Nokia Corporation — 2019 Form 20-F summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Financial statements are prepared under IFRS. Unless stated otherwise, amounts are in euros.
Business context and financial performance
Nokia sells network infrastructure, software, services and intellectual-property licenses. Its reporting segments are Networks, Nokia Software and Nokia Technologies. Commercial 5G deployments began scaling in 2019; management said early-stage 5G product costs and access-business execution weighed on results.
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | €23.315bn (+3%) | €22.563bn |
| Gross profit / margin | €8.326bn / 35.7% | €8.446bn / 37.4% |
| Operating profit (loss) / margin | €485m / 2.1% | (€59m) / (0.3%) |
| Profit (loss), continuing operations | €18m | (€549m) |
| Profit (loss) attributable to parent, continuing operations | €14m; diluted EPS €0.00 | (€554m); diluted EPS (€0.10) |
| Profit (loss) for year, including discontinued operations | €11m | (€335m) |
| Cash from operating activities | €390m | €360m |
| Capital expenditure | €690m | €672m |
| Total cash and current financial investments | €6.007bn | €6.873bn |
| Net cash and current financial investments | €1.730bn | €3.053bn |
Operating cash flow was constrained by €1.788bn absorbed by net working capital, including a significant decline in liabilities, partly offset by lower inventory. Investing activities used €167m net and financing activities used €479m; cash and cash equivalents fell €351m to €5.910bn. Management reported a €1.4bn improvement in net cash position in the fourth quarter. The company also had an undrawn €1.5bn revolving credit facility. Year-end interest-bearing liabilities were €4.277bn; IFRS 16 lease liabilities were an additional €1.030bn.
Segments and material changes
- Networks: Sales €18.209bn (+5%); operating profit €665m versus €773m. Operating margin fell to 3.7% from 4.4%, principally as Mobile Access margins were pressured by high early 5G product costs and deployment services. IP Routing sales rose 15%; Fixed Access sales fell 5%.
- Nokia Software: Sales €2.767bn (+2%); operating profit rose 31% to €589m and margin increased to 21.3% from 16.6%.
- Nokia Technologies: Sales €1.487bn (−1%); operating profit increased 3% to €1.239bn. Revenue was from patent and brand licensing.
- Group gross margin declined despite higher sales. Lower R&D and selling, general and administrative expenses, and fewer product-portfolio integration costs, helped move operating results back to profit. Restructuring and associated charges in the segment reconciliation were €502m; the filing separately cites approximately €450m of charges related to current and past cost-saving programs.
- The reporting structure changed effective January 1, 2019; comparative segment information was recast. IFRS 16 was adopted using a cumulative catch-up method, so 2018 comparatives were not restated. This affected lease assets, liabilities, expenses and cash-flow classification.
- Discontinued operations, principally legacy HERE and Devices & Services tax matters, recorded a €7m loss in 2019 versus €214m profit in 2018. The 2018 result largely reflected tax dispute resolution and releases of uncertain tax positions.
Outlook, risks and other notable items
- Management targeted €500m of net cost-saving benefits by the end of 2020 compared with 2018, reduced from a previous €700m expectation; approximately €200m had been realized by the end of 2019. Management expected the remaining savings in 2020.
- Management expected Mobile Access profitability to improve gradually during 2020 and said it was taking steps to reduce 5G costs, including rolling out its ReefShark system-on-chip portfolio, improving deal discipline and managing services for margin and cash. It aimed to stabilize 4G+5G market share at approximately 27% excluding China and expressed confidence in positioning for a stronger 2021. These are forward-looking statements, not guarantees.
- Nokia ended 2019 with 62 commercial 5G deals and 18 live networks. Management described Nokia Enterprise, IP Routing, Nokia Software and Nokia Technologies as areas of strength, offset by Mobile Access and cash-generation challenges.
- The Board proposed no dividend for 2019 and had stopped the remaining 2018 quarterly installments. It said distributions would resume after net cash improved to approximately €2bn. The 2019 proposal was to pay no dividend and seek no dividend authorization.
- Principal risks include intense competition and price erosion, execution and cost competitiveness in 5G, customer concentration and large-contract timing, working-capital and customer-credit exposure, patent licensing disputes and regulatory change, foreign-exchange movements, tax uncertainty, cybersecurity and supply-chain disruption. Nokia also disclosed ongoing tax investigations in multiple jurisdictions and litigation, including patent disputes and a U.S. securities class action; outcomes are uncertain.
- Subsequent events: Nokia drew a €500m European Investment Bank loan on February 24, 2020. On March 2, 2020, it appointed Pekka Lundmark as CEO effective September 1, 2020; Rajeev Suri was to step down August 31, 2020.
- The auditor gave unqualified opinions on the IFRS financial statements and internal control over financial reporting. Management and the auditor concluded that internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether 5G product costs and access-business execution improve margins as management expected, and whether Nokia maintains market share while improving deal economics.
- Whether the €500m savings target is achieved, alongside restructuring cash outflows and the planned increase in 5G investment.
- Whether working-capital performance converts reported profit into stronger operating cash flow; review the impact of customer payment terms, receivables financing and inventory.
- How the €1.730bn reported net cash position should be assessed alongside €1.030bn of lease liabilities, customer financing commitments and guarantees.
- The basis and sustainability of licensing revenue, deferred licensing revenue, and any material outcomes from patent litigation, tax investigations or other contingencies.
- Future dividend decisions and the conditions for resuming distributions; the filing proposes no 2019 dividend.