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Nokia Corporation Interim Report for Q1 2017

Nokia Corporation 
Interim Report
April 27, 2017 at 08:00 (CET +1)

Nokia Corporation Interim Report for Q1 2017

Solid overall results, with strong performance in Mobile Networks; full year outlook reiterated

This is a summary of the Nokia Corporation interim report for first quarter 2017 published today. The complete first quarter 2017 interim report with tables is available at www.nokia.com/financials. Investors should not rely on summaries of our interim reports only, but should review the complete reports with tables.

FINANCIAL HIGHLIGHTS

  • Non-IFRS net sales in Q1 2017 of EUR 5.4bn (EUR 5.6bn in Q1 2016). Reported net sales in Q1 2017 of EUR 5.4bn (EUR 5.5bn in Q1 2016).
  • Non-IFRS diluted EPS in Q1 2017 of EUR 0.03 (EUR 0.03 in Q1 2016). Reported diluted EPS in Q1 2017 of negative EUR 0.08 (negative EUR 0.11 in Q1 2016).

Nokia's Networks business

  • 6% year-on-year net sales decrease in Q1 2017 primarily due to IP/Optical Networks and Fixed Networks, with approximately flat net sales in Mobile Networks and Applications & Analytics.
  • Strong Q1 2017 gross margin of 39.5% and solid operating margin of 6.6%, supported by continued focus on operational excellence, with particularly strong performance in Mobile Networks.

Nokia Technologies

  • 25% year-on-year net sales increase in Q1 2017, primarily due to higher patent and brand licensing income and the acquisition of Withings, partially offset by the absence of licensing income related to certain expired agreements. Approximately one third of the net increase was due to non-recurring net sales related to a new license agreement.
  • 9% year-on-year operating profit increase in Q1 2017, primarily related to higher net sales, which were partially offset by higher operating expenses. The year-on-year increase in operating expenses was primarily due to the ramp-up of our digital health and digital media businesses and increased licensing-related litigation costs.

First quarter 2017 non-IFRS results. Refer to note 1, "Basis of Preparation", in the Financial statement information section for further details 1
EUR million (except for EPS in EUR) Q1'17 Q1'16 YoY change Q4'16 QoQ change
Net sales - constant currency (non-IFRS)     (6)%   (21)%
Net sales (non-IFRS) 5 388 5 615 (4)% 6 731 (20)%
  Nokia's Networks business 4 902 5 193 (6)% 6 086 (19)%
Ultra Broadband Networks 3 597 3 741 (4)% 4 346 (17)%
IP Networks and Applications 1 304 1 453 (10)% 1 740 (25)%
  Nokia Technologies 247 198 25% 309 (20)%
  Group Common and Other 254 235 8% 340 (25)%
Gross profit (non-IFRS) 2 196 2 228 (1)% 2 842 (23)%
Gross margin % (non-IFRS) 40.8% 39.7% 110bps 42.2% (140)bps
Operating profit (non-IFRS) 341 345 (1)% 940 (64)%
  Nokia's Networks business 324 337 (4)% 858 (62)%
Ultra Broadband Networks 301 230 31% 564 (47)%
IP Networks and Applications 23 107 (79)% 294 (92)%
  Nokia Technologies 116 106 9% 158 (27)%
  Group Common and Other (99) (99) 0% (76)  
Operating margin % (non-IFRS) 6.3% 6.1% 20bps 14.0% (770)bps
Financial income and expenses (non-IFRS) (81) (67) 21% (72) 13%
Taxes (non-IFRS) (48) (140) (66)% (204) (76)%
Profit (non-IFRS) 203 139 46% 676 (70)%
Profit attributable to the equity holders of the parent (non-IFRS) 196 152 29% 672 (71)%
Non-controlling interests (non-IFRS) 6 (13)   4 50%
EPS, EUR diluted (non-IFRS) 0.03 0.03 0% 0.12 (75)%

First quarter 2017 reported results, unless otherwise specified. Refer to note 1, "Basis of Preparation", in the Financial statement information section for further details 1
EUR million (except for EPS in EUR) Q1'17 Q1'16 YoY change Q4'16 QoQ change
Net Sales - constant currency     (4)%   (20)%
Net sales 5 378 5 511 (2)% 6 657 (19)%
  Nokia's Networks business 4 902 5 193 (6)% 6 086 (19)%
Ultra Broadband Networks 3 597 3 741 (4)% 4 346 (17)%
IP Networks and Applications 1 304 1 453 (10)% 1 740 (25)%
  Nokia Technologies 247 198 25% 309 (20)%
  Group Common and Other 254 235 8% 340 (25)%
  Non-IFRS exclusions (11) (104)   (74)  
Gross profit 2 125 1 577 35% 2 683 (21)%
Gross margin % 39.5% 28.6% 1 090bps 40.3% (80)bps
Operating (loss)/profit (127) (712) (82)% 317 (140)%
  Nokia's Networks business 324 337 (4)% 858 (62)%
Ultra Broadband Networks 301 230 31% 564 (47)%
IP Networks and Applications 23 107 (79)% 294 (92)%
  Nokia Technologies 116 106 9% 158 (27)%
  Group Common and Other (99) (99) 0% (76)  
  Non-IFRS exclusions (468) (1 057)   (622)  
Operating margin % (2.4)% (12.9)% 1 050bps 4.8% (720)bps
Financial income and expenses (146) (103) 42% (72) 103%
Taxes 2 (154) 101   401  
(Loss)/Profit 2 (435) (712) (39)% 658  
(Loss)/Profit attributable to the equity holders of the parent 2 (473) (623) (24)% 659  
Non-controlling interests 2 37 (88)   0  
EPS, EUR diluted 2 (0.08) (0.11) (27)% 0.11  
Net cash and other liquid assets 4 409 8 246 (47)% 5 299 (17)%
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 in the Financial statement information in this report. Change in net sales at constant currency excludes the impact 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.
2 Reported Q1'16 result is not comparable to the previously published Reported Q1'16 result due to an update to the Alcatel-Lucent purchase price allocation in Q3'16 which resulted in an adjustment to the reported Q1'16 income tax benefit.

Acquisition of Comptel Corporation

On February 9, 2017 Nokia announced that it had entered into a transaction agreement with Comptel Corporation under which Nokia, through its wholly owned indirect subsidiary Nokia Solutions and Networks Oy, undertook to make a voluntary public cash tender offer to purchase all of the issued and outstanding shares and option rights in Comptel not owned by Comptel, in order to advance Nokia's software strategy and provide service providers with a comprehensive solution to design, deliver, orchestrate and assure communications and digital services across physical, virtual and hybrid networks. The tender offer valued Comptel at approximately EUR 347 million, on a fully diluted basis, and resulted in Nokia consolidating Comptel as of March 30, 2017. Together with open market purchases, Nokia Solutions and Networks Oy held approximately 96.95% of all Comptel shares as of April 24, 2017.

The acquisition of Comptel is part of Nokia's strategy to build a standalone software business at scale by expanding and strengthening Nokia's go-to-market capabilities with a software-dedicated sales force and strong partner network. The acquisition of Comptel also supports Nokia's desire to build a software portfolio that allows customers to automate as much of their network and business operations as possible - including customer services, self-optimization, management and orchestration.

Comptel is a long-time Nokia partner. It is a listed Finnish company, founded in 1986, with approximately 800 employees in 32 countries. Comptel has completed over 1 400 customer projects in more than 90 countries. It processes 20 percent of the world's mobile usage data every day, orchestrates communications and digital services for more than two billion end-users daily and its largest customer has around 300 million subscribers. In 2016, Comptel's net sales were EUR 100 million with an 11% operating margin. The company's major sites are in Finland, Bulgaria, Malaysia, India, the United Kingdom and Norway.

It is Nokia's intention to acquire all the shares and option rights in Comptel. As the ownership in Comptel exceeds nine-tenths (9/10) of the shares and voting rights in Comptel, Nokia has filed an application to initiate compulsory redemption proceedings for the remaining Comptel shares under the Finnish Limited Liability Companies Act and intends to redeem the remaining option rights in accordance with their terms and conditions.

Changes in reporting structure, effective from April 1, 2017

On March 17, 2017, Nokia announced changes in its organizational structure designed to accelerate the execution of its strategy, including strengthening Nokia's ability to deliver strong financial performance, drive growth in services, meet changing customer demands in mobile networks, achieve cost savings and ongoing transformation goals, and enable strategic innovation across Nokia's Networks business.

These organizational changes include the separation of Nokia's Mobile Networks business group into two distinct, but closely linked, organizations: one focused on products and solutions, called Mobile Networks, and the other on services, called Global Services. The new Global Services business group is comprised of the Global Services organization that resided within the Mobile Networks business group, including company-wide managed services. In the first quarter 2017, Global Services represented approximately 70% of total services net sales within the Networks business, with the remaining amounts reported within the net sales of the other Networks business groups.

Starting from the second quarter 2017, Nokia will change its reporting structure to reflect the updated organizational structure and provide additional information on Global Services. Nokia will continue to report quarterly financial information for Ultra Broadband Networks, IP Networks and Applications and Nokia Technologies. Ultra Broadband Networks will be composed of the Mobile Networks, Global Services and Fixed Networks business groups. IP Networks and Applications will continue to be composed of the IP/Optical Networks and Applications & Analytics business groups. Nokia will continue to disclose net sales for total services for Nokia's Networks business on a quarterly basis.

Non-IFRS results provide meaningful supplemental information regarding underlying business performance

In addition to information on our reported IFRS results, we provide certain information on a non-IFRS, or underlying business performance, basis. We believe that our non-IFRS results provide meaningful supplemental information to both management and investors regarding Nokia's underlying business performance by excluding the below-described items that may not be indicative of Nokia's business operating results. These non-IFRS financial measures should not be viewed in isolation or as substitutes to the equivalent IFRS measure(s), but should be used in conjunction with the most directly comparable IFRS measure(s) in the reported results.

Non-IFRS results exclude 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. The non-IFRS exclusions are not allocated to the segments, and hence they are reported only at the Nokia consolidated level.

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 and eliminations", in the Financial statement information section in this report.


CEO STATEMENT

Nokia's first quarter 2017 results demonstrated our improving business momentum, even if some challenges remain. We slowed the rate of topline decline and generated healthy orders in what is typically a seasonally weak quarter for us. We also continued to see expansion of cross-selling across our full portfolio, delivered excellent gross margins and improved group-level profitability.

The power of our end-to-end portfolio was again evident in our first quarter results. We saw encouraging stabilization in Mobile Networks topline, our strategy to build a strong software business gained momentum in Applications & Analytics, and Nokia Technologies saw significant year-on-year improvement in sales. This progress offset relative weakness in Fixed Networks and IP/Optical Networks, and allowed us to maintain Networks' strong gross margin - which was among the strongest Networks has ever delivered for a Q1.

Mobile Networks was clearly the highlight of the quarter. A combination of robust market interest in our advanced LTE solutions, including closing the quarter with 145 4.5G customers, and ongoing cost discipline allowed us to get closer to stabilizing our topline while delivering improved profitability.

Applications & Analytics also showed significant, even if early, signs of improvement. Sales were roughly flat compared to the same quarter last year and new orders were robust. As we move forward, we remain focused on improving profitability in this business. 

Fixed Networks, which had an excellent 2016, was impacted by several large deployments coming to an end. Despite this, we are seeing growing traction in cross-selling in markets where Nokia has traditionally been strong, and are continuing to invest in the promising cable market.

In IP/Optical Networks our business is heavily weighted towards communication service providers, and that market is currently quite soft. We are making good progress in expanding our business to new customers, including large internet companies where growth is strong, and expect that a coming IP product refresh will strengthen our competitive position. In addition, we are taking steps to ensure that our cost base is appropriate for current market conditions while continuing to invest as needed to maintain long-term competitiveness. Despite these challenges, I am confident that we are taking the right steps in the right way to deliver medium-term improvements in both IP/Optical Networks and Fixed Networks.

Overall, given Nokia's performance in the first quarter, I am optimistic about the year ahead, even if cautiously so. Our competitive position is strong, we are executing well, and, as a result, we are able to confirm our guidance for full-year 2017.


Rajeev Suri
President and CEO


NOKIA IN Q1 2017 - NON-IFRS

Non-IFRS net sales and non-IFRS operating profit

Nokia non-IFRS net sales decreased 4% year-on-year and 20% sequentially. On a constant currency basis, Nokia non-IFRS net sales would have decreased 6% year-on-year and 21% sequentially.

Year-on-year changes

EUR million, non-IFRS Net sales % change Gross profit (R&D) (SG&A) Other income and (expenses) Operating profit Change in operating margin %
Networks business (291) (6)% (70) 33 2 22 (13) 10bps
Nokia Technologies 49 25% 38 (3) (26) 0 10 (650)bps
Group Common and Other 19 8% 0 (3) (9) 11 0 310bps
Eliminations (4)   0 0 0 0 0  
Nokia (227) (4)% (32) 28 (33) 33 (4) 20bps

Sequential changes

EUR million, non-IFRS Net Sales % change Gross profit (R&D) (SG&A) Other income and (expenses) Operating profit Change in operating margin %
Networks business (1 184) (19)% (555) 7 7 8 (534) (750)bps
Nokia Technologies (62) (20)% (53) 9 5 (4) (42) (410)bps
Group Common and Other (86) (25)% (38) (2) 4 12 (23) (1 660)bps
Eliminations (12)   0 0 0 0 0  
Nokia (1 343) (20)% (646) 15 16 16 (599) (770)bps

 

Non-IFRS profit attributable to the equity holders of the parent

Year-on-year changes

EUR million, non-IFRS Operating profit Financial income and expenses Taxes Profit Non-controlling interests Profit attributable to the equity holders of the parent
Nokia (4) (14) 92 64 (19) 44

 

Nokia's regional profit mix in the first quarter 2017 resulted in an unusually low non-IFRS tax rate of 19%, compared to Nokia's previous guidance for the Q1 2017 non-IFRS tax rate to be between 35% and 40%.

Sequential changes

EUR million, non-IFRS Operating profit Financial income and expenses Taxes Profit Non-controlling interests Profit attributable to the equity holders of the parent
Nokia (599) (9) 156 (473) (2) (476)

 

On a sequential basis, the lower taxes were primarily due to lower profit before tax and Nokia's regional profit mix. The regional profit mix in the first quarter 2017 resulted in an unusually low non-IFRS tax rate of 19%, compared to Nokia's previous guidance for the Q1 2017 non-IFRS tax rate to be between 35% and 40%.


NOKIA IN Q1 2017 - REPORTED

FINANCIAL DISCUSSION

Net sales

Nokia net sales decreased 2% year-on-year and 19% sequentially. On a constant currency basis, Nokia net sales would have decreased 4% year-on-year, and 20% sequentially.

Year-on-year discussion

The year-on-year decrease in net sales in the first quarter 2017 was primarily due to Nokia's Networks business, partially offset by lower non-IFRS exclusions related to deferred revenue, and higher net sales in Nokia Technologies and Group Common and Other.

