TIDMNOKIA
Nokia Corporation
Interim report
October 24, 2019 at 08:00 (CET +1)
Nokia Corporation Financial Report for Q3 and January-September 2019
Solid Q3 and expected strong Q4; Lowering full year 2019 and full year
2020 outlook due to margin pressure and additional investment needs
-- Strong performance in Nokia Software, Nokia Enterprise and IP routing
-- 5G momentum continues; 48 deals and 15 live networks launched
-- Dividend payments paused to increase investments in 5G and strategic
focus areas and to strengthen cash position
-- Long term target operating margin of 12-14% supported by our end-to-end
portfolio, diversification and patent licensing
This is a summary of the Nokia Corporation financial report for Q3 and
January-September 2019 published today. The complete financial report
for Q3 and January-September 2019 with tables is available at
https://www.globenewswire.com/Tracker?data=S7UGyGJEpVLglHNoYyuoYHlPhFyc4Sh6k-1OZdeL4t2BYIMCikgrRJnvpK-cuAgzDpSYhQOimoFpkWcJh-3Ca34JlJ501gbKo-GSkcTtBdc=
www.nokia.com/financials. Investors should not rely on summaries of our
financial reports only, but should review the complete financial reports
with tables.
RAJEEV SURI, PRESIDENT AND CEO, ON Q3 2019 RESULTS
Nokia delivered a solid third quarter, with positive free cash flow;
widespread sales growth; solid operating margin; strong performances in
Nokia Enterprise, Nokia Software and IP Routing; and good progress
towards meeting our 2019 cost reduction goals. We are proud to have
launched 15 live 5G networks with customers, including Sprint, Verizon,
AT&T and T-Mobile in the US; Vodafone Italy and Zain in Saudi Arabia; as
well as SKT, KT and LGU+ in Korea.
Many of our businesses are performing well and we expect Q4 to be strong,
with a robust operating margin and an increase in net cash of
approximately EUR 1.2 billion. At the same time, some of the risks that
we flagged previously related to the initial phase of 5G are now
materializing. In particular, our Q3 gross margin was impacted by
product mix; a high cost level associated with our first generation 5G
products; profitability challenges in China; pricing pressure in early
5G deals; and uncertainty related to the announced operator merger in
North America.
We expect that we will be able to progressively mitigate these issues
over the course of next year. To do so, we will increase investment in
5G in order to accelerate product roadmaps and product cost reductions,
and in the digitalization of internal processes to improve overall
productivity. We will also continue to invest in our enterprise and
software businesses, which are developing rapidly and performing well.
Given these investments and the risks we see materializing, we are
adjusting our targets for full-year 2019 and 2020; and we expect our
recovery to drive improvement in our 2021 financial performance relative
to 2020.
I am confident that our strategy remains the right one. We continue to
focus on leadership in high-performance end-to-end networks with
Communication Service Providers; strong growth in enterprise;
strengthening our software business; and diversification of licensing
into IoT and consumer electronics.
As I look to the future, it is clear to me that Nokia has some unique
advantages. We have a powerful, end-to-end portfolio that allows us to
benefit from 5G investments across all network domains. We have a
demonstrated ability to drive value and cash flow through product
leadership. We have successful diversification into enterprise and
software well underway. We have a large patent licensing business that
is sustainable and cash generative over time, with opportunities to
enter new growth segments. We have meaningful opportunities to drive
further cost reductions through digitalization and automation.
These advantages give me confidence in our ability to create value for
our shareholders and achieve our longer-term operating margin target.
Q3 2019 and January-September 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.
