nokia's underlying business
performance. For additional details, please refer to note 2,
"Non-IFRS to reported reconciliation", in the Financial statement
information section in this report.
|
|
|
|
|
|
EUR
million |
Q3'17 |
Q3'16 |
YoY change |
Q2'17 |
QoQ change |
Net sales |
(38) |
(60) |
(37)% |
(11) |
245% |
Gross profit |
(181) |
(149) |
21% |
(114) |
59% |
R&D |
(177) |
(179) |
(1)% |
(172) |
3% |
SG&A |
(139) |
(145) |
(4)% |
(151) |
(8)% |
Other income and
expenses |
(401) |
(29) |
1
283% |
(182) |
120% |
Operating (loss)/profit |
(898) |
(501) |
79% |
(620) |
45% |
Financial income and
expenses |
0 |
(1) |
(100)% |
(156) |
(100)% |
Taxes |
192 |
105 |
83% |
(98) |
(296)% |
(Loss)/Profit |
(706) |
(397) |
78% |
(873) |
(19)% |
(Loss)/Profit
attributable to the shareholders of the parent |
(706) |
(378) |
87% |
(873) |
(19)% |
Non-controlling interests |
0 |
(20) |
(100)% |
(1) |
(100)% |
Non-IFRS exclusions in net sales
In the third quarter 2017, non-IFRS exclusions in net sales
amounted to EUR 38 million, and related to product portfolio
strategy costs and a purchase price allocation adjustment related
to a reduced valuation of deferred revenue that existed on
Alcatel-Lucent's balance sheet at the time of the acquisition.
Non-IFRS exclusions in operating profit
In the third quarter 2017, non-IFRS exclusions in operating
profit amounted to EUR 898 million, and were primarily due to
non-IFRS exclusions that adversely affected gross profit, research
and development ("R&D") expenses, SG&A expenses and other
income and expenses as follows:
In the third quarter 2017, non-IFRS exclusions in gross profit
amounted to EUR 181 million, and were primarily due to product
portfolio strategy costs related to the acquisition of
Alcatel-Lucent, and the deferred revenue.
In the third quarter 2017, non-IFRS exclusions in R&D
expenses amounted to EUR 177 million, and were primarily due to the
amortization of intangible assets resulting from the acquisition of
Alcatel-Lucent and, to a lesser extent, product portfolio strategy
costs related to the acquisition of Alcatel-Lucent.
In the third quarter 2017, non-IFRS exclusions in SG&A
expenses amounted to EUR 139 million, and were primarily due to the
amortization of intangible assets resulting from the acquisition of
Alcatel-Lucent and integration and transaction related costs.
In the third quarter 2017, non-IFRS exclusions in other income
and expenses amounted to EUR 401 million, and were primarily due to
restructuring and associated charges for Nokia's cost reduction and
efficiency improvement initiatives, and a EUR 141 million
impairment charge.
Non-IFRS exclusions in profit/(loss) attributable to the equity
holders of the parent
In the third quarter 2017, non-IFRS exclusions in profit/(loss)
attributable to the equity holders of the parent amounted to EUR
706 million, and were primarily due to the non-IFRS exclusions
affecting operating profit, in addition to non-IFRS exclusions that
adversely affected financial income and expenses and taxes as
follows:
In the third quarter 2017, non-IFRS exclusions in financial
income and expenses amounted to zero.
In the third quarter 2017, non-IFRS exclusions in taxes amounted
to EUR 192 million, and were due to non-IFRS exclusions in
operating profit.
Cost savings
program
The following table summarizes the financial information related
to our cost savings program, as of the end of the third quarter
2017. Balances related to previous Nokia and Alcatel-Lucent
restructuring and cost savings programs have been included as part
of this overall cost savings program as of the second quarter
2016.
In
EUR million, approximately |
Q3'17 |
Opening balance of
restructuring and associated liabilities |
750 |
+ Charges in the
quarter |
260 |
- Cash outflows
in the quarter |
130 |
= Ending balance
of restructuring and associated liabilities |
880 |
of which
restructuring provisions |
760 |
of which other
associated liabilities |
120 |
|
|
Total expected
restructuring and associated charges |
1 900 |
- Cumulative
recorded |
1 260 |
= Charges
remaining to be recorded |
640 |
|
|
Total expected
restructuring and associated cash outflows |
2 250 |
- Cumulative
recorded |
830 |
= Cash outflows
remaining to be recorded |
1 420 |
The following table summarizes our full year 2016 results and
future expectations related to our cost savings program and network
equipment swaps.
