Strong year-on-year sales growth; Weak Nokia Networks profitability compensated by good performance in Nokia Technologies and HERE

nokiaInterim Report for Q1 2015

 

Strong year-on-year sales growth; Weak Nokia Networks profitability compensated by good performance in Nokia Technologies and HERE


This is a summary of the Nokia Corporation interim report for first quarter 2015 published today. The complete first quarter 2015 interim report with tables is available at http://company.nokia.com/en/financials. Investors should not rely on summaries of our interim reports only, but should review the complete interim reports with tables.

FINANCIAL HIGHLIGHTS

  • Net sales in Q1 2015 of EUR 3.2 billion (EUR 2.7 billion in Q1 2014), up 20% year-on-year

  • Non-IFRS diluted EPS in Q1 2015 of EUR 0.05 (EUR 0.04 in Q1 2014), an increase of 25% year-on-year; reported diluted EPS in Q1 2015 of EUR 0.05 (EUR 0.03 in Q1 2014), up 67% year-on-year

Nokia Networks

  • 15% year-on-year net sales growth driven by growth in four out of our six regions, with non-IFRS operating margin declining to 3.2% from 9.3%
  • 21% year-on-year growth in Global Services net sales, primarily driven by strong growth in the network implementation business line. 10% year-on-year growth in Mobile Broadband net sales, primarily driven by overall radio technologies, particularly LTE
  • 61% year-on-year decline in non-IFRS operating profit primarily driven by lower software sales, lower non-IFRS gross profit in the systems integration business line, the short-term impact of strategic entry deals, higher non-IFRS operating expenses due to foreign exchange impacts and increased investments in LTE, 5G and cloud core, and more challenging market conditions

HERE

  • 25% year-on-year growth in net sales, with 29% year-on-year increase in sales of new vehicle licenses for embedded navigation systems
  • 90% year-on-year growth in non-IFRS operating profit, with non-IFRS operating margin expanding to 7.3% from 4.8%

 

Nokia Technologies

  • 103% year-on-year growth in net sales and 124% growth in non-IFRS operating profit, primarily due to non-recurring adjustments to accrued net sales from existing agreements, revenue share related to previously divested intellectual property rights, and intellectual property rights divested in the first quarter 2015. In addition, net sales and non-IFRS operating profit benefitted from higher intellectual property licensing income from existing licensees

 

 

 

Reported first quarter 2015 results1

EUR million

Q1’15

Q1’14

YoY change

Q4’14

QoQ change

Net sales – constant currency

 

 

11%

 

(21)%

Net sales

3 196

2 664

20%

3 802

(16)%

  Nokia Networks

2 673

2 328

15%

3 365

(21)%

  HERE

261

209

25%

292

(11)%

  Nokia Technologies

266

131

103%

149

79%

Gross margin % (non-IFRS)

42.5%

45.6%

(310)bps

43.5%

(100)bps

Operating profit (non-IFRS)

265

305

(13)%

524

(49)%

  Nokia Networks

85

216

(61)%

470

(82)%

  HERE

19

10

90%

20

(5)%

  Nokia Technologies

193

86

124%

77

151%

  Group Common Functions

(32)

(8)

 

(43)

 

Operating margin % (non-IFRS)

8.3%

11.4%

(310)bps

13.8%

(550)bps

Profit (non-IFRS)

200

172

16%

356

(44)%

Profit

181

110

65%

327

(45)%

EPS, EUR diluted (non-IFRS)

0.05

0.04

25%

0.09

(44)%

EPS, EUR diluted

0.05

0.03

67%

0.08

(38)%

(1) Results are as reported unless otherwise specified. The results information in this report is unaudited. Please see “Notes to financial statements – Basis of preparation” in our complete Q1 2015 interim report for more information. Non-IFRS results exclude transaction and other related costs resulting from the sale of substantially all of Nokia’s Devices & Services business to Microsoft, goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring related costs, and certain other items that may not be indicative of Nokia’s underlying business performance. For a detailed discussion, please see the year to date discussion and the non-IFRS to reported reconciliation note to the financial statements in our complete Q1 2015 interim report. A reconciliation of our Q4 2014 non-IFRS results to our reported results can be found in our complete Q4 2014 interim report with tables on pages 20-25 published on January 29, 2015. A reconciliation of our Q3 2014 non-IFRS results to our reported results can be found in our complete Q3 2014 interim report with tables on pages 22-27 published on October 23, 2014. A reconciliation of our Q2 2014 non-IFRS results to our reported results can be found in our complete Q2 2014 interim report with tables on pages 22-27 published on July 24, 2014.


