Nokia Corporation Report for Q2 and Half Year 2024

Nokia Corporation
Half Year Report
18 July 2024 at 08:00 EEST

Nokia Corporation Report for Q2 and Half Year 2024

Full year outlook reiterated in challenging environment

• Q2 net sales declined 18% y-o-y in constant currency (-18% reported) primarily due to strong year-ago quarter in India.
• Submarine Networks treated as discontinued operation.
• Positively, order intake trends continued to improve, particularly in Network Infrastructure.
• Comparable gross margin in Q2 increased by 450bps y-o-y to 44.7% (reported increased 380bps to 43.3%), mainly driven by Mobile Networks, in part benefiting from the resolution of an outstanding contract negotiation.
• Q2 comparable operating margin decreased 190bps y-o-y to 9.5% (reported up 110bps to 9.7%), mainly due to low net sales coverage of operating expenses which more than offset the Mobile Networks contract resolution.
• Q2 comparable diluted EPS of EUR 0.06; reported diluted EPS of negative EUR 0.03. Q2 reported EPS impacted by non-cash impairment charge of EUR 514 million related to Submarine Networks, presented as discontinued operation.
• Q2 free cash flow of EUR 0.4bn, net cash balance EUR 5.5bn. Buyback program planned to be accelerated.
• Significant progress with gross cost savings program, with EUR 400 million run-rate of savings already actioned.
• Nokia's full year 2024 outlook is unchanged. Nokia currently expects comparable operating profit of between EUR 2.3 billion and 2.9 billion and free cash flow conversion from comparable operating profit of between 30% and 60%.

This is a summary of the Nokia Corporation Report for Q2 and Half Year 2024 published today. Nokia only publishes a summary of its financial reports in stock exchange releases. The summary focuses on Nokia Group's financial information as well as on Nokia's outlook. The detailed, segment-level discussion will be available in the complete financial report hosted at www.nokia.com/financials. A video interview summarizing the key points of our Q2 results will also be published on the website. Investors should not solely rely on summaries of Nokia's financial reports and should also review the complete reports with tables.

PEKKA LUNDMARK, PRESIDENT AND CEO, ON Q2 2024 RESULTS

I am pleased to confirm that the improving order intake momentum we’ve talked about for the past couple of quarters has continued in the second quarter across the group and most notably in Network Infrastructure. This trend means our backlog further expanded and we look forward to a meaningful improvement in net sales in the second half. Generally, the market remains uncertain, so we will continue to be agile and prudently manage our cost base as we navigate this environment.

In Q2, we announced two significant transactions in Network Infrastructure in support of our strategic pillar of actively managing our portfolio. On 27 June, we announced an agreement to sell our Submarine Networks business to the French State. We also announced our intention to acquire Infinera to increase the scale and profitability of our Optical Networks business. This will enable us to deliver faster innovation and expand our position both with webscale customers and regionally in North America. These transactions will focus and strengthen our Network Infrastructure business with its future built on three market-leading units in Fixed Networks, IP Networks and Optical Networks. We are investing in Network Infrastructure as we see a compelling opportunity in this business to drive mid-single digit net sales growth and improve our profitability to a mid-to-high teens operating margin over time.

Our financial performance in the second quarter continued to be impacted by the ongoing market weakness with net sales declining 18% year-on-year in constant currency. The most significant impact was the challenging year-ago comparison period which saw the peak of India's rapid 5G deployment with India accounting for three quarters of the decline. In the quarter there was a benefit of EUR 150 million to both net sales and operating profit in Mobile Networks related to a portion of our contract resolution with AT&T. Our comparable operating margin was 9.5% compared to 11.4% in the prior year. We have made significant progress on our cost savings program and have already actioned run-rate savings of EUR 400 million out of our targeted EUR 800 million to EUR 1.2 billion gross cost savings by 2026.

Q2 was another strong quarter for cash generation with free cash flow of EUR 394 million as our working capital position continues to normalize. Our improving cash generation means the board now intends to accelerate our on-going EUR 600 million buyback program with the view to completing it by the end of this year, compared to the previous end of 2025 target.

In Network Infrastructure we secured a number of important design wins in the quarter. We won several important fiber deals, including in the US, and received orders from a US distributor for both Fixed and IP products as we gear up to supply operators under the BEAD program. It is also notable that we returned to growth in North America which was one of the first markets where we saw the 2023 market slowdown. With the challenges of 2023 behind us, and more normalized customer inventory levels, we believe we can now look forward to a stronger second half and a return to growth, which we expect to continue into 2025.

