Nokia Corporation Report for Q4 2016 and Full Year 2016

Nokia Corporation 
Financial Statement Release
February 2, 2017 at 08:00 (CET +1)

Nokia Corporation Report for Q4 2016 and Full Year 2016

Operating margin for Nokia’s Networks business at the high end of our guidance range for full year 2016

This is a summary of the Nokia Corporation report for fourth quarter 2016 and full year 2016 published today. The complete fourth quarter 2016 and full year 2016 report with tables is available at www.nokia.com/financials. Investors should not rely on summaries of our interim reports only, but should review the complete reports with tables.

FINANCIAL HIGHLIGHTS

• Non-IFRS net sales in Q4 2016 of EUR 6.7bn (reported: EUR 6.6bn). In the year-ago quarter, non-IFRS net sales would have been EUR 7.7bn on a comparable combined company basis (reported: EUR 3.6bn on a Nokia stand-alone basis).
• Non-IFRS diluted EPS in Q4 2016 of EUR 0.12 (reported: EUR 0.11) benefited by approximately EUR 0.02-0.03 due to the Q4 2016 non-IFRS tax rate coming in at 23% compared to our guidance.
• Non-IFRS diluted EPS in full year 2016 of EUR 0.22 (reported: negative EUR 0.13).
• Nokia’s Board of Directors will propose a dividend of EUR 0.17 per share for 2016 (EUR 0.16 per share for 2015).

Nokia’s Networks business

• 14% year-on-year net sales decrease in Q4 2016, reflecting challenging market conditions in Q4 2016 and the difficult comparison against the strong performance by Alcatel-Lucent in Q4 2015.
• Strong Q4 2016 gross margin of 40.6% and operating margin of 14.1%, supported by continued focus on operational excellence and cost controls.
• Operating margin of 8.9% in full year 2016, at the high end of our guidance range of 7-9%.

Nokia Technologies

• 25% year-on-year net sales decrease and 49% operating profit decrease in Q4 2016, primarily due to the absence of the Samsung arbitration award, which benefited Q4 2015. The declines were partially offset by the expanded intellectual property rights (“IPR”) license agreement with Samsung announced in Q3 2016 and divested IPR. In addition, the acquisition of Withings helped to offset the decline in net sales.

Group Common and Other

• 34% year-on-year net sales increase in Q4 2016, with particularly strong growth in Alcatel Submarine Networks.
  
  

Nokia and Apple patent license renewal

In December 2016, Nokia announced that it had begun filing complaints against Apple, alleging that Apple products infringe Nokia patents. As of today, in actions across 11 countries in Asia, Europe and the US, there are now more than 50 Nokia patents in suit, covering technologies such as display, user interface, software, antenna, chipsets, video coding, as well as 3G & 4G cellular standards. Apple has also filed certain complaints against Nokia.

As one of the world’s leading innovators, and following the acquisition of full ownership of Nokia Siemens Networks in 2013 and Alcatel-Lucent in 2016, Nokia now owns three valuable portfolios of intellectual property. Built on more than EUR 115 billion invested in research and development (“R&D”) over the past twenty years, the tens of thousands of patents cover many important technologies used in smartphones, tablets, personal computers and similar devices.

The previous license agreement between Nokia and Apple, covering some patents from the Nokia Technologies portfolio, expired at the end of 2016 and Apple currently has no license under Nokia patents. Despite sustained efforts by Nokia, Apple has not accepted any licensing offers Nokia has made for the previously licensed patents, as well as for other patented inventions used by many of Apple’s products.

Non-IFRS results provide meaningful supplemental information regarding underlying business performance

In addition to information on our reported IFRS results, we provide certain information on a non-IFRS, or underlying business performance, basis. We believe that our non-IFRS results provide meaningful supplemental information to both management and investors regarding Nokia’s underlying business performance by excluding the below-described items that may not be indicative of Nokia’s business operating results. These non-IFRS financial measures should not be viewed in isolation or as substitutes to the equivalent IFRS measure(s), but should be used in conjunction with the most directly comparable IFRS measure(s) in the reported results.

Non-IFRS results exclude costs related to the Alcatel-Lucent transaction and related integration, goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring and associated charges, and certain other items that may not be indicative of Nokia’s underlying business performance. The non-IFRS exclusions are not allocated to the segments, and hence they are reported only at the Nokia consolidated level.