Constant Constant
EUR million (except YoY currency YoY currency
for EPS in EUR) Q3'19 Q3'18 change YoY change Q1-Q3'19 Q1-Q3'18 change YoY change
----- ------ ------- ----------- -------- -------- -------- -----------
Net sales 5 686 5 458 4% 1% 16 412 15 695 5% 2%
Operating profit/(loss) 264 (54) (318) (611)
Operating margin % 4.6% (1.0)% 560bps (1.9)% (3.9)% 200bps
EPS, diluted 0.01 (0.02) (0.10) (0.13)
Operating profit/(loss)
(non-IFRS) 478 487 (2)% 869 1 060 (18)%
Operating margin %
(non-IFRS) 8.4% 8.9% (50)bps 5.3% 6.7% (140)bps
EPS, diluted (non-IFRS) 0.05 0.06 (17)% 0.07 0.10 (30)%
Net cash and current
financial investments(1) 344 1 879 (82)% 344 1 879 (82)%
----- ------ ------- ----------- -------- -------- --------
(1) Net cash and current financial investments does not include lease
liabilities.
-- Net sales in Q3 2019 were EUR 5.7 billion, compared to EUR 5.5 billion in
Q3 2018. On a constant currency basis, net sales increased 1%. Our solid
overall topline performance was driven by improved industry demand and
the competitiveness of our end-to-end portfolio, with growth across four
out of six regions and all customer types.
-- Non-IFRS diluted EPS in Q3 2019 was EUR 0.05, compared to EUR 0.06 in Q3
2018, primarily driven by lower gross profit in Networks and a net
negative fluctuation in financial income and expenses. This was partially
offset by higher gross profit in Nokia Software and continued progress
related to Nokia's cost savings program, which resulted in lower
operating expenses across Networks, Nokia Software and Nokia
Technologies.
-- Reported diluted EPS in Q3 2019 was EUR 0.01, compared to negative EUR
0.02 in Q3 2018, primarily driven by continued progress related to
Nokia's cost savings program and a gain on defined benefit plan
amendments, partially offset by higher income taxes.
-- In Q3 2019, net cash and current financial investments decreased
sequentially by approximately EUR 160 million. Within this, we generated
positive net cash from operating activities, which partially offset cash
outflows from investing and financing activities, including the payment
of the quarterly dividend.
-- Full year 2019 and full year 2020 outlook lowered primarily due to margin
pressure, additional 5G investments and additional digitalization
investments.
NOKIA'S LONGER TERM VALUE DRIVERS
1. Unique end-to-end Nokia's unique end-to-end portfolio will drive
portfolio stronger share of wallet with service provider
and enterprise customers. Portfolio allows Nokia
to benefit from virtuous 5G investment cycle in
multiple capital expenditure domains (mobile access,
fixed access, IP routing, optical networks and
software).
----------------------------- --------------------------------------------------------
2. Value through product Nokia has a demonstrated ability to create value
leadership and drive cash flow through product leadership.
Examples include FP4-based routing and PSE-3 based
optical products, best-performing 4G networks,
automated services, leading small cell and fixed
wireless access portfolio.
----------------------------- --------------------------------------------------------
3. Successful diversification Nokia's successful diversification into high growth
strategy enterprise business and medium growth software
business is well underway. Both are meaningfully
accretive opportunities for our margins, as well
as our cash position.
----------------------------- --------------------------------------------------------
4. Sustainable patent Nokia's strong and constantly growing patent portfolio
licensing provides long-term, highly profitable and cash
generative opportunities, including extension
into new segments, including multiple IoT verticals
and consumer electronics.
----------------------------- --------------------------------------------------------
5. Structural cost reductions Nokia has identified additional opportunities
for meaningful cost reductions spanning both cost
of sales and operating expenses, which will also
help to drive improved cash performance. Opportunities
include: reductions enabled by digitalization
and automation of processes, product cost innovation
(such as System on Chip in mobile, common software
foundation in Nokia Software), ongoing R&D efficiencies
and related site consolidation and improved product
serviceability.