|
Actual |
Expected amounts for |
In EUR million, approximately rounded to the nearest EUR 50
million |
2016 |
FY 2017 as of the end of |
FY 2018 as of the end of |
FY 2019 and beyond as of the end of |
Total as of the end of |
|
|
Q2'17 |
Q3'17 |
Q2'17 |
Q3'17 |
Q2'17 |
Q3'17 |
Q2'17 |
Q3'17 |
Total cost savings |
550 |
250 |
250 |
400 |
400 |
0 |
0 |
1
200 |
1
200 |
- operating expenses |
350 |
100 |
150 |
350 |
300 |
0 |
0 |
800 |
800 |
- cost of sales |
200 |
150 |
100 |
50 |
100 |
0 |
0 |
400 |
400 |
Restructuring and associated charges |
750 |
750 |
650 |
200 |
500 |
0 |
0 |
1
700 |
1
900 |
Restructuring and associated cash outflows |
400 |
750 |
600 |
550 |
650 |
450 |
600 |
2
150 |
2
250 |
Charges related to network equipment swaps |
150 |
450 |
550 |
300 |
550 |
0 |
150 |
900 |
1
400 |
Cash outflows related to network equipment swaps |
150 |
450 |
600 |
300 |
500 |
0 |
150 |
900 |
1 400 |
In full year 2016, the actual total cost savings benefitted from
lower incentive accruals, related to the full year 2016 financial
performance. Lower incentive accruals drove more than half of the
higher than previously expected decrease in total costs in 2016,
and this is expected to reverse in 2017, assuming full year 2017
financial performance in-line with our expectations. On a
cumulative basis, Nokia continues to be on track to achieve the
targeted EUR 1.2 billion of total cost savings in full year
2018.
The increase in restructuring and associated charges is expected
to be approximately EUR 200 million, approximately half of which is
related to a non-cash US pension curtailment and the other half
related to a number of smaller items, which are expected to have an
approximately EUR 100 million cash impact.
The approximately EUR 500 million increase in estimated charges
and cash outflows related to network equipment swaps was primarily
due to the extended time taken to converge a limited set of
products. We are now fully in the deployment phase of our swaps
program. In addition to the increase in estimated charges and cash
outflows, the program was also extended into 2019.
OUTLOOK
|
Metric |
Guidance |
Commentary |
Nokia |
Annual cost savings for Nokia, excluding Nokia Technologies |
Approximately EUR 1.2 billion of total annual cost savings to be
achieved in full year 20181 |
Compared to the combined non-IFRS operating costs of Nokia and
Alcatel-Lucent for full year 2015, excluding Nokia Technologies.
Nokia expects approximately EUR 800 million of the cost savings to
come from operating expenses and approximately EUR 400 million from
cost of sales. Restructuring and associated charges are
expected to total approximately EUR 1.9 billion. Restructuring and
associated cash outflows are expected to total approximately EUR
2.25 billion.(This is an update to earlier commentary for
restructuring and associated charges to total approximately EUR 1.7
billion and restructuring and associated cash outflows to total
approximately EUR 2.15 billion.) |
|
Network equipment swaps |
Approximately EUR 1.4 billion in total1 (update) |
The charges related to network equipment swaps are being recorded
as non-IFRS exclusions, and therefore do not affect Nokia's
non-IFRS operating profit.(This is an update to earlier guidance
for network equipment swaps to be approximately EUR 900 million
total.) |
|
Non-IFRS financial income and expenses |
Expense of approximately EUR 250 million in full year 2017 |
Primarily includes net interest expenses related to
interest-bearing liabilities and defined benefit pension and other
post-employment benefit plans, as well as the impact of foreign
exchange rate fluctuations on certain balance sheet items.Nokia
expects cash outflows related to non-IFRS financial income and
expenses to be approximately EUR 200 million in full year
2017. |
|
Non-IFRS tax rate |
Approximately 20% for full year 2017 (update) |
Nokia's non-IFRS tax rate in full year 2017 is expected to be
influenced by factors including regional profit mix.(This is an
update to earlier guidance and commentary for the non-IFRS tax rate
to be between 25% to 30% for full year 2017.)Nokia expects cash
outflows related to taxes to be approximately EUR 800 million for
full year 2017. |
|
Capital expenditures |
Approximately EUR 600 million in full year 2017 (update) |
Primarily attributable to Nokia's Networks business.(This is an
update to earlier guidance for capital expenditures to be
approximately EUR 500 million for full year 2017.) |
Nokia's Networks business |
Net sales |
Decline in line with the primary addressable market in full year
2017 |
We currently expect market conditions for full year
2017 to be slightly more challenging than earlier anticipated, and
we are providing new commentary on our primary addressable market
for full year 2018. Guidance for Nokia's Networks business in 2018
is planned to be provided in conjunction with Nokia's Report for Q4
and Full Year 2017.Nokia's outlook for net sales and operating
margin for Nokia's Networks business are expected to be influenced
by factors including: An approximately 4 to 5 percent decline in
the primary addressable market for Nokia's Networks business in
full year 2017, compared to the full year 2016, on a constant
currency basis (This is an update to earlier commentary for a 3 to
5 percent decline.); An approximately 2 to 5 percent decline in the
primary addressable market for Nokia's Networks business in full
year 2018, compared to the full year 2017, on a constant currency
basis (new commentary for our primary addressable market in full
