SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

Report of Foreign Private Issuer

Pursuant to Rule 13a -16 or 15d -16 of

the Securities Exchange Act of 1934

 

Report on Form 6-K dated July 26, 2018

(Commission File No. 1-13202)

 

Nokia Corporation

Karaportti 3

FI-02610 Espoo

Finland

(Name and address of registrant’s principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-Fx     Form 40-F: o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes: o     Nox

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes: o     Nox

 

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes: o     Nox

 

 

 



 

Enclosures:

 

Nokia stock exchange release dated July 26, 2018: Nokia Corporation Financial Report for Q2 and Half Year 2018

 



 

HALF YEAR FINANCIAL REPORT

 

July 26, 2018

 

Nokia Corporation

Half Year Financial Report
July 26, 2018 at 08:00 (CET +1)

 

Nokia Corporation Financial Report for Q2 and Half Year 2018

 

First half 2018 as expected; improvement expected in Nokia’s Networks business in second half 2018

 

·                  Full year 2018 Nokia-level guidance reiterated

 

This is a summary of the Nokia Corporation financial report for Q2 and half year 2018 published today. The complete financial report for Q2 and half year 2018 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 financial reports with tables.

 

FINANCIAL HIGHLIGHTS

 

·                  Net sales in Q2 2018 were EUR 5.3bn, compared to EUR 5.6bn in Q2 2017. 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.

·                  Continued progress was made in Q2 with our strategy 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 our end-to-end strategy continued, with approximately 40% of our sales pipeline now comprised of solutions, products and services from multiple business groups.

 

1



 

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; no major agreements were announced in Q2.

 

Outlook

 

·                  Nokia reiterates 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: a) our ability to scale our supply chain operations to meet increasing demand; b) recovery actions to address increased price pressure; and c) 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.

·                  Please refer to the full details and other targets in the Outlook section of this press release.

 

Second quarter and January-June 2018 non-IFRS results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)

 

EUR million (except for EPS in EUR)

 

Q2’18

 

Q2’17

 

YoY 
change

 

Constant
currency
YoY 
change

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY 
change

 

Constant
currency
YoY 
change

 

Net sales (non-IFRS)

 

5 318

 

5 629

 

(6

)%

(1

)%

10 246

 

11 017

 

(7

)%

0

%

Nokia’s Networks business

 

4 693

 

4 971

 

(6

)%

0

%

9 018

 

9 873

 

(9

)%

(1

)%

Nokia Technologies

 

361

 

369

 

(2

)%

(2

)%

726

 

616

 

18

%

19

%

Group Common and Other

 

278

 

307

 

(9

)%

(4

)%

530

 

562

 

(6

)%

(1

)%

Gross profit (non-IFRS)

 

2 038

 

2 350

 

(13

)%

 

 

3 979

 

4 546

 

(12

)%

 

 

Gross margin % (non-IFRS)

 

38.3

%

41.7

%

(340

)bps

 

 

38.8

%

41.3

%

(250

)bps

 

 

Operating profit (non-IFRS)

 

334

 

574

 

(42

)%

 

 

573

 

915

 

(37

)%

 

 

Nokia’s Networks business

 

69

 

406

 

(83

)%

 

 

112

 

730

 

(85

)%

 

 

Nokia Technologies

 

292

 

230

 

27

%

 

 

565

 

346

 

63

%

 

 

Group Common and Other

 

(27

)

(62

)

(56

)%

 

 

(105

)

(161

)

(35

)%

 

 

Operating margin % (non-IFRS)

 

6.3

%

10.2

%

(390

)bps

 

 

5.6

%

8.3

%

(270

)bps

 

 

Financial income and expenses (non-IFRS)

 

(84

)

(63

)

33

%

 

 

(200

)

(144

)

39

%

 

 

Income taxes (non-IFRS)

 

(106

)

(74

)

43

%

 

 

(143

)

(122

)

17

%

 

 

Profit for the period (non-IFRS)

 

139

 

441

 

(68

)%

 

 

223

 

644

 

(65

)%

 

 

Profit attributable to the equity holders of the parent (non-IFRS)

 

144

 

449

 

(68

)%

 

 

230

 

646

 

(64

)%

 

 

Non-controlling interests (non-IFRS)

 

(4

)

(9

)

 

 

 

 

(7

)

(2

)

 

 

 

 

EPS, EUR diluted (non-IFRS)

 

0.03

 

0.08

 

(63

)%

 

 

0.04

 

0.11

 

(64

)%

 

 

 

2



 

Second quarter and January-June 2018 reported results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)

 

EUR million (except for EPS in EUR)

 

Q2’18

 

Q2’17

 

YoY
change

 

Constant
currency
YoY
change

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY
change

 

Constant
currency
YoY
change

 

Net sales

 

5 313

 

5 619

 

(5

)%

(1

)%

10 237

 

10 996

 

(7

)%

0

%

Nokia’s Networks business

 

4 693

 

4 971

 

(6

)%

0

%

9 018

 

9 873

 

(9

)%

(1

)%

Nokia Technologies

 

361

 

369

 

(2

)%

(2

)%

726

 

616

 

18

%

19

%

Group Common and Other

 

278

 

307

 

(9

)%

(4

)%

530

 

562

 

(6

)%

(1

)%

Non-IFRS exclusions

 

(5

)

(11

)

(55

)%

 

 

(9

)

(21

)

(57

)%

 

 

Gross profit

 

1 860

 

2 236

 

(17

)%

 

 

3 666

 

4 361

 

(16

)%

 

 

Gross margin %

 

35.0

%

39.8

%

(480

)bps

 

 

35.8

%

39.7

%

(390

)bps

 

 

Operating loss

 

(221

)

(45

)

391

%

 

 

(557

)

(173

)

222

%

 

 

Nokia’s Networks business

 

69

 

406

 

(83

)%

 

 

112

 

730

 

(85

)%

 

 

Nokia Technologies

 

292

 

230

 

27

%

 

 

565

 

346

 

63

%

 

 

Group Common and Other

 

(27

)

(62

)

(56

)%

 

 

(105

)

(161

)

(35

)%

 

 

Non-IFRS exclusions

 

(555

)

(620

)

(10

)%

 

 

(1 129

)

(1 088

)

4

%

 

 

Operating margin %

 

(4.2

)%

(0.8

)%

(340

)bps

 

 

(5.4

)%

(1.6

)%

(380

)bps

 

 

Financial income and expenses

 

(56

)

(287

)

(80

)%

 

 

(164

)

(433

)

(62

)%

 

 

Income taxes

 

10

 

(103

)

 

 

 

 

104

 

(256

)

 

 

 

 

Loss for the period

 

(271

)

(433

)

(37

)%

 

 

(625

)

(868

)

(28

)%

 

 

Loss attributable to the equity holders of the parent

 

(267

)

(423

)

(37

)%

 

 

(618

)

(896

)

(31

)%

 

 

Non-controlling interests

 

(4

)

(9

)

 

 

 

 

(7

)

28

 

 

 

 

 

EPS, EUR diluted

 

(0.05

)

(0.07

)

(29

)%

 

 

(0.11

)

(0.16

)

(31

)%

 

 

Net cash and current financial investments

 

2 144

 

3 964

 

(46

)%

 

 

2 144

 

3 964

 

(46

)%

 

 

 


(1)Results are as reported 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 the non-IFRS exclusions section included in discussions of both the quarterly and year to date performance and 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.

 

CEO STATEMENT

 

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.

 

3



 

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.

 

Our entry into the enterprise market continued to proceed well in Q2. 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.

 

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.

 

Rajeev Suri
President and CEO

 

4



 

OUTLOOK

 

 

 

Metric

 

Guidance

 

Commentary

Nokia

 

Non-IFRS operating margin

 

9-11% for full year 2018 and
12-16% for full year 2020

 

Nokia ‘s guidance for significant improvement between full year 2018 and full year 2020 is primarily due to expectations for:

a) Improved results in Nokia’s Networks business, which are detailed below;

b) Improved results in Nokia Technologies, which are detailed below; and

c) Lower Nokia support function costs within Nokia’s Networks business and Group Common and Other.

 

 

Non-IFRS diluted earnings per share

 

EUR 0.23 - 0.27 in full year 2018 and
EUR 0.37 - 0.42 in full year 2020

 

 

 

 

 

 

 

 

 

 

Dividend

 

Approximately 40% to 70% of non-IFRS EPS on a long-term basis

 

Nokia’s Board of Directors is committed to proposing a growing dividend, including for 2018.

 

 

 

 

 

 

 

 

 

Recurring free cash flow

 

Slightly positive in full year 2018 and clearly positive in full year 2020

 

Recurring free cash flow is expected to improve over the longer-term, due to lower cash outflows related to restructuring and network equipment swaps(1) and improved operational results over time.

 

 

 

 

 

 

 

 

 

Recurring annual cost savings for Nokia, excluding Nokia Technologies

 

Approximately EUR 1.2 billion of recurring annual cost savings in full year 2018, of which approximately EUR 800 million are expected from operating expenses(1) 

 

The reference period is full year 2015, in which the combined operating expenses of Nokia and Alcatel-Lucent, excluding Nokia Technologies, were approximately EUR 7.3 billion.
As a result of active efforts to drive 5G adoption, and in the interest of our long-term strategy given the acceleration of 5G, in 2018 we expect to incur approximately EUR 100 to 200 million of temporary incremental expenses related to 5G customer trials that will partially reduce the positive impact from the recurring annual cost savings.

 

 

 

 

 

 

 

 

 

Network equipment swaps

 

Approximately EUR 1.4 billion of charges and cash outflows in total(1)

 

The charges related to network equipment swaps are being recorded as non-IFRS exclusions, and therefore do not affect Nokia’s non-IFRS operating profit.

 

 

 

 

 

 

 

 

 

Non-IFRS financial income and expenses

 

Expense of approximately EUR 350 million in full year 2018 and approximately EUR 300 million over the longer-term
(This is an update to earlier guidance of approximately EUR 300 million for full year 2018)

 

Nokia’s outlook for non-IFRS financial income and expenses in full year 2018 and over the longer-term is expected to be influenced by factors including:

·                  Net interest expenses related to interest-bearing liabilities and defined benefit pension and other post-employment benefit plans;

·                  Foreign exchange fluctuations and hedging costs; and

·                  Expenses related to the sale of receivables.

 

 

 

 

 

 

 

 

 

Non-IFRS tax rate

 

Approximately 30% for full year 2018 and 25% over the longer-term

 

Nokia’s outlook for non-IFRS tax rate for full year 2018 and over the longer-term is expected to be influenced by factors including the absolute level of profits, regional profit mix and any further changes to our operating model.
Nokia expects cash outflows related to taxes to be approximately EUR 400 million in full year 2018 and approximately EUR 450 million over the longer-term until Nokia’s US or Finnish deferred tax assets are fully utilized.
(This is an update to earlier commentary for cash outflows related to taxes to be approximately EUR 450 million in full year 2018.)

 

 

 

 

 

 

 

 

 

Capital expenditures

 

Approximately EUR 700 million in full year 2018 and approximately EUR 600 million over the longer-term

 

Primarily attributable to Nokia’s Networks business, and consistent with the depreciation of property, plant and equipment over the longer-term.

 

 

 

 

 

 

 

Nokia’s Networks business

 

Net sales

 

Outperform its primary addressable market in 2018 and over the longer-term

 

For Nokia’s Networks business, Nokia expects net sales to outperform its primary addressable market and operating margin to expand between full year 2018 and full year 2020.

 

5



 

 

 

Operating margin

 

6-9% for full year 2018 and
9-12% for full year 2020

 

Nokia’s outlook for net sales and operating margin for Nokia’s Networks business in 2018 and 2020 is expected to be influenced by factors including:

·                  An approximately 1 to 3 percent decline in the primary addressable market for Nokia’s Networks business in full year 2018, compared to 2017, on a constant currency basis;

·                  Customer demand for 5G, with commercial 5G network deployments expected to begin near the end of 2018;

·                  Improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America, following weakness in the first half of 2018 (This is an update to earlier commentary for improved market conditions in the second half of 2018, particularly in North America.);

·                  Growth in the primary addressable market for Nokia’s Networks business in 2019 and 2020, on a constant currency basis;

·                  Our ability to scale our supply chain operations to meet increasing demand;

·                  Recovery actions to address increased price pressure, including the ability to offset price erosion through cost reductions (new commentary);

·                  The timing of completions and acceptances of certain projects, particularly related to 5G (new commentary);

·                  Focus on targeted growth opportunities in attractive adjacent markets;

·                  Building a strong standalone software business;

·                  Improved R&D productivity resulting from new ways of working and the reduction of legacy platforms over time;

·                  Lower support function costs, including IT and site costs;

·                  Uncertainty related to potential mergers or acquisitions by our customers;

·                  Product and regional mix; and

·                  Competitive and other industry dynamics.

 

 

 

 

 

 

 

Nokia Licensing within Nokia Technologies

 

Recurring net sales

 

Grow at a compound annual growth rate (CAGR) of approximately 10% over the 3-year period ending 2020

 

Due to risks and uncertainties in determining the timing and value of significant patent, brand and technology licensing agreements, Nokia believes it is not appropriate to provide annual outlook ranges for Nokia Licensing within Nokia Technologies. Although annual results are difficult to forecast, Nokia expects net sales growth and operating margin expansion over the 3-year period ending 2020.

In full year 2017, licensing net sales were approximately EUR 1.6 billion, of which approximately EUR 300 million were non-recurring in nature and related to catch-up net sales for prior years.
Nokia’s outlook for net sales and operating margin for Nokia Licensing within Nokia Technologies is expected to be influenced by factors including:

·                  The timing and value of new patent licensing agreements with smartphone vendors, automotive companies and consumer electronics companies;

·                  Renegotiation of expiring patent licensing agreements;

·                  Increases or decreases in net sales related to existing patent licensees;

·                  Results in brand and technology licensing;

·                  Costs to protect and enforce our intellectual property rights; and

·                  The regulatory landscape.

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

Expand to approximately 85% for full year 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOKIA IN Q2 2018 — NON-IFRS

 

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.

 

6



 

Year-on-year changes in non-IFRS net sales and non-IFRS operating profit

 

Nokia non-IFRS net sales decreased 6% year-on-year. On a constant currency basis, Nokia non-IFRS net sales would have decreased 1% year-on-year.

 

EUR million, non-IFRS

 

Net sales

 

% change

 

Gross
profit

 

(R&D)

 

(SG&A)

 

Other
income and
(expenses)

 

Operating
profit

 

Change in
operating
margin %

 

Networks business

 

(278

)

(6

)%

(313

)

5

 

31

 

(60

)

(337

)

(670

)bps

Nokia Technologies

 

(8

)

(2

)%

2

 

24

 

25

 

11

 

62

 

1 860

bps

Group Common and Other

 

(29

)

(9

)%

(1

)

(3

)

4

 

35

 

35

 

1 050

bps

Eliminations

 

3

 

 

 

0

 

0

 

0

 

0

 

0

 

 

 

Nokia

 

(311

)

(6

)%

(312

)

25

 

60

 

(14

)

(240

)

(390

)bps

 

On a year-on-year basis, foreign exchange fluctuations had a negative impact on non-IFRS gross profit, a positive impact on non-IFRS operating expenses and an approximately neutral net impact on non-IFRS operating profit in the second quarter 2018.

 

Year-on-year changes in non-IFRS profit attributable to the equity holders of the parent

 

EUR million, non-
IFRS

 

Operating
profit

 

Financial
income and
expenses

 

Income taxes

 

Profit

 

Non-
controlling
interests

 

Profit attributable to
the equity holders of
the parent

 

Nokia

 

(240

)

(21

)

(32

)

(302

)

(5

)

(305

)

 

Non-IFRS financial income and expenses

 

The net negative fluctuation in non-IFRS financial income and expenses was primarily due to the absence of venture fund distributions. Interest expenses associated with the inclusion of new items such as costs related to the sale of receivables and financing elements from customer and other contracts as a result of the adoption of new IFRS standards in the first quarter 2018 were offset by lower interest expenses from financing activities.

 

Non-IFRS income taxes

 

Increase in non-IFRS tax rate to 43% in the second quarter 2018 was primarily due to regional profit mix. In the second quarter 2017 regional profit mix resulted in an unusually low non-IFRS tax rate of 14% and in addition, in the second quarter 2018 the combination of lower absolute level of profit and certain prior year tax charges increased the non-IFRS tax rate.

 

7



 

NOKIA IN Q2 2018 - REPORTED

 

FINANCIAL DISCUSSION

 

Year-on year changes in net sales and operating profit

 

Nokia net sales decreased 5% year-on-year. On a constant currency basis, Nokia net sales would have decreased 1% year-on-year.

 

EUR million

 

Net Sales

 

% change

 

Gross
profit

 

(R&D)

 

(SG&A)

 

Other
income and
(expenses)

 

Operating
profit

 

Change in
operating
margin %

 

Networks business

 

(278

)

(6

)%

(313

)

5

 

31

 

(60

)

(337

)

(670

)bps

Nokia Technologies

 

(8

)

(2

)%

2

 

24

 

25

 

11

 

62

 

1 860

bps

Group Common and Other

 

(29

)

(9

)%

(1

)

(3

)

4

 

35

 

35

 

1 050

bps

Eliminations

 

3

 

 

 

0

 

0

 

0

 

0

 

0

 

 

 

Non-IFRS exclusions

 

6

 

(55

)%

(64

)

23

 

34

 

72

 

65

 

 

 

Nokia

 

(306

)

(5

)%

(376

)

49

 

93

 

59

 

(176

)

(340

)bps

 

Year-on year changes in profit attributable to the equity holders of the parent

 

EUR million

 

Operating
profit

 

Financial
income and
expenses

 

Income taxes

 

Profit

 

Non-
controlling
interests

 

Profit attributable to
the equity holders of
the parent

 

Nokia

 

(176

)

231

 

113

 

162

 

(5

)

156

 

 

Financial income and expenses

 

The net positive fluctuation in financial income and expenses was primarily due to the absence of non-IFRS exclusions related to Nokia’s tender offer to purchase the 6.50% notes due January 15, 2028, the 6.45% notes due March 15, 2029 and the 5.375% notes due May 15, 2019 and the absence of non-recurring interest expense resulting from the uncertain tax position related to disposal of former Alcatel-Lucent railway signaling business to Thales as well as the release of cumulative exchange differences related to abandonment of foreign operations and the change in financial liability to acquire NSB non-controlling interest.

 

Income taxes

 

The change in taxes from an expense in the second quarter 2017 to a slight benefit in the second quarter 2018 was primarily due to absence of non-recurring tax expenses related to the disposal of the former Alcatel Lucent railway signaling business to Thales and deferred tax valuation allowance both of which had negative impact on the second quarter 2017 tax expense.

 

8



 

Non-IFRS exclusions in Q2 2018

 

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.

 

Cost savings program

 

The following table summarizes the financial information related to our cost savings program, as of the end of the second quarter 2018. 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.

 

In EUR million, approximately

 

Q2’18

 

Opening balance of restructuring and associated liabilities

 

830

 

+ Charges in the quarter

 

30

 

- Cash outflows in the quarter

 

110

 

= Ending balance of restructuring and associated liabilities

 

750

 

of which restructuring provisions

 

680

 

of which other associated liabilities

 

70

 

 

 

 

 

Total expected restructuring and associated charges

 

1 900

 

- Cumulative recorded

 

1 490

 

= Charges remaining to be recorded

 

410

 

 

 

 

 

Total expected restructuring and associated cash outflows

 

2 250

 

- Cumulative recorded

 

1 190

 

= Cash outflows remaining to be recorded

 

1 060

 

 

The following table summarizes our full year 2016 and 2017 results and future expectations related to our cost savings program and network equipment swaps.

 

 

 

Actual

 

Actual

 

Actual

 

Expected amounts for

 

In EUR million, approximately
rounded to the nearest EUR 50 

 

 

 

 

 

Cumulative
through
the end of

 

FY 2018
as of the end of

 

FY 2019 and
beyond
as of the end of

 

Total
as of the end of

 

million

 

2016

 

2017

 

2017

 

Q1’18

 

Q2’18

 

Q1’18

 

Q2’18

 

Q1’18

 

Q2’18

 

Recurring annual cost savings

 

550

 

250

 

800

 

400

 

400

 

0

 

0

 

1 200

 

1 200

 

- operating expenses

 

350

 

150

 

500

 

300

 

300

 

0

 

0

 

800

 

800

 

- cost of sales

 

200

 

100

 

300

 

100

 

100

 

0

 

0

 

400

 

400

 

Restructuring and associated charges

 

750

 

550

 

1 300

 

600

 

600

 

0

 

0

 

1 900

 

1 900

 

Restructuring and associated cash outflows

 

400

 

550

 

950

 

650

 

650

 

650

 

650

 

2 250

 

2 250

 

Charges related to network equipment swaps

 

150

 

450

 

600

 

650

 

650

 

150

 

150

 

1 400

 

1 400

 

Cash outflows related to network equipment swaps

 

150

 

450

 

600

 

650

 

650

 

150

 

150

 

1 400

 

1 400

 

 

9



 

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”,

 

10



 

“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 strategy is subject to various risks and uncertainties and we may be unable to successfully implement our strategic plans, sustain or improve the operational and financial performance of our business groups, correctly identify or successfully pursue business opportunities or otherwise grow our business; 2) general economic and market conditions and other developments in the economies where we operate; 3) competition and our ability to effectively and profitably 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) our ability to maintain our existing sources of intellectual property-related revenue, establish new sources of revenue and protect our intellectual property from infringement; 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) Nokia Technologies’ ability to protect its IPR and to maintain and establish new sources of patent, brand and technology licensing income and IPR-related revenues, particularly in the smartphone market, which may not materialize as planned, 13) 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; 14) 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; 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) our exposure to various legal frameworks regulating corruption, fraud, trade policies, and other risk areas, and the possibility of proceedings or

 

11



 

investigations that result in fines, penalties or sanctions; 18) adverse developments with respect to customer financing or extended payment terms we provide to customers; 19) 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; 20) our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 21) our ability to retain, motivate, develop and recruit appropriately skilled employees; 22) disruptions to our manufacturing, service creation, delivery, logistics and supply chain processes, and the risks related to our geographically-concentrated production sites; 23) the impact of litigation, arbitration, agreement-related disputes or product liability allegations associated with our business; 24) our ability to re-establish investment grade rating or maintain our credit ratings; 25) our ability to achieve targeted benefits from, or successfully implement planned transactions, as well as the liabilities related thereto; 26) our involvement in joint ventures and jointly-managed companies; 27) the carrying amount of our goodwill may not be recoverable; 28) uncertainty related to the amount of dividends and equity return we are able to distribute to shareholders for each financial period; 29) pension costs, employee fund-related costs, and healthcare costs; and 30) risks related to undersea infrastructure, as well as the risk factors specified on pages 71 to 89 of our 2017 annual report on Form 20-F published on March 22, 2018 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 July 25, 2018.