Sequential discussion

The sequential decrease in Nokia net sales in the first quarter 2017 was primarily due to Nokia's Networks business, and, to a lesser extent, Group Common and Other and Nokia Technologies. This was partially offset by lower non-IFRS exclusions.

Operating profit

Year-on-year discussion

In the first quarter 2017, the decrease in Nokia's operating loss was primarily due to higher gross profit and lower selling, general and administrative ("SG&A") expenses, partially offset by a net negative fluctuation in other income and expenses.

The increase in gross profit was primarily due to the absence of non-IFRS exclusions related to the valuation of inventory, lower non-IFRS exclusions related to deferred revenue and, to a lesser extent, higher gross profit in Nokia Technologies. This was partially offset by lower gross profit in Nokia's Networks business.

Research and development ("R&D") expenses were approximately flat, primarily due to lower R&D expenses in Nokia's Networks business, partially offset by higher non-IFRS exclusions related to product portfolio integration costs.

The decrease in SG&A expenses was primarily due to lower non-IFRS exclusions related to transaction and integration costs, partially offset by higher SG&A expenses in Nokia Technologies.

Nokia's other income and expenses was an expense of EUR 69 million in the first quarter 2017, compared to an expense of EUR 52 million in the year-ago period. The net negative fluctuation was primarily related to higher non-IFRS exclusions attributable to higher restructuring and associated charges, partially offset by Nokia's Networks business and Group Common and Other.

Sequential discussion

In the first quarter 2017, Nokia recorded an operating loss, compared to an operating profit in the fourth quarter 2016. The change was primarily due to lower gross profit, partially offset by a net positive fluctuation in other income and expenses and lower R&D and SG&A expenses.

The decrease in gross profit was primarily due to Nokia's Networks business and, to a lesser extent, Nokia Technologies and Group Common and Other, partially offset by lower non-IFRS exclusions related to deferred revenue and lower product portfolio integration costs.

The decrease in R&D expenses was primarily due to Nokia Technologies and Nokia's Networks business.

The decrease in SG&A expenses was primarily due to lower non-IFRS exclusions related to transaction and integration costs.

Nokia's other income and expenses was an expense of EUR 69 million in the first quarter 2017, compared to an expense of EUR 126 million in the fourth quarter 2016. The net positive fluctuation was primarily due to lower restructuring and associated charges and Group Common and Other.

Profit/(Loss) attributable to the equity holders of the parent

Year-on-year discussion

In the first quarter 2017, the decrease in Nokia's loss attributable to the equity holders of the parent was primarily due to lower operating loss, partially offset by higher taxes, a net negative fluctuation in non-controlling interests and a net negative fluctuation in financial income and expenses.

The net negative fluctuation in financial income and expenses was primarily due to non-IFRS exclusions related to Nokia's tender offer to repurchase the 6.75% notes due February 4, 2019, the 6.50% debentures due January 15, 2028 and the 6.45% debentures due March 15, 2029. The purpose of these transactions was to optimize Nokia's debt maturity profile, to lower average interest expense run rate and to eliminate subsidiary level external debt. In addition, the first quarter 2017 was negatively affected by foreign exchange fluctuations, partially offset by the absence of non-IFRS exclusions related to the early redemption of Alcatel-Lucent high yield bonds in the first quarter of 2016 and a net positive fluctuation in other financial income and expenses.

The higher taxes were primarily due to non-recurring tax expenses of EUR 245 million related to the integration of the former Alcatel-Lucent and Nokia operating models.

The net negative fluctuation in non-controlling interests was primarily related to a non-recurring income in a partly-owned subsidiary in the first quarter 2017.

Sequential discussion

In the first quarter 2017, Nokia recorded a loss attributable to the equity holders of the parent compared to a profit in the fourth quarter 2016. The change was primarily due to a tax expense, compared to a tax benefit in the fourth quarter 2016, a lower operating profit and, to a lesser extent, a net negative fluctuation in the financial income and expenses.

