Nokia Corporation
Interim Report
October 27, 2016 at 08:00 (CET +1)
Solid financial and operational performance across the company
This is a summary of the Nokia Corporation interim report for third quarter 2016 and January-September 2016 published today. The complete interim report for third quarter 2016 and January-September 2016 with tables is available at www.nokia.com/financials. Investors should not rely on summaries of our interim reports only, but should review the complete interim reports with tables.
FINANCIAL HIGHLIGHTS
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Non-IFRS net sales in Q3 2016 of EUR 6.0 billion (reported: EUR 5.9 billion). In the year-ago quarter, non-IFRS net sales would have been EUR 6.4 billion on a comparable combined company basis (reported: EUR 3.0 billion on a Nokia stand-alone basis).
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Non-IFRS diluted EPS in Q3 2016 of EUR 0.04 (reported: EUR negative 0.02).
Nokia's Networks business
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12% year-on-year net sales decrease in Q3 2016. Consistent with our outlook for the wireless infrastructure market, net sales were weak in Mobile Networks within Ultra Broadband Networks, and accounted for approximately 80% of the overall decrease in Nokia's Networks business. IP Networks and Applications also contributed to the decrease. This was partially offset by growth in Fixed Networks within Ultra Broadband Networks.
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In Q3 2016, solid gross margin of 37.2% and operating margin of 8.1%, supported by continued strong operational performance and cost controls.
Nokia Technologies
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109% year-on-year net sales increase and 168% operating profit increase in Q3 2016. Excluding the impact of non-recurring licensing income, Nokia Technologies net sales and operating profit both would have grown by approximately 50% year-on-year, primarily due to higher intellectual property licensing income and, to a lesser extent, increased net sales resulting from the acquisition of Withings.
Group Common and Other
| Q3 and January-September 2016 non-IFRS results. Refer to note 1 to the interim financial statements for further details 1,2 | |
| | | Combined company histori-cals2 | | | | | Combined company histori-cals2 | | |
| EUR million | Q3'16 | Q3'15 | YoY change | Q2'16 | QoQ change | Q1-
Q3'16 | Q1-
Q3'15 | YoY change | |
| Net sales -
constant currency
(non-IFRS) | | | (6)% | | 4% | | | (8)% | |
| Net sales
(non-IFRS) | 5 950 | 6 395 | (7)% | 5 676 | 5% | 17 230 | 18 887 | (9)% | |
| Nokia's Networks
business | 5 322 | 6 020 | (12)% | 5 228 | 2% | 15 730 | 17 578 | (11)% | |
| Ultra Broadband
Networks | 3 903 | 4 469 | (13)% | 3 807 | 3% | 11 438 | 12 999 | (12)% | |
| IP Networks and
Applications | 1 419 | 1 552 | (9)% | 1 421 | 0% | 4 292 | 4 579 | (6)% | |
| Nokia Technologies | 353 | 169 | 109% | 194 | 82% | 745 | 661 | 13% | |
| Group Common
and Other | 298 | 211 | 41% | 271 | 10% | 805 | 668 | 21% | |
| Gross profit
(non-IFRS) | 2 365 | 2 410 | (2)% | 2 202 | 7% | 6 771 | 7 170 | (6)% | |
| Gross margin %
(non-IFRS) | 39.7% | 37.7% | 200bps | 38.8% | 90bps | 39.3% | 38.0% | 130bps | |
| Operating profit
(non-IFRS) | 556 | 682 | (18)% | 332 | 67% | 1 233 | 1 607 | (23)% | |
| Nokia's Networks
business | 432 | 678 | (36)% | 312 | 38% | 1 081 | 1 399 | (23)% | |
| Ultra Broadband
Networks | 326 | 478 | (32)% | 228 | 43% | 788 | 954 | (17)% | |
| IP Networks and
Applications | 106 | 200 | (47)% | 84 | 26% | 293 | 445 | (34)% | |
| Nokia Technologies | 225 | 84 | 168% | 89 | 153% | 420 | 381 | 10% | |
| Group Common
and Other | (101) | (80) | | (68) | | (268) | (173) | | |
| Operating margin %
(non-IFRS) | 9.3% | 10.7% | (140)bps | 5.8% | 350bps | 7.2% | 8.5% | (130)bps | |
| Q3 and January-September 2016 reported results, unless otherwise specified. Refer to note 1 to the interim financial statements for further details1,3 | |
| | | Nokia stand-alone histori-cals3 | | | | | Nokia stand-alone histori-cals3 | | |
| EUR million
(except for EPS
in EUR) | Q3'16 | Q3'15 | YoY change | Q2'16 | QoQ change | Q1-Q3'16 | Q1-
Q3'15 | YoY change | |
| Net Sales -
constant currency | | | 95% | | 5% | | | 91% | |