 

·                  Nokia plans to publish its third quarter and January-September 2018 results on October 25, 2018.

 

Media Enquiries:

 

Nokia

Communications
Tel. +358 (0) 10 448 4900
Email: press.services@nokia.com
Jon Peet, Vice President, Corporate Communications

 

12



Investor Enquiries:

 

Nokia Investor Relations

Tel. +358 4080 3 4080

Email: investor.relations@nokia.com

 

About Nokia

 

We create the technology to connect the world. Powered by the research and innovation of Nokia Bell Labs, we serve communications service providers, governments, large enterprises and consumers, with the industry’s most complete, end-to-end portfolio of products, services and licensing.

 

We adhere to the highest ethical business standards as we create technology with social purpose, quality and integrity. Nokia is enabling the infrastructure for 5G and the Internet of Things to transform the human experience www.nokia.com

 

13



 

Financial Report for Q2 and Half Year 2018

 

First half 2018 as expected; improvement expected in Nokia’s Networks business in second half 2018

 

·                  Full year 2018 Nokia-level guidance reiterated

 

Financial highlights

 

·             Net sales in Q2 2018 were EUR 5.3bn, compared to EUR 5.6bn in Q2 2017. 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.

·             Continued progress was made in Q2 with our strategy 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 our end-to-end strategy continued, with approximately 40% of our 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; no major agreements were announced in Q2.

 

Outlook

 

·             Nokia reiterates 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: a) our ability to scale our supply chain operations to meet increasing demand; b) recovery actions to address increased price pressure; and c) 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.

·             Please refer to the full details and other targets in the Outlook section of this press release.

 

July 26, 2018

 

1



 

Second quarter and January-June 2018 non-IFRS results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)

 

EUR million (except for EPS in EUR)

 

Q2’18

 

Q2’17

 

YoY
change

 

Constant
currency
YoY
change

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY
change

 

Constant
currency
YoY
change

 

Net sales (non-IFRS)

 

5 318

 

5 629

 

(6

)%

(1

)%

10 246

 

11 017

 

(7

)%

0

%

Nokia’s Networks business

 

4 693

 

4 971

 

(6

)%

0

%

9 018

 

9 873

 

(9

)%

(1

)%

Nokia Technologies

 

361

 

369

 

(2

)%

(2

)%

726

 

616

 

18

%

19

%

Group Common and Other

 

278

 

307

 

(9

)%

(4

)%

530

 

562

 

(6

)%

(1

)%

Gross profit (non-IFRS)

 

2 038

 

2 350

 

(13

)%

 

 

3 979

 

4 546

 

(12

)%

 

 

Gross margin % (non-IFRS)

 

38.3

%

41.7

%

(340

)bps

 

 

38.8

%

41.3

%

(250

)bps

 

 

Operating profit (non-IFRS)

 

334

 

574

 

(42

)%

 

 

573

 

915

 

(37

)%

 

 

Nokia’s Networks business

 

69

 

406

 

(83

)%

 

 

112

 

730

 

(85

)%

 

 

Nokia Technologies

 

292

 

230

 

27

%

 

 

565

 

346

 

63

%

 

 

Group Common and Other

 

(27

)

(62

)

(56

)%

 

 

(105

)

(161

)

(35

)%

 

 

Operating margin % (non-IFRS)

 

6.3

%

10.2

%

(390

)bps

 

 

5.6

%

8.3

%

(270

)bps

 

 

Financial income and expenses (non-IFRS)

 

(84

)

(63

)

33

%

 

 

(200

)

(144

)

39

%

 

 

Income taxes (non-IFRS)

 

(106

)

(74

)

43

%

 

 

(143

)

(122

)

17

%

 

 

Profit for the period (non-IFRS)

 

139

 

441

 

(68

)%

 

 

223

 

644

 

(65

)%

 

 

Profit attributable to the equity holders of the parent (non-IFRS)

 

144

 

449

 

(68

)%

 

 

230

 

646

 

(64

)%

 

 

Non-controlling interests (non-IFRS)

 

(4

)

(9

)

 

 

 

 

(7

)

(2

)

 

 

 

 

EPS, EUR diluted (non-IFRS)

 

0.03

 

0.08

 

(63

)%

 

 

0.04

 

0.11

 

(64

)%

 

 

 

Second quarter and January-June 2018 reported results. Refer to note 1, “Basis of Preparation” and note 15, “Performance measures”, in the “Financial statement information” section for further details(1)

 

EUR million (except for EPS in EUR)

 

Q2’18

 

Q2’17

 

YoY
change

 

Constant
currency
YoY
change

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY
change

 

Constant
currency

YoY
change

 

Net sales

 

5 313

 

5 619

 

(5

)%

(1

)%

10 237

 

10 996

 

(7

)%

0

%

Nokia’s Networks business

 

4 693

 

4 971

 

(6

)%

0

%

9 018

 

9 873

 

(9

)%

(1

)%

Nokia Technologies

 

361

 

369

 

(2

)%

(2

)%

726

 

616

 

18

%

19

%

Group Common and Other

 

278

 

307

 

(9

)%

(4

)%

530

 

562

 

(6

)%

(1

)%

Non-IFRS exclusions

 

(5

)

(11

)

(55

)%

 

 

(9

)

(21

)

(57

)%

 

 

Gross profit

 

1 860

 

2 236

 

(17

)%

 

 

3 666

 

4 361

 

(16

)%

 

 

Gross margin %

 

35.0

%

39.8

%

(480

)bps

 

 

35.8

%

39.7

%

(390

)bps

 

 

Operating loss

 

(221

)

(45

)

391

%

 

 

(557

)

(173

)

222

%

 

 

Nokia’s Networks business

 

69

 

406

 

(83

)%

 

 

112

 

730

 

(85

)%

 

 

Nokia Technologies

 

292

 

230

 

27

%

 

 

565

 

346

 

63

%

 

 

Group Common and Other

 

(27

)

(62

)

(56

)%

 

 

(105

)

(161

)

(35

)%

 

 

Non-IFRS exclusions

 

(555

)

(620

)

(10

)%

 

 

(1 129

)

(1 088

)

4

%

 

 

Operating margin %

 

(4.2

)%

(0.8

)%

(340

)bps

 

 

(5.4

)%

(1.6

)%

(380

)bps

 

 

Financial income and expenses

 

(56

)

(287

)

(80

)%

 

 

(164

)

(433

)

(62

)%

 

 

Income taxes

 

10

 

(103

)

 

 

 

 

104

 

(256

)

 

 

 

 

Loss for the period

 

(271

)

(433

)

(37

)%

 

 

(625

)

(868

)

(28

)%

 

 

Loss attributable to the equity holders of the parent

 

(267

)

(423

)

(37

)%

 

 

(618

)

(896

)

(31

)%

 

 

Non-controlling interests

 

(4

)

(9

)

 

 

 

 

(7

)

28

 

 

 

 

 

EPS, EUR diluted

 

(0.05

)

(0.07

)

(29

)%

 

 

(0.11

)

(0.16

)

(31

)%

 

 

Net cash and current financial investments

 

2 144

 

3 964

 

(46

)%

 

 

2 144

 

3 964

 

(46

)%

 

 

 


(1) Results are as reported 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 the non-IFRS exclusions section included in discussions of both the quarterly and year to date performance and 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.

 

2



 

CEO statement

 

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.

 

Our entry into the enterprise market continued to proceed well in Q2. 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.

 

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.

 

Rajeev Suri
President and CEO

 

3



 

Outlook

 

 

 

Metric

 

Guidance

 

Commentary

Nokia

 

Non-IFRS operating margin

 

9-11% for full year 2018 and
12-16% for full year 2020

 

Nokia ‘s guidance for significant improvement between full year 2018 and full year 2020 is primarily due to expectations for:

a)        Improved results in Nokia’s Networks business, which are detailed below;

b)        Improved results in Nokia Technologies, which are detailed below; and

c)         Lower Nokia support function costs within Nokia’s Networks business and Group Common and Other.

 

 

Non-IFRS diluted earnings per share

 

EUR 0.23 - 0.27 in full year 2018 and
EUR 0.37 - 0.42 in full year 2020

 

 

 

Dividend

 

Approximately 40% to 70% of non-IFRS EPS on a long-term basis

 

Nokia’s Board of Directors is committed to proposing a growing dividend, including for 2018.

 

 

Recurring free cash flow

 

Slightly positive in full year 2018 and clearly positive in full year 2020

 

Recurring free cash flow is expected to improve over the longer-term, due to lower cash outflows related to restructuring and network equipment swaps(1) and improved operational results over time.

 

 

Recurring annual cost savings for Nokia, excluding Nokia Technologies

 

Approximately EUR 1.2 billion of recurring annual cost savings in full year 2018, of which approximately EUR 800 million are expected from operating expenses(1) 

 

The reference period is full year 2015, in which the combined operating expenses of Nokia and Alcatel-Lucent, excluding Nokia Technologies, were approximately EUR 7.3 billion.

As a result of active efforts to drive 5G adoption, and in the interest of our long-term strategy given the acceleration of 5G, in 2018 we expect to incur approximately EUR 100 to 200 million of temporary incremental expenses related to 5G customer trials that will partially reduce the positive impact from the recurring annual cost savings.

 

 

Network equipment swaps

 

Approximately EUR 1.4 billion of charges and cash outflows in total(1)

 

The charges related to network equipment swaps are being recorded as non-IFRS exclusions, and therefore do not affect Nokia’s non-IFRS operating profit.

 

 

Non-IFRS financial income and expenses

 

Expense of approximately EUR 350 million in full year 2018 and approximately EUR 300 million over the longer-term
(This is an update to earlier guidance of approximately EUR 300 million for full year 2018)

 

Nokia’s outlook for non-IFRS financial income and expenses in full year 2018 and over the longer-term is expected to be influenced by factors including:

·             Net interest expenses related to interest-bearing liabilities and defined benefit pension and other post-employment benefit plans;

·             Foreign exchange fluctuations and hedging costs; and

·             Expenses related to the sale of receivables.

 

 

Non-IFRS tax rate

 

Approximately 30% for full year 2018 and 25% over the longer-term

 

Nokia’s outlook for non-IFRS tax rate for full year 2018 and over the longer-term is expected to be influenced by factors including the absolute level of profits, regional profit mix and any further changes to our operating model.
Nokia expects cash outflows related to taxes to be approximately EUR 400 million in full year 2018 and approximately EUR 450 million over the longer-term until Nokia’s US or Finnish deferred tax assets are fully utilized.
(This is an update to earlier commentary for cash outflows related to taxes to be approximately EUR 450 million in full year 2018.)

 

 

Capital expenditures

 

Approximately EUR 700 million in full year 2018 and approximately EUR 600 million over the longer-term

 

Primarily attributable to Nokia’s Networks business, and consistent with the depreciation of property, plant and equipment over the longer-term.

 

 

Net sales

 

Outperform its primary addressable market in

 

 

 

 

4



 

Nokia’s Networks business

 

 

 

2018 and over the longer-term

 

For Nokia’s Networks business, Nokia expects net sales to outperform its primary addressable market and operating margin to expand between full year 2018 and full year 2020.

 

 

Operating margin

 

6-9% for full year 2018 and
9-12% for full year 2020

 

Nokia’s outlook for net sales and operating margin for Nokia’s Networks business in 2018 and 2020 is expected to be influenced by factors including:

 

·             An approximately 1 to 3 percent decline in the primary addressable market for Nokia’s Networks business in full year 2018, compared to 2017, on a constant currency basis;

·             Customer demand for 5G, with commercial 5G network deployments expected to begin near the end of 2018;

·             Improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America, following weakness in the first half of 2018 (This is an update to earlier commentary for improved market conditions in the second half of 2018, particularly in North America.);

·             Growth in the primary addressable market for Nokia’s Networks business in 2019 and 2020, on a constant currency basis;

·             Our ability to scale our supply chain operations to meet increasing demand;

·             Recovery actions to address increased price pressure, including the ability to offset price erosion through cost reductions (new commentary);

·             The timing of completions and acceptances of certain projects, particularly related to 5G (new commentary);

·             Focus on targeted growth opportunities in attractive adjacent markets;

·             Building a strong standalone software business;

·             Improved R&D productivity resulting from new ways of working and the reduction of legacy platforms over time;

·             Lower support function costs, including IT and site costs;

·             Uncertainty related to potential mergers or acquisitions by our customers;

·             Product and regional mix; and

·             Competitive and other industry dynamics.

 

 

 

 

 

 

 

Nokia Licensing within Nokia Technologies

 

Recurring net sales

 

Grow at a compound annual growth rate (CAGR) of approximately 10% over the 3-year period ending 2020

 

Due to risks and uncertainties in determining the timing and value of significant patent, brand and technology licensing agreements, Nokia believes it is not appropriate to provide annual outlook ranges for Nokia Licensing within Nokia Technologies. Although annual results are difficult to forecast, Nokia expects net sales growth and operating margin expansion over the 3-year period ending 2020.

 

In full year 2017, licensing net sales were approximately EUR 1.6 billion, of which approximately EUR 300 million were non-recurring in nature and related to catch-up net sales for prior years.

 

Nokia’s outlook for net sales and operating margin for Nokia Licensing within Nokia Technologies is expected to be influenced by factors including:

 

·             The timing and value of new patent licensing agreements with smartphone vendors, automotive companies and consumer electronics companies;

·             Renegotiation of expiring patent licensing agreements;

·             Increases or decreases in net sales related to existing patent licensees;

·             Results in brand and technology licensing;

·             Costs to protect and enforce our intellectual property rights; and

·             The regulatory landscape.

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

Expand to approximately 85% for full year 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)For further details related to the cost savings and network equipment swaps guidance, please refer to the “Cost savings program” on page 8.

 

5



 

Nokia in Q2 2018 – Non-IFRS

 

Net sales (non-IFRS) Margin (non-IFRS) Components of operating profit (non-IFRS)

 

 

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.

 

Year-on-year changes in non-IFRS net sales and non-IFRS operating profit

 

Nokia non-IFRS net sales decreased 6% year-on-year. On a constant currency basis, Nokia non-IFRS net sales would have decreased 1% year-on-year.

 

EUR million, non-IFRS Net sales % change Gross profit (R&D) (SG&A) Other income and (expenses) Operating profit Change in operating margin %

 

 

On a year-on-year basis, foreign exchange fluctuations had a negative impact on non-IFRS gross profit, a positive impact on non-IFRS operating expenses and an approximately neutral net impact on non-IFRS operating profit in the second quarter 2018.

 

Year-on-year changes in non-IFRS profit attributable to the equity holders of the parent

 

EUR million, non-IFRS Operating profit Financial income and expenses Income taxes Profit Non-controlling interests Profit attributable to the equity holders of the parent

 

 

Non-IFRS financial income and expenses

 

The net negative fluctuation in non-IFRS financial income and expenses was primarily due to the absence of venture fund distributions. Interest expenses associated with the inclusion of new items such as costs related to the sale of receivables and financing elements from customer and other contracts as a result of the adoption of new IFRS standards in the first quarter 2018 were offset by lower interest expenses from financing activities.

 

Non-IFRS income taxes

 

Increase in non-IFRS tax rate to 43% in the second quarter 2018 was primarily due to regional profit mix. In the second quarter 2017 regional profit mix resulted in an unusually low non-IFRS tax rate of 14% and in addition, in the second quarter 2018 the combination of lower absolute level of profit and certain prior year tax charges increased the non-IFRS tax rate.

 

6



 

Nokia in Q2 2018 – Reported

 

Components of net sales Margin Components of operating profit

 

Financial discussion

 

Year-on-year changes in net sales and operating profit

 

Nokia net sales decreased 5% year-on-year. On a constant currency basis, Nokia net sales would have decreased 1% year-on-year.

 

EUR million Net Sales % change Gross profit (R&D) (SG&A) Other income and (expenses) Operating profit Change in operating margin %

 

Year-on-year changes in profit attributable to the equity holders of the parent

 

EUR million Operating profit Financial income and expenses Income taxes Profit Non-controlling interests Profit attributable to the equity holders of the parent

 

Financial income and expenses

 

The net positive fluctuation in financial income and expenses was primarily due to the absence of non-IFRS exclusions related to Nokia’s tender offer to purchase the 6.50% notes due January 15, 2028, the 6.45% notes due March 15, 2029 and the 5.375% notes due May 15, 2019 and the absence of non-recurring interest expense resulting from the uncertain tax position related to disposal of former Alcatel-Lucent railway signaling business to Thales as well as the release of cumulative exchange differences related to abandonment of foreign operations and the change in financial liability to acquire NSB non-controlling interest.

 

Income taxes

 

The change in taxes from an expense in the second quarter 2017 to a slight benefit in the second quarter 2018 was primarily due to absence of non-recurring tax expenses related to the disposal of the former Alcatel Lucent railway signaling business to Thales and deferred tax valuation allowance both of which had negative impact on the second quarter 2017 tax expense.

 

Non-IFRS exclusions in Q2 2018

 

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.

 

7



 

Cost savings program

 

The following table summarizes the financial information related to our cost savings program, as of the end of the second quarter 2018. 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.

 

In EUR million, approximately

 

Q2’18

 

Opening balance of restructuring and associated liabilities

 

830

 

+ Charges in the quarter

 

30

 

- Cash outflows in the quarter

 

110

 

= Ending balance of restructuring and associated liabilities

 

750

 

of which restructuring provisions

 

680

 

of which other associated liabilities

 

70

 

 

 

 

 

Total expected restructuring and associated charges

 

1 900

 

- Cumulative recorded

 

1 490

 

= Charges remaining to be recorded

 

410

 

 

 

 

 

Total expected restructuring and associated cash outflows

 

2 250

 

- Cumulative recorded

 

1 190

 

= Cash outflows remaining to be recorded

 

1 060

 

 

The following table summarizes our full year 2016 and 2017 results and future expectations related to our cost savings program and network equipment swaps.

 

 

 

 

 

 

 

Actual
Cumulative

 

Expected amounts for

 

In EUR million, approximately
rounded to the nearest EUR 50

 

Actual

 

Actual

 

through
the end of

 

FY 2018
as of the end of

 

FY 2019 and beyond
as of the end of

 

Total
as of the end of

 

million

 

2016

 

2017

 

2017

 

Q1’18

 

Q2’18

 

Q1’18

 

Q2’18

 

Q1’18

 

Q2’18

 

Recurring annual cost savings

 

550

 

250

 

800

 

400

 

400

 

0

 

0

 

1 200

 

1 200

 

- operating expenses

 

350

 

150

 

500

 

300

 

300

 

0

 

0

 

800

 

800

 

- cost of sales

 

200

 

100

 

300

 

100

 

100

 

0

 

0

 

400

 

400

 

Restructuring and associated charges

 

750

 

550

 

1 300

 

600

 

600

 

0

 

0

 

1 900

 

1 900

 

Restructuring and associated cash outflows

 

400

 

550

 

950

 

650

 

650

 

650

 

650

 

2 250

 

2 250

 

Charges related to network equipment swaps

 

150

 

450

 

600

 

650

 

650

 

150

 

150

 

1 400

 

1 400

 

Cash outflows related to network equipment swaps

 

150

 

450

 

600

 

650

 

650

 

150

 

150

 

1 400

 

1 400

 

 

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.

 

8



 

Nokia’s Networks business in Q2 2018

 

Operational highlights

 

Nokia had several 5G-related developments that underpin our momentum going into the second half of 2018 when meaningful 5G commercial roll-outs are to start in the United States. These developments reflect Nokia’s ongoing progress in delivering well on the four pillars of our strategy.

 

In our first strategy pillar, leading in high-performance, end-to-end networks with communication service providers, we announced, just after the second quarter ended, a one-year frame agreement, valued at up to EUR 1 billion, to support China Mobile’s transition to a future-oriented network infrastructure to meet growing data traffic demand.

 

In June, we announced with T-Mobile a key milestone in delivering mobile 5G with the successful completion of the first bi-directional over-the-air 5G data session in the US on a 3GPP-compliant 5G New Radio system. The 5G data transmission was conducted with Nokia AirScale baseband and radio, AirFrame Open Edge Server, and AirScale Cloud RAN. Similarly, Nokia and Verizon also successfully completed outdoors, rather than in a lab, a series of data sessions over the 3GPP New Radio 5G standard outdoors. Nokia successfully completed a 5G New Radio data call as part of a Chinese government-sponsored 5G Technology R&D trial. And, in France, we did the same, successfully completing a 5G call with SFR using 3GPP-compliant 5G New Radio system.

 

We launched Nokia AirFrame Open Edge Server, the industry’s first Edge Cloud data center solution to meet the stringent and diverse low-latency data processing demands and advanced applications for consumers and industries. In combination with the Nokia ReefShark chipset and our cloud infrastructure software, AirFrame Open Edge Server has been developed for the 5G era and leverages open architectures for fast deployment.

 

Nokia launched new services to help operators prioritize their 5G investments and bring 5G-based services to market faster and more cost effectively. Utilizing the Nokia AVA cognitive services platform and machine learning algorithms, Nokia 5G Digital Design simulates the impact of 5G use cases on networks. Cross-Domain Architecture and Site Evolution Services address detailed deployment considerations and help translate 5G business plans into clear and precise technical requirements across all domains, regardless of vendor.

 

China Mobile ranked Nokia #1 in a central bid to supply equipment for its regional optical transport network, with deployment of the new network having already started. The new optical backbone is a key part of the next-generation of mobile services with the arrival of 5G.

 

Frontier Communications Corporation chose Nokia to deliver 10-gigabit business and residential services in Texas, Florida and California through Nokia’s next-generation XGS-PON fiber technology. Greenlight Networks also selected Nokia’s XGS-PON technology to deliver better, faster and smarter ultra-broadband access to customers in New York. Nokia is also further supporting the rollout of fiber networks in Nepal; this time with Subisu.

 

Nokia and AT&T announced plans to develop Internet of Things (IoT) services for a range of industries, including transportation and health care. Using Nokia’s Worldwide IoT Network Grid (WING), a key aim is to give enterprises new capabilities like 5G network slicing which allows a single network to be partitioned into multiple networks.

 

We announced that Nokia and its venture focused on software-defined networking (SDN), Nuage Networks, will extend Telefónica Spain’s existing SDN infrastructure to include modern software-defined data centers (SDDC). This modernization with Nokia Nuage and IP routing solutions will expand Telefónica Spain’s service offerings from enterprise hosting and co-location to enterprise wide-area networks (WAN) and enterprise cloud infrastructure.

 

In our second strategy pillar, expanding network sales to select vertical markets needing high-performing, secure networks, State Grid Corporation of China (SGCC) chose Nokia to upgrade its optical transport network in Beijing and Tianjin in order to meet fast-growing bandwidth capacity demands, improve operational efficiencies and support a wide range of technologies that will be required as SGCC makes its electrical grid smarter.

