Nokia Siemens Networks Q1 2013 Press Release
Espoo, Finland – May 8, 2013
Solid operating profit, cash generation and financial position
Q1 2013 Financial Highlights:
- In the first quarter 2013, Nokia Siemens Networks delivered a solid operating margin before specific items* of 7.4%, due to strong execution of Nokia Siemens Networks’ focused strategy. Operating margin before specific items* was -4.4% in the first quarter 2012 and 15.0% in the seasonally strong fourth quarter 2012. This marks the fourth consecutive quarter of positive operating margin before specific items*.
- Gross margin before specific items* was 33.8% in the first quarter 2013, an improvement of 7.2 percentage points from the first quarter 2012 and a decline of 2.2 percentage points from the fourth quarter 2012. The year-on-year improvement was primarily driven by Nokia Siemens Networks’ transformation and restructuring program. The sequential decline was primarily due to seasonality and the absence of IPR income of approximately EUR 30 million that was recognized in the fourth quarter 2012.
- Operating expenses before specific items* in the first quarter 2013 were EUR 717 million, down from EUR 888 million in the first quarter 2012 and down from EUR 812 million in the fourth quarter 2012. On a year-on-year basis, the decline was primarily due to the successful execution of our transformation and restructuring program. On a sequential basis, the decline was primarily due to seasonality and lower incentive expenses.
- First quarter 2013 reported net sales of EUR 2 717 million declined 5.1% year-on-year. Excluding businesses divested and the exiting of certain customer contracts and countries, net sales were approximately flat year-on-year on a constant currency basis. Compared to the fourth quarter 2012, reported net sales declined 29.8%, primarily due to seasonality.
- Continued solid cash generation, with free cash flow of EUR 239 million in the first quarter 2013, compared to EUR 291 million in the first quarter 2012 and EUR 733 million in the fourth quarter 2012, further strengthening Nokia Siemens Networks’ financial position.
- In March 2013, Nokia Siemens Networks Finance B.V. issued EUR 800 million Senior Notes giving Nokia Siemens Networks a more solid long-term financial structure. Nokia Siemens Networks ended the first quarter 2013 with gross cash of EUR 2.8 billion and net cash of EUR 1.5 billion.
Rajeev Suri, Chief Executive Officer of Nokia Siemens Networks:
“The Q1 2013 results demonstrate that we are executing well on our strategy and our turnaround is on track. We have fundamentally improved execution capabilities across the organization, through steps such as centralization of pricing, shifting to global delivery of services, and strengthening contract management. As a result, we have built an organization that can deliver strong operating profitability even in a quarter with seasonally lower revenues. In addition, our strong position in LTE demonstrates the power of our focus on both innovation and quality.”
* The before specific items financial measures exclude specific items for all periods: restructuring charges, country/contract exit charges, purchase price accounting related charges and other one-time charges. For an analysis of specific items, refer to page 16 of the Nokia Siemens Networks Q1 2013 Interim Report.
Operating and Financial Review
The figures presented in this Interim Report may differ from those reported earlier by Nokia Corporation (‘Nokia’) due to the treatment of discontinued operations and certain accounting presentation differences, including segment reporting. For standalone financial reporting purposes, we currently have two reportable segments: Mobile Broadband and Global Services. Accordingly, we provide detailed disclosure of certain financial information for these reportable segments. For Nokia financial reporting purposes, we represent one reportable segment.
The following table sets forth a summary of our results for the quarters indicated, as well as the year-on-year and sequential growth rates.
1 References to EBITDA are to profit/loss for the period from continuing operations, before income tax expense, financial income and expenses, depreciation, amortization and share of results of associates. Accordingly, EBITDA can be extracted from the Consolidated Financial Statements by taking loss for the period and adding back income tax expense, financial income and expenses, depreciation, amortization and share of results of associates.
