Nokia Corporation Financial Report for Q4 and full-year 2017

Nokia Corporation 
Financial Statement Release
February 1, 2018 at 08:00 (CET +1)

Nokia Corporation Financial Report for Q4 and full-year 2017

Strong results driven by growth and solid performance in Nokia's Networks business and record net sales in Nokia Technologies

• Nokia's Board of Directors will propose a dividend of EUR 0.19 per share for 2017 (EUR 0.17 for 2016).
• Nokia's Board of Directors is committed to proposing a growing dividend, including for 2018.

This is a summary of the Nokia Corporation financial report for Q4 and full-year 2017 published today. The complete financial report for Q4 and full-year 2017 with tables is available at www.nokia.com/financials. Investors should not rely on summaries of our financial reports only, but should review the complete reports with tables.

FINANCIAL HIGHLIGHTS
 

• Non-IFRS net sales in Q4 2017 of EUR 6.7bn (EUR 6.7bn in Q4 2016). Reported net sales in Q4 2017 of EUR 6.7bn (EUR 6.7bn in Q4 2016). On a constant currency basis, non-IFRS net sales increased 5% and reported net sales increased 6%, with 2% growth in Nokia's Networks business and 80% growth in Nokia Technologies.
• Solid non-IFRS gross margin of 41.4% (42.2% in Q4 2016) and strong non-IFRS operating margin of 15.1% in Q4 2017 (14.0% in Q4 2016), with resilience in Nokia's Networks business and strong performance in Nokia Technologies. Reported gross margin of 39.0% (40.3% in Q4 2016) and reported operating margin of 6.3% in Q4 2017 (4.8% in Q4 2016).
• Non-IFRS diluted EPS in Q4 2017 of EUR 0.13 (EUR 0.12 in Q4 2016) and EUR 0.33 in 2017 (EUR 0.22 in 2016). Reported diluted EPS in Q4 2017 of negative EUR 0.07 (EUR 0.11 in Q4 2016) and negative EUR 0.26 in 2017 (negative EUR 0.13 in 2016). In Q4 2017, reported diluted EPS was adversely affected by approximately EUR 0.13 due to re-measurement of deferred tax assets following the change in tax rates, primarily in the United States.
• Strong cash performance in Q4 2017, with a EUR 1.8 billion sequential increase in net cash to EUR 4.5 billion, resulting from strong net working capital management.

Nokia's Networks business

• 2% net sales growth at constant currency in Q4 2017 was driven by IP Networks and Applications and by Ultra Broadband Networks. The large year-on-year variations in foreign exchange rates had a negative impact on reported net sales, with net sales down 4% compared to the year-ago period.
• Strong operational discipline produced a solid Q4 2017 gross margin of 37.6%, and an operating margin of 11.1%.
• Results for full year 2017 (4% decrease in net sales on a constant currency basis and an operating margin of 8.3%) consistent with our guidance for full year 2017.

Nokia Technologies

• 79% year-on-year net sales increase and 146% year-on-year operating profit increase in Q4 2017, primarily related to new license agreements. Approximately EUR 210 million of the net sales in Q4 2017 (zero in Q4 2016) were non-recurring in nature and related to catch-up net sales, of which approximately EUR 80 million related to 2017 and EUR 130 million related to the prior years.
• 57% year-on-year net sales increase and 94% year-on-year operating profit increase in 2017, primarily related to new license agreements and settled arbitrations. Approximately EUR 300 million of the net sales in 2017 (zero in 2016) were non-recurring in nature and related to catch-up net sales for prior years.

Nokia Outlook for 2018 and 2020

• Nokia targets a non-IFRS diluted EPS of EUR 0.23 to 0.27 in full year 2018 and EUR 0.37 to 0.42 in full year 2020.
• Please refer to the full details and other targets in the Outlook section.

CEO STATEMENT

I am pleased that Nokia ended 2017 with a strong fourth quarter. We saw constant currency growth in three of our five Networks business groups as well as very strong growth in Nokia Technologies. Group profitability increased in both the quarter and the full year, and gross margin remained resilient in Networks despite the dilutive impact of robust competition in China.

This performance reflects the progress we have made since Q3 with our mobile product portfolio, and positions us well for the upcoming transition to 5G. Our recent 4G/LTE software release was the highest quality in our history; our AirScale 5G-ready base stations are shipping in volume and delivering excellent results in the field; and we are making good progress in the execution of product migrations for key customers. Shortly after the quarter ended, we launched ReefShark, our revolutionary new chipset family for mobile products, as well as our end-to-end 5G Future X architecture. Both of these provide a strong competitive advantage for Nokia.

