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Nokia’s outlook for 2017: Targets superior returns through growth, foray into consumer markets

Nokia has outlined its vision and strategic priorities and has also set key financial targets at the company’s Capital Markets Day event in Barcelona. As per CEO Suri, Nokia is now bigger, stronger and more agile, bolstered especially by the acquisition of Alcatel-Lucent.

“Nokia is extremely well-positioned to win in its primary market with communication service providers, and we aim to target superior returns through focused growth into more attractive adjacent markets where high-performance, end-to-end networks are increasingly in demand,” Suri said.

“We also see opportunities to renew current patent licensing agreements at favorable terms, add new licensees in the mobile phone area and expand licensing further into new areas such as consumer electronics and the automotive sector. Given the appeal to others of our innovations in Networks, virtual reality and digital health, we are confident that we can continue to build our patent and technology licensing business further in the coming years,” he continued.

Nokia expects to create new business and licensing opportunities in the consumer ecosystem. 2017 Outlook for the Nokia Technologies business is positive. Nokia expects growth in its Nokia Technologies businesses like Brand Licensing, Digital Health and Digital Media year over year.

key priority areas:

Nokia’s new strategy builds upon its enhanced business portfolio following the Alcatel-Lucent acquisition, and focuses on four key priority areas:

  • Lead in high-performance, end-to-end networks with communication service providers: Use our unparalleled, end-to-end portfolio to sustain our market and profitability leadership.
  • Expand network sales to select vertical markets needing high-performing, secure networks: Broaden our footprint in five select verticals: energy, transportation, public sector, technological extra-large enterprises and webscale.
  • Build a strong, standalone software business: Move beyond our current product-attached software model and create a software business with the margin profile of large software companies, focused on areas including enterprise software and IoT platforms.
  • Create new business and licensing opportunities in the consumer ecosystem: Expand successful patent licensing efforts into areas like automotive, consumer electronics and IoT. Create new revenue streams from technology and brand licensing, and establish new businesses in digital media and digital health. 

2017 outlook for Nokia’s Networks business:

  • Nokia expects net sales for Nokia’s Networks business to decline in line with its primary addressable market in full year 2017.
  • Nokia expects operating margin for Nokia’s Networks business in full year 2017 to be in the range of 8% to 10%.
  • Nokia’s outlook for net sales and operating margin for Nokia’s Networks business in full year 2017 are expected to be influenced by factors including:
    • A low single digit percentage decline in the primary addressable market for Nokia’s Networks business;
    • Competitive industry dynamics;
    • Product and regional mix;
    • The timing of major network deployments; and
    • Execution of cost savings and reinvestment plans, with operating expenses down on a year-on-year basis.

 2017 outlook for Nokia Technologies:

  • 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 full year 2017. 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 for patent and brand licensing would be approximately EUR 800 million in early 2017, with approximately 30% of the global smartphone market, by value, under license.
  • Nokia expects total net sales from Digital Health and Digital Media to grow year-on-year in full year 2017, primarily influenced by increased consumer adoption of our Digital Health and Digital Media products.

Financial Guidelines:

“During the next two years, we aim to advance our leading position with communications service providers, become a credible and recognized player in our target verticals and tap growth in software with a broader ambition to build a significant, standalone software business. As we do this, we will continue to stick closely to our disciplined operating model to deliver compelling financial results that reward our shareholders,” Suri said.

 Long-term targets

  • Nokia targets to grow net sales for Nokia’s Networks business faster over the long-term than its primary addressable market through continued industry leadership and disciplined expansion and diversification to adjacent markets. Nokia’s primary addressable market size is approximately EUR 113 billion in 2016, and is expected to have a 5-year compound annual growth rate of approximately 1%. Nokia’s adjacent addressable market size is approximately EUR 18 billion in 2016, and is expected to have a 5-year compound annual growth rate of approximately 13%.
  • Nokia targets the long-term operating margin range for Nokia’s Networks business to be 10% to 15%, with all Networks business groups expected to contribute double-digit long-term operating margin. If the market environment and Nokia’s execution are both in-line with Nokia’s expectations, Nokia expects operating margin to be around the midpoint of this range.
  • Taxes
    • Nokia expects its long-term effective non-IFRS tax rate to be approximately 30%.
    • Nokia expects cash outflows related to taxes to continue at approximately EUR 400 million annually until Nokia’s deferred tax assets have been fully utilized. The cash tax amount may vary depending on profit levels in different jurisdictions and the amount of license income potentially subject to withholding tax.
  • Nokia targets to maintain total cash and other liquid assets at approximately 30% of its annual net sales over time.

Dividend

  • Nokia targets to deliver an earnings-based growing dividend. Nokia targets to grow the dividend by distributing approximately 40% to 70% of non-IFRS EPS, taking into account Nokia’s cash position and expected cash flow generation.
  • For 2016, Nokia targets to propose a dividend of EUR 0.17 per share, subject to shareholder approval in 2017.