| Net sales | 5 890 | 3 036 | 94% | 5 583 | 5% | 16 972 | 8 890 | 91% | |
| Nokia's Networks
business | 5 322 | 2 877 | 85% | 5 228 | 2% | 15 730 | 8 277 | 90% | |
| Ultra Broadband
Networks | 3 903 | 2 548 | 53% | 3 807 | 3% | 11 438 | 7 343 | 56% | |
| IP Networks and
Applications | 1 419 | 329 | 331% | 1 421 | 0% | 4 292 | 934 | 360% | |
| Nokia Technologies | 353 | 163 | 117% | 194 | 82% | 745 | 624 | 19% | |
| Group Common
and Other | 298 | 0 | | 271 | 10% | 805 | 0 | | |
| Non-IFRS
exclusions | (60) | 0 | | (93) | | (258) | 0 | | |
| Gross profit | 2 216 | 1 316 | 68% | 2 028 | 9% | 5 798 | 3 843 | 51% | |
| Gross margin % | 37.6% | 43.3% | (570)bps | 36.3% | 130bps | 34.2% | 43.2% | (900)bps | |
| Operating profit | 55 | 333 | (83)% | (760) | | (1 417) | 1 054 | | |
| Nokia's Networks
business | 432 | 412 | 5% | 312 | 38% | 1 081 | 854 | 27% | |
| Ultra Broadband
Networks | 326 | 360 | (9)% | 228 | 43% | 788 | 805 | (2)% | |
| IP Networks and
Applications | 106 | 52 | 104% | 84 | 26% | 293 | 49 | 498% | |
| Nokia Technologies | 225 | 89 | 153% | 89 | 153% | 420 | 383 | 10% | |
| Group Common
and Other | (101) | (23) | | (68) | | (268) | (14) | | |
| Non-IFRS
exclusions | (501) | (145) | 246% | (1 092) | (54)% | (2 650) | (168) | 1 477% | |
| Operating
margin % | 0.9% | 11.0% | (1 010)
bps | (13.6)% | 1 450
bps | (8.3)% | 11.9% | (2 020)
bps | |
| Profit (non-IFRS) | 264 | 297 | (11)% | 171 | 54% | 574 | 816 | (30)% | |
| (Loss)/profit 4 | (133) | 188 | | (726) | (82)% | (1 570) | 695 | | |
| EPS, diluted
(non-IFRS) | 0.04 | 0.08 | (50)% | 0.03 | 33% | 0.11 | 0.21 | (48)% | |
| EPS, diluted 4 | (0.02) | 0.05 | | (0.12) | | (0.25) | 0.18 | | |
| Net cash and
other liquid assets | 5 539 | 4 120 | 34% | 7 077 | (22)% | 5 539 | 4 120 | 34% | |
| 1Results are as reported unless otherwise specified. The results information in this report is unaudited. 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. 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 statements attached to this report. A reconciliation of the Q3 2015 non-IFRS combined company results to the reported results can be found in the "Nokia provides recast segment results for 2015 reflecting new financial reporting structure" stock exchange release published on April 22, 2016. Change in net sales at constant currency excludes the impact 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 notes to the financial statements attached to this report. | |
| 2Combined company historicals reflect Nokia's new operating and financial reporting structure, including Alcatel-Lucent, and are presented as additional information as described in the stock exchange release published on April 22, 2016. For more information on the combined company historicals, please refer to note 1, "Basis of Preparation", in the notes to the financial statements attached to this report. | |
| 3Nokia standalone historicals are the recasting of Nokia's historical standalone financial results, reflecting Nokia's updated segment reporting structure, excluding Alcatel-Lucent. Beginning from the first quarter 2016, Nokia results include those of Alcatel-Lucent on a consolidated basis. Accordingly, Nokia results beginning from the first quarter 2016 are not directly comparable to prior period Nokia standalone results. | |
| 4Reported Q1-Q3'16 result is not comparable to the reported results published previously due to an update to the Alcatel-Lucent purchase price allocation in Q3'16 which resulted in an adjustment to the reported Q1'16 income tax benefit. Refer to note 6, "Acquisitions", in the notes to the financial statements attached to this report for further details. | |
SUBSEQUENT EVENTS
New expiration date announced for Nokia's public buy-out offer for Alcatel-Lucent securities; Squeeze-out expected to occur on November 2, 2016
On October 4, 2016, the French stock market authority (Autorité des marchés financiers, "AMF") announced that a legal action was filed before the Paris Court of Appeal (the "Court") on September 30, 2016 for annulment of the AMF's clearance decision regarding Nokia's public buy-out offer (the "Public Buy-Out Offer"), which would be followed by a squeeze-out (the "Squeeze-Out", together with the Public Buy-Out Offer, the "Offer"), for all remaining securities of Alcatel-Lucent.