In Mobile Networks the market dynamic remains challenging as operators continue to be cautious. However there has been significant customer tendering activity and we have won a number of deals this year. This has included winning new customers such as MEO in Portugal, and increasing our footprint with existing customers, demonstrating the strength of our product offering. We also concluded negotiations with AT&T related to our existing RAN contracts. This gives us clarity on the path forward and ensures that we maintain the value agreed in the contracts.

In Cloud and Network Services we are making good progress with winning deals and with our organic efforts to bring new API capabilities and orchestration automation to customers. In Q2 we signed Network as Code collaboration agreements bringing our ecosystem total to 16, which includes new agreements with operators such as Orange, Telefónica, and Turkcell along with ecosystem players Google and Infobip.

In Nokia Technologies we signed an agreement with a video streaming platform covering the use of Nokia’s multimedia technology. This is an early step in what can be a meaningful opportunity for Nokia in the future.

Looking forward, we believe the industry is stabilizing and given the order intake seen in recent quarters we expect a significant acceleration in net sales growth in the second half. While the dynamic is improving, the net sales recovery is happening somewhat later than we previously expected, impacting our business group net sales assumptions for 2024. Despite this, we remain solidly on track to achieve our full year outlook supported by our quick action on cost. We are currently tracking towards the mid-point or slightly below the mid-point of our comparable operating profit guidance of EUR 2.3 to 2.9 billion and towards the higher-end of our free cash flow conversion guidance of 30% to 60%.

FINANCIAL RESULTS

EUR million (except for EPS in EUR)	Q2'24	Q2'23	YoY change	Constant currency YoY change	Q1-Q2'24	Q1-Q2'23	YoY change	Constant currency YoY change
Reported results
Net sales	4 466	5 438	(18)%	(18)%	8 910	11 013	(19)%	(18)%
Gross margin %	43.3%	39.5%	380bps		46.5%	39.1%	740bps
Research and development expenses	(1 134)	(1 034)	10%		(2 259)	(2 130)	6%
Selling, general and administrative expenses	(715)	(690)	4%		(1 408)	(1 407)	0%
Operating profit	432	469	(8)%		836	890	(6)%
Operating margin %	9.7%	8.6%	110bps		9.4%	8.1%	130bps
Profit from continuing operations	370	287	29%		821	570	44%
Profit/(loss) from discontinued operations	(512)	2			(525)	8
Profit/(loss) for the period	(142)	289			296	578	(49)%
EPS for the period, diluted	(0.03)	0.05			0.05	0.10	(50)%
Net cash and interest-bearing financial investments	5 475	3 660	50%		5 475	3 660	50%
Comparable results
Net sales	4 466	5 438	(18)%	(18)%	8 910	11 013	(19)%	(18)%
Gross margin %	44.7%	40.2%	450bps		47.6%	39.6%	800bps
Research and development expenses	(1 064)	(1 015)	5%		(2 140)	(2 096)	2%
Selling, general and administrative expenses	(610)	(607)	0%		(1 194)	(1 239)	(4)%
Operating profit	423	619	(32)%		1 023	1 090	(6)%
Operating margin %	9.5%	11.4%	(190)bps		11.5%	9.9%	160bps
Profit for the period	328	409	(20)%		840	741	13%
EPS for the period, diluted	0.06	0.07	(14)%		0.15	0.13	15%
ROIC(1)	10.0%	13.8%	(380)bps		10.0%	13.8%	(380)bps

¹ Comparable ROIC = Comparable operating profit after tax, last four quarters / invested capital, average of last five quarters’ ending balances. Refer to the Performance measures section in Nokia Corporation Report for Q2 and Half Year 2024 for details.

Business group results	Network Infrastructure		Mobile Networks		Cloud and Network Services		Nokia Technologies		Group Common and Other
EUR million	Q2'24	Q2'23	Q2'24	Q2'23	Q2'24	Q2'23	Q2'24	Q2'23	Q2'24	Q2'23
Net sales	1 522	1 706	1 970	2 623	615	742	356	334	4	35
YoY change	(11)%		(25)%		(17)%		7%		(89)%
Constant currency YoY change	(11)%		(24)%		(16)%		5%		(89)%
Gross margin %	38.4%	41.1%	43.2%	33.4%	33.7%	36.5%	100.0%	100.0%
Operating profit/(loss)	97	252	171	206	(25)	16	258	236	(78)	(91)
Operating margin %	6.4%	14.8%	8.7%	7.9%	(4.1)%	2.2%	72.5%	70.7%

SHAREHOLDER DISTRIBUTION

Dividend

Under the authorization by the Annual General Meeting held on 3 April 2024, the Board of Directors may resolve on the distribution of an aggregate maximum of EUR 0.13 per share to be paid in respect of financial year 2023. The authorization will be used to distribute dividend and/or assets from the reserve for invested unrestricted equity in four installments during the authorization period, in connection with the quarterly results, unless the Board decides otherwise for a justified reason.

