Thank you. I would now like to turn the call over to Mr. Matt Shimao, Head of Investor Relations. You may begin.
Ladies and gentlemen, welcome to Nokia's fourth quarter 2015 conference call. I'm Matt Shimao, Head of Nokia Investor Relations. Rajeev Suri, President and CEO of Nokia, and Timo Ihamuotila, CFO of Nokia, are here in Espoo with me today. Also, joining us today from Paris to help with any questions on Alcatel-Lucent's Q4 and full year 2015 during the Q&A session is Jean Raby, Chief Financial and Legal Officer of Alcatel-Lucent. During this call, we'll be making forward-looking statements regarding the future businesses 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 such risks in more detail on pages 74 through 89 of our 2014 annual report on Form 20-F, our report for Q4 and full year 2015 issued today, as well as our other filings with the U.S. Securities and Exchange Commission. Please note that our results 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 reports with tables available on our website includes a detailed explanation of the contents of the non-IFRS information and a reconciliation between the non-IFRS and the reported information. With that, Rajeev, over to you.
Thank you, Matt, and thanks to all of you for joining. Our fourth quarter results were a good way to cap off what was a truly transformational year for our 150-year-old company. It was a year in which we announced the acquisition of Alcatel-Lucent and moved towards the closing of that transaction faster than we originally thought possible. The year in which we sold our HERE mapping business for over EUR 2.5 billion in cash proceeds, launched our EUR 7 billion capital structure optimization program, and more, all while delivering on our financial commitments for the year. We are certainly not complacent, and we know that we will have some challenges in 2016, but I believe that we can look back to last year with some measure of pride and with confidence that we took the right steps to position the company for the future.
The results that we announced today for the fourth quarter reflect solid performances from both Nokia Networks and Nokia Technologies. On a Nokia level, we delivered non-IFRS diluted EPS of EUR 0.15 during the quarter, a rise of 67% year-on-year, thanks largely to the Samsung arbitration result. Net sales were up 3% versus a year ago, although down 3% on a constant currency basis, at EUR 3.6 billion, and our non-IFRS gross margin was 46.4%. For the full year, net sales were up 6% compared to 2014 at EUR 12.5 billion, although on a constant currency basis, sales would have ticked 2%. Based on the company's good performance, the board of directors is planning to propose an ordinary dividend for 2015 of EUR 0.16 per share and a special dividend of EUR 0.10 per share. In line with our capital structure optimization program, which Timo will cover in more detail later.
Given the recent announcement we made about the completion of the arbitration with Samsung, let me start with that topic. After which I will discuss Nokia Networks' results and the progress we have made with Alcatel-Lucent. While we would have preferred better results from the Samsung arbitration, there are several points that I would like to make to put the outcome in some perspective. First, the arbitration was focused on a portion of the patent portfolio of Nokia Technologies. There are a number of patents within Nokia Technologies that were not covered, and of course, we have separate patent portfolios outside of technologies that were excluded as well. Given this, we expect to have further discussions with Samsung related to those parts of Nokia's intellectual property that were not covered by the arbitration. In time, we believe that we will generate additional revenue from Samsung in these areas.
Second, while the details of the arbitration outcome are confidential, we think the results position us to continue to build our licensing business at terms that we believe will be superior to others in our industry, reflecting the overall strength of our intellectual property. Third, we are fully engaged in licensing actions well beyond just Samsung. In fact, we have an arbitration already underway with another smartphone vendor and ongoing discussions with many other significant industry players. Fourth, we see opportunities to expand our licensing activities not just in mobile devices, but to other segments within consumer electronics and new areas such as automotive. Finally, I would just point out that circumstances for each licensing case are different, and this single arbitration does not necessarily suggest the outcome of future transactions, either with Samsung or with other parties.
In short, I remain confident that our intellectual property portfolio is second to none in the industry and that we continue to have solid opportunities in this area. Timo will discuss this in further detail, along with Nokia Technologies' performance in the quarter in his comments. Now to Nokia Networks, where we ended 2015 delivering on our commitment for the full year with non-IFRS operating margin at the high end of the original guidance range and net sales up 3% on a reported currency basis. Of course, our net sales performance benefited from currency fluctuations, but we demonstrated that we could recover from a weak Q1 and still achieve good annual results. For the quarter, Nokia Networks' net sales were down 5% on a reported basis and 12% on a constant currency basis.
As I've said in the past, I'm not pleased with the decline in sales, but I also believe our performance is not inconsistent with others in our sector. We have kept our focus on delivering strong profitability despite these conditions. Non-IFRS gross margin was an excellent 39.6%, our third consecutive quarter above 39%. Non-IFRS operating margin at 14.6% was the best for the Networks business since the formation of the Nokia Siemens Networks joint venture, helped by software sales that were approximately 400 basis points above the same quarter last year. Operating expenses were also down year-on-year on a constant currency basis, although up slightly on a reported basis. This reflects our ongoing discipline and ability to flexibly adjust our business to reflect market conditions. That discipline is also seen in a range of our operational metrics.
Nokia Networks customer experience survey, which calculates customer satisfaction, ended 2015 at an all-time high, continuing its upward trajectory. This reflects our unrelenting focus on quality transformation. For example, software quality levels are up five times since 2012. We have seen a 60% reduction in outages since 2011. Headcount was down sequentially. We continued to exit from factories during the year. Part of our longer-term approach to streamline operations and tap the expertise of our manufacturing partners. At end December, Nokia Networks operated four manufacturing facilities, down from 10 at the end of 2011. In terms of our reported segments, the business mix in the quarter was 54% mobile broadband versus 46% for Global Services, a touch more weighted towards mobile broadband when compared to the year-ago figures.
