SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a -16 or 15d -16 of
the Securities Exchange Act of 1934
Report on Form 6-K dated July 26, 2018
(Commission File No. 1-13202)
Nokia Corporation
Karaportti 3
FI-02610 Espoo
Finland
(Name and address of registrant’s principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F: x Form 40-F: o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes: o No: x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes: o No: x
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes: o No: x
Enclosures:
Nokia stock exchange release dated July 26, 2018: Nokia Corporation Financial Report for Q2 and Half Year 2018
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HALF YEAR FINANCIAL REPORT |
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| |
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July 26, 2018 |
Nokia Corporation
Half Year Financial Report
July 26, 2018 at 08:00 (CET +1)
Nokia Corporation Financial Report for Q2 and Half Year 2018
First half 2018 as expected; improvement expected in Nokia’s Networks business in second half 2018
· Full year 2018 Nokia-level guidance reiterated
This is a summary of the Nokia Corporation financial report for Q2 and half year 2018 published today. The complete financial report for Q2 and half year 2018 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 financial reports with tables.
FINANCIAL HIGHLIGHTS
· Net sales in Q2 2018 were EUR 5.3bn, compared to EUR 5.6bn in Q2 2017. On a constant currency basis, net sales would have been down 1%.
· Non-IFRS diluted EPS in Q2 2018 was EUR 0.03, compared to EUR 0.08 in Q2 2017. Reported diluted EPS in Q2 2018 was negative EUR 0.05, compared to negative EUR 0.07 in Q2 2017.
· In the second quarter, net cash and current financial investments decreased by approximately EUR 2.0 billion, primarily due to two expected items: the payment of the dividend of approximately EUR 940 million; and the payment of employee incentives related to Nokia’s business performance in 2017, which was the primary driver of the decrease in liabilities within net working capital of approximately EUR 600 million.
Nokia’s Networks business net sales were EUR 4.7bn, with operating profit of EUR 69mn
· Our backlog was strong at the end of Q2, and we continue to expect commercial 5G network deployments to begin near the end of 2018.
· Continued progress was made in Q2 with our strategy to diversify and grow by targeting attractive adjacent markets. Strong momentum continued with large enterprise vertical and webscale customers, with double-digit year-on-year growth in net sales.
· Momentum in our end-to-end strategy continued, with approximately 40% of our sales pipeline now comprised of solutions, products and services from multiple business groups.
Nokia Technologies net sales were EUR 361mn, with operating profit of EUR 292mn
· Strong track record maintained, with 23% year-on-year growth in recurring licensing net sales and 27% year-on-year operating profit increase in Q2, primarily related to license agreements entered into in 2017.
· Nokia Technologies continued to make good progress on new licensing agreements; no major agreements were announced in Q2.
Outlook
· Nokia reiterates full year 2018 Nokia-level guidance and remains on target to deliver EUR 1.2 billion of recurring annual cost savings in full year 2018.
· In its Networks business, Nokia expects improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America. Results in 2018 and over the longer term are expected to be influenced by: a) our ability to scale our supply chain operations to meet increasing demand; b) recovery actions to address increased price pressure; and c) the timing of completions and acceptances of certain projects, particularly related to 5G.
· Nokia continues to see opportunities to build on its track record in Nokia Licensing within Nokia Technologies and drive a compound annual growth rate of approximately 10% for recurring net sales over the 3-year period ending 2020.
· Please refer to the full details and other targets in the Outlook section of this press release.
Second quarter and January-June 2018 non-IFRS results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)
|
EUR million (except for EPS in EUR) |
|
Q2’18 |
|
Q2’17 |
|
YoY |
|
Constant |
|
Q1-Q2’18 |
|
Q1-Q2’17 |
|
YoY |
|
Constant |
|
|
Net sales (non-IFRS) |
|
5 318 |
|
5 629 |
|
(6 |
)% |
(1 |
)% |
10 246 |
|
11 017 |
|
(7 |
)% |
0 |
% |
|
Nokia’s Networks business |
|
4 693 |
|
4 971 |
|
(6 |
)% |
0 |
% |
9 018 |
|
9 873 |
|
(9 |
)% |
(1 |
)% |
|
Nokia Technologies |
|
361 |
|
369 |
|
(2 |
)% |
(2 |
)% |
726 |
|
616 |
|
18 |
% |
19 |
% |
|
Group Common and Other |
|
278 |
|
307 |
|
(9 |
)% |
(4 |
)% |
530 |
|
562 |
|
(6 |
)% |
(1 |
)% |
|
Gross profit (non-IFRS) |
|
2 038 |
|
2 350 |
|
(13 |
)% |
|
|
3 979 |
|
4 546 |
|
(12 |
)% |
|
|
|
Gross margin % (non-IFRS) |
|
38.3 |
% |
41.7 |
% |
(340 |
)bps |
|
|
38.8 |
% |
41.3 |
% |
(250 |
)bps |
|
|
|
Operating profit (non-IFRS) |
|
334 |
|
574 |
|
(42 |
)% |
|
|
573 |
|
915 |
|
(37 |
)% |
|
|
|
Nokia’s Networks business |
|
69 |
|
406 |
|
(83 |
)% |
|
|
112 |
|
730 |
|
(85 |
)% |
|
|
|
Nokia Technologies |
|
292 |
|
230 |
|
27 |
% |
|
|
565 |
|
346 |
|
63 |
% |
|
|
|
Group Common and Other |
|
(27 |
) |
(62 |
) |
(56 |
)% |
|
|
(105 |
) |
(161 |
) |
(35 |
)% |
|
|
|
Operating margin % (non-IFRS) |
|
6.3 |
% |
10.2 |
% |
(390 |
)bps |
|
|
5.6 |
% |
8.3 |
% |
(270 |
)bps |
|
|
|
Financial income and expenses (non-IFRS) |
|
(84 |
) |
(63 |
) |
33 |
% |
|
|
(200 |
) |
(144 |
) |
39 |
% |
|
|
|
Income taxes (non-IFRS) |
|
(106 |
) |
(74 |
) |
43 |
% |
|
|
(143 |
) |
(122 |
) |
17 |
% |
|
|
|
Profit for the period (non-IFRS) |
|
139 |
|
441 |
|
(68 |
)% |
|
|
223 |
|
644 |
|
(65 |
)% |
|
|
|
Profit attributable to the equity holders of the parent (non-IFRS) |
|
144 |
|
449 |
|
(68 |
)% |
|
|
230 |
|
646 |
|
(64 |
)% |
|
|
|
Non-controlling interests (non-IFRS) |
|
(4 |
) |
(9 |
) |
|
|
|
|
(7 |
) |
(2 |
) |
|
|
|
|
|
EPS, EUR diluted (non-IFRS) |
|
0.03 |
|
0.08 |
|
(63 |
)% |
|
|
0.04 |
|
0.11 |
|
(64 |
)% |
|
|
Second quarter and January-June 2018 reported results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)
|
EUR million (except for EPS in EUR) |
|
Q2’18 |
|
Q2’17 |
|
YoY |
|
Constant |
|
Q1-Q2’18 |
|
Q1-Q2’17 |
|
YoY |
|
Constant |
|
|
Net sales |
|
5 313 |
|
5 619 |
|
(5 |
)% |
(1 |
)% |
10 237 |
|
10 996 |
|
(7 |
)% |
0 |
% |
|
Nokia’s Networks business |
|
4 693 |
|
4 971 |
|
(6 |
)% |
0 |
% |
9 018 |
|
9 873 |
|
(9 |
)% |
(1 |
)% |
|
Nokia Technologies |
|
361 |
|
369 |
|
(2 |
)% |
(2 |
)% |
726 |
|
616 |
|
18 |
% |
19 |
% |
|
Group Common and Other |
|
278 |
|
307 |
|
(9 |
)% |
(4 |
)% |
530 |
|
562 |
|
(6 |
)% |
(1 |
)% |
|
Non-IFRS exclusions |
|
(5 |
) |
(11 |
) |
(55 |
)% |
|
|
(9 |
) |
(21 |
) |
(57 |
)% |
|
|
|
Gross profit |
|
1 860 |
|
2 236 |
|
(17 |
)% |
|
|
3 666 |
|
4 361 |
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(16 |
)% |
|
|
|
Gross margin % |
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35.0 |
% |
39.8 |
% |
(480 |
)bps |
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|
35.8 |
% |
39.7 |
% |
(390 |
)bps |
|
|
|
Operating loss |
|
(221 |
) |
(45 |
) |
391 |
% |
|
|
(557 |
) |
(173 |
) |
222 |
% |
|
|
|
Nokia’s Networks business |
|
69 |
|
406 |
|
(83 |
)% |
|
|
112 |
|
730 |
|
(85 |
)% |
|
|
|
Nokia Technologies |
|
292 |
|
230 |
|
27 |
% |
|
|
565 |
|
346 |
|
63 |
% |
|
|
|
Group Common and Other |
|
(27 |
) |
(62 |
) |
(56 |
)% |
|
|
(105 |
) |
(161 |
) |
(35 |
)% |
|
|
|
Non-IFRS exclusions |
|
(555 |
) |
(620 |
) |
(10 |
)% |
|
|
(1 129 |
) |
(1 088 |
) |
4 |
% |
|
|
|
Operating margin % |
|
(4.2 |
)% |
(0.8 |
)% |
(340 |
)bps |
|
|
(5.4 |
)% |
(1.6 |
)% |
(380 |
)bps |
|
|
|
Financial income and expenses |
|
(56 |
) |
(287 |
) |
(80 |
)% |
|
|
(164 |
) |
(433 |
) |
(62 |
)% |
|
|
|
Income taxes |
|
10 |
|
(103 |
) |
|
|
|
|
104 |
|
(256 |
) |
|
|
|
|
|
Loss for the period |
|
(271 |
) |
(433 |
) |
(37 |
)% |
|
|
(625 |
) |
(868 |
) |
(28 |
)% |
|
|
|
Loss attributable to the equity holders of the parent |
|
(267 |
) |
(423 |
) |
(37 |
)% |
|
|
(618 |
) |
(896 |
) |
(31 |
)% |
|
|
|
Non-controlling interests |
|
(4 |
) |
(9 |
) |
|
|
|
|
(7 |
) |
28 |
|
|
|
|
|
|
EPS, EUR diluted |
|
(0.05 |
) |
(0.07 |
) |
(29 |
)% |
|
|
(0.11 |
) |
(0.16 |
) |
(31 |
)% |
|
|
|
Net cash and current financial investments |
|
2 144 |
|
3 964 |
|
(46 |
)% |
|
|
2 144 |
|
3 964 |
|
(46 |
)% |
|
|
(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 to the Financial statement information in this report. Change in net sales at constant currency excludes the effect 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.