We are not presenting EBITDA or EBITDA-based measures as measures of our results of operations. EBITDA and EBITDA-based measures have important limitations as an analytical tool, and they should not be considered in isolation or as substitutes for analysis of our results of operations.
Percentage point changes are denoted by ‘pp’ in the above table.
The year-on-year decrease of 5.1% in our net sales in the first quarter 2013 was primarily due to divestments of businesses in 2012 not consistent with our strategic focus as well as the exiting of certain customer contracts. Excluding these two factors, our net sales in the first quarter 2013 declined by approximately 1% year-on-year and were approximately flat on a constant currency basis* in the first quarter 2013 compared to the first quarter 2012.
Net sales related to our Global Services business declined year-on-year by 7.5% and were partially offset by higher net sales in Mobile Broadband. The year-on-year decline in Global Services was primarily due to lower net sales in Professional Services and Care. The year-on-year increase in Mobile Broadband was primarily due to higher LTE net sales partially offset by lower GSM, WCDMA, Voice and IP transformation net sales.
The sequential decrease of 29.8% in our net sales in the first quarter 2013 was primarily due to lower sales of both Mobile Broadband and Global Services consistent with industry seasonality as well as the absence of IPR income of approximately EUR 30 million that was recognized in the fourth quarter 2012.
* Excluding the impact of changes in exchange rates in comparison to the Euro, our reporting currency.
On a year-on-year basis, the increase of 7.2 percentage points in our gross margin before specific items in the first quarter 2013 was primarily due to a higher gross margin in Mobile Broadband and Global Services, as well as a higher proportion of Mobile Broadband within the total sales mix. On a sequential basis, the decrease of 2.2 percentage points in our gross margin before specific items in the first quarter 2013 was due to a lower gross margin in Global Services as well as the absence of IPR income of approximately EUR 30 million that was recognized in the fourth quarter 2012, partially offset by higher gross margin in Mobile Broadband.
Our research and development (‘R&D’) expenses before specific items decreased 16.3% year-on-year in the first quarter 2013. This decrease was primarily due to reduced investments in business activities that are not consistent with our focused strategy as well as increased R&D efficiency, resulting from the transformation and restructuring program and streamlining of our roadmaps. These cost improvements were partially offset by investments in areas that are consistent with our focused strategy, most notably LTE. Sequentially, our R&D expenses before specific items decreased 8.2% primarily due to lower incentive expenses.
Year-on-year, our selling and marketing expenses before specific items decreased 22.5% in the first quarter 2013 primarily due to structural cost savings. On a sequential basis, our selling and marketing expenses before specific items decreased 14.9% in the first quarter 2013 primarily due to lower incentive expenses and seasonally lower marketing spend.
Our administrative and general expenses before specific items decreased 22.8% year-on-year in the first quarter 2013 primarily due to structural cost savings. On a sequential basis, our administrative and general expenses before specific items were flat.
The year-on-year increase of 11.8 percentage points in our operating margin before specific items in the first quarter 2013 was primarily due to our enhanced gross margin and lower operating expenses in absolute terms as well as a percentage of net sales. The sequential decrease of 7.6 percentage points in our operating margin before specific items in the first quarter 2013 was primarily due to higher operating expenses as a percentage of net sales and lower gross margin.
The year-on-year increase in our operating margin after specific items in the first quarter 2013 was primarily due to lower other income and expenses as a percentage of net sales, higher gross margin and lower operating expenses. The sequential decrease in our operating margin in the first quarter 2013 was primarily due to higher operating expenses as a percentage of net sales and lower gross margin, partially offset by lower other income and expenses as a percentage of net sales.
The following tables set forth our net sales and operating profit/loss before specific items by segment for the quarters presented:
Percentage point changes are denoted by ‘pp’ in the above table.
In the first quarter 2013, Global Services represented 52% of our net sales, compared to 54% in the first quarter 2012 and 51% in the fourth quarter 2012. In the first quarter 2013 and fourth quarter 2012, Mobile Broadband represented 46% of our net sales compared to 43% in the first quarter 2012.
