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Nokia Releases Second Quarter Numbers
Posted: 19-Jul-2012 [Source: Nokia]

[Nokia Devices & Services Q2 net sales decreased 5% quarter-on-quarter. Q3 expected to be a challenging quarter in Smart Devices due to product transitions.]

Espoo, Finland -- FINANCIAL AND OPERATING HIGHLIGHTS

Nokia net sales in Q2 2012 were EUR 7.5 billion, up from EUR 7.4 billion in Q1 2012 - Nokia Devices & Services Q2 net sales decreased 5% quarter-on-quarter. - Lumia Q2 volumes increased quarter-on-quarter to 4 million units. - Mobile Phones Q2 volumes increased quarter-on-quarter and year-on-year to 73 million units.

Nokia non-IFRS EPS in Q2 2012 of EUR -0.08, level with Q1 2012; reported EPS EUR -0.38

- Reported EPS adversely affected by non-cash valuation allowances related to deferred tax assets* of EUR 800 million, inventory-related allowances, and restructuring related charges. - Devices & Services Q2 non-IFRS operating margin negative 9.1%, adversely affected by EUR 220 million of inventory-related allowances for our Lumia, Symbian and MeeGo devices. Smart Devices Q2 gross margin and contribution adversely affected by the inventory-related allowances. Q3 expected to be a challenging quarter in Smart Devices due to product transitions. - Nokia Siemens Networks returned to non-IFRS operating profitability in Q2; restructuring progressing well and company seeing continued progress against new strategy that focuses on key markets and product segments.

Both gross and net cash higher year-on-year

- Nokia ended Q2 with gross cash of EUR 9.4 billion and net cash of EUR 4.2 billion. - Net cash lower quarter-on-quarter, after EUR 742 million annual dividend payment to shareholders. - Nokia Q2 net cash from operating activities of positive EUR 102 million, including receipt of EUR 400 million pre-payments from existing IPR licenses.

*The majority of Devices & Services' Finnish deferred tax assets are indefinite in nature and remain available for Nokia to use against any potential future Finnish tax liabilities.

Commenting on the Q2 results, Stephen Elop, Nokia CEO, said: "Nokia is taking action to manage through this transition period. While Q2 was a difficult quarter, Nokia employees are demonstrating their determination to strengthen our competitiveness, improve our operating model and carefully manage our financial resources.

We shipped four million Lumia Smartphones in Q2, and we plan to provide updates to current Lumia products over time, well beyond the launch of Windows Phone 8. We believe the Windows Phone 8 launch will be an important catalyst for Lumia. During the quarter, we demonstrated stability in our feature phone business, and enhanced our competitiveness with the introduction of our first full touch Asha devices. In Location & Commerce, our business with auto-industry customers continued to grow, and we made good progress establishing our location-based platform with businesses like Yahoo!, Flickr, and Bing. We continued to strengthen our patent portfolio and filed more patents in the first half of 2012 than any previous six month period since 2007. And, we are encouraged that Nokia Siemens Networks returned to underlying operating profitability through strong execution of its focused strategy.

We are executing with urgency on our restructuring program. We are disposing of non-core assets like Vertu. We are taking the necessary steps to restructure the operations of the company, which included the announcement of a new program on June 14. Faster than anticipated, we have already negotiated the closure of the Ulm, Germany R&D site, and the negotiations about the planned closure of our factory in Salo, Finland are proceeding in a collaborative spirit.

We held our net cash resources at a steady level after adjusting for the annual dividend payment to our shareholders. While Q3 will remain difficult, it is a critical priority to return our Devices & Services business to positive operating cash flow as quickly as possible."

NOKIA OUTLOOK

- Nokia expects its non-IFRS Devices & Services operating margin in the third quarter 2012 to be similar to the second quarter 2012 level of negative 9.1%, plus or minus four percentage points. This outlook is based on our expectations regarding a number of factors, including: - competitive industry dynamics continuing to negatively affect the Smart Devices and Mobile Phones business units; - consumer demand particularly related to our current Lumia products; and - the macroeconomic environment.

- Nokia expects the third quarter 2012 to be a challenging quarter in Smart Devices due to product transitions. - Nokia continues to target to reduce its Devices & Services non-IFRS operating expenses to an annualized run rate of approximately EUR 3.0 billion by the end of 2013. - Nokia and Nokia Siemens Networks expect Nokia Siemens Networks non-IFRS operating margin in the third quarter 2012 to be above the second quarter 2012 level of 0.8%. - Nokia Siemens Networks continues to target to reduce its non-IFRS annualized operating expenses and production overheads by EUR 1 billion by the end of 2013, compared to the end of 2011.