For mobile broadband, we notched strong profitability in the quarter, helped by higher software sales, strong growth in LTE, and our growing small cells business. The new Mobile Networks business group is continuing to move aggressively to target leadership in 5G, leveraging our greater size and strengthen market position. We are planning a massive shift of resources to 5G during 2016. Global Services had a good quarter, although a higher proportion of network implementation compared to one year ago had an impact on profitability. Turning to the regions, Greater China was a standout performer in Q4, notching 17% year-on-year growth, thanks largely to ongoing LTE rollouts.
Like others in the industry, I expect that the torrid pace of growth in the Chinese market will come to an end during 2016. We continue to have a strong position in China, thanks to our combined install base in the form of both Nokia and Alcatel Shanghai Bell. Asia Pacific, on the other hand, saw sales fall by 12%, largely driven by the ongoing decline in the market in Japan. While there were pockets of growth, notably in India, which had a stellar year, and in the Philippines and Thailand, these areas were not sufficient to offset the impact of Japan. As you're aware, Japan has been particularly challenging for us and others in the industry over the course of 2015.
With the expanded portfolio that we now have, we continue to see opportunity in Japan, the next large catalyst for the market to improve is likely to be when 5G rollouts start to accelerate. We had slight growth of 2% in Middle East and Africa, boosted by higher net sales in global services and a strong showing, especially in Saudi Arabia. As I've said before, the market in Middle East and Africa is likely to continue to grow, and we are well positioned to take advantage of that growth. European net sales were down 7% due to lower net sales in Russia and Italy, partially offset by growth in the United Kingdom and Ukraine. In North America, net sales fell 6%, although the year-ago figure benefited from a one-time patent sale.
Going forward, of course, our market presence and access will be greatly enhanced by the addition of Alcatel-Lucent. In Latin America, net sales were down 9%, driven by lower net sales in both global services and mobile broadband. This is another region where we think growth is likely in 2016, but there are risks given some of the fragile conditions in the larger economies of the region. As I look out at the market for this year, I expect conditions to be spotty at best. Some regions will likely grow, such as India, North America, Middle East and Africa, and Latin America. We also think 2016 will be the year where we see the third wave of 4G LTE deployments come to fruition in markets like Latin America, Africa, and the Middle East.
Following the first phase in the U.S., Korea, and Japan, and the second phase in China and parts of Europe. Some segments of the market that we will address with Alcatel-Lucent are likely to grow as well, including mobile IMS, fixed access, IP routing, optical as optics technology moves from Optical Multi-Service Node to Wavelength Division Multiplexing, video, analytics, small cells, and the market for cloud stacks. As we see it now, however, this growth will be counterbalanced by what we expect will be a meaningfully challenged outlook for the mobile radio market. Now, before handing over to Timo, let me share some thoughts on Alcatel-Lucent. If you remember that it was only some 10 months ago that we announced the planned acquisition, I think we can be very pleased with the progress made to date.
During the quarter, we received overwhelming approval for the acquisition from our shareholders, the exchange offer for Alcatel-Lucent securities went off smoothly and successfully. We believe that we are getting close to the 95% squeeze-out level, a topic that Timo will discuss in his remarks. While we still continue to work to acquire full ownership of Alcatel-Lucent, combined operations already began in early January, and integration work is off to a strong start. We are now preparing joint bids for customers, and preparations for Mobile World Congress later this month are proceeding at full speed. In fact, you may have already seen some early launches for the event around 5G, security, and analytics. In Barcelona, we will be presenting only one face to the world, one Nokia. As for our product portfolio, in the areas where we have no overlap, we are ready and able to sell today.
For those areas where there is overlap, we are working closely with customers to make fast and effective decisions to ensure we have a streamlined and focused portfolio while ensuring no disruption to their existing operations. We aim to share more details about our preliminary plans with our customers at Mobile World Congress. In China, we are proceeding quickly with a new board of directors in place for Alcatel Shanghai Bell and a new management team to steer operations. We're making good progress helped by our faster than expected closing of the deal. I want to stress that we remain absolutely vigilant about ensuring the integration proceeds with minimal disruption. We are confident we will deliver on our previously announced synergy targets. We continue to believe the timing of the acquisition could not be better.
2016 will be a critical year for the industry as we are now in a cycle between 4G and 5G. The deal allows us to significantly accelerate spending on 5G while reducing spending in 4G. In addition, the combined portfolio will put us in an excellent position as the transition to the cloud accelerates. As I've said before, our new leadership position has put us at the table with our customers in ways that would not have happened if we were two separate companies. To close, a brief comment on the Q4 results at Alcatel-Lucent, which were clearly quite strong. I would note, however, that the unusually robust growth in the Alcatel-Lucent wireless business, 14% year-on-year with plenty of healthy high-margin software included will likely have a negative impact on our first quarter, at least.
To their credit, the Alcatel-Lucent team ended the year on track with their Shift Plan goals, which is quite an impressive achievement. With that, let me now hand the call over to Timo. Then we can turn to your questions. Timo, the floor is yours.
