Nokia Corporation (NYSE: NOK) Q4 2020 earnings call dated Feb. 04, 2021
Corporate Participants:
Matt Shimao — Head of Investor Relations
Pekka Lundmark — President and Chief Executive Officer
Marco Wiren — Chief Financial Officer
Analysts:
Andrew Gardiner — Barclays Capital — Analyst
Sami Sarkamies — Nordea Markets — Analyst
Alexander Duval — Goldman Sachs — Analyst
Alexander Peterc — Societe Generale Corporate and Investment Banking — Analyst
David Mulholland — UBS — Analyst
Robert Sanders — Deutsche Bank — Analyst
Simon Leopold — Raymond James — Analyst
Peter Kurt Nielsen — ABG Sundal Collier — Analyst
Presentation:
Operator
Hello and welcome to the Nokia Fourth Quarter and Full-Year 2020 Earnings Teleconference and Video Call. [Operator Instructions] Please note that this event is being recorded.
I would now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin.
Matt Shimao — Head of Investor Relations
Ladies and gentlemen, welcome to Nokia’s fourth quarter and full-year 2020 conference call. I’m Matt Shimao, Head of Nokia Investor Relations. Pekka Lundmark, President and CEO of Nokia; and Marco Wiren, CFO of Nokia, are here with me via teleconference and video today.
During this call, we’ll be making forward-looking statements regarding our future business and financial performance. 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, as well as internal operating factors. We have identified such risk in more detail in the section titled, Operating and Financial Review and Prospects-Risk Factors of our 2019 Annual Report on Form 20-F, our Financial Report for Q1 published on April 30 on Form 6-K, as well as our other filings with the US Securities and Exchange Commission.
Please note that our results release, the complete report with tables, and the presentation on our website include non-IFRS and comparable results information in addition to the reported results information. Our complete financial 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. Today’s stock exchange release and presentation can be found on the Investor Relations section of the Nokia website.
With that, I would now like to turn the call over to Pekka.
Pekka Lundmark — President and Chief Executive Officer
Thank you very much, Matt, and dear investors welcome to join us today. I’m happy to report that we had a solid Q4 to end 2020, and actually, as you will have seen, we came in at the high-end of our previously communicated outlook range.
The Nokia level non-IFRS result, both gross margin and operating margin, were healthy and they were up. Non-IFRS operating margin was 16.6% and that was up 20 basis points and then, of course, for the full-year the increase was bigger. We came in at 9.7% and previous year was 8.6%. And as you have seen, gross margin development, pretty good non-IFRS gross margin 41.8% for the quarter and 40% the year before. This was driven by, first of all, regional mix shift towards higher-margin North American market. It was also driven by our R&D efforts to enhance product quality and cost competitiveness and this is, of course, pretty encouraging all of it [Phonetic]. Most of this was in the Networks business and then, of course, this was the last year. Now, when we report in this structure, where Networks is one business this year, we will zoom a little bit deeper into the different components of the Networks business.
What we would like to highlight is that, Q4 operating profit benefited about EUR250 million from two drivers, EUR150 million early payment and then EUR100 million from Nokia’s venture fund valuation that Marco will talk about a bit more in detail. And if you turn or kind of calculate that how much the EPS effect out of these two items would have been, it would have been EUR0.035.
We also reiterated our earlier view on 2021 operating margin outlook. So we keep the 7% to 10% margin forecast for this year. And then one important thing to note, which Marco will talk more about is that, we have won pretty large item derecognition of tax asset in Q4, which Marco will talk about, as I said.
Then if I — I mean, that was a very quick high-level summary of the result itself. And now, I would like to move over to a little bit more details, and I start with the regional picture and the regional situation. And then, of course, when you look at this picture here, you see that clearly the performer of the quarter was the North American market.
For the Group, our full-year sales were down 5% for the quarter. This was mostly because of currencies. In constant currencies, the quarter was 1% up, but then, of course, for full-year 2020 we cannot be happy with the fact that we were down 6% on reported and 4% constant currency. But once again, in Q4, the performer was clearly North American region, where we had 11% reported and 19% USD, i.e., constant currency-based growth. This partially reflects the recognized net sales, also the item that I highlighted, the EUR150 million earlier this year — earlier, but, in general, of course, this is pretty strong performance.
