This is a summary of the Nokia Corporation financial report for Q2
and half year 2016 published today. The complete financial report
for Q2 and half year 2016 with tables is available at
http://nokia.com/financials. Investors should not rely on summaries
of our financial reports only, but should review the complete
financial reports with tables.
FINANCIAL HIGHLIGHTS
- Non-IFRS net sales in Q2 2016 of EUR 5.7 billion (reported: EUR
5.6 billion). In the year-ago quarter, non-IFRS net sales would
have been EUR 6.4 billion on a comparable combined company basis
(reported: EUR 2.9 billion on a Nokia stand-alone basis).
- Non-IFRS diluted EPS in Q2 2016 of EUR 0.03 (reported: EUR
negative 0.12).
- Raised annual cost savings target to approximately EUR 1.2
billion of total annual cost savings to be achieved in full year
2018, compared to the combined non-IFRS operating costs of Nokia
and Alcatel-Lucent for full year 2015, excluding Nokia
Technologies. Related to this, Nokia recorded approximately EUR 600
million of restructuring and associated charges in the second
quarter 2016.
Nokia's Networks business
- 11% year-on-year net sales decrease in Q2 2016. Consistent with
our outlook for the wireless infrastructure market, net sales were
weak in Mobile Networks within Ultra Broadband Networks, and
accounted for approximately 80% of the overall decrease in Nokia's
Networks business. IP Networks and Applications also contributed to
the decrease. This was partially offset by strong growth in Fixed
Networks within Ultra Broadband Networks.
- In Q2 2016, solid gross margin of 37.4% and operating margin of
6.0% were adversely affected by a customer in Latin America
undergoing judicial recovery. Excluding this, gross margin would
have been approximately 38% and operating margin would have been
nearly 7%.
Nokia Technologies
- 11% year-on-year net sales decrease in Q2 2016. Excluding the
impact of non-recurring items that benefitted the year-ago quarter,
Nokia Technologies net sales would have grown by approximately 10%
year-on-year, primarily due to higher intellectual property
licensing income from existing licensees.
- Announced an expansion of the patent cross license agreement
with Samsung on July 13, 2016 to cover certain additional patent
portfolios, reinforcing Nokia's leadership in technologies for the
programmable world. The expansion of the agreement occurred
subsequent to the end of the second quarter 2016, and therefore did
not impact the second quarter of 2016 financials. Instead, the
expanded agreement will have a positive impact to Nokia
Technologies starting from the third quarter of 2016. Nokia expects
total annualized net sales related to patent and brand licensing to
grow to a run rate of approximately EUR 950 million by the end of
2016.
Q2 and
January-June 2016 non-IFRS results. See note 1 to the interim
financial statements for further details 1,2 |
|
|
Combined company
histori-cals2 |
|
|
|
|
|
Combined company
histori-cals2 |
|
EUR million |
Q2'16 |
Q2'15 |
YoY
change |
Q1'16 |
QoQ
change |
|
Q1-Q2'16 |
Q1-Q2'15 |
YoY
change |
Net sales - constant currency (non-IFRS) |
|
|
(9)% |
|
2% |
|
|
|
(9)% |
Net sales (non-IFRS) |
5 676 |
6 363 |
(11)% |
5 603 |
1% |
|
11 279 |
12 492 |
(10)% |
Nokia's Networks business |
5 228 |
5 895 |
(11)% |
5 181 |
1% |
|
10 409 |
11 557 |
(10)% |
Ultra Broadband Networks |
3 807 |
4 303 |
(12)% |
3 729 |
2% |
|
7 535 |
8 530 |
(12)% |
IP Networks and
Applications |
1 421 |
1 593 |
(11)% |
1 452 |
(2)% |
|
2 873 |
3 027 |
(5)% |
Nokia Technologies |
194 |
219 |
(11)% |
198 |
(2)% |
|
391 |
492 |
(21)% |
Group Common and Other |
271 |
254 |
7% |
236 |
15% |
|
507 |
457 |
11% |
Gross profit (non-IFRS) |
2 202 |
2 495 |
(12)% |
2 205 |
0% |
|
4 407 |
4 759 |
(7)% |
Gross margin % (non-IFRS) |
38.8% |
39.2% |
(40)bps |
39.4% |
(60)bps |
|
39.1% |
38.1% |
100 bps |
Operating profit (non-IFRS) |
332 |
649 |
(49)% |
345 |
(4)% |
|
677 |
925 |
(27)% |
Nokia's Networks business |
312 |
511 |
(39)% |
337 |
(7)% |