Subsequent events

After the end of the first quarter 2015, Nokia announced it had entered into a memorandum of understanding regarding a combination with Alcatel-Lucent, and that it had initiated a strategic review process related to HERE. Additionally, there were positive developments in Nokia’s venture fund investments after the end of the first quarter. Please refer to page 5 in Nokia’s complete Q1 2015 interim report for additional information related to these events.

 

CEO statement

 

Nokia delivered a 20% increase in net sales and 25% increase in earnings per share in the first quarter.  Underlying these results was excellent performance from HERE and Nokia Technologies, while good growth at Nokia Networks was offset by unsatisfactory profitability. 

I remain confident that our lean operating model, ongoing focus on cost management, and the current strength of our portfolio will enable us to meet our 2015 goals for Nokia Networks. The business delivered healthy year-on-year growth even after adjusting for currency fluctuations, although a number of factors in the quarter had a negative impact on profitability. We expect some of these negative factors to ease, particularly in the second half of 2015.

HERE’s excellent momentum in the automotive sector continued, helping the business deliver 25% year-on-year growth and improved profitability. As we proceed with the strategic review that we announced on April 15, we are considering our options in order to determine what is best for Nokia shareholders and best for HERE. I am very pleased with HERE’s performance and firmly believe that it will have a bright future, either with Nokia or with new ownership.

Nokia Technologies also had a strong quarter with year on year sales up more than 100% and operating margin up sharply both year-on-year and sequentially. The business benefitted in the quarter from some non-recurring effects and revenue share from previously divested intellectual property rights. I am more confident than ever that licensing activities are tracking well and that there is a robust pipeline of potential new licensees. In addition, I believe that we are focusing on the right innovation opportunities and that the necessary cost discipline is in place.

Shortly after the end of the quarter, we announced a landmark deal with Alcatel-Lucent. The strategic logic of this proposed transaction is strong and we believe that it will provide long term benefits to shareholders of both Nokia and Alcatel-Lucent. We are moving fast on the necessary integration planning, and have already established a structure designed to minimize disruption to our ongoing business. We will bring the same operational discipline to our integration activities that we have successfully applied to the earlier transformation at Nokia Networks.

Rajeev Suri
President and CEO of Nokia


Nokia in Q1 2015

The following discussion is of Nokia Group’s reported results for the first quarter 2015 which comprise the results of Nokia’s three businesses – Nokia Networks, HERE and Nokia Technologies, as well as Group Common Functions. Comparisons are given to the first quarter 2014 and fourth quarter 2014 results, unless otherwise indicated.

Financial discussion

Net sales

Nokia’s net sales increased 20% year-on-year and declined 16% sequentially. At constant currency, Nokia’s net sales would have increased 11% year-on-year and declined 21% sequentially.

Year-on-year discussion

The year-on-year increase in Nokia’s net sales in the first quarter 2015 was primarily due to higher net sales in Nokia Networks, Nokia Technologies and, to a lesser extent, in HERE.

Sequential discussion

The sequential decline in Nokia’s net sales in the first quarter 2015 was primarily due to seasonally lower net sales in Nokia Networks and, to a lesser extent, in HERE. This was partially offset by higher net sales in Nokia Technologies.

Non-IFRS Operating profit

Year-on-year discussion

Nokia’s non-IFRS operating profit declined 13% year-on-year in the first quarter 2015, primarily due to a decline in non-IFRS operating profit in Nokia Networks, partially offset by increases in non-IFRS operating profit in Nokia Technologies and, to a lesser extent, in HERE.

Nokia’s non-IFRS other income and expenses was an expense of EUR 19 million in the first quarter 2015, compared to an income of EUR 11 million in the first quarter 2014. On a year-on-year basis, the change in Nokia’s non-IFRS other income and expenses was primarily due to lower other income in Group Common Functions and higher foreign exchange hedging related losses.

Sequential discussion

Nokia’s non-IFRS operating profit declined 49% sequentially in the first quarter 2015, primarily due to a decline in non-IFRS operating profit in Nokia Networks, partially offset by an increase in non-IFRS operating profit in Nokia Technologies.

Nokia’s non-IFRS other income and expenses was an expense of EUR 19 million in the first quarter 2015, compared to an expense of EUR 2 million in the fourth quarter 2014. On a sequential basis, the change in Nokia’s non-IFRS other income and expenses was primarily due to foreign exchange hedging related losses.

Non-IFRS Profit

The share of results of associated companies in the first quarter 2015 includes an approximately EUR 25 million out of period adjustment. Nokia has historically accounted for the results of the associated company in arrears as the results have not been material. Due to an increase in the entity’s earnings, the amounts reflected in the first quarter 2015 should have been recorded in the fourth quarter 2014.

