Nokia Corporation Financial Report for Q3 2021

Nokia Corporation 
Interim report
28 October 2021 at 08:00 EEST

Nokia Corporation Financial Report for Q 3 2021

Strong profitability and cash generation

• Constant currency sales growth of 2% constrained by expected supply chain and Mobile Networks North America headwinds
• Strong sales growth in Network Infrastructure (+6% y-o-y constant currency) and Cloud & Network Services (+12%)
• Comparable gross margin of 40.8% (reported 40.7%), reflecting continued strong execution across the business
• Mobile Networks comparable gross margin of 37.8% (+220 bps y-o-y) showed better cost competitiveness
• Comparable operating margin of 11.7% (reported 9.3%), new operating model bringing strong financial accountability
• Comparable diluted EPS of EUR 0.08; reported diluted EPS of EUR 0.06
• Strong free cash flow generation of €0.7bn
• Launched new FP5 IP routing silicon which sets new industry benchmarks particularly on power efficiency
• Continuing to manage supply chain constraints but challenges are increasing into Q4
• Reiterating our full year guidance for net sales of €21.7bn – 22.7bn and comparable operating margin of 10-12% and now expect to be towards upper-end of the margin range considering continued strong performance

All financial metrics above refer to Q3 2021

This is a summary of the Nokia Corporation Financial Report for Q3 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 Q3 results will also be published on the website. Investors should not solely rely on summaries of Nokia's financial reports, but should also review the complete report with tables.

PEKKA LUNDMARK, PRESIDENT AND CEO, ON Q 3 2021 RESULTS

We delivered another great quarter driven by our increased investments in technology leadership and strong market demand. The highlight of the quarter was the launch of our next generation FP5 IP routing silicon – delivering up to three times more capacity while reducing power consumption by up to 75% per bit compared to previous generation. This will help reduce the carbon footprint of both Nokia and our customers, while also helping customers to manage their operating expenses.

The third quarter saw us achieve 2% constant currency net sales growth despite the impact of earlier communicated headwinds in North America for Mobile Networks and global supply chain constraints. These headwinds were offset by strong growth in Network Infrastructure against a tough year-on-year comparison and by Cloud and Network Services achieving double-digit growth. Our comparable operating margin for the quarter was 11.7%, which is a further testament to the accountability and financial discipline that our new operating model is driving through the organization.

We now have over 380 private wireless customers and the business continues to grow strongly. We are further increasing our investment to ensure we maintain the lead we have built with the industry’s most complete offering.

Overall, I am pleased with our strong financial performance in 2021 so far. We continue to expect seasonality to be less pronounced this year than previously and are reiterating our full year 2021 outlook. Considering our continued strength, we now expect to be towards the upper-end of our comparable operating margin range. As we look ahead, we believe we are well positioned to capitalize on strong demand in our end markets through strengthened technology leadership and improved cost competitiveness. However, the uncertainty around the global semiconductor market limits our visibility into Q4 and 2022. We are working closely not only with our suppliers to ensure component availability but also with our customers to ensure we can meet their needs and mitigate the unprecedented component cost inflation our industry faces. Coupled with the one-offs we’ve benefited from this year, this may limit our margin expansion potential in 2022.