 

We introduced the Advanced Command Center to help public safety agencies transition from voice-based to broadband data-centric emergency response. As part of Nokia’s ViTrust portfolio, the new solution combines next-generation emergency services (NEXES), advanced rich media emergency call-taking and dispatch capabilities with Nokia’s Integrated Operations Center for smart and safe city management.

 

In our third pillar, developing a strong software business at scale, we acquired SpaceTime Insight, a California-based company that provides machine learning-powered analytics and IoT applications for some of the world’s biggest transportation, energy and utilities organizations, including FedEx and Singapore Power. The acquisition supports Nokia’s software strategy by bringing SpaceTime Insight’s sales expertise and proven track record in IoT application development, machine learning and data science to the Nokia

 

9



 

Software IoT product unit. We also announced the creation of a global alliances organization to enhance Nokia Software’s progress in building its partner ecosystem.

 

Nokia appointed Sri Reddy as co-president of our IP/Optical Networks business group and as a member of the Group Leadership Team.

 

10



 

 

Financial highlights

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency YoY
change

 

Net sales

 

4 693

 

4 971

 

(6

)%

0

%

Ultra Broadband Networks

 

2 055

 

2 165

 

(5

)%

0

%

Global Services

 

1 326

 

1 448

 

(8

)%

(3

)%

IP Networks and Applications

 

1 313

 

1 358

 

(3

)%

2

%

Gross profit

 

1 632

 

1 945

 

(16

)%

 

 

Gross margin %

 

34.8

%

39.1

%

(430

)bps

 

 

R&D

 

(911

)

(916

)

(1

)%

 

 

SG&A

 

(621

)

(652

)

(5

)%

 

 

Other income and expenses

 

(30

)

30

 

 

 

 

 

Operating profit

 

69

 

406

 

(83

)%

 

 

Operating margin %

 

1.5

%

8.2

%

(670

)bps

 

 

 

 

11



 

 

Net sales by region

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency
YoY change

 

Asia-Pacific

 

926

 

1 026

 

(10

)%

(3

)%

Europe

 

1 039

 

1 091

 

(5

)%

(3

)%

Greater China

 

518

 

627

 

(17

)%

(17

)%

Latin America

 

299

 

298

 

0

%

11

%

Middle East & Africa

 

443

 

431

 

3

%

7

%

North America

 

1 468

 

1 498

 

(2

)%

6

%

Total

 

4 693

 

4 971

 

(6

)%

0

%

 

Financial discussion

 

Year-on-year changes in net sales and operating profit

 

Nokia’s Networks business net sales decreased 6% year-on-year.  On a constant currency basis, Nokia’s Networks business net sales would have been flat.

 

A discussion of our results within Ultra Broadband Networks, Global Services and IP Networks and Applications is included in the sections “Ultra Broadband Networks”, “Global Services” and “IP Networks and Applications” below.

 

EUR million

 

Net Sales

 

% change

 

Gross profit

 

(R&D)

 

(SG&A)

 

Other income 
and 
(expenses)

 

Operating 
profit

 

Change in 
operating 
margin %

 

Ultra Broadband Networks

 

(110

)

(5

)%

(142

)

0

 

38

 

(38

)

(142

)

(640

)bps

Global Services

 

(122

)

(8

)%

(104

)

(1

)

(1

)

(8

)

(112

)

(770

)bps

IP Networks and Applications

 

(45

)

(3

)%

(67

)

5

 

(7

)

(15

)

(81

)

(590

)bps

Networks business

 

(278

)

(6

)%

(313

)

5

 

31

 

(60

)

(337

)

(670

)bps

 

On a year-on-year basis, the decrease in gross profit was due to both a lower gross margin and lower net sales. The decrease in gross margin was primarily due to price erosion exceeding cost erosion across most regions and segments.

 

12



 

On a year-on-year basis, foreign exchange fluctuations had a negative impact on gross profit, a positive impact on operating expenses and a slightly negative net impact on operating profit in the second quarter 2018.

 

13



 

Ultra Broadband Networks in Q2 2018

 

 

Financial highlights

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

2 055

 

2 165

 

(5

)%

0

%

Mobile Networks

 

1 565

 

1 619

 

(3

)%

2

%

Fixed Networks

 

490

 

546

 

(10

)%

(6

)%

Gross profit

 

898

 

1 040

 

(14

)%

 

 

Gross margin %

 

43.7

%

48.0

%

(430

)bps

 

 

R&D

 

(581

)

(581

)

0

%

 

 

SG&A

 

(255

)

(293

)

(13

)%

 

 

Other income and expenses

 

(13

)

25

 

 

 

 

 

Operating profit

 

49

 

191

 

(74

)%

 

 

Operating margin %

 

2.4

%

8.8

%

(640

)bps

 

 

 

 

14



 

Net sales by region

 

EUR million Q2'18 Q2'17 YoY change Ultra Broadband Networks Mobile Networks Fixed Networks Asia-Pacific 409 437 (6)% 0% Europe 368 417 (12)% (11)% Greater China 218 275 (21)% (21)% Latin America 86 101 (15)% (8)% Middle East & Africa 143 149 (4)% (1)% North America 831 786 6% 14% Total 2 055 2 165 (5)% 0% 2% (6)% change less than 3%

 

Financial discussion

 

Net sales

 

Ultra Broadband Networks net sales decreased 5% year-on-year. On a constant currency basis, Ultra Broadband Networks net sales would have been approximately flat year-on-year, with 2% growth in Mobile Networks offset by a 6% decline in Fixed Networks.

 

The decrease in Mobile Networks net sales was primarily due to radio networks, partially offset by growth in small cells, core networks and microwave.

 

The decrease in Fixed Networks net sales was primarily due to broadband access and services.

 

Operating profit

 

The decrease in Ultra Broadband Networks gross profit was primarily due to Mobile Networks. The decrease in Mobile Networks gross profit was due to both a lower gross margin and lower net sales. The decrease in Mobile Networks gross margin was primarily due to significantly lower margins in North America, Greater China, Asia-Pacific and Middle East & Africa, partially offset by favorable regional mix, as well as higher margins in Europe and Latin America. The decrease in Mobile Networks gross margin in North America was primarily due to price erosion exceeding cost erosion. The decrease in Mobile Networks gross margin in Greater China and Middle East & Africa was primarily due to specific projects with particular customers in each region.

 

The decrease in Ultra Broadband Networks SG&A expenses was primarily due to Mobile Networks. The decrease in Mobile Networks SG&A expenses was primarily due to lower personnel expenses, reflecting progress related to Nokia’s cost savings program. This was partially offset by higher costs related to 5G customer trials.

 

The net negative fluctuation in other income and expenses was primarily due to foreign exchange hedging and higher doubtful account allowances.

 

On a year-on-year basis, foreign exchange fluctuations had a negative impact on gross profit, a positive impact on operating expenses and a slightly negative net impact on operating profit in the second quarter 2018.

 

15



 

Global Services in Q2 2018

 

 

Financial highlights

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

1 326

 

1 448

 

(8

)%

(3

)%

Gross profit

 

201

 

305

 

(34

)%

 

 

Gross margin %

 

15.2

%

21.1

%

(590

)bps

 

 

R&D

 

(22

)

(21

)

5

%

 

 

SG&A

 

(160

)

(159

)

1

%

 

 

Other income and expenses

 

(9

)

(1

)

 

 

 

 

Operating profit

 

11

 

123

 

(91

)%

 

 

Operating margin %

 

0.8

%

8.5

%

(770

)bps

 

 

 

 

16



 

Net sales by region

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency
YoY change

 

Asia-Pacific

 

271

 

321

 

(16

)%

(8

)%

Europe

 

289

 

301

 

(4

)%

(1

)%

Greater China

 

195

 

232

 

(16

)%

(15

)%

Latin America

 

111

 

110

 

1

%

11

%

Middle East & Africa

 

209

 

180

 

16

%

23

%

North America

 

251

 

303

 

(17

)%

(11

)%

Total

 

1 326

 

1 448

 

(8

)%

(3

)%

 

Financial discussion

 

Net sales

 

Global Services net sales decreased 8% year-on-year. On a constant currency basis, Global Services net sales would have decreased 3% year-on-year.

 

The decrease in Global Services net sales was primarily due to network implementation, care and, to a lesser extent, network planning and optimization.

 

Operating profit

 

The decrease in Global Services gross profit was due to both a lower gross margin and lower net sales. The decrease in Global Services gross margin was primarily due to Network Implementation, particularly in Greater China, Asia-Pacific and Europe, partially offset by Middle East & Africa.

 

On a year-on-year basis, foreign exchange fluctuations had a slightly negative impact on gross profit, a slightly positive impact on operating expenses and a slightly negative net impact on operating profit in the second quarter 2018.

 

17



 

IP Networks and Applications in Q2 2018

 

 

Financial highlights

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency
 YoY change

 

Net sales

 

1 313

 

1 358

 

(3

)%

2

%

IP/Optical Networks

 

956

 

993

 

(4

)%

1

%

IP Routing

 

592

 

654

 

(9

)%

(5

)%

Optical Networks

 

365

 

339

 

8

%

13

%

Nokia Software

 

356

 

365

 

(2

)%

2

%

Gross profit

 

533

 

600

 

(11

)%

 

 

Gross margin %

 

40.6

%

44.2

%

(360

)bps

 

 

R&D

 

(309

)

(314

)

(2

)%

 

 

SG&A

 

(206

)

(199

)

4

%

 

 

Other income and expenses

 

(9

)

6

 

 

 

 

 

Operating profit

 

10

 

91

 

(89

)%

 

 

Operating margin %

 

0.8

%

6.7

%

(590

)bps

 

 

 

 

18



 

Net sales by region

 

EUR million Q2’18 Q2’17 YoY change Constant currency YoY change IP Networks and Applications IP/ Optical Networks Nokia Software

 

Financial discussion

 

Net sales

 

IP Networks and Applications net sales decreased 3% year-on-year. On a constant currency basis, IP Networks and Applications net sales would have increased 2% year-on-year, with 1% growth in IP/Optical Networks and 2% growth in Nokia Software.

 

The decrease in IP/Optical Networks net sales was due to IP routing, partially offset by growth in optical networks. The decrease in IP routing was primarily due to North America, Asia-Pacific and Greater China, partially offset by Europe. The growth in optical networks was primarily due to progress with targeted large enterprise vertical and webscale customers and certain customers in Asia-Pacific and Latin America.

 

Operating profit

 

The decrease in IP Networks and Applications gross profit was primarily due to IP/Optical Networks. The decrease in gross profit in IP/Optical Networks was due to both a lower gross margin and lower net sales. The decrease in IP/Optical Networks gross margin was primarily due to a lower gross margin in IP routing and product mix, with a higher proportion of optical networks net sales.

 

The net negative fluctuation in other income and expenses was primarily due to higher doubtful account allowances and foreign exchange hedging.

 

On a year-on-year basis, foreign exchange fluctuations had a negative impact on gross profit, a significantly positive impact on operating expenses and a slightly positive net impact on operating profit in the second quarter 2018.

 

19



 

Nokia Technologies in Q2 2018

 

Operational highlights

 

In the fourth pillar of our strategy, creating new business and licensing opportunities in the consumer ecosystem, Nokia announced and closed the sale of our Digital Health business in May. Nokia Technologies is now focused on licensing.

 

Following the sale of our Digital Health business, Gregory Lee stepped down from his role as President of Nokia Technologies to pursue opportunities elsewhere, and will leave Nokia in the coming months. Nokia announced the appointment of Maria Varsellona as president of Nokia Technologies, in addition to her existing role as the company’s Chief Legal Officer.

 

Our brand licensee, HMD Global, continued the refresh of its portfolio of Android smartphones with the Nokia 5.1, Nokia 3.1 and Nokia 2.1 models for global markets; and HMD launched its first smartphone with a notched display, the Nokia X6, exclusive to China.

 

 

Financial highlights

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

361

 

369

 

(2

)%

(2

)%

Gross profit

 

354

 

352

 

1

%

 

 

Gross margin %

 

98.1

%

95.4

%

270

bps

 

 

R&D

 

(36

)

(60

)

(40

)%

 

 

SG&A

 

(25

)

(50

)

(50

)%

 

 

Other income and expenses

 

(1

)

(12

)

 

 

 

 

Operating profit

 

292

 

230

 

27

%

 

 

Operating margin %

 

80.9

%

62.3

%

1 860

bps

 

 

 

20



 

 

Financial discussion

 

Net sales

 

Nokia Technologies net sales decreased 2% year-on-year, on both a reported and constant currency basis.

 

Of the EUR 361 million of net sales in the second quarter 2018, EUR 352 million related to patent, brand and technology licensing and EUR 9 million related to digital health.

 

The decrease in Nokia Technologies net sales was primarily due to the absence of approximately EUR 70 million of non-recurring licensing net sales, which benefitted the second quarter 2017. This was partially offset by higher recurring licensing net sales. Nokia Technologies non-recurring catch-up net sales in the second quarter 2018 amounted to approximately zero. In the second quarter 2017, non-recurring catch-up net sales were approximately EUR 70 million.

 

Operating profit

 

The decrease in Nokia Technologies R&D expenses was primarily due to reduced investments in digital media, lower patent portfolio costs and lower costs related to digital health following the sale of our digital health business on May 31, 2018.

 

The decrease in Nokia Technologies SG&A expenses was primarily due to lower licensing-related litigation costs and lower costs related to digital health following the sale of our digital health business on May 31, 2018.

 

The net positive fluctuation in other income and expenses was primarily due to the absence of a net negative fluctuation related to foreign exchange hedging, which adversely affected the second quarter 2017.

 

On a year-on-year basis, foreign exchange fluctuations had a slightly negative impact on gross profit, a slightly positive impact on operating expenses and an approximately neutral net impact on operating profit in the second quarter 2018.

 

21



 

Group Common and Other in Q2 2018

 

 

Financial highlights

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

278

 

307

 

(9

)%

(4

)%

Gross profit

 

53

 

54

 

(2

)%

 

 

Gross margin %

 

19.1

%

17.6

%

150

bps

 

 

R&D

 

(69

)

(66

)

5

%

 

 

SG&A

 

(49

)

(53

)

(8

)%

 

 

Other income and expenses

 

38

 

3

 

 

 

 

 

Operating loss

 

(27

)

(62

)

(56

)%

 

 

Operating margin %

 

(9.7

)%

(20.2

)%

1 050

bps

 

 

 

 

22



 

Financial discussion

 

Net sales

 

Group Common and Other net sales decreased 9% year-on-year. On a constant currency basis, Group Common and Other net sales would have decreased 4% year-on-year.

 

The decrease in Group Common and Other net sales was primarily due to Alcatel Submarine Networks, partially offset by Radio Frequency Systems. The decrease in Alcatel Submarine Networks was primarily due to the completion of two large projects, which benefitted the second quarter 2017.

 

Operating profit

 

The net positive fluctuation in other income and expenses was primarily due to gains in Nokia’s venture fund investments, including a non-recurring adjustment.

 

On a year-on-year basis, foreign exchange fluctuations had a slightly negative impact on gross profit, a slightly positive impact on operating expenses and a slightly positive net impact on operating profit in the second quarter 2018.

 

23



 

Cash and cash flow in Q2 2018

 

Nokia change in net cash and current financial investments (EUR billion)

 

 

EUR million, at end of period

 

Q2’18

 

Q2’17

 

YoY change

 

Q1’18

 

QoQ change

 

Total cash and current financial investments(1)

 

5 861

 

7 917

 

(26

)%

7 897

 

(26

)%

Net cash and current financial investments(1)

 

2 144

 

3 964

 

(46

)%

4 176

 

(49

)%

 


(1) Total cash and current financial investments consists of cash and cash equivalents and current financial investments. Net cash and current financial investments equals total cash and current financial investments less long-term and short-term interest-bearing liabilities. For details, please refer to note 9, “Net cash and current financial investments”, in the “Financial statement information” section in this report.

 

During the second quarter 2018, Nokia’s total cash and current financial investments decreased by EUR 2 036 million and Nokia’s net cash and current financial investments decreased by EUR 2 032 million. For both, a majority of the decline was driven by two expected items:

 

·             The payment of the dividend of approximately EUR 940 million; and

·             The payment of 2017 performance-related incentives to employees, which was the primary driver of the decrease in liabilities of approximately EUR 600 million.

 

Foreign exchange rates had an approximately EUR 170 million negative impact on net cash and current financial investments. Approximately half of the negative impact related to US dollar denominated bonds, and was offset by the higher fair valuation of the financial instruments which were used to hedge these liabilities. Approximately half of the negative impact related to balance sheet items in a variety of foreign currencies, and was offset by related positive impacts in liabilities within net working capital from certain hedging activities.

 

In the second quarter 2018, net cash and current financial investments used in operating activities was EUR 830 million:

 

·             Nokia’s adjusted profit before changes in net working capital was EUR 250 million in the second quarter 2018.

·             In the second quarter 2018, Nokia experienced a decrease in net cash and current financial investments related to net working capital of approximately EUR 980 million.

·                  Nokia experienced a decrease in net cash and current financial investments related to restructuring and associated cash items in the second quarter 2018 of approximately EUR 120 million. Excluding this, Nokia experienced a decrease in net cash and current financial investments related to net working capital of approximately EUR 860 million primarily due to a decrease in liabilities and, to a lesser extent, an increase in inventories and an increase in receivables.

·                  The decrease in net cash and current financial investments related to the increase in receivables was approximately EUR 130 million, primarily due to a seasonal increase.

 

24



 

·                  The decrease in net cash and current financial investments related to the increase in inventories was approximately EUR 140 million, primarily due to our decision to ensure sufficient flexibility to deliver higher levels of equipment sales in the second half of 2018.

·                  The decrease in net cash and current financial investments related to the decrease in liabilities was approximately EUR 600 million, primarily due to the payment of employee incentives related to Nokia’s business performance in 2017 and, to a lesser extent a decrease in deferred revenue. This was partially offset by an increase in accounts payable related to higher inventories and longer payment terms, and positive impacts in liabilities within net working capital from certain hedging activities, which offset approximately half of the EUR 170 million negative impact of foreign exchange rates on net cash and current financial investments.

 

·             In addition, Nokia experienced a decrease in net cash and current financial investments related to income taxes of approximately EUR 100 million.

·             Also, Nokia experienced a decrease in net cash and current financial investments related to net interest of approximately EUR 10 million.

 

In the second quarter 2018, net cash and current financial investments used in investing activities primarily related to capital expenditures of approximately EUR 100 million.

 

In the second quarter 2018, net cash and current financial investments used in financing activities primarily related to the payment of the dividend of approximately EUR 940 million.

 

Related to the dividend paid in the second quarter 2018, a withholding tax of approximately EUR 130 million is expected to be paid in the third quarter 2018.

 

25



 

Nokia in half year 2018

 

Components of net sales

Margin

Components of operating profit

 

Financial highlights(1)

 

 

 

 

 

 

 

 

 

Constant
currency YoY 

 

EUR million (except EPS in EUR)

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

change

 

Net sales

 

10 237

 

10 996

 

(7

)%

0

%

Nokia’s Networks business

 

9 018

 

9 873

 

(9

)%

(1

)%

Nokia Technologies

 

726

 

616

 

18

%

19

%

Group Common and Other

 

530

 

562

 

(6

)%

(1

)%

Non-IFRS exclusions

 

(9

)

(21

)

(57

)%

 

 

Gross profit

 

3 666

 

4 361

 

(16

)%

 

 

Gross margin %

 

35.8

%

39.7

%

(390

)bps

 

 

Operating loss

 

(557

)

(173

)

222

%

 

 

Nokia’s Networks business

 

112

 

730

 

(85

)%

 

 

Nokia Technologies

 

565

 

346

 

63

%

 

 

Group Common and Other

 

(105

)

(161

)

(35

)%

 

 

Non-IFRS exclusions

 

(1 129

)

(1 088

)

4

%

 

 

Operating margin %

 

(5.4

)%

(1.6

)%

(380

)bps

 

 

Financial income and expenses

 

(164

)

(433

)

(62

)%

 

 

Income taxes

 

104

 

(256

)

 

 

 

 

Loss for the period

 

(625

)

(868

)

(28

)%

 

 

Loss attributable to the shareholders of the parent

 

(618

)

(896

)

(31

)%

 

 

Non-controlling interests

 

(7

)

28

 

 

 

 

 

EPS, EUR diluted

 

(0.11

)

(0.16

)

(31

)%

 

 

 


(1) Results are reported unless otherwise specified.

 

26



 

Financial discussion

 

Year-on-year changes in net sales and operating profit

 

In the first six months of 2018, Nokia net sales decreased 7% year-on-year.  On a constant currency basis, Nokia net sales would have been flat year-on-year.

 

EUR million

 

Net Sales

 

% change

 

Gross
profit

 

(R&D)

 

(SG&A)

 

Other income
and
(expenses)

 

Operating
profit

 

Change in
operating
margin %

 

Networks business

 

(855

)

(9

)%

(698

)

52

 

54

 

(26

)

(618

)

(620

)bps

Nokia Technologies

 

110

 

18

%

123

 

43

 

44

 

11

 

219

 

2 160

bps

Group Common and Other

 

(32

)

(6

)%

8

 

2

 

11

 

36

 

56

 

880

bps

Eliminations

 

6

 

 

 

0

 

0

 

0

 

0

 

0

 

 

 

Non-IFRS exclusions

 

12

 

(57

)%

(128

)

52

 

56

 

(21

)

(41

)

 

 

Nokia

 

(759

)

(7

)%

(695

)

147

 

165

 

(1

)

(384

)

(380

)bps

 

Year-on-year changes in profit attributable to the shareholders of the parent

 

EUR million

 

Operating profit

 

Financial income
and expenses

 

Income taxes

 

Profit

 

Non-controlling
interests

 

Profit attributable to the
equity holders of the
parent

 

Nokia

 

(384

)

269

 

360

 

243

 

35

 

278

 

 

Financial income and expenses

 

The net positive fluctuation in financial income and expenses was primarily due to the absence of non-IFRS exclusions related to Nokia’s tender offer to purchase the 6.50% notes due January 15, 2028, the 6.45% notes due March 15, 2029, the 6.75% notes due February 4, 2019 and the 5.375% notes due May 15, 2019 and the absence of non-recurring interest expense resulting from the non-recurring tax expense related to disposal of former Alcatel-Lucent railway signaling business to Thales as well as the release of cumulative exchange differences related to abandonment of foreign operations and the change in financial liability to acquire NSB non-controlling interest.

 

Income taxes

 

The income tax benefit, compared to income tax expense in the first half 2017, was primarily due to absence of non-recurring tax expenses related to the integration of the former Alcatel-Lucent and Nokia operating models, the disposal of the former Alcatel Lucent railway signaling business to Thales and deferred tax valuation allowance which all had negative impact on the first half 2017 tax expense.