CEO STATEMENT
Nokia’s Q2 2018 results were consistent with our view that the first half of the year would be weak followed by an increasingly robust second half. Pleasingly, I am able to confirm that we expect to deliver 2018 results within the ranges of our annual guidance.
Our topline started to recover in the second quarter, with sales in constant currency approximately flat at both Group and Networks levels; year-on-year constant currency sales growth in three of five of our Networks business groups and in three out of our six regions.
Our entry into the enterprise market continued to proceed well in Q2. Year-on-year sales in constant currency increased approximately 30%, with strength in both vertical markets and webscale companies. Nokia Technologies had a very good second quarter, with recurring licensing revenues up very strongly and operating profit up at excellent levels compared to Q2 last year.
Our view about the acceleration of 5G has not changed and we continue to believe that Nokia is well-positioned for the coming technology cycle given the strength of our end-to-end portfolio. Our deal win rate is very good, with significant recent successes in the key early 5G markets of the United States and China.
The installed base of our superb high-capacity AirScale product, which enables customers to quickly upgrade to 5G without a hardware swap, is growing fast. And, the strength of our end-to-end portfolio remains a differentiator. When you look at our sales pipeline, 40% of it is now comprised of end-to-end deals. That is the highest level we have seen to-date.
Business and regional mix continued to have some impact on gross margin, as did near-term actions of a small number of large customers funding their 5G entry within their existing budget plans.
We expect market conditions to improve further in the second half, particularly in Q4, Nokia’s seasonally strongest quarter, and as 5G accelerates significantly.
Rajeev Suri
President and CEO
OUTLOOK
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Metric |
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Guidance |
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Commentary |
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Nokia |
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Non-IFRS operating margin |
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9-11% for full year 2018 and |
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Nokia ‘s guidance for significant improvement between full year 2018 and full year 2020 is primarily due to expectations for: a) Improved results in Nokia’s Networks business, which are detailed below; b) Improved results in Nokia Technologies, which are detailed below; and c) Lower Nokia support function costs within Nokia’s Networks business and Group Common and Other. |
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Non-IFRS diluted earnings per share |
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EUR 0.23 - 0.27 in full year 2018 and |
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Dividend |
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Approximately 40% to 70% of non-IFRS EPS on a long-term basis |
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Nokia’s Board of Directors is committed to proposing a growing dividend, including for 2018. |
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Recurring free cash flow |
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Slightly positive in full year 2018 and clearly positive in full year 2020 |
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Recurring free cash flow is expected to improve over the longer-term, due to lower cash outflows related to restructuring and network equipment swaps(1) and improved operational results over time. |
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Recurring annual cost savings for Nokia, excluding Nokia Technologies |
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Approximately EUR 1.2 billion of recurring annual cost savings in full year 2018, of which approximately EUR 800 million are expected from operating expenses(1) |
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The reference period is full year 2015, in which the combined operating expenses of Nokia and Alcatel-Lucent, excluding Nokia Technologies, were approximately EUR 7.3 billion. |
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Network equipment swaps |
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Approximately EUR 1.4 billion of charges and cash outflows in total(1) |
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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. |
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Non-IFRS financial income and expenses |
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Expense of approximately EUR 350 million in full year 2018 and approximately EUR 300 million over the longer-term |
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Nokia’s outlook for non-IFRS financial income and expenses in full year 2018 and over the longer-term is expected to be influenced by factors including: · Net interest expenses related to interest-bearing liabilities and defined benefit pension and other post-employment benefit plans; · Foreign exchange fluctuations and hedging costs; and · Expenses related to the sale of receivables. |
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Non-IFRS tax rate |
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Approximately 30% for full year 2018 and 25% over the longer-term |
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Nokia’s outlook for non-IFRS tax rate for full year 2018 and over the longer-term is expected to be influenced by factors including the absolute level of profits, regional profit mix and any further changes to our operating model. |
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Capital expenditures |
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Approximately EUR 700 million in full year 2018 and approximately EUR 600 million over the longer-term |
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Primarily attributable to Nokia’s Networks business, and consistent with the depreciation of property, plant and equipment over the longer-term. |
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Nokia’s Networks business |
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Net sales |
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Outperform its primary addressable market in 2018 and over the longer-term |
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For Nokia’s Networks business, Nokia expects net sales to outperform its primary addressable market and operating margin to expand between full year 2018 and full year 2020. |
|
|
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Operating margin |
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6-9% for full year 2018 and |
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Nokia’s outlook for net sales and operating margin for Nokia’s Networks business in 2018 and 2020 is expected to be influenced by factors including: · An approximately 1 to 3 percent decline in the primary addressable market for Nokia’s Networks business in full year 2018, compared to 2017, on a constant currency basis; · Customer demand for 5G, with commercial 5G network deployments expected to begin near the end of 2018; · Improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America, following weakness in the first half of 2018 (This is an update to earlier commentary for improved market conditions in the second half of 2018, particularly in North America.); · Growth in the primary addressable market for Nokia’s Networks business in 2019 and 2020, on a constant currency basis; · Our ability to scale our supply chain operations to meet increasing demand; · Recovery actions to address increased price pressure, including the ability to offset price erosion through cost reductions (new commentary); · The timing of completions and acceptances of certain projects, particularly related to 5G (new commentary); · Focus on targeted growth opportunities in attractive adjacent markets; · Building a strong standalone software business; · Improved R&D productivity resulting from new ways of working and the reduction of legacy platforms over time; · Lower support function costs, including IT and site costs; · Uncertainty related to potential mergers or acquisitions by our customers; · Product and regional mix; and · Competitive and other industry dynamics. |
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Nokia Licensing within Nokia Technologies |
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Recurring net sales |
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Grow at a compound annual growth rate (CAGR) of approximately 10% over the 3-year period ending 2020 |
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Due to risks and uncertainties in determining the timing and value of significant patent, brand and technology licensing agreements, Nokia believes it is not appropriate to provide annual outlook ranges for Nokia Licensing within Nokia Technologies. Although annual results are difficult to forecast, Nokia expects net sales growth and operating margin expansion over the 3-year period ending 2020. In full year 2017, licensing net sales were approximately EUR 1.6 billion, of which approximately EUR 300 million were non-recurring in nature and related to catch-up net sales for prior years. · The timing and value of new patent licensing agreements with smartphone vendors, automotive companies and consumer electronics companies; · Renegotiation of expiring patent licensing agreements; · Increases or decreases in net sales related to existing patent licensees; · Results in brand and technology licensing; · Costs to protect and enforce our intellectual property rights; and · The regulatory landscape. |
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Operating margin |
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Expand to approximately 85% for full year 2020 |
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NOKIA IN Q2 2018 — NON-IFRS
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.
Year-on-year changes in non-IFRS net sales and non-IFRS operating profit
Nokia non-IFRS net sales decreased 6% year-on-year. On a constant currency basis, Nokia non-IFRS net sales would have decreased 1% year-on-year.
|
EUR million, non-IFRS |
|
Net sales |
|
% change |
|
Gross |
|
(R&D) |
|
(SG&A) |
|
Other |
|
Operating |
|
Change in |
|
|
Networks business |
|
(278 |
) |
(6 |
)% |
(313 |
) |
5 |
|
31 |
|
(60 |
) |
(337 |
) |
(670 |
)bps |
|
Nokia Technologies |
|
(8 |
) |
(2 |
)% |
2 |
|
24 |
|
25 |
|
11 |
|
62 |
|
1 860 |
bps |
|
Group Common and Other |
|
(29 |
) |
(9 |
)% |
(1 |
) |
(3 |
) |
4 |
|
35 |
|
35 |
|
1 050 |
bps |
|
Eliminations |
|
3 |
|
|
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|
|
|
Nokia |
|
(311 |
) |
(6 |
)% |
(312 |
) |
25 |
|
60 |
|
(14 |
) |
(240 |
) |
(390 |
)bps |
On a year-on-year basis, foreign exchange fluctuations had a negative impact on non-IFRS gross profit, a positive impact on non-IFRS operating expenses and an approximately neutral net impact on non-IFRS operating profit in the second quarter 2018.
