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Press Release -- May 1st, 2014
Source: Nokia Siemens Networks
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Networks Q1 2014 Press Release

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Networks1 Q1 2014 Press Release (PDF, 144 KB)


30 April, 2014

Q1 2014 Financial Highlights

  • First quarter 2014 net sales of EUR 2 328 million, declined 14% year-on-year. Excluding divestments of businesses not consistent with Networks’ strategic focus as well as the exiting of certain customer contracts and countries, net sales year-on-year declined approximately 10%. This was primarily due to reduced wireless infrastructure deployment activity and a negative impact related to foreign currency fluctuations, partially offset by higher net sales in core networks and LTE. Net sales decreased 25% quarter-on-quarter primarily reflecting seasonality.
  • Gross margin before specific items2 was 39.6% in the first quarter 2014, the highest in Networks’ history, and an improvement of 5.8 percentage points from the first quarter 2013. This was primarily due to a higher proportion of software sales, significant efficiency improvements in Global Services and a higher proportion of Mobile Broadband sales. Sequentially, this represented an increase of 2.0 percentage points from the fourth quarter 2013.
  • Operating expenses before specific items2 in the first quarter 2014 were EUR 705 million, down from EUR 717 million in the first quarter 2013, and down from EUR 819 million in the fourth quarter 2013. Investment in research and development was reduced in areas not consistent with Networks’ strategy and increased in areas that are, most notably LTE.
  • Underlying profitability for the eighth consecutive quarter, with the first quarter 2014 operating margin before specific items2 of 9.3%, reflecting the strong gross margin. Operating margin in the first quarter 2014 was up from 7.4% in the first quarter 2013 and down from 11.2% in the fourth quarter 2013.
  • Free cash flow was EUR 153 million in the first quarter 2014, compared to EUR 239 million in the first quarter 2013 and EUR 180 million in the fourth quarter 2013. In the first quarter 2014, Networks’ free cash flow was affected negatively by approximately EUR 110 million of restructuring-related outflows.

Corporate Developments

On April 29, 2014 Nokia announced a new strategy, a program to optimize capital structure and the leadership team of the Nokia Group, including Rajeev Suri as President and Chief Executive Officer. As part of that announcement Nokia announced that NSN will now be known as Networks and will operate under the Nokia brand. You can see the full announcement at: www.company.nokia.com/en/news. Earlier today, NSN published its Annual Report for 2013. This can be found at: www.nsn.com/about-us/company/financial. Additionally, in line with the earlier announcement, Jesper Ovesen stepped down from his role as Executive Chairman of Nokia Solutions and Networks upon the closing of the transaction whereby Nokia sold substantially all of its Devices & Services business to Microsoft on Friday April 25, 2014.

For the full content of Networks’ Interim Report for Q1 2014, please visit:

www.nsn.com/about-us/company/financial.

Nokia Solutions and Networks, also referred to as NSN, was renamed as Networks and will operate under the Nokia brand. The figures presented on a Networks standalone basis in this press release may differ from those reported by Nokia Corporation (‘Nokia’) due to the treatment of discontinued operations and certain accounting presentation differences. In addition, the presentation of underlying business performance information by Nokia and Networks differs due to presentation differences adopted by Nokia (non-IFRS information) and Networks (information before specific items) and the items excluded by each in their respective presentations.

2The before specific items financial measures exclude specific items for all periods: restructuring charges, country/contract exit charges, purchase price accounting related charges and other one-time charges. For an analysis of specific items, refer to page 15 of the Networks Q1 2014 interim report.

Operating and Financial Review

Key financials

The figures presented on a Networks standalone basis in this press release may differ from those reported by Nokia due to the treatment of discontinued operations and certain accounting presentation differences. In addition, the presentation of underlying business performance information by Nokia and Networks differs due to presentation differences adopted by Nokia (non-IFRS information) and Networks (information before specific items) and the items excluded by each in their respective presentations.

The following table sets forth the summary financial information for each of the quarters indicated. This data has been derived from our unaudited interim consolidated financial statements, which are included in the Networks Q1 2014 interim report.

The before specific items financial measures exclude specific items for all periods: restructuring charges, country/contract exit charges, purchase price accounting related charges and other one-time charges. For an analysis of specific items, refer to page 15 of the Networks Q1 2014 interim report.

