Nokia Corporation Interim Report for Q2 2015 and January-June 2015
July 30, 2015 at 08:00 (CET +1)
Nokia Corporation Interim Report for Q2 2015 and January-June 2015
Strong Q2 positions Nokia well to meet full year 2015 objectives
This is a summary of the Nokia Corporation interim report for second quarter 2015 and January-June 2015 published today. The complete interim report for second quarter 2015 and January-June 2015 with tables is available at http://company.nokia.com/en/financials. Investors should not rely on summaries of our interim reports only, but should review the complete interim reports with tables.
- Net sales in Q2 2015 of EUR 3.2 billion (EUR 2.9 billion in Q2 2014), up 9% year-on-year (down 1% year-on-year on a constant currency basis)
- Non-IFRS diluted EPS in Q2 2015 of EUR 0.09 (EUR 0.06 in Q2 2014), an increase of 50% year-on-year; reported diluted EPS in Q2 2015 of EUR 0.09 (loss of EUR 0.01 in Q2 2014)
- 6% year-on-year net sales growth (4% year-on-year decline on a constant currency basis)
- 12% year-on-year growth in non-IFRS gross profit, with non-IFRS gross margin increasing to 40.0% from 38.1%, primarily driven by an elevated level of software sales within Mobile Broadband and strong performance across Global Services
- 11% year-on-year growth in non-IFRS operating profit, with non-IFRS operating margin increasing to 11.5% from 11.0%, supported by continued focus on operational excellence
- 25% year-on-year growth in net sales, with 24% growth in new vehicle licenses for embedded navigation systems
- Non-IFRS operating profit of EUR 27 million, with non-IFRS operating margin increasing year-on-year to 9.3% from 0.0%
- 31% year-on-year growth in net sales and 17% year-on-year growth in non-IFRS operating profit, primarily due to higher intellectual property licensing income from existing and new licensees and non-recurring net sales. In addition, on a year-on-year basis, non-IFRS operating profit was negatively affected by higher non-IFRS operating expenses
Group Common Functions
- Non-IFRS operating profit of EUR 69 million benefitted from a gain of approximately EUR 110 million related to Nokia's investments made through its venture funds
|Reported second quarter 2015 results1||Reported January-June 2015 results1|
|EUR million||Q2'15||Q2'14||YoY change||Q1'15||QoQ change||Q1-Q2'15||Q1-Q2'14||YoY change|
|Net sales - constant currency||(1)%||(1)%||5%|
|Net sales||3 209||2 942||9%||3 196||0%||6 405||5 606||14%|
|Nokia Networks||2 730||2 566||6%||2 673||2%||5 403||4 894||10%|
|Gross margin % (non-IFRS)||46.7%||44.0%||270bps||42.5%||420bps||44.6%||44.8%||(20)bps|
|Operating profit (non-IFRS)||521||346||51%||265||97%||786||651||21%|
|Group Common Functions||69||(31)||(32)||37||(39)|
|Operating margin % (non-IFRS)||16.2%||11.8%||440bps||8.3%||790bps||12.3%||11.6%||70bps|
|EPS, EUR diluted (non-IFRS)||0.09||0.06||50%||0.05||80%||0.15||0.10||50%|
|EPS, EUR diluted||0.09||(0.01)||0.05||80%||0.14||0.02||600%|
1 Results are as reported unless otherwise specified. The results information in this report is unaudited. Please see "Notes to financial statements - Basis of preparation" for more information. Non-IFRS results exclude transaction and other related costs resulting from the sale of substantially all of Nokia's Devices & Services business to Microsoft (the "Sale of the D&S Business"), goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring related costs, and certain other items that may not be indicative of Nokia's underlying business performance. For a detailed discussion, please see the year to date discussion and the non-IFRS to reported reconciliation note to the financial statements. A reconciliation of our Q1 2015 non-IFRS results to our reported results can be found in our complete Q1 2015 interim report with tables on page 29 published on April 30, 2015. A reconciliation of our Q4 2014 non-IFRS results to our reported results can be found in our complete Q4 2014 interim report with tables on pages 20-25 published on January 29, 2015. A reconciliation of our Q3 2014 non-IFRS results to our reported results can be found in our complete Q3 2014 interim report with tables on pages 22-27 published on October 23, 2014.
Nokia delivered strong results in the second quarter, with each of our three businesses performing very well.
I am particularly pleased by Nokia Networks, which delivered improved performance overall, despite a year-on-year decline in net sales on a constant currency basis. Software sales were up significantly; core networking sales improved; we saw a reduced impact of strategic entry deals; Global Services had one of its best quarters in the history of the company; and costs remained well under control.
While we expect the telecom infrastructure market to remain challenging, I believe that our disciplined operating model and strong execution capabilities will continue to differentiate us in this environment. Additionally, we remain highly focused on reducing costs and improving efficiency in order to mitigate the impact of market conditions.