year 2018); Uncertainty related to the timing of completions and
acceptances of certain projects, particularly in the second half of
2017 and first half of 2018 (new commentary for the first half of
2018); Robust competition in China, which is expected to adversely
affect the fourth quarter 2017 in particular (new commentary);
Uncertainty related to potential mergers or acquisitions by our
customers (new commentary); Competitive industry dynamics; Product
and regional mix; The timing of major network deployments;
Execution of cost savings and reinvestment plans, with operating
expenses down on a year-on-year basis in full year 2017; and The
level of R&D investment needed to maintain product
competitiveness and accelerate 5G. |
Operating margin |
8-10% in full year 2017 |
Nokia Technologies |
Net sales |
Not provided |
Due to risks and uncertainties in determining the timing and value
of significant licensing agreements, Nokia believes it is not
appropriate to provide an annual outlook for full year 2017. For
patent and brand licensing, Nokia is now disclosing net sales on a
quarterly basis, rather than providing an annualized net sales run
rate. In the third quarter 2017, Nokia announced plans to focus on
patent, brand and technology licensing and target faster growth in
digital health and accelerate growth in that market, while
optimizing investments in virtual reality. Due to a reduced focus
on digital media, Nokia no longer believes it is appropriate to
provide an annual outlook for digital health and digital media for
the full year 2017 (new commentary). (This is an update to earlier
commentary for total net sales from digital health and digital
media to grow year-on-year in full year 2017, primarily influenced
by increased consumer adoption of our digital health and digital
media products.) |
1For further details related to the cost savings and network
equipment swaps guidance, please refer to the "Cost savings
program" section above.
RISKS AND FORWARD-LOOKING STATEMENTS
a It should be noted that Nokia and its businesses are exposed
to various risks and uncertainties and certain statements herein
that are not historical facts are forward-looking statements,
including, without limitation, those regarding: A) our ability to
integrate acquired businesses into our operations and achieve the
targeted business plans and benefits, including targeted benefits,
synergies, cost savings and efficiencies; B) expectations, plans or
benefits related to our strategies and growth management; C)
expectations, plans or benefits related to future performance of
our businesses; D) expectations, plans or benefits related to
changes in organizational and operational structure; E)
expectations regarding market developments, general economic
conditions and structural changes; F) expectations and targets
regarding financial performance, results, operating expenses,
taxes, currency exchange rates, hedging, cost savings and
competitiveness, as well as results of operations including
targeted synergies and those related to market share, prices, net
sales, income and margins; G) expectations, plans or benefits
related to any future collaboration or to business collaboration
agreements or patent license agreements or arbitration awards,
including income to be received under any collaboration or
partnership, agreement or award; H) timing of the deliveries of our
products and services; I) expectations and targets regarding
collaboration and partnering arrangements, joint ventures or the
creation of joint ventures, and the related administrative, legal,
regulatory and other conditions, as well as our expected customer
reach; J) outcome of pending and threatened litigation,
arbitration, disputes, regulatory proceedings or investigations by
authorities; K) expectations regarding restructurings, investments,
capital structure optimization efforts, uses of proceeds from
transactions, acquisitions and divestments and our ability to
achieve the financial and operational targets set in connection
with any such restructurings, investments, capital structure
optimization efforts, divestments and acquisitions; and L)
statements preceded by or including "believe," "expect,"
"anticipate," "foresee," "sees," "target," "estimate," "designed,"
"aim," "plans," "intends," "focus," "continue," "project,"
"should," "is to," "will" or similar expressions. These statements
are based on management's best assumptions and beliefs in light of
the information currently available to it. Because they involve
risks and uncertainties, actual results may differ materially from
the results that we currently expect. Factors, including risks and
uncertainties that could cause these differences include, but are
not limited to: 1) our ability to execute our strategy, sustain or
improve the operational and financial performance of our business
and correctly identify and successfully pursue business
opportunities or growth; 2) our ability to achieve the anticipated
benefits, synergies, cost savings and efficiencies of acquisitions,
including the acquisition of Alcatel-Lucent, and our ability to
implement changes to our organizational and operational structure
efficiently; 3) general economic and market conditions and other
developments in the economies where we operate; 4) competition and
our ability to effectively and profitably compete and invest in new
competitive high-quality products, services, upgrades and
technologies and bring them to market in a timely manner; 5) our
dependence on the development of the industries in which we
operate, including the cyclicality and variability of the
