Nokia has posted its Q2 2016 Financial results and the two continuing businesses Nokia Networks and Nokia Technologies have raked in EUR 332 Million operating profit in spite of the the sales declining by 11% on a Year on Year basis. The sales however rose slightly on a Quarter on Quarter basis. Net sales is EUR 5.7 billion in Q2 2016. Read the report highlights, check the Earnings table and read the CEO Rajeev Suri’s statement below,
Overall Highlights:
- Non-IFRS net sales in Q2 2016 of EUR 5.7 billion (reported: EUR 5.6 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 2.9 billion on a Nokia stand-alone basis).
- Non-IFRS diluted EPS in Q2 2016 of EUR 0.03 (reported: EUR negative 0.12).
- Raised annual cost savings target to 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. Related to this, Nokia recorded approximately EUR 600 million of restructuring and associated charges in the second quarter 2016.
Nokia’s Networks business:
- 11% year-on-year net sales decrease in Q2 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 strong growth in Fixed Networks within Ultra Broadband Networks.
- In Q2 2016, solid gross margin of 37.4% and operating margin of 6.0% were adversely affected by a customer in Latin America undergoing judicial recovery. Excluding this, gross margin would have been approximately 38% and operating margin would have been nearly 7%.
Nokia Technologies:
- 11% year-on-year net sales decrease in Q2 2016. Excluding the impact of non-recurring items that benefitted the year-ago quarter, Nokia Technologies net sales would have grown by approximately 10% year-on-year, primarily due to higher intellectual property licensing income from existing licensees.
- Announced an expansion of the patent cross license agreement with Samsung on July 13, 2016 to cover certain additional patent portfolios, reinforcing Nokia’s leadership in technologies for the programmable world. The expansion of the agreement occurred subsequent to the end of the second quarter 2016, and therefore did not impact the second quarter of 2016 financials. Instead, the expanded agreement will have a positive impact to Nokia Technologies starting from the third quarter of 2016. Nokia expects total 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.
Earnings Table:
| Q2 and January-June 2016 non-IFRS results. See note 1 to the interim financial statements for further details 1,2 | |||||||||
| Combined company histori-cals2 | Combined company histori-cals2 | ||||||||
| EUR million | Q2’16 | Q2’15 | YoY change | Q1’16 | QoQ change | Q1-Q2’16 | Q1-Q2’15 | YoY change | |
| Net sales – constant currency (non-IFRS) | (9)% | 2% | (9)% | ||||||
| Net sales (non-IFRS) | 5 676 | 6 363 | (11)% | 5 603 | 1% | 11 279 | 12 492 | (10)% | |
| Nokia’s Networks business | 5 228 | 5 895 | (11)% | 5 181 | 1% | 10 409 | 11 557 | (10)% | |
| Ultra Broadband Networks | 3 807 | 4 303 | (12)% | 3 729 | 2% | 7 535 | 8 530 | (12)% | |
| IP Networks and Applications | 1 421 | 1 593 | (11)% | 1 452 | (2)% | 2 873 | 3 027 | (5)% | |
| Nokia Technologies | 194 | 219 | (11)% | 198 | (2)% | 391 | 492 | (21)% | |
| Group Common and Other | 271 | 254 | 7% | 236 | 15% | 507 | 457 | 11% | |
| Gross profit (non-IFRS) | 2 202 | 2 495 | (12)% | 2 205 | 0% | 4 407 | 4 759 | (7)% | |
| Gross margin % (non-IFRS) | 38.8% | 39.2% | (40)bps | 39.4% | (60)bps | 39.1% | 38.1% | 100 bps | |
| Operating profit (non-IFRS) | 332 | 649 | (49)% | 345 | (4)% | 677 | 925 | (27)% | |
| Nokia’s Networks business | 312 | 511 | (39)% | 337 | (7)% | 649 | 720 | (10)% | |
| Ultra Broadband Networks | 228 | 308 | (26)% | 234 | (3)% | 462 | 476 | (3)% | |
| IP Networks and Applications | 84 | 203 | (59)% | 103 | (18)% | 187 | 244 | (23)% | |
| Nokia Technologies | 89 | 120 | (26)% | 106 | (16)% | 195 | 297 | (34)% | |
| Group Common and Other | (68) | 18 | (99) | (167) | (92) | ||||
| Operating margin % (non-IFRS) | 5.8% | 10.2% | (440)bps | 6.2% | (40)bps | 6.0% | 7.4% | (140) bps | |
This is what Nokia’s CEO Rajeev Suri has to say about these results,
Nokia’s second quarter results were largely as expected and reflect solid execution in the midst of a challenging market and the ongoing integration of Alcatel-Lucent. When we announced our first quarter results, I said that we did not expect to see typical seasonal patterns in the first half of the year, and that prediction proved to be correct. Net sales were slightly up sequentially in Q2, while operating margin was slightly down, in part reflecting a meaningful negative impact from one of our major customers in Latin America.
During the quarter we continued to make excellent progress in many areas. We moved rapidly forward with our integration and cost savings efforts; saw robust growth in our Fixed Networks business; announced the acquisition of Gainspeed in order to accelerate our progress with cable operators; closed the acquisition of Withings; reached a licensing deal that will see the Nokia brand return to smartphones and tablets; and more.
I was particularly pleased that the work done in the second quarter to reach an agreement with Samsung on an expanded intellectual property licensing deal came to fruition. After the arbitration results were announced in February, we said that there was still more to come from Samsung and have now delivered on that, with the related financial impact starting in the third quarter.
The decline of our topline remains a concern, and reflects challenging market conditions. While we do not expect those conditions to improve in the near term, we believe we are well-positioned given the scope of our portfolio, focus on operational discipline, strengthening sales execution, and opportunities in the evolution from 4G towards 5G.
In fact, we are already starting to work with customers to help them move to 5G-ready architectures in the core, with a focus on software-defined networking and cloud technologies. As this process takes place, we expect there to be further evolution of 4G radio including more carrier aggregation in order to meet demands for capacity, speed and spectrum utilization. Our AirScale radio platform, which can support different LTE-Advanced Pro (4.5G) technologies and is ‘5G ready,’ is ideally suited to this environment.
We crossed the 95% ownership threshold of Alcatel-Lucent in June, allowing us to move to acquire the remaining shares and reach full ownership of Alcatel-Lucent, which we expect by the end of October. As our successful integration work continues and as we get increased granular visibility into the business, our confidence in our ability to deliver cost savings also increases. As a result, we are now targeting EUR 1.2 billion in total cost savings to be achieved in full year 2018. We have also continued the strategic review of our submarine cable business to determine the best long-term resolution for that business.
While plenty of hard work remains in front of us, we are making good progress and expect to see slight sequential improvement in both net sales and operating margin in our Networks business from the second quarter to the third, followed by significant improvement from the third to the fourth quarter.
