Nokia Corporation Interim Report for Q1 2016
May 10, 2016 at 08:00 (CET +1)
Nokia Corporation Interim Report for Q1 2016
Non-IFRS financial results benefitted from expanded portfolio and continuation of solid execution
This is a summary of the Nokia Corporation interim report for first quarter 2016 published today. The complete interim report for first quarter 2016 with tables is available at http://nokia.com/financials. Investors should not rely on summaries of our interim reports only, but should review the complete interim reports with tables.
Non-IFRS net sales in Q1 2016 of EUR 5.6 billion. In the year-ago quarter, non-IFRS net sales would have been EUR 6.1 billion on a comparable combined company basis.
Non-IFRS diluted EPS in Q1 2016 of EUR 0.03. Q1 2016 reflected the acquisition of Alcatel-Lucent, which resulted in a higher share count, as well as higher non-IFRS tax expenses due to unfavorable changes in the regional profit mix. Note that Nokia's Q1 2016 non-IFRS diluted EPS was reported as a combined company, whereas the Q1 2015 non-IFRS diluted EPS of EUR 0.05 was reported on a Nokia stand-alone basis.
In Q1 2016, the net cash and other liquid assets of the combined company increased by EUR 471 million, to EUR 8.2 billion, compared to Nokia on a standalone basis at the end of Q4 2015, primarily due to the acquisition of Alcatel-Lucent, partially offset by cash outflows related to working capital.
Nokia's Networks business
8% year-on-year net sales decrease in Q1 2016. Our performance was primarily due to Ultra Broadband Networks, which declined 12% year-on-year and 27% sequentially, consistent with our outlook for a greater than normal seasonal decline in the wireless infrastructure market in Q1 2016. IP Networks and Applications grew on a year-on-year basis.
Strong non-IFRS gross margin of 38.3% in Q1 2016 primarily due to improved product mix in Ultra Broadband Networks (led by Mobile Networks) and IP Networks and Applications (led by IP/Optical Networks), as well as efficiency gains.
Non-IFRS operating margin of 6.5% in Q1 2016. The year-on-year increase of 2.8 percentage points was primarily due to the higher non-IFRS gross margin, as well as continued focus on execution excellence.
27% year-on-year net sales decrease in Q1 2016. Our performance was affected by the absence of the following three items which benefitted Q1 2015: non-recurring adjustments to accrued net sales from existing agreements, revenue share related to previously divested intellectual property rights ("IPR"), and IPR divestments. Excluding these three items, net sales increased year-on-year by approximately 10% due to higher intellectual property licensing income.
|First quarter 2016 results compared to combined company historicals. See note 1 to the financial statements for further details1,2|
|Combined company historicals2||Combined company historicals2|
|EUR million||Q1'16||Q1'15||YoY change||Q4'15||QoQ change|
|Net sales - constant currency (non-IFRS)||(9)%||(27)%|
|Net sales (non-IFRS)||5 603||6 129||(9)%||7 719||(27)%|
|Nokia's Networks business||5 181||5 662||(8)%||7 057||(27)%|
|Ultra Broadband Networks||3 729||4 227||(12)%||5 081||(27)%|
|IP Networks and Applications||1 452||1 435||1%||1 976||(27)%|
|Group Common and Other||236||203||16%||254||(7)%|
|Gross profit (non-IFRS)||2 205||2 264||(3)%||3 272||(33)%|
|Gross margin % (non-IFRS)||39.4%||36.9%||250bps||42.4%||(300)bps|
|Operating profit (non-IFRS)||345||276||25%||1 279||(73)%|
|Nokia's Networks business||337||209||61%||1 097||(69)%|
|Ultra Broadband Networks||234||168||39%||702||(67)%|
|IP Networks and Applications||103||42||145%||396||(74)%|
|Group Common and Other||(99)||(111)||(129)|
|Operating margin % (non-IFRS)||6.2%||4.5%||170bps||16.6%||(1 040)bps|
|First quarter 2016 results compared to Nokia standalone historicals. See note 1 to the financial statements for further details1,3|
|Nokia standalone historicals3||Nokia standalone historicals3|
|EUR million (except for EPS in EUR)||Q1'16||Q1'15||YoY change||Q4'15||QoQ change|
|EPS, diluted (non-IFRS)||0.03||0.05||(40)%||0.15||(80)%|
|Net cash and other liquid assets||8 246||4 672||76%||7 775||6%|
1 Results are as reported unless otherwise specified. The results information in this report is unaudited. Non-IFRS results exclude costs related to the Alcatel-Lucent transaction, goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring related costs, and certain other items that may not be indicative of Nokia's underlying business performance. For Q1 2016 details, please refer to the year to date discussion in the complete interim report and note 2, "Non-IFRS to reported reconciliation", in the notes to the financial statements attached to the complete interim report. A reconciliation of the Q1 2015 and the Q4 2015 non-IFRS combined company results to the reported results can be found in the "Nokia provides recast segment results for 2015 reflecting new financial reporting structure" stock exchange release published on April 22, 2016.