Year-on-year changes in non-IFRS profit attributable to the equity holders of the parent
|
EUR million, non- |
|
Operating |
|
Financial |
|
Income taxes |
|
Profit |
|
Non- |
|
Profit attributable to |
|
|
Nokia |
|
(240 |
) |
(21 |
) |
(32 |
) |
(302 |
) |
(5 |
) |
(305 |
) |
Non-IFRS financial income and expenses
The net negative fluctuation in non-IFRS financial income and expenses was primarily due to the absence of venture fund distributions. Interest expenses associated with the inclusion of new items such as costs related to the sale of receivables and financing elements from customer and other contracts as a result of the adoption of new IFRS standards in the first quarter 2018 were offset by lower interest expenses from financing activities.
Non-IFRS income taxes
Increase in non-IFRS tax rate to 43% in the second quarter 2018 was primarily due to regional profit mix. In the second quarter 2017 regional profit mix resulted in an unusually low non-IFRS tax rate of 14% and in addition, in the second quarter 2018 the combination of lower absolute level of profit and certain prior year tax charges increased the non-IFRS tax rate.
NOKIA IN Q2 2018 - REPORTED
FINANCIAL DISCUSSION
Year-on year changes in net sales and operating profit
Nokia net sales decreased 5% year-on-year. On a constant currency basis, Nokia net sales would have decreased 1% year-on-year.
|
EUR million |
|
Net Sales |
|
% change |
|
Gross |
|
(R&D) |
|
(SG&A) |
|
Other |
|
Operating |
|
Change in |
|
|
Networks business |
|
(278 |
) |
(6 |
)% |
(313 |
) |
5 |
|
31 |
|
(60 |
) |
(337 |
) |
(670 |
)bps |
|
Nokia Technologies |
|
(8 |
) |
(2 |
)% |
2 |
|
24 |
|
25 |
|
11 |
|
62 |
|
1 860 |
bps |
|
Group Common and Other |
|
(29 |
) |
(9 |
)% |
(1 |
) |
(3 |
) |
4 |
|
35 |
|
35 |
|
1 050 |
bps |
|
Eliminations |
|
3 |
|
|
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|
|
|
Non-IFRS exclusions |
|
6 |
|
(55 |
)% |
(64 |
) |
23 |
|
34 |
|
72 |
|
65 |
|
|
|
|
Nokia |
|
(306 |
) |
(5 |
)% |
(376 |
) |
49 |
|
93 |
|
59 |
|
(176 |
) |
(340 |
)bps |
Year-on year changes in profit attributable to the equity holders of the parent
|
EUR million |
|
Operating |
|
Financial |
|
Income taxes |
|
Profit |
|
Non- |
|
Profit attributable to |
|
|
Nokia |
|
(176 |
) |
231 |
|
113 |
|
162 |
|
(5 |
) |
156 |
|
Financial income and expenses
The net positive fluctuation in financial income and expenses was primarily due to the absence of non-IFRS exclusions related to Nokia’s tender offer to purchase the 6.50% notes due January 15, 2028, the 6.45% notes due March 15, 2029 and the 5.375% notes due May 15, 2019 and the absence of non-recurring interest expense resulting from the uncertain tax position related to disposal of former Alcatel-Lucent railway signaling business to Thales as well as the release of cumulative exchange differences related to abandonment of foreign operations and the change in financial liability to acquire NSB non-controlling interest.
Income taxes
The change in taxes from an expense in the second quarter 2017 to a slight benefit in the second quarter 2018 was primarily due to absence of non-recurring tax expenses related to the disposal of the former Alcatel Lucent railway signaling business to Thales and deferred tax valuation allowance both of which had negative impact on the second quarter 2017 tax expense.
Non-IFRS exclusions in Q2 2018
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.
Cost savings program
The following table summarizes the financial information related to our cost savings program, as of the end of the second quarter 2018. 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 |
|
Q2’18 |
|
|
Opening balance of restructuring and associated liabilities |
|
830 |
|
|
+ Charges in the quarter |
|
30 |
|
|
- Cash outflows in the quarter |
|
110 |
|
|
= Ending balance of restructuring and associated liabilities |
|
750 |
|
|
of which restructuring provisions |
|
680 |
|
|
of which other associated liabilities |
|
70 |
|
|
|
|
|
|
|
Total expected restructuring and associated charges |
|
1 900 |
|
|
- Cumulative recorded |
|
1 490 |
|
|
= Charges remaining to be recorded |
|
410 |
|
|
|
|
|
|
|
Total expected restructuring and associated cash outflows |
|
2 250 |
|
|
- Cumulative recorded |
|
1 190 |
|
|
= Cash outflows remaining to be recorded |
|
1 060 |
|
The following table summarizes our full year 2016 and 2017 results and future expectations related to our cost savings program and network equipment swaps.
|
|
|
Actual |
|
Actual |
|
Actual |
|
Expected amounts for |
| ||||||||||
|
In EUR million, approximately |
|
|
|
|
|
Cumulative |
|
FY 2018 |
|
FY 2019 and |
|
Total |
| ||||||
|
million |
|
2016 |
|
2017 |
|
2017 |
|
Q1’18 |
|
Q2’18 |
|
Q1’18 |
|
Q2’18 |
|
Q1’18 |
|
Q2’18 |
|
|
Recurring annual cost savings |
|
550 |
|
250 |
|
800 |
|
400 |
|
400 |
|
0 |
|
0 |
|
1 200 |
|
1 200 |
|
|
- operating expenses |
|
350 |
|
150 |
|
500 |
|
300 |
|
300 |
|
0 |
|
0 |
|
800 |
|
800 |
|
|
- cost of sales |
|
200 |
|
100 |
|
300 |
|
100 |
|
100 |
|
0 |
|
0 |
|
400 |
|
400 |
|
|
Restructuring and associated charges |
|
750 |
|
550 |
|
1 300 |
|
600 |
|
600 |
|
0 |
|
0 |
|
1 900 |
|
1 900 |
|
|
Restructuring and associated cash outflows |
|
400 |
|
550 |
|
950 |
|
650 |
|
650 |
|
650 |
|
650 |
|
2 250 |
|
2 250 |
|
|
Charges related to network equipment swaps |
|
150 |
|
450 |
|
600 |
|
650 |
|
650 |
|
150 |
|
150 |
|
1 400 |
|
1 400 |
|
|
Cash outflows related to network equipment swaps |
|
150 |
|
450 |
|
600 |
|
650 |
|
650 |
|
150 |
|
150 |
|
1 400 |
|
1 400 |
|
On a cumulative basis, Nokia continues to be on track to achieve the targeted EUR 1.2 billion of recurring annual cost savings in full year 2018.
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 acquired businesses into our operations and achieve the targeted business plans and benefits, including targeted benefits, synergies, cost savings and efficiencies; B) expectations, plans or benefits related to our strategies and growth management; C) expectations, plans or benefits related to future performance of our businesses; D) expectations, plans or benefits related to changes in organizational and operational structure; E) expectations regarding market developments, general economic conditions and structural changes; F) expectations and targets regarding financial performance, results, operating expenses, taxes, currency exchange rates, hedging, cost savings and competitiveness, as well as results of operations including targeted synergies and those related to market share, prices, net sales, income and margins; G) expectations, plans or benefits related to any future collaboration or to business collaboration agreements or patent license agreements or arbitration awards, including income to be received under any collaboration or partnership, agreement or award; H) timing of the deliveries of our products and services; I) expectations and targets regarding collaboration and partnering arrangements, joint ventures or the creation of joint ventures, and the related administrative, legal, regulatory and other conditions, as well as our expected customer reach; J) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities; K) expectations regarding restructurings, investments, capital structure optimization efforts, uses of proceeds from transactions, acquisitions and divestments and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, capital structure optimization efforts, divestments and acquisitions; and L) statements preceded by or including “believe”, “expect”, “anticipate”, “foresee”, “sees”, “target”, “estimate”, “designed”, “aim”, “plans”,
“intends”, “focus”, “continue”, “project”, “should”, “is to”, “will” or similar expressions. These statements are based on management’s best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors, including risks and uncertainties that could cause these differences include, but are not limited to: 1) our strategy is subject to various risks and uncertainties and we may be unable to successfully implement our strategic plans, sustain or improve the operational and financial performance of our business groups, correctly identify or successfully pursue business opportunities or otherwise grow our business; 2) general economic and market conditions and other developments in the economies where we operate; 3) competition and our 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; 4) our dependence on the development of the industries in which we operate, including the cyclicality and variability of the information technology and telecommunications industries; 5) our dependence on a limited number of customers and large multi-year agreements; 6) our ability to maintain our existing sources of intellectual property-related revenue, establish new sources of revenue and protect our intellectual property from infringement; 7) 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; 8) our ability to achieve the anticipated benefits, synergies, cost savings and efficiencies of acquisitions, including the acquisition of Alcatel Lucent, and our ability to implement changes to our organizational and operational structure efficiently; 9) our ability to manage and improve our financial and operating performance, cost savings, competitiveness and synergies generally and after the acquisition of Alcatel Lucent; 10) exchange rate fluctuations, as well as hedging activities; 11) our ability to successfully realize the expectations, plans or benefits related to any future collaboration or business collaboration agreements and patent license agreements or arbitration awards, including income to be received under any collaboration, partnership, agreement or arbitration award; 12) Nokia Technologies’ ability to protect its IPR and to maintain and establish new sources of patent, brand and technology licensing income and IPR-related revenues, particularly in the smartphone market, which may not materialize as planned, 13) 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; 14) 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; 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) our exposure to various legal frameworks regulating corruption, fraud, trade policies, and other risk areas, and the possibility of proceedings or
investigations that result in fines, penalties or sanctions; 18) adverse developments with respect to customer financing or extended payment terms we provide to customers; 19) 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; 20) our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 21) our ability to retain, motivate, develop and recruit appropriately skilled employees; 22) disruptions to our manufacturing, service creation, delivery, logistics and supply chain processes, and the risks related to our geographically-concentrated production sites; 23) the impact of litigation, arbitration, agreement-related disputes or product liability allegations associated with our business; 24) our ability to re-establish investment grade rating or maintain our credit ratings; 25) our ability to achieve targeted benefits from, or successfully implement planned transactions, as well as the liabilities related thereto; 26) our involvement in joint ventures and jointly-managed companies; 27) the carrying amount of our goodwill may not be recoverable; 28) uncertainty related to the amount of dividends and equity return we are able to distribute to shareholders for each financial period; 29) pension costs, employee fund-related costs, and healthcare costs; and 30) risks related to undersea infrastructure, as well as the risk factors specified on pages 71 to 89 of our 2017 annual report on Form 20-F published on March 22, 2018 under “Operating and financial review and prospects-Risk factors” and in our other filings or documents furnished with the U.S. Securities and Exchange Commission. Other unknown or unpredictable factors or underlying assumptions subsequently proven to be incorrect could cause actual results to differ materially from those in the forward-looking statements. We do not undertake any obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.
