Nokia has now posted earnings for the fourth quarter and full year 2020 today. The highlights for this quarter are yet again surge in profitability, continued 5G momentum and strong growth in Mobile Access portfolio.
Nokia has raked in a positive operating profit in both Q4 and the full year 2020. Here are the earning highlights.
Earning highlights:
- 5% year-on-year decrease in reported net sales in Q4, primarily due to Mobile Access, as declines in network deployment and planning services were partially offset by growth in radio access products
- 1% growth in constant currency net sales in Q4
- Continued improvements in our Mobile Access portfolio; strengthening roadmaps, reducing product costs and improving product performance; commitment to invest in R&D to drive product leadership
- Increase in Mobile Access gross margin in Q4, primarily driven by improved 5G gross margin, partially offset by a project-related loss provision
- Positive operating profit, on a reported basis, in Q4 and full year 2020
- Non-IFRS operating profit in Q4 benefited by approximately EUR 250 million, due to the timing of revenue recognition and a net positive fluctuation in Nokia’s venture fund investments
- Strong free cash flow in Q4 and full year 2020 benefited from an early customer payment of approximately EUR 0.5 billion, which was expected in Q1 2021
- Derecognized EUR 2.9 billion of Finnish deferred tax assets, which are not lost
- Reiterated outlook for 2021 comparable operating margin of 7-10% and provided new outlook for net sales and free cash flow
- Board does not propose a dividend or dividend authorization for the financial year 2020
CEO’s statement:
Here is what the new Nokia CEO Pekka Lundmark has to say about the Q4 2020 results.
Nokia delivered a solid Q4 to end 2020 at the high end of our Outlook range. We saw healthy gross margin and operating margin performance for both Q4 and full year 2020, supported by a regional mix shift towards the higher margin North America region and by our ongoing R&D efforts to enhance product quality and cost competitiveness.
From a business group perspective, in Q4 and full year 2020, our gross margin improvement was primarily driven by Networks, as was our full year operating margin performance. In Q4, our operating profit performance benefited by approximately EUR 250 million from two unexpected, yet significant drivers: a timing benefit of approximately EUR 150 million as we recognized net sales at the very end of the quarter, which we had expected in 2021; and we had a net positive fluctuation in Nokia’s venture fund investments of approximately EUR 100 million.
The healthy close to the year does not change our earlier communicated view for Nokia-level operating margin expected in 2021.
Net sales for Q4 were down 5% on a reported basis and up 1% in constant currency and for full year 2020 they were down 6% on a reported basis and down 4% in constant currency.
Nokia delivered strong cash performance in Q4 and full year 2020, benefitting from a large customer payment that had been expected in Q1 2021, marking the third consecutive quarter of positive free cash flow. Additionally, our liquidity position continues to be solid.
Financial improvement in Mobile Access was clear in both Q4 and full year 2020 results, reflecting our ongoing efforts to strengthen the competitiveness and cost position of our mobile radio products. Overall, we saw growth in radio access products in Q4 and full year 2020, with growth in 5G partially offset by decreases in legacy radio access products.
5G gross margin increased due to product cost reduction, partly helped by higher ReefShark shipment volumes. Our aim was to be above 35% for our KPI on shipments of our “5G Powered by ReefShark” portfolio; we ended the year at 43% and we remain on track to realize 70% by the end of 2021. This underlines the ongoing progress with our Mobile Networks turnaround and, as I said in Q3, we will invest whatever it takes to win in 5G. Completing the turnaround in Mobile Networks remains our top priority for 2021, and these visible signs of progress give me confidence that we are on the right track but there is still work to be done.
Our Enterprise business delivered another good set of results giving a solid foundation to build on. Q4 Enterprise net sales were up 1% in reported and 5% in constant currency. For full year 2020, they were up 11% in reported and 14% in constant currency, reflecting our leadership position in many areas, including in private wireless. We announced key partnerships with AT&T and Verizon for private wireless and won 79 new customers in Q4. We now have 260 private wireless customers. Public sector demand remains robust and we announced a US federal government cyber deal after the quarter end in mid-January.