On October 25, 2016, the AMF announced the continuation of the timetable of the Offer and, accordingly, the Public Buy-Out Offer period will end on October 31, 2016 and the Squeeze-Out will be implemented on November 2, 2016. In connection with the continuation of the timetable, as a precautionary measure, Nokia has agreed to certain commitments that are in force until the decision of the Court, and in the event that the AMF's clearance decision would be nullified or amended by the Court.
The legal challenge filed before the Court against the AMF's clearance decision regarding the Offer is still pending and the Court is expected to issue a decision during the first quarter of 2017. Nokia believes that the Offer complies with all applicable laws and regulations and that the legal challenge is without merit.
Nokia adjusts planned share repurchase program to EUR 1.0 billion, after using approximately EUR 560 million in cash to acquire Alcatel-Lucent securities in order to reach the 95% squeeze-out threshold
On October 29, 2015, Nokia announced a EUR 7 billion Capital Structure Optimization Program, including EUR 1.5 billion of share repurchases. The shareholder distributions were calculated assuming ownership of all outstanding shares of Alcatel-Lucent and conversion of all Nokia and Alcatel-Lucent convertible bonds.
Nokia intended to reach the 95% squeeze-out threshold through the initial and subsequent public share exchange offers made in Q4 2015 and Q1 2016 for all outstanding Alcatel-Lucent securities. However, as the 95% threshold was not reached through the exchange offers, Nokia has, in addition to using its shares, used approximately EUR 560 million in cash to acquire Alcatel-Lucent securities in order to reach the 95% threshold. If the Alcatel-Lucent securities that were purchased in cash by Nokia would have instead been exchanged for Nokia shares at the 0.55 exchange ratio for Alcatel-Lucent shares or the 0.704 exchange ratio for the relevant Alcatel-Lucent convertible bonds, approximately 87 million more Nokia shares would have been issued. Ultimately, including the expected cash to be used for the Public Buy-Out Offer and Squeeze-Out of approximately EUR 630 million, Nokia expects to use a total of approximately EUR 1.2 billion in cash to acquire Alcatel-Lucent securities; and instead of having approximately 6 billion Nokia shares outstanding at the end of the transaction, Nokia now expects approximately 5.8 billion outstanding shares.
Nokia considers the approximately EUR 560 million in cash that was used to reach the 95% squeeze-out threshold as indirect share repurchases, and thus, part of the planned EUR 1.5 billion share repurchase program. Consequently, under Nokia's Capital Structure Optimization program, Nokia has already completed EUR 560 million of indirect share repurchases and intends to proceed with EUR 1.0 billion of share repurchases, starting after the completion of the squeeze-out and continuing through the end of 2017.
Nokia and China Huaxin continue negotiations to create a new joint venture combining Nokia China and Alcatel-Lucent Shanghai Bell
Nokia and China Huaxin Post & Telecommunication Economy Development Center ("China Huaxin") are continuing their discussions under the memorandum of understanding, as originally announced on August 28, 2015, to combine Nokia's telecommunications infrastructure businesses in China ("Nokia China") and Alcatel-Lucent Shanghai Bell into a new joint venture.
The expected time frame to reach a definitive agreement was within nine months after completion of Nokia's proposed combination with Alcatel-Lucent in January 2016. Due to the complexity of the negotiations, Nokia and China Huaxin have not reached final terms of how the new joint venture would be created. Therefore, Nokia and China Huaxin continue negotiations to create a new joint venture combining Nokia China and Alcatel-Lucent Shanghai Bell, while continuing to operate under the existing interim operating agreement.