 

Non-IFRS exclusions in first half 2018

 

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.

 

27



 

Nokia’s Networks business in half year 2018

 

 

Financial highlights

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

9 018

 

9 873

 

(9

)%

(1

)%

Ultra Broadband Networks

 

3 912

 

4 401

 

(11

)%

(4

)%

Global Services

 

2 565

 

2 809

 

(9

)%

(1

)%

IP Networks and Applications

 

2 540

 

2 663

 

(5

)%

3

%

Gross profit

 

3 181

 

3 879

 

(18

)%

 

 

Gross margin %

 

35.3

%

39.3

%

(400

)bps

 

 

R&D

 

(1 808

)

(1 860

)

(3

)%

 

 

SG&A

 

(1 265

)

(1 319

)

(4

)%

 

 

Other income and expenses

 

4

 

30

 

 

 

 

 

Operating profit

 

112

 

730

 

(85

)%

 

 

Operating margin %

 

1.2

%

7.4

%

(620

)bps

 

 

 

 

28



 

Net sales by region

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant
currency YoY
change

 

Asia-Pacific

 

1 832

 

2 072

 

(12

)%

(3

)%

Europe

 

2 024

 

2 067

 

(2

)%

0

%

Greater China

 

992

 

1 183

 

(16

)%

(13

)%

Latin America

 

588

 

525

 

12

%

27

%

Middle East & Africa

 

869

 

834

 

4

%

13

%

North America

 

2 713

 

3 192

 

(15

)%

(5

)%

Total

 

9 018

 

9 873

 

(9

)%

(1

)%

 

 

Financial discussion

 

Year-on-year changes in net sales and operating profit

 

In the first six months of 2018, Nokia’s Networks business net sales decreased 9% year-on-year.  On a constant currency basis, Nokia’s Networks business net sales would have decreased 1% year-on-year.

 

A discussion of our results within Ultra Broadband Networks, Global Services and IP Networks and Applications is included in the sections “Ultra Broadband Networks”, “Global Services” and “IP Networks and Applications” below.

 

EUR million

 

Net Sales

 

% change

 

Gross profit

 

(R&D)

 

(SG&A)

 

Other income
and
(expenses)

 

Operating
profit

 

Change in
operating
margin %

 

Ultra Broadband Networks

 

(489

)

(11

)%

(394

)

27

 

74

 

(9

)

(303

)

(650

)bps

Global Services

 

(244

)

(9

)%

(175

)

0

 

(1

)

2

 

(175

)

(620

)bps

IP Networks and Applications

 

(123

)

(5

)%

(129

)

25

 

(19

)

(18

)

(140

)

(530

)bps

Networks business

 

(855

)

(9

)%

(698

)

52

 

54

 

(26

)

(618

)

(620

)bps

 

On a year-on-year basis, the decrease in gross profit was due to both a lower gross margin and lower net sales. The decrease in gross margin was primarily due to price erosion exceeding cost erosion across most regions and segments.

 

On a year-on-year basis, foreign exchange fluctuations had a significantly negative impact on gross profit, a positive impact on operating expenses and a slightly negative net impact on operating profit in the first six months of 2018.

 

29



 

Ultra Broadband Networks in half year 2018

 

 

Financial highlights

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

3 912

 

4 401

 

(11

)%

(4

)%

Mobile Networks

 

2 978

 

3 353

 

(11

)%

(4

)%

Fixed Networks

 

935

 

1 048

 

(11

)%

(5

)%

Gross profit

 

1 777

 

2 171

 

(18

)%

 

 

Gross margin %

 

45.4

%

49.3

%

(390

)bps

 

 

R&D

 

(1 137

)

(1 164

)

(2

)%

 

 

SG&A

 

(520

)

(594

)

(12

)%

 

 

Other income and expenses

 

13

 

22

 

 

 

 

 

Operating profit

 

134

 

437

 

(69

)%

 

 

Operating margin %

 

3.4

%

9.9

%

(650

)bps

 

 

 

 

30



 

Net sales by region

 

EUR million Q1-Q2'18 Q1-Q2'17 YoY change Ultra Broadband Networks Mobile Networks Fixed Networks Asia-Pacific 809 894 (10)% 0% Europe 743 776 (4)% (4)% Greater China 405 516 (22)% (19)% Latin America 179 165 8% 21% Middle East & Africa 281 274 3% 8% North America 1 496 1 775 (16)% (6)% Total 3 912 4 401 (11)% (4)% (4)% (5)% Constant currency YoY change change less than 3%

 

Financial discussion

 

Net sales

 

In the first six months of 2018, Ultra Broadband Networks net sales decreased 11% year-on-year.  On a constant currency basis, Ultra Broadband Networks net sales would have decreased 4% year-on-year.

 

The decrease in Mobile Networks net sales was primarily due to radio networks, partially offset by growth in small cells and microwave.

 

The decrease in Fixed Networks net sales was primarily due to broadband access and services.

 

Operating profit

 

The decrease in Ultra Broadband Networks gross profit was primarily due to Mobile Networks. The decrease in Mobile Networks gross profit was due to both a lower gross margin and lower net sales. The decrease in Mobile Networks gross margin was primarily due to significantly lower margins in North America, Greater China and Middle East & Africa, partially offset by higher margins in Europe and Latin America. The decrease in Mobile Networks gross margin in North America was primarily due to price erosion exceeding cost erosion. The decrease in Mobile Networks gross margin in Greater China and Middle East & Africa was primarily due to specific projects with particular customers in each region.

 

The decrease in Ultra Broadband Networks R&D expenses was primarily due to Mobile Networks. The decrease in Mobile Networks R&D expenses was primarily due to lower personnel expenses, reflecting progress related to Nokia’s cost savings program.

 

The decrease in Ultra Broadband Networks SG&A expenses was primarily due to Mobile Networks. The decrease in Mobile Networks SG&A expenses was primarily due to lower personnel expenses, reflecting progress related to Nokia’s cost savings program. This was partially offset by higher costs related to 5G customer trials.

 

On a year-on-year basis, foreign exchange fluctuations had a significantly negative impact on gross profit, a positive impact on operating expenses and a slightly negative net impact on operating profit in the first six months of 2018.

 

31



 

Global Services in half year 2018

 

Financial highlights

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

2 565

 

2 809

 

(9

)%

(1

)%

Gross profit

 

373

 

548

 

(32

)%

 

 

Gross margin %

 

14.5

%

19.5

%

(500

)bps

 

 

R&D

 

(44

)

(44

)

0

%

 

 

SG&A

 

(324

)

(323

)

0

%

 

 

Other income and expenses

 

(1

)

(3

)

 

 

 

 

Operating profit

 

4

 

179

 

(98

)%

 

 

Operating margin %

 

0.2

%

6.4

%

(620

)bps

 

 

 

 

32



 

Net sales by region

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant
currency YoY
change

 

Asia-Pacific

 

539

 

647

 

(17

)%

(8

)%

Europe

 

565

 

572

 

(1

)%

1

%

Greater China

 

391

 

440

 

(11

)%

(7

)%

Latin America

 

211

 

197

 

7

%

20

%

Middle East & Africa

 

391

 

355

 

10

%

22

%

North America

 

469

 

598

 

(22

)%

(13

)%

Total

 

2 565

 

2 809

 

(9

)%

(1

)%

 

Financial discussion

 

Net sales

 

In the first six months of 2018, Global Services net sales decreased 9% year-on-year.  On a constant currency basis, Global Services net sales would have decreased 1% year-on-year.

 

The decrease in Global Services net sales was primarily due to network implementation, care and systems integration.

 

Operating profit

 

The decrease in Global Services gross profit was due to both a lower gross margin and lower net sales. The decrease in Global Services gross margin was primarily due to lower margins in Network Implementation, particularly in Europe, Greater China, Asia-Pacific and North America, partially offset by Middle East & Africa.

 

On a year-on-year basis, foreign exchange fluctuations had a negative impact on gross profit, a slightly positive impact on operating expenses and a slightly negative net impact on operating profit in the first six months of 2018.

 

33



 

IP Networks and Applications in half year 2018

 

Financial highlights

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

2 540

 

2 663

 

(5

)%

3

%

IP/Optical Networks

 

1 869

 

1 938

 

(4

)%

4

%

IP Routing

 

1 141

 

1 275

 

(11

)%

(4

)%

Optical Networks

 

727

 

663

 

10

%

18

%

Nokia Software

 

672

 

724

 

(7

)%

(1

)%

Gross profit

 

1 030

 

1 159

 

(11

)%

 

 

Gross margin %

 

40.6

%

43.5

%

(290

)bps

 

 

R&D

 

(627

)

(652

)

(4

)%

 

 

SG&A

 

(422

)

(403

)

5

%

 

 

Other income and expenses

 

(8

)

10

 

 

 

 

 

Operating (loss)/profit

 

(26

)

114

 

 

 

 

 

Operating margin %

 

(1.0

)%

4.3

%

(530

)bps

 

 

 

 

34



 

Net sales by region

 

 

 

 

 

Constant currency YoY change

EUR million

Q1-Q2’18

Q1-Q2’17

YoY change

IP Networks
and
Applications

IP/Optical
Networks

Nokia
Software

 

 

Financial discussion

 

Net sales

 

In the first six months of 2018, IP Networks and Applications net sales decreased 5% year-on-year.  On a constant currency basis, IP Networks and Applications net sales would have increased 3% year-on-year, with 4% growth in IP/Optical Networks, partially offset by a 1% decline in Nokia Software.

 

The decrease in IP/Optical Networks net sales was due to IP routing, partially offset by growth in optical networks. The decrease in IP routing was primarily due to North America, Asia-Pacific and Greater China. The growth in optical networks was primarily due to progress with targeted large enterprise vertical and webscale customers.

 

The decrease in Nokia Software net sales was primarily due to services, network management, digital experience and digital intelligence. This was partially offset by growth in emerging products. In the first six months of 2018, Nokia Software net sales benefitted from the acquisition of Comptel.

 

Operating profit

 

The decrease in IP Networks and Applications gross profit was due to both IP/Optical Networks and Nokia Software. The decrease in gross profit in IP/Optical Networks was due to both a lower gross margin and lower net sales. The decrease in IP/Optical Networks gross margin was primarily due to IP routing, partially offset by optical networks. The decrease in gross profit in Nokia Software was due to both lower net sales and a lower gross margin. The decrease in Nokia Software gross margin was primarily due to unfavorable product mix and lower margin projects in Europe and Asia-Pacific, as well as trial costs in Greater China.

 

The decrease in IP Networks and Applications R&D expenses was due to both Nokia Software and IP/Optical Networks. The decrease in Nokia Software R&D expenses was primarily due to improved productivity, following the successful implementation of a common software foundation. The decrease in IP/Optical Networks R&D expenses was primarily due to net positive foreign exchange fluctuations. On a constant currency basis, IP/Optical Networks R&D would have increased, primarily due to higher investments in our next generation FP4-based IP routing platform and PSE-3-based optical platform.

 

The increase in IP Networks and Applications SG&A expenses was due to both IP/Optical Networks and Nokia Software. The increase in IP/Optical Networks SG&A expenses was primarily due to higher investments in go to market activities particularly for targeted large enterprise vertical and webscale customers. The increase in Nokia Software SG&A expenses was primarily due to investments to build a standalone software sales force, with specialized go to market capabilities.

 

The net negative fluctuation in other income and expenses was primarily due to foreign exchange hedging and higher doubtful account allowances.

 

On a year-on-year basis, foreign exchange fluctuations had a significantly negative impact on gross profit, a significantly positive impact on operating expenses and a slightly positive net impact on operating profit in the first six months 2018.

 

35



 

Nokia Technologies in half year 2018

 

 

Financial highlights

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

726

 

616

 

18

%

19

%

Gross profit

 

709

 

586

 

21

%

 

 

Gross margin %

 

97.7

%

95.1

%

260

bps

 

 

R&D

 

(78

)

(121

)

(36

)%

 

 

SG&A

 

(64

)

(108

)

(41

)%

 

 

Other income and expenses

 

(1

)

(12

)

 

 

 

 

Operating profit

 

565

 

346

 

63

%

 

 

Operating margin %

 

77.8

%

56.2

%

2 160

bps

 

 

 

 

36



 

Financial discussion

 

Net sales

 

In the first six months of 2018, Nokia Technologies net sales increased 18% year-on-year. On a constant currency basis, Nokia Technologies net sales would have increased 19% year-on-year.

 

Of the EUR 726 million of net sales in the first six months of 2018, EUR 701 million related to patent, brand and technology licensing and EUR 25 million related to digital health.

 

The increase in Nokia Technologies net sales was primarily due to higher recurring licensing net sales. Nokia Technologies non-recurring catch-up net sales in the first six months of 2018 amounted to approximately zero. In the first six months of 2017, non-recurring net sales amounted to approximately zero.

 

Operating profit

 

The increase in Nokia Technologies gross profit was primarily due to higher net sales.

 

The decrease in Nokia Technologies R&D expenses was primarily due to reduced investments in digital media and lower patent portfolio costs.

 

The decrease in Nokia Technologies SG&A expenses was primarily due to lower licensing-related litigation costs.

 

The net positive fluctuation in other income and expenses was primarily due to the absence of a net negative fluctuation related to foreign exchange hedging, which adversely affected the first six months of 2017.

 

On a year-on-year basis, foreign exchange fluctuations had a slightly negative impact on gross profit, a slightly positive impact on operating expenses and an approximately neutral net impact on operating profit in the first six months of 2018.

 

37



 

Group Common and Other in half year 2018

 

 

Financial highlights

 

 

 

 

 

 

 

 

 

 

 

EUR million

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Constant currency
YoY change

 

Net sales

 

530

 

562

 

(6

)%

(1

)%

Gross profit

 

89

 

81

 

10

%

 

 

Gross margin %

 

16.8

%

14.4

%

240

bps

 

 

R&D

 

(140

)

(142

)

(1

)%

 

 

SG&A

 

(98

)

(109

)

(10

)%

 

 

Other income and expenses

 

45

 

9

 

 

 

 

 

Operating loss

 

(105

)

(161

)

(35

)%

 

 

Operating margin %

 

(19.8

)%

(28.6

)%

880

bps

 

 

 

 

38



 

Financial discussion

 

Net sales

 

In the first six months of 2018, Group Common and Other net sales decreased 6% year-on-year. On a constant currency basis, Group Common and Other net sales would have decreased 1% year-on-year.

 

The decrease in Group Common and Other net sales was primarily due to Alcatel Submarine Networks, partially offset by Radio Frequency Systems. The decrease in Alcatel Submarine Networks was primarily due to the completion of two large projects, which benefitted the first six months of 2017.

 

Operating profit

 

The decrease in Group Common and Other SG&A was primarily due to lower support function costs.

 

The net positive fluctuation in other income and expenses was primarily due to gains in Nokia’s venture fund investments, including a non-recurring adjustment.

 

On a year-on-year basis, foreign exchange fluctuations had a slightly negative impact on gross profit, a slightly positive impact on operating expenses and a slightly positive net impact on operating profit in the first six months of 2018.

 

39



 

Cash and cash flow in half year 2018

 

Nokia change in net cash and other liquid assets

 

 

EUR million, at end of period

 

Q2’18

 

Q4’17

 

YTD change

 

Total cash and current financial investments(1)

 

5 861

 

8 280

 

(29

)%

Net cash and current financial investments(1)

 

2 144

 

4 514

 

(53

)%

 


(1) Total cash and current financial investments consists of cash and cash equivalents and current financial investments. Net cash and current financial investments equals total cash and current financial investments less long-term and short-term interest-bearing liabilities. For details, please refer to note 9, “Net cash and current financial investments”, in the “Financial statement information” section in this report.

 

During the first six months of 2018, Nokia’s total cash and current financial investments decreased by EUR 2 419 million and Nokia’s net cash and current financial investments decreased by EUR 2 370 million. For both, a majority of the decline was driven by two expected items:

 

·             The payment of the dividends of approximately EUR 950 million; and

·             The payment of 2017 performance-related incentives to employees, which was the primary driver of the decrease in liabilities of approximately EUR 740 million.

 

Foreign exchange rates had an approximately EUR 150 million negative impact on net cash and current financial investments. A vast majority of the negative impact related to balance sheet items in a variety of foreign currencies, and was offset by related positive impacts in liabilities within net working capital from certain hedging activities.

 

In the first six months of 2018, net cash and current financial investments used in operating activities was EUR 940 million:

 

·             Nokia’s adjusted profit before changes in net working capital was EUR 420 million in the first six months of 2018.

·             In the first six months of 2018, Nokia experienced a decrease in net cash and current financial investments related to net working capital of approximately EUR 1 010 million.

·                  Nokia experienced a decrease in net cash and current financial investments related to restructuring and associated cash items in the first six months of 2018 of approximately EUR 240 million. Excluding this, Nokia experienced a decrease in net cash and current financial investments related to net working capital of approximately EUR 760 million primarily due to a decrease in liabilities and, to a lesser extent, an increase in inventories, partially offset by a decrease in receivables.

 

40



 

·                  The increase in net cash and current financial investments related to the decrease in receivables was approximately EUR 280 million, primarily due to the receipt of a payment related to a license agreement entered into in Q4 2017.

·                  The decrease in net cash and current financial investments related to the increase in inventories was approximately EUR 300 million, primarily due to our decision to ensure sufficient flexibility to deliver higher levels of equipment sales in the second half of 2018.

·                  The decrease in net cash and current financial investments related to the decrease in liabilities was approximately EUR 740 million, primarily due to the payment of employee incentives related to Nokia’s business performance in 2017 and, to a lesser extent, a decrease in accounts payable. This was partially offset by positive impacts in liabilities within net working capital from certain hedging activities, which offset approximately half of the EUR 150 million negative impact of foreign exchange rates on net cash and current financial investments, as well as longer payment terms.

·             In addition, Nokia experienced a decrease in net cash and current financial investments related to income taxes of approximately EUR 290 million, of which approximately EUR 100 million was non-recurring and related to the resolution of a tax dispute in India.

·             Also, Nokia experienced a decrease in net cash and current financial investments related to net interest of approximately EUR 70 million, of which approximately EUR 40 million was non-recurring and primarily related to the disposal of the former Alcatel Lucent railway signaling business to Thales.

 

In the first six months of 2018, net cash and current financial investments used in investing activities primarily related to capital expenditures of approximately EUR 360 million, of which approximately EUR 100 million were non-recurring.

 

In the first six months of 2018, net cash and current financial investments used in financing activities primarily related to the payment of dividends of approximately EUR 950 million.

 

Related to the dividend paid in the second quarter 2018, a withholding tax of approximately EUR 130 million is expected to be paid in the third quarter 2018.

 

Shares

 

The total number of Nokia shares on June 30, 2018, equaled 5 631 506 659. On June 30, 2018, Nokia and its subsidiary companies owned 43 952 325 Nokia shares, representing approximately 0.8% of the total number of Nokia shares and voting rights.

 

41



 

Financial statement information

 



 

Consolidated income statement (condensed, unaudited)

 

 

 

Reported

 

Reported

 

Reported

 

Reported

 

Non-IFRS

 

Non-IFRS

 

Non-IFRS

 

Non-IFRS

 

EUR million

 

Q2’18

 

Q2’17

 

Q1-Q2’18

 

Q1-Q2’17

 

Q2’18

 

Q2’17

 

Q1-Q2’18

 

Q1-Q2’17

 

Net sales (notes 2, 3, 4)

 

5 313

 

5 619

 

10 237

 

10 996

 

5 318

 

5 629

 

10 246

 

11 017

 

Cost of sales

 

(3 453

)

(3 383

)

(6 571

)

(6 635

)

(3 279

)

(3 279

)

(6 268

)

(6 471

)

Gross profit (notes 2, 3)

 

1 860

 

2 236

 

3 666

 

4 361

 

2 038

 

2 350

 

3 979

 

4 546

 

Research and development expenses

 

(1 165

)

(1 214

)

(2 332

)

(2 479

)

(1 016

)

(1 041

)

(2 027

)

(2 122

)

Selling, general and administrative expenses

 

(813

)

(906

)

(1 660

)

(1 825

)

(695

)

(755

)

(1 427

)

(1 536

)

Other income and expenses

 

(103

)

(162

)

(231

)

(230

)

7

 

21

 

48

 

26

 

Operating (loss)/profit (notes 2, 3)

 

(221

)

(45

)

(557

)

(173

)

334

 

574

 

573

 

915

 

Share of results of associated companies and joint ventures

 

(4

)

3

 

(8

)

(6

)

(4

)

3

 

(8

)

(6

)

Financial income and expenses (note 10)

 

(56

)

(287

)

(164

)

(433

)

(84

)

(63

)

(200

)

(144

)

(Loss)/profit before tax (note 2)

 

(281

)

(330

)

(729

)

(612

)

246

 

514

 

365

 

765

 

Income tax benefit/(expense)

 

10

 

(103

)

104

 

(256

)

(106

)

(74

)

(143

)

(122

)

(Loss)/profit from continuing operations (note 2)

 

(271

)

(433

)

(625

)

(868

)

139

 

441

 

223

 

644

 

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

 

(267

)

(423

)

(618

)

(896

)

144

 

449

 

230

 

646

 

Non-controlling interests

 

(4

)

(9

)

(7

)

28

 

(4

)

(9

)

(7

)

(2

)

Profit/(loss) from discontinued operations (note 6)

 

1

 

(14

)

163

 

(29

)

0

 

0

 

0

 

0

 

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

 

1

 

(14

)

163

 

(29

)

0

 

0

 

0

 

0

 

Non-controlling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(Loss)/profit for the period

 

(271

)

(447

)

(462

)

(897

)

139

 

441

 

223

 

644

 

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

 

(266

)

(437

)

(454

)

(925

)

144

 

449

 

230

 

646

 

Non-controlling interests

 

(4

)

(9

)

(7

)

28

 

(4

)

(9

)

(7

)

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, EUR (for profit/(loss) attributable to equity holders of the parent)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

(0.05

)

(0.07

)

(0.11

)

(0.16

)

0.03

 

0.08

 

0.04

 

0.11

 

Discontinued operations

 

0.00

 

0.00

 

0.03

 

(0.01

)

0.00

 

0.00

 

0.00

 

0.00

 

(Loss)/profit for the period

 

(0.05

)

(0.08

)

(0.08

)

(0.16

)

0.03

 

0.08

 

0.04

 

0.11

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

(0.05

)

(0.07

)

(0.11

)

(0.16

)

0.03

 

0.08

 

0.04

 

0.11

 

Discontinued operations

 

0.00

 

0.00

 

0.03

 

(0.01

)

0.00

 

0.00

 

0.00

 

0.00

 

(Loss)/profit for the period

 

(0.05

)

(0.08

)

(0.08

)

(0.16

)

0.03

 

0.08

 

0.04

 

0.11

 

Average number of shares (‘000 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

Discontinued operations

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

(Loss)/profit for the period

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

5 603 494

 

5 687 058

 

5 605 036

 

5 705 415

 

Discontinued operations

 

5 603 494

 

5 670 332

 

5 605 036

 

5 689 644

 

5 587 556

 

5 687 058

 

5 585 599

 

5 705 415

 

(Loss)/profit for the period

 

5 587 556

 

5 670 332

 

5 585 599

 

5 689 644

 

5 603 494

 

5 687 058

 

5 605 036

 

5 705 415

 

From continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization (notes 2, 3)

 

(360

)

(407

)

(732

)

(811

)

(128

)

(146

)

(258

)

(287

)

 

The above condensed consolidated income statement should be read in conjunction with accompanying notes.

