Nokia reported second-quarter sales down 11 percent year-on-year to EUR 5.09 billion, hurt by the effects of the Covid-19 pandemic and weakness in China. However, the company continued to improve profitability, thanks to its restructuring, and adjusted net earnings rose 20 percent to EUR 0.06 per share. With the impact of the pandemic less than expected in Q2, the group returned to its previous guidance for the full year.
The company estimates the pandemic reduced sales by around EUR 300 million in the period. Most of this was delayed orders, which will be realised later. As a result of the lower sales, adjusted operating profit was down 6 percent to EUR 423 million, but the margin improved to 8.3 percent from 7.9 percent a year ago.
Nokia said the improved profitability was driven by broad-based strength in Networks, particularly in Mobile Access, with IP Routing and Fixed Access also contributing positively. Cost reductions were offset partially by higher investments in 5G R&D and lower returns on venture fund investments.
The company also highlighted progress in its Mobile Access portfolio, where "roadmaps are strengthening, costs are coming down, and product performance is rising", it said. ReefShark shipments continue to increase, putting the company on track for the new products to make up at least 35 percent of 5G shipments by year-end, and the total number of 5G deals has reached 83.
Free cash flow in the quarter was a positive EUR 265 million, versus negative EUR 1.0 billion one year ago, and Nokia ended Q2 with EUR 1.6 billion of net cash and EUR 7.5 billion in total cash. Given the strong first-half improvement, the company now expects free cash flow for full-year 2020 to be "clearly positive" compared to the earlier guidance of "positive".
The company also slightly increased the midpoint of its earnings guidance, returning to the outlook given at the start of this year. This means EPS of EUR 0.25 per share, up from EUR 0.23 forecast in the last quarter, plus or minus 5 cents. The adjusted operating margin is targeted at 9.5 percent for the year, plus or minus 1.5 points, compared to a previous midpoint of 9.0 percent.
The outlook is based on the expectation that Nokia will slightly underperform its primary addressable market, which is expected to be flattish on a constant currency basis in full year 2020, excluding China. The market outlook was upgraded from the previously expected decline, after less impact from Covid-19 in Q2 than expected.