NON-IFRS RESULTS
Non-IFRS results provide meaningful supplemental information regarding underlying business performance
In addition to information on our reported IFRS results, we provide certain information on a non-IFRS, or underlying business performance, basis. We believe that our non-IFRS results provide meaningful supplemental information to both management and investors regarding Nokia's underlying business performance by excluding the below-described items that may not be indicative of Nokia's business operating results. These non-IFRS financial measures should not be viewed in isolation or as substitutes to the equivalent IFRS measure(s), but should be used in conjunction with the most directly comparable IFRS measure(s) in the reported results.
Non-IFRS results exclude costs related to the Alcatel-Lucent transaction and related integration, goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring and associated charges, and certain other items that may not be indicative of Nokia's underlying business performance. The non-IFRS exclusions are not allocated to the segments, and hence they are reported only at the Nokia consolidated level.
Financial discussion
The financial discussion included in this interim report of Nokia's results comprises the results of Nokia's businesses - Nokia's Networks business and Nokia Technologies, as well as Group Common and Other. For more information on the changes to our reportable segments, please refer to note 3, "Segment information and eliminations", in the notes to the financial statements attached to this report.
In the discussion of Nokia's results in the third quarter 2016 comparisons are given to the third quarter 2015 and second quarter 2016 results on a combined company basis, unless otherwise indicated. This data has been prepared to reflect the financial results of the continuing operations of Nokia as if the new financial reporting structure had been in operation for the full year 2015. Certain accounting policy alignments, adjustments and reclassifications have been necessary, and these are explained in the "Basis of preparation" section of Nokia's stock exchange release published on April 22, 2016. These adjustments also include reallocation of items of costs and expenses based on their nature and changes to the definition of the line items in the combined company accounting policies, which also affect numbers presented in these interim financial statements for 2015.
In the discussion of Nokia's reported results for the third quarter 2016 and January-September 2016 comparisons are given to the third quarter 2015 and January-September 2015 Nokia standalone historical results, which have been recast to reflect Nokia's updated segment reporting structure excluding Alcatel-Lucent, unless otherwise indicated. From the beginning of 2016, Nokia's results include those of Alcatel-Lucent on a consolidated basis and accordingly are not directly comparable to Nokia standalone historical results.
CEO STATEMENT
Nokia delivered solid third quarter results. Nokia Technologies led the way, with a sharp year-on-year increase in net sales, largely driven by revenues related to the Samsung licensing agreement that was announced in Q3. The results also reflect another excellent quarter from Fixed Networks, which improved both net sales and profitability from one year ago.
When we announced our second quarter results in August, we said that we expected to see slight sequential improvement in both net sales and operating margin in the third quarter in our Networks business, and we delivered in both of those areas. I was particularly pleased with our operating margin performance in the quarter, which reflects the strong, focused execution across the organization.
We were able to deliver these solid results despite market conditions that are softer than expected, particularly in mobile infrastructure. As we look forward, we expect those conditions to stabilize somewhat in 2017, with the primary addressable market in which Nokia competes likely to decline in the low single digits for that year.
I believe that Nokia remains well-positioned for this environment. Our disciplined operating model of tight cost controls, prudent investment and focused innovation; our constant industrialization of best practices across the company; our structured approach to fast integration and synergy capture -- all help give us a competitive advantage.
In addition, the power of our broad portfolio was evident in the quarter. We have the unique scope necessary to be able to design and deliver end-to-end networks and thus anchor ourselves in the long-term purchasing strategies of our customers. We also have the capability to diversify into new areas where high-performance, end-to-end networks are increasingly required, such as for large Internet and enterprise vertical market companies. We are seeing good growth in these segments, and have plans to target them further as we move forward.
While the fourth quarter is expected to be soft from a topline perspective, I believe that we will meet our guidance for our Networks business of significant sequential sales and operating margin increase for Q4 and our full-year operating margin guidance of 7% to 9%. In short, we remain on track in our execution and focused on creating value for our customers and shareholders.
Rajeev Suri
President and CEO
NOKIA IN Q3 2016 - NON-IFRS
Non-IFRS Net sales and non-IFRS operating profit
Nokia non-IFRS net sales decreased 7% year-on-year and increased 5% sequentially. On a constant currency basis, Nokia non-IFRS net sales would have decreased 6% year-on-year and increased 4% sequentially.