Thank you, Rajeev. It has been an eventful quarter for Nokia. There are quite a few topics that I would like to cover in my remarks today. I will start with an update on the acquisition of Alcatel-Lucent and the sale of HERE before walking you through the Samsung arbitration result and the performance of Nokia Technologies in Q4. I will then turn to my customary discussion on our cash performance in the quarter. Lastly, I will say a few words on our capital structure optimization program and outlook for 2016. Starting with the Alcatel-Lucent acquisition. As you know, following the successful initial offer period, the offer was reopened on January 14 and closed on February 3rd. The AMF published the results of the reopened offer yesterday.
The solid results show that the vast majority of Alcatel-Lucent investors clearly recognize the potential to create value by combining our two companies. Nokia will hold approximately 91.3% of the share capital of Alcatel-Lucent following the settlement of the tendered securities, which is expected to occur tomorrow. On a fully diluted basis, Nokia will hold approximately 88.1% of the share capital of Alcatel-Lucent. The net cash reported by Nokia and Alcatel-Lucent at the end of 2015 totaled EUR 9.2 billion. Assuming the conversion of the OCEANEs tendered during the initial and reopened offers, the net cash of the combined company would have been approximately EUR 10 billion. Assuming the exchange of all remaining outstanding Alcatel-Lucent shares and convertible bonds into Nokia shares at the exchange ratio offered in the earlier public exchange offers, the total number of Nokia shares would equal approximately 6 billion shares.
Naturally, we aim to get to the 95% threshold enabling Nokia to squeeze out the remaining Alcatel-Lucent securities. We believe that we are very well positioned to reach the 95% threshold. We have a number of options to achieve this goal, as we have indicated in the documentation for the public exchange offer. As previously announced, the Alcatel-Lucent ADS program will be terminated on February 24th, 2016. We intend to cause Alcatel-Lucent to delist its ADSs from the New York Stock Exchange. To ensure proper governance as we progress towards 100% ownership of Alcatel-Lucent, we have put in place a master service agreement. This agreement sets the framework for the joint operations of the two companies until we reach the full ownership of Alcatel-Lucent and has been approved by the boards of both Nokia and Alcatel-Lucent.
We have been able to proceed with the transaction faster than expected. The agreement allows us to continue with the integration at a quick pace. The structure and clarity that the master services agreement provides enables us to already present one face to customers while ensuring that the interests of the remaining Alcatel-Lucent shareholders are protected. Moving to the sale of HERE. As you know, we announced the sale of HERE in early August to an automotive industry consortium at an enterprise value of EUR 2.8 billion. The transaction was completed in early December. Nokia received net proceeds of approximately EUR 2.55 billion from the transaction, which is consistent with our earlier estimated net proceeds of slightly above EUR 2.5 billion. As a result, in Q4, we booked a gain of EUR 1.1 billion in discontinued operations, which is slightly higher than our earlier estimate of approximately EUR 1 billion.
Turning to the outcome of the arbitration with Samsung. I have highlighted earlier the significant potential that we see for Nokia Technologies. None of those aspirations have changed. As we invest in long-term growth opportunities, we have continued to make progress licensing Nokia's industry-leading IPR. Following the outcome of the Samsung arbitration, we recognized EUR 403 million of revenue in Q4 2015 in Nokia Technologies, part of which related to prior periods. Our annualized revenue run rate for Nokia Technologies was approximately EUR 800 million in Q4, excluding the part which related to prior periods. Please note that this run rate is a point-in-time estimate and not a forward-looking projection of net sales.
The five-year agreement covers part of the patent portfolio of Nokia Technologies from the beginning of 2014 until the end of 2018. We expect to have further discussions with Samsung related to intellectual property and technology assets that were not covered by the arbitration proceedings. In Q4, Nokia Technologies non-IFRS OpEx was EUR 87 million, an increase of EUR 18 million compared to the year-ago quarter, as we continued to invest in long-term growth opportunities. Non-IFRS R&D expenses increased by EUR 9 million year-on-year to EUR 54 million, primarily due to higher investments in digital media, digital health, and technology incubation. The year-on-year increase of EUR 9 million in SG&A to EUR 33 million was primarily due to increased licensing activities, the ramp-up of new businesses, and higher business support costs. We believe that these investments are key building blocks in driving longer-term value across Nokia Technologies.
As I've highlighted in the past, we are very diligent and disciplined in making investments into new areas. We have in place a structured, gated investment process designed to align our spending with our technical progress and the market opportunities. Moving to our cash performance during Q4. On a sequential basis, Nokia's gross cash increased by approximately EUR 3 billion with a year-end balance of approximately EUR 9.8 billion. Net cash and other liquid assets increased by approximately EUR 3.7 billion sequentially, with a year-end balance of approximately EUR 7.8 billion. The sequential increase in Nokia's net cash and other liquid assets in the fourth quarter was primarily due to EUR 2.54 billion of cash inflows from the sale of HERE and a cash inflow of EUR 827 million related to Nokia's adjusted net profit.
In addition, during Q4, Nokia utilized the early redemption option of the EUR 750 million convertible bond due in 2017, which had a positive impact of EUR 712 million on our net cash and other liquid assets in the quarter. Although Alcatel-Lucent is still being reported separately in Q4, in our view, they had an exceptionally strong quarter, which included exceptionally strong free cash flow generation. While this is clearly positive, it may naturally lead to some short-term headwinds in cash performance. For example, the sequential decline in their working capital was noticeable in the fourth quarter. We intend to harmonize our practices regarding working capital items going forward.