----------------------------- --------------------------------------------------------
DIVID
Beginning with the distribution for the financial year 2018, Nokia
started paying dividends in quarterly instalments. Under the
authorization by the Annual General Meeting held on May 21, 2019, the
Board of Directors may resolve an aggregate maximum annual distribution
of EUR 0.20 per share to be paid quarterly during the authorization
period, unless the Board decides otherwise for a justified reason. On
the same day, the Board resolved to distribute EUR 0.05 per share as the
first instalment of the dividend. On July 25, 2019, the Board resolved
to distribute EUR 0.05 per share as the second instalment of the
dividend.
On October 24, 2019, the Board resolved to not distribute the third and
fourth quarterly instalments of the dividend for the financial year
2018, in order to: a) guarantee Nokia's ability to increase 5G
investments, b) continue investing in growth in strategic focus areas of
enterprise and software and c) strengthen Nokia's cash position. This is
in accordance with Nokia's dividend policy, which states that dividend
decisions are made taking into account Nokia's cash position and
expected cash flow generation. Over the long term, Nokia continues to
target to deliver an earnings-based dividend. The Board will seek a
dividend authorization from the next Annual General Meeting, and will
continue to review dividend distributions on a quarterly basis. The
Board expects to resume dividend distributions after Nokia's net cash
position improves to approximately EUR 2 billion.
OUTLOOK
Full Year 2019 Metric
Non-IFRS diluted earnings EUR 0.21 plus or minus 3 cents (updated from
per share EUR 0.25 - 0.29), which mathematically implies
a Q4 2019 non-IFRS diluted EPS midpoint of approximately
EUR 0.135
---------------------------------------------------------
Non-IFRS operating margin 8.5% plus or minus 1 percentage point (updated
from 9 - 12%), which mathematically implies
a Q4 2019 non-IFRS operating margin midpoint
of approximately 16.5%
---------------------------------------------------------
Recurring free cash Somewhat negative (updated from slightly positive),
flow(1) which mathematically implies a sequential increase
in net cash to approximately EUR 1.5 billion
at the end of 2019
---------------------------------------------------------
Full Year 2020
Non-IFRS diluted earnings EUR 0.25 plus or minus 5 cents (updated from
per share EUR 0.37 - 0.42)
---------------------------------------------------------
Non-IFRS operating margin 9.5% plus or minus 1.5 percentage points (updated
from 12 - 16%)
---------------------------------------------------------
Recurring free cash Positive (updated from clearly positive)
flow(1)
---------------------------------------------------------
Long term (3 to 5 years)
Non-IFRS operating margin 12 -- 14% (new)
---------------------------------------------------------
Annual distribution to An earnings-based growing dividend of approximately
shareholders 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 perform approximately in-line with our
primary addressable market in full year 2019 and full year 2020, as we
further prioritize profitability and cash, while continuing to drive
growth in our Nokia Software and Nokia Enterprise businesses. (This is an
update to earlier commentary to outperform our primary addressable market
in full year 2019 and over the longer-term.) On a constant currency basis,
we expect our primary addressable market to grow slightly in full year
2019, and for growth to continue in full year 2020;
-- Competitive intensity has increased in some accounts as some competitors
seek to take share in the early stage of 5G, which is particularly
impacting Mobile Access. (This is an update to earlier commentary that
competitive intensity could increase);
-- Additional 5G investments focused on accelerating our product roadmaps
and cost competitiveness. Investment areas include System on Chip based
5G hardware, including diversifying and strengthening the related
supplier base (new commentary);
-- Additional digitalization investments focused on driving automation and
productivity, including further simplification of IT tools and
operational processes (new commentary);
-- Temporary capital expenditure constraints in North America related to
customer merger activity, as well as other potential mergers or
acquisitions by our customers (This is an update to earlier commentary
for potential mergers or acquisitions by our customers);
-- 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 will have seasonality characterized by a
particularly weak first quarter, a strong second quarter, a solid third
quarter and an expected strong fourth quarter (This is an update to
earlier commentary for an expected soft third quarter and an expected
particularly strong fourth quarter);
-- Some customers are reassessing their vendors in light of security
concerns, creating near-term pressure to invest in order to secure
long-term benefits;
-- Our expectation that we will improve our R&D productivity and reduce
support function costs through the successful execution of our cost
savings program;
-- Our product and regional mix, including the impact of the high cost level
associated with our first generation 5G products (This is an update to
our earlier commentary, providing additional details); 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 400 million in full year 2019 and approximately EUR 350 million over
the longer-term (This is an update to earlier commentary for non-IFRS
financial income and expenses to be an expense of approximately EUR 350
million in full year 2019);
-- 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 500 million in
full year 2019 and approximately EUR 450 million over the longer term
until our US or Finnish deferred tax assets are fully utilized. (This is
an update to earlier commentary for cash outflows related to income taxes
of approximately EUR 450 million in full year 2019); and
-- Capital expenditures of approximately EUR 700 million in full year 2019
and approximately EUR 600 million over the longer-term.