information technology and telecommunications industries; 6) our
global business and exposure to regulatory, political or other
developments in various countries or regions, including emerging
markets and the associated risks in relation to tax matters and
exchange controls, among others; 7) our ability to manage and
improve our financial and operating performance, cost savings,
competitiveness and synergies generally or after the acquisition of
Alcatel-Lucent; 8) our dependence on a limited number of customers
and large multi-year agreements; 9) exchange rate fluctuations, as
well as hedging activities; 10) Nokia Technologies' ability to
protect its IPR and to maintain and establish new sources of patent
licensing income and IPR-related revenues, particularly in the
smartphone market; 11) our ability to successfully realize the
expectations, plans or benefits related to any future collaboration
or business collaboration agreements and patent license agreements
or arbitration awards, including income to be received under any
collaboration, partnership, agreement or arbitration award; 12) our
dependence on IPR technologies, including those that we have
developed and those that are licensed to us, and the risk of
associated IPR-related legal claims, licensing costs and
restrictions on use; 13) our exposure to direct and indirect
regulation, including economic or trade policies, and the
reliability of our governance, internal controls and compliance
processes to prevent regulatory penalties in our business or in our
joint ventures; 14) our ability to identify and remediate material
weaknesses in our internal control over financial reporting; 15)
our reliance on third-party solutions for data storage and service
distribution, which expose us to risks relating to security,
regulation and cybersecurity breaches; 16) inefficiencies,
breaches, malfunctions or disruptions of information technology
systems; 17) Nokia Technologies' ability to generate net sales and
profitability through licensing of the Nokia brand, technology
licensing and the development and sales of products and services
for instance in digital health, as well as other business ventures,
which may not materialize as planned; 18) our exposure to various
legislative frameworks and jurisdictions that regulate fraud and
enforce economic trade sanctions and policies, and the possibility
of proceedings or investigations that result in fines, penalties or
sanctions; 19) adverse developments with respect to customer
financing or extended payment terms we provide to customers; 20)
the potential complex tax issues, tax disputes and tax obligations
we may face in various jurisdictions, including the risk of
obligations to pay additional taxes; 21) our actual or anticipated
performance, among other factors, which could reduce our ability to
utilize deferred tax assets; 22) our ability to retain, motivate,
develop and recruit appropriately skilled employees; 23)
disruptions to our manufacturing, service creation, delivery,
logistics and supply chain processes, and the risks related to our
geographically-concentrated production sites; 24) the impact of
litigation, arbitration, agreement-related disputes or product
liability allegations associated with our business; 25) our ability
to optimize our capital structure as planned and re-establish our
investment grade credit rating or otherwise improve our credit
ratings; 26) our ability to achieve targeted benefits from or
successfully achieve the required administrative, legal, regulatory
and other conditions and implement planned transactions, as well as
the liabilities related thereto; 27) our involvement in joint
ventures and jointly-managed companies; 28) the carrying amount of
our goodwill may not be recoverable; 29) uncertainty related to the
amount of dividends and equity return we are able to distribute to
shareholders for each financial period; 30) pension costs, employee
fund-related costs, and healthcare costs; and 31) risks related to
undersea infrastructure, as well as the risk factors specified on
pages 67 to 85 of our 2016 annual report on Form 20-F under
"Operating and financial review and prospects-Risk factors" and in
our other filings or documents furnished with the U.S. Securities
and Exchange Commission. Other unknown or unpredictable factors or
underlying assumptions subsequently proven to be incorrect could
cause actual results to differ materially from those in the
forward-looking statements. We do not undertake any obligation to
publicly update or revise forward-looking statements, whether as a
result of new information, future events or otherwise, except to
the extent legally required.
The financial report was authorized for issue by management on
October 25, 2017.
MEDIA AND INVESTOR CONTACTS:
Communications, tel. +358 10 448 4900 email:
press.services@nokia.com Investor Relations, tel. +358 4080 3 4080
email: investor.relations@nokia.com
- Nokia plans to publish its fourth quarter and annual 2017
results on February 1, 2018.
About Nokia We create the technology to connect the
world. Powered by the research and innovation of Nokia Bell Labs,
we serve communications service providers, governments, large
enterprises and consumers, with the industry's most complete,
end-to-end portfolio of products, services and licensing.
From the enabling infrastructure for 5G and the Internet of
Things, to emerging applications in digital health, we are shaping
the future of technology to transform the human experience.
www.nokia.com
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