Financial discussion

The financial discussion included in this financial report of Nokia’s results comprises the results of Nokia’s businesses – Nokia’s Networks business and Nokia Technologies, as well as Group Common and Other. For more information on the changes to our reportable segments, please refer to note 3, “Segment information and eliminations”, in the Financial statement information section in this financial report.

In the discussion of Nokia’s results in the fourth quarter 2016 comparisons are given to the fourth quarter 2015 and third quarter 2016 results on a combined company basis, unless otherwise indicated. This data has been prepared to reflect the financial results of the continuing operations of Nokia as if the new financial reporting structure had been in operation for the full year 2015. Certain accounting policy alignments, adjustments and reclassifications have been necessary, and these are explained in the “Basis of preparation” section of Nokia’s stock exchange release published on April 22, 2016. These adjustments also include reallocation of items of costs and expenses based on their nature and changes to the definition of the line items in the combined company accounting policies, which also affect numbers presented in this financial report for 2015.

In the discussion of Nokia’s reported results for the fourth quarter 2016 and full year 2016 comparisons are given to the fourth quarter 2015 and full year 2015 Nokia standalone historical results, which have been recast to reflect Nokia’s updated segment reporting structure excluding Alcatel-Lucent, unless otherwise indicated. From the beginning of 2016, Nokia’s results include those of Alcatel-Lucent on a consolidated basis and, accordingly, are not directly comparable to Nokia standalone historical results.

CEO STATEMENT

2016 was a time of transition for Nokia, a year in which we moved forward deliberately and successfully to execute our strategy and broaden our scope.

At the start of the year, Nokia was focused primarily on mobile networks.  We ended the year as a company with a complete portfolio spanning mobile, fixed, routing, optical, stand-alone software and more; with solid opportunities to drive higher returns through expansion into new customer segments; with emerging businesses in digital health and digital media; and with greatly expanded patent and brand licensing activities.

Pleasingly, we saw growing customer support for Nokia’s strategy. Our sales pipeline with customers beyond our traditional communication service provider base accelerated over the course of the year, we saw an increasing share of our Networks pipeline coming from opportunities covering products and services from two or more of our business groups, and the potential of cross-selling started to become a reality.

We also ended the year having successfully concluded the integration of Alcatel-Lucent faster than anticipated, allowing us to shift our full focus to cost savings, continuous improvement programs and the execution of our strategy. In terms of financial performance, we were able to deliver solid results for the full year, with profitability in our Networks business coming in at the high end of our guidance range. Our ongoing intense focus on execution, cost management and pricing discipline was critical to offset the impact of challenging market conditions over the course of the year.  While I remain disappointed with our topline development in 2016, we continue to expect our performance to improve in 2017 and see the potential for margin expansion in 2017 and beyond, as market conditions improve and our sales transformation programs gain further traction.

In short, we ended 2016 positioned well for the future, with well-integrated operations, a powerful end-to-end portfolio and our disciplined operating model still delivering robust results. In addition, we remain in a position of financial strength, with a strong balance sheet and the flexibility to invest in opportunities that we believe will create shareholder value.

Rajeev Suri
President and CEO

NOKIA IN Q4 2016 – NON-IFRS

Non-IFRS net sales and non-IFRS operating profit

Nokia non-IFRS net sales decreased 13% year-on-year and increased 13% sequentially. On a constant currency basis, Nokia non-IFRS net sales would have decreased 13% year-on-year and increased 11% sequentially.

Year-on-year changes

Sequential changes

Non-IFRS financial income and expenses

In the fourth quarter 2016, non-IFRS financial income and expenses was an expense of EUR 72 million. This includes an impairment charge of EUR 63 million related to the performance of certain private funds investing in IPR, which was largely offset by foreign exchange gains mainly resulting from US dollar appreciation against Chinese yuan, as well as gains from venture fund distributions.

Non-IFRS taxes

In the fourth quarter 2016, non-IFRS income taxes were an expense of EUR 204 million. In the fourth quarter 2016, Nokia’s non-IFRS tax rate of 23% was lower than the approximately 40% outlook we previously provided. This was primarily related to two factors. First, there was a favorable change in Nokia’s regional profitability mix, the majority of which was non-recurring in nature and related to a change of estimate in Q4 2016. Second, compared to the expected profitability underlying Nokia’s non-IFRS tax rate guidance, the level of realized profitability was higher, resulting in a lower non-IFRS tax rate due to a relatively larger portion of taxable profit being attributable to tax jurisdictions with lower tax rates.

