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Nokia Corporation Interim Report for Q3 2014 and January-September 2014

Nokia Corporation
Interim Report
October 23, 2014 at 08:00 (CET+1)

This is a summary of the Nokia Corporation Interim Report for Q3 2014 and January-September 2014 published today. The complete Interim Report with tables for Q3 2014 and January-September 2014 is available at http://company.nokia.com/financials. Investors should not rely on summaries of Nokia's interim reports only, but should review the full interim reports with tables.

FINANCIAL AND OPERATING HIGHLIGHTS

Third quarter 2014 highlights:
- Non-IFRS diluted EPS in Q3 2014 of EUR 0.09 (EUR 0.06 in Q3 2013); reported diluted EPS of EUR 0.19 (EUR 0.04 in Q3 2013)
- Net sales in Q3 2014 of EUR 3.3 billion (EUR 2.9 billion in Q3 2013)

Nokia Networks
- Nokia Networks achieved 13% year-on-year growth in net sales, from EUR 2.6 billion in Q3 2013 to EUR 2.9 billion in Q3 2014.
- In Q3 2014, Nokia Networks achieved strong underlying operating profitability with non-IFRS operating profit of EUR 397 million, or 13.5% of net sales, compared to EUR 217 million, or 8.4% of net sales, in Q3 2013.
- The strong net sales and profitability improvement of Nokia Networks on a year-on-year basis was primarily due to major new LTE network deployments in North America and Greater China, which benefitted Mobile Broadband.

HERE
- HERE achieved 12% year-on-year growth in net sales, from EUR 211 million in Q3 2013 to EUR 236 million in Q3 2014.
- In Q3 2014, HERE sold map data licenses for the embedded navigation systems of 3.2 million new vehicles globally, compared to 2.6 million vehicles in Q3 2013.


Nokia Technologies
- Nokia Technologies achieved 9% year-on-year growth in net sales, from EUR 140 million in Q3 2013 to EUR 152 million in Q3 2014, primarily due to Microsoft becoming a more significant intellectual property licensee.

Commenting on the third quarter results on a year-on-year basis, Rajeev Suri, Nokia President and CEO, said:

Nokia's third quarter results demonstrate our strong position in a world where technology is undergoing significant change. We saw growth in all three of our businesses; non-IFRS earnings per share was up 50%; and we moved forward with our capital structure optimization program, returning cash to shareholders.

Performance at Nokia Networks was particularly satisfying, with both growth and improved profitability. Progress was widespread, with four of our six regions increasing sales; Mobile Broadband sales and profitability were up sharply; Global Services delivered its sixth consecutive quarter of double digit profitability; and I was pleased to see a rebound in Europe driven by our robust deal momentum. That said, I also want to be clear that Networks benefited from some unique developments in the quarter, with a business mix weighted towards Mobile Broadband and regional mix that included strong gains in North America.


HERE also delivered a double digit sales increase in the quarter. We are sharpening HERE's strategy in order to better balance growth and profitability while ensuring relentless focus on priority segments such as automotive. I am confident that this strategy, combined with a new focus on efficiency gains, positions HERE well for the future.

Nokia Technologies continued to invest in the innovation and business infrastructure necessary to enable future growth and renewal of our strong patent portfolio. This work, as well as our current licensing activities, will take time to come to fruition, but I believe that we are moving rapidly in the right direction.

Third quarter 2014 material special items:
- In Q3 2014, we recorded a charge to operating profit of EUR 1.2 billion for the impairment of HERE goodwill. The impairment charge is based on our estimate that the recoverable amount of HERE is now EUR 2.0 billion. During Q3 2014, we also recognized a non-cash tax expense of EUR 0.3 billion due to valuation allowances related to HERE's Dutch deferred tax assets.
- At the end of Q3 2014, due to improved operating performance, Nokia recognized EUR 2.1 billion of deferred tax assets from the reassessment of recoverability of deferred tax assets related to Finland and Germany, of which EUR 2.0 billion was recorded as a non-cash tax benefit in Q3 2014 reported tax expenses.

Balance sheet highlights:
- Nokia ended Q3 2014 with a strong balance sheet and solid cash position with gross cash of EUR 7.6 billion and net cash of EUR 5.0 billion compared to EUR 9.0 billion and EUR 6.5 billion, respectively, at the end of Q2 2014.
- In Q3 2014, Nokia paid a special dividend of EUR 966 million (EUR 0.26 per share) and an ordinary dividend of EUR 408 million (EUR 0.11 per share). In Q3 2014, Nokia also commenced the share repurchases under its capital structure optimization program and used EUR 220 million for such share repurchases.
- The sequential decline in Nokia's gross and net cash balances was primarily due to the payments of special and ordinary dividends during Q3 2014 and the commencement of share repurchasing. In addition, the sequential decline in Nokia's cash position was driven by cash outflows related to acquisitions completed during the quarter, amounting to EUR 159 million, partially offset by positive cash flow from operations of EUR 399 million.