Our second largest market, Europe, remained flat. And in constant currencies, it was up 2%. One thing that is important to note and which is partially driving the European market is the swap opportunities due to geopolitical issues and majority of these opportunities are in Europe. There are some deals in other parts of the world as well. But we believe that we have won to date, around half of the value of such deals. And this, of course, supports our business, including — specifically including in Europe. What is important, then, of course, from a margin point of view is that, when you have a swap deal like some of the ones that we have recently won, typically in the beginning — in the early stages of that deal, first year, sometimes too, the margins are lower and then they pick up when you go further.
The other regions are, of course, smaller for us there. We have had some headwinds. In China, we have clearly lost market share. There is no question about that. In the other parts, it’s not that much a market share question. There are some tough comparables as you can see in Asia Pacific in Q4 last year because of the Rakuten deal in Japan and also in Middle East and Africa because of strong deliveries to Saudi Arabia a year ago, so fairly stable in these parts of the world. But, of course, in Latin America, the important thing to keep track on is, of course, the overall economy and the COVID situation, which has clearly delayed some of the investments that would otherwise have taken place in that market. So, overall, solid performance by most of our regions.
And then I move on to the structural customers that we have and, of course, CSPs are clearly our largest customer group, over 80%. But the growth is increasingly on the Enterprise side. We can roughly — now I simply quite a lot. But, in general, we can expect that the CSP market will remain flattish. Of course, there are structural changes like from 4G to 5G and so on, but the overall market is flattish. But the Enterprise market is expected to grow close to double-digit over several years to come. So, this is clearly one place where we want to find growth and we are finding it.
We had full-year sales growth 14% on constant currencies and we have healthy pipeline of new opportunities. We won 79 new customers in Q4. It was 83 in Q3. We have currently 260 private wireless customers. Of course, the Enterprise business is not only private wireless, we are selling a lot of Routing and Fixed Access products to these customers as well. But this is a promising case and couple of highlights perhaps worth mentioning, wireless — private wireless partnerships with both AT&T and Verizon that we published during the quarter. So, overall, solid job and great promise in this segment, which will be further driven by then the next steps in a way the mission-critical network, serious industrial digitalization that is gradually taking speed. So, we really believe that we will be in the heart of the Fourth Industrial Revolution through our Enterprise position, which is already now a solid one with good potential for the future.
Cash flow is, of course, an extremely important measure and Marco will talk a bit more about that. I just highlight that we had EUR2.5 billion net cash at the end of the year. Here, also just — because we just want to be as transparent as possible, we do want to highlight that in the very last days of the year, we had a EUR500 million payment from a customer. Sometimes one day or two can make a difference. Had it been on the January side, the end result today would have been the same, but then this figure would have been EUR2 billion instead of EUR500 million.
You will also have seen the Board’s proposal that there would be no dividend for the financial year 2020, and this is also something that Marco will address in a bit more detail in a moment.
Then I move to the next and go to the performance and that is then the business-specific performance. And I start from the largest business, which is Networks and again — then again, reminding ourselves of the fact that this is the last quarter when we report using this type of units called Networks. But overall, we had 7% reported and 2% constant currency Q4 sales decline and that constant currency decline was 5% for the full-year. This decline was, in Q4, mainly driven by Mobile Access and Optical Networks. In Mobile Access, not by the products, but more by deployment services. This is important to note the product part actually did pretty well.
In Q4, IP Routing and Fixed Access net sales grew on a constant currency basis and declined on a reported basis. And we had 280 basis points gross margin improvement in the Networks business, primarily due to the progress in Mobile Access. And here, I would like to highlight the promising progress that we have made in 5G product cost reductions. I’ll come back to that in a second, which is, of course, something that will carry us also in the future because the product development in 5G has been actually delivering in a pretty promising manner.
Operating profit decreased somewhat due to some of the loss allowances and project cost allowances that we have put on the balance sheet at the end of the quarter. And once again, this business benefited positively about EUR150 million at the end of the quarter from this timing of a transaction with one particular customer.
