Nokia CEO Stephen Elop on Thursday best summarized Nokia’s second quarter earnings: “our Q2 results were clearly disappointing.” The Finnish phone vendor saw operating profit slide a worrisome 44% to €391 million in the second quarter, down from 704 million in the first quarter and €660 in the second quarter last year. Revenue dipped 11% sequentially to €9.275 billion and EPS was cut in half to $0.06. Revenue from smartphone sales dropped 33% to €2.368 billion on shipments of 16.7 million units, down 34% from the same quarter in 2010 when Nokia shipped 25.2 million smartphones. Nokia still managed to top Wall Street’s expectations for the quarter, however, thanks to royalties from a patent settlement with Apple. “The challenges we are facing during our strategic transformation manifested in a greater than expected way in Q2 2011,” said Nokia CEO Stephen Elop in a statement. He continued, “While our Q2 results were clearly disappointing, we are executing well on the initiatives that are most important to our longer term competitiveness. Some progress is already evident, and thus we are targeting to end this year with more net cash and liquid assets than at the end of Q2 2011. We firmly believe that our deliberate and unwavering commitment to making the changes necessary at Nokia is the right way to deal with the disruptive forces in our industry and drive value creation for our shareholders.” Nokia’s full earnings release follows below.
Nokia Q2 2011 net sales EUR 9.3 billion, non-IFRS EPS EUR 0.06 (reported EPS EUR -0.10)
Published July 21, 2011
6.7% Devices & Services non-IFRS operating margin, benefiting from IPR royalty income related to the second quarter 2011 and settling prior periods
Nokia Corporation
Interim Report
July 21, 2011 at 13.30 (CET+1)This is a summary of the second quarter 2011 interim report published today. The complete second quarter 2011 interim report with tables is available at http://www.nokia.com/results/Nokia_results2011Q2e.pdf. Investors should not rely on summaries of our interim reports only, but should review the complete interim reports with tables.
Reported and Non-IFRS second quarter 2011 results1,2 EUR million Q2/2011 Q2/2010 YoY
ChangeQ1/2011 QoQ
ChangeNokia Net sales 9 275 10 003 -7% 10 399 -11% Operating profit -487 295 439 Operating profit (non-IFRS) 391 660 -41% 704 -44% EPS, EUR diluted -0.10 0.06 0.09 EPS, EUR diluted (non-IFRS)3 0.06 0.11 -45% 0.13 -54% Net cash from operating activities -176 944 -173 Net cash and other liquid assets4 3 891 4 088 -5% 6 372 -39% Devices & Services5 Net sales 5 467 6 799 -20% 7 087 -23% Smart Devices net sales 2 368 3 503 -32% 3 528 -33% Mobile Phones net sales 2 551 3 190 -20% 3 407 -25% Mobile device volume (million units) 88.5 111.0 -20% 108.5 -18% Smart Devices volume (million units) 16.7 25.2 -34% 24.2 -31% Mobile Phones volume (million units) 71.8 85.8 -16% 84.3 -15% Mobile device ASP6 62 61 2% 65 -5% Smart Devices ASP6 142 139 2% 146 -3% Mobile Phones ASP6 36 37 -3% 40 -10% Operating profit -247 643 690 Operating profit (non-IFRS) 369 647 -43% 694 -47% Operating margin % -4.5% 9.5% 9.7% Operating margin % (non-IFRS) 6.7% 9.5% 9.8% NAVTEQ Net sales 245 252 -3% 232 6% Operating profit -58 -81 -62 Operating profit (non-IFRS) 53 50 6% 54 -2% Operating margin % -23.7% -32.1% -26.7% Operating margin % (non-IFRS) 21.5% 19.8% 23.3% Nokia Siemens Networks7 Net sales 3 642 3 039 20% 3 171 15% Operating profit -111 -179 -142 Operating profit (non-IFRS) 40 51 -22% 3 1233% Operating margin % -3.0% -5.9% -4.5% Operating margin % (non-IFRS) 1.1% 1.7% 0.1% Note 1 relating to January-June 2011 results: Nokia reported net sales were EUR 19 674 million and reported earnings per share (diluted) were EUR -0.01 for the period from January 1 to June 30, 2011. Further information about the results for the period from January 1 to June 30, 2011 can be found on pages 16, 18, 26, 27 and 29 of the complete Q2 2011 interim report with tables.
Note 2 relating to non-IFRS results: Non-IFRS results exclude special items for all periods. In addition, non-IFRS results exclude intangible asset amortization, other purchase price accounting related items and inventory value adjustments arising from i) the formation of Nokia Siemens Networks and ii) all business acquisitions completed after June 30, 2008. More specific information about the exclusions from the non-IFRS results may be found in our complete interim report with tables for Q2 2011 on pages 4 and 20-22 and 24. Nokia believes that these non-IFRS financial measures provide meaningful supplemental information to both management and investors regarding Nokia’s performance by excluding the above-described items that may not be indicative of Nokia’s business operating results. These non-IFRS financial measures should not be viewed in isolation or as substitutes to the equivalent IFRS measure(s), but should be used in conjunction with the most directly comparable IFRS measure(s) in the reported results. A reconciliation of the non-IFRS results to our reported results for Q2 2011 and Q2 2010 can be found in the tables on pages 17, 20-24 of our complete interim report with tables. A reconciliation of our Q1 2011 non-IFRS results can be found on pages 11-12 and 14-18 of our complete Q1 2011 interim report with tables which was published on April 21, 2011.