NOKIA IN Q4 2016 – REPORTED                                          

FINANCIAL DISCUSSION

Net sales

Nokia net sales increased 84% year-on-year, compared to Nokia standalone net sales, and increased 13% sequentially. On a constant currency basis, Nokia net sales would have increased 84% year-on-year, compared to Nokia standalone net sales, and 10% sequentially.

Year-on-year discussion

The year-on-year increase in Nokia net sales in the fourth quarter 2016, compared to Nokia standalone net sales, was primarily due to growth in Nokia’s Networks business and Group Common and Other, both of which primarily related to the acquisition of Alcatel-Lucent. This was partially offset by Nokia Technologies and a purchase price allocation adjustment related to a reduced valuation of deferred revenue that existed on Alcatel-Lucent’s balance sheet at the time of the acquisition.

Sequential discussion

The sequential increase in Nokia net sales in the fourth quarter 2016 was primarily due to growth in Nokia’s Networks business and Group Common and Other. This was partially offset by Nokia Technologies and the negative impact related to a purchase price allocation adjustment associated with a reduced valuation of deferred revenue that existed on Alcatel-Lucent’s balance sheet at the time of the acquisition.

Operating profit

Year-on-year discussion

The year-on-year decrease in Nokia operating profit, compared to Nokia standalone operating profit, was primarily due to higher research and development (“R&D”) expenses, higher selling, general and administrative (“SG&A”) expenses and a net negative fluctuation in other income and expenses, partially offset by higher gross profit, all of which primarily related to the acquisition of Alcatel-Lucent.

The increase in gross profit was primarily due to Nokia’s Networks business and, to a lesser extent, Group Common and Other, partially offset by non-IFRS exclusions related to both product portfolio integration costs and deferred revenue, as well as Nokia Technologies.

The increase in R&D expenses was primarily due to Nokia’s Networks business, non-IFRS exclusions related to both amortization of intangible assets and product portfolio integration costs and, to a lesser extent, Group Common and Other and Nokia Technologies.

The increase in SG&A expenses was primarily due to Nokia’s Networks business, non-IFRS exclusions related to both amortization of intangible assets and transaction and integration related costs and, to a lesser extent, Nokia Technologies and Group Common and Other.

Nokia’s other income and expenses was an expense of EUR 110 million in the fourth quarter 2016, compared to an expense of EUR 3 million in the year-ago period. The net negative fluctuation was primarily related to non-IFRS exclusions attributable to higher restructuring and associated charges, partially offset by the absence of an approximately EUR 20 million loss recorded in the fourth quarter 2015, which related to certain of Nokia’s investments made through its venture funds.

Sequential discussion

Nokia operating profit increased primarily due to higher gross profit, partially offset by a net negative fluctuation in other income and expenses, as well as higher R&D and SG&A expenses.

The increase in gross profit was primarily due to Nokia’s Networks business and, to a lesser extent, Group Common and Other, partially offset by Nokia Technologies and non-IFRS exclusions.

The increase in R&D expenses was primarily due to Nokia’s Networks business.

The increase in SG&A expenses was primarily due to Nokia’s Networks business, non-IFRS exclusions and Nokia Technologies.

Nokia’s other income and expenses was an expense of EUR 110 million in the fourth quarter 2016, compared to an expense of EUR 39 million in the third quarter 2016. The net negative fluctuation was primarily due to higher restructuring and associated charges.

Description of non-IFRS exclusions in Q4 2016

Non-IFRS exclusions consist of costs related to the Alcatel-Lucent transaction and related integration, goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring and associated charges, and certain other items that may not be indicative of Nokia’s underlying business performance. For additional details, please refer to note 2, “Non-IFRS to reported reconciliation, Continuing Operations (unaudited)”, in the Financial statement information section in this financial report.

Non-IFRS exclusions in net sales

In the fourth quarter 2016, non-IFRS exclusions in net sales amounted to EUR 74 million, and related to a purchase price allocation adjustment related to a reduced valuation of deferred revenue that existed on Alcatel-Lucent’s balance sheet at the time of the acquisition.

Non-IFRS exclusions in operating profit

In the fourth quarter 2016, non-IFRS exclusions in operating profit amounted to EUR 622 million, and were primarily due to non-IFRS exclusions that negatively affected gross profit, R&D, SG&A and other income and expenses as follows:

In the fourth quarter 2016, non-IFRS exclusions in gross profit amounted to EUR 159 million, and were primarily due to product portfolio integration costs related to the acquisition of Alcatel-Lucent, and the deferred revenue.

In the fourth quarter 2016, non-IFRS exclusions in R&D expenses amounted to EUR 185 million, and were primarily due to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent and, to a lesser extent, product portfolio integration costs related to the acquisition of Alcatel-Lucent.

In the fourth quarter 2016, non-IFRS exclusions in SG&A expenses amounted to EUR 162 million, and were primarily due to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent, as well as integration and transaction related costs.

In the fourth quarter 2016, non-IFRS exclusions in other income and expenses amounted to EUR 116 million, and were primarily due to EUR 107 million of restructuring and associated charges for Nokia’s cost reduction and efficiency improvement initiatives.

Financial income and expenses

In the fourth quarter 2016, financial income and expenses was an expense of EUR 72 million. This includes an impairment charge of EUR 63 million related to the performance of certain private funds investing in IPR, which was largely offset by foreign exchange gains mainly resulting from US dollar appreciation against Chinese yuan, as well as gains from venture fund distributions.

Taxes

In the fourth quarter 2016, income taxes were a benefit of EUR 401 million. This was primarily related to two factors. First, following the completion of the squeeze-out of the remaining Alcatel-Lucent shares, Nokia has launched actions to integrate the former Alcatel-Lucent and Nokia operating models. In the fourth quarter 2016, in connection with these integration activities, Nokia transferred certain intellectual property to its US operations, recording a tax benefit and additional deferred tax assets of EUR 348 million. Second, for US tax purposes Nokia elected to treat the acquisition of Alcatel-Lucent’s US operations as an asset purchase. The impact of this election was to utilize or forfeit existing deferred tax assets and record new deferred tax assets with a longer amortization period than the life of those forfeited assets. As a result of this, we recorded EUR 91 million of additional deferred tax assets in the fourth quarter 2016. In addition, there was a favorable change in Nokia’s regional profitability mix, the majority of which was non-recurring in nature and related to a change of estimate in the fourth quarter 2016.

Nokia will continue to make changes in its operating model in 2017. Due to this, in full year 2017, Nokia expects to record a reduction in deferred tax assets of approximately EUR 250 million, which will have a negative non-recurring impact on tax expenses of approximately EUR 250 million, partly offsetting the recorded non-recurring tax benefit of EUR 348 million in the fourth quarter 2016. The operating model changes, including the transfers of intellectual property and certain tax elections that Nokia has made, resulted in non-recurring cash outflows of approximately EUR 90 million in the fourth quarter 2016 and are expected to result in additional non-recurring cash outflows in 2017 of approximately EUR 150 million. The changes are expected to create more future cash tax savings than the additional non-recurring cash tax outflows in 2016 and 2017.

Cost savings program

The following table summarizes the financial information related to our cost savings program, as of the end of the fourth quarter 2016. Balances related to previous Nokia and Alcatel-Lucent restructuring and cost savings programs have been included as part of this overall cost savings program as of the second quarter 2016.

The following table summarizes our full year 2016 results and future expectations related to our cost savings program and network equipment swaps.

In full year 2016, the actual total cost savings benefitted from lower incentive accruals, related to the financial performance in full year 2016. Lower incentive accruals drove more than half of the higher than previously expected decrease in total costs in 2016, and this is expected to reverse in 2017, assuming full year 2017 financial performance in-line with our expectations. On a cumulative basis, Nokia continues to be well on track to achieve the targeted EUR 1.2 billion of total cost savings in full year 2018. To the extent that our actual full year 2016 charges and cash flows deviated from our previous expectations, future expectations have been adjusted accordingly.

OUTLOOK

1 For further details related to the cost savings and network equipment swaps guidance, please refer to the “Cost savings program” section above.