One thing to note for the Networks business going forward is the global component market situation, where there has been a lot of talk about shortages, some of that highlighted by the carmakers. We believe that our situation is manageable, but it requires a lot of attention. There are here and there some point-to-point delivery risks in Q1, nothing that would change the big picture, but this is something that our businesses are paying a lot of attention to. We are intensifying our context and the discussions with the key vendors, discussing forecasts, reservations, inventories and everything. This is something that will most likely be there. This is not a Nokia-specific issue in any way, but a world issue for the next year or two. Difficult to say exactly where it will all lead to, but requires a lot of attention.
Then inside the Networks business, couple of comments on Mobile Access. First, I already mentioned that we had clear improvement on the product side, but also in the Q4 and full-year result due to stronger competitiveness and cost position of mobile radio. As I said, the top line challenge in this business did not come from the product side, it’s from the deployment services side, we had growth in radio access products in Q4 and also full-year. And the 5G growth was partially offset by decreases in legacy radio access products.
5G gross margin was up due to product cost reduction, partly helped by higher ReefShark volumes and this is really important and also encouraging that we actually increased our own target or exceeded our own target on ReefShark, 43% was the share of deliveries in Q4 when our earlier communicated target was 35% and we are reiterating the target of 70% at the end of this year and then 100% at the end of next year. So, this gives us confident — the confidence that the turnaround, which started already a year, year and a half ago is on the right track. But, however, there is still obviously a work — a lot of work to do. And as I’ve said earlier, one of the important things, which then also will be reflected in this year’s Mobile Networks result is that, we will continue to invest. We will actually increase our R&D investment to make sure that we repeat the success of 4G also in 5G.
Our 5G conversion rate, excluding China, is currently at 90% and that’s negatively impacted by our market share development in North America. This is a bit controversial because 2020 and the end of 2020, as you saw, we had strong growth in North America. But now going into this year, exactly as we have highlighted earlier, we are facing some headwinds in Mobile Networks in terms of top line because of North America and also China and then there is a price erosion challenge also that we are facing and the combined effect of — all of this will lead to this year — to this earlier communicated zero expected comparable operating profit for the new Mobile Networks business.
But market share-wise, again, on balance, 4G, 5G market share in 2020, excluding China, we estimate at 27% to 28%. And now, for this year, we are targeting 25% to 27% market share. So it’s not that dramatic, but still there is a small drop. We have currently 195 commercial 5G engagements, including paid trials and 45 5G live 5G networks.
You will have noted some of the recent highlights the 5G deal with T-Mobile, US Federal 5G cybersecurity project, cloud-native core software deal with M1 in Singapore and many, many more. I don’t have time to go through all of them at the moment.
We noted in the outlook assumptions, as a continuation of what we have said earlier about the profitability of this business this year that there will be a significant decline in top line of this business this year and that is one key reason why the profitability is so challenging. It’s important to highlight this because the reason for that expected zero comparable operating margin in Mobile Networks this year is not our technology competitiveness, which is improving quickly. It is — some customers earlier made decisions about market shares, which will affect our top line in 2021.
Then to the next business in Networks, which is Fixed Access. I’m quite encouraged by the situation in this business. We had a 5% decrease in reported net sales, but 1% growth in constant currencies. The decrease is because of copper access and services, but then there is pretty strong growth in digital home and fiber access. And the interesting detail about this business, which is very important is that, we had record high order book for this business at the end of the year.
And when it comes to technology, we launched our 25G-PON, Passive Optical Network technology, which has received an excellent reception on the market, and there is a lot of customers who consider deployments of 25G solutions. And just as one highlight, one large customer, AT&T, recently joined the 25G-PON MSA, an industry organization to promote and accelerate 25G-PON. This is a technology where we currently, roughly speaking, believe that we have 18 months advantage to the closest competitor.
IP Routing is, of course, a great business. We had actually top line-wise the best quarter since the Alcatel-Lucent acquisition. We had, on constant currency basis, an increase in top line of 5% and that makes this quarter higher than the year before if you take it on constant currency basis. We had a lot of key wins and, of course, the FP4 routing silicon platform is the key technology driver in this. And we have had a lot of wins recently, Deutsche Telekom, TELUS in Canada, Pelindo 4 in Indonesia and then, the California-based data networking or data center, an Internet service company, Equinix, global companies, some of the examples of these wins. In short, we are well placed for the next steps in IP Routing business going into 2021 and obviously, you have not seen everything on the product side yet.