Note 3 relating to non-IFRS Nokia EPS: Nokia taxes continued to be unfavorably impacted by Nokia Siemens Networks taxes as no tax benefits are recognized for certain Nokia Siemens Networks deferred tax items. In Q2, this was partially offset by lower Devices & Services taxes. If Nokia’s estimated long-term tax rate of 26% had been applied, non-IFRS Nokia EPS would have been approximately 0.3 Euro cent higher in Q2 2011.
Note 4 relating to Nokia net cash and other liquid assets: Calculated as total cash and other liquid assets less interest-bearing liabilities.
Note 5 relating to Devices & Services reporting structure: Effective from April 1, 2011, our Devices & Services business includes two new operating and reportable segments – Smart Devices, which focuses on smartphones, and Mobile Phones, which focuses on mass market mobile devices – as well as Devices & Services Other. Prior period results for each quarter and the full year 2010 and Q1 2011 have been regrouped (on an unaudited basis) for comparability purposes according to the new reporting format. The regrouped financial information can be accessed at: http://www.nokia.com/investors
Note 6 relating to average selling prices (ASP): Mobile device ASP represents total Devices & Services net sales (Smart Devices net sales, Mobile Phones net sales, and Devices & Services Other net sales) divided by total Devices & Services volumes. Devices & Services Other net sales includes net sales of Nokia’s luxury phone business Vertu and spare parts, as well as intellectual property royalty income. Smart Devices ASP represents Smart Devices net sales divided by Smart Devices volumes. Mobile Phones ASP represents Mobile Phones net sales divided by Mobile Phones volumes.
Note 7 relating to the acquired Motorola Solutions networks assets: Nokia Siemens Networks operating results for Q2 2011 include the results of the acquired Motorola Solutions networks assets from April 30, 2011. Accordingly, the results of Nokia Siemens Networks for Q2 2011 are not directly comparable to its results for prior periods. Information that excludes the results of the acquired Motorola assets in Q2 2011 is provided in the discussion of Nokia Siemens Networks operating results. Additionally, our complete interim report with tables for Q2 2011 includes additional information on the acquisition of Motorola Solutions’ networks assets on pages 31-32.
STEPHEN ELOP, NOKIA CEO:
The challenges we are facing during our strategic transformation manifested in a greater than expected way in Q2 2011. However, even within the quarter, I believe our actions to mitigate the impact of these challenges have started to have a positive impact on the underlying health of our business. Most importantly, we are making better-than-expected progress toward our strategic goals.In Q2, our immediate action to manage unexpected sales and inventory patterns enabled us to create healthier sales channel dynamics, which led to greater business stability in the latter weeks of the quarter.
– Most notably we took action in China and Europe to address an inventory build-up that occurred in the first quarter of 2011.
– We took a more responsive approach to product pricing around the world.
– We have shifted our sales focus and marketing resources more towards retail interactions with consumers.
– We made changes in certain critical sales management.
During this time of transition, we expect competitive pressures to continue. However, we have a clear strategy to address the concerns about our product competitiveness. In Q2, both our Smart Devices and Mobile Phones business units moved forward on their plans.
– In Smart Devices, those who already have viewed our early Windows Phone work are very optimistic about the devices Nokia will bring to market and about the long-term opportunities. Step by step, beginning this year, we plan to have a sequence of concentrated product launches in specific countries, systematically increasing the number of countries and launch partners.
– In Mobile Phones, early results of the Dual SIM product launches are very encouraging, and we are on track to deliver more products this year.
This shift into the execution of our new strategy also has allowed us to identify additional opportunities for operational improvement. We are accelerating our plans for expense reductions, and we now plan to exceed our previous target of non-IFRS operating expense reductions in Devices & Services of EUR 1 billion for the full year 2013.
It was also validated during Q2 that Nokia understands how to take advantage of our strong intellectual property portfolio. We are well positioned to defend against intellectual property claims and to ensure that other industry participants are properly licensed.
Thus, while our Q2 results were clearly disappointing, we are executing well on the initiatives that are most important to our longer term competitiveness. Some progress is already evident, and thus we are targeting to end this year with more net cash and liquid assets than at the end of Q2 2011. We firmly believe that our deliberate and unwavering commitment to making the changes necessary at Nokia is the right way to deal with the disruptive forces in our industry and drive value creation for our shareholders.
NOKIA OUTLOOK
– Nokia targets Nokia Group net cash and other liquid assets at the end of 2011 to be above the EUR 3.9 billion balance at the end of the second quarter 2011.
– Due to limited visibility, Nokia is providing a wider than normal range for its Devices & Services non-IFRS operating margin outlook for the third quarter 2011. Nokia expects its non-IFRS Devices & Services operating margin in the third quarter 2011 to be slightly above breakeven, ranging either above or below this level by approximately 2 percentage points. This outlook is based on our expectations regarding a number of factors, including:
– Competitive industry dynamics;
– Nokia’s actions to intensify its focus on retail sales marketing to drive net sales;
– Improved competitiveness in our Mobile Phones unit due to the ramp up of Dual SIM devices;
– Timing of our new product shipments; and
– The macroeconomic environment.– Nokia is accelerating its plans to reduce its Devices & Services non-IFRS operating expenses and Nokia now targets to exceed its previous Devices & Services non-IFRS operating expense reduction target of EUR 1 billion for the full year 2013, compared to the full year 2010 Devices & Services non-IFRS operating expenses of EUR 5.65 billion.
– Nokia and Nokia Siemens Networks expect Nokia Siemens Networks net sales to be between EUR 3.2 billion and EUR 3.5 billion in the third quarter 2011.
– Nokia and Nokia Siemens Networks expect the non-IFRS operating margin in Nokia Siemens Networks to be between -3% and breakeven in the third quarter 2011.
– Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks net sales to grow faster than the market in 2011.
– Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks non-IFRS operating margin to be above breakeven in 2011.
– Nokia and Nokia Siemens Networks continue to target Nokia Siemens Networks to reduce its non-IFRS annualized operating expenses and production overheads by EUR 500 million by the end of 2011, compared to the end of 2009.
– The outlook relating to Nokia Siemens Networks includes the impact of the acquisition of Motorola Solutions’ networks assets. This is an update to the previous outlook that did not include the impact of the acquisition of Motorola Solutions’ networks assets.
SECOND QUARTER 2011 FINANCIAL HIGHLIGHTS
The non-IFRS results exclude:
Q2 2011 – EUR 878 million consisting of:
– EUR 68 million restructuring charge and other associated items in Nokia Siemens Networks
– EUR 297 million restructuring charge in Devices & Services
– EUR 275 million accrued Accenture deal consideration in Devices & Services
– EUR 41 million impairment of shares in an associated company in Devices & Services
– EUR 83 million of intangible asset amortization and other purchase price accounting related items arising from the formation of Nokia Siemens Networks and the acquisition of Motorola’s networks assets
– EUR 111 million of intangible asset amortization and other purchase price accounting related items arising from the acquisition of NAVTEQ
– EUR 3 million of intangible assets amortization and other purchase price related items arising from the acquisition of OZ Communications, Novarra and Motally in Devices & ServicesQ2 2010 – EUR 365 million consisting of:
– EUR 114 million restructuring charge and other associated items in Nokia Siemens Networks
– EUR 116 million of intangible asset amortization and other purchase price accounting related items arising from the formation of Nokia Siemens Networks
– EUR 131 million of intangible asset amortization and other purchase price accounting related items arising from the acquisition of NAVTEQ
– EUR 4 million of intangible assets amortization and other purchase price related items arising from the acquisition of OZ Communications, Novarra and MetaCarta in Devices & ServicesQ1 2011 – EUR 265 million consisting of:
– EUR 28 million restructuring charge and other associated items in Nokia Siemens Networks
– EUR 117 million of intangible asset amortization and other purchase price accounting related items arising from the formation of Nokia Siemens Networks
– EUR 116 million of intangible asset amortization and other purchase price accounting related items arising from the acquisition of NAVTEQ
– EUR 4 million of intangible assets amortization and other purchase price related items arising from the acquisition of OZ Communications, Novarra and Motally in Devices & ServicesNon-IFRS results exclude special items for all periods. In addition, non-IFRS results exclude intangible asset amortization, other purchase price accounting related items and inventory value adjustments arising from i) the formation of Nokia Siemens Networks and ii) all business acquisitions completed after June 30, 2008.
Nokia Group
The following chart sets out the year-on-year and sequential growth rates in our net sales on a reported basis and at constant currency for the periods indicated.
SECOND QUARTER 2011 NET SALES, REPORTED & CONSTANT CURRENCY1 YoY
ChangeQoQ
ChangeGroup net sales – reported -7% -11% Group net sales – constant currency1 -7% -9% Devices & Services net sales – reported -20% -23% Devices & Services net sales – constant currency1 -20% -21% NAVTEQ net sales – reported -3% 6% NAVTEQ net sales – constant currency1 1% 9% Nokia Siemens Networks net sales – reported 20% 15% Nokia Siemens Networks net sales – constant currency1 21% 16% Note 1: Change in net sales at constant currency excludes the impact of changes in exchange rates in comparison to the Euro, our reporting currency.
The following chart sets out Nokia Group’s cash flow (for the periods indicated) and financial position (at the end of the periods indicated), as well as the year-on-year and sequential growth rates.
NOKIA GROUP CASH FLOW AND FINANCIAL POSITION EUR million Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Net cash from operating activities -176 944 -173 Total cash and other liquid assets 9 358 9 463 -1% 11 056 -15% Net cash and other liquid assets 3 891 4 088 -5% 6 372 -39% Year-on-year, the decrease in net cash from operating activities in the second quarter 2011 was due to negative net working capital impacts mainly driven by lower net sales and an unfavorable geographic mix, as well as lower underlying profitability. These factors were to some extent offset by higher cash inflows of IPR royalty income related to the second quarter 2011 and earlier periods, cash inflows related to foreign currency hedging activities and lower income taxes paid. Sequentially, the decrease in net cash from operating activities in the second quarter 2011 was due to lower underlying profitability, which was offset to some extent by less negative net working capital impacts compared to the previous quarter, higher cash inflows of IPR royalty income related to the second quarter 2011 and earlier periods, cash inflows related to foreign currency hedging activities and lower income taxes paid.
Total as well as net cash and other liquid assets in the second quarter 2011 were somewhat lower compared to the second quarter 2010 primarily due to payment of the dividend, cash outflow related to the acquisition of Motorola’s networks assets and capital expenditure, offset to a large extent by positive overall cash generation. Sequentially, total as well as net cash and other liquid assets decreased primarily due to payment of the dividend. On a sequential basis, net cash and other liquid assets decreased also due to cash outflow related to the acquisition of Motorola’s networks assets that was financed mainly by an increase in short-term interest bearing liabilities.
Devices & Services
Effective from April 1, 2011, our Devices & Services business includes two new operating and reportable segments – Smart Devices, which focuses on smartphones, and Mobile Phones, which focuses on mass market mobile devices – as well as Devices & Services Other. Prior period results for each quarter and the full year 2010 and Q1 2011 have been regrouped (on an unaudited basis) for comparability purposes according to the new reporting format. The regrouped financial information can be accessed at: http://www.nokia.com/investors
The following chart sets out a summary of the results for our Devices & Services business for the periods indicated, as well as the year-on-year and sequential growth rates.
DEVICES & SERVICES RESULTS SUMMARY Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Net sales (EUR millions)1 5 467 6 799 -20% 7 087 -23% Mobile device volume (million units) 88.5 111.0 -20% 108.5 -18% Mobile device ASP (EUR) 62 61 2% 65 -5% Non-IFRS gross margin (%) 31.1% 30.2% 29.1% Non-IFRS operating expenses (EUR millions) 1 329 1 425 -7% 1 385 -4% Non-IFRS operating margin (%) 6.7% 9.5% 9.8% Note 1: Includes IPR royalty income recognized in Devices & Services Other net sales.
Net Sales
The year-on-year and sequential declines in our Devices & Services net sales are discussed below in our operating analysis of our Smart Devices and Mobile Phones business units. Our overall Devices & Services net sales in the second quarter 2011 benefited from the recognition of approximately EUR 430 million of IPR royalty income related to the second quarter 2011 and earlier periods recognized in Devices & Services Other net sales.The following chart sets out the net sales for our Devices & Services business for the periods indicated, as well as the year-on-year and sequential growth rates, by geographic area. The IPR royalty income described in the paragraph above has been allocated to the geographic areas contained in this chart.
DEVICES & SERVICES NET SALES BY GEOGRAPHIC AREA EUR million Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Europe 1 666 2 173 -23% 2 082 -20% Middle East & Africa 988 934 6% 1 088 -9% Greater China 913 1 373 -34% 1 902 -52% Asia-Pacific 1 085 1 543 -30% 1 317 -18% North America 88 223 -61% 140 -37% Latin America 727 553 31% 558 30% Total 5 467 6 799 -20% 7 087 -23% Volume
The following chart sets out our mobile device volumes for the periods indicated, as well as the year-on-year and sequential growth rates, by geographic area.
DEVICES & SERVICES MOBILE DEVICE VOLUMES BY GEOGRAPHIC AREA million units Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Europe 18.4 26.1 -30% 23.4 -21% Middle East & Africa 20.5 21.0 -2% 22.2 -8% Greater China 11.3 19.3 -41% 23.9 -53% Asia-Pacific 24.5 30.8 -20% 27.3 -10% North America 1.5 2.6 -42% 1.2 25% Latin America 12.3 11.2 10% 10.5 17% Total 88.5 111.0 -20% 108.5 -18% On a year-on-year and sequential basis, the declines in our total Devices & Services volumes were driven by declines in both our Smart Devices and Mobile Phones volumes, with a greater percentage decline in our Smart Devices volumes.
At the end of the first quarter 2011, our sales channel inventories were slightly above normal levels given then anticipated volumes. During the second quarter 2011, distributors and operators purchased fewer of our devices across our portfolio as they reduced their inventories of Nokia devices. The second quarter 2011 ended with our sales channel inventories near the midpoint of our normal range of 4-6 weeks.
Due to the devastation caused by the earthquake and tsunami in Japan, we had previously expected our component supply to be adversely impacted in the second and third quarters of 2011. In the second quarter 2011, we were able to redirect our component requirements to suppliers with production capacity and, in addition, our suppliers in Japan were able to recover faster than Nokia anticipated. Thus, related to the tragic events in Japan, we did not experience component constraints in the second quarter 2011, and we do not expect a significant impact in the third quarter 2011 or going forward.
Average Selling Price
On a year-on-year basis, the overall increase in our Devices & Services ASP in the second quarter 2011 was driven by the recognition of approximately EUR 430 million of IPR royalty income related to the second quarter 2011 and earlier periods recognized in Devices & Services Other and a positive impact from foreign currency exchange hedging, partially offset by the lower ASP in Mobile Phones and Smart Devices, appreciation of the Euro against certain currencies, and a product mix shift towards Mobile Phones.On a sequential basis, the overall decline in our Devices & Services ASP was driven by a product mix shift towards Mobile Phones, the lower ASP in Mobile Phones and Smart Devices, and the appreciation of the Euro against certain currencies, partially offset by the recognition of approximately EUR 430 million of IPR royalty income related to the second quarter 2011 and earlier periods recognized in Devices & Services Other and a positive impact from foreign currency exchange hedging.
Gross Margin
On both a year-on-year and sequential basis, the increase in our Devices & Services gross margin in the second quarter 2011 was driven by the recognition of approximately EUR 430 million of IPR royalty income related to the second quarter 2011 and earlier periods, recognized in Devices & Services Other, partially offset by gross margin declines in both Smart Devices and Mobile Phones and a negative impact from foreign currency hedging.Operating Expenses
Devices & Services non-IFRS research and development expenses decreased 9% year-on-year and 10% sequentially due to declines in Devices & Services Other and Smart Devices research and development expenses, partially offset by an increase in Mobile Phones research and development expenses. Devices & Services Other includes common research and development expenses. The decreases in Devices & Services Other and Smart Devices research and development expenses were due primarily to a focus on priority projects and cost controls. The increase in Mobile Phones research and development expenses was due primarily to investments to accelerate product development to bring new innovations to the market faster and at lower price-points, partially offset by a focus on priority projects and cost controls.Devices & Services non-IFRS sales and marketing expenses decreased 3% year-on-year due to lower spending on sales programs and marketing programs. Devices & Services non-IFRS sales and marketing expenses increased 6% sequentially driven by higher spending on marketing programs, while spending on sales programs was flat.