|
649 |
720 |
(10)% |
Ultra Broadband Networks |
228 |
308 |
(26)% |
234 |
(3)% |
|
462 |
476 |
(3)% |
IP Networks and
Applications |
84 |
203 |
(59)% |
103 |
(18)% |
|
187 |
244 |
(23)% |
Nokia Technologies |
89 |
120 |
(26)% |
106 |
(16)% |
|
195 |
297 |
(34)% |
Group Common and Other |
(68) |
18 |
|
(99) |
|
|
(167) |
(92) |
|
Operating margin %
(non-IFRS) |
5.8% |
10.2% |
(440)bps |
6.2% |
(40)bps |
|
6.0% |
7.4% |
(140)
bps |
Q2 and
January-June 2016 reported results, unless otherwise specified. See
note 1 to the interim financial statements for further
details1,3 |
|
|
Nokia stand-alone his- tori-
cals3 |
|
|
|
|
|
Nokia stand-alone his- tori-
cals3 |
|
EUR million (except for
EPS in EUR) |
Q2'16 |
Q2'15 |
YoY
change |
Q1'16 |
QoQ
change |
|
Q1-Q2'16 |
Q1-
Q2'15 |
YoY
change |
Net Sales - constant currency |
|
|
93% |
|
2% |
|
|
|
89% |
Net sales |
5 583 |
2 919 |
91% |
5 499 |
2% |
|
11 082 |
5 854 |
89% |
Nokia's Networks business |
5 228 |
2 729 |
92% |
5 181 |
1% |
|
10 409 |
5 400 |
93% |
Ultra Broadband Networks |
3 807 |
2 440 |
56% |
3 729 |
2% |
|
7 535 |
4 795 |
57% |
IP Networks and
Applications |
1 421 |
289 |
392% |
1 452 |
(2)% |
|
2 873 |
605 |
375% |
Nokia Technologies |
194 |
194 |
0% |
198 |
(2)% |
|
391 |
461 |
(15)% |
Group Common and Other |
271 |
0 |
|
236 |
15% |
|
507 |
0 |
|
Non-IFRS exclusions |
(93) |
0 |
|
(104) |
|
|
(197) |
0 |
|
Gross profit |
2 028 |
1 343 |
51% |
1 554 |
31% |
|
3 582 |
2 527 |
42% |
Gross margin % |
36.3% |
46.0% |
(970)bps |
28.3% |
800bps |
|
32.3% |
43.2% |
(1 090) bps |
Operating (loss)/profit |
(760) |
493 |
|
(712) |
|
|
(1 472) |
721 |
|
Nokia's Networks business |
312 |
331 |
(6)% |
337 |
(7)% |
|
649 |
442 |
47% |
Ultra Broadband Networks |
228 |
312 |
(27)% |
234 |
(3)% |
|
462 |
445 |
4% |
IP Networks and
Applications |
84 |
19 |
342% |
103 |
(18)% |
|
187 |
(3) |
|
Nokia Technologies |
89 |
108 |
(18)% |
106 |
(16)% |
|
195 |
294 |
(34)% |
Group Common and Other |
(68) |
57 |
|
(99) |
|
|
(167) |
8 |
|
Non-IFRS exclusions |
(1 092) |
(3) |
|
(1 057) |
3% |
|
(2 149) |
(24) |
|
Operating margin % |
(13.6)% |
16.9% |
(3 050)bps |
(12.9)% |
(70)bps |
|
(13.3)% |
12.3% |
(2 560) bps |
Profit (non-IFRS) |
171 |
336 |
(49)% |
139 |
23% |
|
310 |
519 |
(40)% |
(Loss)/profit |
(726) |
338 |
|
(613) |
18% |
|
(1 338) |
507 |
|
EPS, diluted (non-IFRS) |
0.03 |
0.09 |
(67)% |
0.03 |
0% |
|
0.06 |
0.14 |
(57)% |
EPS, diluted |
(0.12) |
0.09 |
|
(0.09) |
|
|
(0.21) |
0.13 |
|
Net cash and other liquid
assets |
7
077 |
3
830 |
85% |
8
246 |
(14)% |
|
7
077 |
3
830 |
85% |
1Results
are as reported unless otherwise specified. The results information
in this report is unaudited. Non-IFRS results exclude costs related
to the Alcatel-Lucent transaction 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 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 to the financial statements
attached to this report. A reconciliation of the Q2 2015 non-IFRS
combined company results to the reported results can be found in
the "Nokia provides recast segment results for 2015 reflecting new
financial reporting structure" stock exchange release published on
April 22, 2016. 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 notes to the
financial statements attached to this report. |
2 Combined
company historicals reflect Nokia's new operating and financial
reporting structure, including Alcatel-Lucent, and are presented as
additional information as described in the stock exchange release
published on April 22, 2016. For more information on the combined
company historicals, please refer to note 1, "Basis of
Preparation", in the notes to the financial statements attached to
this report. |
3 Nokia
standalone historicals are the recasting of Nokia's historical
standalone financial results, reflecting Nokia's updated segment
reporting structure, excluding Alcatel-Lucent. Beginning from the
first quarter 2016, Nokia results include those of Alcatel-Lucent
on a consolidated basis. Accordingly, Nokia results beginning from