The change in taxes from a benefit in the fourth quarter 2016 to an expense in the first quarter 2017 was primarily due to the absence of a non-recurring tax benefit of EUR 439 million, which benefitted the fourth quarter 2016, and a non-recurring tax expense of EUR 245 million in the first quarter 2017. The non-recurring tax benefit and tax expense both related to the integration of the former Alcatel-Lucent and Nokia operating models. This was partially offset by a tax benefit resulting from a loss before tax.

The net negative fluctuation in financial income and expenses was primarily due to foreign exchange fluctuations and non-IFRS exclusions related to Nokia's tender offer to repurchase the 6.75% notes due February 4, 2019, the 6.50% debentures due January 15, 2028 and the 6.45% debentures due March 15, 2029. The purpose of these transactions was to optimize Nokia's debt maturity profile, to lower average interest expense run rate and to eliminate subsidiary level external debt. This was partially offset by the absence of an impairment charge of EUR 63 million related to the performance of certain private funds investing in intellectual property rights, which negatively affected the fourth quarter 2016.

Description of non-IFRS exclusions in Q1 2017

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.

           
EUR million Q1'17 Q1'16 YoY change Q4'16 QoQ change
Net sales (11) (104) (89)% (74) (85)%
Gross profit (71) (651) (89)% (159) (55)%
R&D (184) (156) 18% (185) (1)%
SG&A (138) (224) (38)% (162) (15)%
Other income and expenses (74) (25) 196% (116) (36)%
Operating (loss)/profit (468) (1 057) (56)% (622) (25)%
Financial income and expenses (64) (36) 78% 0  
Taxes (106) 242   605  
(Loss)/Profit (638) (851)   (17)  
(Loss)/Profit attributable to the shareholders of the parent (669) (775)   (13)  
Non-controlling interests 31 (76)   (5)  
 

Non-IFRS exclusions in net sales

In the first quarter 2017, non-IFRS exclusions in net sales amounted to EUR 11 million, and related to a purchase price allocation adjustment related to a reduced valuation of deferred revenue that existed on Alcatel-Lucent's balance sheet at the time of the acquisition.

Non-IFRS exclusions in operating profit

In the first quarter 2017, non-IFRS exclusions in operating profit amounted to EUR 468 million, and were primarily due to non-IFRS exclusions that negatively affected gross profit, R&D, SG&A and other income and expenses as follows:

In the first quarter 2017, non-IFRS exclusions in gross profit amounted to EUR 71 million, and were primarily due to product portfolio integration costs related to the acquisition of Alcatel-Lucent, and the deferred revenue.

In the first quarter 2017, non-IFRS exclusions in R&D expenses amounted to EUR 184 million, and were primarily due to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent and, to a lesser extent, product portfolio integration costs related to the acquisition of Alcatel-Lucent.

In the first quarter 2017, non-IFRS exclusions in SG&A expenses amounted to EUR 138 million, and were primarily due to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent and, to a lesser extent, integration and transaction related costs.

In the first quarter 2017, non-IFRS exclusions in other income and expenses amounted to EUR 74 million, and were primarily due to restructuring and associated charges for Nokia's cost reduction and efficiency improvement initiatives.

Non-IFRS exclusions in profit/(loss) attributable to the equity holders of the parent

In the first quarter 2017, non-IFRS exclusions in profit/(loss) attributable to the equity holders of the parent amounted to EUR 669 million, and were primarily due to the non-IFRS exclusions affecting operating profit, in addition to non-IFRS exclusions that negatively affected financial income and expenses and taxes as follows:

In the first quarter 2017, non-IFRS exclusions in financial income and expenses amounted to EUR 64 million, and were primarily related to Nokia's tender offer to repurchase the 6.75% notes due February 4, 2019, the 6.50% debentures due January 15, 2028 and the 6.45% debentures due March 15, 2029.