The financial report was authorized for issue by management on July 25, 2018.
· Nokia plans to publish its third quarter and January-September 2018 results on October 25, 2018.
Media Enquiries:
Nokia
Communications
Tel. +358 (0) 10 448 4900
Email: press.services@nokia.com
Jon Peet, Vice President, Corporate Communications
Investor Enquiries:
Nokia Investor Relations
Tel. +358 4080 3 4080
Email: investor.relations@nokia.com
About Nokia
We create the technology to connect the world. Powered by the research and innovation of Nokia Bell Labs, we serve communications service providers, governments, large enterprises and consumers, with the industry’s most complete, end-to-end portfolio of products, services and licensing.
We adhere to the highest ethical business standards as we create technology with social purpose, quality and integrity. Nokia is enabling the infrastructure for 5G and the Internet of Things to transform the human experience www.nokia.com
Financial Report for Q2 and Half Year 2018
First half 2018 as expected; improvement expected in Nokia’s Networks business in second half 2018
· Full year 2018 Nokia-level guidance reiterated
Financial highlights
· Net sales in Q2 2018 were EUR 5.3bn, compared to EUR 5.6bn in Q2 2017. On a constant currency basis, net sales would have been down 1%.
· Non-IFRS diluted EPS in Q2 2018 was EUR 0.03, compared to EUR 0.08 in Q2 2017. Reported diluted EPS in Q2 2018 was negative EUR 0.05, compared to negative EUR 0.07 in Q2 2017.
· In the second quarter, net cash and current financial investments decreased by approximately EUR 2.0 billion, primarily due to two expected items: the payment of the dividend of approximately EUR 940 million; and the payment of employee incentives related to Nokia’s business performance in 2017, which was the primary driver of the decrease in liabilities within net working capital of approximately EUR 600 million.
Nokia’s Networks business net sales were EUR 4.7bn, with operating profit of EUR 69mn
· Our backlog was strong at the end of Q2, and we continue to expect commercial 5G network deployments to begin near the end of 2018.
· Continued progress was made in Q2 with our strategy to diversify and grow by targeting attractive adjacent markets. Strong momentum continued with large enterprise vertical and webscale customers, with double-digit year-on-year growth in net sales.
· Momentum in our end-to-end strategy continued, with approximately 40% of our sales pipeline now comprised of solutions, products and services from multiple business groups.
Nokia Technologies net sales were EUR 361mn, with operating profit of EUR 292mn
· Strong track record maintained, with 23% year-on-year growth in recurring licensing net sales and 27% year-on-year operating profit increase in Q2, primarily related to license agreements entered into in 2017.
· Nokia Technologies continued to make good progress on new licensing agreements; no major agreements were announced in Q2.
Outlook
· Nokia reiterates full year 2018 Nokia-level guidance and remains on target to deliver EUR 1.2 billion of recurring annual cost savings in full year 2018.
· In its Networks business, Nokia expects improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America. Results in 2018 and over the longer term are expected to be influenced by: a) our ability to scale our supply chain operations to meet increasing demand; b) recovery actions to address increased price pressure; and c) the timing of completions and acceptances of certain projects, particularly related to 5G.
· Nokia continues to see opportunities to build on its track record in Nokia Licensing within Nokia Technologies and drive a compound annual growth rate of approximately 10% for recurring net sales over the 3-year period ending 2020.
· Please refer to the full details and other targets in the Outlook section of this press release.
July 26, 2018
Second quarter and January-June 2018 non-IFRS results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)
|
EUR million (except for EPS in EUR) |
|
Q2’18 |
|
Q2’17 |
|
YoY |
|
Constant |
|
Q1-Q2’18 |
|
Q1-Q2’17 |
|
YoY |
|
Constant |
|
|
Net sales (non-IFRS) |
|
5 318 |
|
5 629 |
|
(6 |
)% |
(1 |
)% |
10 246 |
|
11 017 |
|
(7 |
)% |
0 |
% |
|
Nokia’s Networks business |
|
4 693 |
|
4 971 |
|
(6 |
)% |
0 |
% |
9 018 |
|
9 873 |
|
(9 |
)% |
(1 |
)% |
|
Nokia Technologies |
|
361 |
|
369 |
|
(2 |
)% |
(2 |
)% |
726 |
|
616 |
|
18 |
% |
19 |
% |
|
Group Common and Other |
|
278 |
|
307 |
|
(9 |
)% |
(4 |
)% |
530 |
|
562 |
|
(6 |
)% |
(1 |
)% |
|
Gross profit (non-IFRS) |
|
2 038 |
|
2 350 |
|
(13 |
)% |
|
|
3 979 |
|
4 546 |
|
(12 |
)% |
|
|
|
Gross margin % (non-IFRS) |
|
38.3 |
% |
41.7 |
% |
(340 |
)bps |
|
|
38.8 |
% |
41.3 |
% |
(250 |
)bps |
|
|
|
Operating profit (non-IFRS) |
|
334 |
|
574 |
|
(42 |
)% |
|
|
573 |
|
915 |
|
(37 |
)% |
|
|
|
Nokia’s Networks business |
|
69 |
|
406 |
|
(83 |
)% |
|
|
112 |
|
730 |
|
(85 |
)% |
|
|
|
Nokia Technologies |
|
292 |
|
230 |
|
27 |
% |
|
|
565 |
|
346 |
|
63 |
% |
|
|
|
Group Common and Other |
|
(27 |
) |
(62 |
) |
(56 |
)% |
|
|
(105 |
) |
(161 |
) |
(35 |
)% |
|
|
|
Operating margin % (non-IFRS) |
|
6.3 |
% |
10.2 |
% |
(390 |
)bps |
|
|
5.6 |
% |
8.3 |
% |
(270 |
)bps |
|
|
|
Financial income and expenses (non-IFRS) |
|
(84 |
) |
(63 |
) |
33 |
% |
|
|
(200 |
) |
(144 |
) |
39 |
% |
|
|
|
Income taxes (non-IFRS) |
|
(106 |
) |
(74 |
) |
43 |
% |
|
|
(143 |
) |
(122 |
) |
17 |
% |
|
|
|
Profit for the period (non-IFRS) |
|
139 |
|
441 |
|
(68 |
)% |
|
|
223 |
|
644 |
|
(65 |
)% |
|
|
|
Profit attributable to the equity holders of the parent (non-IFRS) |
|
144 |
|
449 |
|
(68 |
)% |
|
|
230 |
|
646 |
|
(64 |
)% |
|
|
|
Non-controlling interests (non-IFRS) |
|
(4 |
) |
(9 |
) |
|
|
|
|
(7 |
) |
(2 |
) |
|
|
|
|
|
EPS, EUR diluted (non-IFRS) |
|
0.03 |
|
0.08 |
|
(63 |
)% |
|
|
0.04 |
|
0.11 |
|
(64 |
)% |
|
|
Second quarter and January-June 2018 reported results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)
|
EUR million (except for EPS in EUR) |
|
Q2’18 |
|
Q2’17 |
|
YoY |
|
Constant |
|
Q1-Q2’18 |
|
Q1-Q2’17 |
|
YoY |
|
Constant YoY |
|
|
Net sales |
|
5 313 |
|
5 619 |
|
(5 |
)% |
(1 |
)% |
10 237 |
|
10 996 |
|
(7 |
)% |
0 |
% |
|
Nokia’s Networks business |
|
4 693 |
|
4 971 |
|
(6 |
)% |
0 |
% |
9 018 |
|
9 873 |
|
(9 |
)% |
(1 |
)% |
|
Nokia Technologies |
|
361 |
|
369 |
|
(2 |
)% |
(2 |
)% |
726 |
|
616 |
|
18 |
% |
19 |
% |
|
Group Common and Other |
|
278 |
|
307 |
|
(9 |
)% |
(4 |
)% |
530 |
|
562 |
|
(6 |
)% |
(1 |
)% |
|
Non-IFRS exclusions |
|
(5 |
) |
(11 |
) |
(55 |
)% |
|
|
(9 |
) |
(21 |
) |
(57 |
)% |
|
|
|
Gross profit |
|
1 860 |
|
2 236 |
|
(17 |
)% |
|
|
3 666 |
|
4 361 |
|
(16 |
)% |
|
|
|
Gross margin % |
|
35.0 |
% |
39.8 |
% |
(480 |
)bps |
|
|
35.8 |
% |
39.7 |
% |
(390 |
)bps |
|
|
|
Operating loss |
|
(221 |
) |
(45 |
) |
391 |
% |
|
|
(557 |
) |
(173 |
) |
222 |
% |
|
|
|
Nokia’s Networks business |
|
69 |
|
406 |
|
(83 |
)% |
|
|
112 |
|
730 |
|
(85 |
)% |
|
|
|
Nokia Technologies |
|
292 |
|
230 |
|
27 |
% |
|
|
565 |
|
346 |
|
63 |
% |
|
|
|
Group Common and Other |
|
(27 |
) |
(62 |
) |
(56 |
)% |
|
|
(105 |
) |
(161 |
) |
(35 |
)% |
|
|
|
Non-IFRS exclusions |
|
(555 |
) |
(620 |
) |
(10 |
)% |
|
|
(1 129 |
) |
(1 088 |
) |
4 |
% |
|
|
|
Operating margin % |
|
(4.2 |
)% |
(0.8 |
)% |
(340 |
)bps |
|
|
(5.4 |
)% |
(1.6 |
)% |
(380 |
)bps |
|
|
|
Financial income and expenses |
|
(56 |
) |
(287 |
) |
(80 |
)% |
|
|
(164 |
) |
(433 |
) |
(62 |
)% |
|
|
|
Income taxes |
|
10 |
|
(103 |
) |
|
|
|
|
104 |
|
(256 |
) |
|
|
|
|
|
Loss for the period |
|
(271 |
) |
(433 |
) |
(37 |
)% |
|
|
(625 |
) |
(868 |
) |
(28 |
)% |
|
|
|
Loss attributable to the equity holders of the parent |
|
(267 |
) |
(423 |
) |
(37 |
)% |
|
|
(618 |
) |
(896 |
) |
(31 |
)% |
|
|
|
Non-controlling interests |
|
(4 |
) |
(9 |
) |
|
|
|
|
(7 |
) |
28 |
|
|
|
|
|
|
EPS, EUR diluted |
|
(0.05 |
) |
(0.07 |
) |
(29 |
)% |
|
|
(0.11 |
) |
(0.16 |
) |
(31 |
)% |
|
|
|
Net cash and current financial investments |
|
2 144 |
|
3 964 |
|
(46 |
)% |
|
|
2 144 |
|
3 964 |
|
(46 |
)% |
|
|
(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 to the Financial statement information in this report. Change in net sales at constant currency excludes the effect 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.
CEO statement
Nokia’s Q2 2018 results were consistent with our view that the first half of the year would be weak followed by an increasingly robust second half. Pleasingly, I am able to confirm that we expect to deliver 2018 results within the ranges of our annual guidance.
Our topline started to recover in the second quarter, with sales in constant currency approximately flat at both Group and Networks levels; year-on-year constant currency sales growth in three of five of our Networks business groups and in three out of our six regions.