the first quarter 2016 are not directly comparable to prior period
Nokia standalone results. |
SUBSEQUENT EVENTS
Nokia and Samsung expand their intellectual property cross
license
On July 13, 2016, Nokia announced that Nokia and Samsung have
agreed terms to expand their patent cross license agreement to
cover certain additional patent portfolios of both parties. This
agreement is in addition to the outcome of the arbitration between
the two companies that was announced on February 1, 2016.
The agreement expands access for each company to patented
technologies of the other and reinforces Nokia's leadership in
technologies for the programmable world. With this expansion, Nokia
expects a positive impact to the net sales of Nokia Technologies
starting from the third quarter of 2016.
With this expanded agreement, Nokia Technologies' total
annualized net sales related to patent and brand licensing is
expected to grow to a run rate of approximately EUR 950 million by
the end of 2016.
NON-IFRS RESULTS
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 Alcatel-Lucent
transaction 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.
CEO STATEMENT
Nokia's second quarter results were largely as expected and
reflect solid execution in the midst of a challenging market and
the ongoing integration of Alcatel-Lucent. When we announced our
first quarter results, I said that we did not expect to see typical
seasonal patterns in the first half of the year, and that
prediction proved to be correct. Net sales were slightly up
sequentially in Q2, while operating margin was slightly down, in
part reflecting a meaningful negative impact from one of our major
customers in Latin America.
During the quarter we continued to make excellent progress in
many areas. We moved rapidly forward with our integration and cost
savings efforts; saw robust growth in our Fixed Networks business;
announced the acquisition of Gainspeed in order to accelerate our
progress with cable operators; closed the acquisition of Withings;
reached a licensing deal that will see the Nokia brand return to
smartphones and tablets; and more.
I was particularly pleased that the work done in the second
quarter to reach an agreement with Samsung on an expanded
intellectual property licensing deal came to fruition. After the
arbitration results were announced in February, we said that there
was still more to come from Samsung and have now delivered on that,
with the related financial impact starting in the third
quarter.
The decline of our topline remains a concern, and reflects
challenging market conditions. While we do not expect those
conditions to improve in the near term, we believe we are
well-positioned given the scope of our portfolio, focus on
operational discipline, strengthening sales execution, and
opportunities in the evolution from 4G towards 5G.
In fact, we are already starting to work with customers to help
them move to 5G-ready architectures in the core, with a focus on
software-defined networking and cloud technologies. As this process
takes place, we expect there to be further evolution of 4G radio
including more carrier aggregation in order to meet demands for
capacity, speed and spectrum utilization. Our AirScale radio
platform, which can support different LTE-Advanced Pro (4.5G)
technologies and is '5G ready,' is ideally suited to this
environment.
We crossed the 95% ownership threshold of Alcatel-Lucent in
June, allowing us to move to acquire the remaining shares and reach
full ownership of Alcatel-Lucent, which we expect by the end of
October. As our successful integration work continues and as we get
increased granular visibility into the business, our confidence in
our ability to deliver cost savings also increases. As a result, we
are now targeting EUR 1.2 billion in total cost savings to be
achieved in full year 2018. We have also continued the strategic
review of our submarine cable business to determine the best
long-term resolution for that business.