Continued momentum in executing our strategy was also evident in the quarter. Our position with our core communication service provider market remains strong; we are seeing excellent progress in our targeted verticals; our software business is growing and now has a strong foundation; and our licensing business continues to deliver on our strategic roadmap, with expansion to another Chinese company in the quarter.  We are confident that licensing will remain a powerful value driver for Nokia, with an expected recurring revenue CAGR of 10% between now and the end of 2020. 

Looking forward on the Networks side, we expect our market to decline again in 2018, although at a slightly lower rate than our previous forecast, given early signs of improved conditions in North America. For 2019 and 2020, we expect market conditions to improve markedly, driven by full-scale rollouts of 5G networks. As those rollouts occur, Nokia is remarkably well-positioned. Unlike previous generations of technology, 5G requires a coordinated, holistic approach across all network elements, far beyond radio. That requirement plays to the strength of our end-to-end portfolio and our 5G Future X architecture.

As a result of the acceleration of investment in 5G due to the opportunity provided by the accelerated timeframe of 5G deployments, Nokia's operating margin will come under some pressure in 2018. That investment, combined with continued strong execution of our strategy to expand to new vertical segments, build a standalone software business, and maximize the value of our licensing business, will allow us to target improved results in 2020. Therefore, the Board is committed to propose a growing dividend, including for 2018.

For the full-year 2020, we expect earnings per share of EUR 0.37 to EUR 0.42, strongly positive free cash flow, and a group-level, non-IFRS operating margin in the range of 12-16%. If we execute our strategy well, the high-end of that operating margin range is certainly possible.

As we work to deliver that sharply improved performance, we will do so in a very Nokia way: disciplined execution, relentless focus on costs and a commitment to innovation and technological leadership for our customers.

Rajeev Suri
President and CEO

OUTLOOK

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. Non-IFRS operating profit is also used in determining management remuneration. 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 acquisition of Alcatel-Lucent 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. In order to allow full visibility on determining non-IFRS results, information on non-IFRS exclusions is presented separately for each of the components of profit or loss. 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 our reportable segments, please refer to note 3, "Segment information", in the "Financial statement information" section in this report.

NOKIA IN Q4 2017 - NON-IFRS

Non-IFRS net sales and non-IFRS operating profit

Nokia non-IFRS net sales decreased 1% year-on-year and increased 20% sequentially. On a constant currency basis, Nokia non-IFRS net sales would have increased 5% year-on-year and increased 21% sequentially.

A discussion of our results within Nokia's Networks business, Nokia Technologies and Group Common and Other is included in the sections "Nokia's Networks business", "Nokia Technologies" and "Group Common and Other" below.

Year-on-year changes

On a year-on-year basis, foreign exchange fluctuations had a significantly negative impact on non-IFRS gross profit, a positive impact on non-IFRS operating expenses and a slightly negative net impact on non-IFRS operating profit in the fourth quarter 2017.

Sequential changes

On a sequential basis, foreign exchange fluctuations had a slightly negative impact on non-IFRS gross profit, a slightly positive impact on non-IFRS operating expenses and a slightly positive net impact on non-IFRS operating profit in the fourth quarter 2017.

Non-IFRS profit attributable to the equity holders of the parent

Year-on-year changes

Non-IFRS financial income and expenses

The approximately flat financial income and expenses was primarily due to net negative foreign exchange fluctuations, offset by the absence of impairment charges related the performance of certain private funds investing in intellectual property rights ("IPR"), which negatively affected the fourth quarter 2016.

Non-IFRS taxes

The increase in non-IFRS taxes, compared to the fourth quarter 2016, was primarily due to a higher absolute level of profit and a higher non-IFRS tax rate. In the fourth quarter 2017, non-IFRS tax rate increased to 24%, compared to 23% in the fourth quarter 2016, primarily due to Nokia's regional profit mix.

Sequential changes

Non-IFRS financial income and expenses

The net negative fluctuation in financial income and expenses was primarily due to lower income related to gains from venture fund investments, which positively affected the third quarter 2017 and foreign exchange fluctuations, partially offset by the absence of an impairment charge related to the performance of certain private funds investing in IPR, which negatively affected the third quarter 2017.

Non-IFRS taxes

The increase in non-IFRS taxes, compared to the third quarter 2017, was primarily due to a higher non-IFRS tax rate and a higher absolute level of profit. In the fourth quarter 2017, non-IFRS tax rate increased to 24%, compared to 15% in the third quarter 2017, primarily due to Nokia's regional profit mix and absolute level of profit.

NOKIA IN Q4 2017 - REPORTED

FINANCIAL DISCUSSION

Net sales

Nokia net sales were approximately flat year-on-year and increased 21% sequentially. On a constant currency basis, Nokia net sales would have increased 6% year-on-year and increased 22% sequentially.