Devices & Services non-IFRS administrative and general expenses decreased 12% year-on-year and sequentially, driven by a strong focus on near-term cost controls.
Devices & Services non-IFRS other income and expense had a slight negative impact on profitability in the second quarter 2011 both year-on-year and sequentially due to a variety of individually insignificant changes. Reported other income and expense was significantly adversely impacted in the second quarter 2011 primarily as a result of restructuring related expenses discussed below, which were recognized in Devices & Services Other.
Cost Reduction Activities
Nokia is accelerating its plans to reduce its Devices & Services non-IFRS operating expenses and now targets to exceed its previous Devices & Services non-IFRS operating expense reduction target of EUR 1 billion for the full year 2013, compared to the full year 2010 Devices & Services non-IFRS operating expenses of EUR 5.65 billion. This reduction is expected to come from a variety of different sources and initiatives, including a reduction in the number of employees and normal personnel attrition, a reduction in the use of outsourced professionals, reductions in facility costs, and various improvements in efficiencies.Nokia’s cost reduction activities include a strategic collaboration with Accenture to outsource Nokia’s Symbian software development and support activities to Accenture. Approximately 2 800 Nokia employees are expected to transfer to Accenture at closing, which is expected to take place in the early part of October 2011. In addition, we also announced plans to reduce our global workforce by about 4 000 employees by the end of 2012, as well as plans to consolidate the company’s research and product development sites so that each site has a clear role and mission.
During the second quarter 2011, Devices & Services recognized charges related to our cost reduction activities of EUR 572 million, and Nokia expects to recognize additional charges in future quarters.
Smart Devices
The following chart sets out a summary of the results for our Smart Devices business unit for the periods indicated, as well as the year-on-year and sequential growth rates.
SMART DEVICES RESULTS SUMMARY Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Net sales (EUR millions)1 2 368 3 503 -32% 3 528 -33% Smart Devices volume (million units) 16.7 25.2 -34% 24.2 -31% Smart Devices ASP (EUR) 142 139 2% 146 -3% Gross margin (%) 25.7% 32.2% 29.8% Operating expenses (EUR millions) 752 848 -11% 835 -10% Contribution margin (%) -6.2% 8.1% 6.2% Note 1: Does not include IPR royalty income. IPR royalty income is recognized in Devices & Services Other net sales.
Net Sales
Smart Devices net sales decreased both year-on-year and sequentially in the second quarter 2011 primarily due to significantly lower volumes and, to a lesser extent, lower ASP.Volume
The year-on-year and sequential decreases in our Smart Devices volumes were driven by the strong momentum of competing smartphone platforms relative to our Symbian devices, particularly in Europe and China, as well as pricing tactics by certain competitors. In addition, the sequential decrease in our Smart Devices volumes was driven by distributors and operators purchasing fewer of our smartphones during the second quarter 2011 as they reduced their inventories of those devices which were slightly above normal levels at the end of the first quarter 2011, particularly in China.Average Selling Price
Smart Devices ASP increased year-on-year driven by the shipment of new Symbian devices, partially offset by pressure from competing smartphone platforms, tactical pricing actions, and price aggressive competitors.Smart Devices ASP decreased sequentially driven by pressure from competing smartphone platforms, tactical pricing actions, and price aggressive competitors, partially offset by the shipment of new Symbian devices.
Gross Margin
The year-on-year and sequential declines in our Smart Devices gross margin in the second quarter 2011 were driven by lower volumes, greater price erosion than cost erosion, and tactical pricing actions for specific products due to the competitive environment, partially offset by a gross margin benefit due to lower deferral of revenue related to map services sold in combination with devices.Mobile Phones
The following chart sets out a summary of the results for our Mobile Phones business unit for the periods indicated, as well as the year-on-year and sequential growth rates.
MOBILE PHONES RESULTS SUMMARY Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Net sales (EUR millions)1 2 551 3 190 -20% 3 407 -25% Mobile Phones volume (million units) 71.8 85.8 -16% 84.3 -15% Mobile Phones ASP (EUR) 36 37 -3% 40 -10% Gross margin (%) 25.1% 27.8% 27.9% Operating expenses (EUR million) 420 374 12% 386 9% Contribution margin (%) 8.6% 16.1% 16.5% Note 1: Does not include IPR royalty income. IPR royalty income is recognized in Devices & Services Other net sales.
Net Sales
On a year-on-year basis, our Mobile Phones net sales in the second quarter 2011 decreased primarily due to lower volumes and, to a less extent, lower ASP. On a sequential basis, our Mobile Phones net sales decreased due to lower volumes and lower ASP.Volume
The year-on-year and sequential declines in our Mobile Phones volumes were driven by distributors and operators purchasing fewer of our mobile phones during the second quarter 2011 as they reduced their inventories of those devices which were slightly above normal levels at the end of the first quarter 2011. In addition, our lack of Dual SIM phones, a growing part of the market, until late in the second quarter 2011 adversely impacted our Mobile Phones volumes during that quarter. Mobile Phones volumes were also adversely affected by continued pressure from a variety of price aggressive competitors.Average Selling Price
The year-on-year and sequential declines in our Mobile Phones ASP in the second quarter 2011 were driven by a recalibration of our prices as general price competition across all price categories increased following a relatively benign pricing environment over the previous three quarters. On a year-on-year and sequential basis, Mobile Phones ASP was also negatively impacted by a product mix shift towards lower-priced mobile phones, reflecting the market trend towards increasingly affordable smartphones. This was moderated somewhat on a year-on-year basis by the solid performance of QWERTY products in Mobile Phones’ portfolio.Gross Margin
The year-on-year decline in our Mobile Phones gross margin was primarily due to general declines across the majority of the portfolio, partially offset by the strong performance of certain new products such as the Nokia C3, C1-01, C2-01, and X2-00. Gross margin was negatively impacted due to greater price erosion than cost erosion across the portfolio, driven by a recalibration of our prices in the second quarter of 2011 following a relatively benign pricing environment over the previous three quarters. Lower volumes also contributed to the gross margin decline.The sequential decline in our Mobile Phones gross margin was primarily due to greater price erosion than cost erosion across the portfolio, driven by a recalibration of our prices following a relatively benign pricing environment over the previous three quarters. In addition, the gross margin was negatively impacted by lower volumes and tactical pricing actions for specific products due to the competitive environment.
