Nokia Reports Q1 Loss

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4/25/2019

ESPOO, Finland -- Nokia issued its interim report for Q1 2019.

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.

Table 1: Q1 2019 Reported and Non-IFRS 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%
Operating profit/(loss) -524 -336 56%
Operating margin % -10.40% -6.80% (360)bps
EPS, diluted -0.08 -0.06
Operating profit/(loss) (non-IFRS) -59 239
Operating margin % (non-IFRS) -1.20% 4.80% (600)bps
EPS, diluted (non-IFRS) -0.02 0.02
Net cash and current financial investments* 1 991 4 179 -52%
Source: Nokia
* 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.

    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.

    Table 2: 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* 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.
    Source: Nokia
    * 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.

    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.

    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.

    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.

    Nokia Corp. (NYSE: NOK)

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