Nokia Corporation Financial Report for Q2 and Half Year 2020

Nokia Corporation 
Half year report
July 31, 2020 at 08:00 (CET +1)Nokia Corporation Financial Report for Q2 and Half Year 2020Continued improved execution drives strong margin and cash performanceStrong margin expansion, primarily driven by Mobile AccessClear roadmap progress, particularly related to our 5G mid-band portfolioConfidence in resilient customer base and strong liquidity position11% decrease in net sales, largely driven by COVID-19 and ChinaStrong growth in Nokia EnterprisePositive operating profit, on a reported basis, in both Q2 and half year 2020Within previously provided Outlook ranges for full year 2020, adjusted the non-IFRS mid-points for EPS to EUR 0.25 and operating margin to 9.5%Delivered strong free cash flow year-to-date and raised 2020 recurring free cash flow guidance to be clearly positive             
This is a summary of the Nokia Corporation financial report for Q2 and half year 2020 published today. The complete financial report for Q2 and half year 2020 with tables is available at www.nokia.com/financials. Investors should not rely on summaries of our financial reports only, but should review the complete financial reports with tables.RAJEEV SURI, PRESIDENT AND CEO, ON Q2 2020 RESULTSProfitability gains in the quarter were supported by a 4.5 percentage point year-on-year improvement in Networks gross margin, building on a 3.5 percentage point gain in the first quarter, and driving Nokia non-IFRS gross margin to 39.6%. Nokia Enterprise also grew year-on-year constant currency sales by 18% compared to one year ago and expanded margins.Nokia-level revenue was down in the quarter, with the majority of that the result of COVID-19 as well as a sharp decline in China based on the prudent approach we have taken in that market. We also saw a reduction driven by our proactive steps to reduce the volume of low margin services business. We expect that the majority of sales missed in the quarter due to COVID-19 will shift to future periods.At the start of the year, we said we would have a sharp focus on our Mobile Access business and improving cash generation. In both areas we continue to make good progress. Free cash flow in the quarter was positive €265 million, versus negative €1.0 billion one year ago, and Nokia ended Q2 with €1.6 billion of net cash, and €7.5 billion in total cash. Given our strong first-half improvement, we now expect free cash flow for full-year 2020 to be “clearly positive” compared to our earlier guidance of “positive”.In Mobile Access, we saw healthy improvements in our radio portfolio, where roadmaps are strengthening, costs are coming down, and product performance is rising. We have a particularly powerful portfolio in mid-band mobile radio, with proven products deployed with 55 customers, and the first live C-Band network demonstrated in the U.S. during the quarter. Pleasingly, our “5G Powered by ReefShark” shipments continue to increase and we believe we remain on track to reach 35% or better by year end. And, we now have 83 5G deals.Our continued momentum was demonstrated by the progress we announced after the quarter ended. These included the availability of a software upgrade that allows millions of Nokia 4G/LTE radios deployed to more than 350 customers to be migrated seamlessly to 5G; and plans to accelerate leadership in Open RAN. Nokia is the only global supplier fully committed to O-RAN with commercial 5G Cloud-RAN networks. We also announced an expansion of our IP routing business into the data center market and highlighted that Apple was deploying our technology at its data centers.This is my last quarterly announcement as CEO of Nokia and I want to close with a note of thanks: thanks to our shareholders, thanks to our customers, thanks to our many other stakeholders, and a particular thanks to the great employees of Nokia. You have constantly made me proud and I expect that you will continue to do so in the many years to come. Thank you all. It has been a pleasure and an honor.NOKIA FINANCIAL RESULTSBoth non-IFRS and reported net sales in Q2 2020 were EUR 5.1bn, compared to EUR 5.7bn in Q2 2019. On a constant currency basis, both non-IFRS and reported net sales decreased 11%. Excluding one-time licensing net sales in Q2 2020 and Q2 2019, net sales decreased 10% on both a non-IFRS and reported basis.Q2 2020 net sales were impacted by COVID-19 and unique dynamics in China. In Q2 2020, we estimate that COVID-19 had an approximately EUR 300 million negative net impact on our net sales; with the majority of these net sales expected to be shifted to future periods, rather than being lost.In Q2 2020, Nokia’s gross and operating margin both expanded year-on-year, primarily driven by broad based strength in Networks, particularly in Mobile Access, with IP Routing and Fixed Access also contributing positively. In addition, reported operating margin benefitted significantly from lower amortization of acquired intangible assets, as well as lower restructuring and associated charges. Non-IFRS gross margin was 39.6% (reported 39.4%) and non-IFRS operating margin was 8.3% (reported 3.3%).Non-IFRS diluted EPS in Q2 2020 was EUR 0.06, compared to EUR 0.05 in Q2 2019, primarily driven by higher gross profit in Mobile Access within Networks, continued progress related to our cost savings program and a net positive fluctuation in financial income and expenses. This was partially offset by higher investments in 5G R&D to accelerate our product roadmaps and cost competitiveness in Mobile Access and a net negative fluctuation in Nokia’s venture fund investments.Reported diluted EPS in the first six months of 2020 was EUR 0.00, compared to negative EUR 0.11 in the first six months of 2019. The change was primarily driven by lower amortization of acquired intangible assets, lower restructuring and associated charges, continued progress related to our cost savings program, a net positive fluctuation in financial income and expenses and higher gross profit, partially offset by higher investments in 5G R&D to accelerate our product roadmaps and cost competitiveness in Mobile Access and a net negative fluctuation in Nokia’s venture fund investments.Q2 2020 was the fourth quarter in a row of solid cash performance. Since establishing a program in 2019 to focus on free cash flow, we have made great progress driving sustainable operational improvements, particularly in net working capital management. During Q2 2020, net cash increased by approximately EUR 0.2 billion, resulting in an end-of-quarter net cash balance of approximately EUR 1.6 billion. During Q2 2020, total cash increased by approximately EUR 1.2 billion, primarily driven by the successful issuance of EUR 1.0 billion of debt, resulting in an end-of-quarter total cash balance of approximately EUR 7.5 billion.     COVID-19
     