Year-on-year discussion

The approximately flat year-on-year net sales in the fourth quarter 2017 were primarily due to a decrease in Nokia's Networks business and Group Common and Other, partially offset by growth Nokia Technologies and lower non-IFRS exclusions 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.

Sequential discussion

The sequential increase in Nokia net sales in the fourth quarter 2017 was primarily due to Nokia's Networks business and, to a lesser extent, Nokia Technologies, Group Common and Other and lower non-IFRS exclusions related to product portfolio strategy costs.

Operating profit

Year-on-year discussion

The increase in operating profit was primarily due to a net positive fluctuation in other income and expenses, lower research and development ("R&D") expenses and lower selling, general and administrative ("SG&A") expenses, partially offset by lower gross profit.

The decrease 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.

The decrease in R&D expenses was primarily due to lower non-IFRS exclusions, Group Common and Other and Nokia Technologies.

The decrease in SG&A expenses was primarily due to Nokia's Networks business, partially offset by Nokia Technologies.

The net positive fluctuation in Nokia's other income and expenses was primarily related to Group Common and Other, Nokia's Networks business and lower non-IFRS exclusions.

In the fourth quarter 2017, Nokia recorded a non-cash impairment charge to other income and expenses of EUR 32 million related to acquired intangible assets.

Sequential discussion

In the fourth quarter 2017, Nokia recorded an operating profit, compared to an operating loss in the third quarter 2017. The change was primarily due to higher gross profit and a net positive fluctuation in other income and expenses, partially offset by higher SG&A expenses and, to a lesser extent, higher R&D expenses.

The increase in gross profit was primarily due to Nokia's Networks business and, to a lesser extent, Nokia Technologies.

The increase in R&D expenses was primarily due to Nokia's Networks business, partially offset by lower non-IFRS exclusions.

The increase in SG&A expenses was primarily due to Nokia Technologies, higher non-IFRS exclusions primarily related to transaction and integration costs and Group Common and Other. This was partially offset by Nokia's Networks business.

The net positive fluctuation in Nokia's other income and expenses was primarily due to lower non-IFRS exclusions attributable to lower restructuring and associated charges and impairment charges and, to a lesser extent, Group Common and Other.

In the fourth quarter 2017, Nokia recorded a non-cash impairment charge to other income and expenses of EUR 32 million related to acquired intangible assets. In the third quarter 2017, Nokia recorded a non-cash charge to other income and expenses of EUR 141 million, due to the impairment of goodwill related to its digital health business, which is part of Nokia Technologies.

Profit/(Loss) attributable to the equity holders of the parent

Year-on-year discussion

In the fourth quarter 2017, Nokia recorded a loss attributable to the equity holders of the parent, compared to a profit in the fourth quarter 2016. The change was primarily due to an increase in taxes, partially offset by an increase in operating profit.

The change in taxes from a benefit in the fourth quarter 2016 to an expense in the fourth quarter 2017 was primarily due to deferred tax expenses of EUR 738 million from re-measurement of deferred tax assets primarily resulting from the tax rate change in the United States and the absence of a non-recurring tax benefit of EUR 439 million related to the operating model integration, which benefitted the fourth quarter 2016.

Sequential discussion

The increase in loss attributable to the equity holders of the parent was primarily due to a tax expense in the fourth quarter 2017, compared to a tax benefit in the third quarter 2017. This was partially offset by an operating profit in the fourth quarter 2017, compared to an operating loss in the third quarter 2017.

The change in taxes from a benefit in the third quarter 2017, to an expense in the fourth quarter 2017, was primarily due to deferred tax expenses of EUR 738 million from re-measurement of deferred tax assets primarily resulting from the tax rate change in the United States.

Description of non-IFRS exclusions in Q4 2017

Non-IFRS exclusions consist of costs related to the acquisition of Alcatel-Lucent 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", in the "Financial statement information" section in this report.

Non-IFRS exclusions in net sales

In the fourth quarter 2017, non-IFRS exclusions in net sales amounted to EUR 17 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 2017, non-IFRS exclusions in operating profit amounted to EUR 585 million and were due to non-IFRS exclusions that adversely affected gross profit, R&D expenses, SG&A expenses and other income and expenses as follows:

In the fourth quarter 2017, non-IFRS exclusions in gross profit amounted to EUR 169 million and were primarily due to product portfolio strategy costs related to the acquisition of Alcatel-Lucent.

In the fourth quarter 2017, non-IFRS exclusions in R&D expenses amounted to EUR 157 million and were primarily due to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent.

In the fourth quarter 2017, non-IFRS exclusions in SG&A expenses amounted to EUR 163 million and were primarily due to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent and integration and transaction related costs.