Year-on-year changes
| 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 | (699) | (12)% | (246) | 23 | 1 | (24) | (246) | (320)bps |
| Nokia Technologies | 184 | 109% | 175 | (10) | (23) | 0 | 142 | 1 410bps |
| Group Common and Other | 87 | 41% | 26 | (6) | (10) | (31) | (21) | 400bps |
| Eliminations | (16) | | 0 | 0 | 0 | 0 | 0 | |
| Nokia | (444) | (7)% | (46) | 7 | (32) | (55) | (126) | (140)bps |
Sequential changes
| 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 | 94 | 2% | 28 | 44 | 16 | 33 | 121 | 210bps |
| Nokia Technologies | 160 | 82% | 154 | (9) | (11) | 2 | 137 | 1 780bps |
| Group Common and Other | 27 | 10% | (19) | (4) | (5) | (5) | (33) | (880)bps |
| Eliminations | (6) | | 0 | 0 | 0 | 0 | 0 | |
| Nokia | 274 | 5% | 163 | 31 | 0 | 30 | 224 | 350bps |
Sequentially, Nokia's non-IFRS gross profit, non-IFRS other income and expense and non-IFRS operating profit benefitted from the absence of an adverse effect related to a customer in Latin America undergoing judicial recovery in Q2 2016.
NOKIA IN Q3 2016 - REPORTED
FINANCIAL DISCUSSION
Net sales
Nokia net sales increased 94% year-on-year, compared to Nokia standalone net sales, and increased 5% sequentially. On a constant currency basis, Nokia net sales would have increased 95% year-on-year, compared to Nokia standalone net sales, and 5% sequentially.
Year-on-year discussion
The year-on-year increase in Nokia net sales in the third quarter 2016, compared to Nokia standalone net sales, was primarily due to growth in Nokia's Networks business and Group Common and Other, both of which primarily related to the acquisition of Alcatel-Lucent, as well as growth in Nokia Technologies. This was partially offset by purchase price allocation adjustment related to the reduced valuation of deferred revenue that existed on Alcatel-Lucent's balance sheet at the time of the acquisition.
Sequential discussion
The sequential increase in Nokia net sales in the third quarter 2016 was primarily due to growth in Nokia Technologies and Nokia's Networks business, the positive impact related to the purchase price allocation adjustment associated with the reduced valuation of deferred revenue that existed on Alcatel-Lucent's balance sheet at the time of the acquisition and growth in Group Common and Other.
Operating profit
Year-on-year discussion
The year-on-year decrease in Nokia operating profit, compared to Nokia standalone operating profit, was primarily due to higher research and development ("R&D") expenses and higher selling, general and administrative ("SG&A") expenses, partially offset by higher gross profit, all of which related primarily to the acquisition of Alcatel-Lucent.
The increase in gross profit was primarily due to Nokia's Networks business and, to a lesser extent, Nokia Technologies and Group Common and Other, partially offset by non-IFRS exclusions related to deferred revenue.
The increase in R&D expenses was primarily due to Nokia's Networks business, non-IFRS exclusions related to amortization of intangible assets and, to a lesser extent, Group Common and Other and Nokia Technologies.
The increase in SG&A expenses was primarily due to Nokia's Networks business, non-IFRS exclusions related to amortization of intangible assets, as well as transaction and integration related costs and, to a lesser extent, Group Common and Other and Nokia Technologies.
Nokia's other income and expenses was an expense of EUR 39 million in the third quarter 2016, compared to an expense of EUR 80 million in the year-ago period. The net positive fluctuation was primarily related to non-IFRS exclusions attributable to lower restructuring and associated charges, partially offset by the absence of realized gains related to certain of Nokia's investments made through its venture funds.
Sequential discussion
Nokia operating profit increased primarily due to lower restructuring and associated charges and higher gross profit. Sequentially, Nokia's gross profit benefitted from the absence of an adverse effect related to a customer in Latin America undergoing judicial recovery in Q2 2016.
The increase in gross profit was primarily due to Nokia Technologies.
Nokia's other income and expenses was an expense of EUR 39 million in the third quarter 2016, compared to an expense of EUR 643 million in the second quarter 2016. The decrease was primarily due to lower restructuring and associated charges. Sequentially, Nokia's other income and expense benefitted from the absence of an adverse effect related to a customer in Latin America undergoing judicial recovery in Q2 2016.