NOKIA FINANCIAL RESULTS
Constant Constant
EUR million (except for YoY currency YoY currency
EPS in EUR) Q3'19 Q3'18 change YoY change Q1-Q3'19 Q1-Q3'18 change YoY change
------------------------------ ----- ------ ------- ----------- -------- -------- -------- -----------
Net sales 5 686 5 458 4% 1% 16 412 15 695 5% 2%
Networks 4 434 4 265 4% 1% 12 770 12 129 5% 2%
Nokia Software 677 623 9% 5% 1 898 1 775 7% 3%
Nokia Technologies 358 351 2% 2% 1 112 1 077 3% 2%
Group Common and Other 236 236 0% 0% 720 768 (6)% (6)%
Non-IFRS exclusions (2) (4) (50)% (29) (13) 123%
Gross profit 1 969 2 019 (2)% 5 614 5 684 (1)%
Operating profit/(loss) 264 (54) (318) (611) (48)%
Networks 128 178 (28)% (7) 258 (103)%
Nokia Software 156 75 108% 286 117 144%
Nokia Technologies 294 290 1% 919 856 7%
Group Common and Other (100) (56) (329) (171)
Non-IFRS exclusions (214) (541) (60)% (1 187) (1 671) (29)%
Operating margin % 4.6% (1.0)% 560bps (1.9)% (3.9)% 200bps
----- ------ ------- -------- -------- --------
Gross profit (non-IFRS) 2 006 2 141 (6)% 5 765 6 120 (6)%
Operating profit/(loss)
(non-IFRS) 478 487 (2)% 869 1 060 (18)%
Operating margin % (non-IFRS) 8.4% 8.9% (50)bps 5.3% 6.7% (140)bps
----- ------ ------- -------- -------- --------
Financial income and expenses (98) (60) 63% (326) (224) 46%
Income taxes (80) (15) 433% 108 89 21%
Profit/(loss) for the period 87 (127) (545) (752) (28)%
EPS, diluted 0.01 (0.02) (150)% (0.10) (0.13) (23)%
----- ------ ------- -------- -------- --------
Financial income and expenses
(non-IFRS) (113) (48) 135% (291) (247) 18%
Income taxes (non-IFRS) (101) (133) (24)% (161) (275) (41)%
Profit/(loss) for the period
(non-IFRS) 267 309 (14)% 409 532 (23)%
EPS, diluted (non-IFRS) 0.05 0.06 (17)% 0.07 0.10 (30)%
----- ------ ------- -------- -------- --------
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
Constant Constant
YoY currency YoY currency
EUR million Q3'19 Q3'18 change YoY change Q1-Q3'19 Q1-Q3'18 change YoY change
----- ----- ------ ----------- -------- -------- ------ -----------
Asia-Pacific 1 198 1 050 14% 9% 3 173 2 892 10% 6%
Europe 1 614 1 520 6% 6% 4 725 4 573 3% 3%
Greater China 425 540 (21)% (23)% 1 374 1 543 (11)% (12)%
Latin America 341 323 6% 2% 1 005 927 8% 6%
Middle East &
Africa 402 432 (7)% (9)% 1 257 1 310 (4)% (6)%
North America 1 705 1 594 7% 2% 4 877 4 449 10% 4%
Total 5 686 5 458 4% 1% 16 412 15 695 5% 2%
----- ----- ------ ----------- -------- -------- ------ -----------
Net sales by customer type
Constant Constant
YoY currency YoY currency
EUR million Q3'19 Q3'18 change YoY change Q1-Q3'19 Q1-Q3'18 change YoY change
----- ----- ------ ----------- -------- -------- ------ -----------
Communication service
providers 4 780 4 632 3% 0% 13 742 13 111 5% 1%
Enterprise 333 256 30% 27% 910 796 14% 12%
Licensees 358 351 2% 2% 1 112 1 052 6% 4%
Other(1) 215 219 (2)% (1)% 648 736 (12)% (12)%
Total 5 686 5 458 4% 1% 16 412 15 695 5% 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 Nokia Enterprise business is performing well. Net sales to
enterprise customers, excluding the third party integration business