The following table sets forth our net sales by geographic area by location of customer for the quarters presented:
* Note that as of Q1 2013, our Customer Operations team is organized into the three geographical markets demonstrated in the table: Asia, Middle East and Africa markets covering Greater China, Asia-Pacific, India, Japan, the Middle East and Africa regions; Europe and Latin America markets covering East Europe, West Europe, South East Europe and Latin America; and North America markets covering both the United States and Canada.
On a regional basis, the year-on-year decline was primarily due to lower net sales in Europe and Latin America. These regions saw lower net sales in Mobile Broadband, partially offset by higher net sales in North America which saw growth in both Mobile Broadband and Global Services net sales.
On a regional basis, Mobile Broadband and Global Services net sales declined sequentially in all regions except North America. North America was approximately flat on a sequential basis, due to an increase in Mobile Broadband net sales, almost completely offset by a decline in Global Services net sales.
Transformation and restructuring program
Restructuring related charges and cash outflows
The following table sets forth a summary of our cost reduction activities and planned operational adjustments.
As we execute our restructuring plans, we are continuing to consider options as part of our transformation and restructuring program which may impact restructuring-related charges and related cash outflows in the remainder of 2013. Changes in estimates of timing or amounts of costs to be incurred and associated cash flows may become necessary as the transformation and restructuring program is implemented.
We continue to target to reduce our annualized operating expenses and production overheads before specific items by more than EUR 1 billion by the end of 2013, compared to the end of 2011.
In conjunction with this transformation and restructuring program, we estimate total restructuring related charges and the related cash outflows of approximately EUR 1.4 billion. As announced in the Nokia Interim Report published on April 18, 2013, this was an update to the earlier estimate of approximately EUR 1.3 billion for both restructuring related charges as well as restructuring related cash outflows.
At the end of the first quarter 2013, we had approximately 56 700 employees, a reduction of approximately 11 900 compared to the end of the first quarter 2012, and approximately 1 700 compared to the end of the fourth quarter 2012.
In the first quarter, we closed the sale of our Business Support Systems business to Redknee Solutions Inc. The sale of our Optical Networks business closed on May 6, 2013.
Cash flow and financing
We continued our robust performance from a cash perspective, generating free cash flow (which takes account of restructuring and various other charges) of EUR 239 million in the first quarter - the sixth consecutive quarter of positive free cash flow. Underpinning this performance is the continued improvement in our net working capital position on a sequential basis.
In March 2013, we issued EUR 800 million Senior Notes. Most of the net proceeds from the bond issuance were used to prepay certain existing debt, with the remaining proceeds to be used for general corporate purposes.
Q1 2013 Operating Highlights:
- We continued our mobile broadband deal momentum into 2013, adding commercial LTE deals in the first quarter, including: implementing a 4G (LTE) network for Movistar Chile and expanding its 3G network; delivering US Cellular’s second wave of 4G (LTE) services; launching New Zealand’s first 4G service with Vodafone and upgrading its 2G and 3G networks; launching voice services for Bharti Airtel’s 4G TD-LTE customers in Pune, India; enabling Polkomtel to provide voice services with LTE in Poland; extending Orange’s network in Switzerland and preparing it for 4G roll-out; modernizing and expanding E-Plus Group’s GSM and HSPA+ networks in Germany; being selected by BH Telecom to expand and modernize its mobile network across the northern and eastern parts of Bosnia and Herzegovina; providing GSM-Railway (GSM-R) infrastructure for Polish Railways; implementing a 4G (LTE) network for SFR and upgrading its existing GSM and 3G networks in major French cities; conducting a successful 4G (LTE) trial with Vodacom Tanzania; and becoming sole supplier to DOCOMO PACIFIC, a subsidiary of the Japanese telecommunications operator NTT DOCOMO, for an end-to-end 4G LTE network in the U.S. territory of Guam.