Nokia Technologies not only continued its licensing momentum in the quarter with a new agreement with LG, but also recently unveiled OZO, a truly game-changing virtual reality camera. The team in "Tech" has shown both disciplined execution in licensing and an entrepreneurial spirit in pursuing new growth opportunities.
HERE continued to deliver well, again showing year-on-year sales and profitability growth. Our strategic review of that business is now in an advanced stage, and I would like to reiterate that our focus is on what is in the best interests of our shareholders and the long term future of HERE.
Overall, with these results, we are well positioned to deliver on our full-year 2015 commitments.
President and CEO
Nokia in Q2 2015
The following discussion is of Nokia's reported results for the second quarter 2015, which comprise the results of Nokia's three businesses - Nokia Networks, HERE and Nokia Technologies, as well as Group Common Functions. Comparisons are given to the second quarter 2014 and first quarter 2015 results, unless otherwise indicated.
Nokia's net sales increased 9% year-on-year and were approximately flat sequentially. At constant currency, Nokia's net sales would have decreased 1% both on a year-on-year and sequential basis.
The year-on-year increase in Nokia's net sales in the second quarter 2015 was primarily due to higher net sales in Nokia Networks and, to a lesser extent, in HERE and Nokia Technologies.
On a sequential basis, the approximately flat net sales in the second quarter 2015 were primarily due to slightly higher net sales in Nokia Networks and HERE, partially offset by lower net sales in Nokia Technologies.
Non-IFRS Operating profit
Nokia's non-IFRS operating profit increased 51% year-on-year in the second quarter 2015, primarily due to an increase in non-IFRS operating profit in Group Common Functions and, to a lesser extent, in Nokia Networks, HERE and Nokia Technologies.
Nokia's non-IFRS other income and expenses was an income of EUR 113 million in the second quarter 2015, compared to an expense of EUR 9 million in the second quarter 2014. On a year-on-year basis, the change in Nokia's non-IFRS other income and expenses was primarily due to higher other income in Group Common Functions, related to Nokia's investments made through its venture funds. During the second quarter 2015, Nokia Growth Partners sold its holdings in Ganji.com, a major online local services marketplace platform in China, to 58.com. BlueRun Ventures also invested in Ganji.com and participated in the transaction, which valued Nokia's total indirect holdings in Ganji.com at approximately EUR 200 million. Related to the transaction, Nokia recorded a gain of approximately EUR 110 million in the second quarter 2015. The final amount and timing of additional income or expense will depend on the value and date at which the venture funds liquidate the portion of the consideration that was received in shares.
On a year-on-year basis, foreign exchange fluctuations had a significantly positive impact on non-IFRS gross profit, and a significantly negative impact on non-IFRS operating expenses, resulting in a slightly positive net impact on non-IFRS operating profit in the second quarter 2015.
Nokia's non-IFRS operating profit increased 97% sequentially in the second quarter 2015, primarily due to an increase in non-IFRS operating profit in Nokia Networks and Group Common Functions, partially offset by a decrease in non-IFRS operating profit in Nokia Technologies.
Nokia's non-IFRS other income and expenses was an income of EUR 113 million in the second quarter 2015, compared to an expense of EUR 19 million in the first quarter 2015. On a sequential basis, the change in Nokia's non-IFRS other income and expenses was primarily due to higher other income in Group Common Functions, related to Nokia's investments made through its venture funds. During the second quarter 2015, Nokia Growth Partners sold its holdings in Ganji.com, a major online local services marketplace platform in China, to 58.com. BlueRun Ventures also invested in Ganji.com and participated in the transaction, which valued Nokia's total indirect holdings in Ganji.com at approximately EUR 200 million. Related to the transaction, Nokia recorded a gain of approximately EUR 110 million in the second quarter 2015. The final amount and timing of additional income or expense will depend on the value and date at which the venture funds liquidate the portion of the consideration that was received in shares.
On a sequential basis, foreign exchange fluctuations had a slightly negative impact on non-IFRS gross profit, and a slightly negative impact on non-IFRS operating expenses, resulting in a negative net impact on non-IFRS operating profit in the second quarter 2015.
Nokia's non-IFRS profit increased 66% on a year-on-year basis in the second quarter 2015, primarily due to higher non-IFRS operating profit and, to a lesser extent, a net positive fluctuation in non-IFRS financial income and expenses. This was partially offset by higher non-IFRS tax expense. Nokia's non-IFRS tax expense in the second quarter 2015 was based on a tax rate of approximately 27%, and this resulted in a higher non-IFRS tax expense than in the second quarter 2014. However, the tax expenses in the second quarter of 2014 and 2015 are not directly comparable primarily due to Nokia's deferred tax assets in Finland and Germany that were subject to valuation allowances until the third quarter of 2014.
