Nokia Earnings 2019-12-31

As filed with the Securities and Exchange Commission on March 5, 2020

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

Commission file number 1‑13202

Nokia Corporation

(Exact name of Registrant as specified in its charter)

Republic of Finland
(Jurisdiction of incorporation)

Karakaari 7 FI‑02610 Espoo, Finland
(Address of principal executive offices)

Esa Niinimäki, Deputy Chief Legal Officer, Corporate, Telephone: +358 (0) 10 44 88 000, Facsimile: +358 (0) 10 44 81 002,
Karakaari 7, FI‑02610 Espoo, Finland
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”):

 

 

(1)   Not for trading, but only in connection with the registration of American Depositary Shares representing these shares, pursuant to the requirements of the Securities and Exchange Commission.

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Exchange Act: None

Indicate the number of outstanding shares of each of the registrant’s classes of capital or common stock as of the close of the period covered by the annual report. Shares: 5 640 536 159.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company” or “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☐

International Financial Reporting Standards as issued by the International Accounting Standards Board ☒

Other ☐

 

 

 

 

 

 

 

 

 

Certain statements contained in this Annual Report constitute "forward-looking statements". Forward-looking statements provide Nokia's current expectations of future events based on certain assumptions and include any statement that does not directly relate to any current or historical fact. The words “believe”, “expect”, “expectations”, “anticipate”, “foresee”, “see”, “target”, “estimate”, “designed”, “aim”, “plan”, “intend”, “influence”, “assumption”, “focus”, “continue”, “project”, “should", "is to", "will”, "strive", "may" or similar expressions as they relate to us or our management are intended to identify these forward-looking statements, as well as statements regarding:

A)business strategies including the four pillars of Lead, Expand, Build and Create, market expansion, growth management, and future industry trends and megatrends and our plans to address them, including Future X;

B)future performance of our businesses and any future distributions and dividends;

C)expectations and targets regarding financial performance, results, operating expenses, cash flows, taxes, currency exchange rates, hedging, cost savings and competitiveness, as well as results of operations including targeted synergies and those related to market share, prices, net sales, income and margins;

D)expectations, plans, timelines or benefits related to changes in our organizational and operational structure;

E)market developments in our current and future markets and their seasonality and cyclicality, including the communication service provider market, as well as general economic conditions and future regulatory developments;

F)our position in the market, including product portfolio and geographical reach, and our ability to use the same to develop the relevant business or market and maintain our order pipeline over time;  

G)any future collaboration or business collaboration agreements or patent license agreements or arbitration awards, including income from any collaboration or partnership, agreement or award;

H)timing of the development and delivery of our products and services, including our short term and longer term expectations around the deployment of 5G and our ability to capitalize on such deployment as well as use our global installed base as the platform for success in 5G, and the overall readiness of the 5G ecosystem;

I)the outcome of pending and threatened litigation, arbitration, disputes, regulatory proceedings or investigations by authorities;

J)restructurings, investments, capital structure optimization efforts, divestments and our ability to achieve the financial and operational targets set in connection with any such restructurings, investments, and capital structure optimization efforts including our 2019-2020 cost savings program;

K)future capital expenditures, temporary incremental expenditures or other R&D expenditures to develop or rollout new products, including 5G; and

L)the sustainability and corporate responsibility contained in the sustainability and corporate responsibility section of this annual report on Form 20-F.

These statements are based on management’s best assumptions and beliefs in light of the information currently available to it and are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. These statements are only predictions based upon our current expectations and views of future events and developments and are subject to risks and uncertainties that are difficult to predict because they relate to events and depend on circumstances that will occur in the future. Risks and uncertainties that could affect these statements include but are not limited to the risk factors specified under “Operating and financial review and prospectsRisk factors” of this annual report on Form 20-F and in our other filings or documents furnished with the U.S. Securities and Exchange Commission. 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. We do 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 Corporation is a public limited liability company incorporated under the laws of the Republic of Finland. In this annual report on Form 20‑F, any reference to “we,” “us,” “the Group,” “the company” or “Nokia” means Nokia Corporation and its consolidated subsidiaries and generally Nokia’s Continuing operations, except where we separately specify that the term means Nokia Corporation or a particular subsidiary or business segment only or our Discontinued operations. References to “our shares” matters relating to our shares or matters of corporate governance refer to the shares and corporate governance of Nokia Corporation.

Nokia Corporation has published its consolidated financial statements in euro for periods beginning on or after January 1, 1999. In this annual report on Form 20‑F, references to “EUR,” “euro” or “€” are to the common currency of the European Economic and Monetary Union, references to “dollars”, “U.S. dollars”, “USD” or “$” are to the currency of the United States, and references to “Chinese yuan” or “Chinese yuan renminbi” or “CNY” are to the official currency of the People’s Republic of China. Solely for the convenience of the reader, this annual report on Form 20-F contains conversions of selected euro amounts into U.S. dollars at specified rates or, if not so specified, at the year-end rate of 1.1234 U.S. dollars per euro, and conversions of selected euro amounts into Chinese yuan renminbi at specified rates or, if not specified, at the year-end rate 7.8205 Chinese yuan renminbi per euro. The referred year-end rates were the European Central Bank reference rates on December 31, 2019. No representation is made that the amounts have been, could have been or could be converted into U.S. dollars or Chinese yuan at the rates indicated or at any other rates.

Additional terms are defined in the "Glossary of terms".

The information contained in, or accessible through, the websites linked throughout this annual report on Form 20‑F is not incorporated by reference into this document and should not be considered a part of this document.

Nokia Corporation furnishes Citibank, N.A., as Depositary, with its consolidated financial statements and a related audit opinion of our independent auditors annually. These financial statements are prepared on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with IFRS as adopted by the European Union (IFRS). In accordance with the rules and regulations of the SEC, we do not provide a reconciliation of net income and shareholders’ equity in our consolidated financial statements to the generally accepted accounting principles in the United States, or U.S. GAAP. We also furnish the Depositary with quarterly reports containing unaudited financial information prepared on the basis of IFRS, as well as all notices of shareholders’ meetings and other reports and communications that are made available generally to our shareholders. The Depositary makes these notices, reports and communications available for inspection by record holders of American Depositary Receipts (ADRs), evidencing American Depositary Shares (ADSs), and distributes to all record holders of ADRs notices of shareholders’ meetings received by the Depositary.

In addition to the materials delivered to holders of ADRs by the Depositary, holders can access our consolidated financial statements, and other information included in our annual reports and proxy materials, at nokia.com/financials. This annual report on Form 20‑F is also available at nokia.com/financials as well as on Citibank’s website at https://app.irdirect.net/company/49733/hotline/. Holders may also request a hard copy of this annual report by calling the toll-free number 1‑877‑NOKIA-ADR (1‑877‑665‑4223), or by directing a written request to Citibank, N.A., Shareholder Services, PO Box 43077, Providence, RI 02940‑3081, United States. With each annual distribution of our proxy materials, we offer our record holders of ADRs the option of receiving all of these documents electronically in the future.

 

 

 

Contents

 

 

 

 

 

 

5G is changing how people live, work and communicate. Whole industries are being transformed. Networks are becoming faster and more responsive. Artificial intelligence and machine learning are allowing systems to sense their environment and react instantaneously. Digitalization and automation are making Industry 4.0 a reality. 

Nokia is addressing these changes around the globe. Our end-to-end portfolio of solutions and services is unique; our ability to partner with customers anywhere and address their needs is clearly demonstrated; and we are absolutely committed to quality, sustainability and integrity. Security is built in everything we do.

We are driving the innovation for tomorrow and delivering the technology today to make businesses more productive, environments cleaner, workplaces safer, economies stronger, and lives enriched. These are the expectations our customers trust us to deliver.

 

Financial highlights

(1)No dividend is proposed by the Board of Directors related to the financial year 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“2019 was the year 5G took off. We saw the first commercial 5G rollouts, and Nokia played a significant role helping customers in all leading markets. Many of our businesses performed very well – such as Nokia Enterprise delivering double-digit sales growth, IP Routing gaining significant market share and increasing profitability, and Nokia Software substantially expanding its profitability. We faced challenges in our Mobile Access and cash generation but know what we need to fix, and expect to improve over the course of 2020 and start 2021 in a much stronger position.”

Connectivity with a purpose

If Nokia creates the technology to connect the world, then in 2019 the world got that little bit better connected.

2019 was the year 5G was launched into the mass market  – and we were in the pilot’s seat. We are the only company working with all the operators who have chosen their 5G vendor in the early adopter markets of the US, South Korea and Japan. That gave us firsthand experience of the enthusiastic welcome consumers are giving 5G – in Korea, for example, we expected around 3 million users by the end of the year, but the final total was closer to 5 million.

Those would be great figures at any time. But remember that this new technology cycle is still in its early stages – and consumer appetite is only part of the picture. As 5G becomes established in more markets, its increased capacity, reliability and responsiveness will unlock the Fourth Industrial Revolution, profoundly changing the way cities, businesses and governments operate, and creating unprecedented opportunities for economic growth, human wellbeing and environmental sustainability.

That last point is critical. The evidence is clear: 5G can provide solutions to the pressing issue of climate change. Over time, 5G will improve material efficiency, resource efficiency and energy efficiency. The gains will be particularly striking in resource-intensive industries, such as mining and manufacturing.