At the end of 2020, we announced a new operating model to better align us with the needs of our customers and to better maintain and achieve technology leadership in the areas where we choose to compete.
Pleasingly we already have strong technology leadership positions in many key areas of our new business groups. In Network Infrastructure we have industry-leading FP4-based products and in Cloud and Network Services we are jointly developing transformational cloud-native 5G core solutions for CSPs and Enterprise customers. In our Mobile Networks business, together with Elisa and Qualcomm, we hold the worldwide 5G speed record.
These are encouraging results, however, as I said in Q3, we expect 2021 to be challenging, a year of transition, with meaningful headwinds due to market share loss and price erosion in North America.
Additionally, as I said, delivering on our new operating model for a strong and sustainable long-term business requires us to make further 5G R&D investments in 2021, meaning we will sacrifice some short-term margin to ensure leadership in 5G.
Considering these elements, we maintain our comparable operating margin outlook for 2021 and – as new items – give an outlook for net sales and free cash flow for 2021. As previously stated, we intend to provide a long-term outlook latest at Capital Markets Day on March 18.
Regarding dividend, we are pleased with Nokia’s recent operational performance and satisfied that we have strengthened our cash position. However, with the focus on increased investments in 5G and strategic areas, while continuing to establish a track record of sustainable cash generation, the Board does not propose a dividend or dividend authorization for the financial year 2020. We intend to provide an update on our dividend policy latest at Capital Markets Day.
We took important steps in 2020 to accelerate roadmaps, improve execution and create a new way of working, which will enable Nokia to return to a sustainable long-term financial performance. We know we have our work cut out for us in 2021, but the new Group Leadership Team has hit the ground running. As announced earlier, we will go deep into each of our business groups at our Capital Markets Day to discuss specific targets and action plans.
I want to conclude by thanking everyone at Nokia. This has been a year of incredible change where our personal resilience as well as technology has been tested like never before. I am extremely proud of our team, their commitment and their achievements. Thank you.
2021 Outlook:
- In full year 2021, we expect our net sales, adjusted for currency fluctuations, to be affected by:
- A significant decline in Mobile Networks, due to not converting all of its 4G footprint into 5G footprint in North America in 2020, as well as price erosion in North America (new);
- Net sales growth, primarily in Network Infrastructure and Nokia Technologies (new);
- Mobile Networks is expected to deliver comparable operating margin of around zero percent in full year 2021, and significant improvement over the longer term;
- Network Infrastructure is expected to deliver comparable operating margin in the high single digit range in full year 2021, and gradual improvement over the longer term;
- Cloud & Network Services is expected to deliver comparable operating margin in the mid-single digit range in full year 2021, and significant improvement over the longer term;
- Nokia Technologies is expected to deliver a slight improvement in comparable operating profit in full year 2021, relative to full year 2020, and stable performance over the longer term;
- Group Common and Other is expected to deliver a comparable operating loss of approximately EUR 200 million in full year 2021, and stable performance over the longer term;
- In full year 2021, Nokia expects the free cash flow performance of Nokia Technologies to be approximately EUR 600 million lower than its operating profit, primarily due to prepayments we received from certain licensees;
- Comparable financial income and expenses are expected to be an expense of approximately EUR 250 million in full year 2021 and over the longer-term (new);
- Comparable income tax expenses are expected to be approximately EUR 450 million in full year 2021 and over the longer-term, subject to regional profit mix, net sales subject to withholding tax and the timing of patent licensing cash flow (new);
- Cash outflows related to income taxes are expected to be approximately EUR 350 million in full year 2021 and over the longer term until our US or Finnish deferred tax assets are fully utilized (new);
- Capital expenditures are expected to be approximately EUR 700 million in full year 2021 and EUR 600 million over the longer-term (new); and
- Rule of thumb related to currency fluctuations: Assuming our current mix of net sales and total costs (refer to Note 1, “Basis of Preparation” in the “Financial statement information” section for details in Nokia Corporation Financial Report for Q4 and full year 2020), we expect that a 10% increase in the EUR/USD exchange rate would have an impact of approximately negative 4 to 5% on net sales and an approximately neutral impact on operating profit (new).
