Source: Seeking Alpha
Nokia Corporation (NYSE:NOK)
Q2 2014 Earnings Conference Call
July 24, 2014, 08:00 AM ET
Matt Shimao – Head of Investor Relations
Rajeev Suri – President and Chief Executive Officer
Timo Ihamuotila – Executive Vice President and Chief Financial Officer
Sandeep Deshpande – JPMorgan
Gareth Jenkins – UBS
Francois Meunier – Morgan Stanley
Stuart Jeffrey – Nomura
Alexander Peterc – Exane BNP Paribas
Tim Long – BMO Capital Markets
Andrew Gardiner – Barclays
Richard Kramer – Arete Research
Mike Walkley – Canaccord
Ehud Gelblum – Citigroup
Kulbinder Garcha – Credit Suisse
Mark Sue – RBC Capital Markets
Jasmeet Chadha – Bernstein
Good day. My name is Carmen and I will be your conference operator today. At this time, I would like to welcome everyone to the Nokia Q2 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session (Operator Instructions).
I would now like to turn the call over to Matt Shimao, Head of Investor Relations. Mr. Shimao, you may begin.
Matt Shimao – Head of Investor Relations
Ladies and gentlemen, welcome to Nokia’s second quarter 2014 conference call. I’m Matt Shimao, Head of Nokia Investor Relations. Rajeev Suri, President and CEO; and Timo Ihamuotila, EVP and CFO, are here in Espoo with me today.
During this call, we’ll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. These statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external, such as general economic and industry conditions, as well as internal operating factors. We have identified these in more detail on the risk factors section of our 20-F for 2013 and in our Interim Report issued today.
Please note that our results press release, the complete interim report with tables and the presentation on our website include non-IFRS results information in addition to the reported results information. Our complete results report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and a reconciliation between the non-IFRS and the reported information.
With that, Rajeev, over to you.
Rajeev Suri – President and Chief Executive Officer
Thank you, Matt, and thanks to all of you for joining. It is a pleasure to speak to you today after my first quarter as CEO and after what was a very positive quarter for the company. Before I go into the details of our performance, however, I thought I would provide an update on the five priorities I set for my first 100 days and which I outlined on the call last quarter.
The first of those priorities was engaging and understanding. Since being appointed, I have met with senior customers, including the CEOs of Deutsche Telekom, Vodafone, China Mobile and SoftBank. I have talked to more than 15,000 employees in town hall meetings on three continents. I have spent time with government leaders, including the Premier of China and the Prime Minister of Finland. And I have engaged with many of our largest investors in San Francisco, Helsinki, London, representing about 30% of our shareholder base. These meetings have helped give me a perspective on how we are viewed today, our strength and weaknesses and the hopes and concerns people have for our future.
The second priority was to move rapidly from the high-level strategy and vision that we announced last quarter to bold and detailed execution plans. We will share more about the work that we are doing in this area at the Capital Markets Day that we are planning for November. But I am confident that we are heading in the right direction. Of course, we are not waiting to act. To take just one example, we have recently announced five acquisitions, Medio and Desti for HERE and Mesaplexx, SAC Wireless and a 3D geolocation solution from NICE Systems for Networks. These are the kind of deals we like, modest in size, relatively easy to integrate and providing access to new technology that we scale up or execution capabilities that bring us closer to key customers.
My third priority was to develop and implement a number of key systems across our business. I am pleased that we have already begun to implement a new operational governance model, including a company-wide performance management process. These steps will be codified into what we are calling the Nokia Business System, which is designed to ensure that we have best practices based upon common processes, spanning the whole company in a number of areas that include talent development, M&A integration, cost management and lean methodologies.
The fourth priority was culture. Today, we are taking the important step of sharing our new company values with almost 2,000 of our senior leaders, who will then help cascade those values to all employees. By September, we expect to be well on track with our overall cultural transformation, where we will focus on a common culture across the entire organization, with some differences between the businesses that reflect their unique circumstances.
Finally, I said we could not and would not lose sight of our operational performance. And I think the results of the second quarter show that we have kept our focus and discipline even during a time of significant change.
So let me now turn to those results. At the group level, we delivered net sales from continuing operations of €2.9 billion, a 44% non-IFRS gross margin and a non-IFRS operating profit of €347 million or 11.8%. Of course, the group level results reflect the performance of our three distinct businesses, and I will cover each of those today. I will spend most of my time on Networks, as I know some of you have questions about its strong margins and what they imply for the future.
Networks, which comprises our mobile broadband and global services business units, had what was in my view an excellent quarter. We showed very clearly that we could improve our topline performance, while still delivering strong profitability. This is, as I think you know, no small achievement in our sector. And we believe that we continue to outperform the competition on a number of metrics. While Timo will cover cash performance, let me provide some perspective on other key areas.
Second quarter net sales for Networks at €2.6 billion were down year-on-year. But when you adjust for currency fluctuations as well as divestments and country and contract that’s consistent with our strategic focus, the business would have actually grown by 1%. Pleasingly, net sales in our mobile broadband business unit were up 6% year-on-year. This performance was driven by strong sales not just in LTE, but also by double-digit growth in core sales, which typically are more profitable than radio. In recent quarters, we have seen our core solutions, including those in fixed mobile convergence, gain increased traction in the market.
We still have work to do to get global services back to growth after our many contract exits during the last two years. That said, I am confident we are making progress. Take the example of managed services. We can now say that Nokia Networks is very much back in the managed services business. We have won 10 new managed services deals this year. And while that is less than at least one of our competitors, we remain disciplined about limiting our efforts to those contracts where we can generate significant value for our customers and an adequate return for ourselves. We like managed services and can operate very effectively in this business without excellent global delivery centers, but are happy to leave to others those deals that do not make sense to us.
On a regional level, two out of our six regions, Asia-Pacific and Greater China, were back to year-on-year growth, and all regions grew sequentially. The large LTE rollouts in China are proceeding well for us. And we believe we have won the largest share of those rollouts of any foreign vendor. Europe, which has been a difficult region for us, declined year-on-year. That said, we believe that momentum is coming back. The value of new deals won this year was well above that for the same time last year. Our customer satisfaction scores have improved. And our technology is strong, as shown by our recent delivery of telco cloud-based Voice over LTE services to three major customers in the region.
North America was largely between major rollouts, although Sprint deployment activities are likely to accelerate in coming quarters. As we transformed our business in the Middle East and Africa, we saw a decline in net sales on a year-on-year basis, but in recent quarters, our deal momentum in the region has strengthened significantly. Latin America remains our most challenging region, partly a result of regulatory changes in Mexico, but also partly due to our earlier overreliance on services in the region and high impact of exits from those projects during our transformation. We are working hard to turn the situation around, but no one should expect an immediate rebound there.
We believe that demand for our Networks products and services was slightly higher than we were able to deliver, as we continue to face some component shortages in the second quarter. While I recognize that some of our customers are not yet satisfied, we are making progress and the trend improved from the first quarter to the second. If you look at the progress in Networks over the last three quarters, we have shown a consistently better topline trend, have slowed the rate of decline and now expect to return to growth.
Non-IFRS gross margin was a very strong 38%. Operating expenses remained well under control, with a 10% year-on-year decline. And non-IFRS operating profit margin was an excellent 11%. In addition, we had positive operating profits on a reported basis for the eighth consecutive quarter. This performance bodes well for the future. And as you will have seen from our press release today, we expect the full year 2014 non-IFRS operating margin for Networks to be at or slightly above the high end of the targeted long-term non-IFRS operating margin range of 5% to 10%.