And we are starting to get a taste of the potential of meaningful connectivity already before 5G fully arrives. In 2019, for instance, we helped small-scale farmers in Algeria automate their irrigation lines, leading not only to healthier crops but to less wasted water and greater crop yields. We helped the Japanese city of Sendai develop their crisis response system by using automated drones. And in Peru we are working with mining companies to reduce their environmental impact and improve employee safety.

The journey towards a better-connected, sustainable future also presents a huge business opportunity. According to World Economic Forum estimates, 5G alone can create over $13 trillion of global economic value across every conceivable industry, as well as over 22 million jobs, by 2035. Nokia is well positioned to benefit from this opportunity.

I will come back to that later in this letter, but first I want to explore our 2019 financial performance and explain what we are doing to improve in the areas where we have challenges.

Progress in a challenging year

Overall, we cannot be content with our financial performance in 2019. Nokia Group net sales were up 1 percent globally (5 percent excluding China) excluding the impact of changes in foreign currency exchange rates, and our operating margin was up by about 2 percentage points versus 2018.

But, at the same time, we had areas of remarkable strength across our business groups. IP Routing continued its strong momentum, gaining significant market share and improving profitability. Nokia Software delivered on its promise, with an operating margin that was up sharply from 2018. Nokia Enterprise also delivered exceedingly well, hitting its double-digit sales growth target and considerably outperforming the market. And Nokia Technologies increased its already excellent profitability.

Also, taking a regional perspective, we saw many good areas of performance. Our sales increased in Asia Pacific, Europe, Latin America, and North America. Excluding the impact of changes in foreign currency exchange rates, sales were down by 2 percent in Middle East and Africa but that was still a good performance in the context of challenging market dynamics. In Greater China the market presents some unique challenges, and we saw a sales decline of 16 percent excluding the impact of changes in foreign currency exchange rates.

As mentioned above, we were also chosen by early adopter operators in the leading 5G markets – from Sprint and Verizon in the US, to Softbank in Japan, to Korea Telecom in South Korea, amongst others; additionally, we were selected by Orange France and O2 in the UK. This was down to some admirable work across business groups and our customer organization teams. In 2020 we will work hard to maintain and increase the trust our customers have in us.

Improving execution in our access business

In 2019 the Nokia Group results were, however, impacted by the difficulties across our Mobile and Fixed Access businesses. Fixed Access continued to face challenges in the market transition from copper to fiber despite some initial signs of progress towards the end of the year. Going forward, we will continue to have a sharp focus on costs, and we have targeted selective expansion in new areas, particularly fixed wireless access.

The core of our profitability issues came from Mobile Access (a combination of our Mobile Networks and Global Services business groups), and in particular from high radio product costs in the early stages of 5G. Action is underway to overcome these challenges. First, teams across the company are working hard to optimize 5G product costs by addressing every possible part of product bills of materials, including semiconductors, where a transition to our system-on-chip “5G Powered by ReefShark” portfolio is critical.

Second, we want to maintain necessary scale in mobile radio products. This requires that we continue to convert existing 4G customers to 5G and confirm new ones. In 2019 we did well here and ended the year with a 4G+5G market share in the range of 27 percent excluding China. Going forward, we want to stabilize this at approximately the same level.

Third, in 2019 we took significant steps to enhance commercial management and deal discipline to drive better performance in current contracts and improve outcomes in new ones. We will continue to push hard for further improvements this year and expect to see positive impact on the profitability of Mobile Access gradually over the year.

Finally, we further strengthened operational improvements in services, including increases in operational discipline and enhanced efforts to manage for margin and cash. I was pleased to see that in 2019 our hard work started to take hold, and we saw improvement in our Global Services operating margin in 2019 compared to 2018, even if we were still below what we believe we can achieve.

In 2020 we will publish quarterly updates on our operational progress in Mobile Access, as well as on cash generation, which will continue to be an additional area of focus.

Strengthening cash generation

In 2019 we put a structured program in place to improve our cash position, including a company-wide focus on free cash flow and release of working capital, strengthened relevant contractual terms with customers and suppliers, and reinforced controls across our supply chain and inventory management. As a result, we were able to reduce inventories to the lowest levels since the beginning of 2018 and ended the year with a solid net cash position.

Going forward, we will continue to push hard to generate cash, and even though there may be headwinds related to the timing of Nokia Technologies’ cash flow and cash outflows related to restructuring in 2020, we expect these to be mitigated in the coming years.

Creating long-term value

In 2019 we made good progress against our strategic pillars and I am confident our strategy remains the right one and enables long-term value creation for our shareholders, customers, partners and employees.

In the first pillar of our strategy – leading in high-performance, end-to-end networks with communication service providers – we continued to progress in 5G despite the aforementioned challenges in Mobile Access. By the end of 2019 we reached 62 5G commercial deals and launched 18 live networks with our customers. We demonstrated the power of our unique global end-to-end portfolio with an increased number of multi-business group deals in our sales pipeline. Our broad portfolio also means that even though 5G product costs negatively impact our near-term margins, we are well positioned to benefit from the longer 5G investment cycle. 

Our second pillar is about growing our enterprise and webscale business and leading the digitalization of industries with private networks and industrial automation. In recent years we have successfully delivered what we promised we would: we expanded network sales into select vertical markets and positioned ourselves well in the industrial automation market, which we expect will be critical in the Fourth Industrial Revolution. And Nokia Enterprise’s results again in 2019 show high promise for the future.

The third pillar is about strengthening our software business with one Common Software Foundation. As noted above, 2019 was another strong year for us in this space, with leading industry analysts describing Nokia Software as the world’s leading telco software business. Through hard work in recent years, Nokia has grown into the overall market share leader across both telecom software and services combined.

We have also made good progress against our fourth pillar, diversifying our licensing business with new opportunities in patents, IoT and brand. Nokia Technologies has done a great job in creating new licensing opportunities in the consumer ecosystem, and we see meaningful growth opportunities in expanding our scope.

Operational excellence is the foundation for our strategic priorities. In addition to the aforementioned actions in cash, commercial discipline and operational improvements in services, we are continuing with various actions across Nokia that will contribute to our commitment to reduce costs in 2020 by EUR 500 million compared to 2018. This will make us smarter, leaner and more competitive going forward.

Working with integrity

One area bringing us added value – as well as a strong sense of pride – is the high level of integrity in the way we work. We will discuss our achievements in more detail in our People and Planet report published in April, but I want to mention a couple of highlights from 2019.

In February our culture of integrity and our positive impact on the business community and wider ecosystems received recognition, with Ethisphere naming Nokia one of the World’s Most Ethical Companies for the third year. And in 2020, we are happy to see that recognition renewed for the fourth time.

In September we were among the frontrunner companies announcing our intention to recalibrate our emissions targets in line with the scientific consensus that the world needs to limit average rises in temperature to 1.5°C in order to avoid irreversible environmental damage.

In May we published our plan to close the “unexplained pay gap” in the company – a gap that cannot be explained by factors that drive pay at Nokia, such as performance, experience, job grade or location. By July that gap was closed, and we have regular checks in place to make sure it never returns.

Looking ahead

We continue to work hard to create long-term value for Nokia and our customers, and more widely for industries, communities and societies. And, as explained in this letter, we have a clear set of drivers to deliver on that promise.

Despite our short-term challenges in execution in our access business, I remain confident that we are taking the right steps over the course of this year to deliver progressive improvement and to position us for a stronger 2021.

Rajeev Suri

President and CEO

 

 

 

 

 

 

 

Nokia aims at enabling massive consumer broadband and the industrial automation revolution with large networks at scale.

 

In 2016 we identified six global megatrends that we believe continue to impact our current and potential customers, change the lives of people and impact business operations on a global scale. The Nokia Bell Labs Future X vision is aligned to these megatrends, providing opportunities for us to diversify into new growth areas.

The megatrends we have identified are:

Nokia Bell Labs has developed Future X, our vision of a future network architecture that addresses these megatrends in a holistic way. This is our guide to building networks that meet the future needs of our customers and address the inherent opportunities in the megatrends. The Future X vision encompasses the key domains of future networks: emerging devices and sensors, massive-scale access, converged edge cloud, smart network fabric, universal adaptive core, programmable network operating systems, augmented cognition systems, digital value platforms and dynamic data security. Besides this, we have defined five end-to-end solutions on the basis of Future X: 5G, distributed cloud, network slicing, security and industrial automation.

Simultaneously, driven by the megatrends and the resulting increasing relevance of networks to digitize business operations, we see a shift in who is investing in technology. Our primary market with communication service providers (CSPs), in which we have a leadership position, is very large in size, but expected to provide a limited estimated growth opportunity, with growth mainly driven by 5G.

However, the megatrends are increasing the demand for large high-performance networks in other key industries. Webscale companies are investing in cloud technology and network infrastructure at an increasing scale. As other vertical market segments such as transportation, energy, manufacturing and logistics, and governments and cities digitize their operations, they need high-performing, low-latency mission-critical networks as well.

