Nokia Corporation Financial Report for Q1 2023
Strong net sales growth; outlook unchanged
- Net sales grew 9% y-o-y in constant currency (10% reported).
- Enterprise net sales grew 62% y-o-y in constant currency (65% reported).
- Comparable gross margin declined 300bps y-o-y to 37,7% (reported -310bps to 37,5%), due to regional mix and a lower contribution from Nokia Technologies partly related to a license option exercised in Q4 2022.
- Comparable operating margin declined y-o-y by 270bps to 8,2%, due to the above mentioned factors impacting gross margin along with a significant swing in venture fund contribution, somewhat offset by disciplined cost control.
- Reported operating margin increased 70bps y-o-y to 7,3%. In addition to the above factors, the margin increased due to a provision recognized in the prior year compared to a partial reversal this year along with a divestment related gain.
- Comparable diluted EPS of EUR 0,06; reported diluted EPS of EUR 0,05.
- Free cash flow negative EUR 0,1bn, net cash balance of EUR 4,3bn.
- 2023 outlook unchanged in constant currency. Full year net sales outlook applying 31 March 2023 exchange rates is EUR 24.6bn to 26.2bn. Comparable operating margin guidance remains 11.5% to 14.0%.
This is a summary of the Nokia Corporation Financial Report for Q1 2023 publishe. 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 Q1 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 report with tables.
PEKKA LUNDMARK, PRESIDENT AND CEO, ON Q1 2023 RESULTS
We started this year with the unveiling of a renewed corporate strategy and refreshed brand. This reflects who we are today - a B2B technology innovation leader unleashing the exponential potential of networks. Q1 also saw the launch of our new industry-leading optical networking platform PSE-6s and AirScale Habrok, our latest 5G massive MIMO radios powered by a new generation of ReefShark chipsets. Both products are designed to help our customers achieve more with lower power consumption, supporting our intent to develop ESG into a competitive advantage.
Financially we delivered a solid start to 2023 with Q1 net sales growing 9% in constant currency. Our comparable operating margin was 8.2%, a decline of 270bps year-on-year, which was primarily due to expected greater seasonality in Mobile Networks’ profitability, a lower contribution from Nokia Technologies in the quarter and a negative impact from venture fund investments.
Network Infrastructure had another great quarter with 13% constant currency net sales growth and continued operating margin expansion. We saw particular strength in Optical Networks and good growth in both IP Networks and Submarine Networks. Mobile Networks net sales grew 13% as 5G deployments in India ramped up, more than offsetting a slowdown in North America spending. As we expected, we are seeing greater seasonality between the first and second half of the year in terms of profitability for Mobile Networks.
Cloud and Network Services achieved net sales growth of 3% in constant currency, but profitability was impacted by product mix. Nokia Technologies net sales declined 22% in the quarter, which was largely due to a long-term license which is no longer contributing after an option was exercised in Q4 2022. We remain confident Nokia Technologies will return to an annual run-rate of EUR 1.4-1.5bn of net sales.
We maintained our strong momentum in Enterprise with 62% net sales growth in constant currency. We continue to make good progress in both webscale and private wireless and we expect to see strong double-digit growth for the full year.
One of our strategic pillars is to actively manage our portfolio to secure a leading position in all segments where we decide to compete. To support that goal, we have signed agreements to divest part of our Radio Frequency Systems business and our VitalQIP business. In addition, we recently agreed to the sale of our stake in the joint venture TD Tech, subject to closing conditions.
Looking forward, we are starting to see some signs of the economic environment impacting customer spending. Given the ongoing need to invest in 5G and fiber, we see this primarily as a question of timing; nevertheless we will maintain our cost discipline to ensure we can successfully navigate this uncertainty. We remain on track to deliver another year of growth in 2023 so our outlook is unchanged with the expectation that profitability in the second half of the year will be stronger than the first half.
FINANCIAL RESULTS
| EUR million (except for EPS in EUR) | Q1'23 | Q1'22 | YoY change | Constant currency YoY change |
| Reported results | ||||
| Net sales | 5 859 | 5 348 | 10% | 9% |
| Gross margin % | 37,5% | 40,6% | (310)bps | |
| Research and development expenses | (1 108) | (1 072) | 3% | |
| Selling, general and administrative expenses | (729) | (675) | 8% | |
| Operating profit | 426 | 354 | 20% | |
| Operating margin % | 7,3% | 6,6% | 70bps | |
| Profit for the period | 289 | 219 | 32% | |
| EPS, diluted | 0,05 | 0,04 | 25% | |
| Net cash and interest-bearing financial investments | 4 304 | 4 904 | (12)% | |
| Comparable results | ||||
| Net sales | 5 859 | 5 348 | 10% | 9% |
| Gross margin % | 37,7% | 40,7% | (300)bps | |
| Research and development expenses | (1 093) | (1 052) | 4% | |
| Selling, general and administrative expenses | (642) | (581) | 10% | |
| Operating profit | 479 | 583 | (18)% | |
| Operating margin % | 8,2% | 10,9% | (270)bps | |
| Profit for the period | 342 | 416 | (18)% | |
| EPS, diluted | 0,06 | 0,07 | (14)% | |
| ROIC1 | 15,8% | 19,5% | (370)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 Financial Report for Q1 2023 for details.