2 Combined company historicals reflect Nokia's new operating and financial reporting structure, including Alcatel-Lucent, and are presented as additional information as described in the stock exchange release published on April 22, 2016. For more information on the combined company historicals, please refer to note 1, "Basis of Preparation", in the notes to the financial statements attached to the complete interim report.
3 Nokia standalone historicals are the recasting of Nokia's historical standalone financial results, reflecting Nokia's updated segment reporting structure, excluding Alcatel-Lucent. Beginning from the first quarter 2016, Nokia results include those of Alcatel-Lucent on a consolidated basis. Accordingly, Nokia results beginning from the first quarter 2016 are not directly comparable to prior period Nokia standalone results.
Nokia launches headcount reductions as part of global synergy and transformation program
Nokia announced that it has started actions to reduce company personnel globally as part of its synergy and transformation program.
The headcount reductions are expected to take place between now and the end of 2018, consistent with Nokia's synergy target timeline. Reductions will come largely in areas where there are overlaps, as Nokia outlined on October 29, 2015. At the same time, Nokia is taking steps to adapt to challenging market conditions and to shift resources to future-oriented technologies such as 5G, the Cloud and the Internet of Things. As part of the program, Nokia also continues to target savings in real estate, services, procurement, supply chain and manufacturing.
Nokia plans to acquire Withings to accelerate entry into Digital Health
Nokia announced plans to acquire Withings S.A. ("Withings"), a pioneer and leader in the connected health revolution with a family of award-winning digital health products and services to help people all over the world lead healthier, happier and more productive lives. Withings has approximately 200 employees and will be part of our Nokia Technologies business.
With this acquisition, Nokia is strengthening its position in the Internet of Things in a way that leverages the power of the trusted Nokia brand, fits with the Nokia's purpose of expanding the human possibilities of the connected world, and puts Nokia at the heart of a very large addressable market.
The planned transaction values Withings at EUR 170 million, would be settled in cash and is expected to close in early Q3 2016 subject to regulatory approvals and customary closing conditions.
Nokia's first quarter results demonstrate the strategic value of our combination with Alcatel-Lucent.
I am pleased that we were able to deliver solid profitability in what is typically a seasonally weak quarter and at a time when the risk of integration-related disruption was high. While our revenue decline was disappointing, the shortfall was largely driven by Mobile Networks, where the challenging environment is not a surprise. We noted in our Q4 2015 earnings release that we expected some market headwinds in 2016 in the wireless sector and we continue to hold that view today.
Based on our current assessment, we expect a full year 2016 non-IFRS operating margin above 7% in the Networks business. When looking at the first half of the year, we do not expect typical seasonal patterns to occur given likely market conditions in the second quarter and our ongoing integration of Alcatel-Lucent.