that we are exiting, grew 29% on a reported basis and 26% on a constant
currency basis in Q3 2019, and grew 14% on a reported basis and 12% on a
constant currency basis in the first nine months of 2019.
Nokia, Q3 2019 compared to Q3 2018, non-IFRS
Nokia non-IFRS net sales grew 4% as our customers continued to invest in
their networks in preparation for the rise in broadband traffic driven
by 5G. On a constant currency basis, Nokia non-IFRS net sales grew 1%.
Our solid overall topline performance in Q3 2019 reflected improved
industry demand and the competitiveness of our end-to-end portfolio,
with growth across four out of six regions and all customer types. In Q3
2019, we continued to make progress with our strategy to diversify and
grow, with strong performance in Nokia Software and with enterprise
customers.
The strong growth in Nokia Software net sales was primarily due to the
timing of completions and acceptances of certain projects. To a lesser
extent, net sales also benefitted from Nokia Software's improved product
and go-to-market capabilities, with growth in both core networks and
applications.
The strong growth in net sales to enterprise customers was primarily
driven by increased demand for mission-critical networking solutions in
industries including utilities and the public sector, with continued
momentum in private wireless solutions. Net sales also benefitted from
the timing of completions and acceptances of certain projects.
The overall decrease in Nokia non-IFRS gross profit was primarily due to
lower gross margin in Networks. We experienced relatively high 5G
product costs in Networks, as well as elevated levels of deployment
services, consistent with being in the initial phase of 5G. This was
partially offset by net sales growth in both Networks and Nokia Software,
as well as higher gross margin in Nokia Software. In Q3 2019, Nokia
non-IFRS gross profit benefitted from lower incentive accruals.
The decrease in Nokia non-IFRS operating profit was driven by the lower
non-IFRS gross profit, partially offset by continued progress related to
Nokia's cost savings program. In Q3 2019, Nokia non-IFRS operating
profit benefitted from lower incentive accruals.
Nokia, January-September 2019 compared to January-September 2018,
reported
Nokia net sales grew 5% in the first nine months of 2019 as our
customers continued to invest in their networks in preparation for the
rise in broadband traffic driven by 5G. On a constant currency basis,
Nokia net sales grew 2% in the first nine months of 2019. Excluding
approximately EUR 80 million of one-time licensing net sales in the
first nine months of 2019 and EUR 20 million in the first nine months of
2018, Nokia net sales grew 4%.
Our solid overall topline performance in the first nine months 2019
reflected improved industry demand and the competitiveness of our
end-to-end portfolio, with growth across four out of six regions and all
customer types. In the first nine months of 2019, we continued to make
progress with our strategy to diversify and grow, with strong
performance in Nokia Software and with enterprise customers.
