Nokia Corporation delivers a strong Q4 2020
Nokia Corporation has declared its Financial Report for Q4 and Full Year 2020. The company announced solid margin performance driven by customer demand in North America.
• 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
“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.”
Pekks Lundmark, President and CEO
NOKIA FINANCIAL RESULTS
|EUR million (except for EPS in EUR)||Q4’20||Q4’19||YoY change||Constant currency YoY change||Q1-Q4’20||Q1-Q4’19||YoY change||Constant currency YoY change|
|Net sales||6 568||6 903||(5)%||1%||21 867||23 315||(6)%||(4)%|
|Networks||5 040||5 439||(7)%||(2)%||16 865||18 209||(7)%||(5)%|
|Nokia Software||864||870||(1)%||5%||2 658||2 767||(4)%||(1)%|
|Nokia Technologies||382||376||2%||3%||1 402||1 487||(6)%||(6)%|
|Group Common and Other||292||231||26%||26%||983||952||3%||2%|
|Gross margin %1||39.2%||38.5%||70bps||37.6%||35.4%||220bps|
|Nokia Technologies||317||320||(1)%||1 164||1 239||(6)%|
|Group Common and Other||(27)||(161)||(525)||(490)|
|Non-IFRS exclusions||(615)||(331)||(1 196)||(1 518)|
|Operating margin %||7.2%||11.6%||(440)bps||4.2%||2.1%||210bps|
|Net sales (non-IFRS)||6 569||6 903||(5)%||1%||21 870||23 344||(6)%||(4)%|
|Gross margin % (non-IFRS)||41.8%||40.0%||180bps||39.0%||36.5%||250bps|
|Operating profit (non-IFRS)||1 090||1 134||(4)%||2 114||2 003||6%|
|Operating margin % (non-IFRS)||16.6%||16.4%||20bps||9.7%||8.6%||110bps|
|Financial income and expenses||29||(15)||(106)||(341)||(69)%|
|Income taxes||(3 131)||(246)||(3 255)||(138)|
|Profit/(loss) for the period||(2 608)||563||(2 421)||18|
|Financial income and expenses (non-IFRS)||(13)||(46)||(72)%||(184)||(337)||(45)%|
|Income taxes (non-IFRS)||(286)||(288)||(1)%||(488)||(448)||9%|
|Profit for the period (non-IFRS)||811||821||(1)%||1 464||1 230||19%|
|EPS, diluted (non-IFRS)||0.14||0.15||(7)%||0.26||0.22||18%|
In Q4 2020, reported net sales decreased 5%, primarily driven by lower net sales in Mobile Access, where a decline in network deployment and planning services was partially offset by growth in 5G radio access products. On a constant currency basis, Nokia net sales increased 1% in Q4 2020. In full year 2020, reported net sales decreased 6%, primarily due to network deployment and planning services in Mobile Access. In Nokia Enterprise, we continued to make great progress in full year 2020 and delivered 11% year-on-year growth in reported net sales. On a constant currency basis, Nokia net sales decreased 4% in full year 2020.
Reported gross margin in Q4 2020 was 39.2%, compared to 38.5% in Q4 2019. Non-IFRS gross margin was 41.8%, compared to 40.0% in Q4 2019. The improvement in gross margin was primarily driven by Mobile Access, where strong 5G gross margin expansion was partially offset by a project-related loss provision. To a lesser extent, our Q4 2020 gross margin performance was affected by mix shifts, with a higher proportion of Group Common and Other, as well as a decline in Nokia Software. In full year 2020, reported gross margin was 37.6%, compared to 35.4% in full year 2019. Non-IFRS gross margin was 39.0%, compared to 36.5% in full year 2019.
In Q4 2020, our non-IFRS and reported operating profit performance was positively affected by approximately EUR 250 million from two significant drivers: a timing benefit, as we recognized net sales at the very end of the quarter, which we had expected in 2021, and a net positive fluctuation in Nokia’s venture fund investments. Our non-IFRS and reported diluted EPS benefited by approximately EUR 0.035 from these items.
Earnings per share
Non-IFRS diluted EPS in Q4 2020 was EUR 0.14, compared to EUR 0.15 in Q4 2019, primarily due to lower operating profit, partially offset by a net positive fluctuation in financial income and expenses. In full year 2020, non-IFRS diluted EPS was EUR 0.26, compared to 0.22 in full year 2019.