While integrations of the scale of Alcatel-Lucent are complex and take time, we are now sufficiently confident in our progress that we are targeting synergies that are both more than and faster than our original plan. We already have agreed transition plans that cover the most pressing areas of portfolio overlap with most of our top customers; have begun the process of reducing over-lapping personnel including initial reductions in the United States and several other countries; started to consolidate our real estate footprint with several sites already closed and thirty more scheduled for the current quarter; and completed 40 projects with suppliers to drive procurement savings, with 200 more projects currently underway and plans for hundreds of additional projects to be launched largely over the course of Q2 2016.
I am also pleased that we continue to see strong support from our customers, including those from the former Alcatel-Lucent. We are focused on capitalizing on these opportunities through strengthening our sales execution, as well as bringing unique innovation rapidly to market, such as our recently announced 5G-ready AirScale radio access family of products.
On a final note, I am excited that the team from Withings will be joining Nokia, as part of Nokia Technologies. We have said consistently that digital health is an area of strategic interest to us, and with this acquisition we have an excellent opportunity to expand in what is one of the largest markets in the Internet of Things and build future licensing opportunities.
President and CEO
The following discussion is of Nokia's results for the first quarter 2016, which comprise the results of Nokia's businesses - Nokia's Networks business (including Ultra Broadband Networks and IP Networks and Applications) and Nokia Technologies, as well as Group Common and Other. For more information on the recent changes to our reportable segments, please refer to note 3, "Segment information and eliminations", in the notes to the financial statements attached to the complete interim report. Comparisons are given to the first quarter 2015 and fourth quarter 2015 results on a combined company basis, unless otherwise indicated.
This data has been prepared to reflect the financial results of the continuing operations of Nokia as if the new financial reporting structure had been in operation for the full year 2015. Certain accounting policy alignments, adjustments and reclassifications have been necessary, and these are explained in the "Basis of preparation" section of the stock exchange release published on April 22, 2016. These adjustments include also reallocation of items of costs and expenses based on their nature and changes to the definition of the line items in the combined company accounting policies, which affect also numbers presented in these interim financial statements for 2015. For more information on the combined company historicals, please refer to note 1, "Basis of Preparation", in the notes to the financial statements attached to the complete interim report.
Non-IFRS Net sales
Nokia non-IFRS net sales decreased 9% year-on-year and decreased 27% sequentially. On a constant currency basis, Nokia non-IFRS net sales would have decreased 9% year-on-year and would have decreased 27% sequentially.
The year-on-year decrease in Nokia non-IFRS net sales in the first quarter 2016 was primarily due to lower net sales in Nokia's Networks business and Nokia Technologies.
The sequential decrease in Nokia non-IFRS net sales in the first quarter 2016 was primarily due to lower net sales in Nokia's Networks business and Nokia Technologies.
Non-IFRS Operating profit
Nokia non-IFRS operating profit increased primarily due to lower non-IFRS research and development ("R&D") expenses and a net positive fluctuation in non-IFRS other income and expenses, partially offset by lower non-IFRS gross profit.
The lower non-IFRS gross profit was primarily due to Nokia Technologies partially offset by Nokia's Networks business.
The lower non-IFRS R&D expenses was primarily due to Nokia's Networks business and Nokia Technologies.
Nokia non-IFRS other income and expenses was an expense of EUR 15 million in the first quarter 2016, compared to an expense of EUR 49 million in the year-ago quarter. On a year-on-year basis, the change was primarily due to Group Common and Other, as well as Nokia's Networks business.
Nokia non-IFRS operating profit decreased primarily due to lower non-IFRS gross profit, partially offset by lower non-IFRS R&D expenses and non-IFRS selling, general and administrative ("SG&A") expenses.
The lower non-IFRS gross profit was primarily due to Nokia's Networks business and Nokia Technologies.
The lower non-IFRS R&D expenses was primarily due to Nokia's Networks business.
The lower non-IFRS SG&A expenses was primarily due to Nokia's Networks business.
Nokia non-IFRS other income and expenses was an expense of EUR 15 million in the first quarter 2016, compared to an income of EUR 20 million in the fourth quarter 2015. On a sequential basis, the change was primarily due to Nokia's Networks business, partially offset by Group Common and Other.
|Nokia||Annual operating cost synergies||Above EUR 900 million of net operating cost synergies to be achieved in full year 2018 (update)|| Compared to the combined non-IFRS operating costs of Nokia and Alcatel-Lucent for full year 2015.