FINANCIAL RESULTS

EUR million (except for EPS in EUR)	Q3'21	Q3'20	YoY change	Constant currency YoY change	Q1–Q3'21	Q1–Q3'20	YoY change	Constant currency YoY change
Reported results
Net sales	5 399	5 294	2%	2%	15 788	15 299	3%	6%
Gross margin %1	40.7%	37.1%	360bps		39.9%	36.9%	300bps
Research and development expenses1	(1 036)	(923)	12%		(3 096)	(2 942)	5%
Selling, general and administrative expenses1	(674)	(631)	7%		(2 034)	(2 121)	(4)%
Operating profit	502	350	43%		1 418	444	219%
Operating margin %	9.3%	6.6%	270bps		9.0%	2.9%	610bps
Profit for the period	351	197	78%		965	180	436%
EPS, diluted	0.06	0.03	100%		0.17	0.03	467%
Net cash and current financial investments	4 300	1 869	130%		4 300	1 869	130%
Comparable results
Net sales	5 399	5 294	2%	2%	15 788	15 301	3%	6%
Gross margin %	40.8%	37.4%	340bps		40.5%	37.8%	270bps
Research and development expenses	(1 007)	(880)	14%		(2 992)	(2 808)	7%
Selling, general and administrative expenses	(583)	(558)	4%		(1 719)	(1 820)	(6)%
Operating profit	633	486	30%		1 867	1 025	82%
Operating margin %	11.7%	9.2%	250bps		11.8%	6.7%	510bps
Profit for the period	463	305	52%		1 377	653	111%
EPS, diluted	0.08	0.05	60%		0.24	0.11	118%
ROIC2	20.2%	11.6%	855bps
1 In Q4 2020, Nokia reclassified certain items of income and expenses from other operating income and expenses to the functions. The comparative reported results for Q3’20 and Q1–Q3'20 have been recast accordingly. Refer to Note 1, Basis of preparation, in the Financial statement information section included in Nokia Corporation Financial Report for Q3 2021 for details. 2 Comparable ROIC = Comparable operating profit after tax, last four quarters / invested capital, average of last five quarters’ ending balances. Refer to Note 10, Performance measures, in the Financial statement information section included in Nokia Corporation Financial Report for Q3 2021 for details.

Reconciliation of reported operating profit to comparable operating profit
EUR million	Q3'21	Q3'20	YoY change	Q1–Q3'21	Q1–Q3'20	YoY change
Reported operating profit	502	350	43%	1 418	444	219%
Amortization of acquired intangible assets	99	101		293	308
Restructuring and associated charges	34	120		211	337
Impairment of assets, net of impairment reversals	(1)	5		32	25
Settlement of legal disputes	0	0		(80)	0
Gain on defined benefit plan amendment	0	(90)		0	(90)
Other, net	(1)	0		(7)	1
Comparable operating profit	633	486	30%	1 867	1 025	82%

OUTLOOK

	Full year 2021	Full year 2023
Net sales1	EUR 21.7 billion to EUR 22.7 billion	Grow faster than the market
Comparable operating margin2	10 to 12%	10 to 13%
Free cash flow3	Clearly positive	Clearly positive
Comparable ROIC2,4	17 to 21%	15 to 20%

¹ Assuming actual currency rates until Sept 2021 and end of Sept EUR/USD rate of 1.16 continues in the remainder of 2021 (adjusted from actual until June and EUR/USD rate of 1.19 in the remainder of 2021).
² Comparable measures exclude intangible asset amortization and other purchase price fair value adjustments, goodwill impairments, restructuring related charges and certain other items affecting comparability. Refer to Note 10, Performance measures, in the Financial statement information section included in Nokia Corporation Financial Report for Q3 2021 for details.
³ Free cash flow = net cash from/(used in) operating activities - capital expenditures + proceeds from sale of property, plant and equipment and intangible assets – purchase of non-current financial investments + proceeds from sale of non-current financial investments.
⁴ Comparable ROIC = comparable operating profit after tax, last four quarters / invested capital, average of last five quarters’ ending balances. Refer to Note 10, Performance measures, in the Financial statement information section included in Nokia Corporation Financial Report for Q3 2021 for details.

OUTLOOK ASSUMPTIONS

• Nokia’s outlook assumptions for the comparable operating margin of each business group in 2021 and 2023 are provided below:
  
  

	Full year 2021	Full year 2023
Mobile Networks	4 to 7%	5 to 8%
Network Infrastructure	8 to 11%	9 to 12%
Cloud and Network Services	3 to 6%	8 to 11%
Nokia Technologies	>75%	>75%