References to EBITDA are to profit/loss for the period from continuing operations, before income tax expense, financial income and expenses, depreciation, amortization and share of results of associates. Accordingly, EBITDA can be extracted from the consolidated financial statements by taking profit/loss for the period and adding back income tax expense, financial income and expenses, depreciation, amortization and share of results of associates.

Networks is not presenting EBITDA or EBITDA-based measures as measures of its results of operations. EBITDA and EBITDA-based measures have important limitations as an analytical tool, and they should not be considered in isolation or as substitutes for analysis of our results of operations.

Percentage point changes are denoted by ‘pp’ in the above table.

Results of operations

The following tables set forth selected segment data from continuing operations for the quarters presented:

The before specific items financial measures exclude specific items for all periods: restructuring charges, country/contract exit charges, purchase price accounting related charges and other one-time charges. For an analysis of specific items, refer to page 15 of the Networks Q1 2014 interim report.

Percentage point changes are denoted by ‘pp’ in the above table.

For all other segment data refer to page 16 of the Networks Q1 2014 interim report.

The following table sets forth net sales by geographic area by location of customer for the quarters presented:

Net sales

The year-on-year decrease of 14% in Networks’ net sales in the first quarter of 2014 was partially due to divestments of businesses not consistent with its strategic focus, as well as the exiting of certain customer contracts and countries. Excluding these two factors, our net sales in the first quarter of 2014 declined year-on-year by approximately 10%, primarily due to lower net sales in Global Services. Mobile Broadband net sales increased slightly year-on-year. Additionally, our net sales were negatively affected by foreign currency fluctuations. Excluding the negative effect of foreign currency fluctuations and the divestments of businesses not consistent with our strategic focus, as well as the exiting of certain customer contracts and countries, our net sales would have decreased approximately 6% year-on-year.

The year-on-year decrease of 25% in Global Services net sales in the first quarter of 2014 was primarily due to a reduction in network implementation and maintenance activity, consistent with lower levels of large scale network deployments, and the exiting of certain customer contracts and countries. In the first quarter of 2014, Mobile Broadband net sales benefited from higher net sales in core networks and LTE, offset by lower net sales in other radio technologies, resulting in a slight net sales increase year-on-year. Additionally, Mobile Broadband net sales were adversely affected by shortages of certain components, which we expect to continue to impact our business at least through the end of the second quarter of 2014.

On a regional basis, compared to the first quarter of 2013, net sales in North America declined 35%, primarily due to a cyclical slow down in LTE roll-outs; in Middle East and Africa net sales declined 36% and 23%, respectively, primarily due to the focus on a specific set of countries; in Latin America net sales declined 27%, primarily due to constrained operator spending and the exit of certain projects in line with Networks’ strategy; in Asia Pacific net sales declined 24% primarily due to a decline from the height of LTE network roll-outs in the first quarter of 2013 in Korea; and in Europe net sales declined 9%, primarily due to contract exits in line with our strategy, and operator spending that, on balance, was constrained; and net sales in Greater China increased 26% primarily due to the new TD-LTE network roll-outs. For regional data, refer to refer to page 16 of the Networks Q1 2014 interim report.

The sequential decrease of 25% in Networks’ net sales in the first quarter of 2014 reflects a seasonal decrease in sales in both Global Services and Mobile Broadband. The sequential decrease in Global Services was primarily due to a reduction in network implementation and maintenance activity. The decrease in Mobile Broadband net sales was driven by decline in legacy radio technologies. On a regional basis, our net sales decreased sequentially primarily due to Asia, Middle East and Africa, and Europe and Latin America.

In the first quarter of 2014, Global Services represented 46% of Networks’ net sales, compared to 52% in the first quarter of 2013 and 50% in the fourth quarter of 2013. In the first quarter of 2014, Mobile Broadband represented 54% of our net sales, compared to 46% in the first quarter of 2013 and 50% in the fourth quarter of 2013.

At constant currency*, Networks’ net sales would have decreased 10% year-on-year and decreased 23% sequentially. Excluding the negative effect of foreign currency fluctuations and the divestments of businesses not consistent with our strategic focus, as well as the exiting of certain customer contracts and countries, our net sales would have decreased 6% year-on-year and decreased 23% sequentially.

*Excluding the impact of changes in exchange rates in comparison to the Euro, Networks’ reporting currency.

Gross margin

On a year-on-year basis, the increase in Networks’ gross margin before specific items in the first quarter of 2014 was primarily due to a higher proportion of software sales mainly in Japan, a higher gross margin in Global Services related to significant efficiency improvements as a result of its transformation program and a higher proportion of Mobile Broadband in the overall sales mix.