DEVICES & SERVICES

The year-on-year and sequential changes in our Devices & Services net sales, volumes, average selling prices and gross margin are discussed below under our Smart Devices and Mobile Phones business units. On a year-on-year basis, the decline in Devices & Services Other net sales was primarily due to the recognition in the second quarter 2011 of approximately EUR 430 million of IPR royalty income from new contracts related to the second quarter 2011 and earlier periods. We estimate that our current annual IPR royalty income run-rate is approximately EUR 0.5 billion.

At the end of the second quarter 2012, our overall channel inventory was approximately on the same level as at the end of the first quarter 2012. We ended the second quarter 2012 around the high end of our normal 4 to 6 week channel inventory range, but on an absolute unit basis, channel inventories declined slightly sequentially.

Operating Expenses

Devices & Services non-IFRS operating expenses decreased 14% year-on-year and 3% sequentially in the second quarter 2012. On a year-on-year basis, operating expenses related to Mobile Phones increased 7%, whereas operating expenses related to Smart Devices decreased 28%, in the second quarter 2012. On a sequential basis, operating expenses related to Mobile Phones and Smart Devices decreased by 5% and 3%, respectively, in the second quarter 2012. In addition to the factors described below, the year-on-year changes resulted from the proportionate allocation of operating expenses being affected by the relative mix of sales and gross profit performance between Mobile Phones and Smart Devices. This resulted in higher and lower relative allocations to Mobile Phones and Smart Devices, respectively.

Devices & Services non-IFRS research and development expenses decreased 19% year-on-year in the second quarter 2012. On a sequential basis, Devices & Services non-IFRS research and development expenses decreased 7% in the second quarter 2012. Both the year-on-year and sequential declines were primarily due to a reduction in Symbian and MeeGo related costs as well as cost controls.

Devices & Services non-IFRS sales and marketing expenses decreased 6% year-on-year in the second quarter 2012. On a sequential basis, Devices & Services non-IFRS sales and marketing expenses increased 8% in the second quarter 2012. Year-on-year, marketing expenses declined primarily due to lower marketing expenditure on Symbian as well as cost controls, partially offset by higher marketing expenditure on Lumia and feature phone devices. Sequentially, marketing expenses increased primarily due to higher expenditure on Lumia devices as well as expanded regional distribution of Lumia devices, partially offset by cost controls.

Devices & Services non-IFRS administrative and general expenses decreased 30% year-on-year in the second quarter 2012 primarily related to cost savings in support functions, particularly in IT and real estate management and shared function cost categorization. On a sequential basis, Devices & Services non-IFRS administrative and general expenses decreased 35% in the second quarter 2012 primarily due to shared function cost categorization and cost savings in support functions.

In the second quarter 2012, Devices & Services non-IFRS other income and expense had a negative year-on-year and positive sequential impact on profitability. On a reported basis, other income and expense was significantly adversely affected in the second quarter 2012 primarily as a result of restructuring-related expenses discussed below, which were recognized in Devices & Services Other.

Operating Margin

The lower year-on-year and sequential Devices & Services non-IFRS operating margin in the second quarter 2012 was primarily due to lower net sales and gross margins, which was adversely affected by EUR 220 million of inventory-related allowances in Smart Devices, partially offset by lower operating expenses.

Cost Reduction Activities and Planned Operational Adjustments Nokia continues to target to reduce its Devices & Services non-IFRS operating expenses to an annualized run rate of approximately EUR 3.0 billion by the end of 2013.

In connection with the implementation of our strategy announced in February 2011, we have announced and made a number of changes to our operations. In the second quarter of 2012, we recognized restructuring charges and other associated items of EUR 108 million related to our restructuring activities in Devices & Services. By the end of the second quarter 2012, we had recorded cumulative Devices & Services restructuring charges of approximately EUR 1.0 billion. In total, we expect cumulative Devices & Services restructuring charges of approximately EUR 1.8 billion before the end of 2013. By the end of the second quarter 2012, Devices & Services had cumulative restructuring related cash outflows of approximately EUR 600 million. >From the third quarter 2012 onwards, we expect Devices & Services restructuring related cash outflows to be approximately EUR 500 million in 2012 and approximately EUR 500 million in 2013. Of the total expected charges relating to restructuring activities of EUR 1.8 billion, we expect Devices & Services non-cash charges to be approximately EUR 200 million.