Year-on-year discussion

Nokia’s non-IFRS profit increased 16% on a year-on-year basis in the first quarter 2015, primarily due to lower non-IFRS financial expenses and the approximately EUR 25 million out of period adjustment mentioned above, partially offset by lower non-IFRS operating profit and, to a lesser extent, higher non-IFRS tax expenses. In the first quarter 2015 Nokia’s non-IFRS tax expense was based on an effective tax rate of approximately 25%, and this resulted in a higher non-IFRS tax expense than in the first quarter 2014. However, the tax expenses in the first quarter of 2014 and 2015 are not directly comparable due to the fact that Nokia’s deferred tax assets in Finland and Germany were subject to valuation allowances until the third quarter of 2014.

Sequential discussion

Sequentially, Nokia’s non-IFRS profit declined 44% in the first quarter 2015, primarily due to a decline in non-IFRS operating profit, partially offset by lower non-IFRS tax expenses, the approximately EUR 25 million out of period adjustment mentioned above and lower non-IFRS financial expenses.

OUTLOOK

 

 

Metric

Guidance

Commentary

Nokia Networks

FY15 Net sales

Increase YoY

 

FY15 Non-IFRS op. margin

Around the midpoint of the long-term range of 8% – 11% for the full year (update)

Based on factors including competitive industry dynamics, product and regional mix, the timing of major network deployments, and expected continued operational improvement.

This is an update to the earlier non-IFRS operating margin outlook to be in line with the long-term range of 8%-11% for the full year.

HERE

FY15 Net sales

Increase YoY

 

 

FY15 Non-IFRS op. margin

9% – 12% (update)

Based on factors including leading market position, positive industry trends and improved focus on cost efficiency.

This is an update to the earlier non-IFRS operating margin outlook to be between 7%-12% for the full year.

Nokia Technologies

FY15 Net sales

Increase YoY

Excludes potential amounts related to the expected resolution of our arbitration with Samsung. Based on factors including higher investment in licensing activities, licensable technologies and business enablers, including go-to-market capabilities, which target new and significant long-term growth opportunities. 

 

FY15 Non-IFRS op. expense

Approx. in line with Q4’14 level

Nokia

FY15 Capital expenditure

Approx. EUR 250 million (update)

Primarily attributable to Nokia Networks

This is an update to the earlier outlook of approximately EUR 200 million for the full year.

 

FY15 Financial income and expense

Expense of approx. EUR 160 million

Subject to changes in foreign exchange rates and interest-bearing liabilities.

 

FY15 Group Common Functions
non-IFRS op. expense

Approx. EUR 120 million

 

 

Estimated long-term effective tax rate

Approx. 25%

 

 

Annual cash tax obligation

Approx. EUR 250 million per annum until deferred tax assets fully utilized

May vary due to profit levels in different jurisdictions and amount of licence income subject to withholding tax.

 

 