Our “Future X for Industries” network architecture combines the technologies that drive dramatic productivity improvements across a wide range of industry sectors. As technologies such as edge cloud supporting augmented intelligence and advanced security analytics as well as end-to-end 5G-capable networks become a reality, they will radically speed up the digital transformation of industries such as manufacturing, logistics, transportation and energy, as well as governments and cities. Nokia’s holistic approach is helping to drive a new era of productivity and human–machine interaction that is expected to unlock trillions of dollars of economic value in the next decade.

We are addressing both our primary CSP market and the newly identified growth opportunities in the Industrial IoT with our “Rebalancing for Growth” strategy. The strategy builds on our core strength of delivering large high-performance networks by expanding our business into targeted, higher-growth and higher-margin vertical markets.  

 

 

 

 

 

Our key priorities

Our “Rebalancing for growth” strategy sets the right direction for Nokia. We have focused it to reflect the progress so far and to accelerate further execution.

1.Lead

Lead in high-performance, end-to-end networks with communication service providers

Our aspiration, strategy and position

Nokia intends to become the leading, trusted network equipment provider for end-to-end networks and the leader in customer intimacy. Our comprehensive portfolio of access, transport and software allows us to leverage our existing global customer sales channel to generate incremental sales opportunities across multiple network domains, and secure value throughout the network investment cycle. Over the long term, we aim to differentiate with end-to-end solutions that allow us to offer our customers guaranteed mission-critical performance, total cost of ownership savings, time-to-market gains and higher reliability. We expect our technology leadership to protect against the sustained price pressure in the CSP industry, where we focus our Mobile and Fixed Networks as well as our Global Services business on optimizing profit and cash and maximizing Nokia’s end-to-end 5G value proposition. We work relentlessly to drive advantage through strong technology, time to market and significantly lowering product costs in 5G. In addition, we leverage our differentiation in superior 4G network performance, the most comprehensive small cell portfolio and the leading position in 5G fixed wireless access and ultrabroadband optical fiber access solutions. We manage our IP Routing and Optical Networks businesses for growth, based on technological differentiation and leadership as well as market momentum. We strive to expand IP Routing based on product leadership with the FP4 chipset. Optical Networks is in a position of technological strength that will be further improved with the recently launched PSE-3 chipsets.

Our focus areas

Progress

2.Grow

Grow the enterprise and webscale business and lead the digitalization of industries with private networks and industrial automation.

Our aspiration, strategy and position

In 2019, Nokia accelerated its engagement with the enterprise customer market. Recognizing the growth potential of our business within this market, we created a new business group, Nokia Enterprise, effective January 1, 2019. Our Nokia Enterprise business group addresses mission and business critical networking requirements for asset-intensive industries. We build hyperscale cloud and private networks for our customers, and serve the following segments: webscale, transportation,  energy, manufacturing and logistics, governments and cities.

The Nokia Enterprise growth strategy is based on three focus areas – scaling our enterprise networks business, further growing in the webscale segment, and expanding into industrial automation with private networks.

Our focus areas

Progress

 

3. Strengthen

Strengthen the software business with one Common Software Foundation.

Our aspiration, strategy and position

Nokia is recognized as the number 1 leader in telecoms software with a broad portfolio covering most segments of this growth market. Our aspiration is to further strengthen this position and consistently perform at par with the global leaders in enterprise software. Our strategy is to help our customers modernize from slow, siloed and monolithic systems that weigh them down today towards more agile, intelligent and lightweight solutions. Our multi-network and multi-vendor solutions enable our customers to run their business fast and intelligently based on closed-loop automation and smart cognitive technologies. Key to our differentiation is continued investment in our Common Software Foundation and leading architecture, and a product-centric business model. We have seen strong progress in building a standalone software business beyond the product-attached software model. We have implemented significant improvements: re-architecting many of our products, moving to become truly cloud-native, and creating a strong, experienced software sales force. Based on this foundation, we strengthen the business and aim for growth.

Our focus areas

Progress 

4. Diversify

Diversify the licensing business with new opportunities in automotive, consumer electronics, IoT and brand.

Our aspiration, strategy and position

We intend to consolidate our position as a leader in patent licensing. We own one of the broadest and strongest patent portfolios in the mobile communications sector, built from the innovation of Nokia, Nokia Siemens Networks and Alcatel Lucent. At the end of 2019, our patent portfolio included around 20 000 patent families, and we filed patents on more than 1 300 new inventions during 2019. We have successfully generated recurring revenue streams from all major mobile device players. We continue to invest in fundamental R&D from which we also file patents relevant to the 5G cellular standard to ensure our continuing leadership position and portfolio renewal. Our approach is to keep our patent licensing business with mobile device players strong and to target significant cash generation. At the same time, we diversify into new licensing domains in automotive, consumer electronics, and the Internet of Things, together with expanding our brand licensing, and manage these domains for growth.

Our focus areas

Progress

 

5.Operational Excellence

Operational excellence for new levels of efficiency, productivity and industry cost leadership

Our aspiration, strategy and position

Nokia takes action to improve its productivity and efficiency to assume the industry cost leadership position.

Operational excellence remains a source of competitive advantage for us and is the foundation of our strategy. Given the challenge of our main customers, the communication service providers, to monetize the strongly increasing traffic growth, their focus will remain on deploying and managing their networks in the most cost-efficient way. This leads to a focus on total cost of ownership for them and sustained price pressure for us as their supplier. To cope with this price pressure, we must continuously improve our efficiency, productivity and cost position.

Our efforts will continue with accelerated speed and focus to ensure sustainable profitability, cost efficiency and cash generation.

We are making progress in improving our performance and expect our turnaround to have firmly taken hold by the end of 2020. 

Our focus areas

Progress

 

 

Technology innovation will play a key role in achieving a more sustainable planet and better, healthier lives for all people.

We are driving the future of technology and transforming the way people and things communicate. Our leading research and development efforts, including the pioneering Nokia Bell Labs, are enabling innovations that will redefine our customers’ businesses as they deliver extraordinary experiences for individuals and enterprises. The fourth industrial revolution will enrich lives, economies and societies and we are dedicated to assuring that its unprecedented impact will be delivered in ethical and sustainable ways.

Research & development

As one of the industry’s leading investors in communication technology R&D, we drive innovation across entire networks, end-to-end. Our continuous product development in 5G, private wireless, intelligent analytics and automation, Internet of Things (IoT), and next generation software-defined networks  enables our customers to address the needs of a digitally connected world.

We have a global network of R&D centers, each with individual technology and competence specialties. The main R&D centers are located in Belgium, Canada, China, Finland, France, Germany, Greece, Hungary, India, Italy, Japan, Poland, the Philippines, Portugal, Romania, Slovakia, the United Kingdom and the US. The ecosystems around each R&D center helps us to connect with experts on a global scale and our R&D network is further complemented by cooperation with universities and other research facilities. In Belgium, China, Finland, France, Germany and the US, we have significant Nokia Bell Labs research activities where we are conducting disruptive research that focuses on the next phase of the connected world.

Nokia Bell Labs is the world-renowned industrial research and innovation arm of Nokia

Over its nearly 100-year history, Nokia Bell Labs has invented many of the foundational technologies that underpin information and communication networks and all digital devices and systems.

This research has resulted in nine Nobel Prizes, four Turing Awards, three Japan Prizes and a plethora of National Medals of Science and Engineering, as well three Emmys, two Grammys and an Oscar for technical innovations. Nokia Bell Labs continues to conduct disruptive research focused on solving the challenges of the new digital era and innovating the technology that will define the next industrial revolution.

With Nokia Bell Labs, we search for the fundamental limits of what is possible, rather than being constrained by the current state of the art.

We look to the future to understand essential human needs and the potential barriers to enabling this new human existence. We then use our unique diversity of research intellects, disciplines and perspectives to solve key problems through disruptive innovations with the power to enable new economic capabilities, societal behaviors, business models and types of services – in other words, we drive human and technological revolutions.

Our research is focused on key scientific, technological, engineering or mathematical areas that require ten times or more improvement in one or more dimensions. We then combine these areas of research into the Future X Network architecture, which aims to bring these disruptive research elements together into industry-redefining solutions. These innovations are brought to market through our business groups or through technology and patent licensing. Nokia Bell Labs also engages directly with the market and customers through our consulting practice to help define the path to the future network with business model innovation and the optimum techno-economics. 

This model of defining future needs and inventing game-changing solutions to critical problems while advising the market on the path forward has been the constant mission of Nokia Bell Labs.

Nokia Bell Labs focuses on three core areas of disruption:

 

 

Sales and marketing

Nokia considers its customers in two distinct markets. Our primary addressable market consists of communication service providers (CSPs). Our current enterprise business is relatively small in comparison with our operator business, but is growing fast.

Our Customer Operations (CO) organization is the primary interface with our CSP customers. CO Americas is dedicated to our markets in North America and Latin America, while the CO EMEA & APAC organization is responsible for our Asia Pacific, Europe, Greater China, and Middle East and Africa markets.

The CO organization has a comprehensive global presence and is active in approximately 120 countries. Its organizational structure ensures that our customers benefit from dedicated management attention and from our teams’ deep understanding of local markets. This approach enables Nokia to maintain strong customer relationships.

In addition to sales, Customer Operations is also responsible for project delivery, ensuring strong alignment between our customer-facing sales and delivery teams in each account. Our “One CDM” (customer delivery manager) model provides a strong counterpart to our sales-focused customer team setup, ensuring that customers have a seamless experience when working with Nokia. This is particularly important given the value our customers place on Nokia’s approach, which provides end-to-end fully integrated solutions to a pre-defined set of customer needs, for example, in the area of end-to-end security, or mission-critical systems.