A further factor expected to impact Nokia's cash flow negatively in 2016 is our plan to reduce the debt-like items of the combined company by approximately EUR 1 billion as part of our EUR 7 billion program to optimize Nokia's capital structure. Additionally, regarding Q1 2016, the catch-up payment related to the Samsung award is expected to have a positive impact on our cash flow. This is expected to be counterbalanced by certain Alcatel-Lucent transaction-related cash outflows. Moving on to more details on our capital structure optimization program. Nokia has a very strong balance sheet. Improving our capital efficiency is an important element of our value creation strategy. Although the implementation of the overall capital structure optimization program is subject to, for instance, the conversion of all the Alcatel-Lucent convertible bonds, we have been swift in moving ahead with many elements of the program already.
Regarding the deleveraging portion of our Capital Structure Optimization Program, earlier this quarter, we redeemed the $1.85 billion senior notes and repaid the EUR 190 million bond, both of which were issued by Alcatel-Lucent. The other main element of our EUR 3 billion deleveraging program is the plan to reduce debt-like items by EUR 1 billion, as I commented earlier. On the EUR 4 billion shareholder distributions part of our Capital Structure Optimization Program. We said back in October that we intend the dividend for 2015 to be at least EUR 0.15. In line with this, the board will propose a dividend of EUR 0.16 for 2015, in addition to a special dividend of EUR 0.10. This would result in a maximum payout of approximately EUR 960 million in dividends and about EUR 600 million in special dividends, assuming a share count of approximately 6 billion.
The dividend and share buyback are subject to shareholder approval at our AGM in June. As always, a considerable amount of thought has been put into the dividend proposal. In addition to the earnings generated in 2015, the board has carefully considered Nokia's potential sources and uses of cash in the foreseeable future, including achieving 100% ownership of Alcatel-Lucent, accelerating investments in 5G, the Capital Structure Optimization Program, and our integration and synergy plans. I would like to spend a few minutes on our guidance for 2016. Starting with Networks. Due to the very recent acquisition of Alcatel-Lucent, we believe it is not appropriate to provide annual targets for net sales or operating margin at the present time. Instead, we intend to provide the full year 2016 outlook for Networks in conjunction with our Q1 results announcement.
By mid-April, we target to provide comparable historical financials for the combined company. For Q1 2016, net sales and non-IFRS operating margin in Networks are expected to be influenced by factors including a flattish CapEx environment for Nokia's overall addressable market in 2016, a declining wireless infrastructure market in 2016 with a greater than normal seasonal decline in Q1. Competitive industry dynamics, product and regional mix, the timing of major network deployments, and execution of integration and synergy plans. On Nokia Technologies, determining the timing and value of significant licensing agreements involves a lot of risks and uncertainties. We believe it is not appropriate to provide annual targets for net sales.
It is worth noting that Nokia Technologies will include the licensing and intellectual property management operations from Alcatel-Lucent going forward, which will add costs as well as some net sales compared to the previous Nokia Technologies structure. At the Nokia Group level, given the industry environment, we believe our track record of operational discipline and culture of execution excellence will serve us well. We reiterated our target for approximately EUR 900 million of net operating cost synergies to be achieved in the full year of 2018. We have done an astronomical amount of planning. We have already started the execution, and we are confident that we can deliver on this target. The importance of continuous improvement is deeply embedded in the DNA of Nokia. On our interest expense reduction target of approximately EUR 200 million.
Note that the Alcatel-Lucent OCEANE tendered into the offer will help to reduce the interest expenses of the combined company. In addition, on February 9, 2016, Alcatel-Lucent terminated its EUR 504 million revolving credit facility. Furthermore, I mentioned earlier the redemption of Nokia's EUR 750 million convertible bond and Alcatel-Lucent's $1.85 billion U.S. senior notes, and the repayment of Alcatel-Lucent's EUR 190 million bond. In total, these five items are expected to help us to reduce the interest expenses of the combined company by approximately EUR 200 million already on a full year basis in 2016 compared to the year-end 2014 run rate. Thus, we today accelerated our annual interest expense reduction target by one year. In closing, I am confident that Nokia's acquisition of Alcatel-Lucent presents a great value creation opportunity.
We have the energy and management bandwidth to execute the planned synergies and to invest where it matters in a disciplined way. Furthermore, we are in the process of implementing the Nokia business system across the combined company to make sure we look at our long-term value creation opportunity holistically and systematically through both business execution as well as through our capital structure optimization program. With that, I'll hand it over to Matt for Q&A.
Thank you, Timo. Stephanie, please begin with the Q&A session.
Certainly. At this time, if you would like to ask a question, please press star one on your telephone keypad. Your first question comes from the line of Gareth Jenkins from UBS. Your line is open.
Thanks. I think, Matt, you forgot to say one question each, so I might just slip two in. Rajeev, I wondered if you could talk about where you're seeing macro weakness into the first quarter. Where's that most prevalent globally? Maybe one for Timo, just what greater than normal seasonal decline actually means for Q1. Can you provide some color on what that means? I think typically you're down about 23% quarter-on-quarter. Thank you.
Thanks, Gareth. Macro weakness during 2016, we see that in Russia, we see that in Japan, and we see that in China. These are some of the markets we trade in. Of course, coupled with the fact that a lot of the build-out has already happened in Japan and China during the last few years. That's on the macro weakness.
Yeah.