Our entry into the enterprise market continued to proceed well in Q2. Year-on-year sales in constant currency increased approximately 30%, with strength in both vertical markets and webscale companies. Nokia Technologies had a very good second quarter, with recurring licensing revenues up very strongly and operating profit up at excellent levels compared to Q2 last year.
Our view about the acceleration of 5G has not changed and we continue to believe that Nokia is well-positioned for the coming technology cycle given the strength of our end-to-end portfolio. Our deal win rate is very good, with significant recent successes in the key early 5G markets of the United States and China.
The installed base of our superb high-capacity AirScale product, which enables customers to quickly upgrade to 5G without a hardware swap, is growing fast. And, the strength of our end-to-end portfolio remains a differentiator. When you look at our sales pipeline, 40% of it is now comprised of end-to-end deals. That is the highest level we have seen to-date.
Business and regional mix continued to have some impact on gross margin, as did near-term actions of a small number of large customers funding their 5G entry within their existing budget plans.
We expect market conditions to improve further in the second half, particularly in Q4, Nokia’s seasonally strongest quarter, and as 5G accelerates significantly.
Rajeev Suri
President and CEO
Outlook
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Metric |
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Guidance |
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Commentary |
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Nokia |
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Non-IFRS operating margin |
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9-11% for full year 2018 and |
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Nokia ‘s guidance for significant improvement between full year 2018 and full year 2020 is primarily due to expectations for: a) Improved results in Nokia’s Networks business, which are detailed below; b) Improved results in Nokia Technologies, which are detailed below; and c) Lower Nokia support function costs within Nokia’s Networks business and Group Common and Other. |
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|
|
Non-IFRS diluted earnings per share |
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EUR 0.23 - 0.27 in full year 2018 and |
| |
|
|
|
Dividend |
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Approximately 40% to 70% of non-IFRS EPS on a long-term basis |
|
Nokia’s Board of Directors is committed to proposing a growing dividend, including for 2018. |
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|
|
Recurring free cash flow |
|
Slightly positive in full year 2018 and clearly positive in full year 2020 |
|
Recurring free cash flow is expected to improve over the longer-term, due to lower cash outflows related to restructuring and network equipment swaps(1) and improved operational results over time. |
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|
Recurring annual cost savings for Nokia, excluding Nokia Technologies |
|
Approximately EUR 1.2 billion of recurring annual cost savings in full year 2018, of which approximately EUR 800 million are expected from operating expenses(1) |
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The reference period is full year 2015, in which the combined operating expenses of Nokia and Alcatel-Lucent, excluding Nokia Technologies, were approximately EUR 7.3 billion. As a result of active efforts to drive 5G adoption, and in the interest of our long-term strategy given the acceleration of 5G, in 2018 we expect to incur approximately EUR 100 to 200 million of temporary incremental expenses related to 5G customer trials that will partially reduce the positive impact from the recurring annual cost savings. |
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Network equipment swaps |
|
Approximately EUR 1.4 billion of charges and cash outflows in total(1) |
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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. |
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|
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Non-IFRS financial income and expenses |
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Expense of approximately EUR 350 million in full year 2018 and approximately EUR 300 million over the longer-term |
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Nokia’s outlook for non-IFRS financial income and expenses in full year 2018 and over the longer-term is expected to be influenced by factors including: · Net interest expenses related to interest-bearing liabilities and defined benefit pension and other post-employment benefit plans; · Foreign exchange fluctuations and hedging costs; and · Expenses related to the sale of receivables. |
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Non-IFRS tax rate |
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Approximately 30% for full year 2018 and 25% over the longer-term |
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Nokia’s outlook for non-IFRS tax rate for full year 2018 and over the longer-term is expected to be influenced by factors including the absolute level of profits, regional profit mix and any further changes to our operating model. |
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Capital expenditures |
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Approximately EUR 700 million in full year 2018 and approximately EUR 600 million over the longer-term |
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Primarily attributable to Nokia’s Networks business, and consistent with the depreciation of property, plant and equipment over the longer-term. |
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Net sales |
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Outperform its primary addressable market in |
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Nokia’s Networks business |
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2018 and over the longer-term |
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For Nokia’s Networks business, Nokia expects net sales to outperform its primary addressable market and operating margin to expand between full year 2018 and full year 2020. |
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Operating margin |
|
6-9% for full year 2018 and |
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Nokia’s outlook for net sales and operating margin for Nokia’s Networks business in 2018 and 2020 is expected to be influenced by factors including:
· An approximately 1 to 3 percent decline in the primary addressable market for Nokia’s Networks business in full year 2018, compared to 2017, on a constant currency basis; · Customer demand for 5G, with commercial 5G network deployments expected to begin near the end of 2018; · Improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America, following weakness in the first half of 2018 (This is an update to earlier commentary for improved market conditions in the second half of 2018, particularly in North America.); · Growth in the primary addressable market for Nokia’s Networks business in 2019 and 2020, on a constant currency basis; · Our ability to scale our supply chain operations to meet increasing demand; · Recovery actions to address increased price pressure, including the ability to offset price erosion through cost reductions (new commentary); · The timing of completions and acceptances of certain projects, particularly related to 5G (new commentary); · Focus on targeted growth opportunities in attractive adjacent markets; · Building a strong standalone software business; · Improved R&D productivity resulting from new ways of working and the reduction of legacy platforms over time; · Lower support function costs, including IT and site costs; · Uncertainty related to potential mergers or acquisitions by our customers; · Product and regional mix; and · Competitive and other industry dynamics. |
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Nokia Licensing within Nokia Technologies |
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Recurring net sales |
|
Grow at a compound annual growth rate (CAGR) of approximately 10% over the 3-year period ending 2020 |
|
Due to risks and uncertainties in determining the timing and value of significant patent, brand and technology licensing agreements, Nokia believes it is not appropriate to provide annual outlook ranges for Nokia Licensing within Nokia Technologies. Although annual results are difficult to forecast, Nokia expects net sales growth and operating margin expansion over the 3-year period ending 2020.