The overall decrease in Nokia gross profit in the first nine months of
2019 was primarily due to lower gross margin in Networks. We experienced
relatively high 5G product costs in Networks, as well as elevated levels
of deployment services, consistent with being in the initial phase of
5G. This was partially offset by lower costs related to network
equipment swaps, net sales growth in both Networks and Nokia Software,
as well as higher gross margin in Nokia Software. In the first nine
months of 2019, Nokia gross profit benefitted from lower incentive
accruals.
The decrease in Nokia operating loss in the first nine months of 2019
was driven by continued progress related to Nokia's cost savings program,
a gain on defined benefit plan amendments and lower restructuring and
associated charges, partially offset by the lower gross profit. In the
first nine months of 2019, Nokia operating loss benefitted from lower
incentive accruals.
CASH AND CASH FLOW IN Q3 2019
In Q3 2019, Nokia's free cash flow was positive EUR 299 million, driven
by:
-- Adjusted net profit of EUR 769 million;
-- Cash outflows related to net working capital primarily due to a decrease
in liabilities, partially offset by a decrease in receivables;
-- Continued cash outflows related to restructuring; and
-- Capital expenditures and income taxes.
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 as supply chain and inventory optimization. Senior leaders of Nokia
have a significant part of their incentives tied to free cash flow
improvement targets in 2019 and beyond.
QoQ YTD
EUR million, at end of period Q3'19 Q2'19 change Q4'18 change
------- ------- --------- ----- ---------
Total cash and current financial
investments 4 824 4 788 1% 6 873 (30)%
Net cash and current financial
investments(1) 344 502 (31)% 3 053 (89)%
------- ------- --------- ----- ---------
(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 third quarter 2019, Nokia's total cash and current financial
investments ("total cash") increased by EUR 36 million and Nokia's net
cash and current financial investments ("net cash") decreased by EUR 158
million.
Foreign exchange rates had an approximately EUR 30 million negative
impact on net cash.
In the third quarter 2019, net cash from operating activities was EUR
464 million:
-- Nokia's adjusted profit before changes in net working capital was EUR 769
million in the third quarter 2019.
-- In the third quarter 2019, Nokia generated a decrease in net cash related
to net working capital of approximately EUR 150 million. Excluding
approximately EUR 100 million of restructuring and associated cash
outflows, Nokia generated an approximately EUR 50 million decrease in net
cash related to net working capital. This decrease was due to a decrease
in liabilities, partially offset by a decrease in receivables.
Inventories were approximately flat in the quarter.
-- The decrease in receivables was approximately EUR 390 million, and
was primarily due to improved collections achieved through higher
sale of receivables. In the normal course of business, to manage
our credit risk and working capital cycle, Nokia sells trade
receivables to various financial institutions without recourse.
-- The decrease in liabilities was approximately EUR 440 million, and
was primarily due to a decrease in deferred revenues and advance
payments, a decrease in liabilities related to employee benefits
and a decrease in accounts payable.
-- In addition, cash taxes amounted to an outflow of approximately EUR 110
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 third quarter 2019, net cash used in investing activities
primarily related to capital expenditures of approximately EUR 190
million.
In the third quarter 2019, net cash used in financing activities
primarily related to paying the second quarterly instalment of the
dividend and the withholding taxes related to the first instalment,
totaling approximately EUR 320 million and lease 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
500 million reduction of non-IFRS operating expenses and production
overheads ("fixed costs") in full year 2020 compared to full year 2018,
of which EUR 350 million is expected to come from operating expenses and
EUR 150 million is expected to come from cost of sales. This reflects a
EUR 150 million reduction in our expected operating expense savings and
a EUR 50 million reduction in our expected cost of sales savings. The
change from a net EUR 700 million reduction to a net EUR 500 million
reduction is primarily due to our expectation to make additional 5G
investments and additional digitalization investments.
Note that, since the announcement of our most recent cost savings
program on October 25, 2018, net foreign exchange fluctuations have
resulted in an increase in estimated full year 2020 fixed costs of
approximately EUR 180 million, creating an additional headwind to
achieve the earlier net reduction.