• We maintain our expectation for Nokia Technologies to deliver a slight improvement in comparable operating profit in full year 2021, relative to full year 2020, and stable performance over the longer-term;
• Group Common and Other primarily consists of support function costs. We expect the net negative impact of Group Common and Other to be between EUR 150 and 200 million in 2021 and approximately EUR 200 million over the longer-term. The update to our 2021 expectation largely reflects the year-to-date impact from Nokia’s venture fund investments (update);
• In full year 2021, Nokia expects the free cash flow performance of Nokia Technologies to be approximately EUR 600 million lower than its operating profit, primarily due to prepayments we received from certain licensees in previous years;
• Comparable financial income and expenses are expected to be an expense of approximately EUR 200 million in full year 2021 and EUR 250 million over the longer-term;
• Comparable income tax expenses are expected to be approximately EUR 450 million in full year 2021 and over the longer-term, subject to regional profit mix, net sales subject to withholding taxes and the timing of patent licensing cash flow. Over the longer-term, there is some uncertainty in forecasting income tax expenses, as they are also subject to changes in tax legislation, including potential tax reform in the U.S. and the OECD Pillar initiatives (update);
• Cash outflows related to income taxes are expected to be approximately EUR 350 million in full year 2021 and over the longer-term until our US or Finnish deferred tax assets are fully utilized, subject to regional profit mix, net sales subject to withholding taxes and the timing of patent licensing cash flow. Over the longer-term, there is some uncertainty in forecasting cash taxes, as they are also subject to changes in tax legislation, including potential tax reform in the U.S. and the OECD Pillar initiatives (update);
• Capital expenditures are expected to be approximately EUR 600 million over the longer-term; 2021 slightly below that level and with some variation in future years around that level (update); and
• Rule of thumb related to currency fluctuations: Assuming our current mix of net sales and total costs (refer to Note 1, Basis of Preparation, in the Financial statement information section included in Nokia Corporation Financial Report for Q3 2021 for details), we expect that a 10% increase in the EUR/USD exchange rate would have an impact of approximately negative 4 to 5% on net sales and an approximately neutral impact on operating profit.

RISK FACTORS

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

• Competitive intensity, which is particularly impacting Mobile Networks and is expected to continue at a high level in full year 2021, as some competitors seek to take share in the early stages of 5G;
• Our ability to accelerate our product roadmaps and cost competitiveness through additional 5G investments in full year 2021, thereby enabling us to drive product cost reductions and maintain the necessary scale to be competitive;
• Some customers are reassessing their vendors in light of security concerns, creating near-term pressure to invest in order to secure long-term benefits;
• Developments in North America following the conclusion of the C-band auction, including the potential for temporary capital expenditure constraints or the acceleration of 5G deployments;
• The scope and duration of the COVID-19 impact, particularly in certain countries, including India, where the pandemic has worsened, and the pace and shape of the economic recovery following the pandemic;
• The disturbance in the global supply chain;
• Accelerating inflation;
• Other macroeconomic, industry and competitive dynamics;
• Our ability to procure certain standard components and the costs thereof, such as semiconductors;
• The timing of completions and acceptances of certain projects;
• Our product and regional mix;
• The timing and value of new and existing patent licensing agreements with smartphone vendors, automotive companies, consumer electronics companies and other licensees;
• Results in brand and technology licensing; costs to protect and enforce our intellectual property rights; and the regulatory landscape for patent licensing;
  
  

as well as the risk factors specified under Forward-looking Statements of this release, and our 2020 annual report on Form 20-F published on 4 March 2021 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, product launches, growth management and operational key performance indicators; B) expectations, plans or benefits related to future performance of our businesses (including the expected impact, timing and duration of the impact of COVID-19 on our businesses, our supply chain and our customers’ businesses) and any future dividends; C) expectations and targets regarding financial performance, cash generation, results, the timing of receivables, operating expenses, taxes, currency exchange rates, hedging, cost savings and inflation, product cost reductions and competitiveness, as well as results of operations including targeted synergies, better commercial management and those results related to market share, prices, net sales, income and margins; D) ability to execute, expectations, plans or benefits related to changes in organizational and operational structure and cash or cost savings arrangements; and E) any statements preceded by or including "continue", “believe”, “commit”, “estimate”, “expect”, “aim”, “influence”, "will” 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 video webcast will begin on 28 October 2021 at 11.30 a.m. Finnish time (EEST). A link to the webcast will be available at www.nokia.com/financials. Media representatives can follow the presentation via the link, or alternatively call [phone].

About Nokia

At Nokia, we create technology that helps the world act together.

As a trusted partner for critical networks, we are committed to innovation and technology leadership across mobile, fixed and cloud networks. We create value with intellectual property and long-term research, led by the award-winning Nokia Bell Labs.

Adhering to the highest standards of integrity and security, we help build the capabilities needed for a more productive, sustainable and inclusive world.

Inquiries:

Nokia
Communications
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Katja Antila, Head of Media Relations

Nokia
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• Nokia_Results_2021_Q3