Description of non-IFRS exclusions in Q3 2016
Non-IFRS exclusions consist of costs related to the Alcatel-Lucent transaction and related integration, goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring and associated charges, and certain other items that may not be indicative of Nokia's underlying business performance. For additional details, please refer to note 2, "Non-IFRS to reported reconciliation, Continuing Operations", in the notes to the financial statements attached to this report.
| | | Nokia standalone historicals1 | | | |
| EUR million | Q3'16 | Q3'15 | YoY change | Q2'16 | QoQ change |
| Net sales | (60) | 0 | | (93) | (35)% |
| Gross profit | (149) | 0 | | (174) | (14)% |
| R&D | (179) | (8) | 2 138% | (162) | 10% |
| SG&A | (145) | (37) | 292% | (154) | (6)% |
| Other income and expenses | (29) | (100) | | (602) | |
| Operating profit/(loss) | (501) | (145) | | (1 092) | (54)% |
| Financial income and expenses | (1) | 0 | | (3) | (67)% |
| Taxes | 105 | 35 | 200% | 200 | (48)% |
| Profit/(loss) | (397) | (109) | | (896) | (56)% |
| Profit/(loss) attributable to the shareholders of the parent | (378) | (109) | | (862) | (56)% |
| Non-controlling interests | (20) | 0 | | (34) | (41)% |
| 1Nokia standalone historicals are the recasting of Nokia's historical standalone financial results, reflecting Nokia's updated segment reporting structure, excluding Alcatel-Lucent. Beginning from the first quarter 2016, Nokia results include those of Alcatel-Lucent on a consolidated basis. Accordingly, Nokia results beginning from the first quarter 2016 are not directly comparable to prior period Nokia standalone results. |
Net sales
In the third quarter 2016, non-IFRS exclusions in net sales amounted to EUR 60 million, and related to purchase price allocation adjustment related to the reduced valuation of deferred revenue that existed on Alcatel-Lucent's balance sheet at the time of the acquisition.
Operating profit
In the third quarter 2016, non-IFRS exclusions in operating profit amounted to EUR 501 million, and were attributable to non-IFRS exclusions that negatively affected gross profit, R&D, SG&A and other income and expenses as follows:
In the third quarter 2016, non-IFRS exclusions in gross profit amounted to EUR 149 million, and primarily due to product portfolio integration costs related to the acquisition of Alcatel-Lucent, and the deferred revenue.
In the third quarter 2016, non-IFRS exclusions in R&D expenses amounted to EUR 179 million, and primarily related to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent and, to a lesser extent, product portfolio integration costs related to the acquisition of Alcatel-Lucent.
In the third quarter 2016, non-IFRS exclusions in SG&A expenses amounted to EUR 145 million, and primarily related to the amortization of intangible assets resulting from the acquisition of Alcatel-Lucent, as well as integration and transaction related costs.
In the third quarter 2016, non-IFRS exclusions in other income and expenses amounted to EUR 29 million, and primarily related to EUR 34 million of restructuring and associated charges for Nokia's cost reduction and efficiency improvement initiatives.
Cost savings program
The following table summarizes the financial information related to our cost savings program, as of the end of the third quarter 2016. Balances related to previous Nokia and Alcatel-Lucent restructuring and cost savings programs have been included as part of this overall cost savings program.
| In EUR million, approximately | Q3'16 |
| Opening balance of restructuring and associated liabilities | 970 |
| + Charges in the quarter | 40 |
| - Cash outflows in the quarter | 200 |
| = Ending balance of restructuring and associated liabilities | 810 |
| of which restructuring provisions | 780 |
| of which other associated liabilities | 30 |
| | |
| Total expected restructuring and associated charges | 1 200 |
| - Cumulative recorded | 640 |
| = Charges remaining to be recorded | 560 |
| | |
| Total expected restructuring and associated cash outflows | 1 650 |
| - Cumulative recorded | 280 |
| = Cash outflows remaining to be recorded | 1 370 |
OUTLOOK
| | Metric | Guidance | Commentary |
| Nokia | Annual cost savings for Nokia, excluding Nokia Technologies | Approximately EUR 1.2 billion of total annual cost savings to be achieved in full year 2018 | Compared to the combined non-IFRS operating costs of Nokia and Alcatel-Lucent for full year 2015, excluding Nokia Technologies. Under this expanded cost savings program, restructuring and associated charges are expected to total approximately EUR 1.2 billion, of which approximately EUR 640 million was recorded as of Q3 2016. Related restructuring and associated cash outflows are expected to total approximately EUR 1.65 billion, of which approximately EUR 230 million was recorded as of Q3 2016. In addition to the above amounts, note that Nokia's overall charges and cash outflows will also include amounts related to network equipment swaps. The charges related to network equipment swaps will be recorded as non-IFRS exclusions and, therefore, will not affect Nokia's non-IFRS operating profit. |
| | FY16 Non-IFRS financial income and expense | Expense of approximately EUR 300 million | Primarily includes net interest expenses related to interest-bearing liabilities, interest costs related to the defined benefit pension and other post-employment benefit plans, as well as the impact from changes in foreign exchange rates on certain balance sheet items. This outlook may vary subject to changes in the above listed items. |