 

43



 

Consolidated statement of comprehensive income (condensed, unaudited)

 

 

 

Reported

 

Reported

 

Reported

 

Reported

 

EUR million

 

Q2’18

 

Q2’17

 

Q1-Q2’18

 

Q1-Q2’17

 

 

 

 

 

 

 

 

 

 

 

Loss for the period

 

(271

)

(447

)

(462

)

(897

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Items that will not be reclassified to profit or loss:

 

 

 

 

 

 

 

 

 

Remeasurements on defined benefit pensions

 

193

 

70

 

434

 

297

 

Income tax related to items that will not be reclassified to profit or loss

 

(41

)

(7

)

(113

)

(113

)

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

 

 

 

 

 

Translation differences

 

555

 

(991

)

270

 

(1 137

)

Net investment hedges

 

(145

)

260

 

(52

)

276

 

Cash flow hedges

 

(51

)

83

 

(82

)

73

 

Financial assets at fair value through other comprehensive income

 

(22

)

0

 

(42

)

0

 

Available-for-sale investments

 

0

 

(29

)

0

 

(23

)

Other increase, net

 

3

 

1

 

3

 

6

 

Income tax related to items that may be reclassified subsequently to profit or loss

 

41

 

(65

)

33

 

(69

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income/(loss), net of tax

 

533

 

(678

)

451

 

(690

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income/(loss)

 

262

 

(1 125

)

(11

)

(1 587

)

 

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

 

 

Equity holders of the parent

 

266

 

(1 073

)

(4

)

(1 567

)

Non-controlling interests

 

(4

)

(52

)

(7

)

(20

)

 

 

262

 

(1 125

)

(11

)

(1 587

)

 

 

 

 

 

 

 

 

 

 

Attributable to equity holders of the parent:

 

 

 

 

 

 

 

 

 

Continuing operations

 

266

 

(1 059

)

(167

)

(1 538

)

Discontinued operations

 

0

 

(14

)

163

 

(29

)

 

 

266

 

(1 073

)

(4

)

(1 567

)

 

 

 

 

 

 

 

 

 

 

Attributable to non-controlling interests:

 

 

 

 

 

 

 

 

 

Continuing operations

 

(4

)

(52

)

(7

)

(20

)

Discontinued operations

 

0

 

0

 

0

 

0

 

 

 

(4

)

(52

)

(7

)

(20

)

 

The above condensed consolidated statement of comprehensive income should be read in conjunction with accompanying notes.

 

44



 

Consolidated statement of financial position (condensed, unaudited)

 

EUR million

 

June 30,
2018

 

June 30, 
2017

 

December 31,
2017

 

ASSETS

 

 

 

 

 

 

 

Goodwill

 

5 384

 

5 554

 

5 248

 

Other intangible assets

 

3 646

 

4 647

 

3 971

 

Property, plant and equipment

 

1 782

 

1 863

 

1 853

 

Investments in associated companies and joint ventures

 

122

 

113

 

128

 

Non-current financial investments(1) (notes 10, 14)

 

673

 

949

 

816

 

Deferred tax assets (notes 8, 14)

 

4 875

 

5 408

 

4 582

 

Other non-current financial assets (notes 10, 14)

 

345

 

250

 

215

 

Defined benefit pension assets (note 7)

 

4 248

 

3 868

 

3 979

 

Other non-current assets

 

307

 

295

 

368

 

Non-current assets

 

21 383

 

22 948

 

21 160

 

Inventories

 

2 937

 

2 950

 

2 646

 

Trade receivables (notes 10, 14)

 

4 878

 

6 401

 

6 880

 

Contract assets(2) (note 14)

 

1 530

 

0

 

0

 

Prepaid expenses and accrued income

 

1 177

 

1 629

 

1 259

 

Social security, VAT and other indirect taxes

 

575

 

913

 

552

 

Divestment related receivables

 

75

 

86

 

79

 

Other (note 14)

 

527

 

630

 

628

 

Current income tax assets

 

492

 

286

 

475

 

Other financial assets (notes 10, 14)

 

245

 

409

 

302

 

Current financial investments(1) (notes 10, 14)

 

867

 

1 270

 

911

 

Cash and cash equivalents (notes 10, 14)

 

4 993

 

6 647

 

7 369

 

Current assets

 

17 119

 

19 593

 

19 841

 

Assets held for sale

 

40

 

41

 

23

 

Total assets

 

38 543

 

42 581

 

41 024

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY AND LIABILITIES

 

 

 

 

 

 

 

Share capital

 

246

 

246

 

246

 

Share issue premium

 

417

 

410

 

447

 

Treasury shares

 

(417

)

(1 126

)

(1 480

)

Translation differences

 

(704

)

(384

)

(932

)

Fair value and other reserves (note 14)

 

1 062

 

709

 

1 094

 

Reserve for invested non-restricted equity

 

15 589

 

15 616

 

15 616

 

(Accumulated deficit)/retained earnings (note 14)

 

(1 174

)

1 682

 

1 147

 

Capital and reserves attributable to equity holders of the parent

 

15 020

 

17 154

 

16 138

 

Non-controlling interests

 

70

 

858

 

80

 

Total equity

 

15 089

 

18 012

 

16 218

 

Long-term interest-bearing liabilities (notes 10, 12)

 

2 771

 

3 577

 

3 457

 

Deferred tax liabilities (notes 8, 14)

 

399

 

392

 

413

 

Defined benefit pension and post-retirement liabilities (note 7)

 

4 275

 

4 743

 

4 440

 

Contract liabilities (note 14)

 

1 185

 

0

 

0

 

Deferred revenue and other long-term liabilities

 

1 650

 

2 596

 

2 986

 

Advance payments and deferred revenue (note 14)

 

847

 

2 404

 

2 204

 

Other (note 10)

 

803

 

192

 

782

 

Provisions (note 11)

 

688

 

730

 

766

 

Non-current liabilities

 

10 967

 

12 038

 

12 063

 

Short-term interest-bearing liabilities (notes 10, 12)

 

946

 

376

 

309

 

Other financial liabilities (note 10)

 

249

 

244

 

268

 

Current income tax liabilities(3)

 

288

 

520

 

383

 

Trade payables (note 10)

 

3 900

 

3 545

 

3 996

 

Contract liabilities(2) (note 14)

 

3 040

 

0

 

0

 

Accrued expenses, deferred revenue and other liabilities

 

3 078

 

6 543

 

6 666

 

Advance payments and deferred revenue (note 14)

 

460

 

3 309

 

3 513

 

Salaries, wages and social charges

 

1 215

 

1 260

 

1 551

 

Other

 

1 404

 

1 973

 

1 603

 

Provisions(3) (note 11)

 

985

 

1 304

 

1 122

 

Current liabilities

 

12 486

 

12 532

 

12 744

 

Total shareholders’ equity and liabilities

 

38 543

 

42 581

 

41 024

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities, EUR million

 

3 717

 

3 953

 

3 766

 

Shareholders’ equity per share, EUR

 

2.69

 

3.04

 

2.89

 

Number of shares (1 000 shares, excluding treasury shares)

 

5 587 554

 

5 651 797

 

5 579 517

 

 


(1)Related to the adoption of IFRS 9, Financial Instruments on January 1, 2018, financial instruments previously presented within “Available for sale investments” are now presented within “Non-current financial investments”, and financial instruments previously presented within “Available for sale investments, liquid assets” and “Investments at fair value though profit and loss, liquid assets” are now presented within “Current financial investments”. Despite the changes in the presentation of comparatives, IFRS 9 has not been adopted retrospectively.

(2)Nokia continues to evaluate its presentation of contract assets and current contract liabilities, refer to Opening balance sheet adjustment and application of IFRS 15 in 2018 section in note 14, “New accounting standards” for further detail.

(3)Comparatives for June 30, 2017, have been revised to reflect the change in presentation of interest and penalties related to income taxes from current income tax liabilities to provisions.

 

The above condensed consolidated balance sheet should be read in conjunction with accompanying notes.

 

45



 

Consolidated statement of cash flows (condensed, unaudited)

 

EUR million

 

Q2’18

 

Q2’17

 

Q1-Q2’18

 

Q1-Q2’17

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

 

Loss for the period

 

(271

)

(447

)

(462

)

(897

)

Adjustments

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

360

 

407

 

732

 

811

 

Restructuring charges

 

24

 

155

 

155

 

205

 

Financial income and expenses

 

70

 

250

 

84

 

358

 

Income tax (benefit)/expense

 

(12

)

102

 

(177

)

258

 

Other

 

83

 

7

 

92

 

13

 

Change in net working capital

 

 

 

 

 

 

 

 

 

(Increase)/decrease in receivables

 

(131

)

146

 

277

 

383

 

Increase in inventories

 

(135

)

(139

)

(303

)

(525

)

(Decrease)/increase in interest-free liabilities

 

(713

)

990

 

(980

)

612

 

Cash (used in)/from operations

 

(725

)

1 471

 

(582

)

1 218

 

Interest received

 

18

 

16

 

42

 

34

 

Interest paid

 

(27

)

(208

)

(116

)

(356

)

Income taxes, net paid

 

(100

)

(241

)

(288

)

(331

)

Net cash (used in)/from operating activities

 

(834

)

1 038

 

(944

)

565

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(104

)

(142

)

(364

)

(292

)

Proceeds from sale of fixed assets

 

8

 

25

 

20

 

28

 

Acquisition of businesses, net of cash acquired

 

(19

)

(310

)

(31

)

(389

)

Proceeds from disposal of businesses, net of disposed cash

 

0

 

(1

)

0

 

(1

)

Purchase of current financial investments

 

(343

)

(853

)

(1 179

)

(1 624

)

Proceeds from maturities and sale of current financial investments

 

799

 

1 388

 

1 219

 

2 163

 

Purchase of non-current financial investments

 

(29

)

(17

)

(48

)

(36

)

Proceeds from sale of non-current financial investments

 

32

 

43

 

61

 

82

 

Other

 

(2

)

(2

)

0

 

(12

)

Net cash from/(used in) investing activities

 

342

 

131

 

(322

)

(81

)

Cash flow from financing activities

 

 

 

 

 

 

 

 

 

Purchase of treasury shares

 

0

 

(176

)

0

 

(413

)

Purchase of equity instruments of subsidiaries

 

0

 

(30

)

0

 

(30

)

Proceeds from long-term borrowings

 

45

 

883

 

75

 

2 124

 

Repayment of long-term borrowings

 

(5

)

(1 260

)

(17

)

(2 019

)

(Payment of)/proceeds from short-term borrowings

 

(99

)

86

 

(100

)

19

 

Dividends paid and other contributions to shareholders

 

(935

)

(843

)

(950

)

(843

)

Net cash used in financing activities

 

(994

)

(1 340

)

(992

)

(1 162

)

Foreign exchange adjustment

 

(76

)

(169

)

(118

)

(172

)

Net decrease in cash and cash equivalents

 

(1 562

)

(340

)

(2 376

)

(850

)

Cash and cash equivalents at beginning of period

 

6 555

 

6 987

 

7 369

 

7 497

 

Cash and cash equivalents at end of period

 

4 993

 

6 647

 

4 993

 

6 647

 

 

Consolidated statement of cash flows combines cash flows from both the continuing and the discontinued operations. The figures in the consolidated statement of cash flows cannot be directly traced from the statement of financial position without additional information as a result of acquisitions and disposals of subsidiaries and net foreign exchange differences arising on consolidation.

 

The above condensed consolidated statement of cash flows should be read in conjunction with accompanying notes.

 

46



 

Consolidated statement of changes in shareholders’ equity (condensed, unaudited)

 

EUR million

 

Share
capital

 

Share issue
premium

 

Treasury
shares

 

Translation
difference

 

Fair value and 
other reserves

 

Reserve for invested
non-restricted equity

 

(Accumulated
deficit)/retained
earnings

 

Equity holders
of the parent

 

Non-controlling
interest

 

Total equity

 

January 1, 2017

 

246

 

439

 

(881

)

483

 

488

 

15 731

 

3 588

 

20 094

 

881

 

20 975

 

Remeasurements on defined benefit pension plans, net of tax

 

0

 

0

 

0

 

0

 

181

 

0

 

0

 

181

 

0

 

181

 

Translation differences

 

0

 

0

 

0

 

(1 088

)

0

 

0

 

0

 

(1 088

)

(49

)

(1 137

)

Net investment hedges, net of tax

 

0

 

0

 

0

 

221

 

0

 

0

 

0

 

221

 

0

 

221

 

Cash flow hedges, net of tax

 

0

 

0

 

0

 

0

 

58

 

0

 

0

 

58

 

0

 

58

 

Available-for-sale investments, net of tax

 

0

 

0

 

0

 

0

 

(20

)

0

 

0

 

(20

)

0

 

(20

)

Other increase/decrease, net

 

0

 

0

 

0

 

0

 

3

 

0

 

3

 

6

 

1

 

7

 

Loss for the period

 

0

 

0

 

0

 

0

 

0

 

0

 

(925

)

(925

)

28

 

(897

)

Total comprehensive loss

 

0

 

0

 

0

 

(867

)

222

 

0

 

(922

)

(1 567

)

(20

)

(1 587

)

Share-based payment

 

0

 

27

 

0

 

0

 

0

 

0

 

0

 

27

 

0

 

27

 

Excess tax benefit on share-based payment

 

0

 

2

 

0

 

0

 

0

 

0

 

0

 

2

 

0

 

2

 

Settlement of performance and restricted shares

 

0

 

(60

)

153

 

0

 

0

 

(115

)

0

 

(22

)

0

 

(22

)

Acquisition of treasury shares

 

0

 

0

 

(398

)

0

 

0

 

0

 

0

 

(398

)

0

 

(398

)

Dividends

 

0

 

0

 

0

 

0

 

0

 

0

 

(963

)

(963

)

(3

)

(966

)

Acquisitions through business combinations

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

18

 

18

 

Acquisition of non-controlling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

(21

)

(21

)

(18

)

(39

)

Other movements

 

0

 

1

 

0

 

0

 

0

 

0

 

0

 

1

 

0

 

1

 

Total of other equity movements

 

0

 

(29

)

(245

)

0

 

0

 

(114

)

(984

)

(1 373

)

(3

)

(1 376

)

June 30, 2017

 

246

 

410

 

(1 126

)

(384

)

709

 

15 616

 

1 682

 

17 154

 

858

 

18 012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

246

 

447

 

(1 480

)

(932

)

1 094

 

15 616

 

1 147

 

16 138

 

80

 

16 218

 

Adoption of IFRS 9 and IFRS 15 (note 14)

 

0

 

0

 

0

 

0

 

(252

)

0

 

198

 

(54

)

0

 

(54

)

January 1, 2018

 

246

 

447

 

(1 480

)

(932

)

843

 

15 616

 

1 345

 

16 083

 

80

 

16 163

 

Remeasurements on defined benefit pension plans, net of tax

 

0

 

0

 

0

 

0

 

317

 

0

 

0

 

317

 

0

 

317

 

Translation differences

 

0

 

0

 

0

 

270

 

0

 

0

 

0

 

270

 

1

 

271

 

Net investment hedges, net of tax

 

0

 

0

 

0

 

(42

)

0

 

0

 

0

 

(42

)

0

 

(42

)

Cash flow hedges, net of tax

 

0

 

0

 

0

 

0

 

(65

)

0

 

0

 

(65

)

0

 

(65

)

Financial assets at fair value through other comprehensive income, net of tax (note 10)

 

0

 

0

 

0

 

0

 

(36

)

0

 

0

 

(36

)

0

 

(36

)

Other increase/decrease, net

 

0

 

0

 

0

 

0

 

5

 

0

 

1

 

6

 

0

 

6

 

Loss for the period

 

0

 

0

 

0

 

0

 

0

 

0

 

(454

)

(454

)

(7

)

(462

)

Total comprehensive loss

 

0

 

0

 

0

 

229

 

220

 

0

 

(453

)

(4

)

(7

)

(11

)

Share-based payment

 

0

 

24

 

0

 

0

 

0

 

0

 

0

 

24

 

0

 

24

 

Excess tax benefit on share-based payment

 

0

 

3

 

0

 

0

 

0

 

0

 

0

 

3

 

0

 

3

 

Settlement of performance and restricted shares

 

0

 

(57

)

63

 

0

 

0

 

(26

)

0

 

(21

)

0

 

(21

)

Cancellation of treasury shares

 

0

 

0

 

1 000

 

0

 

0

 

0

 

(1 000

)

0

 

0

 

0

 

Dividends

 

0

 

0

 

0

 

0

 

0

 

0

 

(1 063

)

(1 063

)

(4

)

(1 068

)

Acquisition of non-controlling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

(1

)

(1

)

1

 

0

 

Total of other equity movements

 

0

 

(30

)

1 063

 

0

 

0

 

(26

)

(2 065

)

(1 059

)

(3

)

(1 063

)

June 30, 2018

 

246

 

417

 

(417

)

(704

)

1 062

 

15 589

 

(1 174

)

15 020

 

70

 

15 089

 

 

The above condensed consolidated statement of changes in shareholders’ equity should be read in conjunction with accompanying notes.

 

47



 

Notes to Financial statements

 

1. BASIS OF PREPARATION

 

This unaudited, consolidated, condensed financial statement information of Nokia has been prepared in accordance with IAS 34, Interim Financial Reporting. This condensed financial statement information should be read in conjunction with the financial statements for 2017, which have been prepared in accordance with IFRS as published by the IASB and adopted by the EU. The same accounting policies, methods of computation and applications of judgment are followed in this financial statement information as was followed in the financial statements for 2017 with the exception of changes resulting from adoption of IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers as described in note 14, “New accounting standards”.

 

This financial report was authorized for issue by management on July 25, 2018.

 

Nokia presents financial information on reported, non-IFRS and constant currency basis. Non-IFRS measures presented in this document 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. 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.

 

Constant currency reporting provides additional information on change in financial measures on a constant currency basis in order to better reflect the underlying business performance. Therefore, change in financial measures at constant currency excludes the impact of changes in exchange rates in comparison to euro.

 

Non-IFRS or constant currency financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with IFRS, and either of these financial measures as used by Nokia may not be comparable to similarly titled measures used by other companies or persons.

 

On July 3, 2017, Nokia and China Huaxin Post & Telecommunication Economy Development Center (“China Huaxin”) commenced operations of the new joint venture Nokia Shanghai Bell (“NSB”). As part of the NSB definitive agreements, China Huaxin obtained the right to fully transfer its ownership interest in NSB to Nokia in exchange for a future cash settlement. To reflect its conditional obligation to China Huaxin, Nokia recorded the present value of the expected future cash settlement as a financial liability of EUR 737 million within other long-term liabilities and derecognised its non-controlling interest balance of EUR 772 million related to NSB with the difference recorded within retained earnings. The recognition of the present value discount on the financial liability will increase interest expense and any changes in the estimated future cash settlement will be recorded within financial income and expense.

 

Percentages and figures presented herein may include rounding differences and therefore may not add up precisely to the totals presented and may vary from previously published financial information.

 

New and amended standards and interpretations adopted

 

On January 1, 2018, Nokia adopted IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers. The nature of new standards, impact of adoption on Nokia’s consolidated financial statements and changes to Nokia’s accounting policies resulting from the adoption are described in detail in note 14, “New accounting standards”. Other amendments and interpretations that became effective on January 1, 2018, did not have a material impact on Nokia’s consolidated financial statements.

 

Standards issued but not yet effective

 

IFRS 16 Leases, issued in January 2016, sets out the requirements for the recognition, measurement, presentation and disclosure of leases. IFRS 16 provides a single lessee accounting model, requiring lessees to recognize right-of-use assets and lease liabilities for substantially all leases in the consolidated statement of financial position. Nokia will adopt IFRS 16 on the effective date of January 1, 2019 using the cumulative catch-up transition method, whereby the cumulative effect of initially applying IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings on January 1, 2019 and comparative information will not be restated. Nokia is currently assessing the full impact of IFRS 16 but the initial expectation is that the main impact from adoption relates to the recognition and disclosure of Nokia’s real estate related operating leases. In the consolidated financial statements for the quarter ended June 30, 2018, Nokia disclosed non-cancellable operating lease commitments of EUR 818 million.

 

Other revisions, amendments and interpretations to existing standards issued by the IASB that are not yet effective are not expected to have a material impact on Nokia’s consolidated financial statements when adopted.

 

48



 

Currency exposures, approximately (unaudited)

 

 

 

Q2’18

 

Q2’17

 

Q1’18

 

 

 

Net sales

 

Total costs 

 

Net sales

 

Total costs 

 

Net sales

 

Total costs 

 

EUR

 

~25

%

~30

%

~20

%

~30

%

~25

%

~30

%

USD

 

~45

%

~45

%

~50

%

~40

%

~45

%

~40

%

CNY

 

~10

%

~10

%

~10

%

~10

%

~10

%

~10

%

Other

 

~20

%

~15

%

~20

%

~20

%

~20

%

~20

%

Total

 

100

%

100

%

100

%

100

%

100

%

100

%

 

End of Q2’18 balance sheet rate 1 EUR = 1.17 USD, end of Q2’17 balance sheet rate 1 EUR = 1.14 USD and end of Q1’18 balance sheet rate 1 EUR = 1.23 USD

 

Exchange rates

 

Nokia is a company with global operations and net sales derived from various countries and invoiced in various currencies. Therefore, our business and results from operations are exposed to changes in exchange rates between the euro, our reporting currency, and other currencies, such as the US dollar and the Chinese yuan. To mitigate the impact of changes in exchange rates on our results, we hedge operative forecasted net foreign exchange exposures, typically within a 12-month horizon, and apply hedge accounting in the majority of cases.

 

49



 

2. NON-IFRS TO REPORTED RECONCILIATION (unaudited)

 

In addition to information on our reported IFRS results, Nokia provides certain information on a non-IFRS, or underlying business performance, basis. Non-IFRS measures presented in this document 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. Nokia believes that the non-IFRS results provide meaningful supplemental information to both management and investors regarding Nokia’s underlying business performance by excluding the above-described items. 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.