SMART DEVICES

Net Sales On a year-on-year basis, the decline in our Smart Devices net sales in the second quarter 2012 was primarily due to lower Symbian volumes, partially offset by sales of Nokia Lumia devices. In addition, Symbian ASPs decreased on a year-on-year basis.

On a sequential basis, the decline in our Smart Devices net sales in the second quarter 2012 was primarily due to lower Symbian volumes, partially offset by higher volumes of Nokia Lumia devices. In addition, Symbian ASPs increased and Lumia ASPs decreased on a sequential basis.

Volume The year-on-year decline in our Smart Devices volumes in the second quarter 2012 continued to be driven by the strong momentum of competing smartphone platforms relative to our Symbian devices, partially offset by sales of 4 million Lumia devices. All regions showed a significant year-on-year decline in the second quarter 2012 except for North America, where the sharp decline in sales of Symbian devices was more than offset by sales of our Lumia devices including the Lumia 900 with AT&T and the Lumia 710 with T-Mobile.

On a sequential basis, the decline in our Smart Devices volumes in the second quarter 2012 was primarily driven by lower Symbian volumes in all regions. This more than offset the sequential increase in Nokia Lumia device volumes, which was driven by sales of the Lumia 610 and the Lumia 900 as well as expanded regional distribution, particularly into China and Latin America.

Average Selling Price The year-on-year increase in our Smart Devices ASP in the second quarter 2012 was primarily due to a positive mix shift towards sales of Nokia Lumia devices which carry a higher ASP than Symbian devices, as well as a positive impact related to deferred revenue on services sold in combination with our devices. Sequentially, the increase in our Smart Devices ASP in the second quarter 2012 was primarily due to a positive mix shift towards sales of Nokia Lumia devices. The ASP of our Lumia devices in the second quarter 2012 was EUR 186, compared to EUR 220 in the first quarter 2012.

Gross Margin The significant year-on-year and sequential decline in our Smart Devices gross margin in the second quarter 2012 was primarily due to the recognition of approximately EUR 220 million of allowances related to excess component inventory, future purchase commitments and an inventory revaluation related to our Lumia, Symbian and MeeGo devices. Increases or decreases to Smart Devices allowances may be required in the future depending on several factors, including future sales performance.

In addition, the year-on-year gross margin decline in the second quarter 2012 was due to price reductions across our Symbian portfolio as well as higher fixed costs per unit, such as certain royalties, because of lower sales volumes.

MOBILE PHONES

Net Sales Both on a year-on-year and sequential basis, our Mobile Phones net sales in the second quarter 2012 decreased due to the lower ASP.

Volume On a year-on-year basis, the increase in our Mobile Phones volumes in the second quarter 2012 was primarily due to the continued ramp up of our latest generation of feature phones, such as the Nokia 100 and 101, which we sell to our customers for below EUR 50. However, volumes of our higher priced feature phone portfolio were adversely affected by competition from more affordable smartphones and from competitors with broader portfolios of feature phones with more smartphone-like experiences, such as full touch devices.

On a sequential basis, the increase in our Mobile Phones volumes in the second quarter 2012 was also primarily due to the continued ramp up of our latest generation of feature phones which we sell to our customers for below EUR 50. Volumes of our higher priced feature phone portfolio stayed at approximately the same level sequentially.

Average Selling Price The year-on-year decline in our Mobile Phones ASP in the second quarter 2012 was primarily due to an increased proportion of sales of lower priced devices and price erosion.

On a sequential basis, the decline in our Mobile Phones ASP in the second quarter 2012 was also primarily due to an increased proportion of sales of lower priced devices. Sequentially, however, the prices of our feature phones remained approximately at the same level.

Gross Margin The year-on-year decline in our Mobile Phones gross margin in the second quarter 2012 was primarily due to a negative product mix shift towards lower gross margin feature phones, partially offset by greater cost erosion than price erosion.

The sequential decrease in our Mobile Phones gross margin in the second quarter 2012 was primarily due to higher warranty expense, partially offset by greater cost erosion than price erosion. In the first quarter 2012, our gross margin was positively impacted by a warranty provision release benefit as our claims rates and repair costs declined.

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