In full year 2017, licensing net sales were approximately EUR 1.6 billion, of which approximately EUR 300 million were non-recurring in nature and related to catch-up net sales for prior years.
Nokia’s outlook for net sales and operating margin for Nokia Licensing within Nokia Technologies is expected to be influenced by factors including:
· The timing and value of new patent licensing agreements with smartphone vendors, automotive companies and consumer electronics companies; · Renegotiation of expiring patent licensing agreements; · Increases or decreases in net sales related to existing patent licensees; · Results in brand and technology licensing; · Costs to protect and enforce our intellectual property rights; and · The regulatory landscape. |
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Operating margin |
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Expand to approximately 85% for full year 2020 |
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(1)For further details related to the cost savings and network equipment swaps guidance, please refer to the “Cost savings program” on page 8.
Nokia in Q2 2018 – Non-IFRS
|
Net sales (non-IFRS) Margin (non-IFRS) Components of operating profit (non-IFRS) |
|
|
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.
Year-on-year changes in non-IFRS net sales and non-IFRS operating profit
Nokia non-IFRS net sales decreased 6% year-on-year. On a constant currency basis, Nokia non-IFRS net sales would have decreased 1% year-on-year.
|
EUR million, non-IFRS Net sales % change Gross profit (R&D) (SG&A) Other income and (expenses) Operating profit Change in operating margin % |
|
|
On a year-on-year basis, foreign exchange fluctuations had a negative impact on non-IFRS gross profit, a positive impact on non-IFRS operating expenses and an approximately neutral net impact on non-IFRS operating profit in the second quarter 2018.
Year-on-year changes in non-IFRS profit attributable to the equity holders of the parent
|
EUR million, non-IFRS Operating profit Financial income and expenses Income taxes Profit Non-controlling interests Profit attributable to the equity holders of the parent |
|
|
Non-IFRS financial income and expenses
The net negative fluctuation in non-IFRS financial income and expenses was primarily due to the absence of venture fund distributions. Interest expenses associated with the inclusion of new items such as costs related to the sale of receivables and financing elements from customer and other contracts as a result of the adoption of new IFRS standards in the first quarter 2018 were offset by lower interest expenses from financing activities.
Non-IFRS income taxes
Increase in non-IFRS tax rate to 43% in the second quarter 2018 was primarily due to regional profit mix. In the second quarter 2017 regional profit mix resulted in an unusually low non-IFRS tax rate of 14% and in addition, in the second quarter 2018 the combination of lower absolute level of profit and certain prior year tax charges increased the non-IFRS tax rate.
Nokia in Q2 2018 – Reported
|
Components of net sales Margin Components of operating profit |
Financial discussion
Year-on-year changes in net sales and operating profit
Nokia net sales decreased 5% year-on-year. On a constant currency basis, Nokia net sales would have decreased 1% year-on-year.
|
EUR million Net Sales % change Gross profit (R&D) (SG&A) Other income and (expenses) Operating profit Change in operating margin % |
Year-on-year changes in profit attributable to the equity holders of the parent
|
EUR million Operating profit Financial income and expenses Income taxes Profit Non-controlling interests Profit attributable to the equity holders of the parent |
Financial income and expenses
The net positive fluctuation in financial income and expenses was primarily due to the absence of non-IFRS exclusions related to Nokia’s tender offer to purchase the 6.50% notes due January 15, 2028, the 6.45% notes due March 15, 2029 and the 5.375% notes due May 15, 2019 and the absence of non-recurring interest expense resulting from the uncertain tax position related to disposal of former Alcatel-Lucent railway signaling business to Thales as well as the release of cumulative exchange differences related to abandonment of foreign operations and the change in financial liability to acquire NSB non-controlling interest.
Income taxes
The change in taxes from an expense in the second quarter 2017 to a slight benefit in the second quarter 2018 was primarily due to absence of non-recurring tax expenses related to the disposal of the former Alcatel Lucent railway signaling business to Thales and deferred tax valuation allowance both of which had negative impact on the second quarter 2017 tax expense.
Non-IFRS exclusions in Q2 2018
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.
Cost savings program
The following table summarizes the financial information related to our cost savings program, as of the end of the second quarter 2018. 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 |
|
Q2’18 |
|
|
Opening balance of restructuring and associated liabilities |
|
830 |
|
|
+ Charges in the quarter |
|
30 |
|
|
- Cash outflows in the quarter |
|
110 |
|
|
= Ending balance of restructuring and associated liabilities |
|
750 |
|
|
of which restructuring provisions |
|
680 |
|
|
of which other associated liabilities |
|
70 |
|
|
|
|
|
|
|
Total expected restructuring and associated charges |
|
1 900 |
|
|
- Cumulative recorded |
|
1 490 |
|
|
= Charges remaining to be recorded |
|
410 |
|
|
|
|
|
|
|
Total expected restructuring and associated cash outflows |
|
2 250 |
|
|
- Cumulative recorded |
|
1 190 |
|
|
= Cash outflows remaining to be recorded |
|
1 060 |
|
The following table summarizes our full year 2016 and 2017 results and future expectations related to our cost savings program and network equipment swaps.
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|
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Actual |
|
Expected amounts for |
| ||||||||||
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In EUR million, approximately |
|
Actual |
|
Actual |
|
through |
|
FY 2018 |
|
FY 2019 and beyond |
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Total |
| ||||||
|
million |
|
2016 |
|
2017 |
|
2017 |
|
Q1’18 |
|
Q2’18 |
|
Q1’18 |
|
Q2’18 |
|
Q1’18 |
|
Q2’18 |
|
|
Recurring annual cost savings |
|
550 |
|
250 |
|
800 |
|
400 |
|
400 |
|
0 |
|
0 |
|
1 200 |
|
1 200 |
|
|
- operating expenses |
|
350 |
|
150 |
|
500 |
|
300 |
|
300 |
|
0 |
|
0 |
|
800 |
|
800 |
|
|
- cost of sales |
|
200 |
|
100 |
|
300 |
|
100 |
|
100 |
|
0 |
|
0 |
|
400 |
|
400 |
|
|
Restructuring and associated charges |
|
750 |
|
550 |
|
1 300 |
|
600 |
|
600 |
|
0 |
|
0 |
|
1 900 |
|
1 900 |
|
|
Restructuring and associated cash outflows |
|
400 |
|
550 |
|
950 |
|
650 |
|
650 |
|
650 |
|
650 |
|
2 250 |
|
2 250 |
|
|
Charges related to network equipment swaps |
|
150 |
|
450 |
|
600 |
|
650 |
|
650 |
|
150 |
|
150 |
|
1 400 |
|
1 400 |
|
|
Cash outflows related to network equipment swaps |
|
150 |
|
450 |
|
600 |
|
650 |
|
650 |
|
150 |
|
150 |
|
1 400 |
|
1 400 |
|
On a cumulative basis, Nokia continues to be on track to achieve the targeted EUR 1.2 billion of recurring annual cost savings in full year 2018.
Nokia’s Networks business in Q2 2018
Operational highlights
Nokia had several 5G-related developments that underpin our momentum going into the second half of 2018 when meaningful 5G commercial roll-outs are to start in the United States. These developments reflect Nokia’s ongoing progress in delivering well on the four pillars of our strategy.
In our first strategy pillar, leading in high-performance, end-to-end networks with communication service providers, we announced, just after the second quarter ended, a one-year frame agreement, valued at up to EUR 1 billion, to support China Mobile’s transition to a future-oriented network infrastructure to meet growing data traffic demand.
In June, we announced with T-Mobile a key milestone in delivering mobile 5G with the successful completion of the first bi-directional over-the-air 5G data session in the US on a 3GPP-compliant 5G New Radio system. The 5G data transmission was conducted with Nokia AirScale baseband and radio, AirFrame Open Edge Server, and AirScale Cloud RAN. Similarly, Nokia and Verizon also successfully completed outdoors, rather than in a lab, a series of data sessions over the 3GPP New Radio 5G standard outdoors. Nokia successfully completed a 5G New Radio data call as part of a Chinese government-sponsored 5G Technology R&D trial. And, in France, we did the same, successfully completing a 5G call with SFR using 3GPP-compliant 5G New Radio system.
We launched Nokia AirFrame Open Edge Server, the industry’s first Edge Cloud data center solution to meet the stringent and diverse low-latency data processing demands and advanced applications for consumers and industries. In combination with the Nokia ReefShark chipset and our cloud infrastructure software, AirFrame Open Edge Server has been developed for the 5G era and leverages open architectures for fast deployment.
Nokia launched new services to help operators prioritize their 5G investments and bring 5G-based services to market faster and more cost effectively. Utilizing the Nokia AVA cognitive services platform and machine learning algorithms, Nokia 5G Digital Design simulates the impact of 5G use cases on networks. Cross-Domain Architecture and Site Evolution Services address detailed deployment considerations and help translate 5G business plans into clear and precise technical requirements across all domains, regardless of vendor.