Sequentially, Nokia's non-IFRS profit increased 79% in the second quarter 2015, primarily due to a higher non-IFRS operating profit, partially offset by higher non-IFRS tax expenses and the absence of the approximately EUR 25 million out of period adjustment to the share of results of associated companies that benefitted the first quarter 2015.
|Nokia Networks||FY15 Net sales||Increase YoY|
|FY15 Non-IFRS op. margin||Around the midpoint of the long-term range of 8% - 11% for the full year||Based on factors including competitive industry dynamics, product and regional mix, expected industry seasonality in the second half of 2015, the timing of major network deployments, and expected continued operational improvement.|
|HERE||FY15 Net sales||Increase YoY|
|FY15 Non-IFRS op. margin||9% - 12%||Based on factors including leading market position, positive industry trends and improved focus on cost efficiency.|
|Nokia Technologies||FY15 Net sales||Increase YoY||Excludes potential amounts related to the expected resolution of our arbitration with Samsung. Based on factors including higher investment in licensing activities, licensable technologies and business enablers, including go-to-market capabilities, which target new and significant long-term growth opportunities. This an update to the earlier FY15 non-IFRS operating expense outlook to be approximately in line with the Q4 2014 level.|
|FY15 Non-IFRS op. expense||Approx. in line with Q2'15 level (update)|
|Nokia||FY15 Capital expenditure||Approx. EUR 250 million||Primarily attributable to Nokia Networks.|
|FY15 Financial income and expense||Expense of approx. EUR 160 million||Subject to changes in FX rates and interest-bearing liabilities.|
| FY15 Group Common Functions
non-IFRS op. expense
|Approx. EUR 120 million|
|Estimated long-term effective tax rate||Approx. 25%|
|Annual cash tax obligation||Approx. EUR 250 million per annum until deferred tax assets fully utilized||May vary due to profit levels in different jurisdictions and amount of licence income subject to withholding tax.|
RISKS AND FORWARD-LOOKING STATEMENTS
It should be noted that Nokia and its businesses are exposed to various risks and uncertainties and certain statements herein that are not historical facts are forward-looking statements, including, without limitation, those regarding: A) the outcome, transaction timeline and closing of the proposed combination of Nokia and Alcatel-Lucent pursuant to a memorandum of understanding ("MoU") as announced on April 15, 2015 ("Proposed transaction") and the ability of Nokia to integrate Alcatel-Lucent into Nokia operations ("Combined company") and achieve the targeted benefits; B) satisfaction of conditions precedent, including closing conditions, related to the Proposed transaction in a timely manner, or at all, including obtaining required regulatory approvals, the confirmation and approval of our shareholders for the Proposed transaction and successfully completing tenders for the Alcatel-Lucent shares; C) expectations, plans or benefits related to Nokia's strategies, including the review of strategic options for our HERE business; D) expectations, plans or benefits related to future performance of Nokia's businesses Nokia Networks, HERE and Nokia Technologies; E) expectations, plans or benefits related to changes in our management and other leadership, operational structure and operating model, including the expected characteristics, business and operations of the Combined company; F) expectations regarding market developments, general economic conditions and structural changes; G) expectations and targets regarding performance, including those related to market share, prices, net sales and margins; H) timing of the deliveries of our products and services; I) expectations and targets regarding our financial performance, operating expenses, taxes, cost savings and competitiveness, as well as results of operations, including synergies related to the Proposed transaction, the target annual run rate of cost synergies for the Combined company and expected financial results of the Combined company; J) expectations and targets regarding collaboration and partnering arrangements, including the expected customer reach of the Combined company; K) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities; L) expectations regarding restructurings, investments, uses of proceeds from transactions, acquisitions and divestments and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, divestments and acquisitions, including any expectations, plans or benefits related to or caused by the transaction where Nokia sold substantially all of its Devices & Services business to Microsoft on April 25, 2014; and M) statements preceded by or including "believe," "expect," "anticipate," "foresee," "sees," "target," "estimate," "designed," "aim," "plans," "intends," "focus," "continue," "project," "should," "will" or similar expressions.
