Nokia’s Networks business
• 2% net sales growth at constant currency in Q4 2017 was driven by IP Networks and Applications and by Ultra Broadband Networks. The large year-on-year variations in foreign exchange rates had a negative impact on reported net sales, with net sales down 4% compared to the year-ago period.
• Strong operational discipline produced a solid Q4 2017 gross margin of 37.6%, and an operating margin of 11.1%.
Results for full year 2017 (4% decrease in net sales on a constant currency basis and an operating margin of 8.3%) consistent with our guidance for full year 2017.
• 79% year-on-year net sales increase and 146% year-on-year operating profit increase in Q4 2017, primarily related to new license agreements. Approximately EUR 210 million of the net sales in Q4 2017 (zero in Q4 2016) were non-recurring in nature and related to catch-up net sales, of which approximately EUR 80 million related to 2017 and EUR 130 million related to the prior years.
• 57% year-on-year net sales increase and 94% year-on-year operating profit increase in 2017, primarily related to new license agreements and settled arbitrations. Approximately EUR 300 million of the net sales in 2017 (zero in 2016) were non-recurring in nature and related to catch-up net sales for prior years
Full Year Highlights
|EUR million (except for EPS in EUR)||Q4’17||Q4’16||YoY change||Q3’17||QoQ change||Q1-Q4’17||Q1-Q4’16||YoY change|
|Net sales (non-IFRS)||6 668||6 731||-1%||5 537||20%||23 223||23 972||-3%|
|change in constant currency||5%||21%||-1%|
|Nokia’s Networks business||5 827||6 086||-4%||4 823||21%||20 523||21 830||-6%|
|change in constant currency||2%||22%||-4%|
|Ultra Broadband Networks||2 471||2 586||-4%||2 099||18%||8 970||9 758||-8%|
|change in constant currency||2%||19%||-6%|
|Global Services||1 642||1 759||-7%||1 359||21%||5 810||6 036||-4%|
|change in constant currency||-1%||22%||-2%|
|IP Networks and Applications||1 714||1 740||-1%||1 365||26%||5 742||6 036||-5%|
|change in constant currency||5%||27%||-3%|
|Nokia Technologies||554||309||79%||483||15%||1 654||1 053||57%|
|change in constant currency||80%||15%||57%|
|Group Common and Other||302||340||-11%||251||20%||1 115||1 142||-2%|
|change in constant currency||-12%||19%||-5%|
|Gross profit (non-IFRS)||2 762||2 842||-3%||2 365||17%||9 674||9 657||0%|
|Gross margin % (non-IFRS)||41.4%||42.2%||(80)bps||42.7%||(130)bps||41.7%||40.3%||140bps|
|Operating profit (non-IFRS)||1 004||940||7%||668||50%||2 587||2 172||19%|
|Nokia’s Networks business||647||858||-25%||334||94%||1 711||1 943||-12%|
|Ultra Broadband Networks||267||333||-20%||78||242%||781||922||-15%|
|IP Networks and Applications||259||294||-12%||146||77%||519||615||-16%|
|Nokia Technologies||389||158||146%||390||0%||1 124||579||94%|
|Group Common and Other||-31||-76||-59%||-56||-45%||-248||-350||-29%|
|Operating margin % (non-IFRS)||15.1%||14.0%||110bps||12.1%||300bps||11.1%||9.1%||200bps|
• Non-IFRS net sales in Q4 2017 of EUR 6.7bn (EUR 6.7bn in Q4 2016). Reported net sales in Q4 2017 of EUR 6.7bn (EUR 6.7bn in Q4 2016). On a constant currency basis, non-IFRS net sales increased 5% and reported net sales increased 6%, with 2% growth in Nokia’s Networks business and 80% growth in Nokia Technologies.
• Solid non-IFRS gross margin of 41.4% (42.2% in Q4 2016) and strong non-IFRS operating margin of 15.1% in Q4 2017 (14.0% in Q4 2016), with resilience in Nokia’s Networks business and strong performance in Nokia Technologies. Reported gross margin of 39.0% (40.3% in Q4 2016) and reported operating margin of 6.3% in Q4 2017 (4.8% in Q4 2016).
• Non-IFRS diluted EPS in Q4 2017 of EUR 0.13 (EUR 0.12 in Q4 2016) and EUR 0.33 in 2017 (EUR 0.22 in 2016). Reported diluted EPS in Q4 2017 of negative EUR 0.07 (EUR 0.11 in Q4 2016) and negative EUR 0.26 in 2017 (negative EUR 0.13 in 2016). In Q4 2017, reported diluted EPS was adversely affected by approximately EUR 0.13 due to re-measurement of deferred tax assets following the change in tax rates, primarily in the United States.
• Strong cash performance in Q4 2017, with a EUR 1.8 billion sequential increase in net cash to EUR 4.5 billion, resulting from strong net working capital management.
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