6-K 1 a19-8888_16k.htm 6-K

 

 

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 April 25, 2019

(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 April 25, 2019:  Nokia Corporation Interim Report for Q1 2019

 

Nokia Corporation Interim Report for Q1 2019 [FULL REPORT ATTACHED TO THE STOCK EXCHANGE RELEASE]

 


 

INTERIM REPORT

 

 

 

April 25, 2019

 

Nokia Corporation Interim Report for Q1 2019

 

Nokia Corporation

Interim Report
April 25, 2019 at 08:00 (CET +1)

 

Nokia Corporation Interim Report for Q1 2019

 

Particularly weak Q1, consistent with our outlook; Full year 2019 guidance maintained due to expected 5G ramp up

 

This is a summary of the Nokia Corporation interim report for Q1 2019 published today. The complete interim report for Q1 2019 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 interim reports with tables.

 

RAJEEV SURI, PRESIDENT AND CEO, ON Q1 2019 RESULTS

 

Q1 was a weak quarter for Nokia. We expected that it would be, and the outcome has not changed our perspective on the full year. We are confident that those issues that drove weakness in our results will ease over the remainder of the year. While overall risks have increased slightly, we continue to see positive developments and are maintaining our guidance for the full year.

 

As the year progresses, we expect meaningful topline and margin improvements. 5G revenues are expected to grow sharply, particularly in the second half of the year, driven by our 36 commercial wins to date. Global services profitability should improve as we recover in a handful of large rollout projects, IP routing is now firmly back to growth given our product leadership, and optical networks continues its long run of growth. We are also seeing good underlying momentum in our strategic focus areas of software and enterprise, and we are moving steadily forward on our path to build a strong licensing business that is sustainable for the long-term.

 

In terms of risks, one factor is our slow start to the year. In addition, competitive intensity has slightly increased in certain accounts as some competitors seek to be more commercially aggressive in the early stages of 5G and as some customers reassess their vendors in light of security concerns, creating near-term pressure but longer-term opportunity. We will continue to take a balanced view, and are prepared to invest prudently in cases where there is the right longer-term profitability profile. We are also progressing well with our previously announced EUR 700 million cost savings program.

 

In short, an expectedly weak Q1, but continued reason for optimism as the year progresses.

 

1


 

Q1 2019 reported and non-IFRS results. Refer to note 1, “Basis of Preparation”, note 2, “Non-IFRS to reported reconciliation” and note 13, “Performance measures”, in the “Financial statement information” section for details.

 

EUR million (except for EPS in EUR)

 

Q1’19

 

Q1’18

 

YoY
change

 

Constant
currency
YoY
change

 

Net sales

 

5 032

 

4 924

 

2

%

(2

)%

Operating profit/(loss)

 

(524

)

(336

)

56

%

 

 

Operating margin %

 

(10.4

)%

(6.8

)%

(360

)bps

 

 

EPS, diluted

 

(0.08

)

(0.06

)

 

 

 

 

Operating profit/(loss) (non-IFRS)

 

(59

)

239

 

 

 

 

 

Operating margin % (non-IFRS)

 

(1.2

)%

4.8

%

(600

)bps

 

 

EPS, diluted (non-IFRS)

 

(0.02

)

0.02

 

 

 

 

 

Net cash and current financial investments(1)

 

1 991

 

4 179

 

(52

)%

 

 

 


(1)Net cash and current financial investments does not include lease liabilities.

 

·                  Non-IFRS net sales in Q1 2019 were EUR 5.1bn, compared to EUR 4.9bn in Q1 2018. Reported net sales in Q1 2019 were EUR 5.0bn, compared to EUR 4.9bn in Q1 2018. On a constant currency basis, non-IFRS net sales decreased 1% and reported net sales decreased 2%. Our solid topline reflects the competitiveness of our offerings, as well as an improving industry environment. We continue to see positive momentum building for our end-to-end strategy, with strong customer engagement in all key markets and across our portfolio. Due to the evolving readiness of the 5G ecosystem, in Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019.

·                  Non-IFRS diluted EPS in Q1 2019 was negative EUR 0.02, compared to EUR 0.02 in Q1 2018, primarily driven by lower gross profit, partially offset by income tax benefits compared to income tax expenses in the year-ago quarter.

·                  Reported diluted EPS in Q1 2019 was negative EUR 0.08, compared to negative EUR 0.06 in Q1 2018, primarily driven by lower gross profit, partially offset by a net positive fluctuation in financial income and expenses, higher income tax benefits and lower operating expenses.

·                  In Q1 2019, net cash and current financial investments decreased sequentially by approximately EUR 1.1bn, primarily due to weak seasonality and changes in net working capital.

·                  Full year 2019 guidance maintained. Nokia’s cash performance in the second quarter of 2019 is expected to include the payment of 2018 performance-related incentives to employees and a quarterly dividend. We expect substantially stronger financial performance in the second half of 2019 as large scale 5G deployments accelerate meaningfully.

 

2


 

NEW FINANCIAL REPORTING STRUCTURE BEGINNING Q1 2019

 

Nokia announced organizational changes to accelerate its strategy execution during the fourth quarter of 2018. In line with financial regulations, Nokia revised its financial reporting structure to better reflect its strategy, organizational structure and the way it evaluates operational performance and allocates resources. As of the first quarter 2019, Nokia has three reportable segments: (i) Networks, (ii) Nokia Software and (iii) Nokia Technologies. In addition, Nokia discloses segment-level data for Group Common and Other.

 

For each reportable segment, Nokia provides detailed financial disclosure, including net sales and operating profit. Additionally, Nokia provides adjusted financial disclosure for its Networks and Nokia Software reportable segments, with amounts related to licensing and Nokia Bell Labs allocated 85% to Networks and 15% to Nokia Software.

 

In addition, Nokia provides net sales disclosure for the following businesses: (i) Mobile Access, (ii) Fixed Access, (iii) IP Routing and (iv) Optical Networks, which together comprise the new Networks reportable segment. Nokia also provides separate net sales disclosure for its different customer types: (i) Communication Service Providers, (ii) Enterprises and (iii) Licensees. Net sales by region are provided at the Nokia level.

 

To provide a basis for comparison, Nokia published a recasting of financial results on an unaudited basis for all four quarters of 2018 separately, as well as for the full year 2018, on April 18, 2019.

 

LICENSEES

 

After the end of Q1 2019, Nokia Technologies agreed to financial terms with a new licensee, further validating our global licensing program. The final agreement is expected to be signed during the coming weeks. Including this new licensee, Nokia Technologies’ annualized net sales run-rate would be approximately EUR 1.4 billion.

 

Over more than 20 years, we have cumulatively invested over EUR 125 billion in advanced telecommunications technologies R&D and defined many of the fundamental technologies used in virtually all mobile devices. We have taken a leadership role in standards setting, and we have secured a leading share of essential patents for GSM, 3G, 4G and 5G technologies.

 

3


 

OUTLOOK

 

Metric

 

Full Year 2019

 

Full Year 2020

Non-IFRS diluted earnings per share

 

EUR 0.25 - 0.29

 

EUR 0.37 - 0.42

Non-IFRS operating margin

 

9 - 12%

 

12 - 16%

Recurring free cash flow(1)

 

Slightly positive

 

Clearly positive

Annual distribution to shareholders

 

Over the long term, Nokia targets to deliver an earnings-based growing dividend by distributing approximately 40% to 70% of non-IFRS diluted EPS, taking into account Nokia’s cash position and expected cash flow generation. The annual distribution would be paid as quarterly dividends.

 


(1)Free cash flow = net cash from operating activities - capital expenditures + proceeds from sale of property, plant and equipment and intangible assets — purchase of non-current financial investments + proceeds from sale of non-current financial investments.

 

Key drivers of Nokia’s outlook

 

Net sales and operating margin for Networks and Nokia Software are expected to be influenced by factors including:

 

·                  Our expectation that we will outperform our primary addressable market in full year 2019 and over the longer-term, driven by our strategy, which includes competing in 5G more effectively due to our strong end-to-end portfolio, focusing on targeted growth opportunities in attractive adjacent markets and building a strong network agnostic software business. On a constant currency basis, we expect our primary addressable market to be flattish in full year 2019 and to grow in full year 2020;

·                  The slow start to 2019 and expected weak overall first half puts significant pressure on execution in the second half. Due to the evolving readiness of the 5G ecosystem, in Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019. (new commentary);

·                  The timing of completions and acceptances of certain projects, particularly related to 5G. Based on the evolving readiness of the 5G ecosystem and the staggered nature of 5G rollouts in lead countries, we expect full year 2019 to follow a similar pattern as full year 2018: a soft first half followed by a robust second half, with a particularly weak Q1;

·                  Competitive intensity could increase in some accounts as some competitors seek to take share in the early phases of 5G (new commentary);

·                  Some customers are reassessing their vendors in light of security concerns, creating near-term pressure to invest in order to secure long-term benefits (new commentary);

·                  Our expectation that we will improve our R&D productivity and reduce support function costs through the successful execution of our cost savings program;

·                  Potential mergers or acquisitions by our customers;

·                  Our product and regional mix; and

·                  Macroeconomic, industry and competitive dynamics.

 

4


 

Net sales and operating margin for Nokia Technologies is expected to be influenced by factors including:

 

·                  The timing and value of new and existing patent licensing agreements with smartphone vendors, automotive companies and consumer electronics companies;

·                  Results in brand and technology licensing;

·                  Costs to protect and enforce our intellectual property rights; and

·                  The regulatory landscape.

 

Additionally, our outlook is based on the following assumptions:

 

·                  Nokia’s recurring free cash flow is expected to improve over the longer-term due to lower cash outflows related to restructuring and network equipment swaps and improved operational results over time;

·                  Non-IFRS financial income and expenses to be an expense of approximately EUR 300 million in full year 2019 and over the longer-term;

·                  Non-IFRS income taxes at a rate of approximately 28% in full year 2019 and approximately 25% over the longer-term, subject to the absolute level of profits, regional profit mix and changes to our operating model;

·                  Cash outflows related to income taxes of approximately EUR 450 million in full year 2019 and over the longer term until our US or Finnish deferred tax assets are fully utilized; and

·                  Capital expenditures of approximately EUR 700 million in full year 2019 and approximately EUR 600 million over the longer-term.

