Manufacturer finally able to turn its back on failing devices business as prepares for handover to Microsoft
Nokia's Devices & Services business has experienced another quarter of falling sales, across mobile phones and smartphones. Sales for the quarter were down by 29% year on year and had dropped 5% from the third quarter as the usually prosperous Christmas-period for devices failed to materialise for Nokia.
In the fourth quarter 2013, Nokia Devices & Services discontinued operations net sales were Euro 2.6 billion and non-IFRS operating margin was -7.3%. Full year 2013 discontinued operations net sales were Euro 10.7 billion and non-IFRS operating margin was -4.8%.
Nokia's mobile phone sales were blamed for the majority of the falling unit shipments, although smartphone sales were also down. Sales for Nokia Lumia devices in the fourth quarter of 2013 was 8.2 million, down from 8.8 million in the third quarter, although the past year has seen Lumia sales grow significantly, up from 4.4 million units shipped in the fourth quarter of 2012.
Mobile phones net sales were affected by competitive industry dynamics, including intense smartphone competition at increasingly lower price points and intense competition at the low end of Nokia's product portfolio. Smart devices net sales were affected by competitive industry dynamics including the strong momentum of competing smartphone platforms, as well as Nokia's portfolio transition from Symbian products to Lumia products, said Nokia.
The sequential decline in discontinued operations net sales in the fourth quarter 2013 was primarily due to lower smart devices net sales; on a sequential basis, mobile phones net sales were approximately flat.
The company is putting its former forte behind it however, and looking instead towards growing Nokia Solutions Networks (NSN), Nokia HERE and Advanced Technologies. It is already calling its Devices & Services division 'discontinued operations'.
On 3 September 2013, Nokia announced that it had signed an agreement to enter into a transaction whereby Nokia will sell substantially all of its Devices & Services business and license its patents to Microsoft for Euro 5.44 billion in cash, payable at closing.
The transaction is expected to close in the first quarter of 2014, subject to regulatory approvals and other customary closing conditions.
Overall for continuing operations, Nokia's net sales in the fourth quarter 2013 were Euro 3.5 billion, up 18% compared to Q3 2013. Nokia's full year net sales 2013 were Euro 12.7 billion, down 17% compared to full year 2012.
NSN experienced a year on year decrease of 22% in NSN net sales in the fourth quarter 2013, partially due to divestments of businesses not consistent with its strategic focus, as well as the exiting of certain customer contracts and countries. Excluding these two factors, NSN net sales in the fourth quarter 2013 declined by approximately 15% primarily due to reduced wireless infrastructure deployment activity, which affected both global services and mobile broadband.
Additionally, NSN net sales were negatively affected by foreign currency fluctuations. The year on year decrease in mobile broadband was primarily due to lower sales in GSM and core networks, which were partially offset by an increase in LTE sales primarily in Greater China, Europe and Asia-Pacific excluding Japan. The year on year decrease in global services was primarily due to a reduction in network implementation activity, consistent with lower levels of large scale mobile broadband deployments, and the exiting of certain contracts in line with NSN's strategic focus.
NSN reported net profit improved to Euro 15 million, compared to a reported net loss of Euro 1.4 billion in 2012, reflecting lower levels of restructuring charges, strong operational performance in both global services and mobile broadband, and lower purchase price accounting related expenses.
The sequential increase of 20% in NSN net sales in the fourth quarter 2013 reflects a seasonal increase in sales in both mobile broadband and global services. The increase in mobile broadband net sales was driven by growth across our radio access portfolio. The increase in global services was driven by growth in all business lines. On a regional basis, NSN's net sales increased sequentially primarily due to Greater China, Middle East & Africa and Asia Pacific, partially offset by lower sales in North America.
Despite NSN's lower top line, underlying operating profitability improved to Euro 1.1 billion or 9.7% of net sales, compared to Euro 0.8 billion or 5.7% of net sales in 2012, reflecting strong gross margin and continued progress relative to its strategy.
HERE's external net sales grew to Euro 225 million, an increase of 10% year on year and 28% sequentially. In the fourth quarter 2013, the year on year increase in external HERE net sales was primarily due to higher sales to vehicle customers, partially offset by lower sales to personal navigation device (PND) customers consistent with declines in the PND industry. In the fourth quarter 2013, the sequential increase in external HERE net sales was primarily due to higher seasonal sales to vehicle and PND customers.
In the fourth quarter 2013, HERE had sales of new vehicle licenses of 3.2 million units, compared to 2.4 million units in the fourth quarter 2012 and 2.6 million units in the third quarter 2013. On a year on year basis, unit sales to vehicle customers increased primarily due to higher vehicle sales and higher consumer uptake of in-vehicle navigation. On a sequential basis unit sales to vehicle customers increased primarily due to higher consumer uptake of in-vehicle navigation. Sales to vehicle customers represented well over 50% of external HERE net sales in the fourth quarter 2013, as well as in the fourth quarter 2012 and the third quarter 2013.
In the fourth quarter 2013, the year on year and sequential declines in internal HERE net sales were primarily due to lower recognition of deferred revenue related to our smartphone sales.
The year on year and sequential decline in Advanced Technologies net sales in the fourth quarter 2013, at -20% and -14% respectively, was primarily due to lower intellectual property licensing income from certain licensees that experienced lower levels of business activity. Sequentially, net sales were also negatively affected by fluctuations in quarterly revenue recognition from certain licensees.
Nokia also announced that Samsung extended a patent license agreement between Nokia and Samsung for five years. Samsung will pay compensation to Nokia for the period commencing from 1 January 2014. The amount to be paid by Samsung will be finally settled in a binding arbitration, which is expected to be concluded during 2015.
Risto Siilasmaa, Nokia Chairman and interim CEO commented on the company's progress: 'During the fourth quarter, Nokia's continuing businesses produced a healthy underlying operating margin of 12%. While the first quarter of the year is seasonally weak for our continuing operations, we continue to expect the closing of the Microsoft transaction to significantly improve Nokia's earnings profile.'
He added: 'The strength of NSN's underlying profitability highlights just how fundamentally different the company is today, compared with two years ago when it started its restructuring and transformation program. Today, we are more focused, more innovative and more disciplined. With these fundamental elements in place, we believe NSN is well-positioned to deliver solid business performance for the year ahead.
'For HERE, we see long term transformational growth opportunities in the automotive market, as well as in other industries. Thus, we are planning to increase investment levels in 2014 to capture these exciting opportunities in the coming years. For Advanced Technologies, we are focused on continuing to invest in innovation, implementing our successful business strategy of licensing our industry leading intellectual property to companies interested in Nokia's innovations, and are planning to add further value to our partners through technology licensing,' he concluded.