NOKIA CORP annual report, Q4 FY2020

Business context and reporting period

Nokia Corporation’s Form 20-F, filed March 4, 2021, reports on the fiscal year ended December 31, 2020, with comparisons to 2019 and 2018. The figures below are in euros; financial statements are prepared under IFRS. This is an annual filing, not a standalone fourth-quarter report.

Nokia supplies mobile and fixed network equipment, software and services, and licenses intellectual property. For 2020, it reported three segments: Networks, Nokia Software and Nokia Technologies, with Group Common and Other also disclosed. A new four-business-group operating model took effect January 1, 2021.

Financial and operating results

Operating performance improved despite lower sales. Networks revenue fell 7% to €16.852bn, principally reflecting lower Mobile Access sales; Networks operating margin rose to 5.5% from 3.7%. Nokia Software revenue decreased 4% to €2.656bn and operating profit fell 14% to €507m. Nokia Technologies revenue decreased 6% to €1.402bn and operating profit fell 6% to €1.164bn. Enterprise customer sales rose 11% to €1.571bn.

Cash and current financial investments were €8.061bn at year-end, against €5.576bn of short- and long-term interest-bearing liabilities, producing reported net cash of €2.485bn. Capital expenditure was €479m. The €1.5bn revolving credit facility was undrawn and had no financial covenants. The Board proposed no dividend for 2020.

Material changes versus the prior period

• Revenue declined 6%, led by lower Networks sales; the company cited reduced network deployment and planning services and legacy radio technologies within Mobile Access.
• Gross and operating margins improved, supported by regional sales mix, product quality and cost competitiveness efforts, and improved Networks performance.
• Operating profit increased, but a €2.918bn derecognition of Finnish deferred tax assets drove a €3.256bn income tax expense and a €2.513bn continuing-operations loss. Nokia said the tax assets were not lost, could be used in future taxation, and the accounting derecognition was not expected to affect Group cash taxes.
• Operating cash flow strengthened to €1.759bn, while year-end net cash increased by €755m. Cash included proceeds from new borrowings.
• The Networks segment’s operating profit improved to €935m from €665m; Nokia Software and Nokia Technologies reported lower operating profit year over year.

Outlook, commentary, risks and unusual items

• Management said 2021 would be challenging, with meaningful headwinds primarily from market-share loss and price erosion in North America. The filing provides no clear numerical 2021 revenue, margin or cash-flow guidance.
• Nokia began a strategic review and implemented a new operating model in 2021. Its priorities include technology leadership, cloud-native software and services, and long-term research and patents. Detailed business-group strategies were scheduled for Capital Markets Day on March 18, 2021.
• The company reported achieving its €500m recurring cost-savings target for 2020, alongside approximately €350m in temporary savings, including pandemic-related lower travel and personnel costs and lower variable compensation.
• COVID-19 caused temporary factory closures, supply-chain constraints and lower travel; Nokia said some affected sales were expected to shift to later periods. The pandemic’s duration and economic effects remained uncertain.
• A €200m non-cash goodwill impairment was recorded in Fixed Networks. The filing notes that reasonably possible changes to key valuation assumptions could cause further impairment there.
• In February 2021, an emerging-market customer began debt-restructuring discussions to avoid insolvency. Nokia recognized a €58m increase in expected credit losses and €34m of adjustments to sales, cost of sales and other operating expenses.
• Material exposures include competitive pricing and customer concentration, 5G execution and market-share risks, intellectual-property licensing and litigation, tax disputes, currency and credit risks, and supply-chain, cybersecurity and regulatory risks. Disclosed legal matters include approximately 300 asbestos-related cases, a securities class action, and patent disputes involving Daimler and Lenovo. Nokia said it did not expect currently known legal proceedings to have a material adverse effect on financial position, while noting outcomes are inherently uncertain.

Investor facts to verify

• Review the tax note for the €2.918bn Finnish deferred-tax-asset derecognition, its assumptions and the conditions under which assets might be recognized again.
• Check subsequent reporting for the emerging-market customer’s restructuring, related receivable and loan recoveries, and any additional credit-loss charges.
• Track North American 5G market share, price erosion, Mobile Networks competitiveness and the execution of the new operating model.
• Reconcile cash generation and debt maturities, including the €350m note redemption in February 2021 and the effect of borrowing proceeds on net cash.
• Assess the Fixed Networks goodwill impairment assumptions and any further impairment indicators.
• Monitor the Board’s dividend position, the strategic review’s detailed plans, and any updates to numerical guidance.