On a sequential basis, the increase in Networks’ gross margin before specific items in the first quarter of 2014 was primarily due to a higher proportion of software sales mainly in Japan, and a higher proportion of Mobile Broadband in the overall sales mix. The improved margin within Mobile Broadband was primarily due to lower costs in connection with the technology shift to TD-LTE in China.

Operating expenses

Networks’ research and development expenses before specific items decreased 4% year-on-year in the first quarter of 2014. On a year-on-year basis, research and development expenses before specific items were lower, primarily due to business divestments and reduced investments in business activities that are not consistent with our focused strategy, as well as increased research and development efficiency, partially offset by higher investments in areas that are consistent with our focused strategy, most notably LTE. On a sequential basis, research and development expenses before specific items decreased 7%, primarily due to lower accrued incentive expenses, which were at an elevated level in the fourth quarter of 2013, and improved research and development efficiency.

On a year-on-year basis, Networks’ selling, general and administrative expenses before specific items decreased 2%, primarily due to structural cost savings from its transformation and restructuring program. On a sequential basis, selling, general and administrative expenses before specific items decreased 11%, consistent with seasonally lower net sales and lower accrued incentive expenses, which were at an elevated level in the fourth quarter of 2013.

Networks’ other income and expenses before specific items was an expense of EUR 2 million in the first quarter of 2014, compared to an income of EUR 7 million in the first quarter of 2013, and an expense of EUR 50 million in the fourth quarter of 2013. On a sequential basis, our other income and expenses before specific items was a lower expense due to the absence of the following factors, which resulted in elevated expense levels in the fourth quarter of 2013: a non-recurring litigation provision, a write down of a VAT receivable, an increase in doubtful account allowances, and asset retirement charges.

Operating profit

The year-on-year increase in Networks’ operating profit before specific items in the first quarter of 2014 was primarily due to a higher operating profit before specific items in Global Services, partially offset by a lower operating profit before specific items in Mobile Broadband. On a year-on-year basis, the increase in Global Services operating profit before specific items was primarily due to higher gross profit. On a year-on-year basis, the decrease in Mobile Broadband operating profit before specific items was primarily due to lower gross profit.

The sequential decrease in Networks’ operating profit before specific items in the first quarter of 2014 was primarily due to the lower operating profit before specific items in Global Services, and to a lesser degree, a lower operating profit before specific items in Mobile Broadband. On a sequential basis, the decrease in Global Services operating profit before specific items was primarily due to seasonally lower net sales contributing to lower gross profit, partially offset by lower operating expenses. On a sequential basis, the decrease in Mobile Broadband operating profit before specific items was primarily due to seasonally lower net sales contributing to lower gross profit, partially offset by lower operating expenses.

Financial income and expenses

In the first quarter of 2014, Networks incurred a net expense in financial income and expenses of EUR 26 million compared to a net expense of EUR 75 million in the first quarter of 2013 and a net expense of EUR 38 million in the fourth quarter of 2013. On a year-on-year basis, the reduction in the net financial expense was primarily due to higher net foreign exchange losses in the first quarter of 2013, resulting mainly from the weakening of currencies that could not be hedged.

Income tax expense

In the first quarter of 2014, Networks incurred an income tax expense of EUR 29 million compared to EUR 73 million in the first quarter of 2013 and EUR 32 million in the fourth quarter of 2013. The Group’s income tax expense fluctuates from quarter to quarter as our effective tax rate varies significantly due to the non-recognition of the Finnish deferred tax assets as well as payments of foreign withholding taxes in certain overseas jurisdictions, for which no benefit is recorded, and the mix of profitability in our subsidiaries.

Networks periodically assesses its unrecognized deferred tax assets. At March 31, 2014, we have a total of approximately EUR 1.5 billion unrecognized net deferred tax assets, of which approximately EUR 1.2 billion relate to Finland and have not been recognized in the financial statements due to our history of losses in Finland. A significant portion of our Finnish deferred tax assets is indefinite in nature and available against future Finnish taxable income. We will continue to closely monitor the realizability of these deferred tax assets, including assessing future financial performance in Finland. Should the recent improvements in our financial results be sustained, we may recognize all or part of the unrecognized deferred tax asset in the future.

Net profit

Networks reported a net profit of EUR 124 million for the first quarter of 2014, up from a net loss of EUR 143 million in the first quarter of 2013 and down from a net profit of EUR 174 million in the fourth quarter of 2013. On a year-on-year basis, our result in the first quarter of 2014 has improved significantly due to lower restructuring related charges and improved profitability as part of our successful transformation to date. The sequential decrease in our net profit in the first quarter of 2014 was primarily due to the lower operating profit.

Transformation and restructuring program (announced in November 2011)

During the first quarter of 2014, restructuring related charges were approximately EUR 15 million and the related cash outflows were approximately EUR 110 million. At March 31, 2014, since the commencement of the global transformation and restructuring program, cumulative restructuring charges amounted to approximately EUR 1 850 million, and cumulative related cash outflows amounted to approximately EUR 1 350 million. Networks continues to estimate cumulative restructuring related charges and related cash outflows to be approximately EUR 1 950 million and EUR 1 700 million, respectively, by the end of 2014. Changes in estimates of timing or amounts of costs to be incurred and associated cash flows may become necessary as the transformation and restructuring program is being completed.

At the end of the first quarter of 2014, Networks had approximately 48 500 employees, a reduction of approximately 8 200 employees compared to the end of the first quarter of 2013, and a reduction of approximately 100 employees compared to the end of the fourth quarter of 2013.

Q1 2014 operating highlights:

  • Networks’ strong deal momentum in mobile broadband and related services continued. During the quarter we were granted a five-year contract with Vodafone for the SingleRAN and Subscriber Data Management solutions in the operator’s Project Spring network upgrade, and selected by Everything Everywhere in the UK to support the continued expansion of its LTE network. We were also selected as the sole supplier of Elisa’s LTE network in Finland. Other contracts in the quarter included VimpelCom’s LTE radio access networks in the central region of Russia, Siberia, South and most of the Volga and Ural regions; the implementation of an LTE network and modernization of the existing GSM and 3G networks for TELE Greenland; the implementation of Taiwan Mobile’s multi-band LTE and LTE-Advanced network; the upgrade of Telkomsel’s GSM and 3G HSPA+ network in Indonesia; the modernization and expansion of Mobily’s 2G, 3G WCDMA and TD-LTE networks in Saudi Arabia; and LTE infrastructure for Avantel in Colombia. At the end of the first quarter of 2014, we had 138 commercial LTE contracts.
  • Networks continues to lead in 4G radio technology, demonstrating 2.6 Gbps throughput over a single sector in Sprint’s TD-LTE network. In the live network of Optus in Australia, the operator and Networks built the world’s first ‘Gigasite’ attaining an aggregate downlink capacity of 1.7 Gbps.
  • Networks announced the world’s first TDD-FDD carrier aggregation demonstration together with two South Korean operators, Korea Telecom and SK Telecom; and together with Broadcom Corporation and Elisa in Finland, the first ever demonstration of LTE Advanced carrier aggregation on a live commercial network.
  • Networks continues to invest in innovation and further evolved its Smart Scheduler that is now able to provide up to 30 percent faster downlink speeds at the cell edge; and announced new Centralized RAN software capable of doubling the uplink capacity of existing LTE networks. We also demonstrated our FutureWorks 5G research concept that enables ultra-dense networks, a mobile network ‘on demand’ for mega events, and a self-learning network that analyzes big data in real time and responds in an instant.
  • Networks extended its Flexi Zone small cell architecture and introduced the Flexi Zone controller that supports the integration of our Liquid Applications to deliver services directly from small cell base station clusters.
  • Networks announced the first telco cloud based IP Multimedia Subsystem (IMS); launched the Telco Cloud Management solution for operators; and extended our Services to help operators prepare, implement and run their own telco clouds and migrate existing telco services to cloud-based networks.
  • Tele2 Sweden chose Networks’ Serve at Once Traffica Customer Experience Management (CEM) solution, and Networks announced CEM for Loyalty Scores and the CEM Umbrella Solution for a customized overview of customer experience across an operator group’s countries or regions.
  • Networks renewed the managed services contract with Saudi Telecom Company, covering the operator’s GSM, 3G and LTE network; and launched Predictive Operations, the world’s first managed service for predicting mobile broadband service and network degradations; LTE Service Management that helps ensure the quality of mobile broadband services running over LTE networks; and Services for OTT management that helps operators improve the delivery of OTT content.
  • Telecommunication Development Industry Alliance (TDIA) awarded Networks’ contribution to time division (TD) technology; Networks’ Liquid Applications won a Global TD-LTE Initiative (GTI) Award in the “Innovative Solutions” category; and at the GSMA Global Mobile Awards 2014, Networks and O2 (Telefónica UK) won the top prize in the “Best Mobile Infrastructure” category for the deployment of iSON Automation for Operations.

Risks and forward-looking statements:

It should be noted that Networks and its business are exposed to various risks and uncertainties and certain statements herein that are not historical facts are forward-looking statements, including, without limitation, those regarding: A) expectations, plans or benefits related to our strategy, future performance of our business; B) expectations regarding market developments, general economic conditions and structural changes; C) expectations and targets regarding performance, including those related to market share, prices, net sales and margins; D) the timing of the deliveries of our products and services; E) expectations and targets regarding our financial performance, cost savings and competitiveness as well as results of operations; F) expectations and targets regarding collaboration and partnering arrangements; G) the outcome of pending and threatened litigation, disputes, regulatory proceedings or investigations by authorities; H) statements preceded by or including "believe," "expect," "anticipate," "foresee," "sees," "target," "estimate," "designed," "aim", "plans," "intends," "focus", “continue”, “project”, “should”, "will" or similar expressions.  These statements are based on management's best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors, including risks and uncertainties that could cause these differences include, but are not limited to: 1) our ability to execute our strategy and effectively, profitably and timely adapt our business and operations to the increasingly diverse needs of our customers and technological developments; 2) our ability to sustain or improve the operational and financial performance of our business and correctly identify business opportunities or successfully pursue new business opportunities; 3) our dependence on the development of the mobile and communications industry in numerous diverse markets, as well as on general economic conditions globally and regionally; 4) our ability to effectively and profitably invest in and timely introduce new competitive high-quality products, services, upgrades and technologies; 5) our dependence on a limited number of customers and large, multi-year contracts; 6) the impact of regulatory, political or other developments on our operations and sales in those various countries or regions where we do business; 7) our ability to reach targeted results or improvements by managing and improving our financial performance, cost savings and competitiveness; 8) the performance of the parties we partner and collaborate with, and our ability to achieve successful collaboration or partnering arrangements; 9) our ability to manage our manufacturing, service creation and delivery, and logistics efficiently and without interruption, especially if the limited number of suppliers we depend on fail to deliver sufficient quantities of fully functional products and components or deliver timely services; 10) exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Japanese yen and the Chinese yuan, as well as certain other currencies; 11) the impact of unfavorable outcome of litigation, contract related disputes or allegations of health hazards associated with our business; 12) the potential complex tax issues and obligations we may face, including the obligation to pay additional taxes in various jurisdictions and our actual or anticipated performance, among other factors, could result in allowances related to deferred tax assets; 13) any inefficiency, malfunction or disruption of a system or network that our operations rely on or any impact of a possible cybersecurity breach; 14) management of our customer financing exposure; 15) effects of impairments or charges to carrying values of assets, including goodwill, or liabilities; 16) our ability to protect numerous patented standardized or proprietary technologies from third-party infringement or actions to invalidate the intellectual property rights of these technologies; 17) our ability to protect the technologies, which we develop, license, use or intend to use from claims that we have infringed third parties' intellectual property rights, as well as, impact of possible licensing costs, restriction on our usage of certain technologies, and litigation related to intellectual property rights; 18) our ability to retain, motivate, develop and recruit appropriately skilled employees; 19) our ability to successfully implement planned transactions, such as acquisitions, divestments, mergers or joint ventures, manage unexpected liabilities related thereto and achieve the targeted benefits; as well as the risk factors specified in the most recent  annual report of Nokia on Form 20-F under Item 3D. “Risk Factors” and of Networks under “Risk Factors.” 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. Nokia does 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.

- Ends -

About Nokia

Nokia invests in technologies important in a world where billions of devices are connected. We are focused on three businesses: network infrastructure software, hardware and services, which we offer through Networks; location intelligence, which we provide through HERE; and advanced technology development and licensing, which we pursue through Technologies. Each of these businesses is a leader in its respective field.

Through Networks, Nokia is the world’s specialist in mobile broadband. From the first ever call on GSM, to the first call on LTE, we operate at the forefront of each generation of mobile technology. Our global experts invent the new capabilities our customers need in their networks. We provide the world’s most efficient mobile networks, the intelligence to maximize the value of those networks, and the services to make it all work seamlessly. www.nsn.com / www.company.nokia.com

Media Enquiries

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Phone: +358 7140 02869
E-mail: mediarelations@nsn.com

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