While plenty of hard work remains in front of us, we are making
good progress and expect to see slight sequential improvement in
both net sales and operating margin in our Networks business from
the second quarter to the third, followed by significant
improvement from the third to the fourth quarter.
Rajeev Suri President and CEO
NOKIA IN Q2 2016 - NON-IFRS
FINANCIAL DISCUSSION
The following discussion is of Nokia's results for the second
quarter 2016, which comprise the results of Nokia's businesses -
Nokia's Networks business and Nokia Technologies, as well as Group
Common and Other. For more information on the recent changes to our
reportable segments, please refer to note 3, "Segment information
and eliminations", in the notes to the financial statements
attached to this report. Comparisons are given to the second
quarter 2015 and first quarter 2016 results on a combined company
basis, unless otherwise indicated.
This data has been prepared to reflect the financial results of
the continuing operations of Nokia as if the new financial
reporting structure had been in operation for the full year 2015.
Certain accounting policy alignments, adjustments and
reclassifications have been necessary, and these are explained in
the "Basis of preparation" section of the stock exchange release
published on April 22, 2016. These adjustments include also
reallocation of items of costs and expenses based on their nature
and changes to the definition of the line items in the combined
company accounting policies, which affect also numbers presented in
these interim financial statements for 2015. For more information
on the combined company historicals, please refer to note 1, "Basis
of Preparation", in the notes to the financial statements attached
to this report.
Non-IFRS Net sales
Nokia non-IFRS net sales decreased 11% year-on-year and
increased 1% sequentially. On a constant currency basis, Nokia
non-IFRS net sales would have decreased 9% year-on-year and
increased 2% sequentially.
Year-on-year discussion
The year-on-year decrease in Nokia non-IFRS net sales in the
second quarter 2016 was primarily due to Nokia's Networks
business.
Sequential discussion
The sequential increase in Nokia non-IFRS net sales in the
second quarter 2016 was primarily due to Nokia's Networks business
and Group Common and Other.
Non-IFRS Operating profit
Year-on-year discussion
Nokia non-IFRS operating profit decreased primarily due to lower
non-IFRS gross profit and a net negative fluctuation in non-IFRS
other income and expenses, partially offset by lower non-IFRS
research and development ("R&D") expenses and non-IFRS selling,
general and administrative ("SG&A") expenses.
The decrease in non-IFRS gross profit was primarily due to
Nokia's Networks business and, to a lesser extent, Nokia
Technologies, partially offset by Group Common and Other. In Q2
2016, non-IFRS gross profit was adversely affected by a customer in
Latin America undergoing judicial recovery, as revenue was deferred
while the related costs of sale were expensed as incurred.
The decrease in non-IFRS R&D expenses was primarily due to
Nokia's Networks business and, to a lesser extent, Nokia
Technologies and Group Common and Other.
The decrease in non-IFRS SG&A expenses was primarily due to
Nokia's Networks business and, to a lesser extent, Group Common and
Other, partially offset by Nokia Technologies.
Nokia non-IFRS other income and expenses was an expense of EUR
41 million in the second quarter 2016, compared to an income of EUR
74 million in the year-ago quarter. On a year-on-year basis, the
change was primarily due to the absence of realized gains and
losses related to certain of Nokia's investments made through its
venture funds. In Q2 2016, non-IFRS other income and expenses were
adversely affected by a customer in Latin America undergoing
judicial recovery, as certain provisions were recorded due to the
risk of asset impairment.
Sequential discussion
Nokia non-IFRS operating profit decreased primarily due to a net
negative fluctuation in non-IFRS other income and expenses and
higher non-IFRS SG&A expenses, partially offset by lower
non-IFRS R&D expenses.
The slight decrease in non-IFRS gross profit was primarily due
to Nokia's Networks business, partially offset by Group Common and
Other. In Q2 2016, non-IFRS gross profit was adversely affected by
a customer in Latin America undergoing judicial recovery, as
revenue was deferred while the related costs of sale were expensed
as incurred.
The decrease in non-IFRS R&D expenses was primarily due to
Nokia's Networks business.
The increase in non-IFRS SG&A expenses was primarily due to
Nokia's Networks business and Nokia Technologies.