 

Q2’18

 

EUR million

 

Net sales

 

Cost of 
sales

 

Research and 
development 
expenses

 

Selling, 
general and 
administrative 
expenses

 

Other 
income and 
expenses

 

Operating 
profit/(loss)

 

Financial 
income and 
expenses

 

Income tax 
(expense)/ 
benefit

 

Profit/(loss) 
from 
continuing 
operations

 

Attributable to
the equity 
holders of the 
parent

 

Attributable to
non-controlling
interests

 

Non-IFRS

 

5 318

 

(3 279

)

(1 016

)

(695

)

7

 

334

 

(84

)

(106

)

139

 

144

 

(4

)

Release of acquisition-related fair value adjustments to deferred revenue and inventory

 

(5

)

 

 

 

 

 

 

 

 

(5

)

 

 

2

 

(3

)

(3

)

 

 

Amortization and depreciation of acquired intangible assets and property, plant and equipment

 

 

 

(1

)

(142

)

(88

)

 

 

(232

)

 

 

51

 

(181

)

(181

)

 

 

Transaction and related costs, including integration costs

 

 

 

(3

)

 

 

(29

)

 

 

(32

)

 

 

7

 

(25

)

(25

)

 

 

Restructuring and associated charges

 

 

 

 

 

 

 

 

 

(34

)

(34

)

 

 

7

 

(27

)

(27

)

 

 

Product portfolio strategy costs

 

 

 

(169

)

(7

)

 

 

 

 

(176

)

 

 

35

 

(141

)

(141

)

 

 

Impairment of assets

 

 

 

 

 

 

 

 

 

(16

)

(16

)

 

 

4

 

(13

)

(13

)

 

 

Divestment of businesses

 

 

 

 

 

 

 

 

 

(18

)

(18

)

 

 

 

 

(18

)

(18

)

 

 

Fair value changes of legacy IPR fund

 

 

 

 

 

 

 

 

 

(42

)

(42

)

 

 

10

 

(32

)

(32

)

 

 

Change in financial liability to acquire NSB non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

0

 

9

 

 

 

9

 

9

 

 

 

Release of cumulative exchange differences related to abandonment of foreign operations

 

 

 

 

 

 

 

 

 

 

 

0

 

19

 

1

 

20

 

20

 

 

 

Total non-IFRS exclusions

 

(5

)

(173

)

(149

)

(117

)

(110

)

(555

)

28

 

116

 

(411

)

(411

)

0

 

Reported

 

5 313

 

(3 453

)

(1 165

)

(813

)

(103

)

(221

)

(56

)

10

 

(271

)

(267

)

(4

)

 

Q2’17

 

EUR million

 

Net sales

 

Cost of 
sales

 

Research and 
development 
expenses

 

Selling, 
general and 
administrative 
expenses

 

Other 
income and 
expenses

 

Operating 
profit/(loss)

 

Financial 
income and 
expenses

 

Income tax 
(expense)/ 
benefit

 

Profit/(loss) 
from 
continuing 
operations

 

Attributable to
the equity 
holders of the 
parent

 

Attributable to
non-controlling
interests

 

Non-IFRS

 

5 629

 

(3 279

)

(1 041

)

(755

)

21

 

574

 

(63

)

(74

)

441

 

449

 

(9

)

Release of acquisition-related fair value adjustments to deferred revenue and inventory

 

(11

)

 

 

 

 

 

 

 

 

(11

)

 

 

3

 

(7

)

(7

)

 

 

Amortization and depreciation of acquired intangible assets and property, plant and equipment

 

 

 

(2

)

(159

)

(99

)

(1

)

(261

)

 

 

74

 

(187

)

(186

)

(1

)

Transaction and related costs, including integration costs

 

 

 

(9

)

 

 

(51

)

 

 

(60

)

 

 

11

 

(48

)

(48

)

 

 

Restructuring and associated charges

 

 

 

 

 

 

 

(1

)

(166

)

(167

)

 

 

39

 

(128

)

(128

)

 

 

Product portfolio strategy costs

 

 

 

(93

)

(13

)

 

 

(16

)

(121

)

 

 

26

 

(96

)

(96

)

 

 

Early redemption cost of debt

 

 

 

 

 

 

 

 

 

 

 

0

 

(156

)

31

 

(125

)

(125

)

 

 

Uncertain tax position in Germany

 

 

 

 

 

 

 

 

 

 

 

0

 

(69

)

(137

)

(206

)

(206

)

 

 

Deferred tax valuation allowance

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

(77

)

(77

)

(77

)

 

 

Total non-IFRS exclusions

 

(11

)

(103

)

(173

)

(151

)

(182

)

(620

)

(225

)

(29

)

(873

)

(873

)

(1

)

Reported

 

5 619

 

(3 383

)

(1 214

)

(906

)

(162

)

(45

)

(287

)

(103

)

(433

)

(423

)

(9

)

 

50



 

Q1-Q2’18

 

EUR million

 

Net sales

 

Cost of
sales

 

Research and
development
expenses

 

Selling,
general and
administrative
expenses

 

Other
income and
expenses

 

Operating
profit/(loss)

 

Financial
income and
expenses

 

Income tax
(expense)/
benefit

 

Profit/(loss)
from
continuing
operations

 

Attributable to
the equity
holders of the
parent

 

Attributable to
non-controlling
interests

 

Non-IFRS

 

10 246

 

(6 268

)

(2 027

)

(1 427

)

48

 

573

 

(200

)

(143

)

223

 

230

 

(7

)

Release of acquisition-related fair value adjustments to deferred revenue and inventory

 

(9

)

 

 

 

 

 

 

 

 

(9

)

 

 

3

 

(6

)

(6

)

 

 

Amortization and depreciation of acquired intangible assets and property, plant and equipment

 

 

 

(3

)

(290

)

(181

)

 

 

(474

)

 

 

110

 

(364

)

(364

)

 

 

Transaction and related costs, including integration costs

 

 

 

(4

)

 

 

(51

)

 

 

(55

)

 

 

12

 

(43

)

(43

)

 

 

Restructuring and associated charges

 

 

 

 

 

 

 

(1

)

(187

)

(188

)

 

 

39

 

(149

)

(149

)

 

 

Product portfolio strategy costs

 

 

 

(297

)

(15

)

 

 

 

 

(312

)

 

 

63

 

(249

)

(249

)

 

 

Impairment of assets

 

 

 

 

 

 

 

 

 

(31

)

(31

)

 

 

7

 

(24

)

(24

)

 

 

Divestment of businesses

 

 

 

 

 

 

 

 

 

(18

)

(18

)

 

 

 

 

(18

)

(18

)

 

 

Fair value changes of legacy IPR fund

 

 

 

 

 

 

 

 

 

(42

)

(42

)

 

 

10

 

(32

)

(32

)

 

 

Change in financial liability to acquire NSB non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

0

 

16

 

 

 

16

 

16

 

 

 

Release of cumulative exchange differences related to abandonment of foreign operations

 

 

 

 

 

 

 

 

 

 

 

0

 

19

 

1

 

20

 

20

 

 

 

Deferred tax valuation allowance

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

(12

)

(12

)

(12

)

 

 

Operating model integration

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

13

 

13

 

13

 

 

 

Total non-IFRS exclusions

 

(9

)

(304

)

(305

)

(233

)

(278

)

(1 129

)

36

 

246

 

(848

)

(848

)

0

 

Reported

 

10 237

 

(6 571

)

(2 332

)

(1 660

)

(231

)

(557

)

(164

)

104

 

(625

)

(618

)

(7

)

 

Q1-Q2’17

 

EUR million

 

Net sales

 

Cost of
sales

 

Research and
development
expenses

 

Selling,
general and
administrative
expenses

 

Other
income and
expenses

 

Operating
profit/(loss)

 

Financial
income and
expenses

 

Income tax
(expense)/
benefit

 

Profit/(loss)
from
continuing
operations

 

Attributable to
the equity
holders of the
parent

 

Attributable to
non-controlling
interests

 

Non-IFRS

 

11 017

 

(6 471

)

(2 122

)

(1 536

)

26

 

915

 

(144

)

(122

)

644

 

646

 

(2

)

Release of acquisition-related fair value adjustments to deferred revenue and inventory

 

(21

)

 

 

 

 

 

 

 

 

(21

)

 

 

7

 

(14

)

(14

)

 

 

Amortization and depreciation of acquired intangible assets and property, plant and equipment

 

 

 

(3

)

(321

)

(199

)

(1

)

(525

)

 

 

151

 

(373

)

(373

)

(1

)

Transaction and related costs, including integration costs

 

 

 

(14

)

 

 

(88

)

 

 

(101

)

 

 

20

 

(81

)

(81

)

 

 

Restructuring and associated charges

 

 

 

 

 

 

 

(2

)

(240

)

(242

)

 

 

58

 

(184

)

(184

)

 

 

Product portfolio strategy costs

 

 

 

(146

)

(36

)

 

 

(16

)

(198

)

 

 

43

 

(155

)

(186

)

31

 

Early redemption cost of debt

 

 

 

 

 

 

 

 

 

 

 

0

 

(220

)

44

 

(176

)

(176

)

 

 

Uncertain tax position in Germany

 

 

 

 

 

 

 

 

 

 

 

0

 

(69

)

(137

)

(206

)

(206

)

 

 

Deferred tax valuation allowance

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

(77

)

(77

)

(77

)

 

 

Operating model integration

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

(245

)

(245

)

(245

)

 

 

Total non-IFRS exclusions

 

(21

)

(164

)

(357

)

(289

)

(257

)

(1 088

)

(289

)

(135

)

(1 512

)

(1 542

)

30

 

Reported

 

10 996

 

(6 635

)

(2 479

)

(1 825

)

(230

)

(173

)

(433

)

(256

)

(868

)

(896

)

28

 

 

51



 

3. SEGMENT INFORMATION (unaudited)

 

Nokia has two businesses: Nokia’s Networks business and Nokia Technologies, and four reportable segments for financial reporting purposes: (1) Ultra Broadband Networks, (2) Global Services and (3) IP Networks and Applications within Nokia’s Networks business; and (4) Nokia Technologies. Segment-level information for Group Common and Other is also presented.

 

Nokia has aggregated Mobile Networks and Fixed Networks operating segments to one reportable segment, Ultra Broadband Networks; and IP/Optical Networks and Nokia Software(1) operating segments to one reportable segment, IP Networks and Applications. The aggregated operating segments have similar economic characteristics, such as long-term margins; have similar products, production processes, distribution methods and customers; and operate in a similar regulatory environment.

 

The President and CEO is the chief operating decision maker and monitors the operating results of operating and reportable segments for the purpose of making decisions about resource allocation and performance assessment. Key financial performance measures of the segments include primarily net sales and operating profit. The evaluation of segment performance and allocation of resources is based on non-IFRS operating profit.

 

Accounting policies of the segments are the same as those described in note 2, “Significant accounting policies” of our Annual Report for 2017. Inter-segment revenues and transfers are accounted for as if the revenues were to third parties, that is, at current market prices. Non-IFRS exclusions are not allocated to the segments.

 

Ultra Broadband Networks

 

Ultra Broadband Networks comprises Mobile Networks and Fixed Networks operating segments.

 

The Mobile Networks operating segment offers an industry-leading portfolio of end-to-end mobile networking solutions comprising hardware and software for communications service providers, enterprises and related markets/verticals, such as public safety and Internet of Things (“IoT”).

 

The Fixed Networks operating segment provides copper and fiber access products, solutions and services. The portfolio allows for a customized combination of technologies that brings fiber to the most economical point for the customer.

 

Global Services

 

Global Services operating segment provides a wide range of professional services with multi-vendor capabilities, covering network planning and optimization, systems integration as well as company-wide managed services. It also provides network implementation and care services for mobile networks, using the strength of its global service delivery for quality, speed and efficiency.

 

IP Networks and Applications

 

IP Networks and Applications comprises IP/Optical Networks and Nokia Software operating segments.

 

The IP/Optical Networks operating segment provides the key IP routing and optical transport systems, software and services to build high capacity network infrastructure for the internet and global connectivity.

 

The Nokia Software operating segment offers software solutions spanning customer experience management, network operations and management, communications and collaboration, policy and charging, as well as Cloud, IoT, security, and analytics platforms that enable digital services providers and enterprises to accelerate innovation, monetize services, and optimize their customer experience.

 

Nokia Technologies

 

The Nokia Technologies operating segment, building on decades of innovation and R&D leadership in technologies used in virtually all mobile devices used today, is expanding Nokia patent licensing business, reintroducing the Nokia brand to smartphones through brand licensing, and establishing a technology licensing business. The majority of net sales and related costs and expenses attributable to licensing and patenting the separate patent portfolios of Nokia Technologies, Nokia’s Networks business, and Nokia Bell Labs are recorded in Nokia Technologies. Each reportable segment continues to separately record its own research and development expenses.

 

Group Common and Other

 

Group Common and Other includes Alcatel-Lucent Submarine Networks and Radio Frequency Systems, both of which are being managed as separate entities. In addition, Group Common and Other includes Nokia Bell Labs’ operating expenses, as well as certain corporate-level and centrally managed operating expenses.

 


(1)Applications & Analytics operating segment was renamed as Nokia Software on February 1, 2018.

 

52



 

Q2’18

 

EUR million

 

Ultra Broadband
Networks(1)

 

Global Services

 

IP Networks and
Applications(2)

 

Nokia’s Networks
business Total

 

Nokia
Technologies

 

Group Common
and Other

 

Eliminations

 

Non-IFRS total

 

Non-IFRS
exclusions(3)

 

Nokia Total

 

Net sales

 

2 055

 

1 326

 

1 313

 

4 693

 

361

 

278

 

(15

)

5 318

 

(5

)

5 313

 

Cost of sales

 

(1 157

)

(1 125

)

(779

)

(3 061

)

(7

)

(226

)

15

 

(3 279

)

(173

)

(3 453

)

Gross profit

 

898

 

201

 

533

 

1 632

 

354

 

53

 

0

 

2 038

 

(178

)

1 860

 

% of net sales

 

43.7

%

15.2

%

40.6

%

34.8

%

98.1

%

19.1

%

 

 

38.3

%

 

 

35.0

%

Research and development expenses

 

(581

)

(22

)

(309

)

(911

)

(36

)

(69

)

0

 

(1 016

)

(149

)

(1 165

)

Selling, general and administrative expenses

 

(255

)

(160

)

(206

)

(621

)

(25

)

(49

)

0

 

(695

)

(117

)

(813

)

Other income and expenses

 

(13

)

(9

)

(9

)

(30

)

(1

)

38

 

0

 

7

 

(110

)

(103

)

Operating profit/(loss)

 

49

 

11

 

10

 

69

 

292

 

(27

)

0

 

334

 

(555

)

(221

)

% of net sales

 

2.4

%

0.8

%

0.8

%

1.5

%

80.9

%

(9.7

)%

 

 

6.3

%

 

 

(4.2

)%

Depreciation and amortization

 

(58

)

(18

)

(39

)

(98

)

(5

)

(8

)

0

 

(128

)

(232

)

(360

)

Share of results of associated companies and joint ventures

 

(3

)

0

 

0

 

(3

)

0

 

0

 

0

 

(4

)

0

 

(4

)

EBITDA

 

104

 

28

 

48

 

164

 

297

 

(19

)

0

 

458

 

(323

)

135

 

 


(1)

 

Mobile Networks net sales of EUR 1 565 million and Fixed Networks net sales of EUR 490 million.

(2)

 

IP Routing net sales of EUR 592 million, Optical Networks net sales of EUR 365 million and Nokia Software net sales of EUR 356 million.

(3)

 

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.

 

Q2’17

 

EUR million

 

Ultra Broadband
Networks(1)

 

Global Services

 

IP Networks and
Applications(2)

 

Nokia’s Networks
business Total

 

Nokia
Technologies

 

Group Common
and Other

 

Eliminations

 

Non-IFRS total

 

Non-IFRS
exclusions(3)

 

Nokia Total

 

Net sales

 

2 165

 

1 448

 

1 358

 

4 971

 

369

 

307

 

(18

)

5 629

 

(11

)

5 619

 

Cost of sales

 

(1 125

)

(1 142

)

(759

)

(3 026

)

(17

)

(253

)

18

 

(3 279

)

(103

)

(3 383

)

Gross profit

 

1 040

 

305

 

600

 

1 945

 

352

 

54

 

0

 

2 350

 

(114

)

2 236

 

% of net sales

 

48.0

%

21.1

%

44.2

%

39.1

%

95.4

%

17.6

%

 

 

41.7

%

 

 

39.8

%

Research and development expenses

 

(581

)

(21

)

(314

)

(916

)

(60

)

(66

)

0

 

(1 041

)

(173

)

(1 214

)

Selling, general and administrative expenses

 

(293

)

(159

)

(199

)

(652

)

(50

)

(53

)

0

 

(755

)

(151

)

(906

)

Other income and expenses

 

25

 

(1

)

6

 

30

 

(12

)

3

 

0

 

21

 

(182

)

(162

)

Operating profit/(loss)

 

191

 

123

 

91

 

406

 

230

 

(62

)

0

 

574

 

(620

)

(45

)

% of net sales

 

8.8

%

8.5

%

6.7

%

8.2

%

62.3

%

(20.2

)%

 

 

10.2

%

 

 

(0.8

)%

Depreciation and amortization

 

(67

)

(21

)

(42

)

(130

)

(4

)

(12

)

0

 

(146

)

(260

)

(407

)

Share of results of associated companies and joint ventures

 

3

 

0

 

0

 

3

 

0

 

0

 

0

 

3

 

0

 

3

 

EBITDA

 

261

 

144

 

133

 

539

 

234

 

(50

)

0

 

723

 

(359

)

364

 

 


(1)

 

Mobile Networks net sales of EUR 1 619 million and Fixed Networks net sales of EUR 546 million.

(2)

 

IP Routing net sales of EUR 654 million, Optical Networks net sales of EUR 339 million and Nokia Software net sales of EUR 365 million.

(3)

 

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.

 

53



 

Q1-Q2’18

 

EUR million

 

Ultra Broadband
Networks(1)

 

Global Services

 

IP Networks and
Applications(2)

 

Nokia’s Networks
business Total

 

Nokia
Technologies

 

Group Common
and Other

 

Eliminations

 

Non-IFRS total

 

Non-IFRS
exclusions(3)

 

Nokia Total

 

Net sales

 

3 912

 

2 565

 

2 540

 

9 018

 

726

 

530

 

(27

)

10 246

 

(9

)

10 237

 

Cost of sales

 

(2 135

)

(2 192

)

(1 510

)

(5 837

)

(17

)

(441

)

27

 

(6 268

)

(304

)

(6 571

)

Gross profit

 

1 777

 

373

 

1 030

 

3 181

 

709

 

89

 

0

 

3 979

 

(313

)

3 666

 

% of net sales

 

45.4

%

14.5

%

40.6

%

35.3

%

97.7

%

16.8

%

 

 

38.8

%

 

 

35.8

%

Research and development expenses

 

(1 137

)

(44

)

(627

)

(1 808

)

(78

)

(140

)

0

 

(2 027

)

(305

)

(2 332

)

Selling, general and administrative expenses

 

(520

)

(324

)

(422

)

(1 265

)

(64

)

(98

)

0

 

(1 427

)

(233

)

(1 660

)

Other income and expenses

 

13

 

(1

)

(8

)

4

 

(1

)

45

 

0

 

48

 

(278

)

(231

)

Operating profit/(loss)

 

134

 

4

 

(26

)

112

 

565

 

(105

)

0

 

573

 

(1 129

)

(557

)

% of net sales

 

3.4

%

0.2

%

(1.0

)%

1.2

%

77.8

%

(19.8

)%

 

 

5.6

%

 

 

(5.4

)%

Depreciation and amortization

 

(117

)

(34

)

(76

)

(211

)

(10

)

(21

)

0

 

(258

)

(474

)

(732

)

Share of results of associated companies and joint ventures

 

(8

)

0

 

0

 

(8

)

0

 

0

 

0

 

(8

)

0

 

(8

)

EBITDA

 

243

 

38

 

50

 

315

 

576

 

(84

)

0

 

823

 

(656

)

167

 

 


(1)

Mobile Networks net sales of EUR 2 978 million and Fixed Networks net sales of EUR 935 million.

(2)

IP Routing net sales of EUR 1 141 million, Optical Networks net sales of EUR 727 million and Nokia Software net sales of EUR 672 million.

(3)

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.

 

Q1-Q2’17

 

EUR million

 

Ultra Broadband
Networks(1)

 

Global Services

 

IP Networks and
Applications(2)

 

Nokia’s Networks
business Total

 

Nokia
Technologies

 

Group Common
and Other

 

Eliminations

 

Non-IFRS total

 

Non-IFRS
exclusions(3)

 

Nokia Total

 

Net sales

 

4 401

 

2 809

 

2 663

 

9 873

 

616

 

562

 

(33

)

11 017

 

(21

)

10 996

 

Cost of sales

 

(2 230

)

(2 261

)

(1 503

)

(5 993

)

(30

)

(481

)

33

 

(6 471

)

(164

)

(6 635

)

Gross profit

 

2 171

 

548

 

1 159

 

3 879

 

586

 

81

 

0

 

4 546

 

(185

)

4 361

 

% of net sales

 

49.3

%

19.5

%

43.5

%

39.3

%

95.1

%

14.4

%

 

 

41.3

%

 

 

39.7

%

Research and development expenses

 

(1 164

)

(44

)

(652

)

(1 860

)

(121

)

(142

)

0

 

(2 122

)

(357

)

(2 479

)

Selling, general and administrative expenses

 

(594

)

(323

)

(403

)

(1 319

)

(108

)

(109

)

0

 

(1 536

)

(289

)

(1 825

)

Other income and expenses

 

22

 

(3

)

10

 

30

 

(12

)

9

 

0

 

26

 

(257

)

(230

)

Operating profit/(loss)

 

437

 

179

 

114

 

730

 

346

 

(161

)

0

 

915

 

(1 088

)

(173

)

% of net sales

 

9.9

%

6.4

%

4.3

%

7.4

%

56.2

%

(28.6

)%

 

 

8.3

%

 

 

(1.6

)%

Depreciation and amortization

 

(131

)

(40

)

(85

)

(256

)

(8

)

(23

)

0

 

(287

)

(524

)

(811

)

Share of results of associated companies and joint ventures

 

4

 

0

 

0

 

4

 

(10

)

0

 

0

 

(6

)

0

 

(6

)

EBITDA

 

572

 

219

 

199

 

990

 

343

 

(138

)

0

 

1 196

 

(564

)

632

 

 


(1)

Mobile Networks net sales of EUR 3 353 million and Fixed Networks net sales of EUR 1 048 million.

(2)

IP Routing net sales of EUR 1 275 million, Optical Networks net sales of EUR 663 million and Nokia Software net sales of EUR 724 million.