China Mobile ranked Nokia #1 in a central bid to supply equipment for its regional optical transport network, with deployment of the new network having already started. The new optical backbone is a key part of the next-generation of mobile services with the arrival of 5G.
Frontier Communications Corporation chose Nokia to deliver 10-gigabit business and residential services in Texas, Florida and California through Nokia’s next-generation XGS-PON fiber technology. Greenlight Networks also selected Nokia’s XGS-PON technology to deliver better, faster and smarter ultra-broadband access to customers in New York. Nokia is also further supporting the rollout of fiber networks in Nepal; this time with Subisu.
Nokia and AT&T announced plans to develop Internet of Things (IoT) services for a range of industries, including transportation and health care. Using Nokia’s Worldwide IoT Network Grid (WING), a key aim is to give enterprises new capabilities like 5G network slicing which allows a single network to be partitioned into multiple networks.
We announced that Nokia and its venture focused on software-defined networking (SDN), Nuage Networks, will extend Telefónica Spain’s existing SDN infrastructure to include modern software-defined data centers (SDDC). This modernization with Nokia Nuage and IP routing solutions will expand Telefónica Spain’s service offerings from enterprise hosting and co-location to enterprise wide-area networks (WAN) and enterprise cloud infrastructure.
In our second strategy pillar, expanding network sales to select vertical markets needing high-performing, secure networks, State Grid Corporation of China (SGCC) chose Nokia to upgrade its optical transport network in Beijing and Tianjin in order to meet fast-growing bandwidth capacity demands, improve operational efficiencies and support a wide range of technologies that will be required as SGCC makes its electrical grid smarter.
We introduced the Advanced Command Center to help public safety agencies transition from voice-based to broadband data-centric emergency response. As part of Nokia’s ViTrust portfolio, the new solution combines next-generation emergency services (NEXES), advanced rich media emergency call-taking and dispatch capabilities with Nokia’s Integrated Operations Center for smart and safe city management.
In our third pillar, developing a strong software business at scale, we acquired SpaceTime Insight, a California-based company that provides machine learning-powered analytics and IoT applications for some of the world’s biggest transportation, energy and utilities organizations, including FedEx and Singapore Power. The acquisition supports Nokia’s software strategy by bringing SpaceTime Insight’s sales expertise and proven track record in IoT application development, machine learning and data science to the Nokia
Software IoT product unit. We also announced the creation of a global alliances organization to enhance Nokia Software’s progress in building its partner ecosystem.
Nokia appointed Sri Reddy as co-president of our IP/Optical Networks business group and as a member of the Group Leadership Team.
Financial highlights
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency YoY |
|
|
Net sales |
|
4 693 |
|
4 971 |
|
(6 |
)% |
0 |
% |
|
Ultra Broadband Networks |
|
2 055 |
|
2 165 |
|
(5 |
)% |
0 |
% |
|
Global Services |
|
1 326 |
|
1 448 |
|
(8 |
)% |
(3 |
)% |
|
IP Networks and Applications |
|
1 313 |
|
1 358 |
|
(3 |
)% |
2 |
% |
|
Gross profit |
|
1 632 |
|
1 945 |
|
(16 |
)% |
|
|
|
Gross margin % |
|
34.8 |
% |
39.1 |
% |
(430 |
)bps |
|
|
|
R&D |
|
(911 |
) |
(916 |
) |
(1 |
)% |
|
|
|
SG&A |
|
(621 |
) |
(652 |
) |
(5 |
)% |
|
|
|
Other income and expenses |
|
(30 |
) |
30 |
|
|
|
|
|
|
Operating profit |
|
69 |
|
406 |
|
(83 |
)% |
|
|
|
Operating margin % |
|
1.5 |
% |
8.2 |
% |
(670 |
)bps |
|
|
Net sales by region
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency |
|
|
Asia-Pacific |
|
926 |
|
1 026 |
|
(10 |
)% |
(3 |
)% |
|
Europe |
|
1 039 |
|
1 091 |
|
(5 |
)% |
(3 |
)% |
|
Greater China |
|
518 |
|
627 |
|
(17 |
)% |
(17 |
)% |
|
Latin America |
|
299 |
|
298 |
|
0 |
% |
11 |
% |
|
Middle East & Africa |
|
443 |
|
431 |
|
3 |
% |
7 |
% |
|
North America |
|
1 468 |
|
1 498 |
|
(2 |
)% |
6 |
% |
|
Total |
|
4 693 |
|
4 971 |
|
(6 |
)% |
0 |
% |
Financial discussion
Year-on-year changes in net sales and operating profit
Nokia’s Networks business net sales decreased 6% year-on-year. On a constant currency basis, Nokia’s Networks business net sales would have been flat.
A discussion of our results within Ultra Broadband Networks, Global Services and IP Networks and Applications is included in the sections “Ultra Broadband Networks”, “Global Services” and “IP Networks and Applications” below.
|
EUR million |
|
Net Sales |
|
% change |
|
Gross profit |
|
(R&D) |
|
(SG&A) |
|
Other income |
|
Operating |
|
Change in |
|
|
Ultra Broadband Networks |
|
(110 |
) |
(5 |
)% |
(142 |
) |
0 |
|
38 |
|
(38 |
) |
(142 |
) |
(640 |
)bps |
|
Global Services |
|
(122 |
) |
(8 |
)% |
(104 |
) |
(1 |
) |
(1 |
) |
(8 |
) |
(112 |
) |
(770 |
)bps |
|
IP Networks and Applications |
|
(45 |
) |
(3 |
)% |
(67 |
) |
5 |
|
(7 |
) |
(15 |
) |
(81 |
) |
(590 |
)bps |
|
Networks business |
|
(278 |
) |
(6 |
)% |
(313 |
) |
5 |
|
31 |
|
(60 |
) |
(337 |
) |
(670 |
)bps |
On a year-on-year basis, the decrease in gross profit was due to both a lower gross margin and lower net sales. The decrease in gross margin was primarily due to price erosion exceeding cost erosion across most regions and segments.
On a year-on-year basis, foreign exchange fluctuations had a negative impact on gross profit, a positive impact on operating expenses and a slightly negative net impact on operating profit in the second quarter 2018.
Ultra Broadband Networks in Q2 2018
Financial highlights
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency |
|
|
Net sales |
|
2 055 |
|
2 165 |
|
(5 |
)% |
0 |
% |
|
Mobile Networks |
|
1 565 |
|
1 619 |
|
(3 |
)% |
2 |
% |
|
Fixed Networks |
|
490 |
|
546 |
|
(10 |
)% |
(6 |
)% |
|
Gross profit |
|
898 |
|
1 040 |
|
(14 |
)% |
|
|
|
Gross margin % |
|
43.7 |
% |
48.0 |
% |
(430 |
)bps |
|
|
|
R&D |
|
(581 |
) |
(581 |
) |
0 |
% |
|
|
|
SG&A |
|
(255 |
) |
(293 |
) |
(13 |
)% |
|
|
|
Other income and expenses |
|
(13 |
) |
25 |
|
|
|
|
|
|
Operating profit |
|
49 |
|
191 |
|
(74 |
)% |
|
|
|
Operating margin % |
|
2.4 |
% |
8.8 |
% |
(640 |
)bps |
|
|
Net sales by region
|
EUR million Q2'18 Q2'17 YoY change Ultra Broadband Networks Mobile Networks Fixed Networks Asia-Pacific 409 437 (6)% 0% Europe 368 417 (12)% (11)% Greater China 218 275 (21)% (21)% Latin America 86 101 (15)% (8)% Middle East & Africa 143 149 (4)% (1)% North America 831 786 6% 14% Total 2 055 2 165 (5)% 0% 2% (6)% change less than 3% |
|
|
Financial discussion
Net sales
Ultra Broadband Networks net sales decreased 5% year-on-year. On a constant currency basis, Ultra Broadband Networks net sales would have been approximately flat year-on-year, with 2% growth in Mobile Networks offset by a 6% decline in Fixed Networks.
The decrease in Mobile Networks net sales was primarily due to radio networks, partially offset by growth in small cells, core networks and microwave.
The decrease in Fixed Networks net sales was primarily due to broadband access and services.
Operating profit
The decrease in Ultra Broadband Networks gross profit was primarily due to Mobile Networks. The decrease in Mobile Networks gross profit was due to both a lower gross margin and lower net sales. The decrease in Mobile Networks gross margin was primarily due to significantly lower margins in North America, Greater China, Asia-Pacific and Middle East & Africa, partially offset by favorable regional mix, as well as higher margins in Europe and Latin America. The decrease in Mobile Networks gross margin in North America was primarily due to price erosion exceeding cost erosion. The decrease in Mobile Networks gross margin in Greater China and Middle East & Africa was primarily due to specific projects with particular customers in each region.
The decrease in Ultra Broadband Networks SG&A expenses was primarily due to Mobile Networks. The decrease in Mobile Networks SG&A expenses was primarily due to lower personnel expenses, reflecting progress related to Nokia’s cost savings program. This was partially offset by higher costs related to 5G customer trials.
The net negative fluctuation in other income and expenses was primarily due to foreign exchange hedging and higher doubtful account allowances.