NAVTEQ
On June 22, 2011, we announced plans to create a new Location & Commerce business which will combine NAVTEQ and Nokia’s social location services operations from Devices & Services. The Location & Commerce business will be an operating and reportable segment beginning October 1, 2011. In addition to a broad portfolio of products and services for the wider internet ecosystem, the Location & Commerce business will create integrated social location offerings in support of Nokia’s strategic goal in smartphones, including Nokia products with Windows Phone, as well as support for bringing the internet to the next billion.
The following chart sets out a summary of the results for NAVTEQ for the periods indicated, as well as the year-on-year and sequential growth rates.
NAVTEQ RESULTS SUMMARY Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Net sales (EUR millions) 245 252 -3% 232 6% Non-IFRS gross margin (%) 82.9% 81.4% 84.1% Non-IFRS operating expenses (EUR millions) 151 153 -1% 142 6% Non-IFRS operating margin (%) 21.5% 19.8% 23.3% Net Sales
The year-on-year decrease in NAVTEQ net sales was primarily driven by changes in the foreign currency exchange rate and lower sales of map licenses to mobile device customers, partially offset by higher sales of map licenses to vehicle customers due to higher consumer uptake of vehicle navigation systems. Sequentially, the increase in NAVTEQ net sales was primarily driven by seasonally higher sales in all customer categories except for mobile devices. At constant currency, NAVTEQ net sales would have increased 1% year-on-year and 9% sequentially.Gross Margin
On a year-on-year basis, the increase in NAVTEQ non-IFRS gross margin was primarily due to reduced royalty payments to data suppliers. Sequentially, the decline in NAVTEQ non-IFRS gross margin was primarily due to the annual reset of a royalty contract with a data supplier.Operating Expenses
NAVTEQ non-IFRS research and development expenses were flat year-on-year driven by increased spending on the development of location content, offset by changes in foreign currency exchange rates. NAVTEQ non-IFRS research and development expenses increased 4% sequentially driven by the timing of projects and increased spending on the development of location content.NAVTEQ non-IFRS sales and marketing expenses decreased 6% year-on-year driven by changes in foreign currency exchange rates. NAVTEQ non-IFRS sales and marketing expenses increased 10% sequentially driven by seasonal increases in marketing expenses related to map update marketing campaigns.
NAVTEQ non-IFRS administrative and general expenses were flat year-on-year driven by changes in foreign currency exchange rates and lower occupancy costs, offset by costs related to the forming of the planned Location & Commerce business. NAVTEQ non-IFRS administrative and general expenses increased 13% sequentially driven by costs related to the forming of the planned Location & Commerce business.
Nokia Siemens Networks
Nokia Siemens Networks operating results for the second quarter 2011 reflect the inclusion of the acquired Motorola Solutions networks assets from April 30, 2011. Accordingly, the results of Nokia Siemens Networks for the second quarter 2011 are not directly comparable to its results for prior periods.
The following chart sets out a summary of the results for Nokia Siemens Networks for the periods indicated, as well as the year-on-year and sequential growth rates.
NOKIA SIEMENS NETWORKS RESULTS SUMMARY Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Net sales (EUR millions) 3 642 3 039 20% 3 171 15% Non-IFRS gross margin (%) 26.6% 30.8% 26.9% Non-IFRS operating expenses (EUR millions) 931 898 4% 852 9% Non-IFRS operating margin (%) 1.1% 1.7% 0.1% Net Sales
The following chart sets out Nokia Siemens Networks net sales for the periods indicated, as well as the year-on-year and sequential growth rates, by geographic area.
NOKIA SIEMENS NETWORKS NET SALES BY GEOGRAPHIC AREA EUR millions Q2/2011 Q2/2010 YoY Change Q1/2011 QoQ Change Europe 1 122 1 136 -1% 1 001 12% Middle East & Africa 389 400 -3% 307 27% Greater China 403 357 13% 322 25% Asia-Pacific 973 594 64% 988 -2% North America 311 181 72% 169 84% Latin America 444 371 20% 384 16% Total 3 642 3 039 20% 3 171 15% Nokia Siemens Networks completed the acquisition of Motorola Solutions’ networks assets on April 29, 2011.
As of April 30, 2011, responsibility for supporting customers of Motorola Solutions’ GSM, CDMA, WCDMA, WiMAX and LTE products and services was transferred to Nokia Siemens Networks. Approximately 6900 employees are transferring to Nokia Siemens Networks, as well as responsibility for supporting 50 operators across 52 countries. The acquisition covers a number of research and development facilities, including sites in the United States, China, Russia, India and the UK. The acquisition is expected to strengthen Nokia Siemens Networks’ market position in key geographic markets, in particular North America and Japan, as well as with some of the world’s major service providers.
