Nokia Corporation — FY2017 Form 20-F
Reporting period: Year ended December 31, 2017. Nokia, a Finland-based global network infrastructure, software, services and intellectual-property licensing company, reported under IFRS. Unless indicated otherwise, figures below are for continuing operations and in euros.
Key financial and operating metrics
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Net sales | EUR 23.147bn | EUR 23.641bn | Down 2% |
| Gross profit / margin | EUR 9.139bn / 39.5% | EUR 8.524bn / 36.1% | Margin up 343 basis points |
| Operating profit (loss) / margin | EUR 16m / 0.1% | EUR (1.100)bn / (4.7)% | Near break-even; results include substantial unallocated costs |
| Loss for the year | EUR (1.437)bn | EUR (912)m | Widened, mainly reflecting higher tax expense and net financial expense |
| Loss attributable to parent shareholders; diluted EPS | EUR (1.494)bn; EUR (0.26) | EUR (766)m; EUR (0.13) | Loss per share increased |
| Net cash from operating activities | EUR 1.811bn | EUR (1.454)bn | Improved by EUR 3.265bn |
| Cash and other liquid assets; net cash | EUR 8.280bn; EUR 4.514bn | EUR 9.327bn; EUR 5.299bn | Both declined year over year |
| Interest-bearing liabilities | EUR 3.766bn | EUR 4.027bn | Lower by EUR 261m |
| Capital expenditure | EUR 601m | EUR 477m | Up EUR 124m |
Net cash is defined by Nokia as cash and other liquid assets less interest-bearing liabilities. At year-end, cash and cash equivalents alone were EUR 7.369bn; Nokia also had an undrawn EUR 1.579bn revolving credit facility, extended to June 2020. Total assets were EUR 41.024bn and total equity EUR 16.218bn.
Business performance and changes versus prior year
- Networks: Net sales fell 6% to EUR 20.523bn; operating profit was EUR 1.711bn and margin 8.3%, versus 8.9% in 2016. Sales declined across Ultra Broadband Networks (down 8%), Global Services (down 4%) and IP Networks and Applications (down 5%). Nokia cited challenging network infrastructure markets, customer-specific declines and weaker IP/optical demand.
- Nokia Technologies: Net sales rose 57% to EUR 1.654bn and operating profit rose 94% to EUR 1.124bn. Patent and brand licensing accounted for EUR 1.602bn of sales. About EUR 300m of 2017 licensing sales were non-recurring catch-up revenue relating to prior years.
- Margins and costs: Gross margin improved partly because 2016 included EUR 840m of working-capital-related purchase-price allocation adjustments, compared with EUR 55m in 2017. Networks operating margin nevertheless declined. Reported group operating profit was reduced by EUR 2.571bn of unallocated items, including acquired-asset amortization, restructuring, product portfolio costs and impairment.
- Cash flow: The operating cash flow improvement reflected a EUR 597m release of net working capital, compared with EUR 2.207bn absorbed in 2016. The company reported an upfront cash payment of about EUR 1.7bn, partly recognized as 2017 revenue. Shareholder distributions included EUR 970m of dividends and EUR 785m of share repurchases.
Outlook, management commentary, risks and unusual items
- Management expected the Networks market to decline again in 2018, but at a slightly slower rate than in 2017. It expected market conditions to improve materially in 2019 and 2020 as 5G rollouts expanded. The filing does not provide a clear numerical forecast for 2018 group revenue or earnings.
- Nokia said it was on track to achieve EUR 1.2bn of recurring annual structural cost savings in full-year 2018. It recorded about EUR 550m of restructuring and associated charges in 2017; cumulative charges were about EUR 1.3bn, with total charges expected to reach EUR 1.9bn. Expected total related cash outflows were about EUR 2.25bn.
- The Board proposed a 2017 dividend of EUR 0.19 per share, up from EUR 0.17 for 2016, subject to shareholder approval. Management stated a long-term aim to distribute approximately 40%–70% of earnings per share, excluding unallocated items, while considering cash and expected cash generation.
- Notable expenses included a EUR 777m deferred tax charge from remeasuring U.S. deferred tax balances following U.S. tax reform; EUR 245m of tax expense related to integration of former Nokia and Alcatel Lucent operating models; and EUR 220m of one-time interest charges related to debt tender offers. These contributed to a EUR 927m income tax expense and EUR 537m net financial expense.
- Nokia recorded a EUR 141m non-cash goodwill impairment, reducing Digital Health goodwill to zero, and announced a strategic review of that business in February 2018. It also stopped development of its OZO virtual reality camera and related business.
- Liquidity and execution risks include market cyclicality, intense competition and pricing pressure, reliance on a limited number of large customers and contracts, foreign-exchange exposure, integration and savings delivery, patent licensing variability, tax disputes, customer financing, and cybersecurity and supply-chain risks. Customer financing outstanding and committed totaled EUR 655m; performance guarantees included EUR 1.678bn issued by financial institutions and EUR 1.114bn of direct corporate guarantees.
- The filing identifies ongoing legal and tax matters, including patent and commercial disputes; Nokia stated that it could not predict litigation outcomes with certainty. The Apple patent litigation was settled in May 2017 under a patent license and business collaboration agreement, including an upfront cash payment and further revenue during the agreement term.
- The auditor issued an unqualified opinion on the IFRS financial statements and concluded that internal control over financial reporting was effective at December 31, 2017. Nokia reported that two material weaknesses identified in Alcatel Lucent controls in 2016—U.S. income tax accounting and China revenue recognition—were remediated during 2017.
Important facts for investors to verify
- How much of the improved gross margin and licensing performance is repeatable, given the EUR 300m of non-recurring catch-up licensing revenue and prior-year purchase-price adjustments?
- Whether Nokia achieved the EUR 1.2bn recurring cost-savings target in 2018, and how actual restructuring cash outflows compared with the stated estimates.
- Whether operating cash flow remains positive without the working-capital release and upfront customer payment reported in 2017.
- How Networks market conditions, 5G deployment timing and segment margins developed after the filing’s 2018–2020 outlook.
- Whether the proposed EUR 0.19 dividend was approved and paid, and how later cash generation and capital allocation affected net cash and debt.
- Developments in Digital Health, tax investigations and other contingencies, customer financing exposure, and Nokia Shanghai Bell’s conditional ownership-transfer obligation.