Nokia Corporation Half Year Financial Report July 27, 2017
at 08:00 (CET +1)
Nokia Corporation Financial Report for Q2 and Half Year
2017
Strong results in Nokia Technologies and solid performance in
Nokia's Networks business This is a summary of the Nokia
Corporation financial report for Q2 and half year 2017 published
today. The complete financial report for Q2 and half year 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 Q2 2017 of EUR 5.6bn (EUR 5.7bn in Q2
2016). Reported net sales in Q2 2017 of EUR 5.6bn (EUR 5.6bn in Q2
2016).
- Non-IFRS diluted EPS in Q2 2017 of EUR 0.08 (EUR 0.03 in Q2
2016). Reported diluted EPS in Q2 2017 of negative EUR 0.07
(negative EUR 0.12 in Q2 2016).
Nokia's Networks business
- 5% year-on-year net sales decrease in Q2 2017, primarily due to
Ultra Broadband Networks. Within Ultra Broadband Networks, Mobile
Networks declined in Q2 following a strong Q1, while Fixed Networks
declined at a lower rate in Q2 compared to Q1. Within IP Networks
and Applications, IP/Optical Networks declined at a lower rate in
Q2 compared to Q1, and Applications & Analytics grew. Global
Services net sales were approximately flat.
- Strong Q2 2017 gross margin of 39.1% and operating margin of
8.2%, with solid performance across Ultra Broadband Networks,
Global Services and IP Networks and Applications.
Nokia Technologies
- 90% year-on-year net sales increase in Q2 2017, primarily due
to a new license agreement in Q2 2017 and a license agreement that
was expanded in Q3 2016. Approximately 40% of the EUR 175 million
year-on-year increase was non-recurring in nature and related to
catch-up net sales for Q1 2017.
- 158% year-on-year operating profit increase in Q2 2017,
primarily related to higher net sales, partially offset by
increased licensing-related litigation costs and the ramp-up of our
digital health business unit.
Second quarter and January-June 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) |
Q2'17 |
Q2'16 |
YoY change |
Q1'17 |
QoQ change |
Q1- Q2'17 |
Q1- Q2'16 |
YoY change |
Net sales - constant
currency (non-IFRS) |
|
|
(2)% |
|
7% |
|
|
(4)% |
Net sales
(non-IFRS) |
5
629 |
5
670 |
(1)% |
5
388 |
4% |
11
017 |
11
285 |
(2)% |
Nokia's Networks
business |
4
971 |
5
222 |
(5)% |
4
902 |
1% |
9
873 |
10
415 |
(5)% |
Ultra Broadband Networks |
2
165 |
2
356 |
(8)% |
2
236 |
(3)% |
4
401 |
4
653 |
(5)% |
Global Services |
1
448 |
1
444 |
0% |
1
361 |
6% |
2
809 |
2
888 |
(3)% |
IP
Networks and Applications |
1
358 |
1
421 |
(4)% |
1
304 |
4% |
2
663 |
2
874 |
(7)% |
Nokia
Technologies |
369 |
194 |
90% |
247 |
49% |
616 |
391 |
58% |
Group Common and
Other |
307 |
270 |
14% |
254 |
21% |
562 |
506 |
11% |
Gross profit
(non-IFRS) |
2
350 |
2
205 |
7% |
2
196 |
7% |
4
546 |
4
433 |
3% |
Gross margin %
(non-IFRS) |
41.7% |
38.9% |
280bps |
40.8% |
90bps |
41.3% |
39.3% |
200bps |
Operating profit
(non-IFRS) |
574 |
332 |
73% |
341 |
68% |
915 |
677 |
35% |
Nokia's Networks
business |
406 |
313 |
30% |
324 |
25% |
730 |
650 |
12% |
Ultra Broadband Networks |
191 |
184 |
4% |
245 |
(22)% |
437 |
311 |
41% |
Global Services |
123 |
34 |
262% |
55 |
124% |
179 |
137 |
31% |
IP
Networks and Applications |
91 |
95 |
(4)% |
23 |
296% |
114 |
202 |
(44)% |
Nokia
Technologies |
230 |
89 |
158% |
116 |
98% |
346 |
195 |
77% |
Group Common and
Other |
(62) |
(70) |
|
(99) |
|
(161) |
(169) |
|
Operating margin %
(non-IFRS) |
10.2% |
5.9% |
430bps |
6.3% |
390bps |
8.3% |
6.0% |
230bps |
Financial income and
expenses (non-IFRS) |
(63) |
(29) |
117% |
(81) |
(22)% |
(144) |
(96) |
50% |
Taxes (non-IFRS) |
(74) |
(135) |
(45)% |
(48) |
54% |
(122) |
(275) |
(56)% |
Profit (non-IFRS) |
441 |
171 |
158% |
203 |
117% |
644 |
310 |
108% |