 

NOKIA FINANCIAL RESULTS

 

EUR million (except for EPS in EUR)

 

Q1’19

 

Q1’18

 

YoY
change

 

Constant
currency
YoY
change

 

Net sales

 

5 032

 

4 924

 

2

%

(2

)%

Networks

 

3 944

 

3 783

 

4

%

0

%

Nokia Software

 

543

 

541

 

0

%

(4

)%

Nokia Technologies

 

370

 

365

 

1

%

0

%

Group Common and Other

 

220

 

252

 

(13

)%

(12

)%

Non-IFRS exclusions

 

(25

)

(5

)

400

%

 

 

Gross profit

 

1 580

 

1 805

 

(12

)%

 

 

Operating profit/(loss)

 

(524

)

(336

)

 

 

 

 

Networks

 

(254

)

46

 

 

 

 

 

Nokia Software

 

(7

)

1

 

 

 

 

 

Nokia Technologies

 

302

 

274

 

10

%

 

 

Group Common and Other

 

(100

)

(83

)

 

 

 

 

Non-IFRS exclusions

 

(464

)

(575

)

 

 

 

 

Operating margin %

 

(10.4

)%

(6.8

)%

(360

)bps

 

 

Gross profit (non-IFRS)

 

1 641

 

1 941

 

(15

)%

 

 

Operating profit/(loss) (non-IFRS)

 

(59

)

239

 

 

 

 

 

Operating margin % (non-IFRS)

 

(1.2

)%

4.8

%

(600

)bps

 

 

Financial income and expenses

 

(55

)

(108

)

(49

)%

 

 

Income taxes

 

142

 

94

 

51

%

 

 

Profit/(loss) for the period

 

(442

)

(354

)

 

 

 

 

EPS, diluted

 

(0.08

)

(0.06

)

 

 

 

 

Financial income and expenses (non-IFRS)

 

(93

)

(116

)

(20

)%

 

 

Income taxes (non-IFRS)

 

41

 

(36

)

 

 

 

 

Profit/(loss) for the period (non-IFRS)

 

(116

)

83

 

 

 

 

 

EPS, diluted (non-IFRS)

 

(0.02

)

0.02

 

 

 

 

 

 

5


 

Results are as reported and relate to continuing operations 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 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.

 

Net sales by region

 

EUR million

 

Q1’19

 

Q1’18

 

YoY
change

 

Constant
currency
YoY
change

 

Asia-Pacific

 

963

 

910

 

6

%

2

%

Europe

 

1 500

 

1 506

 

(0

)%

(1

)%

Greater China

 

434

 

480

 

(10

)%

(12

)%

Latin America

 

305

 

297

 

3

%

0

%

Middle East & Africa

 

413

 

431

 

(4

)%

(7

)%

North America

 

1 418

 

1 301

 

9

%

1

%

Total

 

5 032

 

4 924

 

2

%

(2

)%

 

Net sales by customer type

 

EUR million

 

Q1’19

 

Q1’18

 

YoY
change

 

Constant
currency
YoY
change

 

Communication service providers

 

4 207

 

4 080

 

3

%

(1

)%

Enterprise

 

260

 

244

 

7

%

3

%

Licensees

 

370

 

349

 

6

%

5

%

Other(1)

 

195

 

251

 

(22

)%

(21

)%

Total

 

5 032

 

4 924

 

2

%

(2

)%

 


(1)Includes net sales of Alcatel Submarine Networks (ASN) and Radio Frequency Systems (RFS), both of which are being managed as separate entities, and certain other items, such as eliminations of inter-segment revenues and certain items related to purchase price allocation. ASN and RFS net sales include also revenue from communications service providers and enterprise customers.

 

6


 

Our new Nokia Enterprise business is performing well. Net sales to enterprise customers, excluding the third party integration business that we are exiting, grew 8% on a reported basis, and 5% on a constant currency basis.

 

Nokia, Q1 2019 compared to Q1 2018

 

Nokia reported net sales grew approximately 2%. Nokia non-IFRS net sales grew approximately 3%, due to the exclusion of EUR 22 million of restructuring and associated charges. On a constant currency basis, Nokia reported net sales decreased approximately 2% and Nokia non-IFRS net sales decreased approximately 1%.

 

Nokia non-IFRS and reported net sales, excluding approximately EUR 40 million (EUR 10 million in Q1 2018) of one-time licensing net sales in Q1 2019, both grew by approximately 2%, as our customers added network capacity in preparation for the continued rise in broadband traffic driven by 5G. Our solid topline in Q1 2019 reflected the competitiveness of our end-to-end portfolio, with particular strength in IP routing, as well as an improving industry environment.

 

Due to the evolving readiness of the 5G ecosystem, in Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019.

 

Networks and Nokia Software continued to see strong customer engagement related to 5G across multiple parts of our portfolio, including radio, cloud core, transport, IP routing and network agnostic software. In Q1 2019, we continued to make progress with our strategy to diversify and grow, with solid results in Nokia Software and with enterprise customers.

 

In Nokia Technologies, the growth in net sales was primarily due to one-time licensing net sales in Q1 2019. On a recurring basis, net sales declined by 4%.

 

The growth in net sales to enterprise customers was primarily due to strong demand for our market-leading IP routing portfolio and, to a lesser extent, particularly strong percentage growth in private LTE and 5G wireless networks for industrial applications. We see strong momentum in industries like utilities, oil, gas, mines, manufacturing and logistics, as well as the public sector. Excluding the third party integration business that we are exiting, net sales to enterprise customers grew 8% on a reported basis, and 5% on a constant currency basis.

 

The decline in Nokia gross profit was primarily attributable to Networks, which was negatively affected by broad-based gross margin erosion in Mobile Access.

 

Nokia non-IFRS diluted EPS decreased by EUR 0.04, primarily due to lower gross profit, partially offset by income tax benefits compared to income tax expenses in the year-ago quarter.

 

Nokia reported diluted EPS decreased by EUR 0.02, primarily driven by lower gross profit, partially offset by a net positive fluctuation in financial income and expenses, higher income tax benefits and lower operating expenses.

 

7


 

CASH AND CASH FLOW IN Q1 2019

 

During the first quarter of 2019 Nokia’s free cash flow was negative EUR 913 million driven by:

 

·                  continued cash outflows related to restructuring and network equipment swaps;

·                  seasonally weak profitability in the first quarter;

·                  seasonally lower cash collection following significantly higher sale of receivables in the fourth quarter of 2018 and certain unexpected and unusual overdues at end of the first quarter by a limited number of customers; and

·                  seasonally higher inventory levels, as well as higher than normal inventory levels due to: a) our decision to ensure sufficient flexibility to deliver higher levels of equipment sales, particularly related to 5G and b) the deferral of revenue recognition, mainly in North America. In Q1 2019, we were unable to recognize approximately EUR 200 million of net sales, which we expect to recognize in full before the end of 2019.

 

In the second quarter 2019 Nokia expects inventories to remain at elevated levels, followed by significantly improved inventory levels in second half of 2019 as large scale 5G deployments accelerate meaningfully.

 

Nokia has established a free cash flow program to ensure company-wide focus on free cash flow and release of working capital, including project asset optimization, review of contract terms & conditions as well supply chain and inventory optimization. Senior leaders of Nokia have significant part of their incentives tied to free cash flow improvement targets in 2019 and beyond.

 

EUR million, at end of period

 

Q1’19

 

Q4’18

 

QoQ 
change

 

Total cash and current financial investments(1)

 

6 394

 

6 873

 

(7)

%

Net cash and current financial investments(1)

 

1 991

 

3 053

 

(35)

%

 


(1) Net cash and current financial investments does not include lease liabilities. For details, please refer to note 7, “Net cash and current financial investments”, and note 13, “Performance measures”, in the “Financial statement information” section in this report.

 

During the first quarter 2019, Nokia’s total cash and current financial investments decreased by EUR 479 million and Nokia’s net cash and current financial investments (“net cash”) decreased by EUR 1 062 million.

 

Foreign exchange rates had an approximately EUR 50 million negative impact on net cash, primarily related to liabilities.

 

In the first quarter 2019, net cash used in operating activities was EUR 747 million:

 

·                  Nokia’s adjusted profit before changes in net working capital was EUR 7 million in the first quarter 2019.

·                  In the first quarter 2019, Nokia generated a decrease in net cash related to net working capital of approximately EUR 530 million. Excluding approximately EUR 130 million of restructuring and associated cash outflows, Nokia generated an approximately EUR 410

 

8


 

million decrease in net cash related to net working capital, primarily due to a decrease in liabilities and an increase in inventories, partially offset by a decrease in receivables.

·                  The decrease in receivables was approximately EUR 380 million, primarily due to a seasonal decrease. The seasonal decrease was less than normal, due to the high level of receivables sold in Q4 2018.

·                  The increase in inventories was approximately EUR 280 million, primarily due to our decision to ensure sufficient flexibility to deliver higher levels of equipment sales, particularly related to 5G, and a seasonal increase in inventories. In Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019.

·                  The decrease in liabilities was approximately EUR 510 million, primarily due to the seasonal decrease in accounts payable.

·                  In addition, cash taxes amounted to an outflow of approximately EUR 180 million. In Q1 2019, cash taxes were at an elevated level primarily due to the timing of tax payments. Also, net interest amounted to an outflow of approximately EUR 40 million.

·                  The implementation of IFRS 16 positively impacted our net cash used in operating activities and negatively impacted our net cash from financing activities, both by approximately EUR 60 million.

 

In the first quarter 2019, net cash used in investing activities primarily related to capital expenditures of approximately EUR 180 million.

 

In the first quarter 2019, net cash used in financing activities primarily related to leasing payments of approximately EUR 60 million following the implementation of IFRS 16.

 

Cost savings program

 

We expect our most recent cost savings program to result in a net EUR 700 million reduction of non-IFRS operating expenses and production overheads in full year 2020 compared to full year 2018, of which EUR 500 million is expected to come from operating expenses and EUR 200 million is expected to come from cost of sales. The related restructuring charges are expected to total EUR 900 million.

 

Balances related to previous restructuring and cost savings programs have been included as part of this cost savings program. At the beginning of Q1 2019, the balance of restructuring and associated liabilities related to prior cost savings programs was approximately EUR 630 million. This amount is included in the total expected restructuring and associated cash outflows of EUR 1 550 million, rounded to the nearest EUR 50 million, in addition to the approximately EUR 900 million of expected cash outflows related to our most recent cost savings program.

 

The following table summarizes the financial information related to our cost savings program as of the end of the first quarter 2019.

 

9


 

In EUR million, approximately

 

Q1’19

 

Balance of restructuring and associated liabilities for prior programs

 

630

 

+ Charges in the quarter

 

160

 

- Cash outflows in the quarter

 

130

 

= Ending balance of restructuring and associated liabilities

 

660

 

of which restructuring provisions

 

470

 

of which other associated liabilities

 

190

 

 

 

 

 

Total expected restructuring and associated charges

 

900

 

- Cumulative recorded

 

160

 

= Charges remaining to be recorded

 

740

 

 

 

 

 

Total expected restructuring and associated cash outflows

 

1 550

 

- Cumulative recorded

 

130

 

= Cash outflows remaining to be recorded

 

1 420

 

 

The below table includes future expectations related to our most recent cost savings program, as well as the remaining cash outflows related to our previous programs and network equipment swaps.

 

 

 

Expected amounts for

 

In EUR million, approximately
rounded to the nearest EUR 50 million

 

FY
2019

 

FY 2020 
and 
beyond

 

Total

 

 

 

 

 

 

 

 

 

Recurring annual cost savings

 

200

 

500

 

700

 

- operating expenses

 

150

 

350

 

500

 

- cost of sales

 

50

 

150

 

200

 

Restructuring and associated charges

 

550

 

350

 

900

 

Restructuring and associated cash outflows

 

700

 

850

 

1 550

 

Charges related to network equipment swaps

 

150

 

0

 

150

 

Cash outflows related to network equipment swaps

 

150

 

0

 

150

 

 

OPERATIONAL HIGHLIGHTS

 

Nokia has begun the year by strengthening its position across key markets and industries and punctuating the period with a number of important 5G commercial deals.

 

In the first pillar of our strategy, leading in high-performance, end-to-end networks with communication service providers:

 

During the period Nokia signed significant deals with major providers across the globe, reaching 30 commercial 5G deals during the quarter. These included: a MoU with Telecom Egypt to introduce a 5G network and test cases in the Egyptian market; the launch of South Africa’s first

 

10


 

commercial-ready 5G network in Cape Town with South African Operator rain; a deal with Saudi Telecom Company to deploy Nokia’s end-to-end 5G solutions in western and southern Saudi Arabia; and a five-year deal with U.S. Cellular to provide end-to-end 5G technology, software and services solutions.

 

In Europe, A1 in Austria announced they selected Nokia to expand next-generation 5G mobile communications in that country. Switzerland’s Salt selected Nokia’s radio and mobile core network in order to prepare for the roll-out of 5G, and Ice Group will deploy Nokia’s AirScale Radio Access technology in urban areas across Norway to build a 5G-ready mobile network. After the quarter ended, Nokia announced the first 5G call on a commercial network in Latin America with ANTEL Uruguay.

 

In other markets, Nokia, in partnership with Sprint, is field testing standards-based 5G in Los Angeles. Telenor Pakistan announced it is deploying the country’s first 5G-ready cloud-based RAN platform and controllers, and Vodafone Idea in India announced it will roll out its future ready LTE network across multiple service areas, based on Nokia’s Single RAN, massive MIMO and small cells portfolio.

 

In optical, Bharti Airtel in India announced it will trial Nokia’s fronthaul solution. M-net in Bavaria has become the first carrier to trial Nokia’s PSE-3 coherent digital signal processing technology. PTCL in Pakistan is also deploying the Nokia PSE-3 chipset to build a 100G optical network, and Nokia announced that it was selected by Liquid Telecom Kenya to upgrade its existing fiber network.

 

In IP routing, the Nokia 7750 SR-s, powered by the FP4 network processor, was chosen by multiple operators. Indosat Ooredoo selected the router to upgrade its IP/MPLS network, ensuring the scale, security and functionality needed for the 100GE network. DE-CIX announced it is the first Internet Exchange in the world to offer 400-GE access technology with the Nokia 7750 SR-s which is deployed in DE-CIX Frankfurt, the Internet Exchange with the highest peak traffic in the world. After the quarter ended, Proximus announced it will deliver a tenfold capacity increase to its IP transport network with the 7750 SR-s, and BT also announced it had selected the platform to dramatically boost its backbone network capacity to meet growing traffic demand from FTTP and 5G.

 

Nokia also announced USD$750,000 support for IETF, the premier Internet standards development organization, and will host the 106th IETF meeting in November.

 

In fixed access, Nokia introduced a new FastMile 5G Gateway that allows operators upgrading their LTE network to capture new Fixed Wireless Access (FWA) revenue and accelerate 5G rollouts. In Australia, Nokia partnered with Optus to provide the 5G RAN and Fastmile 5G CPEs for their home broadband. Telia will introduce Nokia FastMile 5G gateway for 4G-5G FWA to the Finnish market. The FWA 5G gateway is also part of the rain launch of its 5G network in Cape Town. KDDI in Japan is deploying Nokia’s G.fast solution while Chorus in New Zealand will trial Nokia’s market leading XGS-PON solution to bring 10 gigabit per second (Gbps) services to residential and SME customers in selected areas of Auckland and Wellington.

 

11


 

Nokia’s Nuage Networks SD-WAN 2.0 solution was chosen by managed service provider SDNbucks to provide fully managed connectivity for SciSports cloud-based data analytics service. Nuage Networks was also selected by Airtel for datacenter automation in a first-of-its-kind initiative in India.

 

Telecom Egypt and Nokia announced plans to build the first cloud infrastructure in Egypt exclusively for IoT services. Telecom Egypt will use Nokia’s Worldwide IoT Network Grid (WING) as a service to launch IoT services to its enterprise customers. In addition, under a MOU, Zain Saudi Arabia will leverage Nokia’s WING to launch IoT services in the country.

Multiple additions to the portfolio were announced at Mobile World Congress. Nokia announced a raft of enhancements to its Anyhaul transport portfolio that help operators prepare their networks for 5G by delivering throughput speeds of up to 25 Gbps to base stations. New additions to the small cell portfolio included: a new mmWave small cell for extreme-traffic outdoor areas and a small cell mid-band radio to seamlessly upgrade indoor coverage to 5G. Nokia introduced a 5G Maturity Index to guide operators on how to align technology investments with business objectives to succeed with 5G-enabled services. And Nokia launched Cognitive Collaboration Hubs to help operators design 5G networks and create AI-enabled use cases.

 

Other notable news announced at Mobile World Congress includes: a collaboration with Vodafone on active antennas to boost 5G radio capacity and reduce costs, and a partnership and demonstration with CMCC for 5G AI powered QoE solution for an immersive VR gaming application. Nokia announced adoption of the fronthaul specifications of the Open Radio Access Network Alliance (O-RAN) and is now part of the AT&T Innovation Program.

 

In the second pillar of our strategy, expanding network sales to select vertical markets needing high-performing, secure networks:

 

Nokia partnered with Qualcomm and Deutsche Messe to showcase 10 industrial applications/use cases in the 5G Arena at the world’s largest industrial trade show Hannover Messe 2019.

 

Nokia signed a five-year cooperation agreement with Oulu Port Ltd to provide a private wireless service with Ukkoverkot. Norway’s MIRIS has chosen Nokia’s AirFrame Open Edge data center technology to support delivery of Smart City services in business parks and residential areas.

 

In other geographies, Nokia partnered with Dawiyat Integrated Telecommunications and Information Technology Company, part of Saudi Electricity Corporation (SEC), to collaborate on multiple projects to develop the ecosystem for Industry 4.0 in the country.

 

Room40, a company specializing in security monitoring analytics solutions, selected Nokia’s Scene Analytics to flag emergencies and crime at sites in Belgium.

 

Nokia, along with Continental, Deutsche Telekom, Fraunhofer ESK and MHP, successfully concluded tests of connected driving technology on the A9 Digital Test Track. In addition, Nokia joined ARENA2036, a collaboration of automotive industry leaders, to create a flexible research factory model for production of the next generation of automobiles.

 

12


 

Nokia also signed an agreement with Pöyry and Infosys to further enhance and accelerate the adoption of KRTI 4.0TM, an artificial intelligence (AI) framework for operational excellence.

 

In the third pillar of our strategy, developing a strong software business at scale:

 

This was the first quarter in which Nokia’s Cloud Core solutions resources and sales accountability were aligned to the Nokia Software Business Group. While work remains to complete and optimize the integration, Nokia Software continued to demonstrate the strength of its network agnostic portfolio with healthy order intake and wins at Bharti, China Unicom, Globacom Nigeria, Ooredoo Qatar, Orange Poland, Telefonica Peru, Vodafone Idea, and US Cellular.

 

Nokia and Korea Telecom signed a MOU to collaborate and trial various 5G technologies, including NFV and network slicing. Nokia’s IMPACT IoT platform was chosen by M1 Limited to enhance its Smart City IoT Solutions. IMPACT was also selected by Rakuten to tap opportunities in Japan, and we are also working with Rakuten to build a new mobile network in Japan.

 

Nokia and Grameenphone announced completion of the migration of Grameenphone’s 72 million customers to the Nokia User Data Convergence (UDC) cloud core platform, and Telefónica Group selected Nokia as its Service Operation Center vendor.

 

In the fourth pillar of our strategy, now focused primarily on licensing:

 

During Q1 2019, Nokia signed patent licensing agreements with Chinese smartphone vendors including TCL, Tinno and Wiko. Nokia also saw continuing momentum in automotive licensing as Audi and Porsche joined BMW, Mini and Rolls Royce on the roster of brands licensed to our patents for their connected cars.

 

After the end of Q1 2019, Nokia Technologies agreed to financial terms with a new licensee, further validating our global licensing program. The final agreement is expected to be signed during the coming weeks. Including this new licensee, Nokia Technologies’ annualized net sales run-rate would be approximately EUR 1.4 billion. Over more than 20 years, we have cumulatively invested over EUR 125 billion in advanced telecommunications technologies R&D and defined many of the fundamental technologies used in virtually all mobile devices. We have taken a leadership role in standards setting, and we have secured a leading share of essential patents for GSM, 3G, 4G and 5G technologies.

 

HMD Global, the home of Nokia phones, launched four new Nokia smartphones and one featurephone at Mobile World Congress, delivering pioneering experiences and true innovation in imaging. Gaining over 50% share of voice in smartphone coverage of MWC, the new Nokia devices also won 24 awards during the show; 19 for Nokia 9 PureView. HMD also announced it had technical approval from three North American carriers to start sales in the US and Canada.

 

Shortly after the quarter closed, OPPO launched its new flagship smartphone, the OPPO Reno, which uses Nokia’s OZO Audio technology.

 

13


 

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. These forward-looking statements reflect Nokia’s current expectations and views of future developments and include statements regarding: A) expectations, plans or benefits related to our strategies and growth management; B) expectations, plans or benefits related to future performance of our businesses, including our ability to execute during the second half of 2019, and any expected future dividends; C) 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; 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) 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; 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, including our short term and longer term expectations around the rollout of 5G and our ability to capitalize on such rollout; and the overall readiness of the 5G ecosystem ; 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, including our current cost savings program; L) expectations, plans or benefits related to future capital expenditures, temporary incremental expenditures or other R&D expenditures to develop or rollout new products, including 5G; and M) statements preceded by or including “believe”, “expect”, “expectations”, “commit”, “anticipate”, “foresee”, “see”, “target”, “estimate”, “designed”, “aim”, “plan”, “intend”, “influence”, “assumption”, “focus”, “continue”, “project”, “should”, “is to”, “will” or similar expressions. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. These statements are based on management’s best assumptions and beliefs in light of the information currently available to it. These forward-looking statements are only predictions based upon our current expectations and views of future events and developments and are subject to risks and uncertainties that are difficult to predict because they relate to events and depend on circumstances that will occur in the future. 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, including the timeline for the deployment of 5G and our ability to successfully capitalize on that deployment; 3) competition and our ability to effectively and profitably invest in existing and new  high-quality products, services, upgrades and technologies

 

14


 

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 and our own R&D capabilities and investments; 5) our dependence on a limited number of customers and large multi-year agreements, as well as external events impacting our customers including mergers and acquisitions; 6) our ability to maintain our existing sources of intellectual property-related revenue through our intellectual property, including through licensing, establish new sources of revenue and protect our intellectual property from infringement; 7) our ability to manage and improve our financial and operating performance, cost savings, competitiveness and synergies generally, expectations and timing around our ability to recognize any net sales and our ability to implement changes to our organizational and operational structure efficiently; 8) 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; 9) our ability to achieve the anticipated benefits, synergies, cost savings and efficiencies of acquisitions, including 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, or our customers’ security concerns; 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; 30) our ability to successfully complete and capitalize on our order backlogs and continue converting our sales pipeline into net sales; and 31) risks related to undersea

 

15


 

infrastructure, as well as the risk factors specified on pages 60 to 75 of our 2018 annual report on Form 20-F published on March 21, 2019 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.