In the first quarter 2017, non-IFRS exclusions in taxes amounted to EUR 106 million, and were primarily due to a non-recurring tax expense of EUR 245 million in the first quarter 2017 related to the integration of the former Alcatel-Lucent and Nokia operating models. This was partially offset by a tax benefit of EUR 139 million related to non-IFRS exclusions in operating profit and financial income and expenses.

In the first quarter 2017, non-IFRS exclusions in non-controlling interests included non-recurring income in a partly-owned subsidiary.

Cost savings program        

The following table summarizes the financial information related to our cost savings program, as of the end of the first quarter 2017. 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 Q1'17
Opening balance of restructuring and associated liabilities 790
 + Charges in the quarter 80
 - Cash outflows in the quarter 150
 = Ending balance of restructuring and associated liabilities 720
  of which restructuring provisions 650
  of which other associated liabilities 70
   
Total expected restructuring and associated charges 1 700
 - Cumulative recorded 830
 = Charges remaining to be recorded 870
   
Total expected restructuring and associated cash outflows 2 150
 - Cumulative recorded 560
 = Cash outflows remaining to be recorded 1 590

The following table summarizes our full year 2016 results and future expectations related to our cost savings program and network equipment swaps.

  Actual Expected amounts for
In EUR million, approximately
rounded to the nearest EUR 50 million
2016 FY 2017
as of the end of
FY 2018
as of the end of
FY 2019 and beyond
as of the end of
Total
as of the end of
    Q4'16 Q1'17 Q4'16 Q1'17 Q4'16 Q1'17 Q4'16 Q1'17
Total cost savings 550 250 250 400 400 0 0 1 200 1 200
 - operating expenses 350 100 100 350 350 0 0 800 800
 - cost of sales 200 150 150 50 50 0 0 400 400
Restructuring and associated charges 750 750 750 200 200 0 0 1 700 1 700
Restructuring and associated cash outflows 400 750 750 550 550 450 450 2 150 2 150
Charges and cash outflows related to network equipment swaps 150 450 450 300 300 0 0 900 900

In full year 2016, the actual total cost savings benefitted from lower incentive accruals, related to the financial performance in full year 2016. Lower incentive accruals drove more than half of the higher than previously expected decrease in total costs in 2016, and this is expected to reverse in 2017, assuming full year 2017 financial performance in-line with our expectations. On a cumulative basis, Nokia continues to be well on track to achieve the targeted EUR 1.2 billion of total cost savings in full year 2018.

OUTLOOK

  Metric Guidance Commentary
Nokia Annual cost savings for Nokia, excluding Nokia Technologies Approximately EUR 1.2 billion of total annual cost savings to be achieved in full year 20181 Compared to the combined non-IFRS operating costs of Nokia and Alcatel-Lucent for full year 2015, excluding Nokia Technologies. Nokia expects approximately EUR 800 million of the cost savings to come from operating expenses and approximately EUR 400 million from cost of sales.

 

Restructuring and associated charges are expected to total approximately EUR 1.7 billion. Restructuring and associated cash outflows are expected to total approximately EUR 2.15 billion.
  Network equipment swaps Approximately EUR 900 million in total1 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.
  Non-IFRS financial income and expenses Expense of approximately EUR 250 million in full year 2017

(update)
Primarily includes net interest expenses related to interest-bearing liabilities and defined benefit pension and other post-employment benefit plans, as well as the impact of foreign exchange rate fluctuations on certain balance sheet items.
(This is an update to the earlier outlook for an expense of approximately EUR 300 million in full year 2017. This update is primarily related to lower estimated net interest expenses, as well as the expected performance of certain venture fund investments.)

 

Nokia expects cash outflows related to financial income and expenses to be approximately EUR 200 million in full year 2017.
  Non-IFRS tax rate Between 30% and 35% for full year 2017 Nokia expects its non-IFRS tax rate for full year 2017 to be around the midpoint of the guidance range.