The COVID-19 crisis has made vividly clear the critical importance of connectivity to keep society functioning. We believe we have a resilient customer base, and we feel a sense of duty to our customers and the communities they serve.We believe the impact of COVID-19 on Nokia’s financial performance and financial position was primarily related to a net sales impact of approximately EUR 500 million in the first half of 2020, with the majority of these net sales expected to be shifted to future periods, rather than being lost. In Q1 2020, the estimated COVID-19 impact was approximately EUR 200 million, and related primarily to supply chain disruptions. In Q2 2020, the estimated COVID-19 net impact was approximately EUR 300 million, composed of a negative impact of approximately EUR 400 million related to delivery and implementation challenges, partially offset by a positive impact of approximately EUR 100 million related to capturing a part of the negative net sales impact from Q1 2020. To a much lesser extent, COVID-19 also affected our operational costs (for example, lower travel), capital expenditures (temporary delays), cash outflows related to taxes (tax relief), and net working capital (for example, lower inventories due to temporary disruptions).In addition, and in accordance with our prudent management of our capital structure, we took further proactive steps to strengthen our liquidity position by raising EUR 1.0 billion of debt in Q2 2020, on a net basis. As a result, we ended Q2 2020 with approximately EUR 7.5 billion of total cash.Potential risks and uncertainties continue to exist related to the scope and duration of the COVID-19 impact and the pace and shape of the economic recovery following the pandemic.During the COVID-19 pandemic, we have continued to advance our 5G roadmap and product evolution, as planned, and our COVID-19 mitigation actions in R&D have been very successful. We believe we remain on track with our plans to drive progressive improvement over the course of 2020.Health and safetyNaturally, Nokia’s first focus during the COVID-19 crisis is to our employees. We have in place strict protocols for Nokia facilities and provided clear advice to our employees about how they can mitigate the risks of COVID-19 in situations where they have to go about critical work.We took already early on a range of steps, including banning international travel for Nokia employees, except for strictly-defined ‘critical’ reasons; closing all our facilities to all visitors, with the exception of people engaged in essential maintenance and services, and asking our staff to work from home wherever possible. We started implementing these measures in some regions in January already and have updated guidance as the situation has developed.As the overwhelming majority of Nokia employees continue working remotely, we are providing guidance on how staff can maintain a healthy work-life balance and look after their physical and mental well-being.Supporting the essential services our customers provideThe products and services that we provide have never been more critical in enabling the world to continue to function in an orderly way. We continue to work closely with all our customers, to ensure that the changing needs and requirements at this time are well understood and that we respond appropriately to them.In Q2 2020, connectivity continued to bring together people isolated from each other by the COVID-19 pandemic. Remote working and schooling, robust delivery of basic services and smart deliveries are just some examples that have been enabled by connectivity solutions. We announced new deals that bring connectivity to the most rural areas of, for example, California and Ireland, making sure small businesses, farms and schools are connected.Nokia has a global manufacturing footprint designed for optimized global supply, and to mitigate against risks such as local disruptive events, transportation capacity problems, and political risks. Our supply network consists of 25 factories around the globe and six hubs for customer fulfillment. As a result, we are not dependent on one location or entity. We have also established a global command center to manage the supply chain challenges arising from the outbreak; and we are ready to activate relevant business continuity plans should the situation in any part of our organization require this.Impact on asset valuationsCOVID-19 has affected the valuations of certain assets, including investments in non-publicly quoted assets through Nokia’s venture fund investments and pension plans, the valuation of which is inherently challenging in fast-moving market conditions (for details, please refer to note 5, “Pensions and other post-employment benefits” and note 8, “Fair value of financial instruments” in the “Financial statement information” section included in Nokia Corporation interim report for Q2 and Half Year 2020).In relation to its financial statements as of June 30, 2020, Nokia has considered also the indicators of impairment of goodwill and other intangible assets, recoverability of deferred tax assets, valuation of inventories, and collectability of trade receivables and contract assets. Based on these assessments, COVID-19 is currently not expected to have such long-term effects on Nokia’s financial performance that it would require adjustments to the carrying amounts of goodwill and other intangible assets or deferred tax assets. Also, Nokia has not identified any significant increase in the amount of bad debt or need to adjust the valuation of inventories.Doing our part to fight the pandemicWe also feel another sense of duty – to the societies where Nokia operates. As a global company, we have a duty to be part of the global fight against this pandemic. Therefore, Nokia has launched a Coronavirus Global Donation Fund.In Q2 2020, we engaged with local organizations such as hospitals, community groups and NGOs in nearly 50 countries, helping them fight the pandemic and mitigate its impacts.These actions demonstrate our strong commitment to supporting global efforts to end the pandemic and overcoming the disruption and challenges we currently face.OUTLOOKFull Year 2020Long term (3 to 5 years)¹   Free cash flow = net cash from/(used in) operating activities – capital expenditures + proceeds from sale of property, plant and equipment and intangible assets – purchase of non-current financial investments + proceeds from sale of non-current financial investments.
KEY DRIVERS OF NOKIA’S OUTLOOK
Networks and Nokia Software are expected to be influenced by factors including: