Q4 2019 Earnings Call
Head of investor relations sir, you may begin.
Ladies and gentlemen, welcome to Nokia's fourth-quarter and full-year 2019 conference call. I'm at head of no key investor relations with Syria president and CEO of Nokia and Chris took Lola CFO of Nokia are here in espoo with me today during this call will be making forward-looking statements regarding the future business and financial performance of Nokia, and this industry these statements were predictions that involve risks and uncertainties actual results made therefore differ materially from the results. We currently expect factors that could cause such differences can be both external such as general economic and Industry conditions as well as internal operating factors identified such risk in more detail on pages 60 through 75 of our 2018 annual report on form 20-f our financial report for a full year 2019 issued today as well as our other filings with the Securities and Exchange Commission. Please note that our results release the complete interim Report with tables and the presentation number.
Our website include non our fresh results information in addition to the reported results information our complete financial report with tables available on our website includes a detailed explanation the concept of the non our first information and a Reconciliation between the non our forests and the reported information with that relief over to you. Thanks Matt and thanks to all of them joining. I would like to start my remarks today by talking about the two areas where we will have a particularly sharp Focus this year executing in Mobile access and strengthening cash generation. I will then come back to an overview of our fourth quarter and give you some more color on our results in what we see going forward executing and mobile access and strengthening cash generation are the two thousand most pressing issues that we Face since we announced our third-quarter results we have listened carefully to you are investors in many other stakeholders. We are committed to improving our performance wage.
Based on the feedback. We have received are taking steps to provide greater transparency on progress against the
Instead we have made before going into the details. However, let me make two additional upfront comments first despite our strong fourth-quarter results. We still have plenty of work to do particularly in Mobile access. We expect to make meaningful progress over the course of the year. And as I said a few months ago expect our turnaround to a firmly taken hold by the end of this year second while I get very focused on addressing the areas where we need to improve we saw robust performance in many other parts of the company in both the fourth quarter and full-year 2019.
On a full year basis IP routing continued strong momentum gaining significant market share and improving profitability Nokia software delivered on its promise with an operating. Margin. That was up sharply. 2018 Nokia Enterprise also delivered exceedingly. Well hitting its double-digit sales growth Target and considerably outperforming the market and Nokia Technologies increased. It's already excellent profitability while all of this is good we are well aware of the fact access is not performing. Well Nokia as a company will struggle to perform. Well, so let me turn to that now off to start. Let me just be clear about terminology when I talk about mobile access. I'm talking about the combination of our product focused mobile networks business group and our Global Services organization this Thursday right grouping to look at overall mobile performance given the close linkage between the two in our earnings release. We report net sales for mobile access for precisely this reason
Within mobile access. Our focus is on four key areas first improving profitability through consistent product.
Cost reductions second maintaining scale to be competitive. So enhancing Commercial Management and deal discipline and forth further strengthening operational performance in offices. Let me talk more about each of these topics starting with improving profitability through consistent product cost reductions, which are essential to improving our Nokia level gross margins over time.
We are highly competitive in for G and are consistently rated as having the best performing 4G networks in North America Europe and other parts of the world by third party such as rootmetrics and others long as we discussed last quarter. We are facing challenges with high radio product costs in the early stages of 5G our teams in mobile networks procurement and others are working hard to optimize those costs by addressing wage. Every possible part of product bill of materials including semiconductors where a transition to system-on-chip is critical. We are making the right progress, but it will take time for those results to show in our financial performance. There is typically about a six-month lag when a new cost optimized product is shipped and when it starts to impact the financials volumes need to increase and deployments need to take place.
Good rest are 5G product issues and meet higher performance requirements. We have started rolling out Nokia's new.
5G powered by reef shark base station portfolio these new products made up about 10% of our 5G product shipments in Q4 2019. And we expect that number to increase, roughly over the course of the Year ending at more than 35% for fully or 20 21. We would be in the range of 70% and the transition would essentially be complete in 2022.