2 For further details related to the tax guidance, please refer to the “Taxes” section above.

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, including, without limitation, those regarding:  A) our ability to integrate Alcatel-Lucent into our operations and achieve the targeted business plans and benefits, including targeted synergies in relation to the acquisition of Alcatel-Lucent; B) expectations, plans or benefits related to our strategies and growth management; C) expectations, plans or benefits related to future performance of our businesses; D) expectations, plans or benefits related to changes in organizational and operational structure; E) expectations regarding market developments, general economic conditions and structural changes; F) expectations and targets regarding financial performance, results, operating expenses, taxes, currency exchange rates, hedging, cost savings and competitiveness, as well as results of operations including targeted synergies and those related to market share, prices, net sales, income and margins; G) timing of the deliveries of our products and services; H) expectations and targets regarding collaboration and partnering arrangements, joint ventures or the creation of joint ventures, as well as our expected customer reach; I) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities; J) expectations regarding restructurings, investments, 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, divestments and acquisitions; and K) 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, sustain or improve the operational and financial performance of our business and correctly identify and successfully pursue business opportunities or growth; 2) our ability to achieve the anticipated benefits, synergies, cost savings and efficiencies of the Alcatel-Lucent acquisition, and our ability to implement our organizational and operational structure efficiently; 3) general economic and market conditions and other developments in the economies where we operate; 4) competition and our ability to effectively and profitably compete and invest in new competitive high-quality products, services, upgrades and technologies and bring them to market in a timely manner; 5) our dependence on the development of the industries in which we operate, including the cyclicality and variability of the information technology and telecommunications industries; 6) 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; 7) our ability to manage and improve our financial and operating performance, cost savings, competitiveness and synergies after the acquisition of Alcatel-Lucent; 8) our dependence on a limited number of customers and large multi-year agreements; 9) exchange rate fluctuations, as well as hedging activities; 10) Nokia Technologies’ ability protect its IPR and to maintain and establish new sources of patent licensing income and IPR-related revenues, particularly in the smartphone market; 11) 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; 12) 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; 13) our reliance on third-party solutions for data storage and service distribution, which expose us to risks relating to security, regulation and cybersecurity breaches; 14) inefficiencies, breaches, malfunctions or disruptions of information technology systems; 15) Nokia Technologies’ ability to generate net sales and profitability through licensing of the Nokia brand, particularly in digital media and digital health, and the development and sales of products and services, as well as other business ventures which may not materialize as planned; 16) our exposure to various legislative frameworks and jurisdictions that regulate fraud and enforce economic trade sanctions and policies, and the possibility of proceedings or investigation that result in fines, penalties or sanctions; 17) adverse developments with respect to customer financing or extended payment terms we provide to customers; 18) 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; 19) our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 20) our ability to retain, motivate, develop and recruit appropriately skilled employees; 21) disruptions to our manufacturing, service creation, delivery, logistics and supply chain processes, and the risks related to our geographically-concentrated production sites; 22) the impact of litigation, arbitration, agreement-related disputes or product liability allegations associated with our business; 23) our ability to optimize our capital structure as planned and re-establish our investment grade credit rating or otherwise improve our credit ratings; 24) our ability to achieve targeted benefits from or successfully implement planned transactions, as well as the liabilities related thereto; 25) our involvement in joint ventures and jointly-managed companies; 26) the carrying amount of our goodwill may not be recoverable; 27) uncertainty related to the amount of dividends and equity return we are able to distribute to shareholders for each financial period; 28) pension costs, employee fund-related costs, and healthcare costs; and 29) risks related to undersea infrastructure, as well as the risk factors specified on pages 69 to 87 of our annual report on Form 20-F filed on April 1, 2016 under “Operating and financial review and prospects-Risk factors”, and in Nokia’s other filings 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.

The financial statements were authorized for issue by management on February 1, 2017

Media and Investor Contacts:

Communications, tel. +358 10 448 4900 email: press.services@nokia.com
Investor Relations, tel. +358 4080 3 4080 email: investor.relations@nokia.com

• Nokia plans to publish its “Nokia in 2016” annual report, which includes the review by the Board of Directors and the audited annual accounts, in week 12 of 2017. The annual report will be available atwww.nokia.com/financials.
• Nokia plans to publish its first quarter 2017 results on April 27, 2017.
• Nokia’s Annual General Meeting 2017 is planned to be held on May 23, 2017.
• Nokia plans to publish its second quarter and half year 2017 results on July 27, 2017.
• Nokia plans to publish its third quarter 2017 results on October 26, 2017.

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