 

Nokia expects cash outflows related to taxes to be approximately EUR 600 million for full year 2017.
  Capital expenditures Approximately EUR 500 million in full year 2017 Primarily attributable to Nokia's Networks business.
Nokia's Networks business Net sales Decline in line with the primary addressable market in full year 2017 Nokia's outlook for net sales and operating margin for Nokia's Networks business in full year 2017 are expected to be influenced by factors including:

  • A low single digit percentage decline in the primary addressable market for Nokia's Networks business;
  • Competitive industry dynamics;
  • Product and regional mix;
  • The timing of major network deployments; and
  • Execution of cost savings and reinvestment plans, with operating expenses down on a year-on-year basis.
The 2017 outlook for Nokia's Networks business was provided on November 15, 2016 assuming constant foreign exchange rates.
Operating margin 8-10% in full year 2017

 
Nokia Technologies 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 full year 2017.

For patent and brand licensing, Nokia is now disclosing net sales on a quarterly basis, rather than providing an annualized net sales run rate. (This is an update to earlier commentary for the annualized net sales run rate for patent and brand licensing to be approximately EUR 800 million in 2017, assuming no new licensing agreements are signed.)

Nokia expects total net sales from digital health and digital media to grow year-on-year in full year 2017, primarily influenced by increased consumer adoption of our digital health and digital media products.

1For further details related to the cost savings and network equipment swaps guidance, please refer to the "Cost savings program" section above.

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; 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) timing of the deliveries of our products and services; H) expectations and targets regarding collaboration and partnering arrangements, joint ventures or the creation of joint ventures, as well as our expected customer reach; I) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities; J) 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 K) 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 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 ability to execute our strategy, sustain or improve the operational and financial performance of our business and correctly identify and successfully pursue business opportunities or growth; 2) our ability to achieve the anticipated benefits, synergies, cost savings and efficiencies of the acquisition of Alcatel Lucent, and our ability to implement our organizational and operational structure efficiently; 3) general economic and market conditions and other developments in the economies where we operate; 4) competition and 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; 5) our dependence on the development of the industries in which we operate, including the cyclicality and variability of the information technology and telecommunications industries; 6) 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; 7) our ability to manage and improve our financial and operating performance, cost savings, competitiveness and synergies after the acquisition of Alcatel Lucent; 8) our dependence on a limited number of customers and large multi-year agreements; 9) exchange rate fluctuations, as well as hedging activities; 10) Nokia Technologies' ability to protect its IPR and to maintain and establish new sources of patent licensing income and IPR-related revenues, particularly in the smartphone market; 11) 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; 12) 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; 13) our ability to identify and remediate material weaknesses in our internal control over financial reporting; 14) our reliance on third-party solutions for data storage and service distribution, which expose us to risks relating to security, regulation and cybersecurity breaches; 15) inefficiencies, breaches, malfunctions or disruptions of information technology systems; 16) Nokia Technologies' ability to generate net sales and profitability through licensing of the Nokia brand, particularly in digital media and digital health, and the development and sales of products and services, as well as other business ventures which may not materialize as planned; 17) our exposure to various legislative frameworks and jurisdictions that regulate fraud and enforce economic trade sanctions and policies, 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 optimize our capital structure as planned and re-establish our investment grade credit rating or otherwise improve 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 67 to 85 of our 2016 annual report on Form 20-F under "Operating and financial review and prospects-Risk factors" and in our 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 report was authorized for issue by management on April 26, 2017.


MEDIA AND INVESTOR CONTACTS:
Communications, tel. +358 10 448 4900 email: press.services@nokia.com
Investor Relations, tel. +358 4080 3 4080 email: investor.relations@nokia.com

  • Nokia's Annual General Meeting 2017 is planned to be held on May 23, 2017.
  • Nokia plans to publish its second quarter and half year 2017 results on July 27, 2017.
  • Nokia plans to publish its third quarter 2017 results on October 26, 2017.
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