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 their 2019 cost reduction goals.
The vendor has launched 15 live 5G networks with its 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.
They 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 were previously flagged related to the initial phase of 5G are now materializing. In particular, Nokia’s Q3 gross margin was impacted by product mix, a high cost level associated with their 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.
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. |
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|
EUR million (except for EPS in EUR) |
Q3'19 |
Q3'18 |
YoY change |
Constant currency YoY change |
Q1-Q3'19 |
Q1-Q3'18 |
YoY change |
Constant currency 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 investments1 |
344 |
1 879 |
(82)% |
|
344 |
1 879 |
(82)% |
|
|
1Net cash and current financial investments does not include lease liabilities. |
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OUTLOOK
Full Year 2019 |
Metric |
|
|
|
Non-IFRS diluted earnings per share |
EUR 0.21 plus or minus 3 cents (updated from 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 flow1 |
Somewhat negative (updated from slightly positive), 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 per share |
EUR 0.25 plus or minus 5 cents (updated from 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 flow1 |
Positive (updated from clearly positive) |
|
Long term (3 to 5 years) |
||
|
|
Non-IFRS operating margin |
12 – 14% (new) |
|
|
Annual distribution to shareholders |
An earnings-based growing dividend of approximately 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. |
1Free 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.
Nokia, Q3 2019 compared to Q3 2018, non-IFRS
NOKIA FINANCIAL RESULTS
EUR million (except for EPS in EUR) |
Q3'19 |
Q3'18 |
YoY change |
Constant currency YoY change |
Q1-Q3'19 |
Q1-Q3'18 |
YoY change |
Constant currency 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. |
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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.
Net sales by region
EUR million |
Q3'19 |
Q3'18 |
YoY change |
Constant currency YoY change |
Q1-Q3'19 |
Q1-Q3'18 |
YoY change |
Constant currency 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
EUR million |
Q3'19 |
Q3'18 |
YoY change |
Constant currency YoY change |
Q1-Q3'19 |
Q1-Q3'18 |
YoY change |
Constant currency 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% |
|
Other1 |
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. |
||||||||
Cash and 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 which was partially offset by a decrease in receivables, as well as continued cash outflows related to restructuring; and capital expenditures and income taxes.
Nokia 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.
|
|
|
|
|
|
|
|
EUR million, at end of period |
Q3'19 |
Q2'19 |
QoQ change |
Q4'18 |
YTD change |
|
Total cash and current financial investments |
4 824 |
4 788 |
1% |
6 873 |
(30)% |
|
Net cash and current financial investments1 |
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. |
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In the third quarter 2019, net cash from operating activities was EUR 464 million.
The vendor expects their 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 their 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.
In addition, since the announcement of the Nokia’s 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.
Nokia plans to publish its fourth quarter and full year 2019 results on February 6, 2020.