Your second question. The discussion on the greater than normal seasonal decline. As we said, going into the year, we are seeing a bit slower market on wireless infrastructure, and that has a bit of an impact on that. The second thing which has an impact as well is that both companies had very strong Q4 performance, and we are also expecting that to have a bit of an impact. Traditionally, as you said, we have had about 23%, 24%, 25%, somewhere there, seasonally decline from Q4 to Q1. Thank you, Gareth. Stephanie, next question, please.
Our next question comes from the line of Sandeep Deshpande with J.P. Morgan. Your line is open. Sandeep Deshpande, your line is open.
Please hold.
Your next question comes from the line of Andrew Gardiner with Barclays. Your line is open.
Thanks very much. Good afternoon. I had a question on the Alcatel integration now that you've got the deal closed. Timo, you mentioned how strongly Alcatel had finished the fourth quarter. Certainly looks good from that point of view. Does make things a little more challenging as you start this year. Aside from that sort of the comps perhaps being a bit tricky, is there anything else that you've sort of found now that you've got the deal closed that is of concern? Or perhaps alternatively, have you found anything that surprises you positively? Just related to that, how quickly can you execute on the integration plan in terms of actually starting to take cost out? Is that something we can look for by second quarter? Is it going to be more starting in the second half of the year?
Any sort of idea on the phasing of the cost cuts would be helpful. Thanks very much.
Okay. Thank you, Andrew. A couple of questions there, I guess. First of all, on the Alcatel-Lucent integration and have we found anything sort of surprising? No, I would not say so. I think this has been going according to the plan. We noted today actually that in our new reporting structure, there will be two businesses reported as part of corporate ASN and RFS. These we will look at somewhat differently maybe than in the previous structure, no, we have not found anything which would be some kind of major surprise. On the cost execution, we have not really given any further guidance on the cost side. I want to reemphasize that we have the master services agreement in place, which is approved by both companies, and under that, we can move swiftly ahead already now.
We are moving ahead as quickly as possible, and of course, we target as good outcome as possible. Unfortunately, I can't give any more detail at this point.
Thank you, Andrew. Stephanie, let's see if we can find Sandeep.
Sandeep Deshpande with J.P. Morgan, your line is open.
Yeah. Hi, can you hear me?
Yes.
Hello. Yeah, hi. My question is regarding IPR. There was some disappointment regarding how much you monetized on the IPR portfolio from Samsung. Is this the price that you now get from everybody else? That's my question. In terms of further monetization with various other parties, is that ongoing at this point, and when should we expect to see some results from that? Thank you.
Thanks, Sandeep. As I said, we would have, of course, preferred a better outcome. I want to be clear and point out that circumstances for each case are really different. This single arbitration does not necessarily suggest the outcome of future transaction, either with Samsung or with other parties. Then again, I want to repeat the main points. First, the arbitration with Samsung was focused on a part of the patent portfolio within Nokia Technologies. There are other parts within Nokia Technologies that we can yet monetize, and then there are, of course, portfolio beyond Nokia Technologies, which is both Nokia Networks as well as Alcatel-Lucent. Given this, we expect that we will have discussions with Samsung going forward as well to generate additional revenue from these areas. Then we are fully engaged in licensing actions well beyond just Samsung.
Like I said, we have other licensees in play. We've also got an arbitration already underway with another smartphone vendor. I also see opportunities to expand the licensing activities, not just in mobile devices, but clearly on a longer term basis in other segments. Automotive is one example. IoT, consumer electronics will be other. Overall, I'd say that we believe that our portfolio is second to none, and we still have a strong licensing opportunity on the long term given the strength of the portfolio. Thank you, Sandeep. Stephanie, next question, please.
Your next question comes from the line of Robert Sanders with Deutsche Bank. Your line is open.
Yeah. Hi, guys. Maybe just the first question would be around the services business of the old Nokia. Is that set to grow in 2016 or are you seeing some pressure also in that business?
Thanks, Robert. On the services business now, of course, we'll have full services business in a sense because every business group will have an underlying services business that they will be focused on. As you know, we've been doing quite well in the services business. The opportunities for us in terms of growth will be primarily in the services-led segments, such as network planning, optimization, which are a bit independent from the mobile broadband equipment sales. Of course, systems integration, both in mobile networks business group, but also beyond that in applications and analytics, because typically IMS, VoLTE, a lot of these kinds of sales, customer experience management analytics drive system integration and also the move to the cloud. Those are the growth pockets, but I will not comment on whether we see growth overall in services.
Yeah. Maybe on that we can say as much that traditionally services business top line has been a bit more stable than mobile broadband top line.
Yeah.
Thank you, Rob. Stephanie, we'll take our next question, please.
Your next question comes from the line of François Meunier with Morgan Stanley. Your line is open.
Yes. Thank you. Timo, I think you made quite a few remarks about the cash development in Q1 in 2016. I just wanted to dig a bit deeper into that. The working capital Alcatel seems to have been going in the wrong direction, actually in the right direction in 2016 and 2015, while yours has been in the wrong direction. Do you expect one to offset each other and maybe to have a flattish working cap cash outlay in 2016? Is that the plan? I was wondering regarding the pensions of Alcatel, if you could give us an idea of the cash outlay we need to put in the model for 2016 and the coming years. Is it still around EUR 130 million? I was wondering about the factoring of Alcatel. I know you're not too keen on that.