(3)

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.

 

54



 

4. NET SALES BY GEOGRAPHIC AREA (unaudited)

 

EUR million

 

Q2’18

 

Q2’17

 

YoY change

 

Q1-Q2’18

 

Q1-Q2’17

 

YoY change

 

Asia-Pacific

 

932

 

1 037

 

(10

)%

1 842

 

2 093

 

(12

)%

Europe

 

1 548

 

1 676

 

(8

)%

3 054

 

3 053

 

0

%

Greater China

 

524

 

637

 

(18

)%

1 003

 

1 202

 

(17

)%

Latin America

 

308

 

306

 

1

%

605

 

540

 

12

%

Middle East & Africa

 

447

 

435

 

3

%

878

 

840

 

5

%

North America

 

1 554

 

1 528

 

2

%

2 855

 

3 268

 

(13

)%

Total

 

5 313

 

5 619

 

(5

)%

10 237

 

10 996

 

(7

)%

 

5. ACQUISITIONS AND DISPOSALS (unaudited)

 

Acquisitions

 

The acquisitions completed during 2018 did not have a material impact to the consolidated statement of financial position, comprehensive income or cash flows. The provisional aggregate purchase price, aggregate net assets and aggregate goodwill amount to EUR 29 million, negative EUR 1 million and EUR 30 million, respectively. The purchase accounting for the acquisitions is ongoing and Nokia will conduct additional analysis that may result in adjustments in the subsequent quarters of 2018.

 

Unium Inc.

 

On March 15, 2018 Nokia acquired 100% ownership interest in Unium Inc., a US-based software company that specializes in solving complex wireless networking problems for use in mission-critical and residential Wi-Fi applications. The goodwill arising from the acquisition was allocated to Fixed Networks operating segment.

 

SpaceTime Insight Inc.

 

On April 30, 2018 Nokia acquired the business of SpaceTime Insight Inc., a US-based software company that provides machine learning-powered analytics and IoT applications for some of the world’s largest transportation, energy and utilities organizations. The goodwill arising from the acquisition was allocated to Nokia Software operating segment.

 

Disposals

 

On May 31, 2018, Nokia closed the sale of its Digital Health business. The disposal comprised 100% of the share capital of Nokia Technologies (France) SA and its subsidiaries. Nokia recognized a loss of EUR 18 million related to the transaction within other income and expenses.

 

55



 

6. DISCONTINUED OPERATIONS (unaudited)

 

Discontinued operations include the continuing financial effects of the HERE business and the Devices & Services business, the disposals of which were completed on December 4, 2015 and April 25, 2014, respectively.

 

Results of discontinued operations

 

EUR million

 

Q2’18

 

Q2’17

 

Q1-Q2’18

 

Q1-Q2’17

 

Net sales

 

0

 

0

 

0

 

0

 

Cost of sales

 

0

 

0

 

0

 

0

 

Gross profit

 

0

 

0

 

0

 

0

 

Operating expenses

 

2

 

(19

)

10

 

(28

)

Operating profit/(loss)

 

2

 

(19

)

10

 

(28

)

Financial income and expense

 

(3

)

5

 

80

 

1

 

(Loss)/profit before tax

 

(1

)

(14

)

90

 

(27

)

Income tax benefit/(expense)

 

2

 

0

 

73

 

(2

)

Profit/(loss) for the period, ordinary activities

 

1

 

(14

)

163

 

(29

)

Gain on the sale of businesses, net of tax

 

0

 

0

 

0

 

0

 

Profit/(loss) from discontinued operations

 

1

 

(14

)

163

 

(29

)

 

Cash flows from discontinued operations

 

 

 

Reported

 

Reported

 

Reported

 

Reported

 

EUR million

 

Q2’18

 

Q2’17

 

Q1-Q2’18

 

Q1-Q2’17

 

Net cash from/(used in) operating activities

 

72

 

(1

)

(34

)

(3

)

Net cash from/(used in) investing activities

 

7

 

(1

)

10

 

(1

)

Net cash flow for the period

 

79

 

(2

)

(24

)

(4

)

 

The results and cash flows of discontinued operations in the first half of 2018 mostly relate to a resolution reached in the tax dispute concerning the applicability of withholding tax in respect of payments by Nokia India Private Limited to Nokia Corporation for the supply of operating software in Devices & Services business.

 

56



 

7. PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS (unaudited)

 

Nokia operates a number of post-employment plans in various countries including both defined contribution and defined benefit plans. Defined benefit plans include pension plans and post-retirement welfare benefit plans, providing post-retirement healthcare benefits and life insurance coverage. Defined benefit plans expose Nokia to actuarial risks such as investment risk, interest rate risk, and life expectancy risk. The characteristics and associated risks of the defined benefit plans vary depending on legal, fiscal, and economic requirements in each country.

 

96% of Nokia’s defined benefit obligation and 98% of plan assets fair values were remeasured as of June 30, 2018. Nokia’s pension and post-retirement obligations in the United States have been remeasured by updated valuations from an external actuary and Nokia’s main pension plans outside of the U.S. (in Germany, United Kingdom, Switzerland and Belgium) have been remeasured based upon changes in the discount rates during the reporting period. The impact of not remeasuring other pension and post-employment obligations is considered not material.

 

Change in pension and post-retirement net asset/(liability) recognized

 

 

 

June 30, 2018

 

June 30, 2017

 

December 31, 2017

 

EUR million

 

Pension
benefits(1)

 

Post-
retirement
benefits

 

Total

 

Pension
benefits(1)

 

Post-
retirement
benefits

 

Total

 

Pension
benefits(1)

 

Post-
retirement
benefits

 

Total

 

Net asset/(liability) recognized at January 1

 

1 525

 

(1 986

)

(461

)

1 284

 

(2 482

)

(1 198

)

1 284

 

(2 482

)

(1 198

)

Current service cost

 

(90

)

0

 

(90

)

(88

)

0

 

(88

)

(180

)

0

 

(180

)

Net interest income/(expense)

 

26

 

(32

)

(6

)

22

 

(43

)

(21

)

44

 

(81

)

(37

)

Curtailment

 

(21

)

0

 

(21

)

(28

)

(1

)

(29

)

(5

)

(1

)

(6

)

Pension and healthcare plan amendments

 

0

 

0

 

0

 

0

 

0

 

0

 

9

 

0

 

9

 

Total expense recognized in the income statement

 

(85

)

(32

)

(117

)

(94

)

(44

)

(138

)

(132

)

(82

)

(214

)

Actuarial gains/(losses) for the period

 

351

 

178

 

529

 

386

 

(1

)

385

 

823

 

133

 

956

 

Change in asset ceiling, excluding amounts included in net interest (expense)

 

(95

)

0

 

(95

)

(88

)

0

 

(88

)

(233

)

0

 

(233

)

Total recognized in other comprehensive income

 

256

 

178

 

434

 

298

 

(1

)

297

 

590

 

133

 

723

 

Exchange differences

 

77

 

(51

)

26

 

(151

)

192

 

41

 

(240

)

297

 

57

 

Contributions and benefits paid

 

103

 

(5

)

98

 

137

 

(2

)

135

 

246

 

4

 

250

 

Other movements(2)

 

(1

)

(6

)

(7

)

0

 

(12

)

(12

)

(223

)

144

 

(79

)

Net asset/(liability) recognized at the end of the period

 

1 875

 

(1 902

)

(27

)

1 474

 

(2 349

)

(875

)

1 525

 

(1 986

)

(461

)

of which:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- Defined benefit pension assets

 

4 248

 

0

 

4 248

 

3 868

 

0

 

3 868

 

3 979

 

0

 

3 979

 

- Defined benefit pension and post-retirement liabilities

 

(2 373

)

(1 902

)

(4 275

)

(2 394

)

(2 349

)

(4 743

)

(2 454

)

(1 986

)

(4 440

)

 


(1)Includes pensions, retirement indemnities and end-of-service gratuities.

(2)Includes Section 420 transfers, medicare subsidies, acquisition through business combinations and other transfers.

 

Weighted average discount rates

 

June 30,
2018

 

June 30,
2017

 

December 31,
2017

 

U.S. Pension

 

3.9

 

3.4

 

3.3

 

U.S. Post-retirement healthcare and other

 

3.7

 

3.1

 

3.1

 

U.S. Post-retirement group life

 

4.0

 

3.6

 

3.4

 

Euro - Pension(1)

 

1.5

 

1.7

 

1.3

 

U.K. - Pension

 

2.7

 

2.6

 

2.5

 

 


(1)Includes pensions, retirement indemnities and end-of service gratuities.

 

Funded status

 

June 30, 2018

 

June 30, 2017

 

December 31,
2017

 

Defined benefit obligation

 

(24 276

)

(26 810

)

(25 498

)

Fair value of plan assets

 

24 869

 

26 307

 

25 536

 

Funded status

 

593

 

(503

)

38

 

Impact of the asset ceiling

 

(620

)

(372

)

(499

)

Net liability recognized at end of period

 

(27

)

(875

)

(461

)

 

57


 


 

8. DEFERRED TAXES
(unaudited)

 

At June 30, 2018, Nokia had recognized deferred tax assets of EUR 4.9 billion. The deferred tax assets are recognized to the extent it is probable that taxable profit will be available against which the tax losses, tax credits and deductible temporary difference can be utilized in the relevant jurisdictions. The majority of Nokia’s recognized deferred tax assets relate to unused tax losses, tax credits and deductible temporary differences in Finland (EUR 2.5 billion) and the United States (EUR 1.2 billion). Based on the recent years’ profitability in Finland and the United States and the latest forecasts of future financial performance, Nokia has been able to establish a pattern of sufficient tax profitability in Finland and the United States to conclude that it is probable that Nokia will be able to utilize the tax losses, tax credits and deductible temporary differences in the foreseeable future.

 

At June 30, 2018, Nokia had unrecognized deferred tax assets of approximately EUR 5 billion related to unused tax losses, tax credits and deductible temporary differences. The majority of the unrecognized deferred tax assets relate to France (approximately EUR 4 billion). These deferred tax assets have not been recognized due to uncertainty regarding their utilization. A significant portion of the French unrecognized deferred tax assets are indefinite in nature and available against future French tax liabilities, subject to a limitation of 50% of annual taxable profits.

 

At June 30, 2018, Nokia had deferred tax liabilities of EUR 0.4 billion. The majority of the deferred tax liabilities relate to the fair value adjustments on the purchase accounting of Alcatel-Lucent acquisition.

 

9. NET CASH AND CURRENT FINANCIAL INVESTMENTS
(unaudited)

 

EUR million

 

June 30, 2018

 

June 30, 2017

 

March 31, 2018

 

December 31,
2017

 

Current financial investments

 

867

 

1 270

 

1 342

 

911

 

Cash and cash equivalents

 

4 993

 

6 647

 

6 555

 

7 369

 

Total cash and current financial investments

 

5 861

 

7 917

 

7 897

 

8 280

 

 

 

 

 

 

 

 

 

 

 

Long-term interest-bearing liabilities

 

2 771

 

3 577

 

3 172

 

3 457

 

Short-term interest-bearing liabilities

 

946

 

376

 

548

 

309

 

Interest-bearing liabilities

 

3 717

 

3 953

 

3 721

 

3 766

 

 

 

 

 

 

 

 

 

 

 

Net cash and current financial investments

 

2 144

 

3 964

 

4 176

 

4 514

 

 

58



 

10. FAIR VALUE OF FINANCIAL INSTRUMENTS (unaudited)

 

Financial assets and liabilities recorded at fair value are categorized based on the amount of unobservable inputs used to measure their fair value. Three hierarchical levels are based on an increasing amount of judgment associated with the inputs used to derive fair valuation for these assets and liabilities; Level 1 being market values for exchange traded products, Level 2 being primarily based on quotes from third-party pricing services and Level 3 requiring most management judgment. For more information about the valuation methods and principles, refer to note 2, “Significant accounting policies” and note 24, “Fair value of financial instruments”, of our Annual Report for 2017. For information on changes in classification related to the adoption of IFRS 9, refer to note 14, “New accounting standard”. Items carried at fair value in the following table are measured at fair value on a recurring basis.

 

 

 

Carrying amounts

 

 

 

 

 

Fair value through profit or loss

 

Fair value through other comprehensive
income

 

 

 

Fair value

 

EURm 

 

Amortized cost

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Total

 

At June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current financial investments

 

0

 

2

 

0

 

671

 

0

 

0

 

0

 

673

 

673

 

Other non-current financial assets

 

163

 

0

 

108

 

9

 

0

 

65

 

0

 

345

 

330

 

Other current financial assets including derivatives

 

21

 

0

 

96

 

0

 

0

 

128

 

0

 

245

 

245

 

Trade receivables

 

0

 

0

 

0

 

0

 

0

 

4 878

 

0

 

4 878

 

4 878

 

Current financial investments

 

148

 

0

 

72

 

0

 

0

 

647

 

0

 

867

 

867

 

Cash and cash equivalents

 

3 840

 

0

 

1 153

 

0

 

0

 

0

 

0

 

4 993

 

4 993

 

Total financial assets

 

4 172

 

2

 

1 429

 

680

 

0

 

5 718

 

0

 

12 001

 

11 986

 

Long-term interest-bearing liabilities

 

2 771

 

0

 

0

 

0

 

0

 

0

 

0

 

2 771

 

2 824

 

Other long-term financial liabilities

 

33

 

0

 

0

 

692

 

0

 

0

 

0

 

725

 

725

 

Short-term interest-bearing liabilities

 

946

 

0

 

0

 

0

 

0

 

0

 

0

 

946

 

959

 

Other financial liabilities including derivatives

 

0

 

0

 

249

 

0

 

0

 

0

 

0

 

249

 

249

 

Other liabilities, dividend payable

 

135

 

0

 

0

 

0

 

0

 

0

 

0

 

135

 

135

 

Trade payables

 

3 900

 

0

 

0

 

0

 

0

 

0

 

0

 

3 900

 

3 900

 

Total financial liabilities

 

7 785

 

0

 

249

 

692

 

0

 

0

 

0

 

8 726

 

8 792

 

 

 

 

Carrying amounts

 

 

 

 

 

Fair value through profit or loss

 

Fair value through other comprehensive
income

 

 

 

Fair value

 

EURm 

 

Amortized cost

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Total

 

At December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current available-for-sale investments

 

119

 

0

 

0

 

0

 

16

 

137

 

544

 

816

 

816

 

Other non-current financial assets

 

108

 

0

 

99

 

8

 

0

 

0

 

0

 

215

 

195

 

Other current financial assets including derivatives

 

106

 

0

 

196

 

0

 

0

 

0

 

0

 

302

 

302

 

Trade receivables

 

6 880

 

0

 

0

 

0

 

0

 

0

 

0

 

6 880

 

6 880

 

Available-for-sale investments, liquid assets

 

0

 

0

 

0

 

0

 

0

 

911

 

0

 

911

 

911

 

Cash and cash equivalents

 

5 407

 

0

 

1 962

 

0

 

0

 

0

 

0

 

7 369

 

7 369

 

Total financial assets

 

12 620

 

0

 

2 257

 

8

 

16

 

1 048

 

544

 

16 493

 

16 473

 

Long-term interest-bearing liabilities

 

3 457

 

0

 

0

 

0

 

0

 

0

 

0

 

3 457

 

3 574

 

Other long-term financial liabilities

 

44

 

0

 

0

 

672

 

0

 

0

 

0

 

716

 

716

 

Short-term interest-bearing liabilities

 

309

 

0

 

0

 

0

 

0

 

0

 

0

 

309

 

309

 

Other financial liabilities including derivatives

 

0

 

0

 

268

 

0

 

0

 

0

 

0

 

268

 

268

 

Trade payables

 

3 996

 

0

 

0

 

0

 

0

 

0

 

0

 

3 996

 

3 996

 

Total financial liabilities

 

7 806

 

0

 

268

 

672

 

0

 

0

 

0

 

8 746

 

8 863

 

 

59


 


 

Level 3 Financial assets include a large number of investments in unlisted equities and unlisted venture funds, including investments managed by Nokia Growth Partners specializing in growth-stage investing and by BlueRun Ventures focusing on early stage opportunities.

 

Level 3 Financial liabilities include a conditional obligation to China Huaxin related to Nokia Shanghai Bell.

 

EURm

 

Level 3 Financial Assets

 

Level 3 Financial
Liabilities

 

Balance at December 31, 2017

 

552

 

(672

)

Adoption of IFRS 9(1)

 

122

 

0

 

Balance at January 1, 2018

 

674

 

(672

)

Net gains/(losses) in income statement

 

8

 

(15

)

Additions

 

45

 

0

 

Deductions

 

(49

)

4

 

Other movements

 

2

 

(9

)

Balance at June 30, 2018

 

680

 

(692

)

 


(1)Non-current available-for-sale investments for which the fair value was estimated to equal cost less impairment under IAS 39, as their fair value was not possible to estimate reliably, are classified as level 3 financial instruments at fair value through profit or loss under IFRS 9.

 

The gains and losses from venture fund and similar investments categorized in level 3 are included in other operating income and expenses. A net loss of EUR 46 million (net gain of EUR 63 million in 2017) related to level 3 financial instruments held at June 30, 2018, was included in the profit and loss during 2018.

 

60



 

11. PROVISIONS (unaudited)

 

EUR million

 

Restructuring

 

Divestment
related

 

Warranty

 

Project losses

 

Litigation

 

Environmental
liabilities

 

Material
liability

 

Other

 

Total

 

At January 1, 2018

 

722

 

76

 

210

 

76

 

130

 

107

 

66

 

502

 

1 888

 

Translation differences

 

0

 

(5

)

0

 

1

 

(11

)

2

 

1

 

1

 

(10

)

Reclassification

 

0

 

0

 

0

 

0

 

9

 

0

 

(1

)

(9

)

(1

)

Charged to income statement

 

155

 

(4

)

47

 

(5

)

17

 

(1

)

23

 

(106

)

125

 

Additional provisions

 

179

 

0

 

78

 

0

 

23

 

1

 

38

 

40

 

358

 

Changes in estimates(1)

 

(24

)

(4

)

(31

)

(5

)

(6

)

(2

)

(15

)

(146

)

(233

)

Utilized during period(2)

 

(200

)

0

 

(53

)

(7

)

(18

)

(4

)

(15

)

(32

)

(329

)

At June 30, 2018

 

676

 

67

 

204

 

65

 

126

 

104

 

73

 

357

 

1 673

 

 


(1)The changes in estimates in other provisions include a release of EUR 110 million due to resolution of a tax dispute related to discontinued operations.

 

(2)The utilization of restructuring provision includes items transferred to accrued expenses, of which EUR 33 million remained in accrued expenses as of June 30, 2018.

 

12. INTEREST-BEARING LIABILITIES (unaudited)

 

 

 

 

 

 

 

Nominal

 

 

 

Carrying amount (EUR million)

 

Issuer/Borrower

 

Instrument

 

Currency

 

(million)

 

Final maturity

 

June 30, 2018

 

June 30, 2017

 

December 31, 2017

 

Nokia Corporation

 

6.75 % Senior Notes

 

EUR

 

231

 

February 2019

 

236

 

245

 

241

 

Nokia Corporation

 

5.375 % Senior Notes

 

USD

 

581

 

May 2019

 

498

 

517

 

487

 

Nokia Corporation

 

1.00 % Senior Notes

 

EUR

 

500

 

March 2021

 

498

 

498

 

498

 

Nokia Corporation

 

3.375 % Senior Notes

 

USD

 

500

 

June 2022

 

409

 

431

 

406

 

Nokia Corporation

 

2.00 % Senior Notes

 

EUR

 

750

 

March 2024

 

744

 

743

 

744

 

Nokia Corporation

 

4.375 % Senior Notes

 

USD

 

500

 

June 2027

 

399

 

428

 

404

 

Nokia of America Corporation

 

6.50 % Senior Notes

 

USD

 

74

 

January 2028

 

64

 

65

 

62

 

Nokia of America Corporation

 

6.45 % Senior Notes

 

USD

 

206

 

March 2029

 

179

 

183

 

174

 

Nokia Corporation

 

6.625 % Senior Notes

 

USD

 

500

 

May 2039

 

434

 

446

 

424

 

Nokia Corporation

 

Revolving credit facility

 

EUR

 

1579

 

June 2020

 

0

 

0

 

0

 

Nokia Corporation and various subsidiaries

 

Other liabilities

 

 

 

 

 

 

 

256

 

397

 

326

 

Total

 

 

 

 

 

 

 

 

 

3 717

 

3 953

 

3 766

 

 

All Nokia borrowings are senior unsecured and have no financial covenants.

 

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13. COMMITMENTS AND CONTINGENCIES (unaudited)

 

EUR million

 

June 30, 2018

 

June 30, 2017

 

December 31, 2017

 

Collateral for own commitments

 

 

 

 

 

 

 

Assets pledged

 

0

 

5

 

5

 

Contingent liabilities on behalf of Group companies(1)

 

 

 

 

 

 

 

Guarantees issued by financial institutions

 

1 596

 

1 782

 

1 678

 

Other guarantees

 

504

 

751

 

487

 

Contingent liabilities on behalf of other companies

 

 

 

 

 

 

 

Other guarantees

 

28

 

31

 

27

 

Leasing obligations

 

818

 

1 014

 

961

 

Financing commitments

 

 

 

 

 

 

 

Customer finance commitments

 

468

 

546

 

495

 

Financing commitments to associated companies

 

20

 

18

 

20

 

Venture fund commitments

 

375

 

461

 

396

 

 

The amounts above represent the maximum principal amount of commitments and contingencies.

 


(1)In contingent liabilities on behalf of Group companies Nokia reports guarantees that have been given to third parties in the normal course of business. These are mainly guarantees given by financial institutions to Nokia’s customers for the performance of Nokia’s obligations under supply agreements, including tender bonds, performance bonds, and warranty bonds issued by financial institutions on behalf of Nokia. Additionally Nokia has issued corporate guarantees with primary obligation given directly to customers with these guarantees amounting to EUR 1 052 million (EUR 1 508 million at June 30, 2017 and EUR 1 114 million at December 31, 2017). In Other guarantees Nokia reports guarantees related to non-commercial contracts that support Nokia’s business activities. As a result of internal policies and active management of outstanding guarantee exposure, Nokia has not been subject to any material guarantee claims during recent years.

 

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14. NEW ACCOUNTING STANDARDS (unaudited)

 

Nokia has adopted IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers on their effective date of January 1, 2018. This note describes the impact of adoption on Nokia’s consolidated financial statements and also discloses the changes to Nokia’s accounting policies that resulted from the adoption. In accordance with the transitional provision in IFRS 9 and IFRS 15, Nokia has not restated prior year comparatives.

 

The following table shows the adjustments recognized for each individual line item in the statement of financial position. Line items that were not affected by the changes have not been included, and as a result, the subtotals and totals cannot be calculated from the numbers provided. The adjustments are explained in more detail by standard below.