Reported diluted EPS in Q4 2020 was negative EUR 0.46, compared to EUR 0.10 in Q4 2019. The change was primarily driven by a net negative fluctuation in income taxes related to the EUR 2.9 billion derecognition of Finnish deferred tax assets and, to a lesser extent, lower operating profit, partially offset by a net positive fluctuation in financial income and expenses. In full year 2020, reported diluted EPS was negative EUR 0.43, compared to 0.00 in full year 2019. The derecognition was required due to a regular assessment of our ability to utilize the tax assets in Finland in the foreseeable future that is done primarily based on our historical performance. These tax assets are not lost, and the derecognition can be reversed. They can still be utilized in the taxation and the derecognition is not expected to affect the overall taxation of the Nokia Group or its cash taxes. For further details on the derecognition of Finnish deferred tax assets, please refer to note 6, “Deferred taxes” in the “Financial statement information” section in Nokia Corporation Financial Report for Q4 and full year 2020.
Q4 2020 was the third quarter in a row of positive free cash flow. During Q4 2020, net cash increased by approximately EUR 0.6 billion, resulting in an end-of-quarter net cash balance of approximately EUR 2.5 billion. During Q4 2020, total cash increased by approximately EUR 0.4 billion, resulting in an end-of-quarter total cash balance of approximately EUR 8.1 billion. Strong cash performance in Q4 and full year 2020 benefited from an early customer payment of approximately EUR 0.5 billion, which was expected in Q1 2021.
COVID-19 resulted in a net sales impact of approximately EUR 200 million in full year 2020, with the majority of these net sales expected to be shifted to future periods, rather than being lost. In addition, we had a temporary benefit of approximately EUR 250 million due to lower travel and personnel expenses related to COVID-19.
Beginning with the distribution for the financial year 2018, Nokia started paying dividends in quarterly instalments. On October 24, 2019, the Board resolved to pause dividend distributions, in order to: a) guarantee Nokia’s ability to increase 5G investments, b) continue investing in growth in strategic focus areas of enterprise and software and c) strengthen Nokia’s cash position. This was done in accordance with Nokia’s dividend policy, which states that dividend decisions are made taking into account Nokia’s cash position and expected cash flow generation.
The Board is pleased with Nokia’s recent operational performance and the track record of sustainable cash generation that Nokia is starting to build. The Board is satisfied that Nokia has strengthened its cash position. However, the Board continues to focus on ensuring Nokia’s ability to increase investments in 5G and strategic areas, while continuing to establish a track record of sustainable cash generation. Therefore, the Board does not propose a dividend or dividend authorization for the financial year 2020. After Q4 2021, the Board will assess the possibility of proposing a dividend distribution for the financial year 2021, taking into account the net cash position, as well as the outlook for 2022.
The COVID-19 pandemic 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.
Due to significant uncertainties and risks in estimating the impact of customer-related delivery and implementation challenges, we are now focusing our COVID-19 disclosure on the impact of factory closures, which have had a net sales impact of approximately EUR 200 million in full year 2020, with the majority of these net sales expected to be shifted to future periods, rather than being lost. The EUR 200 million of negative impact in full year 2020 relates primarily to Alcatel Submarine Networks in Group Common and Other, which experienced temporary factory closures that particularly impacted Q1 2020 and Q2 2020.
COVID-19 also affected our operational costs (for example, temporary lower travel), capital expenditures (temporary delays), and cash outflows related to taxes (tax relief). In full year 2020, we had a temporary benefit of approximately EUR 250 million due to lower travel and personnel expenses related to COVID-19, of which approximately EUR 150 million benefited operating expenses and approximately EUR 100 million benefited cost of sales. In full year 2021, based on our current understanding of the COVID-19-related developments, we expect a temporary benefit of approximately EUR 150 million due to lower travel and personnel expenses related to COVID-19, of which approximately EUR 100 million is expected to benefit operating expenses and approximately EUR 50 million is expected to benefit cost of sales.
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 and it is impossible to predict with accuracy the precise impact of such risks on us, our operations and our business.
During the COVID-19 pandemic, we have continued to advance our 5G roadmap and product evolution, as planned, and we believe that our COVID-19 mitigation actions in R&D have been successful.
Health and safety
Naturally, Nokia’s first focus during the COVID-19 pandemic 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 have taken 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 already in January 2020 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 provide
The 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 Q4 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 our connectivity solutions. In December, we announced that, together with Vodafone India Foundation, we have deployed a Smart Agriculture solution that aims to improve the productivity of farmers in India. The pilot project is being implemented in 100 locations in the states of Madhya Pradesh and Maharashtra and will benefit over 50 000 farmers in the region by enhancing their productivity and income.
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, at the Nokia level, 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.
These actions demonstrate our strong commitment to supporting global efforts to end the pandemic and overcoming the disruption and challenges we currently face.