 

This financial report was authorized for issue by management on April 24, 2019.

 

·                  Nokia’s Annual General Meeting 2019 is planned to be held on May 21, 2019.

·                  Nokia plans to publish its second quarter and half year 2019 results on July 25, 2019.

·                  Nokia plans to publish its third quarter and January-September 2019 results on October 24, 2019.

 

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. We develop and deliver the industry’s only end-to-end portfolio of network equipment, software, services and licensing that is available globally. Our customers include communications service providers whose combined networks support 6.1 billion subscriptions, as well as enterprises in the private and public sector that use our network portfolio to increase productivity and enrich lives.

 

Through our research teams, including the world-renowned Nokia Bell Labs, we are leading the world to adopt end-to-end 5G networks that are faster, more secure and capable of revolutionizing lives, economies and societies. Nokia adheres to the highest ethical business standards as we create technology with social purpose, quality and integrity. www.nokia.com

 

16


 

 

Interim Report for Q1 2019

 

Particularly weak Q1, consistent with our outlook; Full year 2019 guidance maintained due to expected 5G ramp up

 

Rajeev Suri, President and CEO, on Q1 2019 results

 

Q1 was a weak quarter for Nokia. We expected that it would be, and the outcome has not changed our perspective on the full year. We are confident that those issues that drove weakness in our results will ease over the remainder of the year. While overall risks have increased slightly, we continue to see positive developments and are maintaining our guidance for the full year.

 

As the year progresses, we expect meaningful topline and margin improvements. 5G revenues are expected to grow sharply, particularly in the second half of the year, driven by our 36 commercial wins to date. Global services profitability should improve as we recover in a handful of large rollout projects, IP routing is now firmly back to growth given our product leadership, and optical networks continues its long run of growth. We are also seeing good underlying momentum in our strategic focus areas of software and enterprise, and we are moving steadily forward on our path to build a strong licensing business that is sustainable for the long-term.

 

In terms of risks, one factor is our slow start to the year. In addition, competitive intensity has slightly increased in certain accounts as some competitors seek to be more commercially aggressive in the early stages of 5G and as some customers reassess their vendors in light of security concerns, creating near-term pressure but longer-term opportunity. We will continue to take a balanced view, and are prepared to invest prudently in cases where there is the right longer-term profitability profile. We are also progressing well with our previously announced EUR 700 million cost savings program.

 

In short, an expectedly weak Q1, but continued reason for optimism as the year progresses.

 

Q1 2019 reported and non-IFRS results. Refer to note 1, “Basis of Preparation”, note 2, “Non-IFRS to reported reconciliation” and note 13, “Performance measures”, in the “Financial statement information” section for details.

 

EUR million (except for EPS in EUR)

 

Q1’19

 

Q1’18

 

YoY change

 

Constant
currency
YoY change

 

Net sales

 

5 032

 

4 924

 

2

%

(2

)%

Operating profit/(loss)

 

(524

)

(336

)

56

%

 

 

Operating margin %

 

(10.4

)%

(6.8

)%

(360

)bps

 

 

EPS, diluted

 

(0.08

)

(0.06

)

 

 

 

 

Operating profit/(loss) (non-IFRS)

 

(59

)

239

 

 

 

 

 

Operating margin % (non-IFRS)

 

(1.2

)%

4.8

%

(600

)bps

 

 

EPS, diluted (non-IFRS)

 

(0.02

)

0.02

 

 

 

 

 

Net cash and current financial investments(1)

 

1 991

 

4 179

 

(52

)%

 

 

 


(1)Net cash and current financial investments does not include lease liabilities.

 

·             Non-IFRS net sales in Q1 2019 were EUR 5.1bn, compared to EUR 4.9bn in Q1 2018. Reported net sales in Q1 2019 were EUR 5.0bn, compared to EUR 4.9bn in Q1 2018. On a constant currency basis, non-IFRS net sales decreased 1% and reported net sales decreased 2%. Our solid topline reflects the competitiveness of our offerings, as well as an improving industry environment. We continue to see positive momentum building for our end-to-end strategy, with strong customer engagement in all key markets and across our portfolio. Due to the evolving readiness of the 5G ecosystem, in Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019.

 

April 25, 2019

 

1


 

·             Non-IFRS diluted EPS in Q1 2019 was negative EUR 0.02, compared to EUR 0.02 in Q1 2018, primarily driven by lower gross profit, partially offset by income tax benefits compared to income tax expenses in the year-ago quarter.

·             Reported diluted EPS in Q1 2019 was negative EUR 0.08, compared to negative EUR 0.06 in Q1 2018, primarily driven by lower gross profit, partially offset by a net positive fluctuation in financial income and expenses, higher income tax benefits and lower operating expenses.

·             In Q1 2019, net cash and current financial investments decreased sequentially by approximately EUR 1.1bn, primarily due to weak seasonality and changes in net working capital.

·             Full year 2019 guidance maintained. Nokia’s cash performance in the second quarter of 2019 is expected to include the payment of 2018 performance-related incentives to employees and a quarterly dividend. We expect substantially stronger financial performance in the second half of 2019 as large scale 5G deployments accelerate meaningfully.

 

2


 

New financial reporting structure beginning Q1 2019

 

Nokia announced organizational changes to accelerate its strategy execution during the fourth quarter of 2018. In line with financial regulations, Nokia revised its financial reporting structure to better reflect its strategy, organizational structure and the way it evaluates operational performance and allocates resources. As of the first quarter 2019, Nokia has three reportable segments: (i) Networks, (ii) Nokia Software and (iii) Nokia Technologies. In addition, Nokia discloses segment-level data for Group Common and Other.

 

For each reportable segment, Nokia provides detailed financial disclosure, including net sales and operating profit. Additionally, Nokia provides adjusted financial disclosure for its Networks and Nokia Software reportable segments, with amounts related to licensing and Nokia Bell Labs allocated 85% to Networks and 15% to Nokia Software.

 

In addition, Nokia provides net sales disclosure for the following businesses: (i) Mobile Access, (ii) Fixed Access, (iii) IP Routing and (iv) Optical Networks, which together comprise the new Networks reportable segment. Nokia also provides separate net sales disclosure for its different customer types: (i) Communication Service Providers, (ii) Enterprises and (iii) Licensees. Net sales by region are provided at the Nokia level.

 

To provide a basis for comparison, Nokia published a recasting of financial results on an unaudited basis for all four quarters of 2018 separately, as well as for the full year 2018, on April 18, 2019.

 

Licensees

 

After the end of Q1 2019, Nokia Technologies agreed to financial terms with a new licensee, further validating our global licensing program. The final agreement is expected to be signed during the coming weeks. Including this new licensee, Nokia Technologies’ annualized net sales run-rate would be approximately EUR 1.4 billion.

 

Over more than 20 years, we have cumulatively invested over EUR 125 billion in advanced telecommunications technologies R&D and defined many of the fundamental technologies used in virtually all mobile devices. We have taken a leadership role in standards setting, and we have secured a leading share of essential patents for GSM, 3G, 4G and 5G technologies.

 

3


 

Outlook

 

Metric

 

Full Year 2019

 

Full Year 2020

Non-IFRS diluted earnings per share

 

EUR 0.25 - 0.29

 

EUR 0.37 - 0.42

Non-IFRS operating margin

 

9 - 12%

 

12 - 16%

Recurring free cash flow(1)

 

Slightly positive

 

Clearly positive

Annual distribution to shareholders

 

Over the long term, Nokia targets to deliver an earnings-based growing dividend by distributing approximately 40% to 70% of non-IFRS diluted EPS, taking into account Nokia’s cash position and expected cash flow generation. The annual distribution would be paid as quarterly dividends.

 


(1)Free cash flow = net cash from operating activities - capital expenditures + proceeds from sale of property, plant and equipment and intangible assets — purchase of non-current financial investments + proceeds from sale of non-current financial investments.

 

Key drivers of Nokia’s outlook

 

Net sales and operating margin for Networks and Nokia Software are expected to be influenced by factors including:

 

·                  Our expectation that we will outperform our primary addressable market in full year 2019 and over the longer-term, driven by our strategy, which includes competing in 5G more effectively due to our strong end-to-end portfolio, focusing on targeted growth opportunities in attractive adjacent markets and building a strong network agnostic software business. On a constant currency basis, we expect our primary addressable market to be flattish in full year 2019 and to grow in full year 2020;

·                  The slow start to 2019 and expected weak overall first half puts significant pressure on execution in the second half. Due to the evolving readiness of the 5G ecosystem, in Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019. (new commentary);

·                  The timing of completions and acceptances of certain projects, particularly related to 5G. Based on the evolving readiness of the 5G ecosystem and the staggered nature of 5G rollouts in lead countries, we expect full year 2019 to follow a similar pattern as full year 2018: a soft first half followed by a robust second half, with a particularly weak Q1;

·                  Competitive intensity could increase in some accounts as some competitors seek to take share in the early phases of 5G (new commentary);

·                  Some customers are reassessing their vendors in light of security concerns, creating near-term pressure to invest in order to secure long-term benefits (new commentary);

·                  Our expectation that we will improve our R&D productivity and reduce support function costs through the successful execution of our cost savings program;

·                  Potential mergers or acquisitions by our customers;

·                  Our product and regional mix; and

·                  Macroeconomic, industry and competitive dynamics.

 

Net sales and operating margin for Nokia Technologies is expected to be influenced by factors including:

 

·                  The timing and value of new and existing patent licensing agreements with smartphone vendors, automotive companies and consumer electronics companies;

·                  Results in brand and technology licensing;

·                  Costs to protect and enforce our intellectual property rights; and

·                  The regulatory landscape.

 

Additionally, our outlook is based on the following assumptions:

 

·                  Nokia’s recurring free cash flow is expected to improve over the longer-term due to lower cash outflows related to restructuring and network equipment swaps and improved operational results over time;

·                  Non-IFRS financial income and expenses to be an expense of approximately EUR 300 million in full year 2019 and over the longer-term;

·                  Non-IFRS income taxes at a rate of approximately 28% in full year 2019 and approximately 25% over the longer-term, subject to the absolute level of profits, regional profit mix and changes to our operating model;

·                  Cash outflows related to income taxes of approximately EUR 450 million in full year 2019 and over the longer term until our US or Finnish deferred tax assets are fully utilized; and

·                  Capital expenditures of approximately EUR 700 million in full year 2019 and approximately EUR 600 million over the longer-term.

 

4


 

Nokia financial results

 

 

EUR million (except for EPS in EUR)

 

Q1’19

 

Q1’18

 

YoY
change

 

Constant
currency
YoY
change

 

Net sales

 

5 032

 

4 924

 

2

%

(2

)%

Networks

 

3 944

 

3 783

 

4

%

0

%

Nokia Software

 

543

 

541

 

0

%

(4

)%

Nokia Technologies

 

370

 

365

 

1

%

0

%

Group Common and Other

 

220

 

252

 

(13

)%

(12

)%

Non-IFRS exclusions

 

(25

)

(5

)

400

%

 

 

Gross profit

 

1 580

 

1 805

 

(12

)%

 

 

Operating profit/(loss)

 

(524

)

(336

)

 

 

 

 

Networks

 

(254

)

46

 

 

 

 

 

Nokia Software

 

(7

)

1

 

 

 

 

 

Nokia Technologies

 

302

 

274

 

10

%

 

 

Group Common and Other

 

(100

)

(83

)

 

 

 

 

Non-IFRS exclusions

 

(464

)

(575

)

 

 

 

 

Operating margin %

 

(10.4

)%

(6.8

)%

(360

)bps

 

 

Gross profit (non-IFRS)

 

1 641

 

1 941

 

(15

)%

 

 

Operating profit/(loss) (non-IFRS)

 

(59

)

239

 

 

 

 

 

Operating margin % (non-IFRS)

 

(1.2

)%

4.8

%

(600

)bps

 

 

Financial income and expenses

 

(55

)

(108

)

(49

)%

 

 

Income taxes

 

142

 

94

 

51

%

 

 

Profit/(loss) for the period

 

(442

)

(354

)

 

 

 

 

EPS, diluted

 

(0.08

)

(0.06

)

 

 

 

 

Financial income and expenses (non-IFRS)

 

(93

)

(116

)

(20

)%

 

 

Income taxes (non-IFRS)

 

41

 

(36

)

 

 

 

 

Profit/(loss) for the period (non-IFRS)

 

(116

)

83

 

 

 

 

 

EPS, diluted (non-IFRS)

 

(0.02

)

0.02

 

 

 

 

 

 

Results are as reported and relate to continuing operations 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 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.

 

5


 

Amounts related to licensing and Nokia Bell Labs allocated 85% to Networks and 15% to Nokia Software

 

 

 

Q1’19

 

Allocations

 

Q1’19

 

Q1’18

 

 

 

Before
allocations

 

Licensing

 

Nokia Bell Labs

 

After
allocations

 

After
allocations

 

Net sales (EUR million)

 

 

 

 

 

 

 

 

 

 

 

Networks

 

3 944

 

315

 

1

 

4 259

 

4 081

 

Nokia Software

 

543

 

56

 

 

 

598

 

594

 

Nokia Technologies

 

370

 

(370

)

 

 

0

 

16

 

Group Common and Other

 

220

 

 

 

(1

)

219

 

251

 

Eliminations

 

(20

)

 

 

 

 

(20

)

(12

)

Non-IFRS total

 

5 057

 

0

 

0

 

5 057

 

4 929

 

Operating Profit (EUR million)

 

 

 

 

 

 

 

 

 

 

 

Networks

 

(254

)

257

 

(44

)

(42

)

255

 

Nokia Software

 

(7

)

45

 

(8

)

30

 

38

 

Nokia Technologies

 

302

 

(302

)

 

 

0

 

(23

)

Group Common and Other

 

(100

)

 

 

52

 

(48

)

(32

)

Non-IFRS total

 

(59

)

0

 

0

 

(59

)

239

 

Operating Margin %

 

 

 

 

 

 

 

 

 

 

 

Networks

 

(6.4

)%

 

 

 

 

(1.0

)%

6.2

%

Nokia Software

 

(1.3

)%

 

 

 

 

5.0

%

6.4

%

Nokia Technologies

 

81.6

%

 

 

 

 

0.0

%

(143.8

)%

Group Common and Other

 

(45.5

)%

 

 

 

 

(21.9

)%

(12.7

)%

Non-IFRS total

 

(1.2

)%

 

 

 

 

(1.2

)%

4.8

%

 

 

Net sales by region

 

EUR million

 

Q1’19

 

Q1’18

 

YoY change

 

Constant
currency YoY
change

 

Asia-Pacific

 

963

 

910

 

6

%

2

%

Europe

 

1 500

 

1 506

 

(0

)%

(1

)%

Greater China

 

434

 

480

 

(10

)%

(12

)%

Latin America

 

305

 

297

 

3

%

0

%

Middle East & Africa

 

413

 

431

 

(4

)%

(7

)%

North America

 

1 418

 

1 301

 

9

%

1

%

Total

 

5 032

 

4 924

 

2

%

(2

)%

 

6


 

Net sales by customer type

 

EUR million

 

Q1’19

 

Q1’18

 

YoY change

 

Constant
currency
YoY change

 

Communication service providers

 

4 207

 

4 080

 

3

%

(1

)%

Enterprise

 

260

 

244

 

7

%

3

%

Licensees

 

370

 

349

 

6

%

5

%

Other(1)

 

195

 

251

 

(22

)%

(21

)%

Total

 

5 032

 

4 924

 

2

%

(2

)%

 


(1)Includes net sales of Alcatel Submarine Networks (ASN) and Radio Frequency Systems (RFS), both of which are being managed as separate entities, and certain other items, such as eliminations of inter-segment revenues and certain items related to purchase price allocation. ASN and RFS net sales include also revenue from communications service providers and enterprise customers.

 

Our new Nokia Enterprise business is performing well. Net sales to enterprise customers, excluding the third party integration business that we are exiting, grew 8% on a reported basis, and 5% on a constant currency basis.

 

Nokia, Q1 2019 compared to Q1 2018

 

EUR million

 

Net
sales

 

%
change

 

%
change
in
constant
currency

 

Gross
profit

 

(R&D)

 

(SG&A)

 

Other
income
and
(expenses)

 

Operating
profit/(loss)

 

Financial
income
and
expenses

 

Income
taxes

 

Profit/(loss)

 

Networks

 

161

 

4

%

0

%

(256

)

(12

)

14

 

(45

)

(300

)

 

 

 

 

 

 

Nokia Software

 

2

 

0

%

(4

)%

(14

)

10

 

10

 

(15

)

(8

)

 

 

 

 

 

 

Nokia Technologies

 

5

 

1

%

0

%

2

 

13

 

14

 

0

 

28

 

 

 

 

 

 

 

Group Common and Other

 

(32

)

(13

)%

(12

)%

(32

)

(9

)

(12

)

36

 

(17

)

 

 

 

 

 

 

Eliminations

 

(8

)

 

 

 

 

0

 

0

 

0

 

0

 

0

 

 

 

 

 

 

 

Nokia non-IFRS

 

128

 

3

%

(1

)%

(300

)

2

 

24

 

(24

)

(298

)

23

 

77

 

(199

)

Non-IFRS exclusions

 

(20

)

400

%

 

 

74

 

9

 

1

 

27

 

111

 

30

 

(29

)

111

 

Nokia reported

 

108

 

2

%

(2

)%

(225

)

11

 

23

 

3

 

(188

)

53

 

48

 

(88

)

 

Nokia reported net sales grew approximately 2%. Nokia non-IFRS net sales grew approximately 3%, due to the exclusion of EUR 22 million of restructuring and associated charges. On a constant currency basis, Nokia reported net sales decreased approximately 2% and Nokia non-IFRS net sales decreased approximately 1%.

 

Nokia non-IFRS and reported net sales, excluding approximately EUR 40 million (EUR 10 million in Q1 2018) of one-time licensing net sales in Q1 2019, both grew by approximately 2%, as our customers added network capacity in preparation for the continued rise in broadband traffic driven by 5G. Our solid topline in Q1 2019 reflected the competitiveness of our end-to-end portfolio, with particular strength in IP routing, as well as an improving industry environment.

 

Due to the evolving readiness of the 5G ecosystem, in Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019.

 

Networks and Nokia Software continued to see strong customer engagement related to 5G across multiple parts of our portfolio, including radio, cloud core, transport, IP routing and network agnostic software. In Q1 2019, we continued to make progress with our strategy to diversify and grow, with solid results in Nokia Software and with enterprise customers.

 

In Nokia Technologies, the growth in net sales was primarily due to one-time licensing net sales in Q1 2019. On a recurring basis, net sales declined by 4%.

 

The growth in net sales to enterprise customers was primarily due to strong demand for our market-leading IP routing portfolio and, to a lesser extent, particularly strong percentage growth in private LTE and 5G wireless networks for industrial applications. We see strong momentum in industries like utilities, oil, gas, mines, manufacturing and logistics, as well as the public sector. Excluding the third party integration business that we are exiting, net sales to enterprise customers grew 8% on a reported basis, and 5% on a constant currency basis.

 

The decline in Nokia gross profit was primarily attributable to Networks, which was negatively affected by broad-based gross margin erosion in Mobile Access.

 

Nokia non-IFRS diluted EPS decreased by EUR 0.04, primarily due to lower gross profit, partially offset by income tax benefits compared to income tax expenses in the year-ago quarter.

 

Nokia reported diluted EPS decreased by EUR 0.02, primarily driven by lower gross profit, partially offset by a net positive fluctuation in financial income and expenses, higher income tax benefits and lower operating expenses.

 

7


 

Cash and cash flow in Q1 2019

 

During the first quarter of 2019 Nokia’s free cash flow was negative EUR 913 million driven by:

 

·             continued cash outflows related to restructuring and network equipment swaps;

·             seasonally weak profitability in the first quarter;

·             seasonally lower cash collection following significantly higher sale of receivables in the fourth quarter of 2018 and certain unexpected and unusual overdues at end of the first quarter by a limited number of customers; and

·             seasonally higher inventory levels, as well as higher than normal inventory levels due to: a) our decision to ensure sufficient flexibility to deliver higher levels of equipment sales, particularly related to 5G and b) the deferral of revenue recognition, mainly in North America. In Q1 2019, we were unable to recognize approximately EUR 200 million of net sales, which we expect to recognize in full before the end of 2019.

 

In the second quarter 2019 Nokia expects inventories to remain at elevated levels, followed by significantly improved inventory levels in second half of 2019 as large scale 5G deployments accelerate meaningfully.

 

Nokia has established a free cash flow program to ensure company-wide focus on free cash flow and release of working capital, including project asset optimization, review of contract terms & conditions as well supply chain and inventory optimization. Senior leaders of Nokia have significant part of their incentives tied to free cash flow improvement targets in 2019 and beyond.

 

EUR million, at end of period

 

Q1’19

 

Q4’18

 

QoQ change

 

Total cash and current financial investments(1)

 

6 394

 

6 873

 

(7

)%

Net cash and current financial investments(1)

 

1 991

 

3 053

 

(35

)%

 


(1) Net cash and current financial investments does not include lease liabilities. For details, please refer to note 7, “Net cash and current financial investments”, and note 13, “Performance measures”, in the “Financial statement information” section in this report.

 

EUR billion

 

 

During the first quarter 2019, Nokia’s total cash and current financial investments decreased by EUR 479 million and Nokia’s net cash and current financial investments (“net cash”) decreased by EUR 1 062 million.

 

Foreign exchange rates had an approximately EUR 50 million negative impact on net cash, primarily related to liabilities.

 

In the first quarter 2019, net cash used in operating activities was EUR 747 million:

 

·             Nokia’s adjusted profit before changes in net working capital was EUR 7 million in the first quarter 2019.

·             In the first quarter 2019, Nokia generated a decrease in net cash related to net working capital of approximately EUR 530 million. Excluding approximately EUR 130 million of restructuring and associated cash outflows, Nokia generated an approximately EUR 410 million decrease in net cash related to net working capital, primarily due to a decrease in liabilities and an increase in inventories, partially offset by a decrease in receivables.

 

·                  The decrease in receivables was approximately EUR 380 million, primarily due to a seasonal decrease. The seasonal decrease was less than normal, due to the high level of receivables sold in Q4 2018.

 

8


 

·                  The increase in inventories was approximately EUR 280 million, primarily due to our decision to ensure sufficient flexibility to deliver higher levels of equipment sales, particularly related to 5G, and a seasonal increase in inventories. In Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019.

·                  The decrease in liabilities was approximately EUR 510 million, primarily due to the seasonal decrease in accounts payable.

 

·             In addition, cash taxes amounted to an outflow of approximately EUR 180 million. In Q1 2019, cash taxes were at an elevated level primarily due to the timing of tax payments. Also, net interest amounted to an outflow of approximately EUR 40 million.

·             The implementation of IFRS 16 positively impacted our net cash used in operating activities and negatively impacted our net cash from financing activities, both by approximately EUR 60 million.

 

In the first quarter 2019, net cash used in investing activities primarily related to capital expenditures of approximately EUR 180 million.

 

In the first quarter 2019, net cash used in financing activities primarily related to leasing payments of approximately EUR 60 million following the implementation of IFRS 16.

 

9


 

Cost savings program

 

We expect our most recent cost savings program to result in a net EUR 700 million reduction of non-IFRS operating expenses and production overheads in full year 2020 compared to full year 2018, of which EUR 500 million is expected to come from operating expenses and EUR 200 million is expected to come from cost of sales. The related restructuring charges are expected to total EUR 900 million.

 

Balances related to previous restructuring and cost savings programs have been included as part of this cost savings program. At the beginning of Q1 2019, the balance of restructuring and associated liabilities related to prior cost savings programs was approximately EUR 630 million. This amount is included in the total expected restructuring and associated cash outflows of EUR 1 550 million, rounded to the nearest EUR 50 million, in addition to the approximately EUR 900 million of expected cash outflows related to our most recent cost savings program.

 

The following table summarizes the financial information related to our cost savings program as of the end of the first quarter 2019.

 

In EUR million, approximately

 

Q1’19

 

Balance of restructuring and associated liabilities for prior programs

 

630

 

+ Charges in the quarter

 

160

 

- Cash outflows in the quarter

 

130

 

= Ending balance of restructuring and associated liabilities

 

660

 

of which restructuring provisions

 

470

 

of which other associated liabilities

 

190

 

 

 

 

 

Total expected restructuring and associated charges

 

900

 

- Cumulative recorded

 

160

 

= Charges remaining to be recorded

 

740

 

 

 

 

 

Total expected restructuring and associated cash outflows

 

1 550

 

- Cumulative recorded

 

130

 

= Cash outflows remaining to be recorded

 

1 420

 

 

The below table includes future expectations related to our most recent cost savings program, as well as the remaining cash outflows related to our previous programs and network equipment swaps.

 

 

 

Expected amounts for

 

In EUR million, approximately
rounded to the nearest EUR 50 million

 

FY 2019

 

FY 2020
and
beyond

 

Total

 

Recurring annual cost savings

 

200

 

500

 

700

 

- operating expenses

 

150

 

350

 

500

 

- cost of sales

 

50

 

150

 

200

 

Restructuring and associated charges

 

550

 

350

 

900

 

Restructuring and associated cash outflows

 

700

 

850

 

1 550

 

Charges related to network equipment swaps

 

150

 

0

 

150

 

Cash outflows related to network equipment swaps

 

150

 

0

 

150

 

 

10


 

Operational highlights

 

Nokia has begun the year by strengthening its position across key markets and industries and punctuating the period with a number of important 5G commercial deals.

 

In the first pillar of our strategy, leading in high-performance, end-to-end networks with communication service providers:

 

During the period Nokia signed significant deals with major providers across the globe, reaching 30 commercial 5G deals during the quarter. These included: a MoU with Telecom Egypt to introduce a 5G network and test cases in the Egyptian market; the launch of South Africa’s first commercial-ready 5G network in Cape Town with South African Operator rain; a deal with Saudi Telecom Company to deploy Nokia’s end-to-end 5G solutions in western and southern Saudi Arabia; and a five-year deal with U.S. Cellular to provide end-to-end 5G technology, software and services solutions.

 

In Europe, A1 in Austria announced they selected Nokia to expand next-generation 5G mobile communications in that country. Switzerland’s Salt selected Nokia’s radio and mobile core network in order to prepare for the roll-out of 5G, and Ice Group will deploy Nokia’s AirScale Radio Access technology in urban areas across Norway to build a 5G-ready mobile network. After the quarter ended, Nokia announced the first 5G call on a commercial network in Latin America with ANTEL Uruguay.

 

In other markets, Nokia, in partnership with Sprint, is field testing standards-based 5G in Los Angeles. Telenor Pakistan announced it is deploying the country’s first 5G-ready cloud-based RAN platform and controllers, and Vodafone Idea in India announced it will roll out its future ready LTE network across multiple service areas, based on Nokia’s Single RAN, massive MIMO and small cells portfolio.

 

In optical, Bharti Airtel in India announced it will trial Nokia’s fronthaul solution. M-net in Bavaria has become the first carrier to trial Nokia’s PSE-3 coherent digital signal processing technology. PTCL in Pakistan is also deploying the Nokia PSE-3 chipset to build a 100G optical network, and Nokia announced that it was selected by Liquid Telecom Kenya to upgrade its existing fiber network.

 

In IP routing, the Nokia 7750 SR-s, powered by the FP4 network processor, was chosen by multiple operators. Indosat Ooredoo selected the router to upgrade its IP/MPLS network, ensuring the scale, security and functionality needed for the 100GE network. DE-CIX announced it is the first Internet Exchange in the world to offer 400-GE access technology with the Nokia 7750 SR-s which is deployed in DE-CIX Frankfurt, the Internet Exchange with the highest peak traffic in the world. After the quarter ended, Proximus announced it will deliver a tenfold capacity increase to its IP transport network with the 7750 SR-s, and BT also announced it had selected the platform to dramatically boost its backbone network capacity to meet growing traffic demand from FTTP and 5G.

 

Nokia also announced USD$750,000 support for IETF, the premier Internet standards development organization, and will host the 106th IETF meeting in November.

 

In fixed access, Nokia introduced a new FastMile 5G Gateway that allows operators upgrading their LTE network to capture new Fixed Wireless Access (FWA) revenue and accelerate 5G rollouts. In Australia, Nokia partnered with Optus to provide the 5G RAN and Fastmile 5G CPEs for their home broadband. Telia will introduce Nokia FastMile 5G gateway for 4G-5G FWA to the Finnish market. The FWA 5G gateway is also part of the rain launch of its 5G network in Cape Town. KDDI in Japan is deploying Nokia’s G.fast solution while Chorus in New Zealand will trial Nokia’s market leading XGS-PON solution to bring 10 gigabit per second (Gbps) services to residential and SME customers in selected areas of Auckland and Wellington.

 

Nokia’s Nuage Networks SD-WAN 2.0 solution was chosen by managed service provider SDNbucks to provide fully managed connectivity for SciSports cloud-based data analytics service. Nuage Networks was also selected by Airtel for datacenter automation in a first-of-its-kind initiative in India.

 

Telecom Egypt and Nokia announced plans to build the first cloud infrastructure in Egypt exclusively for IoT services. Telecom Egypt will use Nokia’s Worldwide IoT Network Grid (WING) as a service to launch IoT services to its enterprise customers. In addition, under a MOU, Zain Saudi Arabia will leverage Nokia’s WING to launch IoT services in the country.

 

Multiple additions to the portfolio were announced at Mobile World Congress. Nokia announced a raft of enhancements to its Anyhaul transport portfolio that help operators prepare their networks for 5G by delivering throughput speeds of up to 25 Gbps to base stations. New additions to the small cell portfolio included: a new mmWave small cell for extreme-traffic outdoor areas and a small cell mid-band radio to seamlessly upgrade indoor coverage to 5G. Nokia introduced a 5G Maturity Index to guide operators on how to align technology investments with business objectives to succeed with 5G-enabled services. And Nokia launched Cognitive Collaboration Hubs to help operators design 5G networks and create AI-enabled use cases.

 

Other notable news announced at Mobile World Congress includes: a collaboration with Vodafone on active antennas to boost 5G radio capacity and reduce costs, and a partnership and demonstration with CMCC for 5G AI powered QoE solution for an immersive VR gaming application. Nokia announced adoption of the fronthaul specifications of the Open Radio Access Network Alliance (O-RAN) and is now part of the AT&T Innovation Program.

 

In the second pillar of our strategy, expanding network sales to select vertical markets needing high-performing, secure networks:

 

Nokia partnered with Qualcomm and Deutsche Messe to showcase 10 industrial applications/use cases in the 5G Arena at the world’s largest industrial trade show Hannover Messe 2019.

 

11


 

Nokia signed a five-year cooperation agreement with Oulu Port Ltd to provide a private wireless service with Ukkoverkot. Norway’s MIRIS has chosen Nokia’s AirFrame Open Edge data center technology to support delivery of Smart City services in business parks and residential areas.

 

In other geographies, Nokia partnered with Dawiyat Integrated Telecommunications and Information Technology Company, part of Saudi Electricity Corporation (SEC), to collaborate on multiple projects to develop the ecosystem for Industry 4.0 in the country.

 

Room40, a company specializing in security monitoring analytics solutions, selected Nokia’s Scene Analytics to flag emergencies and crime at sites in Belgium.

 

Nokia, along with Continental, Deutsche Telekom, Fraunhofer ESK and MHP, successfully concluded tests of connected driving technology on the A9 Digital Test Track. In addition, Nokia joined ARENA2036, a collaboration of automotive industry leaders, to create a flexible research factory model for production of the next generation of automobiles.

 

Nokia also signed an agreement with Pöyry and Infosys to further enhance and accelerate the adoption of KRTI 4.0TM, an artificial intelligence (AI) framework for operational excellence.

 

In the third pillar of our strategy, developing a strong software business at scale:

 

This was the first quarter in which Nokia’s Cloud Core solutions resources and sales accountability were aligned to the Nokia Software Business Group. While work remains to complete and optimize the integration, Nokia Software continued to demonstrate the strength of its network agnostic portfolio with healthy order intake and wins at Bharti, China Unicom, Globacom Nigeria, Ooredoo Qatar, Orange Poland, Telefonica Peru, Vodafone Idea, and US Cellular.

 

Nokia and Korea Telecom signed a MOU to collaborate and trial various 5G technologies, including NFV and network slicing. Nokia’s IMPACT IoT platform was chosen by M1 Limited to enhance its Smart City IoT Solutions. IMPACT was also selected by Rakuten to tap opportunities in Japan, and we are also working with Rakuten to build a new mobile network in Japan.

 

Nokia and Grameenphone announced completion of the migration of Grameenphone’s 72 million customers to the Nokia User Data Convergence (UDC) cloud core platform, and Telefónica Group selected Nokia as its Service Operation Center vendor.

 

In the fourth pillar of our strategy, now focused primarily on licensing:

 

During Q1 2019, Nokia signed patent licensing agreements with Chinese smartphone vendors including TCL, Tinno and Wiko. Nokia also saw continuing momentum in automotive licensing as Audi and Porsche joined BMW, Mini and Rolls Royce on the roster of brands licensed to our patents for their connected cars.

 

After the end of Q1 2019, Nokia Technologies agreed to financial terms with a new licensee, further validating our global licensing program. The final agreement is expected to be signed during the coming weeks. Including this new licensee, Nokia Technologies’ annualized net sales run-rate would be approximately EUR 1.4 billion. Over more than 20 years, we have cumulatively invested over EUR 125 billion in advanced telecommunications technologies R&D and defined many of the fundamental technologies used in virtually all mobile devices. We have taken a leadership role in standards setting, and we have secured a leading share of essential patents for GSM, 3G, 4G and 5G technologies.

 

HMD Global, the home of Nokia phones, launched four new Nokia smartphones and one featurephone at Mobile World Congress, delivering pioneering experiences and true innovation in imaging. Gaining over 50% share of voice in smartphone coverage of MWC, the new Nokia devices also won 24 awards during the show; 19 for Nokia 9 PureView. HMD also announced it had technical approval from three North American carriers to start sales in the US and Canada.

 

Shortly after the quarter closed, OPPO launched its new flagship smartphone, the OPPO Reno, which uses Nokia’s OZO Audio technology.

 

12


 

Networks, Q1 2019 compared to Q1 2018

 

 

EUR million

 

Q1’19

 

Q1’18

 

YoY change

 

Constant
currency YoY
change

 

Net sales

 

3 944

 

3 783

 

4

%

0

%

Mobile Access

 

2 473

 

2 426

 

2

%

(2

)%

Fixed Access

 

426

 

445

 

(4

)%

(8

)%

IP Routing

 

645

 

550

 

17

%

12

%

Optical Networks

 

400

 

363

 

10

%

7

%

Gross profit

 

1 061

 

1 317

 

(19

)%

 

 

Gross margin %

 

26.9

%

34.8

%

(790

)bps

 

 

R&D

 

(778

)

(766

)

2

%

 

 

SG&A

 

(518

)

(532

)

(3

)%

 

 

Other income and expenses

 

(18

)

27

 

 

 

 

 

Operating profit/(loss)

 

(254

)

46

 

 

 

 

 

Operating margin %

 

(6.4

)%

1.2

%

(760

)bps

 

 

 

 

Networks net sales grew 4%. On a constant currency basis, Networks net sales were flat.

 

The growth in Networks net sales was due to IP Routing, Mobile Access and Optical Networks, partially offset by a decrease in Fixed Access.

 

The growth in IP Routing was primarily due to our market-leading portfolio. The growth in Mobile Access was primarily due to network deployment services, partially offset by decreases in legacy radio technologies. The growth in Optical Networks was primarily due to our market-leading portfolio. The decrease in Fixed Access was primarily due to copper access technologies.

 

13


 

Due to the evolving readiness of the 5G ecosystem, in Q1 2019, we were unable to recognize approximately EUR 200 million of net sales related to 5G deliveries mainly in North America, which we expect to recognize in full before the end of 2019.

 

The decrease in Networks gross profit was primarily due to Mobile Access and Fixed Access, partially offset by IP Routing and Optical Networks. The decrease in Mobile Access and Fixed Access gross profit was primarily due to lower gross margin. The increase in IP Routing and Optical Networks gross profit was primarily due to higher net sales.

 

The gross margin decline in Mobile Access was broad-based, extending across nearly all products and services, as well as regions. From a products and services perspective, the Mobile Access gross margin decline was particularly due to legacy radio technologies. In Q1 2019, Mobile Access gross margin was negatively affected by an unfavorable product mix, with a greater proportion of network deployment services net sales, as well as a lower proportion of software net sales due to the absence of radio software releases in the quarter. From a regional perspective, the Mobile Access gross margin decline was particularly due to North America and Asia-Pacific. This was partially offset by favorable regional mix, with a larger proportion of net sales in North America.

 

The lower gross margin in Fixed Access was primarily due to copper access technologies, digital home and services. In Q1 2019, Fixed Access gross margin declined across all regions and was also negatively affected by an unfavorable regional mix, with a smaller proportion of net sales in North America. From a regional perspective, the Fixed Access gross margin decline was particularly due to North America.

 

The increase in Networks R&D expenses was primarily due to higher 5G investments in Mobile Access, partially offset by progress related to Nokia’s cost savings program.

 

The decrease in Networks SG&A expenses was primarily due to progress related to Nokia’s cost savings program.

 

The net negative fluctuation in other income and expenses was primarily due to foreign exchange hedging.

 

14


 

Nokia Software, Q1 2019 compared to Q1 2018

 

 

EUR million

 

Q1’19

 

Q1’18

 

YoY change

 

Constant
currency YoY
change

 

Net sales

 

543

 

541

 

0

%

(4

)%

Gross profit

 

219

 

233

 

(6

)%

 

 

Gross margin %

 

40.3

%

43.1

%

(280

)bps

 

 

R&D

 

(118

)

(128

)

(8

)%

 

 

SG&A

 

(101

)

(111

)

(9

)%

 

 

Other income and expenses

 

(7

)

8

 

 

 

 

 

Operating profit/(loss)

 

(7

)

1

 

 

 

 

 

Operating margin %

 

(1.3

)%

0.2

%

(150

)bps

 

 

 

 

 

Nokia Software net sales grew slightly. On a constant currency basis, Nokia Software net sales decreased 4%.

 

The slight growth in Nokia Software net sales was primarily due to applications and, to a lesser extent, core networks. In applications, growth was particularly driven by sales of our CloudBand and self-organizing network solutions. From a regional perspective, applications and core networks both grew in North America and Middle East & Africa and declined in Asia-Pacific.

 

The decrease in Nokia Software gross profit was primarily due to lower gross margin in core networks, partially offset by slightly higher gross margin in applications.

 

The decrease in Nokia Software R&D expenses was primarily due to an increase in R&D productivity achieved through our investments in a Common Software Foundation and the further optimization of resources.

 

The decrease in Nokia Software SG&A expenses was primarily due to the integration and streamlining of core networks.

 

15


 

Completing the integration of core networks into Nokia Software is a key priority, and we intend to transform our core networks business to support growth and higher returns, similar to how we transformed our applications business over the past 3 years. As we drive this, we expect overall operating expenses for Nokia Software to continue at similar or slightly higher levels as in Q1 2019.

 

The net negative fluctuation in other income and expenses was primarily due to foreign exchange hedging and higher loss allowances on trade receivables.

 

16


 

Nokia Technologies, Q1 2019 compared to Q1 2018

 

 

EUR million

 

Q1’19

 

Q1’18

 

YoY change

 

Constant
currency YoY
change

 

Net sales

 

370

 

365

 

1

%

0

%

Gross profit

 

357

 

355

 

1

%

 

 

Gross margin %

 

96.5

%

97.3

%

(80

)bps

 

 

R&D

 

(30

)

(43

)

(30

)%

 

 

SG&A

 

(25

)

(39

)

(36

)%

 

 

Other income and expenses

 

0

 

0

 

 

 

 

 

Operating profit/(loss)

 

302

 

274

 

10

%

 

 

Operating margin %

 

81.6

%

75.1

%

650

bps

 

 

 

 

Nokia Technologies net sales grew 1%. On a constant currency basis, Nokia Technologies net sales were flat.

 

The EUR 370 million of net sales in the first quarter 2019 related entirely to licensing. Of the EUR 365 million of net sales in the first quarter 2018, EUR 349 million related to licensing and EUR 16 million related to digital health products. We sold our digital health business in May 2018.

 

The growth in Nokia Technologies net sales was primarily due to higher one-time catch-up net sales related to a new license agreement and the sale of certain patents, partially offset by lower recurring licensing net sales, as well as the sale of our digital health business in May 2018. One-time net sales amounted to approximately EUR 40 million in the first quarter 2019 and approximately EUR 10 million in the first quarter 2018.

 

The decrease in Nokia Technologies R&D expenses was primarily due to the absence of costs related to digital health, following the sale of our digital health business.

 

17


 

The decrease in Nokia Technologies SG&A expenses was primarily due to the absence of costs related to digital health, following the sale of our digital health business and lower business support costs.

 

18


 

Group Common and Other, Q1 2019 compared to Q1 2018

 

 

EUR million

 

Q1’19

 

Q1’18

 

YoY change

 

Constant
currency YoY
change

 

Net sales

 

220

 

252

 

(13

)%

(12

)%

Gross profit

 

4

 

36

 

(89

)%

 

 

Gross margin %

 

1.8

%

14.3

%

(1 250

)bps

 

 

R&D

 

(83

)

(74

)

12

%

 

 

SG&A

 

(64

)

(52

)

23

%

 

 

Other income and expenses

 

43

 

7

 

 

 

 

 

Operating profit/(loss)

 

(100

)

(83

)

 

 

 

 

Operating margin %

 

(45.5

)%

(32.9

)%

(1 260

)bps

 

 

 

 

Group Common and Other net sales decreased 13%. On a constant currency basis, Group Common and Other net sales decreased 12%.

 

The decrease in Group Common and Other net sales was primarily due to Alcatel Submarine Networks. The decrease in Alcatel Submarine Networks was primarily due to a lower level of ongoing projects.

 

The decrease in Group Common and Other gross profit was primarily due to lower gross margin in Radio Frequency Systems and Alcatel Submarine Networks and, to a lesser extent, lower net sales.

