29 October 2020 at 08:00 (CET +1)
Nokia Corporation Interim Report for Q3 and January-September 2020
Solid margin and free cash flow; net sales decline primarily due to services
This is a summary of the Nokia Corporation Interim Report for Q3 and January-September 2020 published today. The complete Interim Report for Q3 and January-September 2020 with tables is available at www.nokia.com/financials. Investors should not rely on summaries of our financial reports only, but should review the complete financial reports with tables.
PEKKA LUNDMARK, PRESIDENT AND CEO, ON Q3 2020 RESULTS
In my first quarter as CEO of Nokia, I have seen both opportunities and challenges. As our solid Q3 results demonstrate, we are making good progress in many parts of our business. Profitability was up on a year-on-year basis, we had the fifth consecutive quarter of solid free cash flow, Nokia Enterprise maintained its double-digit growth, and we continued to strengthen the competitiveness and cost position of our mobile radio products.
When I look ahead, however, the good progress we have made is not enough. Our financial performance in 2021 is expected to be challenging, and more change is needed. We have lost share at one large North American customer, see some margin pressure in that market, and believe we need to further increase R&D investments to ensure leadership in 5G. In fact, we have decided that we will invest whatever it takes to win in 5G. Our customers are counting on us and we will be there for them.
We announced separately today some important changes to our operating model. The goal of this new model is to better align with the needs of our customers, and through that improve our performance and create shareholder value. The changes announced today mark a shift from end-to-end as a strategic principle to a more focused approach with each business group having a distinct role in our overall strategy.
Each of the four new business groups will have P&L responsibility and ownership of creating a path to becoming one of the market leaders in their respective sector. The changes optimize our operating model for better accountability and transparency, increased simplicity and cost-efficiency.
We plan to share more details about our strategy in December and at a Capital Markets Day in March. A more rigorous approach to capital allocation will be key to our strategic direction. As a technology company we will invest to win in those segments where we choose to compete.
Equally important is our view of the future, where we see an opportunity to lead in “network-as-a-service” business models for telecom operators and enterprise customers. This change offers a broad opportunity for Nokia to provide a trusted, software-led and cloud-based network capability that can be rapidly integrated, deployed, and self-managed as a complete service, allowing us to move up the value chain and provide additional “network plus” value-adding services. This vision will take time to become a reality, but Nokia is well positioned to win given our deep experience in delivering carrier-grade network performance and extensive work with webscale companies and enterprises.
I have no doubt that the potential of Nokia is substantial, even if delivering on that promise will take time. We expect to stabilize our financial performance in 2021 and deliver progressive improvement towards our long-term goal after that. We intend to provide an update on long-term outlook at the latest on Capital Markets Day. I am confident that with the right strategy, focus, and operating model we will be successful. Today, we embark on that journey.
NOKIA FINANCIAL RESULTS
|EUR million (except for EPS in EUR)||Q3'20||Q3'19||YoY change||Constant currency YoY change||Q1-Q3'20||Q1-Q3'19||YoY change||Constant currency YoY change|
|Net sales||5 294||5 686||(7)%||(3)%||15 299||16 412||(7)%||(6)%|
|Networks||4 112||4 434||(7)%||(3)%||11 825||12 770||(7)%||(6)%|
|Nokia Software||585||677||(14)%||(10)%||1 795||1 898||(5)%||(4)%|
|Nokia Technologies||331||358||(8)%||(8)%||1 020||1 112||(8)%||(8)%|
|Group Common and Other||275||236||17%||16%||691||720||(4)%||(5)%|
|Gross profit||1 976||1 969||0%||5 760||5 614||3%|
|Group Common and Other||(138)||(100)||(499)||(329)|
|Non-IFRS exclusions||(136)||(214)||(581)||(1 187)|
|Operating margin %||6.6%||4.6%||200bps||2.9%||(1.9)%||480bps|
|Net sales (non-IFRS)||5 294||5 688||(7)%||(3)%||15 301||16 441||(7)%||(6)%|
|Gross profit (non-IFRS)||1 981||2 006||(1)%||5 785||5 765||0%|
|Operating profit (non-IFRS)||486||478||2%||1 025||869||18%|
|Operating margin % (non-IFRS)||9.2%||8.4%||80bps||6.7%||5.3%||140bps|
|Financial income and expenses||(73)||(98)||(26)%||(134)||(326)||(59)%|
|Profit/(loss) for the period||203||87||133%||187||(545)|
|Financial income and expenses (non-IFRS)||(78)||(113)||(31)%||(172)||(291)||(41)%|
|Income taxes (non-IFRS)||(103)||(101)||2%||(202)||(161)||25%|
|Profit for the period (non-IFRS)||305||267||14%||653||409||60%|
|EPS, diluted (non-IFRS)||0.05||0.05||0%||0.11||0.07||57%|
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 included in Nokia Corporation Interim Report for Q3 and January-September 2020. 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 included in Nokia Corporation Interim Report for Q3 and January-September 2020.
