Espoo, Finland – August 8, 2013
NSN* Q2 2013 Press Release
Q2 2013 Net Sales of EUR 2.8 billion and Operating Margin Before Specific Items** of 12.2%
*Nokia Siemens Networks was renamed as Nokia Solutions and Networks, also referred to as NSN, and the terms “Nokia Solutions and Networks”, “NSN” and “Nokia Siemens Networks” can be used interchangeably in this release.
**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 19 of the NSN Q2 2013 Interim Report.
Rajeev Suri, Chief Executive Officer of NSN:
“Our fourth consecutive quarter of strong profitability is testament to excellent performance in both our Mobile Broadband and Global Services segments. As a result of our focused strategy and strong financial position, we believe NSN is very well positioned to build on its leadership position in LTE as our customers build the next generation of mobile broadband networks.”
For the full content of NSN’s Interim Report for Q2 2013 and January – June 2013, please visit:
Operating and Financial Review
The figures presented in this press release and the NSN Q2 2013 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 14.7% in our net sales in the second quarter 2013 was partially due to divestments of businesses not consistent with our strategic focus, as well as the exiting of certain customer contracts and countries. Excluding these two factors, our net sales in the second quarter 2013 declined by approximately 11% due to reduced wireless infrastructure deployment activity, which affected both Mobile Broadband and Global Services. The year-on-year decrease in Mobile Broadband was primarily due to lower GSM and Voice and IP transformation net sales partially offset by higher LTE net sales. The year-on-year decrease in Global Services was primarily due to a reduction in network implementation activity, as some major network deployment projects near completion. On a regional basis, we had lower cyclical sales in Japan following high levels of spending a year ago, and lower year-on-year sales in Europe related to network modernization and constrained operator spending. In China, the year-on-year decline was due to constrained operator spending in anticipation of a technology shift to TD-LTE.
The sequential decrease in our net sales in the second quarter 2013 was due to divestments of businesses not consistent with our strategic focus as well as the exiting of certain customer contracts and countries. Excluding these two factors, our net sales in the second quarter 2013 increased by approximately 4%, with higher sales in both Global Services and Mobile Broadband. The sequential increase in Global Services net sales was primarily due to higher sales in customer care services and professional services, partially offset by lower network implementation activity. The sequential increase in Mobile Broadband net sales was primarily due to higher WCDMA and GSM sales, partially offset by declines in LTE and CDMA sales. On a regional basis, our net sales benefited from stronger seasonal sales in Latin America, Europe and China. In Japan and North America, net sales declined sequentially due to the cyclical nature of carrier spending.
In the second quarter 2013, our net sales benefited from non-recurring IPR income of EUR 17 million. At constant currency*, our net sales would have decreased approximately 15% year-on-year and increased approximately 1% sequentially.
*Excluding the impact of changes in exchange rates in comparison to the Euro, our reporting currency.
On a year-on-year basis, the increase in our gross margin before specific items in the second quarter 2013 was primarily due to higher gross margin in both Mobile Broadband and Global Services and non-recurring IPR income of EUR 17 million, as well as a slightly higher proportion of Mobile Broadband within the total sales mix.
On a sequential basis, the increase in our gross margin before specific items in the second quarter 2013 was due to significantly higher gross margin in Global Services as well as non-recurring IPR income of EUR 17 million, partially offset by lower gross margin in Mobile Broadband. The higher gross margin in Global Services was primarily driven by a strong performance in customer care services and professional services, supported by strong execution relative to our restructuring program. In addition, the gross margin in Global Services benefited from a greater sequential revenue recognition triggered by certain project acceptances. We do not expect a similar benefit in the third quarter 2013.
Our research and development expenses before specific items decreased 6.2% year-on-year in the second quarter 2013. On a year-on-year basis, research and development expenses before specific items were lower primarily due to reduced investments in business activities that are not consistent with our focused strategy as well as increased research and development efficiency, partially offset by higher investments in areas that are consistent with our focused strategy most notably LTE. On a sequential basis, research and development expenses before specific items increased slightly by 1.1% in the second quarter 2013.
On a year-on-year basis, our sales and marketing expenses before specific items decreased 16.4% in the second quarter 2013 primarily due to structural cost savings from our transformation and restructuring program. On a sequential basis, our sales and marketing expenses before specific items increased 3.3% in the second quarter 2013.
Our general and administrative expenses before specific items increased 22.2% year-on-year and 15.2% sequentially in the second quarter 2013. Both on a year-on-year and sequential basis, general and administrative expenses before specific items were higher primarily due to costs associated with certain finance and information technology-related projects and divestments.
Our other income and expenses before specific items for the second quarter 2013 was income of EUR 29 million, compared to expense of EUR 25 million in the second quarter 2012, and income of EUR 7 million in the first quarter 2013. On a year-on-year basis, the change in other income and expenses before specific items was primarily due to a reduction in doubtful account allowances, a gain on the sale of real estate and a net positive impact related to foreign currency fluctuation. On a sequential basis, the change was primarily due to a reduction in doubtful account allowances and a gain on sale of real estate, partially offset by a net negative impact related to foreign currency fluctuations.