Nokia also has a dedicated enterprise sales force with global presence, focused on selling to enterprise customers both directly and via channel partners. Partners include system integrators, consulting companies, distributors and value-added resellers.

The CO organization also works very closely with Nokia Software to ensure the right level of customer focus and expertise in this crucial area, and with Nokia Enterprise to make sure that we are efficient in developing and selling the solutions that will benefit both our CSP and enterprise customers. We strongly support our “Service-Provider-as-a-Partner” (SPaaP) sales approach, in which we work in partnership with operators to address customers in the enterprise space. This model is proving to be a successful route to market for CSPs as well as for Nokia.

 

Mobile Networks

Market overview

The primary market for our Mobile Networks business group includes technologies for mobile access and microwave transport. This encompasses access network technologies ranging from 2G to 5G licensed and unlicensed spectrum for both macro and small cell deployments.

Business overview and organization

In Mobile Networks our goal is to be a leader in 5G and provide the best value to our customers as they evolve their networks. We continue to develop our 5G portfolio according to the latest 3GPP specifications, we have declared more than 2  100 patent families as essential for 5G, and are proud of the number of industry firsts that we have completed on the path to 5G commercialization. In November 2019 the independent analytics firm, IPLytics GmbH, ranked Nokia number 2 for ownership of granted patents declared as essential for 5G. We see a strong appetite for 5G across mobile markets, and we are the only end-to-end mobile network vendor working with the major operators in the United States, China, South Korea and Japan. Nokia is rolling out technology today as our customers launch 5G networks. 

We have a large global installed base in 2G/3G/4G that is expected to provide us with the platform for success in 5G. We have more than 350 customers in 4G/LTE and a robust AirScale platform, which can be upgraded from 4G to 5G. We built our AirScale portfolio and small cells, software and mobile transport solutions to work across all generations of technology and all relevant spectrum bands for efficient, simplified and optimized sites for our customers. In radio networks we build our access portfolio based on one architecture: Future X is the foundation of our reference architecture for all deployment models. The Nokia 5G Future X end-to-end product and services portfolio combines high-capacity 5G New Radio (NR), core, software-defined network (SDN)  -controlled “Anyhaul” transport, edge clouds, and software orchestration to provide a complete set of network capabilities for commercial 5G. At the Future X Lab Nokia enables customers to experience Nokia’s full end-to-end portfolio of 5G equipment, software and services, allowing communication service providers, enterprises and infrastructure providers to learn and understand the techno-economic power of a 5G end-to-end network to better serve their customers and unleash new value.

Nokia was involved in more than 100 5G technical engagements in 2019, with the total number of 5G commercial deals at 62 at the end of 2019.  A total of 18 of those 5G networks were live in 2019 in Asia Pacific, the United States, Europe, Middle East and Africa. Among them, we had live networks operating for SK Telecom, KT, and LGU+ in South Korea serving 5 million 5G subscriptions at the end of 2019; and AT&T, T-Mobile, Sprint and Verizon in the United States.  At the end of 2019, we also had two 5G deals with enterprise customers beyond communication service providers.

Competition

The mobile networks market is a highly consolidated market, and our main competitors are Huawei and Ericsson. Additionally, there are four regional vendors, ZTE,  Samsung, Fujitsu and NEC, as well as some new, small entrants, such as Altiostar, Mavenir, Parallel Wireless, JMA Wireless and Airspan. The microwave transport market segment is more fragmented. There, besides Huawei and Ericsson, our key competitors include, for example, Ceragon, NEC and Aviat.

 

 

Global Services

Market overview

The Global Services business group deploys, supports and operates communication service providers’ (CSP) and enterprise networks. This includes network infrastructure services and professional services for mobile networks and managed operations for fixed, mobile, IP and optical domains. In addition, new growth areas are network cognitive services and analytics, deploying and operating networks in public sector, energy and transport markets and introducing new business models for CSPs, such as our Worldwide IoT Network Grid (WING).

Business overview and organization

The services, solutions and multivendor capabilities of Global Services business group guide CSPs in their digital transformation journey and help navigate through the evolving technology landscape, network complexity and data growth. We work with CSPs to improve end user experience while providing support in day-to-day network planning, implementation, operations and maintenance.

The Global Services offering allows Nokia to differentiate in the 5G market while helping CSPs prioritize their 5G investments and bring 5G-based services to the market faster. Nokia 5G digital services portfolio helps CSPs assess the technical choices, design and deploy end-to-end 5G networks that meet the needs of diverse 5G use cases such as cloud gaming, connected cars and autonomous factory robots. 

A key focus area in Global Services is empowering CSPs to transform to digital service providers. We are building a new digital architecture for the full life cycle of network design, deployment, operations and technical support – for both legacy and cloud-based networks. The Nokia AVA framework provides advanced AI and analytics as well as a common data lake to help boost network performance, operational efficiency and customer experience. We also help digital service providers to seize the possibilities of Internet of Things (IoT) and enter new markets using Nokia Worldwide IoT Network Grid (WING), which provides seamless connectivity across geographical borders and technologies. We enable our customers to enter new markets rapidly and with low risk through pay-as-you-grow or revenue share models.

Enterprise is a strategic growth area for Global Services. We are enabling the digitalization of asset-intensive industries with connectivity-driven services and digital automation solutions. Our new digital service framework shortens sales cycles and drives rapid, repeatable service delivery helping our enterprise customers to minimize complexity. We deploy private broadband networks to accelerate the digitalization of industries, enabling higher productivity, operational efficiency and increased worker and asset safety. Our global expertise in managed services enables our enterprise customers to reap the benefits of operational transformation, managed security and network operations support for their new IP/MPLS and mission-critical private LTE networks.

Competition

In a market segment that combines products and services as well as managed services, Nokia competes against traditional network equipment providers such as Ericsson and Huawei, while for the service-led businesses like cognitive, IoT and enterprise services, we see other competitors such as Cisco, HPE, and IBM emerging.

 

 

 

Fixed Networks

Market overview

The primary market of Fixed Networks is the communication service providers (CSP). Fiber-to-the-home (FTTH) is now established as the main deployment model, but fiber-based access technologies, such as fixed wireless access (FWA), xDSL upgrades or cable upgrades, continue to be a valid complement. The key to make the universal “gigabit to the home” business case work – and connect more people, sooner – is to select the right tool for the job. 5G FWA is a new “tool” in the broadband toolkit, and sees significant interest. We build solutions not only to deliver a gigabit to every home, but also to bring that gigabit experience into the home using meshed Wi-Fi solution. Fixed Networks has been diversifying into new segments, including cable MSOs, non-traditional players like infrastructure wholesalers, and enterprise.

Business overview and organization

The Fixed Networks strategy is based on three pillars: fiber-based access infrastructure to bring a gigabit to every home; Wi-Fi solutions to bring a gigabit into the home; and cloud/virtualization solutions to automate and simplify the network. Innovation and thought leadership are a cornerstone of all three areas.

The first pillar of Fixed Networks strategy is about offering the right technology mix to deliver gigabit access to more people, everywhere.  It includes fiber, fixed wireless access, xDSL upgrades, and cable upgrades. Nokia is a leader in fiber access with a number 1 position in next-generation XGS-PON technology and remains a market leader in copper technologies, such as VDSL and G.fast. In 2019, we have expanded our portfolio with new fixed wireless access solutions, including 4G/5G outdoor receivers and indoor gateways. For cable operators, Nokia offers a similar toolkit consisting of FTTH and cable upgrades, and started to see traction across the globe.

The second pillar, delivering a gigabit to and into the home, is about ensuring the perfect connectivity throughout the home. Our Nokia Wi-Fi portfolio includes meshed Wi-Fi solutions to provide Wi-Fi coverage in every corner of the building. In 2019, we also added cloud-based controllers to not only manage and optimize Wi-Fi performance in single home, but also across buildings. We also introduced several new options (entry-level beacons and high-end beacons), resulting in 34 CSP references to date.

Finally, as networks combine different technologies and deployment models, they also become more complex. The third pillar of Fixed Networks strategy looks at simplifying and automating operations, with the cloud and virtualization playing a key role. Our Software-Defined Access Network (SDAN) solution takes an open and pragmatic approach, with concrete use cases like slicing and a smooth evolution path for the installed base. 2019 saw the first deployments. 

Competition

The competitive landscape in fixed access for CSPs has two major key players, Nokia and Huawei, who have the bulk of market share. ZTE, in third position, has been impacted by the United States components ban,  although to a fairly limited degree. Smaller players like Calix and Adtran in North America and Fiberhome in China have limited footprint and have an estimated market share smaller than 10% and no comparable breadth of portfolio.

 

 

 

IP/Optical Networks

Market overview

The primary market for our IP/Optical Networks business group includes IP, optical and network automation technologies and related services sold to communication service providers (CSPs). Our comprehensive wide area networking (WAN) solutions enable CSPs to build and operate automated, secure, and high-performance networks at massive scale. They use them to interconnect people and things from any broadband access modality to – and among - edge clouds, central clouds, the Internet, and other services and data centers. This market includes technologies such as: IP routers, IP service gateways, packet optical switches, optical line systems, and network automation platforms.

A growing portion of our IP/Optical Networks revenue is derived from adjacent markets, which include customer segments like webscale companies and enterprises. In the enterprise segment, we address verticals like transport, energy and the public sector as well as software-defined networking for health care, finance and retail enterprises. We address these mission-critical markets with the same solution sets augmented with purpose-built variants to address unique requirements.

Business overview and organization

For our IP/Optical Networks business group, we provide the high-performance and massively scalable networks that underpin the digital world’s dynamic interconnectivity. Our portfolio of robust and innovative software, systems and services play across multiple domains, from programmable IP and optical transport networks for the smart network fabric to analytics and software-defined capabilities for the programmable network operating system and more.

CSP networks are under tremendous pressure from cloud-based applications, ultra-broadband evolution and the Industrial IoT. Our IP and optical networking solutions reduce time to market and risk as CSPs launch new services, rapidly scale them to meet surging demands, and add new features and functions in future. Our insight-driven network automation solutions help to further ensure that network services are delivered with consistent quality, reliability and security and that restorative actions are automatically initiated when any parameter varies beyond set limits. These carrier-grade attributes also address the needs of – and are valued by – our webscale, transport, energy, public sector and large enterprise customers.

The IP/Optical Networks product portfolio includes:

■  Comprehensive family of IP routers for aggregation, edge, core, data center, and Internet peering applications.

■  Comprehensive family of packet optical switches, DWDM multiplexers, and optical line systems for metro access and aggregation, data center interconnection, and core, subsea and longhaul applications.

■  Advanced cloud-optimized IP service gateways for residential, business, mobile and Industrial IoT services and unique hybrid solutions enabling a converged services future.

■  Advanced network automation platforms that analyze, automate, manage and control multi-vendor IP and optical networks.

■  Advanced data center automation and software-defined WAN solutions that configure network connectivity among clouds and to any enterprise branch office with the ease and efficiency of cloud compute using products from our Nuage portfolio.

■  An extensive portfolio of professional services to accelerate the benefits of integrating new technologies to transform networks and leverage the latest innovations in SDN, virtualization and programmable IP and optical networks.

Competition

Our competitive landscape in this space includes Cisco, Juniper Networks, Huawei, and Ciena.

 

 

 

 

 

 

Nokia Software

Market overview

Nokia Software is the leading solutions provider in the telecoms software market.

The telecoms software market is driven by large-scale service and network operations automation, and by digital business transformation in support of communication service providers’ shift to 5G. At the same time, 4G modernization will continue to drive investment in less developed markets. These market drivers are countered by 3G legacy decline and pricing pressure.

Business overview and organization

Built on Nokia’s cloud-native Common Software Foundation (CSF), Nokia’s multi-vendor and multi-network software solutions enrich and secure user experiences; automate operations and infrastructure; and enable new revenue streams and cost efficiencies. Nokia’s CSF ensures our software solutions are easy to deploy, integrate, use, scale and service. Nokia was the first to build a cloud-native software platform at scale in the telecoms software market.

Nokia Software’s business has two parts, Applications and Core. Nokia software applications provide solutions for digital experience, digital intelligence and digital operations, all designed to connect service providers’ business to their network. In January 2019, Nokia core networks portfolio was aligned inside Nokia Software. Nokia’s core network solutions span 5G, mobile broadband, and IoT; and simplify operations and enable new services and revenue streams.

Our strategy is to strengthen our software business at scale by further evolving our R&D and delivery functions and focusing our investments in the strategic areas of 5G, automation, portfolio integration, and digital innovation platforms.

Investment in a cloud-native CSF and our multi-vendor, multi-network agnostic approach sets us apart from most large competitors. Against smaller players, Nokia has the advantage of global delivery capabilities and a large installed base, backed by a broad, end-to-end portfolio.

Competition

Nokia’s software competitors fall into two categories: independent software vendors (ISVs) and network equipment providers (NEPs). The main ISV competitors are Amdocs, Netcracker and Oracle; in addition, we see increasing competition from niche, boutique software players. The main NEP competitors are Huawei and Ericsson, which sell software as part of large infrastructure deals.

Many large telco software competitors are struggling to generate near-term growth until 5G deployments scale up; while the high number of small boutique software players adds competitive intensity to this market. Like most telecoms-related markets, telecom software is a buyers’ market with significant pricing pressure. It does, however, provide significant long-term opportunity for those vendors that can drive technology and operational leadership and set the pace of transformation in the industry.

Due to the fragmentation of the market, there remains significant growth opportunities for those companies able to consolidate the market through organic growth and/or acquisitions.

Nokia’s software business is number 1 in applications with about 9% estimated market share, while in core networks we have 25% estimated market share.

 

 

 

Nokia Enterprise

Market overview

In 2019, Nokia accelerated its engagement with the enterprise customer market. Recognizing the growth potential of our business within this market, we created a new business group, Nokia Enterprise, effective January 1, 2019. Our Enterprise business group addresses mission and business critical networking requirements for asset-intensive industries. We build hyperscale cloud and private networks for our customers, and serve the following segments: webscale,  transportation, energy, manufacturing,  logistics, governments and cities.

Business overview and organization

Nokia has a strong track record of helping enterprises modernize the communications networks they rely on to manage and control a range of operations, incorporating technologies from across Nokia’s Mobile and Fixed Access, IP/Optical Networks, Software and Global Services portfolios, coupled with enterprise-specific products for digital automation, analytics and Internet of Things (IoT). High-performance networking is at the nexus of these critical customer requirements, addressing the demand for ubiquitous connectivity with private network infrastructure (with an increased importance of wireless) that delivers seamless connectivity, data management and analytics to drive relevant and tangible business outcomes. Enterprise customers seek to harness advances in communications and Industrial Internet of Things (IIoT) technology and benefit from digitalization, efficient asset management, improved processes, deeper levels of network security, worker safety, and new business models that will arise from ubiquitous connectivity. Our proven enterprise portfolio provides the foundation for more than 1 300 mission-critical networks deployed across industries.

Nokia's enterprise portfolio supports our Future X for Industries network architecture developed by Nokia Bell Labs, a blueprint for future industrial networks that intelligently combines high-performance, ubiquitous access and intelligent IP/optical networks with agile multi-cloud-enabled solutions, analytics-driven digital value platforms and business applications – with security capabilities embedded at all levels – to support industrial automation. Future X for Industries provides a strategic framework for our enterprise portfolio.

A significant and strategic accomplishment in 2019 has been the acceleration of our enterprise portfolio with specific advances in private networks. By augmenting our IP/MPLS, Optics, GSM-R and other existing portfolios with private networks, we are providing customers with the performance and security they require as they digitize and transform their communications infrastructure and applications. We also continue to drive the adoption of multi-cloud, IoT and automation with strategic investments in emerging technologies such as Software Defined Networks  (SDN),  Software Defined Wide-Area network (SD-WAN) applications, and data centers.

Transportation

In the transportation segment, Nokia continues to expand market penetration of the railway, highway, aviation and maritime industries. We deliver mission-critical networks and analytics that enable and support railway signaling, airport communications, air traffic control, digital signage and toll collection, and on-board broadband and infotainment.

Energy

In the energy sector, Nokia provides the mission-critical information network infrastructure and automation that is foundational in the transformation to next generation automated energy grids. We also provide oil, gas and mining companies with private networks that deliver new levels of performance and security to a range of mission-critical operations, protecting lives and increasing productivity.

Government and Cities

Nokia addresses the public sector from multiple principal perspectives. Nokia’s public safety portfolio provides first responders with real-time, broadband mission-critical communications that help to save lives and manage crisis situations. These solutions support traditional two-way radio communications, while laying the foundation for advanced control centers and the data-rich mobile broadband services to enhance situational awareness and operational intelligence.  

Additionally, as cities seek to deliver safer and higher quality of life for citizens, Nokia offers a platform-based approach to support the connectivity, data sharing and usage control capabilities needed for services such as smarter parking, lighting, traffic management and other municipal services. We continue to partner with governments and new network providers to bring broadband to remote, unserved and under-served communities.

Manufacturing and Logistics

Nokia continues to diversify into the industrial sector by enabling Industry 4.0 transformations with private networks and digital automation solutions in the segments of manufacturing and logistics. Our IIoT platforms, automation platforms and private wireless networking solutions help these customers to increase productivity and reduce costs through the digitalization and automation of their operational systems.

Webscale companies

The webscale companies are a select group of enterprises that handle millions of transactions per day, demand hyper-efficiency in content delivery and support exceptional online experiences. We enable these companies to intelligently and instantaneously scale their services through automated cloud-based global service delivery platforms with robust cybersecurity features by leveraging our intelligent IP and optical networking solutions.

Competition

The competitive landscape for the enterprise space is broad and includes many specialized players focused on specific markets. From this broad perspective, the primary players who supply high-performance networking and mission-critical fixed and mobile communications technologies across a range of market industries include Nokia, Cisco, Juniper, Huawei and Ericsson. Reflecting more on Nokia’s strategic focus, the landscape can be more finely bifurcated between traditional private networks and private wireless. Within the private wireless area the key players are Nokia, Ericsson, Huawei and Commscope. From a technology perspective, private wireless competes with, and to some extent displaces, Wi-Fi technology. As such, Wi-Fi providers such as Cisco, HPE Aruba and Ruckus also appear on our competitive landscape.

 

 

 

 

Nokia Technologies

Market overview

Nokia Technologies is focused on licensing Nokia intellectual property, including patents, technologies and the Nokia brand, building on Nokia’s continued innovation and decades of R&D leadership in technologies used in virtually all connected devices used today.

Business overview and organization

Nokia Technologies is focused on licensing.    

■  We continue to grow our patent licensing and monetization activities, which drive most of Nokia Technologies’ net sales. This includes our successful mobile devices licensing program, which currently has most of the major smartphone vendors under license.

■  We also have patent licensing programs for other markets which use our standardized technologies, including consumer electronics and broadcast, connected cars, smart meters, payment terminals, asset tracking and other Internet of Things devices and related industries.

■  Nokia Technologies enables the commercialization of selected fundamental innovations from Nokia Bell Labs and other Nokia business groups in new areas via strategic collaboration with other companies.

■  We continue to license our innovative OZO spatial audio and visual technologies to smartphone and camera manufacturers through our Technology Licensing business.

■  Our Brand Partnerships business continues to work with HMD Global, our exclusive licensee for Nokia branded phones and tablets, and is exploring further opportunities to license the brand in other product categories.

■  Nokia Technologies manages the Nokia patent portfolio, working with all other Nokia businesses, also driving advanced audio and video research and standardization through our Media Technologies Research unit.

Sales and marketing

Nokia Technologies is responsible for monetizing Nokia’s intellectual property by making our innovations available to the markets through licensing activities and transactions.

Nokia Technologies continues to engage in global sales and marketing activities supporting the technology licensing of our innovative audiovisual solutions such as OZO Audio.

Research and development

The applied nature of our R&D in the Finland-based Media Technologies Research unit in Nokia Technologies has resulted in various relevant and valuable inventions in areas that we believe are important for emerging consumer experiences, such as audio and video standardization.

Patents and licenses

For more than 20 years, we have defined many of the fundamental technologies used in virtually all mobile devices and taken a leadership role in standards setting. As a result, we own a leading share of standard essential patents (SEPs) for the 2G, 3G, 4G and 5G standards. Our portfolio of cellular SEPs has continued to grow in recent years and comprises more than 2 800 patent families declared to one or more of the standards, including more than 2 100 for 5G.

As part of our active portfolio management approach, we are continuously evaluating our collective assets and taking actions to optimize the size of our overall portfolio while preserving the high quality of our patents. At the end of 2019, our portfolio stands at around 20 000 patent families, built on combined R&D investments of more than EUR 129  billion over the last two decades.

We continue to refresh our portfolio from R&D activities across all Nokia businesses, filing patent applications on more than 1 300 new inventions in 2019.

 

 

 

 

 

Operating and financial review and prospects

Contents

 

 

 

 

Business-specific trends

Networks and Nokia Software

We are a leading vendor in the network and IP infrastructure, software, and the related services market. We provide a broad range of products, from the hardware components of networks used by communication service providers and increasingly by customers in other select verticals, to software solutions, as well as services to plan, optimize, implement, run and upgrade networks. Our Networks reportable segment is comprised of the following businesses: Mobile Access, Fixed Access, IP Routing and Optical Networks. Together with Nokia Software, these businesses provide an end-to-end portfolio of hardware, software and services to enable us to deliver the next generation of leading networks solutions and services to our customers. We aim to be innovation leaders, drawing on our frontline R&D capabilities to deliver leading products and services for our customers, and ultimately ensure our long-term value creation.

Industry trends

The network and IP infrastructure, software and related services industry has witnessed three main trends in recent years, which have also affected our Networks and Nokia Software segments. First, the increase in the use of data services and the resulting exponential growth in data traffic has led to an increased need for high-performance, high-quality and highly reliable networks. This trend is one of the leading drivers for the start of the 5G cycle, which has been accelerated by communication service providers. The rise in data traffic has, however, not been directly reflected in growth of communication service providers’ revenue. Consequently, there is an imperative to be efficient and cost competitive for both communication service providers and network infrastructure and services vendors.

Second, we are witnessing continued consolidation among communication service providers, driven by their desire to provide a wider scope of services, especially through the convergence of disparate network technologies across mobile, fixed, and IP and optical networks. In order to improve networks in terms of coverage, capacity and quality, communication service providers are continuing their transition to all-IP architectures, with an emphasis on fast access to their networks through fiber, LTE and 5G access and new digital services delivery. We are also seeing similar trends with cable operators, who are investing in the deployment of high-speed networks.

Third, we see a stronger demand for large high-performance networks in some key areas outside the traditional communication service provider space. Webscale companies and extra-large enterprises - such as Apple, Facebook, Google, Alibaba and Amazon - are investing in cloud technology and network infrastructure to build these high-performing, secure networks. In addition, other target vertical markets such as energy, transportation and the public sector are investing to build carrier-grade, mission-critical networks.

The first three pillars of our strategy are aligned with these industry trends for our Networks and Nokia Software segments. We continue to execute well on our strategy, with a particular focus on high-performance, end-to-end networks, expansion into new select verticals and building a strong software business at scale. More information about our strategy can be found in “Business Overview – Our Strategy”.

Additionally in 2019, we witnessed some customers reassessing their vendor selection strategies, in light of on-going security concerns. We have not seen any material business or market share impact of this in 2019, but is has the potential to slightly shift the vendor balance in certain regions and technology domains.

Specifically in China, where pursuing market share presents significant profitability challenges and the region has some unique market dynamics, we are executing against a clear strategic goal to improve our overall business mix in the region. Therefore, we expect to be prudent in 5G, while targeting more attractive opportunities with communication service providers in other parts of our business such as core, routing, transport, fixed access and LTE, as well as with enterprise and webscale customers.

Pricing and price erosion

While we experience varying levels of price erosion across our businesses, it is particularly evident in our Mobile Networks business group, given the highly standardized nature of the business.  In 2019, we witnessed increased competitive intensity in some accounts, as certain competitors sought to take share in the early stages of 5G. Generally, at this stage of the cycle, strong 4G margins would be expected to offset the 5G competitive pressure. However, as early 5G deals often include 4G, we experienced declines in our 4G margins in 2019.

Product mix

The profitability of our Networks and Nokia Software segments is affected by our product mix, including the share of software in the sales mix. This is particularly evident during large technology cycles, as initial deployments consist of a larger portion of hardware and services and less software. As the initial phases of deployments tend to be lower margin, this is offset by the ongoing deployment of previous generation technologies, which tend to be higher margin. This ratio shifts more towards higher-margin software further into the cycle, as additional capacity and features are deployed. In 2019, we experienced relatively high 5G product costs in Networks, as well as elevated levels of deployment services, consistent with being in the initial phase of 5G.

Products and services also have varying profitability profiles. For instance, our Networks and Nokia Software segments offer a combination of hardware, software and services. Hardware and software products generally have higher gross margins, but require significant R&D investment, whereas services are typically labor-intensive, while carrying low R&D investment, and have relatively low gross margins compared to the hardware and software products.

Seasonality and cyclical nature of projects

Net sales in our Networks and Nokia Software segments are affected by seasonality in the spending cycles of communication service providers, with generally higher sales in the fourth quarter, followed by generally lower sales in the first quarter. Also, we have recently witnessed that Networks and Nokia Software segments generate the majority of their respective operating profit and free cash flow in the fourth quarter.  In addition to normal industry seasonality, there are normal peaks and troughs in the deployment of large infrastructure projects. As an example, the 5G technology cycle has accelerated over the past year, as commercial deployments ramped up in 2019 and are expected to continue in 2020 and

beyond. The timing of these projects depends on a number of factors, including new radio spectrum allocation, network upgrade cycles and the availability of new consumer devices and services, which in turn could affect the net sales of our businesses.

Continued operational efficiency improvements

In 2018, following the completion of the Alcatel Lucent integration and the related cost savings program, we announced a new cost reduction program where we intend to target substantial savings while continuing to make further investments to drive future growth and higher returns. The savings are expected to come from a wide range of areas, including investments in digitalization to drive more automation and productivity, further process and tool simplification, significant reductions in central support functions to reach best-in-class cost levels, prioritization of R&D programs to best create long-term value, a sharp reduction of R&D in legacy products, driving efficiency from further application of our Common Software Foundation and innovative software development techniques, the consolidation of selected cross-company activities and further reductions in real estate and other overhead costs.

In 2019, we made strong progress in generating cost savings through the actions listed above. Given the need to increase investment in 5G in order to accelerate product roadmaps and product cost reductions, and in the digitalization of internal processes to improve overall productivity, we now expect this cost savings program to yield EUR 500 million of net benefits, compared to our previous expectation of EUR 700 million.

Cost of components and raw materials

There are several important factors driving the profitability and competitiveness of our Networks segment: scale, operational efficiency, pricing, and cost discipline. The costs of our networks products are comprised of, among others, components, manufacturing, labor and overheads, royalties and licensing fees, depreciation of product machinery, logistics and warranty and other quality costs. In 2019, margins in our Networks segment were negatively impacted by relatively high 5G product costs.