| Business group results | Network
Infrastructure |
Mobile
Networks |
Cloud and Network Services | Nokia
Technologies |
Group Common and Other | |||||
| EUR million | Q1'23 | Q1'22 | Q1'23 | Q1'22 | Q1'23 | Q1'22 | Q1'23 | Q1'22 | Q1'23 | Q1'22 |
| Net sales | 2 248 | 1 974 | 2 567 | 2 268 | 760 | 736 | 242 | 306 | 48 | 76 |
| YoY change | 14% | 13% | 3% | (21)% | (37)% | |||||
| Constant currency YoY change | 13% | 13% | 3% | (22)% | (38)% | |||||
| Gross margin % | 38,0% | 34,7% | 33,8% | 39,8% | 32,8% | 38,6% | 100,0% | 99,7% | (12,5)% | 2,6% |
| Operating profit/(loss) | 344 | 195 | 137 | 171 | (20) | 20 | 149 | 220 | (131) | (23) |
| Operating margin % | 15,3% | 9,9% | 5,3% | 7,5% | (2,6)% | 2,7% | 61,6% | 71,9% | (272,9%) | (30,3)% |
SHAREHOLDER DISTRIBUTION
Dividend
Under the authorization by the Annual General Meeting held on 4 April 2023, the Board of Directors may resolve on the distribution of an aggregate maximum of EUR 0.12 per share to be paid in respect of financial year 2022. 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 20 April 2023, the Board resolved to distribute a dividend of EUR 0.03 per share. The dividend record date is on 25 April 2023 and the dividend will be paid on 4 May 2023. 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 0.09 per share.
Share buyback program
In February 2022, 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 second EUR 300 million phase of the share buyback program started in January 2023 and it will end at the latest by 21 December 2023. Under this phase, Nokia has by 31 March 2023 repurchased 19 019 000 of its own shares at an average price per share of approximately EUR 4.41.
OUTLOOK
| Full Year 2023 | |
| Net sales1 | EUR 24.6 billion to EUR 26.2 billion1 (2 to 8% growth in constant currency) |
| Comparable operating margin2 | 11.5 to 14.0% |
| Free cash flow2 | 20 to 50% conversion from comparable operating profit |
1Assuming the rate 1 EUR = 1.09 USD as of 31 March 2023 continues for the remainder of 2023 along with actual Q1 foreign exchange rates (adjusted from prior 1.07 USD rate as of 31 December 2022). Assuming the year-end 2022 exchange rate the net sales outlook would continue to be EUR 24.9bn to EUR 26.5bn.
2 Please refer to Performance measures section in Nokia Corporation Financial Report for Q1 2023 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. The comments for relative growth by business group are provided to give a reference on how we expect each to perform relative to the overall group.
| 2023 total addressable market (update) | Nokia business group assumptions | |||
| Size (EUR bn)1 | Constant currency growth | Net sales growth | Operating margin | |
| Network Infrastructure2 | 47 (update) | 4% | In-line to below group | 11.0 to 14.0% |
| Mobile Networks3 | 51 (update) | 4% (update) | Faster than group | 7.0 to 10.0% |
| Cloud and Network Services | 28 (update) | 3% (update) | In-line to below group | 5.5 to 8.5% |
1 Total addressable market forecasts assume the rate 1 EUR = 1.09 USD as of 31 March 2023 continues for the remainder of 2023 along with actual Q1 foreign exchange rates. The addressable market is excluding Russia and Belarus.
2 Excluding Submarine Networks.
3 Excluding China.
Nokia provides the following approximate outlook assumptions for additional items concerning 2023:
| Full year 2023 | Comment | |
| Nokia Technologies operating profit | Largely stable | Assuming closure of outstanding litigation / renewal discussions we expect largely stable operating profit in Nokia Technologies in 2023. Nokia currently assumes free cash flow slightly greater than operating profit in Nokia Technologies. |
| Group Common and Other operating profit | Negative
EUR 350-400 million (update) |
This includes central function costs largely stable at below EUR 200 million and an increase in investment in long-term research now above EUR 100 million. This line also accounts for Radio Frequency Systems (RFS) and could be impacted by any positive or negative revaluations in Nokia's venture funds in 2023. |
| Comparable financial income and expenses | EUR 0 million | As interest rates have increased we now expect financial income and expenses to be approximately balanced. |
| Comparable income tax rate | ~25% | Following the re-recognition of deferred tax assets at the end of 2022 we now provide an assumption based on a % tax rate instead of an absolute amount. |
| Cash outflows related to income taxes | EUR 700 million | Cash outflows related to income taxes are expected to increase due to mandatory capitalization of R&D costs under U.S. tax laws as well as evolving regional mix. |
| Capital Expenditures | EUR 700 million (update) |
LONG-TERM TARGETS
Nokia's long-term targets remain unchanged from those introduced with its Q4 2021 financial results. The targets had an associated timeline of 3-5 years which remains unchanged and implies by 2024-2026. These targets remain intended to show Nokia's ambition to deliver continuous improvement in the business over the time period.
| Net sales | Grow faster than the market |
| Comparable operating margin1 | ≥ 14% |
| Free cash flow1 | 55 to 85% conversion from comparable operating profit |
| 1 Please refer to Performance measures section in Nokia Corporation Financial Report for Q1 2023 for a full explanation of how these terms are defined. | |
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;
- 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;
- Accelerating 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 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; on-going litigation with respect to licensing and regulatory landscape for patent licensing;
- The outcomes of on-going and potential disputes and litigation;
- 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 US and 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 2022 annual report on Form 20-F published on 2 March 2023 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, 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 and the general macroeconomic conditions on our businesses, our supply chain 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, 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 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”, “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 webcast will begin on 20 April 2023 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 +1-412-317-5619.
FINANCIAL CALENDAR 2023
- Nokia plans to publish its second quarter and half year 2023 results on 20 July 2023.
- Nokia plans to publish its third quarter and January-September 2023 results on 19 October 2023.