OREANDA-NEWS. This is a summary of the Nokia Corporation financial report for Q2 and half year 2016 published today. Investors should not rely on summaries of our financial reports only, but should review the complete financial reports with tables.

FINANCIAL HIGHLIGHTS

  • Non-IFRS net sales in Q2 2016 of EUR 5.7 billion (reported: EUR 5.6 billion). In the year-ago quarter, non-IFRS net sales would have been EUR 6.4 billion on a comparable combined company basis (reported: EUR 2.9 billion on a Nokia stand-alone basis).
  • Non-IFRS diluted EPS in Q2 2016 of EUR 0.03 (reported: EUR negative 0.12).
  • Raised annual cost savings target to approximately EUR 1.2 billion of total annual cost savings to be achieved in full year 2018, compared to the combined non-IFRS operating costs of Nokia and Alcatel-Lucent for full year 2015, excluding Nokia Technologies. Related to this, Nokia recorded approximately EUR 600 million of restructuring and associated charges in the second quarter 2016.

Nokia's Networks business

  • 11% year-on-year net sales decrease in Q2 2016. Consistent with our outlook for the wireless infrastructure market, net sales were weak in Mobile Networks within Ultra Broadband Networks, and accounted for approximately 80% of the overall decrease in Nokia's Networks business. IP Networks and Applications also contributed to the decrease. This was partially offset by strong growth in Fixed Networks within Ultra Broadband Networks.
  • In Q2 2016, solid gross margin of 37.4% and operating margin of 6.0% were adversely affected by a customer in Latin America undergoing judicial recovery. Excluding this, gross margin would have been approximately 38% and operating margin would have been nearly 7%.

Nokia Technologies

  • 11% year-on-year net sales decrease in Q2 2016. Excluding the impact of non-recurring items that benefitted the year-ago quarter, Nokia Technologies net sales would have grown by approximately 10% year-on-year, primarily due to higher intellectual property licensing income from existing licensees.
  • Announced an expansion of the patent cross license agreement with Samsung on July 13, 2016 to cover certain additional patent portfolios, reinforcing Nokia's leadership in technologies for the programmable world. The expansion of the agreement occurred subsequent to the end of the second quarter 2016, and therefore did not impact the second quarter of 2016 financials. Instead, the expanded agreement will have a positive impact to Nokia Technologies starting from the third quarter of 2016. Nokia expects total annualized net sales related to patent and brand licensing to grow to a run rate of approximately EUR 950 million by the end of 2016.

Nokia and Samsung expand their intellectual property cross license

On July 13, 2016, Nokia announced that Nokia and Samsung have agreed terms to expand their patent cross license agreement to cover certain additional patent portfolios of both parties. This agreement is in addition to the outcome of the arbitration between the two companies that was announced on February 1, 2016.

The agreement expands access for each company to patented technologies of the other and reinforces Nokia's leadership in technologies for the programmable world. With this expansion, Nokia expects a positive impact to the net sales of Nokia Technologies starting from the third quarter of 2016.

With this expanded agreement, Nokia Technologies' total annualized net sales related to patent and brand licensing is expected to grow to a run rate of approximately EUR 950 million by the end of 2016.

NON-IFRS RESULTS

Non-IFRS results provide meaningful supplemental information regarding underlying business performance

In addition to information on our reported IFRS results, we provide certain information on a non-IFRS, or underlying business performance, basis. We believe that our non-IFRS results provide meaningful supplemental information to both management and investors regarding Nokia's underlying business performance by excluding the below-described items that may not be indicative of Nokia's business operating results. These non-IFRS financial measures should not be viewed in isolation or as substitutes to the equivalent IFRS measure(s), but should be used in conjunction with the most directly comparable IFRS measure(s) in the reported results.

Non-IFRS results exclude costs related to the Alcatel-Lucent transaction and related integration, goodwill impairment charges, intangible asset amortization and purchase price related items, restructuring and associated charges, and certain other items that may not be indicative of Nokia's underlying business performance. The non-IFRS exclusions are not allocated to the segments, and hence they are reported only at the Nokia consolidated level.

CEO STATEMENT

Nokia's second quarter results were largely as expected and reflect solid execution in the midst of a challenging market and the ongoing integration of Alcatel-Lucent. When we announced our first quarter results, I said that we did not expect to see typical seasonal patterns in the first half of the year, and that prediction proved to be correct. Net sales were slightly up sequentially in Q2, while operating margin was slightly down, in part reflecting a meaningful negative impact from one of our major customers in Latin America.

During the quarter we continued to make excellent progress in many areas. We moved rapidly forward with our integration and cost savings efforts; saw robust growth in our Fixed Networks business; announced the acquisition of Gainspeed in order to accelerate our progress with cable operators; closed the acquisition of Withings; reached a licensing deal that will see the Nokia brand return to smartphones and tablets; and more.