Profitability can be affected by changes in the sales volume, as well as the requirement to source large volumes of components on short notice, which can impact the cost of sales, or in cases where component shortages emerge, the net sales.

Product Design and Serviceability

Factors such as product design and serviceability also have an impact on our cost structure with Networks. For example, product design decisions, such as the use of system-on-chip, or “SoCs” in our Mobile Networks products, allow us to improve our product costs as the proportion of SoCs increases within our products. Additionally, costs can be reduced through improved product serviceability. In 2019, these were contributing factors to the relatively high 5G product costs that impacted our Networks segment.

Nokia Technologies

Nokia Technologies is focused on pursuing new licensing opportunities for our valuable intellectual property, including patents, innovative technologies and know-how, and the Nokia brand.

General trends in IPR licensing

In general, there has been increased focus on IPR protection and licensing in the market, and this trend is expected to continue. As such, new agreements are generally a product of lengthy negotiations and occasionally through arbitration or litigation, and therefore the timing and outcome may be difficult to forecast. Due to the structure of patent license agreements, the payments may be infrequent, at times may be partly retrospective, and the lengths of license agreements can vary.

Additionally, there are clear regional differences in the ease of protecting and licensing patented innovations. We have seen some licensees actively avoiding making license payments, and some licensors using aggressive methods to collect them; both behaviors have attracted regulatory attention. We expect discussion of the regulation of licensing to continue at both global and regional level. Some of those regulatory developments may be adverse to the interests of technology developers and patent owners, including us.

Financial markets trends

We are a company with global operations and net sales derived from various countries, invoiced in various currencies. Therefore, our business and results from operations are exposed to changes in exchange rates between the euro, our reporting currency, and other currencies, such as the U.S. dollar and the Chinese yuan. The magnitude of foreign exchange exposures changes over time as a function of our net sales and costs in different markets, as well as the prevalent currencies used for transactions in those markets. Significant changes in exchange rates may also impact our competitive position and related price pressures through their impact on our competitors.

To mitigate the impact of changes in exchange rates on our results, we hedge material net foreign exchange exposures (net sales less costs in a currency) typically with a hedging horizon of approximately 12 months. For the majority of these hedges, hedge accounting is applied to reduce income statement volatility.

In 2019, approximately 25% of Group net sales and total costs were denominated in euro, and approximately 50% of Group net sales and 45% of Group total costs were denominated in U.S. dollars. In 2019, approximately 5% of Group net sales and 10% of Group total costs were denominated in Chinese yuan.

The average currency mix for Group net sales and total costs:

During 2019, the U.S. dollar appreciated against the euro on a year-on-year basis and this had significantly positive impact on our net sales reported in euros. However, the stronger U.S. dollar also contributed to higher costs of sales and slightly higher operating expenses on a year-on-year basis. In total, before hedging, the stronger U.S. dollar on a year-on-year basis had a slightly positive effect on our operating profit in 2019.

For the full year 2019 compared to the previous year, the Chinese yuan was slightly stronger against the euro. The slightly stronger Chinese yuan in 2019 on a year-on-year basis had an approximately neutral impact on our net sales, cost of sales, operating expenses, as well as operating profit before hedging.

For a discussion of the instruments used by us in connection with our hedging activities, refer to Note 36, Financial risk management, of our consolidated financial statements included in this annual report on Form 20-F. Refer also to “Operating and financial review and prospects – Risk factors”.

 

 

 

 

 

 

The financial information included in this “Operating and financial review and prospects” section as of December 31, 2019 and 2018 and for each of the three years ended December 31, 2019, 2018 and 2017 has been derived from our audited consolidated financial statements included in this annual report on Form 20‑F. The financial information as of December 31, 2019 and 2018 and for each of the three years ended December 31, 2019, 2018 and 2017 should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements.

In 2019, we had three reportable segments for financial reporting purposes: (1) Networks, (2) Nokia Software and (3) Nokia Technologies. We also present certain segment-level information for Group Common and Other as well as for Discontinued operations. We adopted our current operational and reporting structure on January 1, 2019. The reporting structure was revised to better reflect our strategy, organizational structure and the way the management evaluates operational performance and allocates resources. Previously we had two businesses: Nokia’s Networks business and Nokia Technologies, and four reportable segments for financial reporting purposes: (1) Ultra Broadband Networks, (2) Global Services and (3) IP Networks and Applications within Nokia’s Networks business; and (4) Nokia Technologies. Segment information for 2018 and 2017 presented throughout this annual report on Form 20-F has been recast for comparability purposes according to the new operating and reporting structure. For more information on our operational and reporting structure, refer to Note 5, Segment information, in the consolidated financial statements.

In 2019 we applied IFRS 16, Leases, for the first time. The financial information as of December 31, 2018 and for the years ended December 31, 2018 and 2017 has not been restated for the effects of IFRS 16. Refer to Note 3, New and amended standards and interpretations, in the consolidated financial statements.

Continuing operations

For the year ended December 31, 2019 compared to the year ended December 31, 2018

The following table sets forth selective line items and the percentage of net sales for the years indicated.

 

Net sales

Net sales in 2019 were EUR 23 315 million, an increase of EUR 752 million, or 3%, compared to EUR 22 563 million in 2018. The increase in net sales was primarily due to an increase in Networks net sales, and, to a lesser extent, Nokia Software net sales. This was partially offset by a decrease in Group Common and Other and Nokia Technologies net sales.

The following tables set forth distribution of net sales by geographical area and net sales by customer type for the years indicated.

(1)   All Nokia Technologies IPR and licensing net sales are allocated to Finland.

 

(1) Includes net sales of Alcatel Submarine Networks and Radio Frequency Systems, both of which are being managed as separate entities, and certain other items, such as eliminations of inter-segment revenues and certain items related to purchase price allocation. Alcatel Submarine Networks and Radio Frequency Systems net sales include also revenue from communications service providers and enterprise customers.

 

Gross profit

Gross profit in 2019 was EUR 8 326 million, a decrease of EUR 120 million, or 1%, compared to EUR 8 446 million in 2018. The decrease in gross profit was primarily due to lower gross profit in Networks, Group Common and Other and Nokia Technologies, partially offset by lower product portfolio integration-related costs and higher gross profit in Nokia Software. Gross margin in 2019 was 35.7%, compared to 37.4% in 2018. In 2019, gross profit included product portfolio integration-related costs of EUR 123 million, compared to EUR 548 million in 2018.

Operating expenses

Our research and development expenses in 2019 were EUR 4 411 million, a decrease of EUR 209 million, or 5%, compared to EUR 4 620 million in 2018. Research and development expenses represented 18.9% of our net sales in 2019 compared to 20.5% in 2018. The decrease in research and development expenses were due to a decrease in Networks, and, to a lesser extent, Nokia Software and Nokia Technologies research and development expenses. This was partially offset by an increase in Group Common and Other research and development expenses.

Our selling, general and administrative expenses in 2019 were EUR 3 101 million, a decrease of EUR 362 million, or 10%, compared to EUR 3 463 million in 2018. Selling, general and administrative expenses represented 13.3% of our net sales in 2019 compared to 15.3% in 2018. The decrease in selling, general and administrative expenses was primarily due to a decrease in Networks selling, general and administrative expenses, lower transaction and integration-related costs and, to a lesser extent, lower Nokia Software and Nokia Technologies selling, general and administrative expenses. This was partially offset by higher Group Common and Other selling, general and administrative expenses. Selling, general and administrative expenses included transaction and integration-related costs of EUR 50 million, compared to EUR 207 million in 2018.

Other operating income and expenses in 2019 was a net expense of EUR 329 million, a decrease of EUR 93 million, compared to a net expense of EUR 422 million in 2018. The net positive fluctuation in our other operating income and expenses was primarily due to a gain related to a defined benefit plan amendment, as well as the absence of charges related to fair value changes of a legacy IPR fund and lower charges related to divestments of businesses. This was partially offset by higher restructuring and associated charges and a net negative fluctuation in Group Common and Other operating income and expenses. Other operating income and expenses included restructuring and associated charges of EUR 435 million in 2019 compared to EUR 319 million in 2018.

In 2019, we recorded a non-cash impairment charge to other operating income and expenses of EUR 29 million, compared to EUR 48 million in 2018. 

Operating profit/loss

Our operating profit in 2019 was EUR 485 million, a change of EUR 544 million, compared to an operating loss of EUR 59 million in 2018. The change in operating result was primarily due to lower selling, general and administrative expenses, research and development expenses and a net positive fluctuation in other operating income and expenses, partially offset by lower gross profit. Our operating margin in 2019 was 2.1%, compared to approximately breakeven in 2018.

The following table sets forth the impact of unallocated items on operating profit/loss:

(1)   Excludes costs related to the acquisition of Alcatel Lucent and related integration, goodwill impairment charges, intangible asset amortization and other purchase price fair value adjustments, restructuring and associated charges and certain other items.

 

Financial income and expenses

Financial income and expenses was a net expense of EUR 341 million in 2019, an increase of EUR 28 million, or 9%, compared to a net expense of EUR 313 million in 2018. The net negative fluctuation in financial income and expenses was primarily due to an impairment charge related to loans extended to a certain emerging market customer,  a recognition of interest expenses on lease liabilities within financial expenses,  following the adoption of IFRS 16, Leases, in 2019, as well as an increase in the costs related to the sale of receivables in 2019 compared to 2018. We sell trade receivables to various financial institutions without recourse in the normal course of business, in order to manage our credit risk and working capital cycle. The negative fluctuation was partially offset by income due to a change in the fair value of the financial liability related to Nokia Shanghai Bell, which positively impacted other financial income.

