2016-05-10 07:01:06 CEST
2016-05-10 07:01:06 CEST
REGULATED INFORMATION
Nokia - Interim report (Q1 and Q3)
Nokia Corporation Interim Report for Q1 2016
Nokia Corporation
Interim Report
May 10, 2016 at 08:00 (CET +1)
Nokia Corporation Interim Report for Q1 2016
Non-IFRS financial results benefitted from expanded portfolio and continuation
of solid execution
This is a summary of the Nokia Corporation interim report for first quarter
2016 published today. The complete interim report for first quarter 2016 with
tables is available at http://nokia.com/financials. Investors should not rely on
summaries of our interim reports only, but should review the complete interim
reports with tables.
FINANCIAL HIGHLIGHTS
* Non-IFRS net sales in Q1 2016 of EUR 5.6 billion. In the year-ago quarter,
non-IFRS net sales would have been EUR 6.1 billion on a comparable combined
company basis.
* Non-IFRS diluted EPS in Q1 2016 of EUR 0.03. Q1 2016 reflected the
acquisition of Alcatel-Lucent, which resulted in a higher share count, as
well as higher non-IFRS tax expenses due to unfavorable changes in the
regional profit mix. Note that Nokia's Q1 2016 non-IFRS diluted EPS was
reported as a combined company, whereas the Q1 2015 non-IFRS diluted EPS of
EUR 0.05 was reported on a Nokia stand-alone basis.
* In Q1 2016, the net cash and other liquid assets of the combined company
increased by EUR 471 million, to EUR 8.2 billion, compared to Nokia on a
standalone basis at the end of Q4 2015, primarily due to the acquisition of
Alcatel-Lucent, partially offset by cash outflows related to working
capital.
Nokia's Networks business
* 8% year-on-year net sales decrease in Q1 2016. Our performance was primarily
due to Ultra Broadband Networks, which declined 12% year-on-year and 27%
sequentially, consistent with our outlook for a greater than normal seasonal
decline in the wireless infrastructure market in Q1 2016. IP Networks and
Applications grew on a year-on-year basis.
* Strong non-IFRS gross margin of 38.3% in Q1 2016 primarily due to improved
product mix in Ultra Broadband Networks (led by Mobile Networks) and IP
Networks and Applications (led by IP/Optical Networks), as well as
efficiency gains.
* Non-IFRS operating margin of 6.5% in Q1 2016. The year-on-year increase of
2.8 percentage points was primarily due to the higher non-IFRS gross margin,
as well as continued focus on execution excellence.
Nokia Technologies
* 27% year-on-year net sales decrease in Q1 2016. Our performance was affected
by the absence of the following three items which benefitted Q1 2015: non-
recurring adjustments to accrued net sales from existing agreements, revenue
share related to previously divested intellectual property rights ("IPR"),
and IPR divestments. Excluding these three items, net sales increased year-
on-year by approximately 10% due to higher intellectual property licensing
income.
First quarter 2016 results compared to combined company historicals. See note
1 to the financial statements for further details(1,2)
-------------------------------------------------------------------------------
Combined company Combined company
historicals(2) historicals(2)
EUR million Q1'16 Q1'15 YoY Q4'15 QoQ change
change
-------------------------------------------------------------------------------
Net sales -
constant (9)% (27)%
currency (non-
IFRS)
Net sales (non- 5 603 6 129 (9)% 7 719 (27)%
IFRS)
Nokia's
Networks 5 181 5 662 (8)% 7 057 (27)%
business
Ultra Broadband 3 729 4 227 (12)% 5 081 (27)%
Networks
IP Networks and 1 452 1 435 1% 1 976 (27)%
Applications
Nokia 198 273 (27)% 413 (52)%
Technologies
Group Common 236 203 16% 254 (7)%
and Other
Gross profit 2 205 2 264 (3)% 3 272 (33)%
(non-IFRS)
Gross margin % 39.4% 36.9% 250bps 42.4% (300)bps
(non-IFRS)
Operating
profit (non- 345 276 25% 1 279 (73)%
IFRS)
Nokia's
Networks 337 209 61% 1 097 (69)%
business
Ultra Broadband 234 168 39% 702 (67)%
Networks
IP Networks and 103 42 145% 396 (74)%
Applications
Nokia 106 178 (40)% 311 (66)%
Technologies
Group Common (99) (111) (129)
and Other
Operating
margin % (non- 6.2% 4.5% 170bps 16.6% (1 040)bps
IFRS)
-------------------------------------------------------------------------------
First quarter 2016 results compared to Nokia standalone historicals. See note
1 to the financial statements for further details(1,3)
-------------------------------------------------------------------------------
Nokia standalone Nokia standalone
historicals(3) historicals(3)
EUR million YoY QoQ
(except for EPS Q1'16 Q1'15 change Q4'15 change
in EUR)
-------------------------------------------------------------------------------
Profit (non- 139 184 (24)% 575 (76)%
IFRS)
(Loss)/profit (613) 169 499
EPS, diluted 0.03 0.05 (40)% 0.15 (80)%
(non-IFRS)
EPS, diluted (0.09) 0.05 0.13
Net cash and
other liquid 8 246 4 672 76% 7 775 6%
assets
-------------------------------------------------------------------------------
(1) Results 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, 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 Q1 2016 details, please refer to the year to date discussion in
the complete interim report and note 2, "Non-IFRS to reported reconciliation",
in the notes to the financial statements attached to the complete interim
report. A reconciliation of the Q1 2015 and the Q4 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.
(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 the complete interim 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 launches headcount reductions as part of global synergy and transformation
program
Nokia announced that it has started actions to reduce company personnel globally
as part of its synergy and transformation program.
The headcount reductions are expected to take place between now and the end of
2018, consistent with Nokia's synergy target timeline. Reductions will come
largely in areas where there are overlaps, as Nokia outlined on October
29, 2015. At the same time, Nokia is taking steps to adapt to challenging market
conditions and to shift resources to future-oriented technologies such as 5G,
the Cloud and the Internet of Things. As part of the program, Nokia also
continues to target savings in real estate, services, procurement, supply chain
and manufacturing.
Nokia plans to acquire Withings to accelerate entry into Digital Health
Nokia announced plans to acquire Withings S.A. ("Withings"), a pioneer and
leader in the connected health revolution with a family of award-winning digital
health products and services to help people all over the world lead healthier,
happier and more productive lives. Withings has approximately 200 employees and
will be part of our Nokia Technologies business.
With this acquisition, Nokia is strengthening its position in the Internet of
Things in a way that leverages the power of the trusted Nokia brand, fits with
the Nokia's purpose of expanding the human possibilities of the connected world,
and puts Nokia at the heart of a very large addressable market.
The planned transaction values Withings at EUR 170 million, would be settled in
cash and is expected to close in early Q3 2016 subject to regulatory approvals
and customary closing conditions.
CEO STATEMENT
Nokia's first quarter results demonstrate the strategic value of our combination
with Alcatel-Lucent.
I am pleased that we were able to deliver solid profitability in what is
typically a seasonally weak quarter and at a time when the risk of integration-
related disruption was high. While our revenue decline was disappointing, the
shortfall was largely driven by Mobile Networks, where the challenging
environment is not a surprise. We noted in our Q4 2015 earnings release that we
expected some market headwinds in 2016 in the wireless sector and we continue to
hold that view today.
Based on our current assessment, we expect a full year 2016 non-IFRS operating
margin above 7% in the Networks business. When looking at the first half of the
year, we do not expect typical seasonal patterns to occur given likely market
conditions in the second quarter and our ongoing integration of Alcatel-Lucent.
While integrations of the scale of Alcatel-Lucent are complex and take time, we
are now sufficiently confident in our progress that we are targeting synergies
that are both more than and faster than our original plan. We already have
agreed transition plans that cover the most pressing areas of portfolio overlap
with most of our top customers; have begun the process of reducing over-lapping
personnel including initial reductions in the United States and several other
countries; started to consolidate our real estate footprint with several sites
already closed and thirty more scheduled for the current quarter; and completed
40 projects with suppliers to drive procurement savings, with 200 more projects
currently underway and plans for hundreds of additional projects to be launched
largely over the course of Q2 2016.
I am also pleased that we continue to see strong support from our customers,
including those from the former Alcatel-Lucent. We are focused on capitalizing
on these opportunities through strengthening our sales execution, as well as
bringing unique innovation rapidly to market, such as our recently announced 5G-
ready AirScale radio access family of products.
On a final note, I am excited that the team from Withings will be joining Nokia,
as part of Nokia Technologies. We have said consistently that digital health is
an area of strategic interest to us, and with this acquisition we have an
excellent opportunity to expand in what is one of the largest markets in the
Internet of Things and build future licensing opportunities.
Rajeev Suri
President and CEO
FINANCIAL DISCUSSION
The following discussion is of Nokia's results for the first quarter 2016, which
comprise the results of Nokia's businesses - Nokia's Networks business
(including Ultra Broadband Networks and IP Networks and Applications) 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 the complete interim report. Comparisons are given to the first quarter 2015
and fourth quarter 2015 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 the complete
interim report.