- We continue to invest to stay at the forefront of mobile broadband, and at Mobile World Congress in February we announced Liquid Applications, the biggest base station transformation since the launch of GSM 22 years ago. Liquid Applications turns base stations into an intelligent part of a mobile operator’s network to serve and deliver local content. We also announced a collaboration with IBM to deliver this new platform, which allows mobile operators to create a truly unique mobile experience, relieve the ever-increasing strain on network infrastructure and bring new Liquid Broadband solutions to market. We are working together with SK Telecom to evaluate Liquid Applications in the operator’s LTE network.
- In February, we extended our small cell portfolio with new Flexi Zone Micro and Pico base stations for hot spots complemented by new service offerings that together deliver optimal coverage and capacity, and launched Smart Wi-Fi to seamlessly integrate wireless local area networks (WLAN) with mobile networks. We also introduced a range of new features to our Liquid Radio Software Suites to help operators address constantly changing capacity demands. The improved set of features can help release 35% of GSM spectrum for use by WCDMA and LTE, and ensure that LTE networks and spectrum are fully utilized.
- We were recognized by Global TD-LTE Initiative (GTI) for our global advances and deployments, winning the TD-LTE Market Development Award 2013, with TD-LTE innovations allowing operators to use their valuable spectrum more effectively, serve more customers profitably and converge TD-LTE and FDD LTE to meet steep data demand.
- In January, we enabled the world’s first live TV broadcast via TD-LTE with China Mobile. The TD-LTE network, solely built by us, exceeded requirements to transmit high definition (HD) video and images from cameras on the move, providing the best live TV experience, matching a relay via satellite.
- We were selected, along with Panasonic Mobile Communications, by NTT DOCOMO in Japan to develop next-generation mobile broadband network architecture for LTE-A (long term evolution-advanced), and as part of a multi-year agreement that will provide high-capacity base stations and Remote Radio Heads (RRH) for small cells roll-out.
- In services, we unveiled a suite of products and services at Mobile World Congress, to simplify operations for mobile operators as underlying networks become increasingly complex. We were selected by Lebanese telecommunications operator, touch, to simplify its operations and improve its customer experience. To achieve this, the operator has selected our unique operations support systems (‘OSS’) portfolio and its related integration services. The solution will transform touch’s service operations cost-efficiently and pave the way for the operator to achieve service assurance.
Risks and forward-looking statements
It should be noted that Nokia Siemens Networks and its business are exposed to various risks and uncertainties and certain statements herein that are not historical facts are forward-looking statements, including, without limitation, those regarding: A) the timing and expected benefits of our strategies, including expected operational and financial benefits and targets as well as changes in leadership and operational structure; B) the timing of the deliveries of our products and services; C) our ability to innovate, develop, execute and commercialize new technologies, products and services; D) expectations regarding market developments and structural changes; E) expectations and targets regarding our industry growth, market share, prices, net sales and margins of our products and services; F) expectations and targets regarding our operational priorities and results of operations; G) expectations and targets regarding collaboration and partnering arrangements; H) the outcome of pending and threatened litigation, regulatory proceedings or investigations by authorities; I) expectations regarding the successful completion of restructurings, investments, acquisitions and divestments on a timely basis and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, acquisitions and divestments; and J) statements preceded by "believe," "expect," "anticipate," "foresee," "target," "estimate," "designed," "aim", "plans," "intends," "will" or similar expressions. These statements are based on management's best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors, including risks and uncertainties that could cause these differences, include, but are not limited to: 1) our success in the mobile broadband infrastructure and related services market and our ability to effectively and profitably adapt our business and operations in a timely manner to the increasingly diverse needs of our customers; 2) the intensity of competition in the various markets where we do business and our ability to maintain or improve our market position or respond successfully to changes in the competitive environment; 3) our ability to execute effectively and in a timely manner our plan designed to improve our financial performance and market position, increase profitability and to effectively and