The 20% year-on-year increase in Nokia Siemens Networks net sales in the second quarter 2011 was primarily driven by growth in both the product and services businesses in most regions, as well as the contribution from the acquired Motorola networks assets. Excluding the acquired Motorola networks assets, Nokia Siemens Networks net sales would have increased 13% year-on-year.
The 15% sequential increase in Nokia Siemens Networks net sales in the second quarter 2011 was driven by a seasonally stronger infrastructure market in most regions as well as the contribution from the acquired Motorola networks assets. Excluding the acquired Motorola networks assets, Nokia Siemens Networks net sales would have increased 8% sequentially.
At constant currency, Nokia Siemens Networks net sales would have increased 21% year-on-year and increased 16% sequentially.
Gross Margin
The lower year-on-year Nokia Siemens Networks non-IFRS gross margin in the second quarter 2011 was primarily due to lower software sales, an unfavorable regional net sales mix and new network infrastructure modernization projects in certain regions. On a year-on-year basis, the acquired Motorola networks assets had a positive impact on the non-IFRS gross margin of approximately 30 basis points.The lower sequential Nokia Siemens Networks non-IFRS gross margin in the second quarter 2011 was primarily due to the negative impact of certain network modernization projects, which more than offset the improved regional mix and the positive impact of approximately 30 basis points from the acquired Motorola networks assets.
Operating Expenses
Excluding the acquired Motorola networks assets, Nokia Siemens Networks non-IFRS operating expenses would have decreased 6% year-on-year and decreased 1% sequentially.Nokia Siemens Networks non-IFRS research and development expenses increased 6% year-on-year and 9% sequentially. Excluding the acquired Motorola networks assets, Nokia Siemens Networks non-IFRS research & development expenses would have decreased by 6% year-on-year and 3% sequentially driven by ongoing cost initiatives which more than offset increased investments in strategic initiatives in radio technology.
Nokia Siemens Networks non-IFRS sales and marketing expenses decreased 1% year-on-year and increased 7% sequentially. Excluding the acquired Motorola networks assets, Nokia Siemens Networks non-IFRS sales and marketing expenses would have decreased 6% year-on-year and increased 2% sequentially. The year-on-year decline was driven by lower pre-sales activities as well as ongoing cost savings initiatives. The sequential increase was driven primarily by pre-sales activities.
Nokia Siemens Networks non-IFRS administrative and general expenses increased 7% year-on-year and 15% sequentially. Excluding the acquired Motorola networks assets, Nokia Siemens Networks non-IFRS administrative and general expenses would have decreased 2% year-on-year and increased 4% sequentially. The year-on-year decline was driven by ongoing cost initiatives. On a sequential basis, the increase was primarily due to higher revenues.
Nokia Siemens Networks non-IFRS other income and expense decreased year-on-year and was flat sequentially due to a variety of individually insignificant changes.
Operating Margin
The lower year-on-year Nokia Siemens Networks non-IFRS operating margin in the second quarter 2011 primarily reflected the lower gross margin and increased operating expenses and integration costs related to the acquired Motorola networks assets. Sequentially, the increase in Nokia Siemens Networks non-IFRS operating margin reflected the higher net sales, offset to some extent by increased operating expenses and integration costs related to the acquired Motorola networks assets.On a year-on-year and sequential basis, the acquired Motorola networks assets had a negative impact on the non-IFRS operating margin of approximately 50 basis points. The impact would have been positive excluding integration-related items.
Since the end of the quarter, Nokia Siemens Networks has confirmed that a review for assessing private equity interest in the company had been completed. The two current shareholders, Nokia and Siemens, believe they are in the best position to further enhance the value of Nokia Siemens Networks and have thus reaffirmed their commitment to the company. Together with Siemens, Nokia is evaluating alternatives that would create an industry leading company with best-in-class profitability and which is viable on a stand-alone basis.
SECOND QUARTER 2011 OPERATING HIGHLIGHTS
Nokia
– We announced the appointment of Michael Halbherr as Executive Vice President to lead the new Location & Commerce business, which will combine NAVTEQ and Nokia’s social location services operations from Devices & Services as of October 1, 2011. As of July 1, Halbherr is a member of the Nokia Leadership Team, reporting to CEO Stephen Elop. The Location & Commerce business will develop a new class of integrated social location products and services for consumers, as well as platform services and local commerce services for device manufacturers, application developers, internet services providers, merchants, and advertisers.
– To deliver on its new strategy, Nokia announced plans to align its global workforce and consolidate site operations, including plans to reduce its global workforce by about 4 000 employees by the end of 2012, with the majority of reductions in Denmark, Finland and the UK.Devices & Services
– We signed a definitive agreement with Microsoft on a partnership that will result in a new global mobile ecosystem, utilizing the very complementary assets of both companies.
– We announced that we have signed a patent license agreement with Apple. The agreement resulted in settlement of all patent litigation between the companies, including the withdrawal by Nokia and Apple of their respective complaints to the US International Trade Commission.
– We started shipping the Nokia E6 and the Nokia X7, two new smartphones aimed at business people and entertainment enthusiasts respectively. The two devices are the first Nokia smartphones running on Symbian Anna, the latest Symbian software, with new icons and usability enhancements such as improved text input, a faster browser and refreshed Ovi Maps.
– We started shipping Nokia N8s, E7s, C7s and C6-01s with the new Symbian Anna software, and announced that, by the end of August, existing owners of these devices can also download Symbian Anna.
– Nokia and Accenture finalized an agreement for Nokia to outsource Symbian software development and support activities to Accenture. Under the agreement, Accenture will provide Symbian based software development and support services to Nokia through 2016. Approximately 2 800 Nokia employees located in China, Finland, India, United Kingdom and the United States, are expected to transfer to Accenture at closing, which is expected to take place in the early part of October, 2011.