Optical Networks had a challenging year from — and the quarter from top line perspective. Q4 last year was a really tough comparison as you can see here, but we were down 10% even in constant currency. Also, here, even though, this business has had its share of challenges, there is now promising developments on the technology side. We have launched our WaveFabric Elements portfolio with the PSE V and then the Elenion acquisition, all supporting the development into 2021 and beyond. So, we do expect improvement in this business this year and then going forward as well.
Then the next business is software business, great 5% constant currency sales growth in the quarter. Reported basis, unfortunately because of currency, decrease by 1%. Great and solid 2021 order book and several cloud core wins, including Softbank. And one, I think, I would like to highlight is, in January, which, of course, is after the reporting quarter ended, we announced the software partnership with Google to jointly develop cloud-native 5G core solutions for CSPs and Enterprises. So, the comprehensiveness of our cloud-native, multi-vendor, multi-network portfolio continues to give us a strong position in the telco software market.
And finally, then, Nokia Technologies, 2% increase in net sales and 3% in constant currencies. This growth was primarily due to patent licensing and higher catch-up net sales from a renewed patent licensing agreement that we delivered in Q4. Of course, full-year sales decreased a little bit, largely due to a reduction in brand licensing revenue and certain one-offs. Brand licensing revenue, mostly because of the declined handset market because of COVID-19.
We have increased our R&D expenses a little bit to continue to develop our intellectual property portfolio and to maintain it. And this is also something that we are focusing on in the future, not only monetizing the portfolio that we currently have, but really taking advantage of our research organization. The fact that we have already now 1,350 declared 5G essential patents and then ongoing expansion to new areas, such as consumer products, IoT solutions going forward, automotive segment, etc. So, this is a pretty solid performance in this business as well.
And then before I hand it over to Marco, a couple of comments on the leadership team and the operational model. The old leadership team was 17 members. Now, the new one will be 11, and it’s almost complete. Now, there is only one appointment still to be made, which is the pipeline, which is our Chief Corporate Affairs Officer. But everything else is now in place. This organization has been effective now for one month. So it’s, of course, very early stage. Fundamental principle here is, of course, full P&L accountability to the businesses — four businesses led by Business Group President. This does, of course, not mean that these businesses would operate in silos in the customer interface and that’s why we have a customer experience organization led by Ricky Corker, who is responsible for the account teams that are facing the customer. But this should not be mixed with the P&L responsibility, which is very clear. It is in the BGs — led by the BG President.
Another very important detail that I want to highlight here is the appointment of Nishant Batra as our Chief Strategy and Technology Officer. His task is really to drive our technology strategy across businesses, challenge businesses in terms of technology, but also then take care of our network architecture and our product architecture across businesses, and very importantly, to drive our long-term research, including Bell Labs. This whole thing that we have done to the organization and the operational model is a major simplification from the previous one. As I have said before, just one example, in the previous model, a fairly simple Mobile Access deal required five management team members to participate. Now, it is only one and that simplifies things greatly.
Then I actually believe that this is enough for my part. Marco will now go through the financials in more detail and then after that we are ready for your questions. So, now, I’m happy to hand over to you, Marco.
Marco Wiren — Chief Financial Officer
Thank you so much, and hello from my side as well. There’s basically four areas that I would like to cover with you today and I will start with Group Common and Others and then go over to cash position and liquidity position at the end of the year. And then explain a little bit more about the derecognition of the Finnish DTA, deferred tax asset, that impacted our reported results. And then finally, I will close with some comments about our ’21 guidance.
So if we start with the Group Common and just starting here that we had a very strong year-on-year net sales growth. And this was actually second quarter in a row. And the main driver here was the ASN, Alcatel Submarine Networks. And if you remember, already in Q3, they started with a very good path, and this continued in Q4 as well. And just to point out here that, due to the COVID, we had to close our factories in Alcatel Submarine Networks and that affected heavily their business and volumes as well. And now when the factories have been reopened, they have been able to deliver occurring as well.
Another thing that I would like to highlight on the ASN side is, as well that, they have — first of all, they are market leader today in their business. And their order book is extremely good at EUR1.75 billion at the end of 2020. And, of course, we believe that we can continue a good development when it comes to top line during ’21 as well.