Profit attributable to the equity holders of the parent
(non-IFRS) |
449 |
194 |
131% |
196 |
129% |
646 |
346 |
87% |
Non-controlling interests (non-IFRS) |
(9) |
(24) |
(63)% |
6 |
|
(2) |
(37) |
(95)% |
EPS, EUR
diluted (non-IFRS) |
0.08 |
0.03 |
167% |
0.03 |
167% |
0.11 |
0.06 |
83% |
Second quarter and January-June 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) |
Q2'17 |
Q2'16 |
YoY change |
Q1'17 |
QoQ change |
Q1-Q2'17 |
Q1-Q2'16 |
YoY change |
Net Sales - constant
currency |
|
|
0% |
|
7% |
|
|
(2)% |
Net sales |
5
619 |
5
576 |
1% |
5
378 |
4% |
10
996 |
11
088 |
(1)% |
Nokia's Networks
business |
4
971 |
5
222 |
(5)% |
4
902 |
1% |
9
873 |
10
415 |
(5)% |
Ultra Broadband Networks |
2
165 |
2
356 |
(8)% |
2
236 |
(3)% |
4
401 |
4
653 |
(5)% |
Global Services |
1
448 |
1
444 |
0% |
1
361 |
6% |
2
809 |
2
888 |
(3)% |
IP
Networks and Applications |
1
358 |
1
421 |
(4)% |
1
304 |
4% |
2
663 |
2
874 |
(7)% |
Nokia
Technologies |
369 |
194 |
90% |
247 |
49% |
616 |
391 |
58% |
Group Common and
Other |
307 |
270 |
14% |
254 |
21% |
562 |
506 |
11% |
Non-IFRS
exclusions |
(11) |
(93) |
(88)% |
(11) |
0% |
(21) |
(197) |
(89)% |
Gross profit |
2
236 |
2
031 |
10% |
2
125 |
5% |
4
361 |
3
608 |
21% |
Gross margin % |
39.8% |
36.4% |
340bps |
39.5% |
30bps |
39.7% |
32.5% |
720bps |
Operating
(loss)/profit |
(45) |
(760) |
(94)% |
(127) |
(65)% |
(173) |
(1
472) |
(88)% |
Nokia's Networks
business |
406 |
313 |
30% |
324 |
25% |
730 |
650 |
12% |
Ultra Broadband Networks |
191 |
184 |
4% |
245 |
(22)% |
437 |
311 |
41% |
Global Services |
123 |
34 |
262% |
55 |
124% |
179 |
137 |
31% |
IP
Networks and Applications |
91 |
95 |
(4)% |
23 |
296% |
114 |
202 |
(44)% |
Nokia
Technologies |
230 |
89 |
158% |
116 |
98% |
346 |
195 |
77% |
Group Common and
Other |
(62) |
(70) |
|
(99) |
|
(161) |
(169) |
|
Non-IFRS
exclusions |
(620) |
(1
092) |
(43)% |
(468) |
32% |
(1
088) |
(2
149) |
(49)% |
Operating margin % |
(0.8)% |
(13.6)% |
1
280bps |
(2.4)% |
160bps |
(1.6)% |
(13.3)% |
1
170bps |
Financial income and
expenses |
(218) |
(32) |
581% |
(146) |
49% |
(364) |
(135) |
170% |
Taxes 2 |
(172) |
65 |
|
(154) |
12% |
(325) |
166 |
|
(Loss)/Profit 2 |
(433) |
(726) |
(40)% |
(435) |
0% |
(868) |
(1
437) |
(40)% |
(Loss)/Profit attributable to the equity holders of the parent
2 |
(423) |
(667) |
(37)% |
(473) |
(11)% |
(896) |
(1
291) |
(31)% |
Non-controlling interests 2 |
(9) |
(58) |
(84)% |
37 |
(124)% |
28 |
(147) |
|
EPS, EUR diluted 2 |
(0.07) |
(0.12) |
(42)% |
(0.08) |
(13)% |
(0.16) |
(0.23) |
(30)% |
Net cash
and other liquid assets |
3 964 |
7 077 |
(44)% |
4 409 |
(10)% |
3 964 |
7 077 |
(44)% |
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. |
2 Reported
Q1-Q2'16 result is not comparable to the previously published
Reported Q1-Q2'16 result due to an update to the Alcatel-Lucent
purchase price allocation in Q3'16 which resulted in an adjustment
to the reported Q1'16 income tax benefit. |
Changes in reporting structure, effective from April 1,
2017
On March 17, 2017, Nokia announced changes in its organizational
structure designed to accelerate the execution of its strategy,
including strengthening Nokia's ability to deliver strong financial
performance, drive growth in services, meet changing customer
demands in mobile networks, achieve cost savings and ongoing
transformation goals, and enable strategic innovation across
Nokia's Networks business. These organizational changes included
the separation of Nokia's former Mobile Networks business group
into two distinct organizations: one focused on products and
solutions, called Mobile Networks, and the other on services,
called Global Services.
As a result of these changes, Nokia has changed its financial