| | FY16 Non-IFRS tax rate | Approximately 40% for Q4 2016 and above 40% for full year 2016 (update) | The increase in the non-IFRS tax rate for the combined company, compared to Nokia on a standalone basis, is primarily attributable to unfavorable changes in the regional profit mix as a result of the acquisition of Alcatel-Lucent. Nokia expects its effective long-term non-IFRS tax rate to be clearly below the full year 2016 level, and intends to provide further commentary later in 2016. (This update adds Q4 2016 guidance to unchanged full year 2016 guidance.) |
| | FY16 Cash outflows related to taxes | Approximately EUR 400 million | May vary due to profit levels in different jurisdictions and the amount of licensing income subject to withholding tax. |
| | FY16 Capital expenditures | Approximately EUR 550 million (update) | Primarily attributable to Nokia's Networks business. (This is an update to the earlier outlook for EUR 650 million.) |
| Nokia's Networks business | FY16 net sales | Decline YoY | Combined company net sales and operating margin are expected to be influenced by factors including: -
A declining capital expenditure environment in 2016 for our overall addressable market (this is an update to the earlier guidance commentary for a flattish capital expenditure environment); -
A declining wireless infrastructure market in 2016; -
Significant focus on the integration of Alcatel-Lucent, particularly in the first half of 2016; -
Significant QoQ net sales growth and operating margin expansion in Q4 2016; -
Net sales declining YoY in Q4 2016 at an approximately similar rate as in Q3 2016 (new commentary); -
Competitive industry dynamics; -
Product and regional mix; -
The timing of major network deployments; and -
Execution of cost savings plans. |
| FY16 operating margin | 7-9% |
| Nokia Technologies | FY16 Net sales | Not provided | Due to risks and uncertainties in determining the timing and value of significant licensing agreements, Nokia believes it is not appropriate to provide an annual outlook for fiscal year 2016. Nokia expects annualized net sales related to patent and brand licensing to grow to a run rate of approximately EUR 950 million by the end of 2016. License agreements which currently contribute approximately EUR 150 million to the annualized net sales run rate are set to expire before the end of 2016. If we do not renew these license agreements, nor sign any new licensing agreements, the annualized net sales run rate would be approximately EUR 800 million in early 2017. Furthermore, the contribution of the Withings acquisition to Nokia Technologies net sales is expected to be approximately EUR 50 million in the second half of 2016, with strong Q4 seasonality. The contribution of the acquisition to Nokia Technologies operating profit is expected to be slightly negative for the second half of 2016. |
RISKS AND FORWARD-LOOKING STATEMENTS
It should be noted that Nokia and its businesses are exposed to various risks and uncertainties and certain statements herein that are not historical facts are forward-looking statements, including, without limitation, those regarding: A) our ability to integrate Alcatel Lucent into our operations and achieve the targeted business plans and benefits, including targeted synergies in relation to the acquisition of Alcatel Lucent announced on April 15, 2015 and closed in early 2016; B) our ability to squeeze out the remaining Alcatel Lucent shareholders in a timely manner or at all to achieve full ownership of Alcatel Lucent; C) expectations, plans or benefits related to our strategies and growth management; D) expectations, plans or benefits related to future performance of our businesses; E) expectations, plans or benefits related to changes in our management and other leadership, operational structure and operating model, including the expected characteristics, business, organizational structure, management and operations following the acquisition of Alcatel Lucent; F) expectations regarding market developments, general economic conditions and structural changes; G) 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; 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, as well as our expected customer reach; J) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities, including the implications of the legal action brought against the French stock market authority's (Autorité des marchés financiers) clearance decision on Nokia's proposed public buy-out offer followed by a squeeze-out; K) expectations regarding restructurings, investments, uses of proceeds from transactions, acquisitions and divestments and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, divestments and acquisitions; and L) statements preceded by or including "believe," "expect," "anticipate," "foresee," "sees," "target," "estimate," "designed," "aim," "plans," "intends," "focus," "continue," "project," "should," "will" or similar expressions. These statements are based on the 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 such differences include, but are not limited to: 1) our ability to execute our strategy, sustain or improve the operational and financial performance of our business or correctly identify or successfully pursue business opportunities or growth; 2) our ability to achieve the anticipated business and operational benefits and synergies from the Alcatel