Nokia 2012 Annual Report Download - page 127

Location & Commerce net sales increased 26% to EUR 1 091 million in 2011, compared to
EUR 869 million in 2010. The year-on-year increase in net sales in 2011 was primarily driven by higher
sales of map content licenses to vehicle customers due to increased consumer uptake of navigation
systems and higher recognition of deferred revenue related to sales of map platform licenses to Smart
Devices.
Gross Margin
On a year-on-year basis the gross margin in Location & Commerce was virtually unchanged. In 2011,
the gross margin benefited from an increased proportion of higher gross margin sales compared to
2010, which were offset by a reclassification of certain data-related charges from operating expenditure
to cost of sales in the fourth quarter of 2011.
Operating Expenses
Location & Commerce research and development expenses decreased 5% to EUR 958 million,
compared to EUR 1 011 million in 2010. The decrease was primarily driven by a focus on cost controls,
lower project spending and a shift of research and development operating expenses to cost of sales as
a result of the divestiture of the media advertising business.
Location & Commerce selling and marketing expenses decreased 5% to EUR 259 million, compared to
EUR 274 million in 2010. The decrease was primarily driven by a focus on cost controls and lower
product marketing spending.
Location & Commerce administrative and general expenses decreased 9% to EUR 68 million,
compared to EUR 75 million in 2010. The decrease was primarily driven by a focus on cost controls,
partially offset by increased depreciation costs related to closure of offices.
Operating Margin
Location & Commerce operating loss increased to EUR 1 526 million in 2011, compared with a loss of
EUR 663 million in 2010. Location & Commerce operating margin in 2011 was negative 139.9%,
compared with negative 76.3% in 2010. The year-on-year decrease in operating margin in 2011 was
driven primarily by the higher other operating expenses due to the impairment of Location &
Commerce’s goodwill of EUR 1.1 billion offset to some extent by higher net sales and lower operating
expenses compared to 2010.
In the fourth quarter of 2011, we conducted our annual impairment testing to assess if events or
changes in circumstances indicated that the carrying amount of our goodwill may not be recoverable. As
a result, we recorded the above-noted impairment of goodwill in our Location & Commerce business.
The impairment charge was the result of an evaluation of the projected financial performance of our
Location & Commerce business. This took into consideration the market dynamics in digital map data
and related location-based content markets, including our estimate of the market moving long-term
from fee-based towards advertising-based models especially in some more mature markets. It also
reflected recently announced results and related competitive factors in the local search and advertising
market resulting in lower estimated growth prospects from our location-based assets integrated with
different advertising platforms. After consideration of all relevant factors, we reduced the net sales
projections for Location & Commerce which, in turn, reduced projected profitability and cash flows.
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