January-September 2014 highlights:
Nokia's continuing operations net sales in January-September 2014 were EUR 8.9 billion
- Nokia's continuing operations net sales for the nine months ended September 2014 decreased 3% year-on-year.
- Reported diluted EPS for the nine months ended September 2014 was EUR 0.21, compared to EUR 0.00 in the nine months ended September 2013.


SUMMARY FINANCIAL INFORMATION

  Reported and Non-IFRS third quarter 2014 results1   Reported and Non-IFRS January - September 2014 results1
EUR million Q3/14 Q3/13 YoY

Change
Q2/14 QoQ

Change
  Q1-Q3/

2014
Q1-Q3/

2013
YoY

Change
Continuing Operations                  
Net sales 3 324 2 938 13% 2 942 13%   8 930 9 232 -3%
Gross margin % (non-IFRS) 44.5% 42.9%   44.0%     44.7% 41.9%  
Operating expenses (non-IFRS) -1 007 -963 5% -940 7%   -2 872 -2 976 -3%
Operating profit (non-IFRS) 457 344 33% 347 32%   1 108 1 028 8%
Non-IFRS exclusions from operating profit 1 267 82   62     1 391 784  
Operating profit -810 262   284     -283 244  
Profit (non-IFRS) 353 206 71% 215 64%   739 562 31%
Non-IFRS exclusions from profit -407 68   241     -105 705  
Profit 760 138 451% -26     844 -143  
EPS, EUR diluted (non-IFRS) 0.09 0.06 50% 0.06 50%   0.19 0.12 58%
EPS, EUR diluted (reported) 0.19 0.04 375% -0.01     0.21 0.00  
Net cash from operating activities 406 -   1 455 -72%   2 059 -  
Net cash and other liquid assets 5 025 2 413 108% 6 497 -23%   5 025 2 413 108%

Note 1 relating to results information and non-IFRS (also referred to as "underlying") results: The results information in this report is unaudited. Percentages and figures presented herein may include rounding differences and therefore may not add up precisely to the totals presented and may vary from previously published financial information. In addition to information on our reported IFRS results, we provide certain information on a non-IFRS, or underlying business performance, basis. Non-IFRS results exclude all material special items for all periods. In addition, non-IFRS results exclude intangible asset amortization and other purchase price accounting related items arising from business acquisitions. Nokia believes that our non-IFRS results provide meaningful supplemental information to both management and investors regarding Nokia's underlying business 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. More information, including a reconciliation of our Q3 2014 and Q3 2013 non-IFRS results to our reported results, can be found in our complete Q3 2014 report with tables on pages 22-27. A reconciliation of our Q2 2014 non-IFRS results to our reported results can be found in our complete Q2 2014 interim report with tables on pages 22-27 published on July 24, 2014.

NOKIA'S OUTLOOK
- Nokia now expects Nokia Networks' non-IFRS operating margin for the full year 2014 to be slightly above 11%. This compares to Nokia's previous outlook for Nokia Networks' non-IFRS operating margin for the full year 2014 to be at or slightly above the higher end of Nokia Networks' targeted long-term non-IFRS operating margin range of 5% to 10%. In addition, Nokia continues to expect Nokia Networks' net sales to grow on a year-on-year basis in the second half 2014. This outlook is based on Nokia's financial performance in the first nine months of 2014, as well as Nokia's expectations regarding a number of factors, including:
- competitive industry dynamics;
- a sequentially higher proportion of Global Services net sales in the fourth quarter of 2014, following an elevated proportion of Mobile Broadband net sales in the third quarter of 2014, which was primarily due to major new network deployments;
- regional mix; and
- expected continued operational improvement.
- During 2014, Nokia continues to expect HERE to invest to capture longer-term transformational growth opportunities while taking steps to increase our focus on our automotive and enterprise businesses. Nokia continues to expect these investments to negatively affect HERE's 2014 non-IFRS operating margin.
- Nokia expects Nokia Technologies' annualized net sales to continue at a run rate of approximately EUR 600 million during 2014.
- Nokia currently expects financial income and expenses, including net interest expenses and the impact from changes in foreign exchange rates on certain balance sheet items, to amount to an expense of approximately EUR 40 million on a quarterly basis, subject to changes in foreign exchange rates and the level of interest bearing liabilities.
- Nokia now expects full year 2014 capital expenditures for continuing operations to be approximately EUR 250 million, primarily attributable to capital expenditures by Nokia Networks. This compares to Nokia's previous outlook for full year 2014 capital expenditures for continuing operations of approximately EUR 200 million. The increase in expected capital expenditures for continuing operations for the full year 2014 is primarily due to additional operational investments, including capacity enhancements, in Nokia Networks.
- On a non-IFRS basis, after having recognized the deferred tax assets related to our operations in Finland and Germany in third quarter 2014, Nokia now expects to record tax expenses at a long-term effective tax rate of approximately 25%. However, Nokia's cash tax obligations are expected to continue to be approximately EUR 250 million annually until Nokia's deferred tax assets have been fully utilized. The cash tax amount may vary depending on profit levels in different jurisdictions and the amount of license income potentially subject to withholding tax.