The following table summarizes the financial information related to our
cost savings program as of the end of the third quarter 2019.
In EUR million, approximately(1) Q3'19
-----
Balance of restructuring and associated liabilities
for prior programs 750
+ Charges in the quarter 70
- Cash outflows in the quarter 100
= Ending balance of restructuring and associated
liabilities 720
of which restructuring provisions 520
of which other associated liabilities 200
Total expected restructuring and associated charges, related
to our most recent cost savings program
(rounded to the nearest EUR 50 million) 900
- Cumulative recorded 440
= Charges remaining to be recorded 460
Total expected restructuring and associated cash outflows
(rounded to the nearest EUR 50 million) 1 550
- Cumulative recorded 340
= Cash outflows remaining to be recorded 1 210
(1) 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 table below 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. Please note that we
exclude the impact of lower incentive accruals from our definition of
"Recurring annual cost savings".
In the first nine months of 2019, excluding the impact of the incentive
accruals, we achieved approximately EUR 180 million of structural fixed
costs savings, compared to the first nine months of 2018. Despite net
foreign exchange fluctuations resulting in an increase in estimated full
year 2019 fixed costs of approximately EUR 130 million, we are well on
our way to meet the cost reduction targets for 2019.
Expected amounts for
Beyond
In EUR million, approximately FY 2019 FY 2020 FY 2020 Total
rounded to the nearest EUR 50 million
Recurring annual cost savings 200 300 - 500
- operating expenses 150 200 - 350
- cost of sales 50 100 - 150
Restructuring and associated charges 500 400 - 900
Restructuring and associated cash outflows 550 450 550 1 550
Charges related to network equipment swaps 150 - - 150
Cash outflows related to network equipment
swaps 150 - - 150
------------------------------------------- ------- ------- -------- -----
The expected timeline for the related cash outflows has been adjusted,
with expected cash outflows in full year 2019 moving from EUR 700
million to EUR 550 million, expected cash outflows in full year 2020
moving from EUR 350 million to EUR 450 million and expected cash
outflows beyond 2020 moving from EUR 500 million to EUR 550 million. The
related restructuring charges are expected to total EUR 900 million.
OPERATIONAL HIGHLIGHTS
Nokia showed robust momentum in Q3 2019 across its key markets and
around the globe, particularly in 5G, where Nokia's technology is now
present in all regions in the world.
In the first pillar of our strategy, leading in high-performance,
end-to-end networks with communication service providers:
Nokia signed multiple 5G commercial agreements during the period and the
total number of 5G commercial agreements is now 48. Over half include
more than radio from our end-to-end 5G portfolio. Fifteen of those
networks are now live, including Sprint and Verizon in the US.
Nokia continued to strengthen its 5G foothold in Japan, where it was
selected by KDDI as a primary partner to upgrade its network for 5G.
Nokia also entered into a strategic agreement with Iliad for the
deployment of its 5G network in France and Italy. In New Zealand, Nokia
secured a deal with Vodafone New Zealand to deploy a 5G network in the
country. The network, which will be launched in Auckland, Wellington,
Christchurch and Queenstown in late 2019, will include Nokia's AirScale
radio access network, cloud-native core as well as design services,
providing further proof of the strength of Nokia's end-to-end portfolio.
Nokia also deployed its 5G portfolio in Vietnam, where Viettel and Nokia
broadcasted the country's first end-to-end 5G trial network in Ho Chi
Minh City.
Nokia further showcased its end-to-end 5G leadership with a new Future X
Lab in Finland. The Lab will enable customers to experience Nokia's full
end-to-end portfolio of 5G equipment, software and services, allowing
communications service providers, enterprises and infrastructure
providers to learn and understand the techno-economic power of a 5G
end-to-end network to better serve their customers and unleash new
value.