I was particularly pleased that the work done in the second quarter to reach an agreement with Samsung on an expanded intellectual property licensing deal came to fruition. After the arbitration results were announced in February, we said that there was still more to come from Samsung and have now delivered on that, with the related financial impact starting in the third quarter.

The decline of our topline remains a concern, and reflects challenging market conditions. While we do not expect those conditions to improve in the near term, we believe we are well-positioned given the scope of our portfolio, focus on operational discipline, strengthening sales execution, and opportunities in the evolution from 4G towards 5G.

In fact, we are already starting to work with customers to help them move to 5G-ready architectures in the core, with a focus on software-defined networking and cloud technologies. As this process takes place, we expect there to be further evolution of 4G radio including more carrier aggregation in order to meet demands for capacity, speed and spectrum utilization. Our AirScale radio platform, which can support different LTE-Advanced Pro (4.5G) technologies and is '5G ready,' is ideally suited to this environment.

We crossed the 95% ownership threshold of Alcatel-Lucent in June, allowing us to move to acquire the remaining shares and reach full ownership of Alcatel-Lucent, which we expect by the end of October. As our successful integration work continues and as we get increased granular visibility into the business, our confidence in our ability to deliver cost savings also increases. As a result, we are now targeting EUR 1.2 billion in total cost savings to be achieved in full year 2018. We have also continued the strategic review of our submarine cable business to determine the best long-term resolution for that business.

While plenty of hard work remains in front of us, we are making good progress and expect to see slight sequential improvement in both net sales and operating margin in our Networks business from the second quarter to the third, followed by significant improvement from the third to the fourth quarter.


Rajeev Suri
President and CEO

NOKIA IN Q2 2016 - NON-IFRS

FINANCIAL DISCUSSION

The following discussion is of Nokia's results for the second quarter 2016, which comprise the results of Nokia's businesses - Nokia's Networks business and Nokia Technologies, as well as Group Common and Other. For more information on the recent changes to our reportable segments, please refer to note 3, "Segment information and eliminations", in the notes to the financial statements attached to this report. Comparisons are given to the second quarter 2015 and first quarter 2016 results on a combined company basis, unless otherwise indicated.

This data has been prepared to reflect the financial results of the continuing operations of Nokia as if the new financial reporting structure had been in operation for the full year 2015. Certain accounting policy alignments, adjustments and reclassifications have been necessary, and these are explained in the "Basis of preparation" section of the stock exchange release published on April 22, 2016. These adjustments include also reallocation of items of costs and expenses based on their nature and changes to the definition of the line items in the combined company accounting policies, which affect also numbers presented in these interim financial statements for 2015. For more information on the combined company historicals, please refer to note 1, "Basis of Preparation", in the notes to the financial statements attached to this report.

Non-IFRS Net sales

Nokia non-IFRS net sales decreased 11% year-on-year and increased 1% sequentially. On a constant currency basis, Nokia non-IFRS net sales would have decreased 9% year-on-year and increased 2% sequentially.

Year-on-year discussion

The year-on-year decrease in Nokia non-IFRS net sales in the second quarter 2016 was primarily due to Nokia's Networks business.

Sequential discussion

The sequential increase in Nokia non-IFRS net sales in the second quarter 2016 was primarily due to Nokia's Networks business and Group Common and Other.

Non-IFRS Operating profit

Year-on-year discussion

Nokia non-IFRS operating profit decreased primarily due to lower non-IFRS gross profit and a net negative fluctuation in non-IFRS other income and expenses, partially offset by lower non-IFRS research and development ("R&D") expenses and non-IFRS selling, general and administrative ("SG&A") expenses.

The decrease in non-IFRS gross profit was primarily due to Nokia's Networks business and, to a lesser extent, Nokia Technologies, partially offset by Group Common and Other. In Q2 2016, non-IFRS gross profit was adversely affected by a customer in Latin America undergoing judicial recovery, as revenue was deferred while the related costs of sale were expensed as incurred.

The decrease in non-IFRS R&D expenses was primarily due to Nokia's Networks business and, to a lesser extent, Nokia Technologies and Group Common and Other.

The decrease in non-IFRS SG&A expenses was primarily due to Nokia's Networks business and, to a lesser extent, Group Common and Other, partially offset by Nokia Technologies.

Nokia non-IFRS other income and expenses was an expense of EUR 41 million in the second quarter 2016, compared to an income of EUR 74 million in the year-ago quarter. On a year-on-year basis, the change was primarily due to the absence of realized gains and losses related to certain of Nokia's investments made through its venture funds. In Q2 2016, non-IFRS other income and expenses were adversely affected by a customer in Latin America undergoing judicial recovery, as certain provisions were recorded due to the risk of asset impairment.

Sequential discussion

Nokia non-IFRS operating profit decreased primarily due to a net negative fluctuation in non-IFRS other income and expenses and higher non-IFRS SG&A expenses, partially offset by lower non-IFRS R&D expenses.