To give you visibility to how we are performing. We will give quarterly Updates this year on the percentage of 5G powered by reef shark weigh stations shipped and will flag any issues that we see both positive and negative. As of today. We are tracking against our plan and have seen some of our SOC development proceedings slightly ahead of schedule. This is complex work. However, so there is always a risk of issues or delays that we are now shipping are 5G powered by rear shock massive my more product which launched at the end of 2019 volumes were ramped up over the first half of the year as new variants are added and we expect to have or full lineup of 5G powered by Reef shop massive mimo by the end of the second quarter.
new 5G
Chuck Bass products will continue to come and we saw the successful tape out of two new chips in January as I'm sure many of you know about is the final step of the design process before chips are sent to be manufactured into engineering samples for product integration and testing. We're also making good progress on the next releases of 5G software with integration and verification showing improving quality and mature compared to earlier releases. These efforts are being boosted by both added R&D headcount and better productivity in short. We are tracking well, but there is still plenty of work to do the second issue of old is is maintaining scale and specifically scale related to Mobile Radio products. We expect that when all the results are in Nokia will have a 4G plus 5G market share in the range of 26% for 2019, excluding China while this means we lost some share in the year and this part of our overall primary addressable Market we expect to stabilize at approximately the same level.
27%
Twenty-twenty normal footprint fluctuations of course are always possible. But we have and expect to continue to have the necessary scale to be competitive one reason we have that confidence is that odd 5G win rate remains strong this metric factors in customer size and measures how we are doing in converting our end of 2018 for a footprint as well as adding new 5G a point where we did not previously have a 4G install base at the end of the fourth quarter 2019 are 5G win rate was over 100% excluding China and in the mid ninety percent range including China reflected in this overall performance. We have seen games in Korea Japan and the Middle East offset by some losses including in limited parts of Europe. In addition. We moved to New Communication service provider customers where we do not currently have a 4G footprint one of those being the publicly announced deal with Vodafone Hutchison, Australia. The other is a European operator Thursday.
not public
In short outside of China our position remains strong with customers where we have an existing 4G base and we've added some new 5G customers as well. As of today. We have 66 5019 live networks deployed pleasingly. We also added two new Enterprise 5G customers including Deutsche Bahn so that you can track our progress going forward. We will give quarterly updates on our win rate as well as a qualitative you on customer developments that we are seeing while the win rate is a good way to look at longer-term developments near term outcomes will be impacted by things like purchase orders Network rollout timelines deliveries and customer acceptances as additional background three comments first. We are focused on 4G plus 5G share figures as that the the best way to assess the question of scale and purchasing power. It is also increasingly difficult to decide to get the two technologies as products like massive. Mimo can be used for either one second we own no
For G Plus 5G share excluding China given that pursuing share in China presents significant profitability challenges in the market has some unique Dynamics as you know, we are ill.
Long-term player in China and it worked hard to meet requirements in the country including support for the td-scdma standard when no other Western vendors stepped up. We will continue to engage with our operator customers in China to support your 5G Ambitions, but what we do with them needs to work for Nokia as well. I want to be very clear that we are not backing away from China but simply executing again a clear strategic goal to improve our overall business mix in the country. This means that we will be prudent in 5G while targeting more attractive opportunities with service providers in core routing off transport fixed access and our current business as well as with Enterprise in web-scale customers. We still expect to be a sizable player in China well into the future and with the procurement Brownsburg still to come our final position and 5G will only be clear in time. So I want to emphasize that if you look at our performance in 2019 against our total primary addressable Market, excluding, Georgia
We were in line with market growth the losses in Mobile radio that I just mentioned were largely offset by gains in IP routing Optical and mobile packet code. The next Focus area remote access is enhancing Commercial Management and build discipline over the course of 2019. We have put in place strengthened Commercial Management processes designed to drive better performance and current contracts in Iraq move out comes in new ones deal decisions now include a sharp focus on cash and return on Capital employed metrics improve contractual terms and formal up-sell commitments as well as our Stanford revenue and margin requirements. We've also reviewed projects and customers that do not perform to our standard and have identified laborers to enable better future outcomes in some cases. There are projects where May renegotiate terms. And in fact, there are some where we are already doing so
as expected
New processes of already generated meaningful margin opportunities for Nokia in 2020 and we have included these into targets for sales teams and others finally further strengthening operational improvements and services. Where as I've noted before it turn around the starting to take hold as we increase operational discipline and enhance our efforts to manage for margin and cash. I'm pleased that we saw progress and our goal. This is operating margin full year 2019 compared to 2018. Even if we are still below what we believe we can achieve I also expect progress to continue in 2020 given better execution. Although we will have some headwinds given a roughly similar level of network deployment Services as in 2019 as new 5G bills proceed improvements in 2019 particularly in the second half was a given by a number of things including turn around a fully performing projects strict execution discipline and enforcement of standard delivery models resulting in fasting first time, right Network dead.