Non-IFRS Net sales
Nokia non-IFRS net sales decreased 9% year-on-year and decreased 27%
sequentially. On a constant currency basis, Nokia non-IFRS net sales would have
decreased 9% year-on-year and would have decreased 27% sequentially.
Year-on-year discussion
The year-on-year decrease in Nokia non-IFRS net sales in the first quarter 2016
was primarily due to lower net sales in Nokia's Networks business and Nokia
Technologies.
Sequential discussion
The sequential decrease in Nokia non-IFRS net sales in the first quarter 2016
was primarily due to lower net sales in Nokia's Networks business and Nokia
Technologies.
Non-IFRS Operating profit
Year-on-year discussion
Nokia non-IFRS operating profit increased primarily due to lower non-IFRS
research and development ("R&D") expenses and a net positive fluctuation in non-
IFRS other income and expenses, partially offset by lower non-IFRS gross profit.
The lower non-IFRS gross profit was primarily due to Nokia Technologies
partially offset by Nokia's Networks business.
The lower non-IFRS R&D expenses was primarily due to Nokia's Networks business
and Nokia Technologies.
Nokia non-IFRS other income and expenses was an expense of EUR 15 million in the
first quarter 2016, compared to an expense of EUR 49 million in the year-ago
quarter. On a year-on-year basis, the change was primarily due to Group Common
and Other, as well as Nokia's Networks business.
Sequential discussion
Nokia non-IFRS operating profit decreased primarily due to lower non-IFRS gross
profit, partially offset by lower non-IFRS R&D expenses and non-IFRS selling,
general and administrative ("SG&A") expenses.
The lower non-IFRS gross profit was primarily due to Nokia's Networks business
and Nokia Technologies.
The lower non-IFRS R&D expenses was primarily due to Nokia's Networks business.
The lower non-IFRS SG&A expenses was primarily due to Nokia's Networks business.
Nokia non-IFRS other income and expenses was an expense of EUR 15 million in the
first quarter 2016, compared to an income of EUR 20 million in the fourth
quarter 2015. On a sequential basis, the change was primarily due to Nokia's
Networks business, partially offset by Group Common and Other.
OUTLOOK
Metric Guidance Commentary
-------------------------------------------------------------------------------
Nokia Annual operating Above EUR 900 Compared to the
cost synergies million of net combined non-IFRS
operating cost operating costs of
synergies to be Nokia and Alcatel-
achieved in full Lucent for full year
year 2018 (update) 2015.
Expected to be derived
from a wide range of
initiatives related to
operating expenses and
cost of sales,
including:
* Streamlining of
overlapping
products and
services,
particularly within
the Mobile Networks
business group;
* Rationalization of
regional and sales
organizations;
* Rationalization of
overhead,
particularly within
manufacturing,
supply-chain, real
estate and
information
technology;
* Reduction of
central function
and public company
costs; and
* Procurement
efficiencies, given
the combined
company's expanded
purchasing power.
This is an update to
the earlier annual
operating cost
synergies outlook of
approximately EUR 900
million of net
operating cost
synergies to be
achieved in full year
2018.
-------------------------------------------------------------
FY16 Non-IFRS Expense of Primarily includes net
financial income approximately EUR interest expenses
and expense 300 million 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 Above 40% for full The increase in the
rate year 2016 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 Approximately EUR May vary due to profit
outflows related 400 million levels in different
to taxes jurisdictions and the
amount of licensing
income subject to
withholding tax.
-------------------------------------------------------------
FY16 Capital Approximately EUR Primarily attributable
expenditures 650 million Nokia's Networks
business.
-------------------------------------------------------------------------------
Nokia's Networks FY16 non-IFRS net Decline YoY Combined company non-
business sales IFRS net sales and non-
--------------------------------------IFRS operating margin
FY16 Non-IFRS Above 7% are expected to be
operating margin influenced by factors
including:
* A flattish capex
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;
* Competitive
industry dynamics;
* Product and
regional mix;
* The timing of major
network
deployments; and
* Execution of
synergy plans.
-------------------------------------------------------------------------------
Nokia FY16 Net sales Not provided Due to risks and
Technologies 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, and
does not intend to
provide an outlook in
its reports during
fiscal year 2016.
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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, 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; 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 May 9, 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's Annual General Meeting 2016 is scheduled to be held on June
16, 2016.
* Nokia plans to publish its second quarter 2016 results on August 4, 2016.
[HUG#2010989]
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