Additional financial guidance

  • Nokia expects its free cash flow in 2016, 2017 and 2018 to be affected by cash outflows related to its EUR 1.2 billion cost savings program and network equipment swaps. Consequently, Nokia’s free cash flow is expected to be clearly negative in full year 2016, slightly positive in full year 2017 and clearly positive in full year 2018.
  • Nokia’s EUR 1.2 billion cost savings program
    • Nokia targets approximately EUR 1.2 billion of total annual cost savings in full year 2018 compared to the combined non-IFRS operating costs of Nokia and Alcatel-Lucent for full year 2015, excluding Nokia Technologies. Nokia expects approximately EUR 800 million of the cost savings to come from operating expenses and approximately EUR 400 million from cost of sales. The cost savings are expected to be achieved as follows:
      • approximately EUR 400 million in full year 2016 (approximately EUR 250 million to come from operating expenses and approximately EUR 150 million from cost of sales);
      • an additional approximately EUR 400 million in full year 2017 (approximately EUR 200 million to come from operating expenses and approximately EUR 200 million from cost of sales; and
      • an additional approximately EUR 400 million in full year 2018 (approximately EUR 350 million to come from operating expenses and approximately EUR 50 million from cost of sales).
    • Under this cost savings program, restructuring and associated charges are expected to total approximately EUR 1.7 billion, of which approximately EUR 640 million was recorded as of Q3 2016. Nokia expects approximately EUR 700 million of the total restructuring and associated charges to be recorded in full year 2016, approximately EUR 800 million to be recorded in full year 2017, and approximately EUR 200 million to be recorded in full year 2018. This is an update to the earlier guidance commentary for expected restructuring and associated charges to total approximately EUR 1.2 billion.
    • Related restructuring and associated cash outflows are expected to total approximately EUR 2.15 billion, of which approximately EUR 280 million was recorded as of Q3 2016. Nokia expects approximately EUR 500 million of the total restructuring and associated cash outflows to be recorded in full year 2016, approximately EUR 700 million to be recorded in full year 2017, approximately EUR 500 million to be recorded in full year 2018, and approximately EUR 450 million of cash outflows in full year 2019 and beyond. This is an update to the earlier guidance commentary for expected restructuring and associated cash outflows to total approximately EUR 1.65 billion.
    • The updated guidance commentary for restructuring and associated charges and cash outflows is primarily related to plans to mitigate the more challenging than expected market environment with additional transformation initiatives. These transformation initiatives include plans to further optimize site utilization and plans to further streamline activities that impact our cost of sales, as well as plans to reinvest in our primary business to maintain industry leadership and plans to reinvest to capture growth opportunities, including in the cable access market and targeted enterprise sectors.
  • Network equipment swaps
    • Nokia expects to record approximately EUR 900 million of network equipment swaps in total. The charges and related cash outflows are expected to be recorded as follows: approximately EUR 300 million in full year 2016, approximately EUR 300 million in full year 2017, and approximately EUR 300 million in full year 2018. 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.
  • Financial income and expenses
    • Nokia expects non-IFRS financial income and expenses to be an expense of approximately EUR 300 million in full year 2017. This is expected to primarily include net interest expenses related to interest bearing liabilities, interest costs related to defined benefit pension and other post-employment benefit plans, as well as the impact of foreign exchange rate fluctuations on certain balance sheet items.
    • Nokia expects the cash outflows related to financial income and expenses to be approximately EUR 200 million in full year 2017. This is expected to primarily include net interest expenses related to interest bearing liabilities and the impact of foreign exchange rate fluctuations on certain balance sheet items.
  • Taxes
    • In full year 2017 and 2018, Nokia expects its effective non-IFRS tax rate to be between 30% and 35%. Nokia expects its non-IFRS tax rate in full year 2017 to be at the high end of the guidance range. Nokia expects its non-IFRS tax rate in full year 2018 to be at the low end of the guidance range.
    • Nokia expects cash outflows related to taxes to be approximately EUR 400 million in full year 2017 and 2018. The cash tax amount may vary depending on profit levels in different jurisdictions and the amount of license income potentially subject to withholding tax.
  • Nokia expects capital expenditures to be approximately EUR 500 million in full year 2017, primarily attributable to capital expenditures by Nokia’s Networks business.
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Nayan
Nayan has more than 10 years of experience of covering Technology and innovations. He is a big Nokia fan and Tech disruptions aficionado. He loves to review new cool gadgets and writing about Android, iOS, Gadgets and general Technology stuff. He has been associated with other well-known Tech sites WinCentral and GadgetOx since long. He currently sports a Lumia 950 XL and Nexus 5X. Other interests include listening to Nu-Metal Hits and Kick-Boxing. Write to him at Email: [email protected]
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