 

Consolidated statement of financial position (extract)

 

EUR million

 

December 31, 2017

 

IFRS 9

 

IFRS 15

 

January 1, 2018

 

ASSETS

 

 

 

 

 

 

 

 

 

Non-current financial investments

 

0

 

679

 

 

 

679

 

Available-for-sale investments

 

816

 

(816

)

 

 

0

 

Deferred tax assets

 

4 582

 

9

 

 

 

4 591

 

Other non-current financial assets

 

215

 

132

 

 

 

347

 

Non-current assets

 

21 160

 

4

 

0

 

21 164

 

Trade receivables

 

6 880

 

(46

)

(2 130

)

4 704

 

Contract assets(1)

 

0

 

 

 

1 537

 

1 537

 

Prepaid expenses and accrued income

 

1 259

 

 

 

 

 

1 259

 

Other financial assets

 

302

 

4

 

 

 

306

 

Current financial investments

 

0

 

1 008

 

 

 

1 008

 

Available-for-sale investments, liquid assets

 

911

 

(911

)

 

 

0

 

Cash and cash equivalents

 

7 369

 

(101

)

 

 

7 268

 

Current assets

 

19 841

 

(46

)

(593

)

19 202

 

Total assets

 

41 024

 

(43

)

(593

)

40 389

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY AND LIABILITIES

 

 

 

 

 

 

 

 

 

Fair value and other reserves

 

1 094

 

(252

)

 

 

842

 

Retained earnings

 

1 147

 

214

 

(16

)

1 345

 

Total equity

 

16 218

 

(38

)

(16

)

16 164

 

Deferred tax liabilities

 

413

 

(5

)

(5

)

403

 

Contract liabilities

 

0

 

 

 

1 087

 

1 087

 

Deferred revenue and other long-term liabilities

 

2 986

 

 

 

(1 087

)

1 899

 

Non-current liabilities

 

12 063

 

(5

)

(5

)

12 053

 

Contract liabilities(1)

 

0

 

 

 

2 660

 

2 660

 

Accrued expenses, deferred revenue and other liabilities

 

6 666

 

 

 

(3 232

)

3 434

 

Current liabilities

 

12 744

 

0

 

(572

)

12 172

 

Total shareholders’ equity and liabilities

 

41 024

 

(43

)

(593

)

40 389

 

 


(1)Nokia continues to evaluate its presentation of contract assets and current contract liabilities, refer to Opening balance sheet adjustment and application of IFRS 15 in 2018 section below for further detail.

 

IFRS 9 Financial Instruments

 

IFRS 9 replaces IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 addresses the classification and measurement of financial assets and liabilities, introduces a new impairment model and a new hedge accounting model. On adoption, Nokia has not restated comparative periods but presents the cumulative effect of adopting IFRS 9 as a transition adjustment to the opening balance of other comprehensive income and retained earnings as of January 1, 2018.

 

The effect of changes to Nokia’s financial statement due to the adoption of IFRS 9 are described below.

 

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Classification and measurement of financial assets

 

Nokia has classified its financial assets in the following three categories: financial assets measured at amortized cost, financial assets measured at fair value through other comprehensive income and financial assets measured at fair value through profit and loss. The selection of the appropriate category is made based both on Nokia’s business model for managing the financial asset and on the contractual cash flows characteristics of the financial asset. The new asset classes replace the following IAS 39 asset classification categories: available-for-sale investments, derivative and other current financial assets, loans receivable, trade receivables, financial assets at fair value through profit or loss.

 

Nokia’s business model for managing financial assets is defined on portfolio level. The business model must be observable on practical level by the way business is managed. The cash flows of financial assets measured at amortized cost are solely payments of principal and interest. These assets are held within a business model which has an objective to hold assets to collect contractual cash flows. Financial assets measured at fair value through other comprehensive income have cash flows that are solely payments of principal and interest and these assets are held within a business model which has an objective that is achieved both by holding financial assets to collect contractual cash flows and selling financial assets. Financial assets measured at fair value through profit and loss are assets that do not fall in either of the two above-mentioned categories. In addition to the classification as described above, the accounting for financial assets is impacted if the financial asset is part of a hedging relationship.

 

Non-current Investments: Investments in unlisted private equity shares, technology-related publicly quoted shares and unlisted venture funds are classified as fair value through profit and loss. Under IAS 39 these items were classified as available-for-sale. Fair valuation is recorded in other income and expenses based on the business model assessment performed in conjunction with IFRS 9 transition.

 

Other non-current financial assets: Restricted bank deposits are classified as amortized cost. Under IAS 39 these items were classified as available-for-sale.

 

Loan receivables: Nokia’s business model for managing loans to customers and suppliers is both to collect contractual cash flows and to sell assets and hence customer finance assets are initially recognized and subsequently re-measured at fair value through other comprehensive income. Under IAS 39 these items were measured at amortized cost less impairment using the effective interest method.

 

Derivatives: There is no change in the classification or measurement of derivative assets not designated in hedge accounting relationships apart from embedded derivatives: based on IFRS 9, the whole contract is evaluated based on the classification criteria and then classified as its entirety. Based on IAS 39 embedded derivatives were measured at fair value through profit and loss.

 

Current Investments: Term deposits used as collaterals for derivative transactions are classified as current investments at amortized cost (formerly classified as cash equivalents). Fixed income and money market securities are classified as fair value through other comprehensive income in case the instrument characteristics fulfil the criteria of payments of solely principal and interest and are not part of a structured investment (formerly classified as available-for-sale investments). Other investments are classified at fair value through profit or loss.

 

Trade receivables: Nokia’s business model for managing trade receivables is holding receivables to collect contractual cash flows and selling receivables. Hence, trade receivables are initially recognized at notional amounts and subsequently re-measured at fair value through other comprehensive income. IAS 39 measured these trade receivables at amortized cost.

 

Classification and measurement of financial liabilities

 

Nokia classifies derivative liabilities at fair value through profit and loss and all other financial liabilities at amortized cost. These category classes replace the IAS 39 classes derivative and other financial liabilities, compound financial instruments, loans payable, and account payable. The implementation of IFRS 9 has not had a material effect on the classification and measurement of financial liabilities.

 

Impairment

 

Nokia assesses expected credit losses (ECL) on financial assets on a forward-looking basis whereas the impairment provision under IAS 39 was based on actual credit losses. The impairment requirements concern the following financial assets: customer loans and current investments measured at fair value through other comprehensive income, financial assets measured at amortized cost as well as financial guarantee contracts and loan commitments.

 

A loss allowance is recognized based on 12-month expected credit losses unless the credit risk for the financial instrument has increased significantly since initial recognition. For trade receivables and contract assets Nokia applies a simplified impairment approach to recognizing a loss allowance based on lifetime expected credit losses.

 

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Hedge accounting

 

As Nokia’s foreign exchange risk management policy and hedge accounting model have already been aligned with the requirements of IFRS 9, all hedging relationships qualify for treatment as continuing hedging relationship. The requirement for hedge effectiveness of 80-125 % has been removed from IFRS 9 and the effectiveness of hedging is evaluated based on the economic relationship between the hedging instrument and hedged item. Nokia is separating the forward element and the spot element of a forward contract and designates as the hedging instrument only the change in the value of the spot element of the forward contract. Nokia also separates the time value of options and the basis element of cross currency swaps. These hedging costs are mainly recognized in other comprehensive income and subsequently accounted for in the same way as the intrinsic value. Under IAS 39 these costs were recognized in profit and loss as they occurred.

 

The monetary and line-by-line impact of the changes to classification and measurement of financial assets in the Statement of Financial Position is described in more detail below.

 

 

 

IAS 39
classification

 

IFRS 9
classification

 

December 31, 2017
(IAS 39)

 

January 1, 2018
(IFRS 9)

 

Change in classification

 

Change in
measurement

 

Non-current financial investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in private equity(1)

 

Available-for-sale

 

FVPL

 

679

 

679

 

 

 

 

 

Restricted bank deposits(2)

 

Available-for-sale

 

Amortized cost

 

137

 

 

 

(137

)

 

 

Other non-current financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted bank deposits(2)

 

Available-for-sale

 

Amortized cost

 

 

 

137

 

137

 

 

 

Non-current customer financing(4)

 

Amortized cost

 

FVOCI

 

75

 

70

 

 

 

(5

)

Other non-current financial assets

 

FVPL

 

FVPL

 

107

 

107

 

 

 

 

 

Other non-current financial assets

 

Amortized cost

 

Amortized cost

 

33

 

33

 

 

 

 

 

Other current financial assets including derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

FVPL

 

FVPL

 

196

 

196

 

 

 

 

 

Current portion of customer financing(4)

 

Amortized cost

 

FVOCI

 

84

 

84

 

 

 

 

 

Other current financial assets(2)

 

Amortized cost

 

Amortized cost

 

22

 

27

 

4

 

 

 

Trade receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade receivables(3)

 

Amortized cost

 

FVOCI

 

6 880

 

6 833

 

 

 

(46

)

Current financial investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale investments, liquid assets(5)

 

FVOCI

 

FVPL

 

 

 

84

 

84

 

 

 

Available-for-sale investments, liquid assets(2), (5)

 

FVOCI

 

FVOCI

 

911

 

823

 

(88

)

 

 

Financial investments at amortized cost(6)

 

Amortized cost

 

Amortized cost

 

 

 

101

 

101

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial investments at fair value through profit and loss

 

FVPL

 

FVPL

 

1 962

 

1 962

 

 

 

 

 

Financial investments at amortized cost(6)

 

Amortized cost

 

Amortized cost

 

5 407

 

5 305

 

(101

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

 

 

 

 

4 582

 

4 591

 

 

 

9

 

Deferred tax liabilities

 

 

 

 

 

413

 

409

 

(2

)

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value and other reserves(1), (3), (4), (7), (8)

 

 

 

 

 

1 094

 

843

 

(210

)

(41

)

Retained earnings(1), (7), (8)

 

 

 

 

 

1 147

 

1 361

 

212

 

2

 

 

65



 


(1)Upon initial application of the standard, the accumulated net positive fair value changes for Nokia’s investments in venture funds, a gain of EUR 226 million, formerly recorded to other comprehensive income, is presented as a transition adjustment to opening balance of retained earnings. There was no change in the valuation nor carrying amount of these assets.

(2)Certain restricted bank deposits classified mainly as non-current available-for-sale investments under IAS 39 are classified as amortized cost. There was no change in the carrying amount of these deposits.

(3)The initial fair value adjustment for trade receivables of a loss of EUR 46 million is presented in opening balance of other comprehensive income as a transition adjustment.

(4)The initial fair value adjustment for customer finance assets of a loss of EUR 4 million is presented in opening balance of other comprehensive income as a transition adjustment.

(5)Nokia has assessed the investments currently classified as current available-for-sale, liquid assets, and will classify certain investment funds to be measured at fair value through profit or loss at the adoption of the new standard. The rest of these investments satisfy the conditions for classification at fair value through other comprehensive income.

(6)Certain term deposits used as collaterals for derivative transactions formerly classified as cash equivalents are classified as current financial investments in conjunction with IFRS 9 business model assessment. This transition adjustment is presented as a cash outflow on the Purchase of current financial investments line in the consolidated statement of cash flows.

(7)Nokia has assessed the impact of the new impairment model. As the credit quality of Nokia’s fixed income and money market investments is high, there is no significant impact from the new model. There is an impact of EUR 9 million loss to loans extended to Nokia’s customers as the new model results in an earlier recognition of credit losses that has been recorded in opening balance of other comprehensive income and retained earnings as a transition adjustment.

(8)For cash flow hedge accounting, Nokia has elected to defer cost of hedging in other comprehensive income until the hedged item impacts profit and loss. As a result a loss of EUR 10 million for accumulated forward points related to hedges under cash flow hedge accounting at the end of 2017 has been recorded in opening balance of other comprehensive income and retained earnings as a transition adjustment. For net investment hedge accounting, Nokia has elected to defer cost of hedging in other comprehensive income and amortize it over the duration of the hedge. The initial adjustment related to treatment of cost of net investment hedging is not significant.

 

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IFRS 15 Revenue from Contracts with Customers

 

IFRS 15 replaces IAS 18, Revenue, and IAS 11, Construction contracts and establishes a new five-step model that applies to revenue arising from contracts with customers. Under IFRS 15, revenue is recognized to reflect the transfer of promised goods and services to customers for amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods and services. Nokia adopted the standard by applying the modified retrospective method and has presented the cumulative effect of adopting IFRS 15 as an adjustment to the opening balance of retained earnings as of January 1, 2018.

 

Management analyzed the impact of the adoption of IFRS 15 and concluded that the new standard did not have a material impact on Nokia’s consolidated retained earnings. For the impact on the presentation on the statement of financial position, please refer below under section Opening balance sheet adjustment and application in 2018. The procedures performed by management focused on a review of existing contracts through December 31, 2017, focusing on the following areas:

 

Arrangements with customers

 

Management considered the definition of a contract in accordance with the new standard and concluded that only legally binding commitments should be considered in evaluating the accounting for arrangements with customers. As such, frame agreements will be accounted for based on purchase orders, initial discounts and other material rights. Previously, a broader contract definition was permitted for accounting purposes.

 

Identification of performance obligations and allocation of transaction price

 

In accordance with IFRS 15, the identification of performance obligations and allocation of transaction price is based on a fair value model. Nokia’s application of previous accounting standards is consistent with IFRS 15.

 

Transfer of control of hardware

 

The point at which control transfers to the customer under IFRS 15 is consistent with Nokia’s assessed point of transfer of the significant risks and rewards of ownership to the customer under the previous standard.

 

Software revenue

 

In accordance with IFRS 15, revenue related to software arrangements will be recognized at points in time. Under previous standards, certain software revenue arrangements were recorded as revenue over the terms of the arrangements where customers had access to a portfolio of software solutions. After the adoption of IFRS 15, this change may result in larger fluctuations in revenue between quarters than under the previous standard.

 

Patent license agreements in Nokia Technologies

 

Nokia’s current revenue recognition principles for license agreements, which contain future commitments to perform, are in line with IFRS 15 and continue to be recorded over time. Further, Nokia has determined that, upon transition to IFRS 15, one specific license agreement is a completed contract as it has no such future commitments (refer to Application of transition guidance below).

 

Application of transition guidance

 

In April 2014, Nokia entered into an agreement to license certain technology patents and patent applications owned by Nokia on the effective date of that agreement, on a non-exclusive basis, to a licensee, for a period of 10 years (the “License Agreement”). Contemporaneously and under the terms of the License Agreement, Nokia issued to the licensee an option to extend the technology patent license for remaining life of the licensed patents. Nokia received all cash consideration due for the sale of the 10-year license and option upon closing of the License Agreement. Management has determined that, upon transition to IFRS 15, the License Agreement is a completed contract. As such, in accordance with the transition requirements of the standard, Nokia continues to apply its prior revenue accounting policies, based on IAS 18, Revenue, and related interpretations, to the License Agreement. Under those policies, Nokia is recognizing revenue over the term of the License Agreement.

 

As of June 30, 2018, the balance of deferred revenue related to the License Agreement of EUR 902 million, recognized in advance payments and deferred revenue in the consolidated statement of financial position, is expected to be recognized as revenue through 2024.

 

67



 

Opening balance sheet adjustment and application of IFRS 15 in 2018

 

In accordance with the requirements of IFRS 15, Nokia has presented its customer contracts in the statement of financial position as either a contract asset or a contract liability, depending on the relationship between Nokia’s performance and the customer’s payment for each individual contract. On a net basis, a contract asset position represents where Nokia has performed by transferring goods or services to a customer before the customer pays consideration or before payment is due. Conversely, a contract liability position represents where a customer has paid consideration or payment is due, but Nokia has not yet transferred goods or services to the customer. Invoiced receivables represent unconditional rights to payment, and are presented separately on the statement of financial position. The IFRS 15 related adjustments to the year-end 2017 statement of financial position and the resulting 2018 opening balance sheet are presented in the first section of this note. Contract assets presented in the statement of financial position are current in nature while contract liabilities can be either current or non-current.

 

During Q2 2018, management has continued to evaluate its presentation of contract assets and current contract liabilities with a focus on the netting process, the results of which differ depending on the level at which contract data is analyzed. As a result, management determined that the contract assets and current contract liabilities balance sheet line items may be materially misstated within the January 1, 2018, March 31, 2018 and June 30, 2018 balance sheets. As at September 30, 2018, should the evaluation produce a materially different conclusion, management will restate its January 1, 2018, March 31, 2018 and June 30, 2018 balance sheets. Note, there is no impact on any line items in the income statement, nor any balance sheet line items other than contract assets and current contract liabilities. Further, management is assessing the design of its internal controls over financial reporting related to this disclosure.

 

Adoption of the standard resulted in a post-tax decrease of retained earnings of EUR 16 million in the opening balance sheet of 2018, with offsetting entries in trade receivables and deferred revenue, subsequently subject to presentation on a net basis in contract assets and liabilities.

 

In the first six months of 2018, the difference in the amount of revenue recorded by the application of IFRS 15 as compared to IAS 11, IAS 18 and related Interpretations that were in effect before the adoption of IFRS 15, is immaterial.

 

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15. PERFORMANCE MEASURES (unaudited)

 

In the reporting of financial information, Nokia has adopted various performance measures of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS). These measures are not defined by IFRS and therefore may not be directly comparable with financial measures used by other companies, including those in Nokia’s industry. The following table provides summarized information on the performance measures included in this interim report.

 

Performance measure

 

Definition

 

Purpose

Key performance measures

Non-IFRS measures

 

Non-IFRS measures 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. Refer to note 2, “Non-IFRS to reported reconciliation”.

 

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 non-IFRS items that may not be indicative of Nokia’s business operating results. Non-IFRS operating profit is used in determining management remuneration.

Constant currency measures

 

When financial measures are reported on a constant currency basis, exchange rates used to translate the amounts in local currencies to euro, our reporting currency, are the average actual periodic exchange rates for the comparative financial period. Therefore, the constant currency measures exclude the impact of changes in exchange rates during the current period in comparison to euro.

 

We provide additional information on a constant currency basis in order to better reflect the underlying business performance.

Other performance measures

Recurring/Non-recurring net sales

 

Recurring net sales are revenues that are likely to continue in the future. Recurring net sales exclude e.g. catch-up revenues relating to prior periods. Non-recurring net sales are revenues that are not likely to continue in the future.

 

We use recurring/non-recurring net sales to improve comparability between the financial periods.

Net cash and current financial investments

 

Net cash and current financial investments equals total cash and current financial investments less long-term and short-term interest-bearing liabilities. Refer to note 9, “Net cash and current financial investments”.

 

Net cash and current financial investments is used to indicate Nokia’s liquidity position after cash required to settle the interest-bearing liabilities.

Total cash and current financial investments

 

Total cash and current financial investments consist of cash and cash equivalents and current financial investments.

 

Total cash and current financial investments is used to indicate funds available to Nokia to run its current and invest in future business activities as well as provide return for security holders.

EBITDA

 

Operating profit/(loss) before depreciations and amortizations and adjusted for share of results of associated companies and joint ventures.

 

We use EBITDA as a measure of Nokia’s operating performance.

Adjusted profit/(loss) before changes in net working capital

 

Profit/(loss) for the period adjusted for the movements in non-cash items before changes in net working capital.

 

We use adjusted profit/(loss) before changes in net working capital to provide a structured presentation of cash flows.

Free cash flow

 

Net cash from operating activities - purchases of property, plant and equipment and intangible assets (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.

 

Free cash flow is the cash that Nokia generates after net investments to tangible, intangible and non-current financial investments and it represents the cash available for distribution among its security holders. It is a measure of cash generation, working capital efficiency and capital discipline of the business.

Capital expenditure

 

Purchases of property, plant and equipment and intangible assets (excluding assets acquired under business combinations).

 

We use capital expenditure to describe investments in profit generating activities in the future.

Recurring annual cost savings

 

Reduction in cost of sales and operating expenses resulting from the cost savings program and the impact of which is considered recurring in nature.

 

We use recurring annual cost savings measure to monitor the progress of our cost savings program established after the Alcatel-Lucent transaction against plan.

Restructuring and associated charges, liabilities and cash outflows

 

Charges, liabilities and cash outflows related to activities that either meet the strict definition of restructuring under IFRS or are closely associated with such activities.

 

We use restructuring and associated charges, liabilities and cash outflows to measure the progress of our integration and transformation activities.

Charges and cash outflows related to network equipment swaps

 

Charges and cash outflows related to product portfolio integration for key customers.

 

We use charges and cash outflows related to network equipment swaps to measure the progress of our integration and transformation activities.

 

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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 strategy is subject to various risks and uncertainties and we may be unable to successfully implement our strategic plans, sustain or improve the operational and financial performance of our business groups, correctly identify or successfully pursue business opportunities or otherwise grow our business; 2) general economic and market conditions and other developments in the economies where we operate; 3) competition and our ability to effectively and profitably 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) our ability to maintain our existing sources of intellectual property-related revenue, establish new sources of revenue and protect our intellectual property from infringement; 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) Nokia Technologies’ ability to protect its IPR and to maintain and establish new sources of patent, brand and technology licensing income and IPR-related revenues, particularly in the smartphone market, which may not materialize as planned, 13) 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; 14) 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; 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) our exposure to various legal frameworks regulating corruption, fraud, trade policies, and other risk areas, and the possibility of proceedings or investigations that result in fines, penalties or sanctions; 18) adverse developments with respect to customer financing or extended payment terms we provide to customers; 19) 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; 20) our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 21) our ability to retain, motivate, develop and recruit appropriately skilled employees; 22) disruptions to our manufacturing, service creation, delivery, logistics and supply chain processes, and the risks related to our geographically-concentrated production sites; 23) the impact of litigation, arbitration, agreement-related disputes or product liability allegations associated with our business; 24) our ability to re-establish investment grade rating or maintain our credit ratings; 25) our ability to achieve targeted benefits from, or successfully implement planned transactions, as well as the liabilities related thereto; 26) our involvement in joint ventures and jointly-managed companies; 27) the carrying amount of our goodwill may not be recoverable; 28) uncertainty related to the amount of dividends and equity return we are able to distribute to shareholders for each financial period; 29) pension costs, employee fund-related costs, and healthcare costs; and 30) risks related to undersea infrastructure,

 

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as well as the risk factors specified on pages 71 to 89 of our 2017 annual report on Form 20-F published on March 22, 2018 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.

 

This financial report was authorized for issue by management on July 25, 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 third quarter and January-September 2018 results on October 25, 2018.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant, Nokia Corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: July 26, 2018

Nokia Corporation

 

 

 

By:

/s/ Jussi Koskinen

 

 

Name: Jussi Koskinen

 

 

Title:   Vice President, Corporate Legal