In the second quarter 2013, operating margin before specific items for Global Services was higher than operating margin before specific items for Mobile Broadband.
The year-on-year increase in our operating margin before specific items in the second quarter 2013 was primarily due to higher gross margin, partially offset by higher operating expenses as a percentage of net sales. On a year-on-year basis, operating margin before specific items increased for both Global Services and Mobile Broadband. The sequential increase in our operating margin before specific items in the second quarter 2013 was primarily due to higher gross margin. On a sequential basis, operating margin before specific items increased for Global Services.
Financial income and expenses
In the second quarter 2013, we incurred a net expense in financial income and expenses of EUR 35 million compared to a net expense of EUR 26 million in the second quarter 2012 and a net expense of EUR 75 million in the first quarter 2013. Our financial income and expenses consisted of financial expenses of EUR 27 million (EUR 30 million in the second quarter 2012 and EUR 29 million in the first quarter 2013), primarily relating to interest expense on interest-bearing liabilities, and financial income of EUR 5 million (EUR 3 million in the second quarter 2012 and EUR 3 million in the first quarter 2013). Our other financial results consist primarily of net foreign exchange losses of EUR 13 million (a gain of EUR 1 million in the second quarter 2012 and losses of EUR 49 million in the first quarter 2013). The decrease in net foreign exchange losses compared to the first quarter 2013 is mainly due to a lower negative impact from unhedgeable currency risk and movements in foreign exchange rates. The net foreign exchange gain during the second quarter 2012 was mainly due to a positive impact from unhedgeable currency risk, partly offset by hedging costs.
Income tax expense
In the second quarter 2013, we incurred income tax expense of EUR 85 million compared to EUR 9 million in the second quarter 2012. The income tax expense in the second quarter 2012 was lower due to the profit mix across the various jurisdictions where we pay income tax. In the first quarter 2013, we incurred an income tax expense of EUR 73 million.
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 second quarter 2013, Global Services represented 53% of our net sales, compared to 53% in the second quarter 2012 and 52% in the first quarter 2013. In the second quarter 2013, Mobile Broadband represented 46% of our net sales, compared to 44% in the second quarter 2012 and 46% in the first quarter 2013. For a discussion of the changes in net sales refer to the above section ‘Net sales’ within ‘Key financials’.
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 geographical basis, the year-on-year decline in net sales was primarily due to Asia, Middle East and Africa and Europe and Latin America. In Asia, Middle East and Africa, the year-on-year net sales decline was due to lower sales in Japan and Greater China. In Japan, net sales declined year-on-year following high wireless infrastructure deployment activity in the second quarter 2012. In Greater China, the year-on-year decrease in net sales was due to constrained operator spending in anticipation of a technology shift to TD-LTE. In Europe and Latin America, the year-on-year net sales decline was related to network modernization and constrained operator spending in Europe.
On a geographical basis, the sequential increase in Europe and Latin America was primarily due to stronger seasonal sales. This was partially offset by a sequential decrease in North America due to lower sales following high wireless infrastructure deployment activity in the previous quarter.
For details of net sales by geographic area for the regions included in the above markets, refer to Note 4 of the NSN Q2 2013 Interim Report, Segment information.
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.
The reduction in operating expenses and production overheads in the second quarter 2013 contributed to the improvement in overall profitability in the quarter and is expected to contribute further cost savings in the second half of 2013. As a result of the increased savings in the first half of 2013, and an accelerated pace of execution, we have, as already announced recently, increased the target for a reduction in annualized operating expenses and production overheads, excluding specific items, to more than EUR 1.5 billion by the end of 2013, compared to the end of 2011. The reduction in operating expenses is expected from across the restructuring and transformation program. Overall savings are expected to come largely from the previously announced organizational streamlining, we have also targeted areas such as real estate, information technology, product and service procurement costs, overall general and administrative expenses and a significant reduction of suppliers in order to further lower costs and improve quality.
Non-cash charges and timing differences account for the differences between the above charges and the corresponding cash outflows. 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.
At the end of the second quarter 2013, we had approximately 50 500 employees, a reduction of approximately 12 900 compared to the end of the second quarter 2012, and approximately 6 200 compared to the end of the first quarter 2013.
Q2 2013 Operating Highlights
Risks and forward-looking statements
It should be noted that Nokia Solutions and Networks (renamed from 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, divestments and acquisitions on a timely basis and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, divestments and acquisitions, as well as any expected plans and benefits related to or caused by such transactions; 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 shareholder; 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 divestments and acquisitions, including obtaining required regulatory approvals, and our ability to successfully carve out divested businesses and to 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 NSN’s 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 NSN 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.
NSN (Nokia Solutions and 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. NSN is wholly owned by Nokia Corporation.