RISKS AND FORWARD-LOOKING STATEMENTS

It should be noted that Nokia and its businesses 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) expectations, plans or benefits related to Nokia's strategies; B) expectations, plans or benefits related to future performance of Nokia's businesses Nokia Networks, HERE and Nokia Technologies; C) expectations, plans or benefits related to changes in leadership and operational structure; D) expectations regarding market developments, general economic conditions and structural changes; E) expectations and targets regarding performance, including those related to market share, prices, net sales and margins; F) timing of the deliveries of our products and services; G) expectations and targets regarding our financial performance, cost savings and competitiveness, as well as results of operations; H) expectations and targets regarding collaboration and partnering arrangements; I) outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities; J) expectations regarding restructurings, investments, uses of proceeds from transactions, acquisitions and divestments and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, divestments and acquisitions, including any expectations, plans or benefits related to or caused by the transaction where Nokia sold substantially all of the Devices & Services business to Microsoft on April 25, 2014 ("Sale of the D&S Business"); K) statements preceded by or including "believe", "expect", "anticipate", "foresee", "sees", "target", "estimate", "designed", "aim", "plans", "intends", "focus", "continue", "project", "should", "will" or similar expressions. These statements are based on the 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 such differences include, but are not limited to: 1) our ability to execute our strategies successfully and in a timely manner, and our ability to successfully adjust our operations; 2) our ability to sustain or improve the operational and financial performance of our businesses and correctly identify business opportunities or successfully pursue new business opportunities; 3) our ability to execute Nokia Networks' strategy and effectively, profitably and timely adapt its business and operations to the increasingly diverse needs of its customers and technological developments; 4) our ability within our Nokia Networks business to effectively and profitably invest in and timely introduce new competitive high-quality products, services, upgrades and technologies; 5) our ability to invent new relevant technologies, products and services, to develop and maintain our intellectual property portfolio and to maintain the existing sources of intellectual property related revenue and establish new such sources; 6) our ability to protect numerous patented standardized or proprietary technologies from third-party infringement or actions to invalidate the intellectual property rights of these technologies; 7) our ability within our HERE business to maintain current sources of revenue, historically derived mainly from the automotive industry, create new sources of revenue, for instance in the enterprise business, successfully recognize and pursue growth opportunities and extend the reach of our location services; 8) our dependence on the development of the mobile and communications industry in numerous diverse markets, as well as on general economic conditions globally and regionally; 9) Nokia Networks' dependence on a limited number of customers and large, multi-year contracts; 10) our ability to retain, motivate, develop and recruit appropriately skilled employees; 11) the potential complex tax issues and obligations we may face, including the obligation to pay additional taxes in various jurisdictions and our actual or anticipated performance, among other factors, could result in allowances related to deferred tax assets; 12) our ability to manage our manufacturing, service creation and delivery, and logistics efficiently and without interruption, especially if the limited number of suppliers we depend on fail to deliver sufficient quantities of fully functional products and components or deliver timely services; 13) any inefficiency, malfunction or disruption of a system or network that our operations rely on or any impact of a possible cybersecurity breach; 14) our ability to reach targeted results or improvements by managing and improving our financial performance, cost savings and competitiveness; 15) management of Nokia Networks' customer financing exposure; 16) the performance of the parties we partner and collaborate with, as well as financial counterparties, and our ability to achieve successful collaboration or partnering arrangements; 17) our ability to protect the technologies, which we develop, license, use or intend to use, from claims that we have infringed third parties' intellectual property rights, as well as, impact of possible licensing costs, restriction on our usage of certain technologies, and litigation related to intellectual property rights; 18) the impact of regulatory, political or other developments, including those caused by the impact of trade sanctions, natural disasters or disease outbreaks on our operations and sales in those various countries or regions where we conduct business; 19) exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Japanese yen and the Chinese yuan, as well as certain other currencies; 20) effects of impairments or charges to carrying values of assets, including goodwill, or liabilities; 21) our ability to successfully implement planned transactions, such as acquisitions, divestments, mergers or joint ventures, manage unexpected liabilities related thereto and achieve the targeted benefits; 22) the impact of unfavorable outcome of litigation, arbitration, contract related disputes or allegations of health hazards associated with our business; 23) potential exposure to contingent liabilities due to the Sale of the D&S Business and possibility that the agreements we have entered into with Microsoft may have terms that prove to be unfavorable for us, as well as the risk factors specified on pages 12-35 of Nokia's annual report on Form 20-F for the year ended December 31, 2013 under Item 3D. "Risk Factors." Other unknown or unpredictable factors or underlying assumptions subsequently proven to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Nokia does not undertake 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.

Nokia Management, Helsinki - October 23, 2014

Media and Investor Contacts:

Corporate Communications, tel. +358 10 448 4900 email: press.services@nokia.com
Investor Relations Europe, tel. +358 4080 3 4080
Investor Relations US, tel. +1 650 644 4709

­- Nokia plans to publish its fourth quarter and annual 2014 results on January 29, 2015

- Nokia will hold a Capital Markets Day for institutional investors in London, UK on November 14, 2014. Institutional investors who are planning to attend are encouraged to register for the event, as space is limited. Any questions related to Nokia's Capital Markets Day can be addressed to cmd2014@nokia.com.