Nokia non-IFRS other income and expenses was an expense of EUR
41 million in the second quarter 2016, compared to an expense of
EUR 15 million in the first quarter 2016. On a sequential basis,
the change was primarily due to Nokia's Networks business, as well
as the absence of realized gains and losses related to certain of
Nokia's investments made through its venture funds. In Q2 2016,
non-IFRS other income and expenses were adversely affected by a
customer in Latin America undergoing judicial recovery, as certain
provisions were recorded due to the risk of asset impairment.
NOKIA IN Q2 2016 - REPORTED
FINANCIAL DISCUSSION
Net sales
Nokia net sales increased 91% year-on-year, compared to Nokia
standalone net sales, and increased 2% sequentially. On a constant
currency basis, Nokia net sales would have increased 93%
year-on-year, compared to Nokia standalone net sales, and 2%
sequentially.
Year-on-year discussion
The year-on-year increase in Nokia net sales in the second
quarter 2016, compared to Nokia standalone net sales, was primarily
due to growth in Nokia's Networks business and Group Common and
Other, primarily related to the acquisition of Alcatel-Lucent,
partially offset by non-IFRS exclusions.
Sequential discussion
The sequential increase in Nokia net sales in the second quarter
2016 was primarily due to growth in Nokia's Networks business and
Group Common and Other, as well as reduced negative impact related
to purchase price allocation adjustment related to the reduced
valuation of deferred revenue that existed on Alcatel-Lucent's
balance sheet at the time of the acquisition.
Operating profit
Year-on-year discussion
In the second quarter 2016, Nokia generated an operating loss,
compared to a Nokia standalone operating profit in the year-ago
period. The change was primarily due to restructuring and
associated charges and other net negative fluctuations in other
income and expenses, higher R&D expenses and higher SG&A
expenses, partially offset by higher gross profit, all of which
related primarily to the acquisition of Alcatel-Lucent.
The increase in gross profit was primarily due to Nokia's
Networks business and, to a lesser extent, Group Common and Other,
partially offset by non-IFRS exclusions related to deferred revenue
and to a lesser extent, the absence of a benefit recorded in the
year-ago quarter, which related to a correction of items previously
reported as cost of sales and reductions to accounts receivable. In
Q2 2016, gross profit was adversely affected by a customer in Latin
America undergoing judicial recovery, as revenue was deferred while
the related costs of sale were expensed as incurred.
The increase in R&D expenses was primarily due to Nokia's
Networks business, non-IFRS exclusions related to amortization of
intangible assets and, to a lesser extent, Group Common and
Other.
The increase in SG&A expenses was primarily due to Nokia's
Networks business, non-IFRS exclusions related to amortization of
intangible assets, as well as transaction and integration related
costs and, to a lesser extent, Group Common and Other and Nokia
Technologies.
Nokia's other income and expenses was an expense of EUR 643
million in the second quarter 2016, compared to an income of EUR
114 million in the year-ago period. The change was primarily
related to non-IFRS exclusions attributable to higher restructuring
and associated charges and, to a lesser extent, the absence of
realized gains and losses related to certain of Nokia's investments
made through its venture funds. In Q2 2016, other income and
expenses were adversely affected by a customer in Latin America
undergoing judicial recovery, as certain provisions were recorded
due to the risk of asset impairment.
Sequential discussion
Nokia operating profit decreased primarily due to restructuring
and associated charges, partially offset by higher gross profit
and, to a lesser extent, lower SG&A and R&D expenses.
The increase in gross profit was primarily due to lower non-IFRS
exclusions related to the absence of an inventory revaluation as
part of the Alcatel-Lucent purchase accounting, which negatively
affected the first quarter 2016. In Q2 2016, gross profit was
adversely affected by a customer in Latin America undergoing
judicial recovery, as revenue was deferred while the related costs
of sale were expensed as incurred.
The decrease in R&D expenses was primarily due to Nokia's
Networks business.
The decrease in SG&A expenses was primarily due to lower
non-IFRS exclusions related to transaction and integration related
costs.
Nokia's other income and expenses was an expense of EUR 643
million in the second quarter 2016, compared to an expense of EUR
40 million in the first quarter 2016. The increase was primarily
related to non-IFRS exclusions attributable to recognition of
restructuring and associated charges related to the overall cost
savings program. In Q2 2016, other income and expenses were
adversely affected by a customer in Latin America undergoing
judicial recovery, as certain provisions were recorded due to the
risk of asset impairment.
