Nokia Strong margin expansion, primarily driven by Mobile Access
Clear roadmap progress, particularly related to our 5G mid-band portfolio
Confidence in resilient customer base and strong liquidity position
11% decrease in net sales, largely driven by COVID-19 and China
Strong growth in Nokia Enterprise
Positive operating profit, on a reported basis, in both Q2 and half the year 2020
Within previously provided Outlook ranges for full-year 2020, adjusted the non-IFRS mid-points for EPS to EUR 0.25 and operating margin to 9.5%
Delivered strong free cash flow year-to-date and raised 2020 recurring free cash flow guidance to be clearly positive
RAJEEV SURI, PRESIDENT AND CEO, ON Q2 2020 RESULTS
Nokia delivered a strong improvement in Q2, with better-than-expected profitability, significant improvement in cash generation, clear indications of a return to strength in mobile radio, and a year-on-year increase in earnings-per-share, despite the challenges of COVID-19.
These results show that our execution has improved as planned and that we are well-positioned to end the year with a significantly stronger financial position. As a result, we are adjusting upward both the midpoint of our full-year 2020 non-IFRS EPS and operating margin guidance within our previously disclosed outlook ranges.
Profitability gains in the quarter were supported by a 4.5 percentage point year-on-year improvement in Networks gross margin, building on a 3.5 percentage point gain in the first quarter, and driving Nokia non-IFRS gross margin to 39.6%. Nokia Enterprise also grew year-on-year constant currency sales by 18% compared to one year ago and expanded margins.
Nokia-level revenue was down in the quarter, with the majority of that the result of COVID-19 as well as a sharp decline in China based on the prudent approach we have taken in that market. We also saw a reduction driven by our proactive steps to reduce the volume of the low margin services business. We expect that the majority of sales missed in the quarter due to COVID-19 will shift to future periods.
At the start of the year, we said we would have a sharp focus on our Mobile Access business and improving cash generation. In both areas, we continue to make good progress.
Free cash flow in the quarter was positive €265 million, versus negative €1.0 billion one year ago, and Nokia ended Q2 with €1.6 billion of net cash, and €7.5 billion in total cash. Given our strong first-half improvement, we now expect free cash flow for full-year 2020 to be “clearly positive” compared to our earlier guidance of “positive”.
In Mobile Access, we saw healthy improvements in our radio portfolio, where roadmaps are strengthening, costs are coming down, and product performance is rising.
We have a particularly powerful portfolio in mid-band mobile radio, with proven products deployed with 55 customers, and the first live C-Band network demonstrated in the U.S. during the quarter.
Pleasingly, our “5G Powered by ReefShark” shipments continue to increase and we believe we remain on track to reach 35% or better by year-end. And, we now have 83 5G deals.
Our continued momentum was demonstrated by the progress we announced after the quarter ended. These included the availability of a software upgrade that allows millions of Nokia 4G/LTE radios deployed to more than 350 customers to be migrated seamlessly to 5G; and plans to accelerate leadership in Open RAN.
Nokia is the only global supplier fully committed to O-RAN with commercial 5G Cloud-RAN networks. We also announced an expansion of our IP routing business into the data centre market and highlighted that Apple was deploying our technology at its data centres.
This is my last quarterly announcement as CEO of Nokia and I want to close with a note of thanks: thanks to our shareholders, thanks to our customers, thanks to our many other stakeholders, and a particular thanks to the great employees of Nokia.
You have constantly made me proud and I expect that you will continue to do so in the many years to come. Thank you all. It has been a pleasure and an honour.
NOKIA FINANCIAL RESULTS
- Both non-IFRS and reported net sales in Q2 2020 were EUR 5.1bn, compared to EUR 5.7bn in Q2 2019. On a constant currency basis, both non-IFRS and reported net sales decreased by 11%. Excluding one-time licensing net sales in Q2 2020 and Q2 2019, net sales decreased 10% on both a non-IFRS and reported basis.
- Q2 2020 net sales were impacted by COVID-19 and unique dynamics in China. In Q2 2020, we estimate that COVID-19 had an approximately EUR 300 million negative net impact on our net sales; with the majority of these net sales expected to be shifted to future periods, rather than being lost.
- In Q2 2020, Nokia’s gross and operating margin both expanded year-on-year, primarily driven by broad-based strength in Networks, particularly in Mobile Access, with IP Routing and Fixed Access also contributing positively.
- In addition, reported operating margin benefitted significantly from lower amortization of acquired intangible assets, as well as lower restructuring and associated charges. Non-IFRS gross margin was 39.6% (reported 39.4%) and non-IFRS operating margin was 8.3% (reported 3.3%).
- Non-IFRS diluted EPS in Q2 2020 was EUR 0.06, compared to EUR 0.05 in Q2 2019, primarily driven by higher gross profit in Mobile Access within Networks, continued progress related to our cost savings program and a net positive fluctuation in financial income and expenses.
- This was partially offset by higher investments in 5G R&D to accelerate our product roadmaps and cost competitiveness in Mobile Access and a net negative fluctuation in Nokia’s venture fund investments.
- Reported diluted EPS in the first six months of 2020 was EUR 0.00, compared to negative EUR 0.11 in the first six months of 2019.
- The change was primarily driven by lower amortization of acquired intangible assets, lower restructuring and associated charges, continued progress related to our cost savings program, a net positive fluctuation in financial income and expenses and higher gross profit, partially offset by higher investments in 5G R&D to accelerate our product roadmaps and cost competitiveness in Mobile Access and a net negative fluctuation in Nokia’s venture fund investments.
- Q2 2020 was the fourth quarter in a row of solid cash performance. Since establishing a program in 2019 to focus on free cash flow, we have made great progress driving sustainable operational improvements, particularly in networking capital management.
- During Q2 2020, net cash increased by approximately EUR 0.2 billion, resulting in an end-of-quarter net cash balance of approximately EUR 1.6 billion.
- During Q2 2020, total cash increased by approximately EUR 1.2 billion, primarily driven by the successful issuance of EUR 1.0 billion of debt, resulting in an end-of-quarter total cash balance of approximately EUR 7.5 billion.