The amount of factoring of Alcatel has still increased in 2015 to I think around EUR 2 billion. Is it something that you expect to unfold in Q1, or it's going to take all year or maybe more time? Thank you.
Thanks, François. Jean, I would ask you to just quickly comment on the networking capital performance of Alcatel and the pension question, and then I can talk maybe in more detail on the forward-looking Q1 cash dynamics. If you could, please.
Okay. Thank you, Timo. Insofar as our working capital is concerned, as you saw, we had good performance in the reduction of our inventories. This is really a reflection of the work done since the launch of the Shift Plan, as well as the natural inventory clearing we can do in Q4 on the back of built up of inventories in Q3 ahead of what is traditionally high level activity at the end of the year. I do believe that the Shift Plan has resulted in a much more resilient management of our business, and that includes tighter and more efficient management of our working capital. Secondly, insofar as pension is concerned, you know that the principal cash outlays relate to Europe, not the U.S.
In the U.S., we do not expect, other than the non-qualified pension plans, to make any cash contribution to our pension plans for the foreseeable future. As far as Europe is concerned, taking a trend line from what we achieved, what we had to pay in 2015 is a good place to be. Thank you.
Okay, thanks. On the overall cash going forward. Clearly we have the following impacts on cash. As we said, results we expect to be sequentially down. That will have an impact. We expect some of this net working capital performance to reverse, as there was some really rapid cash from conversion late Q4. Alcatel-Lucent said that there is a licensing agreement with Qualcomm, which will likely result into a negative cash outflow of EUR 2.74 billion. This is related to Nokia's acquisition of Alcatel-Lucent. That triggered that thing. It was mentioned in the Alcatel-Lucent longer report today. On the other side, on a tailwind, we have a Samsung where we will receive, I would say maybe right characterization is clearly less than half of the expected total. We said that between 16 - 18 weeks, expect about $1.3 billion.
Clearly less than half of that. OCEANEs, of course, will play into the cash mix as well during Q1. There will be a lot of moving parts. What comes to the overall reduction of debt-like items, as we have said, as part of our capital structure optimization plan, we will look at this diligently already during Q1 and see what makes sense. Our target clearly is to take the financing cost down as we have very strong balance sheets. Kind of it is possible that we will run quite a big part of that through the P&L already during Q1.
Great. Thank you, François. Stephanie, we'll take our next question, please.
Your next question comes from the line of Kai Korschelt with Merrill Lynch. Your line is open.
Yes, afternoon, gents. Thanks for taking my questions. I just wanted to follow up on the wireless outlook, just because it seems a bit inconsistent with what the semiconductor supply chain is saying about demand improving on the RF side. Is your comment more specific to Alcatel's wireless business because that obviously had a very strong fourth quarter? The Nokia Networks standalone business seemed to have, if anything, let's say a sub-seasonal Q4. I'm just wondering, is this really very broad based or is it maybe more specific to the Alcatel part of the wireless business? The second question is really on the IPR business. I'm just wondering why you haven't provided any revenue guidance, because I thought you said after the Samsung arbitration, your run rate should be around EUR 800 million this year.
It appears that maybe the Apple agreement is due to get renewed this year. Why haven't you said EUR 800 million plus any additional revenue on top from that settlement? Are you potentially concerned that they may stop paying you like they have with some of your peers? Thank you.
Thanks, Kai. On the wireless market, it's the radio market within the wireless market that we see that will be soft during 2016. There will be markets that have momentum in spending because LTE build out still need to be done in some markets. Those are North America, both coverage type and of course, building of capacity. There is Latin America, Middle East and Africa, and partially India. Latin America is a question mark, but could also be. The rest, as I commented, would be in decline. Again, let's be clear, it's the radio market within wireless.
Yeah. Okay, the IPR business revenue outlook. Clearly, the timing and the amounts of these settlements are quite difficult to estimate. For that reason, as we have also said earlier, we think that we don't want to be in a position where we would give certain guidance or outlook on revenue on that business, which would then force us to do deals which would be not in the long-term value creation interest of the company and its shareholders. That really is the main reason. It has nothing to do with somebody either stopping paying or something. If a license agreement runs out and you have not agreed something before it runs out, it's quite typical that somebody would stop paying and then you just sort of do a catch-up when you agree again. There is no drama there.
Thank you, Kai. Stephanie, next question, please.
Your next question comes from the line of Achal Sultania with Credit Suisse. Your line is open.
Hi, thanks. Very quickly on the end market, I think obviously you're talking about RAN softness, but if I look at the Alcatel part of the business, given that RAN or wireless is only about one-third of the business, should we expect some sort of growth in rest of the business, which is routing, optics, fixed, and some parts of platforms?
Thanks, Achal. Like we said, flattish CapEx environment for the total addressable market of the new Nokia, right? Wireless being down, within that it is radio, really, that is the issue of softness. The businesses that have potential for growth are IP transport, backhaul transport, video gateways, some part of the applications and analytics business, and those will offset the decline, if you like, from radio, thereby the market being flattish.
Thanks, Achal. Stephanie, next question, please.
Your next question comes on the line, Vincent Molay with Oddo. Your line is open.
Yeah, good afternoon. A question regarding the risk of de-synergies. Namely, what about the risk of seeing tier 1 mobile operators swapping Alcatel-Lucent? Because so far it seems to be quite reassuring. What about you see in the short term on this topic?