Descriptions of non-IFRS exclusions in Q2 2016
Non-IFRS exclusions consist of costs related to the
Alcatel-Lucent transaction 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
notes to the financial statements attached to this report.
|
|
Nokia standalone
historicals1 |
|
|
|
EUR million |
Q2'16 |
Q2'15 |
YoY
change |
Q1'16 |
QoQ
change |
Net sales |
(93) |
0 |
|
(104) |
(11)% |
Gross profit |
(174) |
37 |
|
(651) |
(73)% |
R&D |
(162) |
(13) |
|
(156) |
4% |
SG&A |
(154) |
(27) |
|
(224) |
(31)% |
Other income and expenses |
(602) |
0 |
|
(25) |
|
Operating
profit/(loss) |
(1
092) |
(3) |
|
(1
057) |
3% |
Financial income and expenses, net |
(3) |
0 |
|
(36) |
(92)% |
Taxes |
200 |
5 |
|
341 |
(41)% |
(Loss)/Profit |
(896) |
2 |
|
(752) |
19% |
(Loss)/Profit attributable to the shareholders
of the parent |
(862) |
2 |
|
(680) |
27% |
Non-controlling interests |
(34) |
0 |
|
(72) |
(53)% |
1Nokia standalone historicals are the recasting of
Nokia's historical standalone financial results, reflecting Nokia's
updated segment reporting structure, excluding Alcatel-Lucent.
Beginning from the first quarter 2016, Nokia results include those
of Alcatel-Lucent on a consolidated basis. Accordingly, Nokia
results beginning from the first quarter 2016 are not directly
comparable to prior period Nokia standalone results. |
Net sales
In the second quarter 2016, non-IFRS exclusions in net sales
amounted to EUR 93 million, and related to purchase price
allocation adjustment related to the reduced valuation of deferred
revenue that existed on Alcatel-Lucent's balance sheet at the time
of the acquisition.
Operating profit
In the second quarter 2016, non-IFRS exclusions in operating
profit amounted to EUR 1 092 million, and were attributable to
non-IFRS exclusions that negatively affected gross profit, R&D,
SG&A and other income and expenses as follows:
In the second quarter 2016, non-IFRS exclusions in gross profit
amounted to EUR 174 million, and primarily related to the deferred
revenue and, to a lesser extent, product portfolio integration
related costs resulting from the acquisition of Alcatel-Lucent.
In the second quarter 2016, non-IFRS exclusions in R&D
expenses amounted to EUR 162 million, and primarily related to the
amortization of intangible assets resulting from the acquisition of
Alcatel-Lucent.
In the second quarter 2016, non-IFRS exclusions in SG&A
expenses amounted to EUR 154 million, and primarily related to the
amortization of intangible assets resulting from the acquisition of
Alcatel-Lucent, as well as transaction and integration related
costs.
In the second quarter 2016, non-IFRS exclusions in other income
and expenses amounted to EUR 602 million, and primarily related to
EUR 596 million of restructuring and associated charges for Nokia's
cost reduction and efficiency improvement initiatives.
Cost savings program
The following table summarizes the financial information related
to our cost savings program, as of the end of the second quarter
2016. Balances related to previous Nokia and Alcatel-Lucent
restructuring and cost savings programs have been included as part
of this overall cost savings program.
In EUR million,
approximately |
Q2'16 |
Opening balance of restructuring and associated
liabilities |
450 |
+ Charges in the quarter |
600 |
- Cash outflows in the quarter |
80 |
= Ending balance of restructuring and
associated liabilities |
970 |
of which restructuring provisions |
850 |
of which other associated liabilities |
120 |
|
|
Total expected restructuring and associated
charges - updated program |
1 200 |
- Cumulative recorded - updated
program |
600 |
= Charges remaining to be recorded -
updated program |
600 |
|
|
Total expected restructuring and associated cash
outflows |
1 650 |
- Cumulative recorded |
80 |
= Cash outflows remaining to be
recorded |
1 570 |
The Q2 2016 opening balance of restructuring and associated
liabilities of approximately EUR 450 million relates to previous
Nokia and Alcatel-Lucent restructuring and cost-savings programs,
and represents expected cash outflows which have been provisioned
for but not yet paid out related to these programs. The
approximately EUR 450 million of restructuring and associated
liabilities consists of approximately EUR 380 million of
restructuring provisions and approximately EUR 70 million of other
related liabilities.