Expected to be derived from a wide range of initiatives related to operating expenses and cost of sales, including:
This is an update to the earlier annual operating cost synergies outlook of approximately EUR 900 million of net operating cost synergies to be achieved in full year 2018.
|FY16 Non-IFRS financial income and expense||Expense of approximately EUR 300 million||Primarily includes net interest expenses related to interest-bearing liabilities, interest costs related to the defined benefit pension and other post-employment benefit plans, as well as the impact from changes in foreign exchange rates on certain balance sheet items. This outlook may vary subject to changes in the above listed items.|
|FY16 Non-IFRS tax rate||Above 40% for full year 2016||The increase in the non-IFRS tax rate for the combined company, compared to Nokia on a standalone basis, is primarily attributable to unfavorable changes in the regional profit mix as a result of the acquisition of Alcatel-Lucent. This outlook is for full year 2016; the quarterly non-IFRS tax rate is expected to be subject to volatility, primarily influenced by fluctuations in profits made by Nokia in different tax jurisdictions. Nokia expects its effective long-term non-IFRS tax rate to be clearly below the full year 2016 level, and intends to provide further commentary later in 2016.|
|FY16 Cash outflows related to taxes||Approximately EUR 400 million||May vary due to profit levels in different jurisdictions and the amount of licensing income subject to withholding tax.|
|FY16 Capital expenditures||Approximately EUR 650 million||Primarily attributable Nokia's Networks business.|
|Nokia's Networks business||FY16 non-IFRS net sales||Decline YoY|| Combined company non-IFRS net sales and non-IFRS operating margin are expected to be influenced by factors including:
|FY16 Non-IFRS operating margin||Above 7%|
|Nokia Technologies|| FY16 Net sales
||Not provided||Due to risks and uncertainties in determining the timing and value of significant licensing agreements, Nokia believes it is not appropriate to provide an annual outlook for fiscal year 2016, and does not intend to provide an outlook in its reports during fiscal year 2016.|
RISKS AND FORWARD-LOOKING STATEMENTS
It should be noted that Nokia and its businesses are exposed to various risks and uncertainties and certain statements herein that are not historical facts are forward-looking statements, including, without limitation, those regarding: A) our ability to integrate Alcatel Lucent into our operations and achieve the targeted business plans and benefits, including targeted synergies in relation to the acquisition of Alcatel Lucent announced on April 15, 2015 and closed in early 2016; B) our ability to squeeze out the remaining Alcatel Lucent shareholders in a timely manner or at all to achieve full ownership of Alcatel Lucent; C) expectations, plans or benefits related to our strategies and growth management; D) expectations, plans or benefits related to future performance of our businesses; E) expectations, plans or benefits related to changes in our management and other leadership, operational structure and operating model, including the expected characteristics, business, organizational structure, management and operations following the acquisition of Alcatel Lucent; F) expectations regarding market developments, general economic conditions and structural changes; G) expectations and targets regarding financial performance, results, operating expenses, taxes, cost savings and competitiveness, as well as results of operations including targeted synergies and those related to market share, prices, net sales, income and margins; H) timing of the deliveries of our products and services; I) expectations and targets regarding collaboration and partnering arrangements, as well as our expected customer reach; J) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities; K) expectations regarding restructurings, investments, uses of proceeds from transactions, acquisitions and divestments and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, divestments and acquisitions; and L) statements preceded by or including "believe," "expect," "anticipate," "foresee," "sees," "target," "estimate," "designed," "aim," "plans," "intends," "focus," "continue," "project," "should," "will" or similar expressions. These statements are based on the management's best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors, including risks and uncertainties, that could cause such differences include, but are not limited to: 1) our ability to execute our strategy, sustain or improve the operational and financial performance of our business or correctly identify or successfully pursue business opportunities or growth; 2) our ability to achieve the anticipated business and operational benefits and synergies from the Alcatel Lucent transaction, including our ability to integrate Alcatel Lucent into our operations and within the timeframe targeted, and our ability to implement our organization and operational structure efficiently; 