 

The increase in Group Common and Other R&D and SG&A expenses was primarily due to longer-term investments to drive digitalization for the future.

 

19


 

The net positive fluctuation in other income and expenses was primarily due to higher gains in Nokia’s venture fund investments.

 

Shares

 

The total number of Nokia shares on March 31, 2019, equaled 5 635 968 159. On March 31, 2019, Nokia and its subsidiary companies owned 37 258 065 Nokia shares, representing approximately 0.7% of the total number of Nokia shares and voting rights.

 

20


 

Financial statement information

 

21


 

Consolidated income statement (condensed, unaudited)

 

 

 

Reported

 

Reported

 

Non-IFRS

 

Non-IFRS

 

EUR million

 

Q1’19

 

Q1’18

 

Q1’19

 

Q1’18

 

Net sales (notes 2, 3, 4)

 

5 032

 

4 924

 

5 057

 

4 929

 

Cost of sales

 

(3 452

)

(3 119

)

(3 416

)

(2 988

)

Gross profit (notes 2, 3)

 

1 580

 

1 805

 

1 641

 

1 941

 

Research and development expenses

 

(1 156

)

(1 167

)

(1 009

)

(1 011

)

Selling, general and administrative expenses

 

(824

)

(847

)

(708

)

(732

)

Other income and expenses

 

(124

)

(127

)

17

 

41

 

Operating (loss)/profit (notes 2, 3)

 

(524

)

(336

)

(59

)

239

 

Share of results of associated companies and joint ventures

 

(5

)

(4

)

(5

)

(4

)

Financial income and expenses

 

(55

)

(108

)

(93

)

(116

)

(Loss)/profit before tax (note 2)

 

(583

)

(448

)

(157

)

119

 

Income tax benefit/(expense)

 

142

 

94

 

41

 

(36

)

(Loss)/profit from continuing operations (note 2)

 

(442

)

(354

)

(116

)

83

 

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

 

(444

)

(351

)

(118

)

86

 

Non-controlling interests

 

2

 

(3

)

2

 

(3

)

(Loss)/profit from discontinued operations

 

(3

)

163

 

0

 

0

 

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

 

(3

)

163

 

0

 

0

 

Non-controlling interests

 

0

 

0

 

0

 

0

 

(Loss)/profit for the period

 

(444

)

(191

)

(116

)

83

 

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

 

(446

)

(188

)

(118

)

86

 

Non-controlling interests

 

2

 

(3

)

2

 

(3

)

 

 

 

 

 

 

 

 

 

 

Earnings per share, EUR (for profit/(loss) attributable to equity holders of the parent)

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

(0.08

)

(0.06

)

(0.02

)

0.02

 

Discontinued operations

 

0.00

 

0.03

 

0.00

 

0.00

 

(Loss)/profit for the period

 

(0.08

)

(0.03

)

(0.02

)

0.02

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

(0.08

)

(0.06

)

(0.02

)

0.02

 

Discontinued operations

 

0.00

 

0.03

 

0.00

 

0.00

 

(Loss)/profit for the period

 

(0.08

)

(0.03

)

(0.02

)

0.02

 

Average number of shares (‘000 shares)

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

5 596 127

 

5 583 621

 

5 596 127

 

5 583 621

 

Discontinued operations

 

5 596 127

 

5 583 621

 

5 596 127

 

5 583 621

 

(Loss)/profit for the period

 

5 596 127

 

5 583 621

 

5 596 127

 

5 583 621

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

5 596 127

 

5 583 621

 

5 596 127

 

5 601 031

 

Discontinued operations

 

5 596 127

 

5 601 031

 

5 596 127

 

5 601 031

 

(Loss)/profit for the period

 

5 596 127

 

5 583 621

 

5 596 127

 

5 601 031

 

 

The above condensed consolidated income statement should be read in conjunction with accompanying notes.

 

22


 

Consolidated statement of comprehensive income (condensed, unaudited)

 

 

 

Reported

 

Reported

 

EUR million

 

Q1’19

 

Q1’18

 

 

 

 

 

 

 

Loss for the period

 

(444

)

(191

)

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

Items that will not be reclassified to profit or loss:

 

 

 

 

 

Remeasurements of defined benefit pensions

 

(212

)

241

 

Income tax related to items that will not be reclassified to profit or loss

 

61

 

(72

)

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

 

Translation differences

 

336

 

(285

)

Net investment hedges

 

(95

)

93

 

Cash flow and other hedges

 

(12

)

(31

)

Financial assets at fair value through other comprehensive income

 

(10

)

(20

)

Other changes, net

 

(1

)

0

 

Income tax related to items that may be reclassified subsequently to profit or loss

 

23

 

(8

)

 

 

 

 

 

 

Other comprehensive income/(loss), net of tax

 

90

 

(82

)

 

 

 

 

 

 

Total comprehensive loss

 

(354

)

(273

)

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

Equity holders of the parent

 

(358

)

(270

)

Non-controlling interests

 

4

 

(3

)

 

 

(354

)

(273

)

 

 

 

 

 

 

Attributable to equity holders of the parent:

 

 

 

 

 

Continuing operations

 

(355

)

(433

)

Discontinued operations

 

(3

)

163

 

 

 

(358

)

(270

)

 

 

 

 

 

 

Attributable to non-controlling interests:

 

 

 

 

 

Continuing operations

 

4

 

(3

)

Discontinued operations

 

0

 

0

 

 

 

4

 

(3

)

 

The above condensed consolidated statement of comprehensive income should be read in conjunction with accompanying notes.

 

23


 

Consolidated statement of financial position (condensed, unaudited)

 

EUR million

 

March 31,
2019

 

March 31,
2018

 

December
31, 2018

 

ASSETS

 

 

 

 

 

 

 

Goodwill

 

5 527

 

5 164

 

5 452

 

Other intangible assets

 

3 139

 

3 752

 

3 353

 

Property, plant and equipment

 

1 777

 

1 789

 

1 790

 

Right-of-use assets (note 12)

 

954

 

0

 

0

 

Investments in associated companies and joint ventures

 

152

 

121

 

145

 

Non-current financial investments(1) (note 8)

 

714

 

658

 

690

 

Deferred tax assets (note 6)

 

5 214

 

4 636

 

4 911

 

Other non-current financial assets (note 8)

 

429

 

336

 

373

 

Defined benefit pension assets (note 5)

 

4 336

 

4 020

 

4 224

 

Other non-current assets

 

305

 

364

 

308

 

Non-current assets

 

22 546

 

20 840

 

21 246

 

Inventories

 

3 528

 

2 777

 

3 168

 

Trade receivables (note 8)

 

4 930

 

4 624

 

4 856

 

Contract assets

 

1 510

 

1 692

 

1 875

 

Prepaid expenses and accrued income

 

1 039

 

1 026

 

1 024

 

Social security, VAT and other indirect taxes

 

553

 

562

 

514

 

Divestment related receivables

 

47

 

78

 

67

 

Other

 

439

 

386

 

443

 

Current income tax assets

 

296

 

489

 

227

 

Other current financial assets (note 8)

 

327

 

229

 

243

 

Current financial investments(1) (note 8)

 

532

 

1 342

 

612

 

Cash and cash equivalents (note 8)

 

5 862

 

6 555

 

6 261

 

Current assets

 

18 025

 

18 734

 

18 266

 

Assets held for sale

 

8

 

22

 

5

 

Total assets

 

40 579

 

39 596

 

39 517

 

 

 

 

March 31, 2019

 

March 31,
2018

 

December
31, 2018

 

SHAREHOLDERS’ EQUITY AND LIABILITIES

 

 

 

 

 

 

 

Share capital

 

246

 

246

 

246

 

Share issue premium

 

407

 

395

 

436

 

Treasury shares

 

(368

)

(418

)

(408

)

Translation differences

 

(334

)

(1 141

)

(592

)

Fair value and other reserves

 

895

 

970

 

1 063

 

Reserve for invested unrestricted equity

 

15 596

 

15 589

 

15 606

 

(Accumulated deficit)/retained earnings

 

(1 509

)

153

 

(1 062

)

Total capital and reserves attributable to equity holders of the parent

 

14 932

 

15 795

 

15 289

 

Non-controlling interests

 

86

 

79

 

82

 

Total equity

 

15 018

 

15 874

 

15 371

 

Long-term interest-bearing liabilities (notes 8, 10)

 

3 650

 

3 169

 

2 826

 

Long-term lease liabilities (notes 8, 12)

 

813

 

3

 

2

 

Deferred tax liabilities (note 6)

 

332

 

409

 

350

 

Defined benefit pension and post-retirement liabilities (note 5)

 

4 623

 

4 268

 

4 327

 

Contract liabilities

 

1 036

 

1 244

 

1 113

 

Deferred revenue and other long-term liabilities

 

824

 

1 687

 

852

 

Deferred revenue

 

738

 

891

 

764

 

Other (note 8)

 

86

 

796

 

88

 

Provisions (note 9)

 

538

 

721

 

572

 

Non-current liabilities

 

11 816

 

11 501

 

10 042

 

Short-term interest-bearing liabilities (notes 8, 10)

 

753

 

548

 

994

 

Short-term lease liabilities (notes 8, 12)

 

254

 

0

 

0

 

Other financial liabilities (note 8)

 

883

 

241

 

891

 

Current income tax liabilities

 

217

 

233

 

268

 

Trade payables (note 8)

 

4 181

 

3 584

 

4 773

 

Contract liabilities

 

2 694

 

2 473

 

2 383

 

Accrued expenses, deferred revenue and other liabilities

 

3 922

 

4 104

 

3 940

 

Deferred revenue

 

155

 

155

 

155

 

Salaries, wages and social charges

 

1 641

 

1 735

 

1 426

 

Other

 

2 127

 

2 214

 

2 359

 

Provisions (note 9)

 

840

 

1 038

 

855

 

Current liabilities

 

13 745

 

12 221

 

14 104

 

Total shareholders’ equity and liabilities

 

40 579

 

39 596

 

39 517

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities, EUR million

 

4 403

 

3 717

 

3 820

 

Shareholders’ equity per share, EUR

 

2.67

 

2.83

 

2.73

 

Number of shares (1 000 shares, excluding treasury shares)

 

5 598 710

 

5 587 547

 

5 593 162

 

 

March 31, 2018 comparative statement of financial position presented for the adoption of IFRS 15, Revenues from Contracts with Customers, has been revised from that presented in the first quarter 2018 interim report. Refer to note 1, Basis of preparation.

 

The above condensed consolidated statement of financial position should be read in conjunction with accompanying notes.

 

24


 

Consolidated statement of cash flows (condensed, unaudited)

 

EUR million

 

Q1’19

 

Q1’18

 

Cash flow from operating activities

 

 

 

 

 

Loss for the period

 

(444

)

(191

)

Adjustments

 

 

 

 

 

Depreciation and amortization