Profit/loss before tax

Our profit before tax in 2019 was EUR 156 million, an increase of EUR 516 million compared to a loss of EUR 360 million in 2018.

Income tax

Income taxes was a net expense of EUR 138 million in 2019, a decrease of EUR 51 million compared to a net expense of EUR 189 million in 2018. The change in net income taxes was primarily attributable to the deferred tax expense recorded in 2018 resulting from the write-off of certain deferred tax assets, primarily related to foreign withholding tax credits in Finland. This was partially offset by higher income taxes due to increased profitability and our regional profit mix in 2019 compared to 2018.

Profit/loss attributable to equity holders of the parent and earnings per share

The profit attributable to equity holders of the parent in 2019 was EUR 14 million, an increase of EUR 568 million, compared to a loss of EUR 554 million in 2018. The change in profit attributable to equity holders of the parent was primarily due to the improvement in operating profit, and, to a lesser extent, lower income tax expenses. This was partially offset by a net negative fluctuation in financial income and expenses.

Our EPS from continuing operations in 2019 was EUR 0.00 (basic) and EUR 0.00 (diluted) compared to negative EUR 0.10 (basic) and negative EUR 0.10 (diluted) in 2018.

Cost savings program

In 2018, following the completion of the Alcatel Lucent integration and the related cost savings program, we announced a new cost reduction program where we intend to target substantial savings while continuing to make further investments to drive future growth and higher returns. This cost savings program is expected to yield EUR 500 million of net benefits. Through the end of 2019, we made strong progress towards our 2020 target, realizing approximately EUR 200 million of savings. The remainder is expected in 2020.

In 2019, we recognized restructuring and associated charges of approximately EUR 450 million related to the current and past cost savings programs. In 2019, we had restructuring and associated cash outflows of approximately EUR 450 million related to the cost savings program. 

For the year ended December 31, 2018 compared to the year ended December 31, 2017

The following table sets forth selective line items and the percentage of net sales for the years indicated.

 

Net sales

Net sales in 2018 were EUR 22 563 million, a decrease of EUR 584 million, or 3%, compared to EUR 23 147 million in 2017. The decrease in net sales was primarily due to a decrease in Networks net sales, and, to a lesser extent, a decrease in Nokia Technologies, Group Common and Other and Nokia Software net sales.

The following tables set forth distribution of net sales by geographical area and net sales by customer type for the years indicated.

(1)   All Nokia Technologies IPR and licensing net sales are allocated to Finland.

 

(1) Includes net sales of Alcatel Submarine Networks and Radio Frequency Systems, both of which are being managed as separate entities, and certain other items, such as eliminations of inter-segment revenues and certain items related to purchase price allocation. Alcatel Submarine Networks and Radio Frequency Systems net sales include also revenue from communications service providers and enterprise customers.

 

Gross profit

Gross profit in 2018 was EUR 8 446 million, a decrease of EUR 693 million, or 8%, compared to EUR 9 139 million in 2017. The decrease in gross profit was primarily due to lower gross profit in Networks, Nokia Technologies and Nokia Software, as well as higher product portfolio integration-related costs, partially offset by lower working capital-related purchase price allocation adjustments. Gross margin in 2018 was 37.4%, compared to 39.5% in 2017. In 2018, gross profit included product portfolio integration-related costs of EUR 548 million and working capital-related purchase price allocation adjustments of EUR 16 million. In 2017, gross profit included product portfolio integration-related costs of EUR 453 million and working capital-related purchase price allocation adjustments of EUR 55 million.

Operating expenses

Our research and development expenses in 2018 were EUR 4 620 million, a decrease of EUR 296 million, or 6%, compared to EUR 4 916 million in 2017. Research and development expenses represented 20.5% of our net sales in 2018 compared to 21.2% in 2017. The decrease in research and development expenses were due to decreases in Nokia Technologies, Nokia Software and Networks research and development expenses, as well as lower amortization and depreciation of acquired intangible assets and property, plant and equipment and product portfolio integration-related costs. In 2018, research and development expenses included amortization and depreciation of acquired intangible assets and property, plant and equipment of EUR 576 million, compared to EUR 633 million in 2017, as well as product portfolio integration-related costs of EUR 28 million, compared to EUR 57 million in 2017.

Our selling, general and administrative expenses in 2018 were EUR 3 463 million, a decrease of EUR 152 million, or 4%, compared to EUR 3 615 million in 2017. Selling, general and administrative expenses represented 15.3% of our net sales in 2018 compared to 15.6% in 2017. The decrease in selling, general and administrative expenses was primarily due to a decrease in Nokia Technologies selling, general and administrative expenses, lower amortization and depreciation of acquired intangible assets and property, plant and equipment, and lower Networks and Group Common and Other selling, general and administrative expenses. Selling, general and administrative expenses included amortization and depreciation of acquired intangible assets, and property, plant and equipment of EUR 358 million in 2018 compared to EUR 394 million in 2017.

Other operating income and expenses in 2018 was a net expense of EUR 422 million, a decrease of EUR 170 million, compared to a net expense of EUR 592 million in 2017. The net positive fluctuation in our other operating income and expenses was primarily due to lower restructuring and associated charges, lower impairment charges and a net positive fluctuation in Group Common and Other operating income and expenses. These were partially offset by a net negative fluctuation in Networks other operating income and expenses, charges related to fair value changes of a legacy IPR fund and charges related to the divestment of businesses. Other operating income and expenses included restructuring and associated charges of EUR 319 million in 2018 compared to EUR 576 million in 2017.

In 2018, we recorded a non-cash impairment charge to other operating income and expenses of EUR 48 million, compared to EUR 141 million in 2017. In 2017, the charge was due to the impairment of goodwill related to our digital health business, which was part of Nokia Technologies. The impairment charge was allocated to the carrying amount of goodwill held within the digital health cash generating unit, which was reduced to zero.

Operating loss/profit

Our operating loss in 2018 was EUR 59 million, a change of EUR 75 million, compared to an operating profit of EUR 16 million in 2017. The change in operating result was primarily due to a lower gross profit, partially offset by lower research and development expenses, a net positive fluctuation in other operating income and expenses and lower selling, general and administrative expenses. Our operating margin in both 2018 and 2017 was approximately breakeven.

The following table sets forth the impact of unallocated items on operating profit/loss:

(1)   Excludes costs related to the acquisition of Alcatel Lucent and related integration, goodwill impairment charges, intangible asset amortization and other purchase price fair value adjustments, restructuring and associated charges and certain other items.

 

Financial income and expenses

Financial income and expenses was a net expense of EUR 313 million in 2018 compared to a net expense of EUR 537 million in 2017, a decrease of EUR 224 million, or 42%. The net positive fluctuation in financial income and expenses was primarily due to the absence of EUR 220 million of costs related to the offer to purchase the 6.50% notes due January 15, 2028, the 6.45% notes due March 15, 2029, the 6.75% notes due February 4, 2019 and the 5.375% notes due May 15, 2019, that negatively impacted 2017; lower losses from foreign exchange fluctuations; and the absence of a loss on the sale of financial assets that negatively impacted 2017. This was partially offset by the absence of gains from venture fund investments, as they were no longer recognized in financial income and expenses in 2018 following the adoption of IFRS 9, Financial Instruments, and the inclusion of expenses associated with customer receivables and overdue payments in financial income and expenses as a result of the adoption of IFRS 15, Revenue from Contracts with Customers.

Loss before tax

Our loss before tax in 2018 was EUR 360 million, a decrease of EUR 150 million compared to a loss of EUR 510 million in 2017.

Income tax

Income taxes was a net expense of EUR 189 million in 2018, a decrease of EUR 738 million compared to a net expense of EUR 927 million in 2017. The change in net income taxes was primarily attributable to the following expenses recorded in 2017: deferred tax expense of EUR 777 million from re-measurement of deferred tax assets resulting from the tax rate change in the United States, a non-recurring tax expense of EUR 245 million related to the integration of the former Alcatel Lucent and Nokia operating models, and income taxes for prior years of EUR 139 million related to the disposal of the former Alcatel Lucent railway signaling business in 2006 to Thalès. This was partially offset by three factors: higher income taxes due to increased profitability and our regional profit mix in 2018 compared to 2017, Base Erosion and Anti-Abuse Tax in the United States, enacted as part of the tax reform and applicable from 2018 onwards, and deferred tax expense resulting from the write-off of certain deferred tax assets in 2018, primarily related to foreign withholding tax credits in Finland. Refer to Note 12, Income taxes, of our consolidated financial statements included in this annual report on Form 20-F.

Loss attributable to equity holders of the parent and earnings per share

The loss attributable to equity holders of the parent in 2018 was EUR 554 million, a decrease of EUR 919 million, compared to a loss of EUR 1 473 million in 2017. The change in loss attributable to equity holders of the parent was primarily due to lower income tax expenses and a net positive fluctuation in financial income and expenses. This was partially offset by an operating loss in 2018, compared to an operating profit in 2017.