On a year-on-year basis, foreign exchange fluctuations had a negative impact on gross profit, a positive impact on operating expenses and a slightly negative net impact on operating profit in the second quarter 2018.
Global Services in Q2 2018
Financial highlights
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency |
|
|
Net sales |
|
1 326 |
|
1 448 |
|
(8 |
)% |
(3 |
)% |
|
Gross profit |
|
201 |
|
305 |
|
(34 |
)% |
|
|
|
Gross margin % |
|
15.2 |
% |
21.1 |
% |
(590 |
)bps |
|
|
|
R&D |
|
(22 |
) |
(21 |
) |
5 |
% |
|
|
|
SG&A |
|
(160 |
) |
(159 |
) |
1 |
% |
|
|
|
Other income and expenses |
|
(9 |
) |
(1 |
) |
|
|
|
|
|
Operating profit |
|
11 |
|
123 |
|
(91 |
)% |
|
|
|
Operating margin % |
|
0.8 |
% |
8.5 |
% |
(770 |
)bps |
|
|
Net sales by region
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency |
|
|
Asia-Pacific |
|
271 |
|
321 |
|
(16 |
)% |
(8 |
)% |
|
Europe |
|
289 |
|
301 |
|
(4 |
)% |
(1 |
)% |
|
Greater China |
|
195 |
|
232 |
|
(16 |
)% |
(15 |
)% |
|
Latin America |
|
111 |
|
110 |
|
1 |
% |
11 |
% |
|
Middle East & Africa |
|
209 |
|
180 |
|
16 |
% |
23 |
% |
|
North America |
|
251 |
|
303 |
|
(17 |
)% |
(11 |
)% |
|
Total |
|
1 326 |
|
1 448 |
|
(8 |
)% |
(3 |
)% |
Financial discussion
Net sales
Global Services net sales decreased 8% year-on-year. On a constant currency basis, Global Services net sales would have decreased 3% year-on-year.
The decrease in Global Services net sales was primarily due to network implementation, care and, to a lesser extent, network planning and optimization.
Operating profit
The decrease in Global Services gross profit was due to both a lower gross margin and lower net sales. The decrease in Global Services gross margin was primarily due to Network Implementation, particularly in Greater China, Asia-Pacific and Europe, partially offset by Middle East & Africa.
On a year-on-year basis, foreign exchange fluctuations had a slightly negative impact on gross profit, a slightly positive impact on operating expenses and a slightly negative net impact on operating profit in the second quarter 2018.
IP Networks and Applications in Q2 2018
Financial highlights
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency |
|
|
Net sales |
|
1 313 |
|
1 358 |
|
(3 |
)% |
2 |
% |
|
IP/Optical Networks |
|
956 |
|
993 |
|
(4 |
)% |
1 |
% |
|
IP Routing |
|
592 |
|
654 |
|
(9 |
)% |
(5 |
)% |
|
Optical Networks |
|
365 |
|
339 |
|
8 |
% |
13 |
% |
|
Nokia Software |
|
356 |
|
365 |
|
(2 |
)% |
2 |
% |
|
Gross profit |
|
533 |
|
600 |
|
(11 |
)% |
|
|
|
Gross margin % |
|
40.6 |
% |
44.2 |
% |
(360 |
)bps |
|
|
|
R&D |
|
(309 |
) |
(314 |
) |
(2 |
)% |
|
|
|
SG&A |
|
(206 |
) |
(199 |
) |
4 |
% |
|
|
|
Other income and expenses |
|
(9 |
) |
6 |
|
|
|
|
|
|
Operating profit |
|
10 |
|
91 |
|
(89 |
)% |
|
|
|
Operating margin % |
|
0.8 |
% |
6.7 |
% |
(590 |
)bps |
|
|
Net sales by region
|
EUR million Q2’18 Q2’17 YoY change Constant currency YoY change IP Networks and Applications IP/ Optical Networks Nokia Software |
|
|
Financial discussion
Net sales
IP Networks and Applications net sales decreased 3% year-on-year. On a constant currency basis, IP Networks and Applications net sales would have increased 2% year-on-year, with 1% growth in IP/Optical Networks and 2% growth in Nokia Software.
The decrease in IP/Optical Networks net sales was due to IP routing, partially offset by growth in optical networks. The decrease in IP routing was primarily due to North America, Asia-Pacific and Greater China, partially offset by Europe. The growth in optical networks was primarily due to progress with targeted large enterprise vertical and webscale customers and certain customers in Asia-Pacific and Latin America.
Operating profit
The decrease in IP Networks and Applications gross profit was primarily due to IP/Optical Networks. The decrease in gross profit in IP/Optical Networks was due to both a lower gross margin and lower net sales. The decrease in IP/Optical Networks gross margin was primarily due to a lower gross margin in IP routing and product mix, with a higher proportion of optical networks net sales.
The net negative fluctuation in other income and expenses was primarily due to higher doubtful account allowances and foreign exchange hedging.
On a year-on-year basis, foreign exchange fluctuations had a negative impact on gross profit, a significantly positive impact on operating expenses and a slightly positive net impact on operating profit in the second quarter 2018.
Nokia Technologies in Q2 2018
Operational highlights
In the fourth pillar of our strategy, creating new business and licensing opportunities in the consumer ecosystem, Nokia announced and closed the sale of our Digital Health business in May. Nokia Technologies is now focused on licensing.
Following the sale of our Digital Health business, Gregory Lee stepped down from his role as President of Nokia Technologies to pursue opportunities elsewhere, and will leave Nokia in the coming months. Nokia announced the appointment of Maria Varsellona as president of Nokia Technologies, in addition to her existing role as the company’s Chief Legal Officer.
Our brand licensee, HMD Global, continued the refresh of its portfolio of Android smartphones with the Nokia 5.1, Nokia 3.1 and Nokia 2.1 models for global markets; and HMD launched its first smartphone with a notched display, the Nokia X6, exclusive to China.
Financial highlights
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency |
|
|
Net sales |
|
361 |
|
369 |
|
(2 |
)% |
(2 |
)% |
|
Gross profit |
|
354 |
|
352 |
|
1 |
% |
|
|
|
Gross margin % |
|
98.1 |
% |
95.4 |
% |
270 |
bps |
|
|
|
R&D |
|
(36 |
) |
(60 |
) |
(40 |
)% |
|
|
|
SG&A |
|
(25 |
) |
(50 |
) |
(50 |
)% |
|
|
|
Other income and expenses |
|
(1 |
) |
(12 |
) |
|
|
|
|
|
Operating profit |
|
292 |
|
230 |
|
27 |
% |
|
|
|
Operating margin % |
|
80.9 |
% |
62.3 |
% |
1 860 |
bps |
|
|
Financial discussion
Net sales
Nokia Technologies net sales decreased 2% year-on-year, on both a reported and constant currency basis.
Of the EUR 361 million of net sales in the second quarter 2018, EUR 352 million related to patent, brand and technology licensing and EUR 9 million related to digital health.
The decrease in Nokia Technologies net sales was primarily due to the absence of approximately EUR 70 million of non-recurring licensing net sales, which benefitted the second quarter 2017. This was partially offset by higher recurring licensing net sales. Nokia Technologies non-recurring catch-up net sales in the second quarter 2018 amounted to approximately zero. In the second quarter 2017, non-recurring catch-up net sales were approximately EUR 70 million.
Operating profit
The decrease in Nokia Technologies R&D expenses was primarily due to reduced investments in digital media, lower patent portfolio costs and lower costs related to digital health following the sale of our digital health business on May 31, 2018.
The decrease in Nokia Technologies SG&A expenses was primarily due to lower licensing-related litigation costs and lower costs related to digital health following the sale of our digital health business on May 31, 2018.
The net positive fluctuation in other income and expenses was primarily due to the absence of a net negative fluctuation related to foreign exchange hedging, which adversely affected the second quarter 2017.
On a year-on-year basis, foreign exchange fluctuations had a slightly negative impact on gross profit, a slightly positive impact on operating expenses and an approximately neutral net impact on operating profit in the second quarter 2018.
Group Common and Other in Q2 2018
Financial highlights
|
EUR million |
|
Q2’18 |
|
Q2’17 |
|
YoY change |
|
Constant currency |
|
|
Net sales |
|
278 |
|
307 |
|
(9 |
)% |
(4 |
)% |
|
Gross profit |
|
53 |
|
54 |
|
(2 |
)% |
|
|
|
Gross margin % |
|
19.1 |
% |
17.6 |
% |
150 |
bps |
|
|
|
R&D |
|
(69 |
) |
(66 |
) |
5 |
% |
|
|
|
SG&A |
|
(49 |
) |
(53 |
) |
(8 |
)% |
|
|
|
Other income and expenses |
|
38 |
|
3 |
|
|
|
|
|
|
Operating loss |
|
(27 |
) |
(62 |
) |
(56 |
)% |
|
|
|
Operating margin % |
|
(9.7 |
)% |
(20.2 |
)% |
1 050 |
bps |
|
|
Financial discussion
Net sales
Group Common and Other net sales decreased 9% year-on-year. On a constant currency basis, Group Common and Other net sales would have decreased 4% year-on-year.
The decrease in Group Common and Other net sales was primarily due to Alcatel Submarine Networks, partially offset by Radio Frequency Systems. The decrease in Alcatel Submarine Networks was primarily due to the completion of two large projects, which benefitted the second quarter 2017.