Several 5G deals and trials, including Smart in the Philippines,
Vodafone New Zealand and Viettel, involved IP Routing and Optical
Networks products.
Further showcasing its market-leading technology within IP and Optical,
Nokia completed the world's first single-carrier terabit-per-second
field trial, setting an optical transmission capacity record over
Etisalat's fibre network in the United Arab Emirates.
In Fixed Access, Nokia secured several Fiber To The Home (FTTH) deals
with top-tier customers. After the end of the quarter, Nokia also
announced it was teaming up with Telia Company to bring its 5G Fixed
Wireless Access solution to customers across Finland.
In Q3 2019, Nokia was also recognized as a "Leader" in Managed Services
by industry analyst firm GlobalData.
In the second pillar of our strategy, expanding network sales to select
vertical markets needing high-performing, secure networks:
Nokia continued to strengthen its position with enterprises. Nokia
worked with Telefónica Peru to enable automated, digital mining
operations for Minera Las Bambas, one of the world's largest copper
mines. The five-year contract will see Nokia build, deploy and support a
private LTE network 4 600 meters above sea level.
Nokia, NTT DOCOMO, INC. and OMRON Corporation agreed to conduct joint
field trials using 5G at their plants and other production sites. As
part of the trial, the partners will leverage 5G connectivity to prove
the feasibility of a layout-free production line with Autonomous Mobile
Robots (AMRs) as well as real-time coaching using AI/IoT.
Nokia was selected by RigNet to upgrade its microwave communications
network which supports the mission-critical communication needs of its
multiple oil and gas customers located in the Gulf of Mexico, covering
more than 55,000 square miles. The network upgrade will see RigNet
customers offered 4G LTE services with support for 5G services in the
future.
In the third pillar of our strategy, developing a strong software
business at scale:
Three UK and Nokia launched the world's first 5G-ready fully integrated
cloud core network. The new 5G-ready core network, which sits in a
virtual environment, offers increased security, flexibility and cost
savings, allowing Three to scale more quickly and efficiently and is a
critical building block for Three to deliver the UK's fastest 5G
network.
Nokia also secured deals with major operators in North America as well
as MTN of South Africa, Orange of France and Telefonica Brazil.
Just after the quarter ended, Analysys Mason ranked Nokia as the top
telecom software provider by market share. According to Analysys Mason's
findings, Nokia is significantly improving its 5G-ready mobile network
management offering by evolving it to be cloud-native and including
value features that communication service providers find valuable, while
also expanding the capabilities and commercial customers for its leading
platforms.
In the fourth pillar of our strategy, now focused primarily on
licensing:
Shortly after the quarter ended, Nokia announced it has declared more
than 2 000 patent families to the European Telecommunications Standards
Institute (ETSI) as essential for the 5G standard, reflecting its
continuing leadership in cellular technology R&D and standardization.
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 and any expected future dividends; C) expectations and
targets, and any mathematical analysis derived from such expectations
and targets, regarding financial performance, results, the timing of
receivables, 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 competition within our market; market
developments, general economic conditions and structural 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; as well as 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 of software
and other new products, including 5G; M) expectation regarding our
customers' future capital expenditure constraints; and N) 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 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; 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
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 October
24, 2019.
--Nokia plans to publish its fourth quarter and full year 2019 results
on February 6, 2020.
Media Enquiries:
Nokia
Communications
Tel. +358 (0) 10 448 4900
Email:
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press.services@nokia.com
Katja Antila, Head of Media Relations
Investor Enquiries:
Nokia Investor Relations
Tel. +358 4080 3 4080
Email:
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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.
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www.nokia.com
Attachment
-- Nokia Corporation Financial Report for Q3 and January-September 2019
https://ml-eu.globenewswire.com/Resource/Download/a7e66648-0cf5-4610-bb29-fd827ae86d53
(END) Dow Jones Newswires
October 24, 2019 01:00 ET (05:00 GMT)
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