Lucent transaction, including our ability to integrate Alcatel Lucent into our operations and within the timeframe targeted, and our ability to implement our organization and operational structure efficiently; 3) our ability to complete the purchases of the remaining outstanding Alcatel Lucent securities and realize the benefits of the public exchange offer for all outstanding Alcatel Lucent securities, and the outcome of the decision by the French Court of Appeal in relation to the clearance decision of Nokia's proposed public buy-out offer and squeeze-out; 4) our dependence on general economic and market conditions and other developments in the economies where we operate; 5) our dependence on the development of the industries in which we operate, including the cyclicality and variability of the telecommunications industry; 6) our exposure to regulatory, political or other developments in various countries or regions, including emerging markets and the associated risks in relation to tax matters and exchange controls, among others; 7) our ability to effectively and profitably compete and invest in new competitive high-quality products, services, upgrades and technologies and bring them to market in a timely manner; 8) our dependence on a limited number of customers and large multi-year agreements; 9) Nokia Technologies' ability to maintain and establish new sources of patent licensing income and IPR-related revenues, particularly in the smartphone market; 10) 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; 11) 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; 12) our reliance on third-party solutions for data storage and the distribution of products and services, which expose us to risks relating to security, regulation and cybersecurity breaches; 13) Nokia Technologies' ability to generate net sales and profitability through licensing of the Nokia brand, the development and sales of products and services, as well as other business ventures which may not materialize as planned; 14) our exposure to legislative frameworks and jurisdictions that regulate fraud, economic trade sanctions and policies, and Alcatel Lucent's previous and current involvement in anti-corruption allegations; 15) 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; 16) our actual or anticipated performance, among other factors, which could reduce our ability to utilize deferred tax assets; 17) our ability to retain, motivate, develop and recruit appropriately skilled employees; 18) our ability to manage our manufacturing, service creation, delivery, logistics and supply chain processes, and the risk related to our geographically concentrated production sites; 19) the impact of unfavorable outcome of litigation, arbitration, agreement-related disputes or allegations of product liability associated with our businesses; 20) exchange rate fluctuations, as well as hedging activities; 21) inefficiencies, breaches, malfunctions or disruptions of information technology systems; 22) our ability to optimize our capital structure as planned and re-establish our investment grade credit rating or otherwise improve our credit ratings; 23) uncertainty related to the amount of dividends and equity return we are able to distribute to shareholders for each financial period; 24) our ability to achieve targeted benefits from or successfully implement planned transactions, as well as the liabilities related thereto; 25) our involvement in joint ventures and jointly-managed companies or failures to create planned joint ventures; 26) performance failures by our partners or failure to agree to partnering arrangements with third parties; 27) our ability to manage and improve our financial and operating performance, cost savings, competitiveness and synergy benefits after the acquisition of Alcatel Lucent; 28) adverse developments with respect to customer financing or extended payment terms we provide to customers; 29) the carrying amount of our goodwill may not be recoverable; 30) risks related to undersea infrastructure; 31) unexpected liabilities with respect to pension plans, insurance matters and employees; and 32) unexpected liabilities or issues with respect to the acquisition of Alcatel Lucent, including pension, postretirement, health and life insurance and other employee liabilities or higher than expected transaction costs as well as the risk factors specified on pages 69 to 87 of our annual report on Form 20-F filed on April 1, 2016 under "Operating and financial review and prospects-Risk factors", as well as in Nokia's other filings with the U.S. Securities and Exchange Commission. Other unknown or unpredictable factors or underlying assumptions subsequently proven to be incorrect could cause actual results to differ materially from those in the forward-looking statements. We do not undertake any obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.
The financial statements were authorized for issue by management on October 26, 2016.
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
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Nokia plans to hold its Capital Markets Day in Barcelona on November 15, 2016.
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Nokia plans to publish its fourth quarter and annual 2016 results on February 2, 2017.
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Nokia's Annual General Meeting 2017 is planned to be held on May 23, 2017.
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