timely execute related restructuring measures; 4) changes in the level of support we receive from our shareholders and conflicts of interest they may have between themselves; 5) the development of the mobile and fixed communications industry and general economic conditions globally and regionally; 6) our ability to timely introduce new competitive products, services, upgrades and technologies; 7) our dependence on a limited number of customers and large, multi-year contracts; 8) our ability to consummate acquisitions or integrate acquired businesses; 9) environmental, health and safety laws and the impact of changes in government policies, trade policies, laws or regulations and economic or political turmoil in countries where our assets are located and we do business; 10) local business risks in the countries in which we operate; 11) our liquidity and our ability to meet our working capital requirements and our access to available credit under our credit facilities and other credit lines as well as cash; 12) the success and performance of our suppliers, collaboration partners and customers, including the ability to achieve timely delivery of sufficient quantities of components, sub-assemblies and software; 13) the failure of any of our partners and collaborators to perform as planned or our ability to achieve the necessary collaboration and partnering needed to succeed; 14) failure to efficiently manage our manufacturing, service creation and to ensure that our products and services meet our and our customers’ requirements; 15) rapid changes to existing regulations or technical standards applicable to our products and services; 16) actual or alleged defects or other quality, safety or security issues in our products or services; 17) the management of our customer financing exposure, particularly in the networks infrastructure and related services business; 18) complex tax issues as a result of our operations in a number of countries and related additional tax obligations; 19) alleged or actual loss, improper disclosure or leak of any personal or consumer data made available to us or our subcontractors; 20) exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the U.S. dollar, as well as certain other currencies; 21) our ability to protect our products, services and technologies, which we develop or that we license from others, from claims that we have infringed third parties’ intellectual property rights; 22) our ability to obtain or continue unrestricted use on commercially acceptable terms of certain technologies in our products and services; 23) our ability to protect our numerous patented, standardized or proprietary technologies from third-party infringement or actions to invalidate the intellectual property rights of these technologies; 24) any disruption to information technology systems and networks upon which our operations rely; 25) our ability to retain, motivate, develop and recruit appropriately skilled employees; 26) organized strikes or work stoppages by unionized employees; 27) the unfavorable outcome of litigations; 28) allegations of possible health risks from electromagnetic fields generated by base stations and mobile products and lawsuits related to them, regardless of merit; 29) a potential requirement for further contributions to pension plans; 30) whether ongoing or any additional governmental investigations into alleged violations of law by some former employees of Siemens may involve and affect the carrier-related assets and employees transferred by Siemens to us; 31) any impairment of our customer relationships resulting from ongoing or any additional governmental investigations involving the Siemens carrier-related operations transferred to us; 32) the risk factors specified on pages 12-47 of Nokia’s annual report on Form 20-F for the year ended December 31, 2012; and 33) the risk factors specified on pages 50-51 of Nokia Siemens Networks’ 2012 Annual Report. Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Neither Nokia nor Nokia Siemens Networks undertakes any obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.
- Ends -
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About Nokia Siemens Networks
Nokia Siemens Networks is the world’s specialist in mobile broadband. From the first ever call on GSM, to the first call on LTE, we operate at the forefront of each generation of mobile technology. Our global experts invent the new capabilities our customers need in their networks. We provide the world’s most efficient mobile networks, the intelligence to maximize the value of those networks, and the services to make it all work seamlessly.
With headquarters in Espoo, Finland, we operate in over 120 countries and had net sales of approximately 13.4 billion euros in 2012. http://www.nokiasiemensnetworks.com
Optical Networks has been classified as a disposal group held for sale since December 31, 2012 and is presented as discontinued operations on a separate income statement line, Loss for the year from discontinued operations. All comparative Optical Networks results for the period ended March 31, 2012 have been re-presented as discontinued operations in the income statement.