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Nokia’s Q4 2017 results beat market expectations. CEO’s message & outlook for future

February 1, 2018

Nokia has today posted strong Q4 2017 results and as per the analysts, it has beaten the market expectations with its Q4 2017 earnings. In fact, while all major Network providers like Huawei, Nokia and Ericsson are facing downturn due to cyclic fall of demand, Nokia has managed to beat Ericsson and others in earnings. It has managed to earn while Ericsson has reported losses.

This is what Reuters has to say in its report.

Nokia’s fourth-quarter group earnings before interest and taxes (EBIT) increased 7 percent from a year ago to 1.0 billion euros ($1.2 billion), well above analysts’ average forecast of 888 million euros in a Reuters poll.
However, the profits were boosted by a one-off patent payment of 210 million euros and operating profit from the networks business fell 25 percent year-on-year.

CEO’s Statement:

I am pleased that Nokia ended 2017 with a strong fourth quarter. We saw constant currency growth in three of our five Networks business groups as well as very strong growth in Nokia Technologies. Group profitability increased in both the quarter and the full year, and gross margin remained resilient in Networks despite the dilutive impact of robust competition in China.

This performance reflects the progress we have made since Q3 with our mobile product portfolio, and positions us well for the upcoming transition to 5G. Our recent 4G/LTE software release was the highest quality in our history; our AirScale 5G-ready base stations are shipping in volume and delivering excellent results in the field; and we are making good progress in the execution of product migrations for key customers. Shortly after the quarter ended, we launched ReefShark, our revolutionary new chipset family for mobile products, as well as our end-to-end 5G Future X architecture. Both of these provide a strong competitive advantage for Nokia.
Continued momentum in executing our strategy was also evident in the quarter. Our position with our core communication service provider market remains strong; we are seeing excellent progress in our targeted verticals; our software business is growing and now has a strong foundation; and our licensing business continues to deliver on our strategic roadmap, with expansion to another Chinese company in the quarter. We are confident that licensing will remain a powerful value driver for Nokia, with an expected recurring revenue CAGR of 10% between now and the end of 2020.
Looking forward on the Networks side, we expect our market to decline again in 2018, although at a slightly lower rate than our previous forecast, given early signs of improved conditions in North America. For 2019 and 2020, we expect market conditions to improve markedly, driven by full-scale rollouts of 5G networks. As those rollouts occur, Nokia is remarkably well-positioned. Unlike previous generations of technology, 5G requires a coordinated, holistic approach across all network elements, far beyond radio. That requirement plays to the strength of our end-to-end portfolio and our 5G Future X architecture.
As a result of the acceleration of investment in 5G due to the opportunity provided by the accelerated timeframe of 5G deployments, Nokia’s operating margin will come under some pressure in 2018. That investment, combined with continued strong execution of our strategy to expand to new vertical segments, build a standalone software business, and maximize the value of our licensing business, will allow us to target improved results in 2020. Therefore, the Board is committed to propose a growing dividend, including for 2018.
For the full-year 2020, we expect earnings per share of EUR 0.37 to EUR 0.42, strongly positive free cash flow, and a group-level, non-IFRS operating margin in the range of 12-16%. If we execute our strategy well, the high-end of that operating margin range is certainly possible.
As we work to deliver that sharply improved performance, we will do so in a very Nokia way: disciplined execution, relentless focus on costs and a commitment to innovation and technological leadership for our customers.

Outlook for 2017:

	Metric	Guidance	Commentary
Nokia	Non-IFRS operating margin	9-11% for full year 2018 and 12-16% for full year 2020	Nokia expects non-IFRS operating margin and non-IFRS diluted earnings per share to expand between full year 2018 and full year 2020 primarily due to: Improved results in Nokia’s Networks business, which are expected from: Improved scale, as commercial 5G network deployments are expected to begin in 2019 and increase in 2020; 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; and The lack of a negative impact to our results related to approximately EUR 100 million of temporary incremental expenses to support 5G customer trials, which we expect to incur in 2018; Improved results in Nokia Technologies, which are expected from: New patent licensing agreements with smartphone vendors, automotive companies and consumer electronics companies; and Results in brand and technology licensing; and Lower Nokia support function costs, including IT and site costs within Nokia’s Networks business and Group Common and Other.
Nokia	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. On a long-term basis, 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.
	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 swaps¹ 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 expenses¹	Relative to the combined non-IFRS cost of sales and operating expenses of Nokia and Alcatel-Lucent for full year 2015, excluding Nokia Technologies. The combined operating expenses of Nokia and Alcatel-Lucent for full year 2015, excluding Nokia Technologies, were approximately EUR 7.3 billion. As a result of the acceleration of 5G and in the interest of our long-term strategy, in 2018 we expect to incur approximately EUR 100 million of temporary incremental expenses related to 5G customer trials that will partially reduce the positive impact from the recurring annual cost savings. (new commentary)
	Network equipment swaps	Approximately EUR 1.4 billion of charges and cash outflows in total¹	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. As of the end of the fourth quarter 2017, approximately EUR 600 million of charges and cash outflows have been incurred in total.
	Non-IFRS financial income and expenses	Expense of approximately EUR 300 million in full year 2018 and over the longer-term	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 450 million in full year 2018 and over the longer-term until Nokia’s US or Finnish deferred tax assets are fully utilized.
	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	Decline approximately in-line with its primary addressable market in 2018 and grow faster than its primary addressable market over the longer-term	For Nokia’s Networks business, Nokia expects net sales to grow faster than its primary addressable market over the longer-term and operating margin to expand between full year 2018 and full year 2020 primarily due to: Improved scale, as commercial 5G network deployments are expected to begin in 2019 and increase in 2020; 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; The lack of a negative impact to our results related to approximately EUR 100 million of temporary incremental expenses to support 5G customer trials, which we expect to incur in 2018; and Lower support function costs, including IT and site costs. Nokia’s outlook for net sales and operating margin for Nokia’s Networks business is expected to be influenced by factors including: An approximately 2 to 4 percent decline in the primary addressable market for Nokia’s Networks business in full year 2018, compared to 2017, on a constant currency basis (This is an update to earlier commentary for a 2 to 5 percent decline.); A negative impact to reported net sales, particularly in first half 2018, due to foreign exchange headwinds; Uncertainty related to the timing of completions and acceptances of certain projects particularly in the first half of 2018; Uncertainty related to potential mergers or acquisitions by our customers; Competitive industry dynamics; Product and regional mix; The timing of major network deployments; and The level of R&D investment needed to maintain product competitiveness.
Nokia’s Networks business	Operating margin	6-9% for full year 2018 and 9-12% for full year 2020
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