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Nokia Corporation Interim Report for Q1 2018Nokia Corporation Nokia Corporation Interim Report for Q1 2018 Solid full year results expected in Networks despite challenging Q1; continued strength in Nokia Technologies
FINANCIAL HIGHLIGHTS
Nokia's Networks business net sales were EUR 4.3bn, with operating profit of EUR 43mn
Nokia Technologies net sales were EUR 365mn, with operating profit of EUR 274mn
Outlook
CEO STATEMENT We see strong momentum building for the full year despite a slow start in Networks. I have considerable confidence that Nokia is well-positioned to out-perform a strengthening Networks market and meet our full-year 2018 guidance. Our confidence is based on strong order intake and backlog in Q1; our end-to-end strategy is resonating with customers, resulting in strong cross-sell activity and a year-on-year doubling of the multi-business group pipeline; we have clear visibility to 5G deals for large-scale commercial rollouts in United States in the second half of the year; and are successfully executing our diversification strategy, with consistent double-digit profitable growth with enterprise and webscale customers. On the licensing side, first quarter recurring revenue was up by 65% year-on-year, and we expect continued strong growth in the months ahead. We see further opportunities in smart phone licensing in China, in the automotive sector and in brand licensing. Our end-to-end portfolio positions us very well for 5G and our efforts to accelerate global 5G adoption are clearly delivering results. We will fuel that adoption in 2018 with investments in trial costs, as needed. These investments will position us to capture opportunities in a 5G market that we believe will substantially accelerate later this year in the United States, followed by other large-scale 5G commercial rollouts starting in 2019 in multiple geographies. Given these developments, we expect to see continued softness in the first half of 2018, followed by a much stronger second half. We also see a clear path to market share gains this year given our success in 4G expansion, 5G deals, IP routing in both the service provider segment and adjacent markets, and optical, driven by 5G and webscale customers. While our Networks gross margin in Q1 decreased on a year-on-year basis, the primary underlying reasons for that - regional and product mix - are largely temporary in nature and expected to improve in the second half of 2018. It is also important to understand that we did not see significant degradation of margins at the overall product level. We remain on track to deliver on our EUR 1.2 billion cost savings commitment.
OUTLOOK
1For further details related to the cost savings and network equipment swaps guidance, please refer to the "Cost savings program".
In order to further increase alignment of management's interests with shareholders and to maximize long-term shareholder value creation, the Board of Directors has decided to offer a co-investment arrangement, as part of the grants under the existing 2018 Performance Share Plan, to the President and CEO and a limited number of senior leaders in key positions whose contributions have a direct impact to the Company's strategy and long-term value. Under the co-investment arrangement, the participants will be offered a matching award of two 2018 Performance Shares for each Nokia share that they purchase voluntarily with their own funds from the open market, with the payout of the Performance Shares subject to actual performance. For each participant, the arrangement is offered in addition to their normal annual long-term incentive award, and the maximum investment value corresponds to their normal annual long-term incentive award set by the company. This arrangement will not change existing shareholder authorizations to the Board of Directors nor the earlier disclosed dilution impact of the 2018 Nokia Equity Program. The related purchases of shares by the participants are expected to be executed mainly during Q2 and Q3 of 2018 and the shares purchased under the arrangement must be held until January 1, 2021 in order for the matching performance share award to vest. Further information of the 2018 Performance Share Plan is available in the company's stock exchange release concerning the 2018 Nokia Equity Program published on February 1, 2018. NOKIA IN Q1 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. Year-on-year changes in non-IFRS net sales and non-IFRS operating profit Nokia non-IFRS net sales decreased 9% year-on-year. On a constant currency basis, Nokia non-IFRS net sales would have been approximately flat year-on-year.
On a year-on-year basis, foreign exchange fluctuations had a significantly negative impact on non-IFRS gross profit, a significantly positive impact on non-IFRS operating expenses and a slightly negative net impact on non-IFRS operating profit in the first quarter 2018. Year-on-year changes in non-IFRS 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 interest expenses associated with the financial liability related to Nokia Shanghai Bell, higher losses from foreign exchange fluctuations and 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. This was partially offset by lower interest expenses. NOKIA IN Q1 2018 - REPORTED FINANCIAL DISCUSSION Year-on year changes in net sales and operating profit Nokia net sales decreased 8% year-on-year. On a constant currency basis, Nokia net sales would have been approximately flat year-on-year.
Year-on-year changes in 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 expenses related to Nokia's tender offer to repurchase certain bonds, which negatively affected the first quarter 2017, and lower interest expenses. This was partially offset by higher losses from foreign exchange fluctuations, expenses associated with the financial liability related to Nokia Shanghai Bell and 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. Taxes The change in taxes was primarily due to the absence of a EUR 245 million tax expense, which negatively affected the first quarter 2017. Non-IFRS exclusions in Q1 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 first 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.
The following table summarizes our full year 2016 and 2017 results and future expectations related to our cost savings program and network equipment swaps.
On a cumulative basis, Nokia continues to be on track to achieve the targeted EUR 1.2 billion of recurring annual cost savings in full year 2018.
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) our dependence on IPR technologies, including those that we have developed and those that are licensed to us, and the risk of associated IPR-related legal claims, licensing costs and restrictions on use; 13) our exposure to direct and indirect regulation, including economic or trade policies, and the reliability of our governance, internal controls and compliance processes to prevent regulatory penalties in our business or in our joint ventures; 14) our reliance on third-party solutions for data storage and service distribution, which expose us to risks relating to security, regulation and cybersecurity breaches; 15) inefficiencies, breaches, malfunctions or disruptions of information technology systems; 16) Nokia Technologies' ability to generate net sales and profitability through licensing of the Nokia brand, technology licensing and the development and sales of products and services for instance in digital health, as well as other business ventures, which may not materialize as planned; 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, 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 April 25, 2018.
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