These statements are based on the management's best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. We describe the risks and uncertainties that affect the Nokia Group or are relevant to all Nokia businesses at the beginning of this section and provide towards the end information on additional risks that are primarily related to the individual Nokia businesses: Nokia Networks, HERE and Nokia Technologies. Factors, including risks and uncertainties, that could cause such differences include, but are not limited to: 1) the inability to close the Proposed transaction in a timely manner, or at all, for instance due to the inability or delays in obtaining the shareholder approval or necessary regulatory approvals for the Proposed transaction, or the occurrence of any event, change or other circumstance that could give rise to the termination of the MoU and successfully completing tenders for the Alcatel-Lucent shares; 2) the inability to achieve the targeted business and operational benefits from the Proposed transaction or disruption caused by the Proposed transaction, including inability to integrate Alcatel-Lucent into Nokia operations and any negative effect from the implementation of the Proposed combination or the announcement of the Proposed transaction, for instance due to the loss of customers, loss of key executives or employees or reduced focus on day-to-day operations and business; 3) our ability to identify market trends and business opportunities to select and execute strategies successfully and in a timely manner, and our ability to successfully adjust our operations and operating models; 4) our ability to sustain or improve the operational and financial performance of our businesses and correctly identify or successfully pursue new business opportunities; 5) our dependence on general economic and market conditions, including the capacity for growth in internet and technology usage; 6) our exposure to regulatory, political or other developments in various countries or regions; 7) our ability to invent new relevant technologies, products and services, to develop and maintain our intellectual property portfolio and to maintain the existing sources of intellectual property related revenue and establish new such sources; 8) our ability to protect our intellectual property rights and defend against third-party infringements and claims that we have infringed third parties' intellectual property rights, as well as increased licensing costs and restrictions on our ability to use certain technologies, and litigation related to IPR; 9) the potential complex tax issues, tax disputes and tax obligations we may face, including the obligation to pay additional taxes in various jurisdictions and our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 10) our ability to retain, motivate, develop and recruit appropriately skilled employees, for instance due to possible disruption caused by the Proposed transaction; 11) the performance of the parties we partner and collaborate with, as well as that of our financial counterparties, and our ability to achieve successful collaboration or partnering arrangements, including any disruption from the Proposed transaction in obtaining or maintaining the contractual relationships; 12) exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Japanese yen and the Chinese yuan, as well as certain other currencies; 13) the impact of unfavorable outcome of litigation, arbitration, contract-related disputes or allegations of health hazards associated with our businesses; 14) any inefficiency, malfunction or disruption of a system or network that our operations rely on or any impact of a possible cybersecurity breach; 15) our ability to achieve targeted benefits from or successfully implement planned transactions, such as acquisitions, divestments, mergers or joint ventures, and manage unexpected liabilities related thereto; 16) our ability to manage our operating expenses and reach targeted results through efforts aimed at improving our financial performance, for instance through cost savings and other efforts aimed at increased competitiveness; 17) our ability to optimize our capital structure as planned and re-establish our investment grade credit rating; 18) Nokia Networks' ability to execute its strategy or to effectively and profitably adapt its business and operations in a timely manner to the increasingly diverse needs of its customers in the mobile broadband infrastructure and related services market or to such technological developments; 19) Nokia Networks' ability to effectively and profitably invest in new competitive high-quality products, services, upgrades and technologies and bring them to market in a timely manner; 20) Nokia Networks' dependence on a limited number of customers and large multi-year agreements and adverse effects as a result of further operator consolidation; 21) Nokia Networks' ability to manage its manufacturing, service creation and delivery, as well as our logistics efficiently and without interruption; 22) Nokia Networks' dependence on a limited number of suppliers, who may fail to deliver sufficient quantities of fully functional products and components or deliver timely services meeting its customers' needs; 23) adverse developments with respect to customer financing or extended payment terms Nokia Networks provides to customers; 24) adverse developments resulting from or in connection with the review of strategic options for our HERE business, including those related to a potential divestment of the HERE business; 25) the intense competition HERE faces and its ability to effectively and profitably invest in new competitive high-quality services and data and bring these to market in a timely manner or adjust its operations efficiently; 26) HERE's dependence on the overall automotive market developments and customer business conditions; 27) HERE's dependence, especially with respect to sales to the automotive industry, on a limited number of customers and large multi-year agreements; 28) Nokia Technologies' ability to maintain its existing sources of intellectual property related revenue or establish new sources; 29) Nokia Technologies' dependence on a limited number of key licensees that contribute proportionally significant patent licensing income, including the outcome of the binding arbitration with Samsung expected in 2015; 30) Nokia Technologies' dependence on adequate regulatory protection for patented or other proprietary technologies; 31) Nokia Technologies' ability to execute its plans through business areas such as technology licensing, licensing the Nokia brand and other business ventures including technology innovation and incubation; and 32) and the impact on the Combined company (after giving effect to the Proposed transaction) of any of the foregoing risks or forward-looking statements, as well as the risk factors specified on pages 74 to 89 of Nokia's latest annual report on Form 20-F under "Operating and Financial Review and Prospects-Risk factors". Other unknown or unpredictable factors or underlying assumptions subsequently proven to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Nokia does not undertake any obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.
Nokia management, Espoo - July 29, 2015
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Nokia plans to publish its third quarter 2015 results on October 29, 2015.