investments in digitalization
Automation driven productivity which are starting to show results the exit of six low-margin managed Services deals tighter control of inventories and strength and capabilities and new customers and higher-margin areas. All of this work should be reflected over time in our networks gross margin as the drivers and actions. I just discussed take hold.
So to conclude on mobile access, we will start to provide regular updates on one progress on improving 5G product costs through a transition to our 5G powered by Richard portfolio to a qualitative assessment progress against our goal to stabilize our 2024 G Plus 5G market share level excluding China at a similar level to 2019 and three are 5G win rate, which is a good name for a longer-term 5G market share position. Now, let me turn to our second Focus area of strengthening cash generation. We saw solid cash performance in the fourth quarter with a 1.5 billion-euro increase in our net cash position allowing us to end the show with a net cash balance of 1.73 billion euros, we expect twenty-twenty to be free cash flow positive as we noted in our third call channels man are both said that it expects to resume dividend distribution after Nokia's net cash position Rises to approximately two billion euros, given typical cash seasonality. We would not expect to
Reached that level in the first three.
Photos of the seal should we exceed the 2 billion-euro level after that point the board will assess the possibility of proposing a dividend distribution for financial year 2020 in his remarks today Christian will give a deeper perspective on the driver's of cash this year. We're we faced some particular headwinds related to Nokia Technologies and restructuring.
We have a structured program in place including a centralized war room to drive a company-wide focus on free cash flow and release of working capital project asset optimization strengthened contractual terms with customers and suppliers and reinforce controls across our supply chain and management of inventory with the work. We did in 2019. We were able to reduce inventories in the fourth quarter to the lowest level since the first quarter of 2018 going for for going forward. We have further increased the weight of cash Targets in the incentives not just for Nokia senior leaders, but for many on the front line with customers, we expect this change will ensure that we maintain our momentum in this critical area.
Christian will also talk about how we will adjust our
Earnings per share guidance, but now let me turn to the fourth quarter where we delivered strong results.
Well, Nokia level constant currency net sales were down. We slightly increased operating margin compared to the same period last year generated strong free cash flow and increased our net cash balance 21.73 billion-euro. I said despite the generally good performance in the quarter. Our Network gross. Margin is where we faced challenges coming in at 34.2% for Q4 2019 versus 36.5% in Q4 2018 on a full year basis networks gross margin was 30.6% for 2019 compared to 34.7% in 2018 on a full year 2019 basis Nokia level net sales were up 1% in constant currency globally and 5% excluding China and our non-ifrs operating margin was down about one percentage Point versus 2018. We remain on track with cost reduction initiatives relative to our commitment to reduce twenty-twenty costs by five hundred million euros compared to 2018 in 2019. We achieved
Euros of recurring cost savings is
Expected even when you exclude the savings benefit from the release of employee incentives. We did this despite facing considerable currency exchange headwinds of 125 million euros.
Given that I've already get dressed mobile access. Let me talk briefly about the Q4 performance in our other business groups starting with IP and Optical networks r i o n overall our momentum in this business was very good with Iowans best quarter ever in terms of both absolute profits and profitability and one of the best as far as sales go RFP for product leadership and IP routing combined with the power of the page. No, Kia sales Channel helped deliver constant currency growth of 6% in the quarter and 12% for the full year, excluding the video business that we are exiting at a time when the routing mom is declining we are clearly gaining share while also improving profitability Optical networks had a good year and fourth quarter constant-currency Q4 sales Rose 16% year-on-year off the bill be increased meaningfully for the full year.
even if there is
Of work still to do including continuously reducing product costs. We can now say with confidence that we are one of the scale players and opticals pleasingly are leading PSE 3 chipset is shipping in volume and has already been deployed in the first direct Optical connection between the USA and Africa with Angela cables.