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 2018 (update) |
Compared to the combined non-IFRS operating costs of Nokia and
Alcatel-Lucent for full year 2015, excluding Nokia Technologies.
Under this expanded cost savings program, restructuring and
associated charges are expected to total approximately EUR 1.2
billion, of which approximately EUR 600 million was recorded in Q2
2016. Related restructuring and associated cash outflows are
expected to total approximately EUR 1.65 billion, which includes
the approximately EUR 450 million balance of restructuring and
associated cash outflows that were provisioned for but not yet paid
as of the beginning of Q2 2016, related to previous Nokia and
Alcatel-Lucent restructuring and cost savings programs. In addition
to the above amounts, note that Nokia's overall charges and cash
outflows will also include amounts related to network equipment
swaps. The charges related to network equipment swaps will be
recorded as non-IFRS exclusions, and therefore will not affect
Nokia's non-IFRS operating profit. This is an update to the earlier
outlook for above EUR 900 million of net operating cost synergies
to be achieved in full year 2018. |
|
FY16 Non-IFRS financial income and expense |
Expense of approximately EUR 300 million |
Primarily includes net interest expenses related to
interest-bearing liabilities, interest costs related to the defined
benefit pension and other post-employment benefit plans, as well as
the impact from changes in foreign exchange rates on certain
balance sheet items. This outlook may vary subject to changes in
the above listed items. |
|
FY16 Non-IFRS tax rate |
Above 40% for full year 2016 |
The increase in the non-IFRS tax rate for the combined company,
compared to Nokia on a standalone basis, is primarily attributable
to unfavorable changes in the regional profit mix as a result of
the acquisition of Alcatel-Lucent. This outlook is for full year
2016; the quarterly non-IFRS tax rate is expected to be subject to
volatility, primarily influenced by fluctuations in profits made by
Nokia in different tax jurisdictions. Nokia expects its effective
long-term non-IFRS tax rate to be clearly below the full year 2016
level, and intends to provide further commentary later in
2016. |
|
FY16 Cash outflows related to taxes |
Approximately EUR 400 million |
May vary due to profit levels in different jurisdictions and the
amount of licensing income subject to withholding tax. |
|
FY16 Capital expenditures |
Approximately EUR 650 million |
Primarily attributable Nokia's Networks business. |
Nokia's Networks business |
FY16 net sales |
Decline YoY |
Combined company net sales and operating margin are
expected to be influenced by factors including: A flattish capital
expenditure environment in 2016 for our overall addressable market;
A declining wireless infrastructure market in 2016; Significant
focus on the integration of Alcatel-Lucent, particularly in the
first half of 2016; Slight QoQ net sales growth and operating
margin expansion in Q3 2016; Significant QoQ net sales growth and
operating margin expansion in Q4 2016; Competitive industry
dynamics; Product and regional mix; The timing of major network
deployments; and Execution of synergy plans. This is an update to
the earlier FY16 operating margin guidance of above 7%. |
FY16 operating margin |
7-9% (update) |
Nokia Technologies |
FY16 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 fiscal year 2016.
Nokia expects annualized net sales related to patent and brand
licensing to grow to a run rate of approximately EUR 950 million by
the end of 2016. License agreements which currently contribute
approximately EUR 150 million to the annualized net sales run rate
are set to expire before the end of 2016. If we do not renew these
license agreements, nor sign any new licensing agreements, the
annualized net sales run rate would be approximately EUR 800
million in early 2017. Furthermore, the contribution of the
Withings acquisition to Nokia Technologies net sales is expected to
be approximately EUR 50 million in the second half of 2016, with
strong Q4 seasonality. The contribution of the acquisition to Nokia
Technologies operating profit is expected to be slightly negative
for the second half of 2016. |
RISKS AND FORWARD-LOOKING STATEMENTS
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
Alcatel Lucent into our operations and achieve the targeted
business plans and benefits, including targeted synergies in
relation to the acquisition of Alcatel Lucent announced on April
15, 2015 and closed in early 2016; B) our ability to squeeze out
the remaining Alcatel Lucent shareholders in a timely manner or at
all to achieve full ownership of Alcatel Lucent; C) expectations,
plans or benefits related to our strategies and growth management;
D) expectations, plans or benefits related to future performance of
our businesses; E) expectations, plans or benefits related to
changes in our management and other leadership, operational
structure and operating model, including the expected
characteristics, business, organizational structure, management and
operations following the acquisition of Alcatel Lucent; F)
expectations regarding market developments, general economic
conditions and structural changes; G) 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; H) timing of the deliveries of our
products and services; I) expectations and targets regarding
collaboration and partnering arrangements, 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,
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,
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," "will" or similar
expressions. These statements are based on the 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 such 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 or correctly
identify or successfully pursue business opportunities or growth;
2) our ability to achieve the anticipated business and operational
benefits and synergies from the Alcatel Lucent transaction,
including our ability to integrate Alcatel Lucent into our
operations and within the timeframe targeted, and our ability to
implement our organization and operational structure efficiently;
3) our ability to complete the purchases of the remaining
outstanding Alcatel Lucent securities and realize the benefits of
the public exchange offer for all outstanding Alcatel Lucent
securities; 4) our dependence on general economic and market
conditions and other developments in the economies where we
operate; 5) our dependence on the development of the industries in
which we operate, including the cyclicality and variability of the
telecommunications industry; 6) our 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
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; 8) our dependence on a
limited number of customers and large multi-year agreements; 9)
Nokia Technologies' ability to maintain and establish new sources
of patent licensing income and IPR-related revenues, particularly
in the smartphone market; 10) 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; 11) 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; 12) our reliance on
third-party solutions for data storage and the distribution of
products and services, which expose us to risks relating to
security, regulation and cybersecurity breaches; 13) Nokia
Technologies' ability to generate net sales and profitability
through licensing of the Nokia brand, the development and sales of
products and services, as well as other business ventures which may
not materialize as planned; 14) our exposure to legislative
frameworks and jurisdictions that regulate fraud, economic trade
sanctions and policies, and Alcatel Lucent's previous and current
involvement in anti-corruption allegations; 15) 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; 16) our actual or anticipated performance, among
other factors, which could reduce our ability to utilize deferred
tax assets; 17) our ability to retain, motivate, develop and
recruit appropriately skilled employees; 18) our ability to manage
our manufacturing, service creation, delivery, logistics and supply
chain processes, and the risk related to our geographically
concentrated production sites; 19) the impact of unfavorable
outcome of litigation, arbitration, agreement-related disputes or
allegations of product liability associated with our businesses;
20) exchange rate fluctuations, as well as hedging activities; 21)
inefficiencies, breaches, malfunctions or disruptions of
information technology systems; 22) our ability to optimize our
capital structure as planned and re-establish our investment grade
credit rating or otherwise improve our credit ratings; 23)
uncertainty related to the amount of dividends and equity return we
are able to distribute to shareholders for each financial period;
24) our ability to achieve targeted benefits from or successfully
implement planned transactions, as well as the liabilities related
thereto; 25) our involvement in joint ventures and jointly-managed
companies; 26) performance failures by our partners or failure to
agree to partnering arrangements with third parties; 27) our
ability to manage and improve our financial and operating
performance, cost savings, competitiveness and synergy benefits
after the acquisition of Alcatel Lucent; 28) adverse developments
with respect to customer financing or extended payment terms we
provide to customers; 29) the carrying amount of our goodwill may
not be recoverable; 30) risks related to undersea infrastructure;
31) unexpected liabilities with respect to pension plans, insurance
matters and employees; and 32) unexpected liabilities or issues
with respect to the acquisition of Alcatel Lucent, including
pension, postretirement, health and life insurance and other
employee liabilities or higher than expected transaction costs as
well as the risk factors specified on pages 69 to 87 of our annual
report on Form 20-F filed on April 1, 2016 under "Operating and
financial review and prospects-Risk factors", as well as in Nokia's
other filings 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 statements were authorized for issue by management
on August 3, 2016.
Media and Investor Contacts: Corporate 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 third quarter 2016 results on
October 27, 2016.
- Nokia plans to hold its Capital Markets Day in Barcelona on
November 15, 2016.
Nokia Half Year Financial Report 2016
http://hugin.info/3009/R/2033036/756876.pdf
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