In the fourth quarter 2017, non-IFRS exclusions in other income and expenses amounted to EUR 96 million and were primarily due to restructuring and associated charges for Nokia's cost reduction and efficiency improvement initiatives and a EUR 32 million impairment charge.

Non-IFRS exclusions in profit/(loss) attributable to the equity holders of the parent

In the fourth quarter 2017, non-IFRS exclusions in profit/(loss) attributable to the equity holders of the parent amounted to EUR 1 094 million and were primarily due to the non-IFRS exclusions affecting operating profit, in addition to non-IFRS exclusions that adversely affected financial income and expenses and taxes as follows:

In the fourth quarter 2017, non-IFRS exclusions in financial income and expenses amounted to EUR 32 million and were due to a change in the fair value of the financial liability to acquire Nokia Shanghai Bell ("NSB") non-controlling interest and the loss on sale of financial assets.

In the fourth quarter 2017, non-IFRS exclusions in taxes amounted to EUR 540 million and were primarily due to deferred tax expenses of EUR 738 million from re-measurement of deferred tax assets primarily resulting from the tax rate change in the United States, partially offset by a tax benefit related to non-IFRS exclusions in operating profit.

Cost savings program        

The following table summarizes the financial information related to our cost savings program, as of the end of the fourth quarter 2017. 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 and 2017 results and future expectations related to our cost savings program and network equipment swaps.

On a cumulative basis, Nokia continues to be on track to achieve the targeted EUR 1.2 billion of recurring annual cost savings in full year 2018.

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 acquired businesses into our operations and achieve the targeted business plans and benefits, including targeted benefits, synergies, cost savings and efficiencies; 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) 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; 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; and L) statements preceded by or including "believe," "expect," "anticipate," "foresee," "sees," "target," "estimate," "designed," "aim," "plans," "intends," "focus," "continue," "project," "should," "is to," "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) general economic and market conditions and other developments in the economies where we operate; 3) 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; 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; 5) our dependence on a limited number of customers and large multi-year agreements;  6) Nokia Technologies' ability to protect its IPR and to maintain and establish new sources of patent licensing income and IPR-related revenues, particularly in the smartphone market; 7) 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; 8) our ability to achieve the anticipated benefits, synergies, cost savings and efficiencies of acquisitions, including the acquisition of Alcatel Lucent, and our ability to implement changes to our organizational and operational structure efficiently;  9) our ability to manage and improve our financial and operating performance, cost savings, competitiveness and synergies generally and after the acquisition of Alcatel Lucent; 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) 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; 13) 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; 14) our ability to identify and remediate material weaknesses in our internal control over financial reporting; 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; 17) Nokia Technologies' ability to generate net sales and profitability through licensing of the Nokia brand, technology licensing and the development and sales of products and services for instance in digital health, as well as other business ventures, which may not materialize as planned; 18) our exposure to various legislative frameworks and jurisdictions that regulate fraud and enforce economic trade sanctions and policies, and the possibility of proceedings or investigations that result in fines, penalties or sanctions; 19) adverse developments with respect to customer financing or extended payment terms we provide to customers; 20) 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; 21) our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 22) our ability to retain, motivate, develop and recruit appropriately skilled employees; 23) disruptions to our manufacturing, service creation, delivery, logistics and supply chain processes, and the risks related to our geographically-concentrated production sites; 24) the impact of litigation, arbitration, agreement-related disputes or product liability allegations associated with our business; 25) our ability to optimize our capital structure as planned and re-establish our investment grade credit rating or otherwise improve our credit ratings; 26) our ability to achieve targeted benefits from or successfully achieve the required administrative, legal, regulatory and other conditions and implement planned transactions, as well as the liabilities related thereto; 27) our involvement in joint ventures and jointly-managed companies; 28) the carrying amount of our goodwill may not be recoverable; 29) uncertainty related to the amount of dividends and equity return we are able to distribute to shareholders for each financial period; 30) pension costs, employee fund-related costs, and healthcare costs; and 31) risks related to undersea infrastructure, as well as the risk factors specified on pages 67 to 85 of our 2016 annual report on Form 20-F 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.

The financial report was authorized for issue by management on January 31, 2018.

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 2017" annual report, which includes the review by the Board of Directors and the audited annual accounts, in week 12 of 2018. The annual report will be available at www.nokia.com/financials.
• Nokia plans to publish its first quarter 2018 results on April 26, 2018.
• Nokia's Annual General Meeting 2018 is planned to be held on May 30, 2018.
• Nokia plans to publish its second quarter and half year 2018 results on July 26, 2018.
• Nokia plans to publish its third quarter and January-September 2018 results on October 25, 2018.

About Nokia
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