On 18 July 2024, the Board resolved to distribute a dividend of EUR 0.03 per share. The dividend record date is 23 July 2024 and the dividend will be paid on 1 August 2024. The actual dividend payment date outside Finland will be determined by the practices of the intermediary banks transferring the dividend payments.

Following this announced distribution, the Board’s remaining distribution authorization is a maximum of EUR 0.06 per share.

Share buyback program

In January 2024, Nokia’s Board of Directors initiated a share buyback program to repurchase shares to return up to EUR 600 million of cash to shareholders in tranches over a period of two years. The first EUR 300 million phase of the share buyback program started in March 2024. Under this phase, Nokia had by 30 June 2024 repurchased 29 507 303 of its own shares at an average price per share of approximately EUR 3.41.

On 27 June 2024, Nokia announced its intention to acquire Infinera in a transaction that values Infinera at US$1.7 billion equity value with up to 30% of the consideration to be paid in Nokia American depositary shares ("ADSs") depending on the elections of Infinera shareholders. Nokia’s Board of Directors is committed to repurchase additional shares on top of the on-going EUR 600 million program to offset the dilution from the transaction to Nokia shareholders. The Board intends to increase the scale of the buyback program once the result of the Infinera shareholder elections are known (between cash and Nokia ADSs). In the interim, Nokia’s Board of Directors intends to accelerate the timeframe for the existing EUR 600 million share buyback program with the aim of completing the full EUR 600 million by the end of this year instead of the initial two year timeframe.

OUTLOOK

	Full Year 2024
Comparable operating profit(1)	EUR 2.3 billion to EUR 2.9 billion
Free cash flow(1)	30% to 60% conversion from comparable operating profit

¹Please refer to Performance measures section in Nokia Corporation Report for Q2 and Half Year 2024 for a full explanation of how these terms are defined.

The outlook, long-term targets and all of the underlying outlook assumptions described below are forward-looking statements subject to a number of risks and uncertainties as described or referred to in the Risk Factors section later in this release. Along with Nokia's official outlook targets provided above, below are outlook assumptions by business group that support the group level outlook.

	Nokia business group assumptions (full year 2024)
	Net sales growth (constant currency)	Operating margin
Network Infrastructure	-2% to +3% (update)	11.5% to 14.5%
Mobile Networks	-19% to -14% (update)	4.0% to 7.0% (update)
Cloud and Network Services	-5% to +0% (update)	6.0% to 9.0%

Nokia provides the following approximate outlook assumptions for additional items concerning 2024:

	Full year 2024	Comment
Seasonality	H2 weighted, with strong Q4 (update)	Average sequential increase in Network Infrastructure, Mobile Networks and Cloud and Network Services net sales combined since 2016 has been 0% in Q3 and 20% in Q4. Nokia expects a somewhat greater than average sequential increase in Q3 2024 and significantly greater than average in Q4 2024 across these combined businesses. Nokia currently expects a largely stable operating margin in Q3 due to the contract resolution benefit seen in Q2 and then a more significant improvement in Q4.
Nokia Technologies operating profit	at least EUR 1.4 billion	Nokia expects cash generation in Nokia Technologies to be EUR 700 million below operating profit in 2024 due to prepayments received in 2023. From 2025 onwards Nokia expects greater alignment between cash generation and operating profit in Nokia Technologies.
Group Common and Other operating expenses	EUR 350 million	This includes central function costs which are expected to be largely stable at approximately EUR 200 million and an increase in investment in long-term research to approximately EUR 150 million. Group Common and Other will also account for any future revaluation impacts of venture fund investments with no assumption made on this so far.
Comparable financial income and expenses	Positive EUR 75 to EUR 125 million (update)	Reflecting improved cash generation in the first half of 2024 and interest rates remaining higher than previously expected (increasing interest income) we now expect an improved financial income and expense result.
Comparable income tax rate	~25%
Cash outflows related to income taxes	EUR 450 million
Capital Expenditures	EUR 550 million (update)

2026 TARGETS

Nokia's current targets for its existing perimeter of the business for 2026 are outlined below. This does not consider pending acquisitions. The update to the Network Infrastructure operating margin assumption is related to Submarine Networks now being treated as a discontinued operation. Nokia sees further opportunities to increase margins beyond 2026 and believes an operating margin of 14% remains achievable over the longer term.

Net sales	Grow faster than the market
Comparable operating margin(1)	≥ 13%
Free cash flow(1)	55% to 85% conversion from comparable operating profit

¹ Please refer to Performance measures section in Nokia Corporation Report for Q2 and Half Year 2024 for a full explanation of how these terms are defined.