reporting structure for its Networks business. As of the second
quarter 2017, Nokia's Networks business is comprised of three
reportable segments and five business groups.
- Ultra Broadband Networks, comprised of the Mobile Networks and
Fixed Networks business groups.
- The Mobile Networks business group is comprised of the products
and solutions that resided within the previous Mobile Networks
business group. As a result of the organization change, services no
longer reside under Mobile Networks. The Mobile Networks business
group provides radio networks, converged core networks and advanced
mobile networks solutions (see note 3, "Segment information", in
the Financial statement information sections in this report for
additional details).
- The Fixed Networks business group provides broadband access,
digital home, access management solutions and Fixed Networks
services (see note 3, "Segment information", in the Financial
statement information sections in this report for additional
details).
- Global Services, comprised of the Global Services business
group.
- The Global Services business group is comprised of the services
that resided within the previous Mobile Networks business group,
including company-wide managed services. Global Services does not
include the services of Fixed Networks, IP/Optical Networks and
Applications & Analytics, which continue to reside within the
respective business groups. The Global Services business group
provides network planning and optimization, network implementation,
system integration, company-wide managed services and care (see
note 3, "Segment information", in the Financial statement
information sections in this report for additional details).
- IP Networks and Applications, comprised of the IP/Optical
Networks and Applications & Analytics business groups.
- The IP/Optical Networks business group provides IP routing,
optics and IP/Optical Networks services (see note 3, "Segment
information", in the Financial statement information sections in
this report for additional details).
- The Applications & Analytics business group provides
intelligent software and services that help service providers build
strong digital businesses including business support systems,
operational support systems, service delivery platforms, network
management, emerging businesses, as well as the software and
services offerings from the Comptel acquisition (see note 3,
"Segment information", in the Financial statement information
sections in this report for additional details).
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
I am proud of the entire Nokia team for delivering strong
profitability in the second quarter and group-level net sales that
were close to flat year-on-year. Underpinning this result was the
excellent performance of Nokia Technologies, as well as robust
gross margins and continued topline improvement in Networks. With
the good work in the quarter, I remain confident that we will
deliver on our full-year guidance of an operating margin of 8-10%
in our Networks business.
Additionally, we made further progress in executing on the four
pillars of our strategy in the second quarter. In terms of the
first pillar, leading in high-performance, end-to-end networks with
communication service providers, we saw year-on-year growth in
orders in the first half of the year; continued to win the majority
of deals we pursued; and landed more large contracts in the first
half than we did during the same time period in 2016. Cross-selling
also continues to generate new opportunities for us, with several
important wins in the quarter, such as our contract to build three
Dense Wavelength Division Multiplexing networks for M1 in
Singapore.