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) the outcome, transaction timeline and closing of the proposed combination of Nokia and Alcatel-Lucent pursuant to a memorandum of understanding (“MoU”) as announced on April 15, 2015 (“Proposed transaction”) and the ability of Nokia to integrate Alcatel-Lucent into Nokia operations (“Combined company”) and achieve the targeted benefits; B) satisfaction of conditions precedent including closing conditions related to the Proposed transaction in a timely manner, or at all, including obtaining required regulatory approvals, the confirmation and approval of our shareholders for the Proposed transaction and successfully completing tenders for the Alcatel-Lucent shares; C) expectations, plans or benefits related to Nokia’s strategies, including the review of strategic options for our HERE business; D) expectations, plans or benefits related to future performance of Nokia’s businesses Nokia Networks, HERE and Nokia Technologies; E) expectations, plans or benefits related to changes in our management and other leadership, operational structure and operating model, including the expected characteristics, business and operations of the Combined company; F) expectations regarding market developments, general economic conditions and structural changes; G) expectations and targets regarding performance, including those related to market share, prices, net sales and margins; H) timing of the deliveries of our products and services; I) expectations and targets regarding our financial performance, operating expenses, taxes, cost savings and competitiveness, as well as results of operations, including synergies related to the Proposed transaction, the target annual run rate of cost synergies for the Combined company and expected financial results of the Combined company; J) expectations and targets regarding collaboration and partnering arrangements, including the expected customer reach of the Combined company; K) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities; L) 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, including any expectations, plans or benefits related to or caused by the transaction where Nokia sold substantially all of its Devices & Services business to Microsoft on April 25, 2014; and M) 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. We describe the risks and uncertainties that affect the Nokia Group or are relevant to all Nokia businesses at the beginning of this section and provide towards the end information on additional risks that are primarily related to the individual Nokia businesses: Nokia Networks, HERE and Nokia Technologies. Factors, including risks and uncertainties that could cause such differences include, but are not limited to: 1) the inability to close the Proposed transaction in a timely manner, or at all, for instance due to the inability or delays in obtaining the shareholder approval or necessary regulatory approvals for the Proposed transaction, or the occurrence of any event, change or other circumstance that could give rise to the termination of the MoU and successfully completing tenders for the Alcatel-Lucent shares; 2) the inability to achieve the targeted business and operational benefits from the Proposed transaction or disruption caused by the Proposed transaction, including inability to integrate Alcatel-Lucent into Nokia operations and any negative effect from the implementation of the Proposed combination or the announcement of the Proposed transaction for instance due to the loss of customers, loss of key executives or employees or reduced focus on day to day operations and business; 3) our ability to identify market trends and business opportunities to select and execute strategies successfully and in a timely manner, and our ability to successfully adjust our operations and operating models; 4) our ability to sustain or improve the operational and financial performance of our businesses and correctly identify or successfully pursue new business opportunities; 5) our dependence on general economic and market conditions, including the capacity for growth in internet and technology usage; 6) our exposure to regulatory, political or other developments in various countries or regions; 7) our ability to invent new relevant technologies, products and services, to develop and maintain our intellectual property portfolio and to maintain the existing sources of intellectual property related revenue and establish new such sources; 8) our ability to protect our intellectual property rights and defend against third-party infringements and claims that we have infringed third parties’ intellectual property rights, as well as increased licensing costs and restrictions on our ability to use certain technologies; 9) the potential complex tax issues, tax disputes and tax obligations we may face, including the obligation to pay additional taxes in various jurisdictions and our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 10) our ability to retain, motivate, develop and recruit appropriately skilled employees, for instance due to possible disruption caused by the Prosed transaction; 11) the performance of the parties we partner and collaborate with, as well as that of our financial counterparties, and our ability to achieve successful collaboration or partnering arrangements, including any disruption from the Proposed transaction to obtaining or maintaining the contractual relationships; 12) exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Japanese yen and the Chinese yuan, as well as certain other currencies; 13) the impact of unfavorable outcome of litigation, arbitration, contract-related disputes or allegations of health hazards associated with our businesses; 14) any inefficiency, malfunction or disruption of a system or network that our operations rely on or any impact of a possible cybersecurity breach; 15) our ability to achieve targeted benefits from or successfully implement planned transactions, such as acquisitions, divestments, mergers or joint ventures, and manage unexpected liabilities related thereto; 16) our ability to manage our operating expenses and reach targeted results through efforts aimed at improving our financial performance, for instance through cost savings and other efforts aimed at increased competitiveness 17) our ability to optimize our capital structure as planned and re-establish our investment grade credit rating; 18) Nokia Networks’ ability to execute its strategy or to effectively and profitably adapt its business and operations in a timely manner to the increasingly diverse needs of its customers in the mobile broadband infrastructure and related services market or to such technological developments; 19) Nokia Networks’ ability to effectively and profitably invest in new competitive high-quality products, services, upgrades and technologies and bring them to market in a timely manner; 20) Nokia Networks’ dependence on a limited number of customers and large multi-year agreements and adverse effects as a result of further operator consolidation; 21) Nokia Networks’ ability to manage our manufacturing, service creation and delivery, as well as our logistics efficiently and without interruption; 22) Nokia Networks’ dependence on a limited number of suppliers, who may fail to deliver sufficient quantities of fully functional products and components or deliver timely services meeting our customers’ needs; 23) adverse developments with respect to customer financing or extended payment terms Nokia Networks provides to customers; 24) adverse developments resulting from or in connection to the review of strategic options for our HERE business, including those related to a potential divestment of the HERE business; 25) the intense competition HERE faces and its ability to effectively and profitably invest in new competitive high-quality services and data and bring these to market in a timely manner or adjust its operations efficiently; 26) HERE’s dependence on the overall automotive market developments and customer business conditions; 27) HERE’s dependence, especially with respect to sales to the automotive industry, on a limited number of customers and large multi-year agreements; 28) Nokia Technologies’ ability to maintain its existing sources of intellectual property related revenue or establish new sources; 29) Nokia Technologies’ dependence on a limited number of key licensees that contribute proportionally significant patent licensing income, including the outcome of the binding arbitration with Samsung expected in 2015; 30) Nokia Technologies’ dependence on adequate regulatory protection for patented or other propriety technologies; and 31) Nokia Technologies’ ability to execute its plans through business areas such as technology licensing, licensing the Nokia brand and other business ventures including technology innovation and incubation; 32) and the impact on the Combined company (after giving effect to the Proposed transaction with Alcatel-Lucent) of any of the foregoing risks or forward-looking statements, as well as the risk factors specified on pages 74 to 89 of Nokia’s latest annual report on Form 20-F under “Operating and Financial Review and Prospects-Risk factors”. 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. Nokia does 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.

Nokia management, Espoo – April 29, 2015

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