The slight decrease in non-IFRS gross profit was primarily due to Nokia's Networks business, partially offset by Group Common and Other. In Q2 2016, non-IFRS gross profit was adversely affected by a customer in Latin America undergoing judicial recovery, as revenue was deferred while the related costs of sale were expensed as incurred.

The decrease in non-IFRS R&D expenses was primarily due to Nokia's Networks business.

The increase in non-IFRS SG&A expenses was primarily due to Nokia's Networks business and Nokia Technologies.

Nokia non-IFRS other income and expenses was an expense of EUR 41 million in the second quarter 2016, compared to an expense of EUR 15 million in the first quarter 2016. On a sequential basis, the change was primarily due to Nokia's Networks business, as well as the absence of realized gains and losses related to certain of Nokia's investments made through its venture funds. In Q2 2016, non-IFRS other income and expenses were adversely affected by a customer in Latin America undergoing judicial recovery, as certain provisions were recorded due to the risk of asset impairment.

NOKIA IN Q2 2016 - REPORTED

FINANCIAL DISCUSSION

Net sales

Nokia net sales increased 91% year-on-year, compared to Nokia standalone net sales, and increased 2% sequentially. On a constant currency basis, Nokia net sales would have increased 93% year-on-year, compared to Nokia standalone net sales, and 2% sequentially.

Year-on-year discussion

The year-on-year increase in Nokia net sales in the second quarter 2016, compared to Nokia standalone net sales, was primarily due to growth in Nokia's Networks business and Group Common and Other, primarily related to the acquisition of Alcatel-Lucent, partially offset by non-IFRS exclusions.

Sequential discussion

The sequential increase in Nokia net sales in the second quarter 2016 was primarily due to growth in Nokia's Networks business and Group Common and Other, as well as reduced negative impact related to purchase price allocation adjustment related to the reduced valuation of deferred revenue that existed on Alcatel-Lucent's balance sheet at the time of the acquisition.

Operating profit

Year-on-year discussion

In the second quarter 2016, Nokia generated an operating loss, compared to a Nokia standalone operating profit in the year-ago period. The change was primarily due to restructuring and associated charges and other net negative fluctuations in other income and expenses, higher R&D expenses and higher SG&A expenses, partially offset by higher gross profit, all of which related primarily to the acquisition of Alcatel-Lucent.

The increase in gross profit was primarily due to Nokia's Networks business and, to a lesser extent, Group Common and Other, partially offset by non-IFRS exclusions related to deferred revenue and to a lesser extent, the absence of a benefit recorded in the year-ago quarter, which related to a correction of items previously reported as cost of sales and reductions to accounts receivable. In Q2 2016, gross profit was adversely affected by a customer in Latin America undergoing judicial recovery, as revenue was deferred while the related costs of sale were expensed as incurred.

The increase in R&D expenses was primarily due to Nokia's Networks business, non-IFRS exclusions related to amortization of intangible assets and, to a lesser extent, Group Common and Other.

The increase in SG&A expenses was primarily due to Nokia's Networks business, non-IFRS exclusions related to amortization of intangible assets, as well as transaction and integration related costs and, to a lesser extent, Group Common and Other and Nokia Technologies.

Nokia's other income and expenses was an expense of EUR 643 million in the second quarter 2016, compared to an income of EUR 114 million in the year-ago period. The change was primarily related to non-IFRS exclusions attributable to higher restructuring and associated charges and, to a lesser extent, the absence of realized gains and losses related to certain of Nokia's investments made through its venture funds. In Q2 2016, other income and expenses were adversely affected by a customer in Latin America undergoing judicial recovery, as certain provisions were recorded due to the risk of asset impairment.

Sequential discussion

Nokia operating profit decreased primarily due to restructuring and associated charges, partially offset by higher gross profit and, to a lesser extent, lower SG&A and R&D expenses.

The increase in gross profit was primarily due to lower non-IFRS exclusions related to the absence of an inventory revaluation as part of the Alcatel-Lucent purchase accounting, which negatively affected the first quarter 2016. In Q2 2016, gross profit was adversely affected by a customer in Latin America undergoing judicial recovery, as revenue was deferred while the related costs of sale were expensed as incurred.

The decrease in R&D expenses was primarily due to Nokia's Networks business.

The decrease in SG&A expenses was primarily due to lower non-IFRS exclusions related to transaction and integration related costs.

Nokia's other income and expenses was an expense of EUR 643 million in the second quarter 2016, compared to an expense of EUR 40 million in the first quarter 2016. The increase was primarily related to non-IFRS exclusions attributable to recognition of restructuring and associated charges related to the overall cost savings program. In Q2 2016, other income and expenses were adversely affected by a customer in Latin America undergoing judicial recovery, as certain provisions were recorded due to the risk of asset impairment.