For the second pillar, expanding sales to new vertical markets,
our work is gaining further traction in terms of orders, customers
and technology. We saw double-digit growth in orders in most of the
verticals we are targeting, and added new customers at a
significantly faster rate than one year ago. And, we launched new
IP routing products that will put us in a strong competitive
position with both our traditional customer base and our new target
markets when the products are available at scale next year. The
early response from customers to these new products has been
excellent, with companies like BT Group and Xiaomi already
expressing their intent to purchase.
We are starting to see the results of the extensive work we have
done in the third pillar of our strategy, building a strong,
stand-alone software business at scale. Q2 sales in our
Applications & Analytics business group were up comfortably
year-on-year and order momentum was strong.
In the fourth pillar of our strategy, creating new business and
licensing opportunities in the consumer ecosystem, the licensing
and business partnership agreement that we reached with Apple in
the quarter was a clear highlight. You could see the benefit of
that agreement in Nokia Technologies' results, and we look forward
to continuing to expand our overall business with Apple in the
coming months. We also closed a licensing deal with Xiaomi, a
milestone win with a Chinese smartphone vendor, setting the stage
for us to engage further with other vendors in the
country.
Finally, we expect our primary addressable market with
communication service providers to be slightly more challenging in
2017 than earlier forecast. We now expect a decline in the market
in the range of 3-5%, versus our earlier view of a low-single digit
decline. In addition, we continue to expect our Networks sales to
perform in line with the market.
Despite these headwinds, I believe Nokia's disciplined operating
model puts us in a strong position to succeed in conditions of all
kinds and continue to deliver solid shareholder value. In addition,
we are seeing catalysts in the United States, China and Japan that
point to an acceleration of 5G and the commencement of meaningful
roll-outs in 2019.
In summary, a good second quarter, some challenges ahead this
year, but also reasons to be optimistic about Nokia's ability to
deliver.
Rajeev Suri President and CEO
NOKIA IN Q2 2017 - NON-IFRS
Non-IFRS net sales and non-IFRS operating profit
Nokia non-IFRS net sales decreased 1% year-on-year and increased
4% sequentially. On a constant currency basis, Nokia non-IFRS net
sales would have decreased 2% year-on-year and increased 7%
sequentially.
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 |
(251) |
(5)% |
(21) |
32 |
12 |
71 |
93 |
220bps |
Nokia Technologies |
175 |
90% |
165 |
(3) |
(11) |
(10) |
141 |
1
640bps |
Group Common and
Other |
37 |
14% |
2 |
4 |
10 |
(7) |
8 |
570bps |
Eliminations |
(2) |
|
0 |
0 |
0 |
0 |
0 |
|
Nokia |
(41) |
(1)% |
145 |
33 |
10 |
55 |
242 |
430bps |
On a year-on-year basis, Nokia's non-IFRS gross profit, non-IFRS
other income and expense and non-IFRS operating profit benefitted
from the absence of an adverse effect related to a customer in
Latin America undergoing judicial recovery in Q2 2016.
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 |
69 |
1% |
10 |
28 |
15 |
30 |
82 |
160bps |
Nokia Technologies |
122 |
49% |
118 |
1 |
8 |
(12) |
114 |
1
530bps |
Group Common and
Other |
53 |
21% |
27 |
10 |
3 |
(3) |
37 |
1
880bps |
Eliminations |
(3) |
|
0 |
0 |
0 |
0 |
0 |
|
Nokia |
241 |
4% |
154 |
39 |
26 |
15 |
233 |
390bps |
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 |
242 |
(34) |
61 |
270 |
(15) |
255 |
Nokia's regional profit mix in the second quarter 2017 resulted
in an unusually low non-IFRS tax rate of 14%. The net negative
fluctuation in financial income and expenses was primarily related
to foreign exchange fluctuations and lower interest income.
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 |
233 |
18 |
(26) |
238 |
15 |
253 |
On a sequential basis, Nokia's regional profit mix remained
similar to the first quarter 2017 and resulted in an unusually low
non-IFRS tax rate of 14%. The net positive fluctuation in financial
income and expenses was primarily related to gains from venture
fund distributions.
NOKIA IN Q2 2017 - REPORTED
FINANCIAL DISCUSSION
Net sales
Nokia net sales increased 1% year-on-year and 4% sequentially.
On a constant currency basis, Nokia net sales would have been
approximately flat year-on-year and would have increased 7%
sequentially.
Year-on-year discussion
The year-on-year increase in net sales in the second quarter
2017 was primarily due to Nokia Technologies, lower non-IFRS
exclusions related to deferred revenue and higher net sales in
Group Common and Other, partially offset by Nokia's Networks
business.
Sequential discussion
The sequential increase in Nokia net sales in the second quarter
2017 was primarily due to Nokia Technologies, Nokia's Networks
business and Group Common and Other.
Operating profit
Year-on-year discussion
In the second quarter 2017, the decrease in operating loss was
primarily due to a net positive fluctuation in other income and
expenses, higher gross profit and, to a lesser extent, lower
research and development ("R&D") and selling, general and
administrative ("SG&A") expenses. On a year-on-year basis,
second quarter 2017 results benefitted from the absence of an
adverse effect related to a customer in Latin America undergoing
judicial recovery in the second quarter 2016.
The increase in gross profit was primarily due to Nokia
Technologies and lower non-IFRS exclusions related to deferred
revenue. This was partially offset by lower gross profit in Nokia's
Networks business.
The decrease in R&D expenses was primarily due to Nokia's
Networks business, partially offset by higher non-IFRS exclusions
related to intangible asset amortization and purchase price related
items and product portfolio strategy costs.
The decrease in SG&A expenses was primarily due to Group
Common and Other and Nokia's Networks business, partially offset by
higher SG&A expenses in Nokia Technologies.
Nokia's other income and expenses was an expense of EUR 162
million in the second quarter 2017, compared to an expense of EUR
636 million in the year-ago period. The net positive fluctuation
was primarily related to lower non-IFRS exclusions attributable to
lower restructuring and associated charges and, to a lesser extent,
Nokia's Networks business. On a year-on-year basis, second quarter
2017 results benefitted from the absence of an adverse effect
related to a customer in Latin America undergoing judicial recovery
in the second quarter 2016.
Sequential discussion
In the second quarter 2017, the decrease in operating loss was
primarily due to higher gross profit and lower R&D and SG&A
expenses, partially offset by a net negative fluctuation in other
income and expenses.
The increase in gross profit was primarily due to Nokia
Technologies and, to a lesser extent, Group Common and Other and
Nokia's Networks business. This was partially offset by higher
non-IFRS exclusions related to product portfolio strategy
costs.
The decrease in R&D expenses was primarily due to Nokia's
Networks business and, to a lesser extent, lower non-IFRS
exclusions related to lower product portfolio strategy costs and
lower R&D expenses in Group Common and Other.
The decrease in SG&A expenses was primarily due to Nokia's
Networks business and Nokia Technologies, partially offset by
higher non-IFRS exclusions related to transaction and integration
costs.
Nokia's other income and expenses was an expense of EUR 162
million in the second quarter 2017, compared to an expense of EUR
69 million in the first quarter 2017. The net negative fluctuation
was primarily due to higher restructuring and associated charges,
higher product portfolio strategy costs and Nokia Technologies.
This was partially offset by Nokia's Networks business.
Profit/(Loss) attributable to the equity holders of the
parent
Year-on-year discussion
In the second quarter 2017, the decrease in loss attributable to
the equity holders of the parent was primarily due to lower
operating loss, partially offset by higher taxes and a net negative
fluctuation in financial income and expenses.
The net negative fluctuation in financial income and expenses
was primarily due to non-IFRS exclusions related to Nokia's tender
offer to purchase 6.50% notes due January 15, 2028, the 6.45% notes
due March 15, 2029 and the 5.375% notes due May 15, 2019. The
purpose of these transactions was to optimize Nokia's debt maturity
profile, to lower average interest expense run rate and to
eliminate subsidiary level external debt. In addition, the second
quarter 2017 was negatively affected by foreign exchange
fluctuations and lower interest income.
The change in taxes from a benefit in the second quarter 2016 to
an expense in the second quarter 2017 was primarily due to a
non-recurring change to uncertain tax positions and a non-recurring
tax expense related to deferred tax valuation allowance. In the
second quarter 2017, Nokia recorded a EUR 206 million tax expense
related to an uncertain tax position in Germany. The matter relates
to the disposal of the former Alcatel Lucent railway signaling
business in 2006 to Thales (see note 12, "Income Taxes" of our
Annual Report for 2016). Based on new facts and circumstances,
management has reassessed the probability of having to pay the
taxes and concluded that recognition of an uncertain tax position
was warranted at the end of the second quarter 2017.
Sequential discussion
In the second quarter 2017, the decrease in loss attributable to
the equity holders of the parent was primarily due to lower
operating loss and a net positive fluctuation in non-controlling
interests, partially offset by a net negative fluctuation in
financial income and expenses and higher taxes.
The net negative fluctuation in financial income and expenses
was primarily due to higher 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. The purpose of these transactions was to optimize Nokia's
debt maturity profile, to lower average interest expense run rate
and to eliminate subsidiary level external debt. This was partially
offset by gains related to venture fund investments.
The higher taxes were primarily due to a non-recurring change to
uncertain tax positions and a non-recurring tax expense related to
deferred tax valuation allowance, partially offset by the absence
of a non-recurring tax expense related to the integration of the
former Alcatel-Lucent and Nokia operating models. In the second
quarter 2017, Nokia recorded a EUR 206 million tax expense related
to an uncertain tax position in Germany. The matter relates to the
disposal of the former Alcatel Lucent railway signaling business in
2006 to Thales (see note 12, "Income Taxes" of our Annual Report
for 2016). Based on new facts and circumstances, management has
reassessed the probability of having to pay the taxes and concluded
that recognition of an uncertain tax position was warranted at the
end of the second quarter 2017.
The net positive fluctuation in non-controlling interests was
primarily related to the absence of a non-recurring income in a
partly-owned subsidiary in the first quarter 2017.
Description of non-IFRS exclusions in Q2 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 |
Q2'17 |
Q2'16 |
YoY change |
Q1'17 |
QoQ change |
Net sales |
(11) |
(93) |
(88)% |
(11) |
0% |
Gross profit |
(114) |
(174) |
(34)% |
(71) |
61% |
R&D |
(173) |
(162) |
7% |
(184) |
(6)% |
SG&A |
(151) |
(154) |
(2)% |
(138) |
9% |
Other income and
expenses |
(182) |
(602) |
(70)% |
(74) |
146% |
Operating (loss)/profit |
(620) |
(1 092) |
(43)% |
(468) |
32% |
Financial income and
expenses |
(156) |
(3) |
5
100% |
(64) |
144% |
Taxes |
(98) |
200 |
|
(106) |
(8)% |
(Loss)/Profit |
(873) |
(896) |
(3)% |
(638) |
37% |
(Loss)/Profit
attributable to the shareholders of the parent |
(873) |
(862) |
1% |
(669) |
30% |
Non-controlling interests |
(1) |
(34) |
(97)% |
31 |
|
Non-IFRS exclusions in net sales
In the second quarter 2017, non-IFRS exclusions in net sales
amounted to EUR 11 million, and 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.
Non-IFRS exclusions in operating profit
In the second quarter 2017, non-IFRS exclusions in operating
profit amounted to EUR 620 million, and were primarily due to
non-IFRS exclusions that negatively affected gross profit, R&D,
SG&A and other income and expenses as follows:
In the second quarter 2017, non-IFRS exclusions in gross profit
amounted to EUR 114 million, and were primarily due to product
portfolio strategy costs related to the acquisition of
Alcatel-Lucent, and the deferred revenue.
In the second quarter 2017, non-IFRS exclusions in R&D
expenses amounted to EUR 173 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 second quarter 2017, non-IFRS exclusions in SG&A
expenses amounted to EUR 151 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 second quarter 2017, non-IFRS exclusions in other income
and expenses amounted to EUR 182 million, and were primarily due to
restructuring and associated charges for Nokia's cost reduction and
efficiency improvement initiatives and, to a lesser extent, product
portfolio strategy costs.
Non-IFRS exclusions in profit/(loss) attributable to the equity
holders of the parent
In the second quarter 2017, non-IFRS exclusions in profit/(loss)
attributable to the equity holders of the parent amounted to EUR
873 million, and were primarily due to the non-IFRS exclusions
affecting operating profit, in addition to non-IFRS exclusions that
negatively affected financial income and expenses and taxes as
follows:
In the second quarter 2017, non-IFRS exclusions in financial
income and expenses amounted to EUR 156 million, and 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.
In the second quarter 2017, non-IFRS exclusions in taxes
amounted to EUR 98 million, and were primarily due to a
non-recurring change to uncertain tax positions and a non-recurring
tax expense related to deferred tax valuation allowance. This was
partially offset by a tax benefit of EUR 184 million related to
non-IFRS exclusions in operating profit and financial income and
expenses.
Cost savings
program
The following table summarizes the financial information related
to our cost savings program, as of the end of the second 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 |
Q2'17 |
Opening balance of
restructuring and associated liabilities |
720 |
+ Charges in the
quarter |
170 |
- Cash outflows
in the quarter |
140 |
= Ending balance
of restructuring and associated liabilities |
750 |
of which
restructuring provisions |
670 |
of which other
associated liabilities |
80 |
|
|
Total expected
restructuring and associated charges |
1 700 |
- Cumulative
recorded |
1 000 |
= Charges
remaining to be recorded |
700 |
|
|
Total expected
restructuring and associated cash outflows |
2 150 |
- Cumulative
recorded |
700 |
= Cash outflows
remaining to be recorded |
1 450 |
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 |
|
|
Q1'17 |
Q2'17 |
Q1'17 |
Q2'17 |
Q1'17 |
Q2'17 |
Q1'17 |
Q2'17 |
Total cost savings |
550 |
250 |
250 |
400 |
400 |
0 |
0 |
1
200 |
1
200 |
- operating expenses |
350 |
100 |
100 |
350 |
350 |
0 |
0 |
800 |
800 |
- cost of sales |
200 |
150 |
150 |
50 |
50 |
0 |
0 |
400 |
400 |
Restructuring and associated charges |
750 |
750 |
750 |
200 |
200 |
0 |
0 |
1
700 |
1
700 |
Restructuring and associated cash outflows |
400 |
750 |
750 |
550 |
550 |
450 |
450 |
2
150 |
2
150 |
Charges and cash outflows related to network equipment swaps |
150 |
450 |
450 |
300 |
300 |
0 |
0 |
900 |
900 |
In full year 2016, the actual total cost savings benefitted from
lower incentive accruals, related to the financial performance in
full year 2016. 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.
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 1.7 billion. Restructuring and
associated cash outflows are expected to total approximately EUR
2.15 billion. |
|
Network equipment swaps |
Approximately EUR 900 million in total1 |
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. |
|
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 |
Between 25% and 30% 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 (new
commentary).(This is an update to earlier guidance and commentary
for non-IFRS tax rate for full year 2017 to be around the midpoint
of a 30% to 35% range.) Nokia expects cash outflows related
to taxes to be approximately EUR 800 million for full year
2017.(This is an update to the earlier commentary for cash outflows
related to taxes to be approximately EUR 600 million for full year
2017. The update is due to a non-recurring tax item.2) |
|
Capital expenditures |
Approximately EUR 500 million in full year 2017 |
Primarily attributable to Nokia's Networks business. |
Nokia's Networks business |
Net sales |
Decline in line with the primary addressable market in full year
2017 |
We currently expect market conditions for 2017 to be
slightly more challenging than earlier anticipated (new
commentary).Nokia's outlook for net sales and operating margin for
Nokia's Networks business in full year 2017 are expected to be
influenced by factors including: A 3 to 5 percent decline in the
primary addressable market for Nokia's Networks business (This is
an update to earlier commentary for a low single digit percentage
decline.); Uncertainty related to the timing of completions and
acceptances of certain projects, particularly in the second half of
2017 (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; and The level of R&D investment needed
to maintain product competitiveness and accelerate 5G (new
commentary); The outlook for Nokia's Networks business is provided
assuming constant foreign exchange rates. |
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. Nokia expects 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.
2For further details related to the non-recurring tax item,
please refer to the "Nokia in Q2 2017 - Reported" section
above.
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; 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 the business
collaboration agreement and the patent license agreement between
Nokia and Apple announced on May 23, 2017, including income to be
received under any collaboration or partnership or agreement; 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 the
acquisition of Alcatel-Lucent, and our ability to implement 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 to the business collaboration agreement
and the patent license agreement between Nokia and Apple announced
on May 23, 2017, including income to be received under any
collaboration or partnership or agreement; 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, particularly in digital media and digital health, and the
development and sales of products and services, 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 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
July 26, 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 third quarter 2017 results on
October 26, 2017.
Attachments:
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