Next Nokia software where our underlying performance has also been strong profitability. As I said was very good with full-year operating profit that was up sharply by 31% compared to a 2018 software sales would down in the fourth quarter and slightly for the full year on a constant currency basis, but I want to make two points to put those results in context first. We are a tough compared in the fourth quarter. Give them the same. In 2018 was Nokia software's strongest top-line quarter on record second on a full year basis software grew in every region, except China in India, as you know, we report India home of the asia-pacific region overall. I remain confident that the trajectory is in the right direction for our software business. Then Nokia Enterprise. I talked on previous calls about goal of double-digit also for your 2019 and the team delivered that constant currency your on your net sales growth was 33% in Q4 and 18% for the full year versus 2018 Q4. Yep.
your 2019 absolute profits and
Possibility both improved your area for 20 20. We are aiming for double-digit sales growth again.
Importantly for a business and growth mode. We added nearly 40 new customers in Q4 including Microsoft close with 122 new logos for the year, excellent growth too important for you to consider when assessing our Enterprise business first, we have moved quickly to grow the business from less than 5% of our total revenue to about 7% in 2019. If we maintain our trajectory, I see no reason why we cannot get to 10% and even Beyond second while we have been very successful in leveraging our routing and Optical portfolios in the Enterprise. We're now seeing rapid uptake of a wireless capabilities would more than double the number of private Wireless customers in 2019 to around $130 in total and see continued robust demand in the market.
Next six networks, which continues to face challenges in the market transition from copper to fiber as I have noted before we saw some initial signs of progress in Q4 including a lower decline rate inconsistency. You're on your sales and strongly improve profitability compared to the first three quarters of the year on a full year basis. However, the results from fixed would disappointing
we continue to have a
Stop focus on costs and if targeted selective expansion in new areas, particularly fixed wireless access where the pipeline is, robust, finally, even though Nokia technology sales were down in both off in full year 2019 profitability remained robust with a 320 basis point increase in operating margin for the full year compared to 2018 excluding 2018 revenue from our divestiture digital help business licensing revenues and 2019 were roughly stable our existing license agreements provide us with some near-term stability in this business and has been your deals come up. We will be adding on a strong portfolio your 5G patents into the current licensing package of earlier generations of mobile technology. We believe these new patterns have meaningful value for us to tap in the future.
With that, let me turn to giving a regional perspective and to First say that we expect that when all the results are in we will have gained share in our primary addressable Market in every region with the exception of China and Asia Pacific.
Civic while very strong in many countries was impacted by India more than that in just a moment where we had a slight decline in share, but we will not be sure of how much until we see all of the operative report their 2019 capex off on a constant currency for your 2019 basis. We saw sales increase in asia-pacific Europe Latin America and North America sales were down for the same. In Middle East and Africa by 2% but that was still a good performance in the context of challenging market dynamics. It is also pleasing to see that we have now been chosen by early adopter operatives in the leading 5G markets from Sprint and Verizon in the US to SoftBank in Japan to Korea Telecom in South Korea amongst others in addition to being selected by orange France and O2 in the UK.
I've already talked in detail about China and would now like to share some more color on North America in India with 5 G deployments progressing in 2019. North America saw 1% constant currency sales growth a full year despite a 5% constant currency declined in the fourth quarter uncertainty related to the announced operator merger where we have a large footprint has continued to present challenges long. As I said last quarter. We cannot predict when this situation will be resolved. We ended the you're having launched 5G networks in many US markets and expect that progress to continue in 2020 Nexus India, which we report as part of the issue Pacific region in which of the country where we have a long history and robust share as I'm sure you know, India's Telecom sector is in the midst of some serious turbulence in general mark down of the multiple years of heavy 3G and 4G Investments. My operator's was excessive dated when the Indian Supreme Court recently ruled that operators need to pay large accumulated Financial liability job.