The COVID-19 pandemic has made vividly clear the critical importance of connectivity to keep society functioning. We believe we have a resilient customer base, and we feel a sense of duty to our customers and the communities they serve.
We believe the impact of COVID-19 on Nokia’s financial performance and financial position has so far been primarily related to factory closures. Due to significant uncertainties and risks in estimating the impact of customer-related delivery and implementation challenges, we are now focusing our COVID-19 disclosure on the impact of factory closures, which have had a net sales impact of approximately EUR 200 million in the first nine months of 2020, with the majority of these net sales expected to be shifted to future periods, rather than being lost. At the end of Q3 2020, we were no longer experiencing factory closures related to COVID-19. The EUR 200 million of negative impact in the first nine months of 2020 relates primarily to Alcatel Submarine Networks within Group Common and Other, which experienced temporary factory closures that impacted Q1 2020 and Q2 2020.
COVID-19 also affected our operational costs (for example, temporary lower travel), capital expenditures (temporary delays), cash outflows related to taxes (tax relief), and net working capital (for example, lower inventories due to temporary disruptions). In full year 2020, we now expect a temporary benefit of approximately EUR 250 million due to lower travel and personnel expenses related to COVID-19, of which approximately EUR 150 million is expected to benefit operating expenses and approximately EUR 100 million is expected to benefit cost of sales.
Potential risks and uncertainties continue to exist related to the scope and duration of the COVID-19 impact and the pace and shape of the economic recovery following the pandemic.
During the COVID-19 pandemic, we have continued to advance our 5G roadmap and product evolution, as planned, and we believe that our COVID-19 mitigation actions in R&D have been successful. We believe we remain on track with our plans to drive progressive improvement over the course of 2020.
Health and safety
Naturally, Nokia’s first focus during the COVID-19 pandemic is to our employees. We have in place strict protocols for Nokia facilities and provided clear advice to our employees about how they can mitigate the risks of COVID-19 in situations where they have to go about critical work.
We have taken a range of steps, including banning international travel for Nokia employees, except for strictly-defined ‘critical’ reasons; closing all our facilities to all visitors, with the exception of people engaged in essential maintenance and services, and asking our staff to work from home wherever possible. We started implementing these measures in some regions already in January and have updated guidance as the situation has developed.
As the overwhelming majority of Nokia employees continue working remotely, we are providing guidance on how staff can maintain a healthy work-life balance and look after their physical and mental well-being.
Supporting the essential services our customers provide
The products and services that we provide have never been more critical in enabling the world to continue to function in an orderly way. We continue to work closely with all our customers, to ensure that the changing needs and requirements at this time are well understood and that we respond appropriately to them.
In Q3 2020, connectivity continued to bring together people isolated from each other by the COVID-19 pandemic. Remote working and schooling, robust delivery of basic services and smart deliveries are just some examples that have been enabled by our connectivity solutions. Our shared value project with UNICEF in Kenya continued in Q3 2020 with the first schools connected in September using our Fixed Wireless Access solution, FastMile. The work started in early 2018. The current COVID-19 pandemic has underlined the importance of connectivity to enable digital learning and inclusion.
Nokia has a global manufacturing footprint designed for optimized global supply, and to mitigate against risks such as local disruptive events, transportation capacity problems, and political risks. Our supply network consists of 25 factories around the globe and six hubs for customer fulfillment. As a result, at the Nokia level, we are not dependent on one location or entity. We have also established a global command center to manage the supply chain challenges arising from the outbreak; and we are ready to activate relevant business continuity plans should the situation in any part of our organization require this.
Impact on asset valuations
COVID-19 has affected the valuations of certain assets, including investments in non-publicly quoted assets through Nokia’s venture fund investments and pension plans, the valuation of which is inherently challenging in fast-moving market conditions. In Q3 2020, the valuation uncertainty has decreased compared to Q2 2020 but still remains elevated (for details, please refer to note 5 “Pensions and other post-employment benefits” and note 8 “Fair value of financial instruments”) in the "Financial statement information" section included in Nokia Corporation interim report for Q3 and January-September 2020).
In relation to its financial statements as of September 30, 2020, Nokia has also considered the indicators of impairment of goodwill and other intangible assets, recoverability of deferred tax assets, valuation of inventories, and collectability of trade receivables and contract assets. Based on these assessments, COVID-19 is currently not expected to have long-term effects on Nokia’s financial performance that would require adjustments to the carrying amounts of goodwill and other intangible assets or deferred tax assets. Also, Nokia has not identified any material increase in the amount of bad debt or need to adjust the valuation of inventories.
Doing our part to fight the pandemic
We also feel another sense of duty – to the societies where Nokia operates. As a global company, we have a duty to be part of the global fight against this pandemic. In Q3 2020, we also continued our support for the mHealth program with UNICEF in Indonesia where their real-time big data and artificial intelligence platform is allowing policymakers and citizens to understand the levels of physical distancing, movement and mobility at the village level. As a result of the insights from the platform, UNICEF Indonesia has been able to materially assist in the formation of evidence-based policy to fight COVID-19, ensuring a lower disease burden and a brighter future in Indonesia.
These actions demonstrate our strong commitment to supporting global efforts to end the pandemic and overcoming the disruption and challenges we currently face.
Full Year 2020
|Non-IFRS diluted earnings per share||EUR 0.23 plus or minus 3 cents (adjusted from EUR 0.25 plus or minus 5 cents)|
|Non-IFRS operating margin||9.0% plus or minus 1.0 percentage points (adjusted from 9.5% plus or minus 1.5 percentage points)|
|Recurring free cash flow1||EUR 600 million plus or minus EUR 250 million (adjusted from clearly positive)|
1 Free cash flow = net cash from/(used in) 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.
Full Year 2021
|Non-IFRS operating margin||7 - 10% (new)|
|Nokia intends to provide a long term outlook, latest at Capital Markets Day on March 18, 2021 (This is in comparison to our previous long term outlook for 12-14% non-IFRS operating margin in 3 to 5 years.) Due to ongoing work related to our strategy and new operating model, we believe it would be premature to provide a long-term outlook.|
|Long term (3 to 5 years) annual dividend distribution target: an earnings-based growing dividend of approximately 40% to 70% of non-IFRS diluted EPS, taking into account Nokia’s cash position and expected cash flow. The annual distribution would be paid as quarterly dividends.|
KEY DRIVERS OF NOKIA’S OUTLOOK
Networks and Nokia Software are expected to be influenced by factors including:
Nokia Technologies is expected to be influenced by factors including:
Additionally, our outlook is based on the following assumptions:
ANALYST CONFERENCE CALL
Nokia's analyst conference call will begin on October 29, 2020 at 3 p.m. Finnish time. A link to the webcast of the conference call will be available at www.nokia.com/financials. Media representatives can listen in via the link, or call +1-412-717-9224.
Tel. +358 10 448 4900
Katja Antila, Head of Media Relations
Nokia Investor Relations
Tel. +358 40 803 4080
We create the technology to connect the world. Only Nokia offers a comprehensive portfolio of network equipment, software, services and licensing opportunities across the globe. With our commitment to innovation, driven by the award-winning Nokia Bell Labs, we are a leader in the development and deployment of 5G networks.
Our communications service provider customers support more than 6.4 billion subscriptions with our radio networks, and our enterprise customers have deployed over 1,300 industrial networks worldwide. Adhering to the highest ethical standards, we transform how people live, work and communicate. For our latest updates, please visit us online www.nokia.com and follow us on Twitter @nokia.
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, growth management and operational key performance indicators; B) expectations, plans or benefits related to future performance of our businesses (including the expected impact, timing and duration of that impact of COVID-19 on our businesses, our supply chain and our customers’ businesses) and any future dividends including timing and qualitative and quantitative thresholds associated therewith; C) expectations and targets regarding financial performance, cash generation, results, the timing of receivables, operating expenses, taxes, currency exchange rates, hedging, cost savings, product cost reductions and competitiveness, as well as results of operations including targeted synergies, better commercial management and those results 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 competition within our market, market developments, general economic conditions and structural and legal change globally and in national and regional markets, such as China; 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, investment requirements with such rollout, and our ability to capitalize on such rollout; 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, reduction of support function costs, temporary incremental expenditures or other R&D expenditures to develop or rollout software and other new products, including 5G, ReefShark and increased digitalization; M) expectations regarding our customers' future actions, including our customers’ capital expenditure constraints and our ability to satisfy customer’s needs and retain their business; and N) statements preceded by or including “believe”, “expect”, “expectations”, “deliver”, “maintain”, “strengthen”, “target”, “estimate”, “plan”, “intend”, “assumption”, “focus”, “continue”, “should", "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 our 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 them. 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, general public health conditions (including its impact on our supply chains) 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 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 and the possibility of our customers awarding business to our competitors; 6) our ability to maintain our existing sources of intellectual property-related revenue through our intellectual property, including through licensing, establishing new sources of revenue and protecting 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; 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 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 (if any) 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; 31) risks related to undersea infrastructure; and 32) the scope and duration of the COVID-19 impact on the global economy and financial markets as well as our customers, supply chain, product development, service delivery, other operations and our financial, tax, pension and other assets, and the shape of the economic recovery following the pandemic as well as the risk factors specified in our 2019 annual report on Form 20-F published on March 5, 2020 under "Operating and financial review and prospects-Risk factors" as supplemented by the form 6-K published on April 30, 2020 under the header “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.