– Nokia introduced the Nokia N9, a pure touch smartphone. The outcome of our MeeGo efforts, the Nokia N9 comes in a unibody polycarbonate design that enables superior antenna performance for better reception, better voice quality and fewer dropped calls; and a smarter all-round experience with NFC for sharing and pairing to accessories. The Nokia N9 also introduces an innovative new design where the home key – typically located at the bottom of the device – is replaced by a simple gesture: a swipe.
– We started shipping the Nokia C2-00, our first Dual SIM mobile phone which enables users to use two SIM cards in the same device, meaning calls and text messages can come to either number when the phone is on. The Nokia C2-00 is a Series 40-based device.
– We started shipping the Dual SIM Nokia X1-01, a Series 30-based phone optimized for music playback through a powerful built-in speaker.
– We further expanded our Dual SIM portfolio with the introduction of the Nokia C2-03, which has unique Dual SIM capabilities. The device enables users to personalize up to five SIM cards, while it also features our Easy Swap technology which makes switching SIM cards simple and quick.
– Along with two other new models we introduced in the quarter – the Nokia C2-02 and Nokia C2-06 – the Nokia C2-03 features the new Nokia Browser, which is designed to provide a more personal and affordable internet experience. The Nokia Browser, which is available in 87 languages, compresses data and can thus reduce the cost of surfing the web. All three new models also feature Nokia Maps for Series 40, which provides an advanced, cost-efficient maps experience. The new Nokia Maps for Series 40 is similar to that available on our smartphones in that people can view maps and plan routes when the phone is in offline mode.
– We launched photorealistic 3D models of certain metropolitan areas for the web version of Ovi Maps. This immersive and free feature adds a new dimension to the Ovi Maps experience and enables people to explore places in a completely different way.
– Store continued to see increased downloads of applications and content during the quarter. By early July 2011, the Store was attracting more than 6.5 million downloads a day, compared with up to 5 million a day reported in April 2011, boosted by downloads on the latest Symbian devices. Increased demand for apps from the approximately 225 million-strong Symbian consumer base has seen the Store catalog grow to more than 50 000 apps.
– We announced plans to make Qt core to our mobile phones strategy. For developers, this means a dramatic increase in the distribution and monetization opportunities for Qt apps.
– We announced the release of Qt SDK 1.1 offering one integrated development environment for creating both consumer applications on Nokia’s Symbian platform as well as for desktop applications such as Windows 7, Mac OSX and Linux. Using the Qt SDK to build their apps, developers have a complete, easy-to-use tool designed to reduce application creation time for Nokia touch-screen devices.NAVTEQ
– NAVTEQ launched its LocationPoint mobile ad network in South Africa.
– NAVTEQ announced the availability of real-time traffic in Russia and United Arab Emirates. The UAE launch coincided with the data being made available on Nokia smartphones.
– NAVTEQ announced it is supplying map data for new GPS-enabled digital cameras from Fujifilm and Olympus Imaging.
– NAVTEQ previewed its TPEG-based traffic services which will significantly reduce costs of delivering traffic and other dynamic data.
– NAVTEQ expanded its presence in India with the opening of a second production center and the launch of NAVTEQ Natural Guidance for India.Nokia Siemens Networks
– Nokia Siemens Networks completed the acquisition of certain wireless network infrastructure assets of Motorola Solutions, paying USD 975 million in cash, on April 29, 2011. The acquisition is expected to strengthen the company’s position in North America and Japan, adding approximately 6 900 employees across 52 countries.
– Nokia Siemens Networks announced several key mobile broadband deals, including a LTE roll-out for LG U+ in Korea, HSPA+ as part of 3G modernization and expansion for Celcom in Klang Valley, Malaysia, as well as 3G/HSPA network equipment and related turnkey services for TelCell in the Netherlands Antilles. The company signed a system integration deal with MegaFon to build a country-wide IP mobile backhaul network in Russia and an exclusive packet core deal with Optus in Australia. In addition, FASTWEB, an Italian broadband provider, selected Nokia Siemens Networks and Juniper Networks to build additional network capacity and deliver a Multiservice IP backbone.
– SK Telecom in Korea selected Nokia Siemens Networks to provide a 100G-ready optical network system and INOVENTICA, a Russian infrastructure service provider, will use the company’s DWDM optical transport network to offer cloud computing services.
– Nokia Siemens Networks announced it has invested in ClariPhy Inc., a leading U.S.-based semiconductor developer for next-generation platforms.
– In services, Nokia Siemens Networks announced the start of operations for its Global Network Operations Center (GNOC) in Sao Paulo, Brazil. In China, Shanghai Unicom awarded the company a five-year contract for network maintenance services. China Unicom’s subsidiary in Anhui province will deploy Nokia Siemens Networks’ Energy Solutions to reduce by 20% total mobile base station site power consumption.
– In the customer experience management field, Nokia Siemens Networks expanded its portfolio with CEM 2.0, which helps operators fully utilize data to improve the customer experience and their business results. The company announced Zain Kuwait is now deploying two CEM platforms, Serve atOnce Traffica and Serve atOnce Intelligence.
– Nokia Siemens Networks has signed a contract with Yutong Bus in China to provide a machine-to-machine (M2M) service platform and develop telematics applications based on a cost efficient Software-as-a-Service (SaaS) model.
– Nokia Siemens Networks has expanded its Liquid Radio architecture with the launch of a new, high power radio module for its Flexi Multiradio Base Station family at CommunicAsia 2011 in Singapore.