3) our ability to complete the purchases of the remaining outstanding Alcatel Lucent securities and realize the benefits of the public exchange offer for all outstanding Alcatel Lucent securities; 4) our dependence on general economic and market conditions and other developments in the economies where we operate; 5) our dependence on the development of the industries in which we operate, including the cyclicality and variability of the telecommunications industry; 6) our exposure to regulatory, political or other developments in various countries or regions, including emerging markets and the associated risks in relation to tax matters and exchange controls, among others; 7) our ability to effectively and profitably compete and invest in new competitive high-quality products, services, upgrades and technologies and bring them to market in a timely manner; 8) our dependence on a limited number of customers and large multi-year agreements; 9) Nokia Technologies' ability to maintain and establish new sources of patent licensing income and IPR-related revenues, particularly in the smartphone market; 10) our dependence on IPR technologies, including those that we have developed and those that are licensed to us, and the risk of associated IPR-related legal claims, licensing costs and restrictions on use; 11) our exposure to direct and indirect regulation, including economic or trade policies, and the reliability of our governance, internal controls and compliance processes to prevent regulatory penalties; 12) our reliance on third-party solutions for data storage and the distribution of products and services, which expose us to risks relating to security, regulation and cybersecurity breaches; 13) Nokia Technologies' ability to generate net sales and profitability through licensing of the Nokia brand, the development and sales of products and services, as well as other business ventures which may not materialize as planned; 14) our exposure to legislative frameworks and jurisdictions that regulate fraud, economic trade sanctions and policies, and Alcatel Lucent's previous and current involvement in anti-corruption allegations; 15) the potential complex tax issues, tax disputes and tax obligations we may face in various jurisdictions, including the risk of obligations to pay additional taxes; 16) our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 17) our ability to retain, motivate, develop and recruit appropriately skilled employees; 18) our ability to manage our manufacturing, service creation, delivery, logistics and supply chain processes, and the risk related to our geographically concentrated production sites; 19) the impact of unfavorable outcome of litigation, arbitration, agreement-related disputes or allegations of product liability associated with our businesses; 20) exchange rate fluctuations; 21) inefficiencies, breaches, malfunctions or disruptions of information technology systems; 22) our ability to optimize our capital structure as planned and re-establish our investment grade credit rating or otherwise improve our credit ratings; 23) uncertainty related to the amount of dividends and equity return we are able to distribute to shareholders for each financial period; 24) our ability to achieve targeted benefits from or successfully implement planned transactions, as well as the liabilities related thereto; 25) our involvement in joint ventures and jointly-managed companies; 26) performance failures by our partners or failure to agree to partnering arrangements with third parties; 27) our ability to manage and improve our financial and operating performance, cost savings, competitiveness and synergy benefits after the acquisition of Alcatel Lucent; 28) adverse developments with respect to customer financing or extended payment terms we provide to customers; 29) the carrying amount of our goodwill may not be recoverable; 30) risks related to undersea infrastructure; 31) unexpected liabilities with respect to pension plans, insurance matters and employees; and 32) unexpected liabilities or issues with respect to the acquisition of Alcatel Lucent, including pension, postretirement, health and life insurance and other employee liabilities or higher than expected transaction costs as well as the risk factors specified on pages 69 to 87 of our annual report on Form 20-F filed on April 1, 2016 under "Operating and financial review and prospects-Risk factors", as well as in Nokia's other filings with the U.S. Securities and Exchange Commission. Other unknown or unpredictable factors or underlying assumptions subsequently proven to be incorrect could cause actual results to differ materially from those in the forward-looking statements. We do not undertake any obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.
The financial statements were authorized for issue by management on May 9, 2016.
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Nokia's Annual General Meeting 2016 is scheduled to be held on June 16, 2016.
Nokia plans to publish its second quarter 2016 results on August 4, 2016.