dating back several
Peers like other companies in this market North Korea is now trying to fully understand the full potential impact of these developments and their impact on customer demand and overall Market risk. It is too early to say how long the situation would play out, but it is certainly an area that we are watching closely with that. Let me turn the call over to Christian. Thank you Jim. I will take a different approach today than in previous quarters. I will pay with cash as this is what we do internally nowadays in all our meetings to remind the organization of the focus needed. I will then continue with a brief summary of our financial results for Nokia Technologies Group, and other then take a look at group level results in Q4 and pull your nineteen. And finally I will quickly provide an update on our cost Savings Program and close with some remarks on our guidance. Okay. Let's start with our cash performance in Q4 want to sequential basis. Nokia's net cash increased approx, 1.44 billion-euro to a quarter and balance of approximately 1.7 wage.
the higher the
Expected cash balance was partly driven by lower-than-expected restructuring cash outflows where approximately 100 million moved from 19 to 20 free cash flow was bought at one point four billion Euro in Q4 primarily driven by operating cash flow which benefited from a solid adjusted net profit net cash inflows wage from net working capital and a one-time benefit as a result of settling certain interest rate derivatives, this one-time benefit total 190 million euro of which one hundred and sixty million positively impact free cash flow and thirty million positively impacted cash from financing activities. This inflows were partly offset by outflows related to capex restructuring cash taxes and a convertible loan off of our partners.
To give a bit deeper to drive a bit deeper Internet working capital excluding restructuring cash outflows. We generated 320 million euro from net working capital primarily driven by a 600 million-euro decrease in inventories as expected as expected. They were to Kia parts to achieving this first hour solid Q4 net sales rep told us to reduce our previously existing inventories in accordance with our plans. Secondly our efforts to optimize our incoming inventory is has kicked in strongly the team has quick page resumed disciplined execution and we are pleased to see the improvement in our numbers off setting this receivables increased three hundred and sixty million euro mostly given by seasonality. Opposite by improved collections, including higher sales of receivables in Q4. We were also able to collect a portion of the overdue receivable from a state-owned operator and we expect to collect the money.
and during the upcoming quarters liabilities were approximately fact approximately flat as we did not see typical seasonal increases in a
It's payable this was due to a combination of two things first already having high inventory levels earlier in the year and second our successful efforts in improving our inventory management. Just roam free cash flow performance include for led to a full year free cash flow. That was somewhat negative as expected while we are for while we are showing signs of life is there is clearly still more work to be done here we have plans for this and we are making needed changes and we'll track the execution very closely throughout 2028. So I have explained in the past quarters. The whole Nokia organization has put extensive focus on free cash flow one area. I would like to provide a bit more clarity around is our cash condition meaning converting our known efforts profits into free cash flow.
We are focused on improving our cash conversion of the time we do however have two large head winds in 20 21st our free cash flow continues to be negatively impacted by restructuring these hopefuls amounted to 450 million euro in nineteen and are expected to be 550 million euro in 20 second while Nokia technology is business generates a strong operating profit the annual free cash flow performance can differ significantly from our p&l performance both up and down. This has to do with the structure of some of the agreements where we receive large prepayments in cash. We put this on our balance sheet and recognize this as net sales over the lifetime of the agreement due to this Factory. We expect a substantial gap between p&l performance and free cash flow performance in 2020.
Of course over the life of each agreement the free cash flow.
For mismatches the the piano performance on the other hand we expect for Tailwind for our cash conversion in 20 21st. The fact that our capex is lower than our depreciation amortization mainly due to the adoption of IRS 60-second. Our pensions related cash outflows are less than our p&l expenses as we can utilize our page surpluses to offset cash requirements third financial interest where our cash outflows are less than our non-ifrs p&l expenses, but mainly due to some non-cash expenses related to the interest component of certain customer contract booked in financial interest and for taxes where our cash taxes are lower than our non-ifrs p&l taxes due to the utilization of deferred tax assets.
the four tablespoons are relatively small in size and as a result with
We faced significant overall head winds when it comes to converting our non-ifrs profits into free cash flow in 2020 there for our positive recurring free cash flow guidance in 2012's you driven by our assumptions of an of an improvement in net working Capital Performance as well as improved operate operational results. This will be partly offset by a larger expected difference in 2020 between profits and