Thanks, Vincent. I think the question is around really portfolio rationalization swaps and so on. We have overlap in substantially the radio business, basically on seven accounts. We have worked through, remember we have talked about the CPRI interface that would allow, in a nutshell, our equipment to talk to the Alcatel-Lucent equipment so that we can minimize the impact of swaps. That is already tested in the labs. We will have it in Barcelona. We are ready for field trials with our customers. We are now working through the specific migration plans of these seven overlapping customers. At this point in time, the dialogue's been pretty good.
Our focus is on continuing to use open interfaces to minimize swaps unless there are very specific cases where there's an element of modernization that might be needed, which is distinct from swaps per se because of a roadmap rationalization.
Thank you, Vincent. Stephanie, we'll take our next question, please.
Your next question comes from the line of Pierre Ferragu with Bernstein. Your line is open.
Hi, thank you for taking my question. I have one actually on gross margin. I have two things in mind. In radio, if you have a softer market in 2016 with a slowdown in rollout in China, in Russia, and to some extent in Japan, is that reasonable to think this will have a positive impact on gross margin? Because typically in a slowdown like that, it's more like the hardware, lower margin part of your activity, which is affected, and it also is the lower margin rollout activity, which is affected. That's one driver I have in mind. The second driver I have in mind is about Alcatel-Lucent. The gross margin they've pulled out for the fourth quarter is very, very impressive.
Should we think of that as almost a one-off, the last nice quarter, and then we should think at a normalized gross margin for Alcatel-Lucent being two, three points below that level? Is it actually like a fairly sustainable level we can take into consideration when we start modeling 2016 for the combined entity? Thanks a lot.
Maybe I'll start first with the second question. I actually think that Alcatel-Lucent called out that there was a bit of additional software sales on the Q4 numbers, and it would have been a few percentage points lower. I think that's in line with what you said, Pierre. What then comes to the overall gross margin performance on 2016, as we said, we are really, at this point, not giving any guidance on 2016, so I can't really comment on that. Of course, big part of the radio is hardware, but I would say overall, the software component everywhere in the network now is bigger and bigger part of the deal. I wouldn't draw such a straight conclusion. Again, we'll come back to the 2016 guidance after Q1 results.
Thank you, Pierre. Stephanie, next question, please.
Your next question comes from the line of Richard Kramer with Arete Research. Your line is open.
Thanks very much. Just to follow that question up with maybe a different take on it. Rajeev, when you look at how networks are evolving and that both companies noted software licenses boosting gross margins, indeed, when you look at Alcatel's Nuage and the platforms business, can you envision reaching a material portion of sales from recurring software license income in 2016? Do you think you'd be willing to disclose that? Equally, since Jean is on the line, I'd love to hear his comments on the sustainability of the cash flows and specifically the margins in some of the Alcatel divisions. The margin in Access, for example, was the highest that we'd seen in a decade or more.
I guess stripping out those software one-off benefits, I'd love to know underlying that, whether there are material margin improvements that we can expect to carry on into following years when there's not the bonus of the Shift Plan hanging overhead. Thanks.
Thanks, Richard. Let me start with the first question. Software, of course, is an area of focus. A lot of the development in the equipment is software driven. All I would say is it's an area of focus, we talked about it from Q1 2015 onwards. We had a one-point increase in software sales during 2015 compared to 2014 again, looking at it from a full year perspective, of course that's the focus that we have to keep driving it separately. We now have applications and analytics, which is a software business in itself, which is primarily all software, our aim is to try and capture more and more of that market over time.
We will look at the new combined networks business through a little bit of a different lens going forward. I don't think it's really appropriate to start to comment how any of these specific businesses, either in Alcatel-Lucent or at Nokia, would carry forward as is, because that's simply not going to be the exact management structure where we will be in. Jean, I'm happy if you want to comment further on the margin performance and how it improved on 2015 and Q4, sort of forward looking, unfortunately, we can't go further.
No, Timo, thanks. I just make one or two comments about our performance in 2015 as a whole on the cash flow and the improvement in margins. It's fair to say that this was all the design of the Shift Plan to improve profitability on a lasting basis and increase the resiliency of the business, and I think the steady progress we have made throughout the Shift Plan demonstrates that. That being said, we have called out in our Q4 release the fact that we had, like Nokia, seen some elevated sales of software. We use a different word. Frankly, gross margin, when you look at it on a more normalized basis, would have been a few percentage points lower.
That being said, it would have still, in our view, exceeded the gross margin of last year, therefore demonstrating the steady progress we have made in improving our profitability and our management of the business. That also reflects a total cultural change we have done within the company to focus on profitability and cash.
Thank you, Jean and Richard. Stephanie, let's take our next question, please.
Your next question comes from the line of Avi Silver with CLSA. Your line is open.
Hi. Thank you very much. How would you characterize the current competitive landscape? Has it changed in the last six months in networks? Do you see competition intensifying now that the deal has closed and the demand environment seems to be a little bit uncertain? On just gross margin, given the softer 1Q revenue outlook, can you talk about 1Q gross margin on a year-on-year basis for the combined companies? I know you're not providing specific guidance, but maybe directionally, you can provide some insight there that would be helpful. To that end, did the FX tailwind in 2015, to what extent did that help gross margin for Nokia? Thank you.
Thank you. On the competitive landscape, we said in Q1 of last year that things had changed, since then, there's no significant shift. I would say it's been stable sequentially over the last few months.