The comparable operating margin target for Nokia group is built on the following assumptions by business group for 2026:

Network Infrastructure	13 - 16% operating margin (update)
Mobile Networks	6 - 9% operating margin
Cloud and Network Services	7 - 10% operating margin
Nokia Technologies	Operating profit more than EUR 1.1 billion
Group common and other	Approximately EUR 300 million of operating expenses

RISK FACTORS

Nokia and its businesses are exposed to a number of risks and uncertainties which include but are not limited to:

• Competitive intensity, which is expected to continue at a high level as some competitors seek to take share;
• Changes in customer network investments related to their ability to monetize the network;
• Our ability to ensure competitiveness of our product roadmaps and costs through additional R&D investments;
• Our ability to procure certain standard components and the costs thereof, such as semiconductors;
• Disturbance in the global supply chain;
• Impact of inflation, increased global macro-uncertainty, major currency fluctuations and higher interest rates;
• Potential economic impact and disruption of global pandemics;
• War or other geopolitical conflicts, disruptions and potential costs thereof;
• Other macroeconomic, industry and competitive developments;
• Timing and value of new, renewed and existing patent licensing agreements with licensees;
• Results in brand and technology licensing; costs to protect and enforce our intellectual property rights; on-going litigation with respect to licensing and regulatory landscape for patent licensing;
• The outcomes of on-going and potential disputes and litigation;
• Our ability to execute, complete and realize the expected benefits from our ongoing transactions;
• Timing of completions and acceptances of certain projects;
• Our product and regional mix;
• Uncertainty in forecasting income tax expenses and cash outflows, over the long-term, as they are also subject to possible changes due to business mix, the timing of patent licensing cash flow and changes in tax legislation, including potential tax reforms in various countries and OECD initiatives;
• Our ability to utilize our Finnish deferred tax assets and their recognition on our balance sheet;
• Our ability to meet our sustainability and other ESG targets, including our targets relating to greenhouse gas emissions;

as well the risk factors specified under Forward-looking statements of this release, and our 2023 annual report on Form 20-F published on 29 February 2024 under Operating and financial review and prospects-Risk factors.

FORWARD-LOOKING STATEMENTS

Certain statements herein that are not historical facts are forward-looking statements. These forward-looking statements reflect Nokia's current expectations and views of future developments and include statements regarding: A) expectations, plans, benefits or outlook related to our strategies, projects, programs, product launches, growth management, licenses, sustainability and other ESG targets, operational key performance indicators and decisions on market exits; B) expectations, plans or benefits related to future performance of our businesses (including the expected impact, timing and duration of potential global pandemics, geopolitical conflicts and the general or regional macroeconomic conditions on our businesses, our supply chain, the timing of market changes or turning points in demand and our customers’ businesses) and any future dividends and other distributions of profit; C) expectations and targets regarding financial performance and results of operations, including market share, prices, net sales, income, margins, cash flows, cost savings, the timing of receivables, operating expenses, provisions, impairments, taxes, currency exchange rates, hedging, investment funds, inflation, product cost reductions, competitiveness, revenue generation in any specific region, and licensing income and payments; D) ability to execute, expectations, plans or benefits related to our ongoing transactions and changes in organizational structure and operating model; E) impact on revenue with respect to litigation/renewal discussions; and F) any statements preceded by or including “continue”, “believe”, “commit”, “envisage”, ”estimate”, “expect”, “aim”, “will”, “target”, “likely”, “intend”, “may”, “could”, “would”, "see", "forecast", “plan” or similar expressions. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause our actual results to differ materially from such statements. These statements are based on management’s best assumptions and beliefs in light of the information currently available to them. These forward-looking statements are only predictions based upon our current expectations and views of future events and developments and are subject to risks and uncertainties that are difficult to predict because they relate to events and depend on circumstances that will occur in the future. Factors, including risks and uncertainties that could cause these differences, include those risks and uncertainties identified in the Risk Factors above.

ANALYST WEBCAST

• Nokia's webcast will begin on 18 July 2024 at 11.30 a.m. Finnish time (EEST). The webcast will last approximately 60 minutes.
• The webcast will be a presentation followed by a Q&A session. Presentation slides will be available for download at www.nokia.com/financials.
• A link to the webcast will be available at www.nokia.com/financials.
• Media representatives can listen in via the link, or alternatively call [phone].

FINANCIAL CALENDAR 2024

• Nokia plans to publish its third quarter and January-September 2024 results on 17 October 2024.

About Nokia

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As a B2B technology innovation leader, we are pioneering networks that sense, think and act by leveraging our work across mobile, fixed and cloud networks. In addition, we create value with intellectual property and long-term research, led by the award-winning Nokia Bell Labs.

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Inquiries:

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Maria Vaismaa, Global Head of External Communications

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