Nokia announced its financial results for the second quarter of 2018 with a decrease in net sales from EUR 5.6bn in Q2 2017 to EUR 5.3bn in Q2 2018. On a constant currency basis, net sales would have been down 1%.
Non-IFRS diluted EPS in Q2 2018 was EUR 0.03, compared to EUR 0.08 in Q2 2017. Reported diluted EPS in Q2 2018 was negative EUR 0.05, compared to negative EUR 0.07 in Q2 2017.
In the second quarter, net cash and current financial investments decreased by approximately EUR 2.0 billion, primarily due to two expected items: the payment of the dividend of approximately EUR 940 million; and the payment of employee incentives related to Nokia's business performance in 2017, which was the primary driver of the decrease in liabilities within net working capital of approximately EUR 600 million.
Nokia's Networks business net sales were EUR 4.7bn, with operating profit of EUR 69mn. "Our backlog was strong at the end of Q2, and we continue to expect commercial 5G network deployments to begin near the end of 2018," the company said.
Continued progress was made in Q2 with Nokia aiming to diversify and grow by targeting attractive adjacent markets. Strong momentum continued with large enterprise vertical and webscale customers, with double-digit year-on-year growth in net sales.
Momentum in end-to-end strategy continued, with approximately 40% of sales pipeline now comprised of solutions, products and services from multiple business groups.
Nokia Technologies net sales were EUR 361mn, with operating profit of EUR 292mn. Strong track record maintained, with 23% year-on-year growth in recurring licensing net sales and 27% year-on-year operating profit increase in Q2, primarily related to license agreements entered into in 2017.
Nokia Technologies continued to make good progress on new licensing agreements and no major agreements were announced in Q2.
Nokia reiterated full year 2018 Nokia-level guidance and remains on target to deliver EUR 1.2 billion of recurring annual cost savings in full year 2018.
In its Networks business, Nokia expects improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America. Results in 2018 and over the longer term are expected to be influenced by its ability to scale its supply chain operations to meet increasing demand and by recovery actions aiming to address increased price pressure, in addition to the timing of completions and acceptances of certain projects, particularly related to 5G.
Nokia continues to see opportunities to build on its track record in Nokia Licensing within Nokia Technologies and drive a compound annual growth rate of approximately 10% for recurring net sales over the 3-year period ending 2020.
Commenting on the results, Nokia's President and CEO Rajeev Suri said, "Nokia's Q2 2018 results were consistent with our view that the first half of the year would be weak followed by an increasingly robust second half. Pleasingly, I am able to confirm that we expect to deliver 2018 results within the ranges of our annual guidance.
"Our topline started to recover in the second quarter, with sales in constant currency approximately flat at both Group and Networks levels; year-on-year constant currency sales growth in three of five of our Networks business groups and in three out of our six regions."
As for Nokia's entry into the enterprise market, Rajeev Suri emphasized that Nokia continued to proceed well in Q2. According to him, year-on-year sales in constant currency increased approximately 30%, with strength in both vertical markets and webscale companies. Nokia Technologies had a very good second quarter, with recurring licensing revenues up very strongly and operating profit up at excellent levels compared to Q2 last year.
"Our view about the acceleration of 5G has not changed and we continue to believe that Nokia is well-positioned for the coming technology cycle given the strength of our end-to-end portfolio. Our deal win rate is very good, with significant recent successes in the key early 5G markets of the United States and China", he added.
"The installed base of our superb high-capacity AirScale product, which enables customers to quickly upgrade to 5G without a hardware swap, is growing fast. And, the strength of our end-to-end portfolio remains a differentiator. When you look at our sales pipeline, 40% of it is now comprised of end-to-end deals. That is the highest level we have seen to-date. Business and regional mix continued to have some impact on gross margin, as did near-term actions of a small number of large customers funding their 5G entry within their existing budget plans."
"We expect market conditions to improve further in the second half, particularly in Q4, Nokia's seasonally strongest quarter, and as 5G accelerates significantly," he concluded.