Yeah. Again, I really don't think I can shed more color on the forward-looking gross margin topic. What comes to the FX had a bit of a tailwind on our gross margin and also on operating margin. Actually, it was bigger in Q3 than Q4. Q4 it was actually a bit less on the Nokia side.
Okay. Thank you, Avi. Stephanie, next question, please.
Your next question comes from the line of Simon Leopold with Raymond James. Your line is open.
Thank you very much for taking my question. First, just a quick clarification. Earlier, you were talking about the Alcatel-Lucent gross margin in the fourth quarter, mentioning that there was a call-out of the contribution from software. Is there a value you can give us for the gross margin, what it would've been ex that additional software mix? Then in terms of my question, I wanted to see if we could talk a little bit more about the trends in China, understanding the macro environment there is tough. One other challenges I'm wondering about is historically China had awarded Western vendors roughly equal share, with Alcatel-Lucent and Nokia each about 10%, and the other fellow with roughly 10%. Is there a headwind where you might be concerned about the Chinese operators trying to rebalance share among the Western suppliers?
Also on China, is there a possibility that Chinese government tries to stimulate its economy with investment in the telco network infrastructure, that might be a possible source of upside if we've seen that? Thank you.
Yeah. Timo Ihamuotila here. Maybe I'll start and then hand over to Rajeev Suri on the China question. Again, as Jean Raby said, the Q4 gross margin in Alcatel-Lucent could have benefited a few percentage points from this, let's call it additional software sale dynamic. If you look at the overall gross margin, if I remember correctly, Jean Raby, you can correct me if I'm wrong, it's a little over 39% for Q4, and for the full year, about 36%. Maybe that gives also a bit of a color on the matter.
Yeah. On the market share question, we did model some potential dis-synergies in China just to be prudent when we did the Alcatel-Lucent deal. Having said that, I don't think there's any underlying reason, as long as we can work with the customers on the product portfolio quickly, and we intend to do that during and before Mobile World Congress, that we should necessarily lose share. We've been prudent in assuming some. The trend in China is that China Mobile did a big rollout over the last two and a half years, we can't see that repeat itself. Having said that, it could be possible Gives and takes in terms of China Unicom and China Telecom potentially accelerating some more build because they did not do an equivalent build. Plus, they may get new spectrum.
We are, for the moment, not counting on that changing. We still think macroeconomic and the big build-outs will lead to a softer market this year.
Thank you, Simon Leopold. Now Stephanie, we are ready for our last question. I think we've used our time for today.
Your last question comes from the line of Sébastien Sztabowicz with Kepler Cheuvreux. Your line is open.
Yeah. Hello, Sébastien Sztabowicz, Kepler Cheuvreux. Thanks for taking my questions. You will report ASN figures now in the Group Common functions going forward. Could you please update us on the strategy you have for the submarine business for the future? Also a question to Jean. You did not mention growth in submarine in the press release for Q4. Could you please comment a little bit on the business trends for the submarine business in Q4 and the outlook for this business in 2016? Thank you.
Okay. Maybe I'll start on the reporting and then hand over to Jean on how the business was doing. Regarding ASN from, I'll call it the new Nokia structure perspective, the reason why we have decided that we will run ASN and also RFS antenna business as part of Group Common, is simply that they are less synergistic to the other businesses we have. We have not made any other decisions. We now have to understand well what these businesses really are capable of doing from our standpoint, how they possibly are or are not synergistic to the rest of the business portfolio, and then we make further assessments. It's way too early to assess it from our management perspective at this point in time.
Jean, did you-
Jean, did you want to comment on the ASN overall?
Yeah. I can comment quickly. As you know, we don't report separate figures for ASN. They're part of IP transport. It's fair to say that the cyclical upswing that we had alluded to in previous communications continues to materialize. If you want to look at 2015 as a whole, we had solid double-digit growth in our revenues, and I mean by that more than 10%, but reflective of the cyclical upswing. I'll leave my comments to that, as I want to restrict any comments I make to past events as opposed to future looking. Thank you.
Okay, thank you, Sébastien. I'd actually like to turn the call back now to Jean before Rajeev's closing comments.
Thank you, Matt. I just wanted to take this opportunity to thank the entire community for your support. You have taken time to understand and contribute to our equity story. You have trusted us that we could execute, and you have challenged us and contributed to our thinking with your insightful questions and comments. Thank you very much. I have the utmost faith in the group. I'll be a long-term shareholder, and hopefully will see some of you in my next endeavor. On that, back to Rajeev.
Thanks, Jean. Thanks, Matt and Timo, and thanks again to all of you for joining. I would like to close with a few words. Q4 ends a chapter in the long histories of both Nokia and Alcatel-Lucent, we have now started a new chapter. Our focus is clearly on delivering the benefits of the Alcatel-Lucent deal to our customers and shareholders, creating long-term value in Nokia Technologies, and quickly taking steps to realize the synergies that we have promised, as well as our EUR 7 billion capital structure optimization program. While we're not blind to the market and macroeconomic challenges ahead of us, we will tackle these head-on and from a much better starting position than we would have had as two separate companies. We start 2016 as an enlarged and strengthened company with confidence and humility. With that, thanks for your time and attention. Matt, back to you.
Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today, we have made a number of forward-looking statements that involve risk and uncertainties. Actual results may therefore differ materially from the results currently expected. 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 pages 74 through 89 of our 2014 annual report on Form 20-F, in our report for Q4 and full year 2015 issued today, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you.
This concludes today's conference call. You may now disconnect.