Then another item that I would like to highlight in the Group Common and that’s the EUR100 million impact that we got just in the end of the year. As we have the venture fund in the Nokia and that fund is investing in different funds and in those funds, there were three IPOs. And those shares hiked quite remarkably in latter part of the year. And that’s why we got this EUR100 million extra boost in our operating profit as well.
And if I go into the net cash part, and just want to give you a little bit more flavor on the cash flow development. Just like Pekka already mentioned, we had a EUR500 million early payment that was due in — actually in Q1 2021 but that came in actually last day of the year in our bank account. And that, of course, helped our cash flow towards the end of the year. But also it impacted positively our net working capital. Although net working capital increased a little bit EUR50 million in Q4. And if you look the big items here, we had receivables increase one by one — EUR1.1 billion. And, of course, this is quite typical in our business because we have a seasonality, where a lot of our sales are quite back-end heavy towards the end of the year.
And then, of course, I want to mention as well that we’ve been reducing our total amount of sale of receivables. And this was offset by that we had about EUR500 million decrease in inventories, and this is also a seasonal impact because lot of shipments go out in latter part of the year. But also we had some component lead time issues and that affected inventories a little bit as well. And then we had about EUR600 million increase in liabilities. And that ended that free cash flow in quarter four was almost EUR800 million and for the full-year it was EUR1.35 billion. And, of course, this was affected by the EUR500 million early payment that we got. And that’s why we exceeded, also the guidance that we had given to you earlier.
And if we look a little bit more about the liquidity position and also our debt portfolio. First of all, if you look net cash, EUR2.5 billion at the end of the year, and that’s quarter-on-quarter increase about EUR600 million. And the total cash is EUR8.1 billion and that’s about EUR400 million increase quarter-on-quarter. And in addition to the cash position, I would say, that we have about EUR1.5 billion undrawn RFCs, which are sustainably linked as well.
And in addition to that, if you look to the right-hand side of the slide, you can see that we have quite well-balanced debt portfolio. And this year we have a maturity of EUR350 million and that actually is something we already are working on and we will redeem that one month before the due date. The due date is in March, but we will do this already in February. Otherwise, next year we have this EUR400 million bond maturity. But all of all, if you look at the maturity profile, the average tenure is about 5.5 years and the average interest is approximately 2%. So, I would say, it’s quite undemanding and well-balanced. And also, if you look at the spread between different sources, you see that we have both euro and US bonds, we have Nordic and European Investment Bank loans as well.
So, if we go to the DTA, deferred tax asset issue, and this is in the Finnish legal entities and this is only accounting technicality, so it doesn’t impact cash. But, of course, we have to book that in our reported numbers. I would like to highlight also that the tax asset itself is not lost. So we can still utilize that in the future, but it’s just that according to the rules — accounting rules, when we have a cumulative loss position, along [Phonetic] the month, then we have to book this tax asset away from our balance sheet. And this is the reason why we’ve done this now. It doesn’t reflect the future of the results. It’s the backward looking. So I just want to highlight that as well.
In light of this, we also have given a little bit more highlight on the tax expenses. So, in 2021, we expect about EUR450 million tax expenses and we believe that in the longer-term, this will be about the same level as well. Remember that on quarterly basis, this will vary because of the different mix on the profits from different countries and different countries have different tax rates and also the timing of the patent licensing, cash flow and related withholding tax. So these are the reasons.
And if we look also the full-year 2021 outlook. First, starting with the net sales and operating profit. Net sales guidance that we have given now is a little bit different than what we have given before. Now, we have assumed the year-end euro-USD rate, which was $1.23. And if you look the average rate that we had in 2020, it was $1.14. And just you understand that if we would have $1.14 in our books and if the year-end rate $1.23 would have been valid throughout the whole year, that would have had almost EUR800 million negative impact on our top line. So you understand the magnitude of the currency in US dollars. Otherwise, I would say that we have quite balanced cost and sales in different currencies. Now, we have about 55% of our sales is in USD currencies and about 50% is in the cost side. In euros, it’s 20% on the sales side, and 25% on the cost side and then other currencies are balanced as well. So, it’s quite well-balanced when it comes to the FX.
When it comes to net sales, again, we will have a significant decline in Mobile Networks, just like Pekka mentioned already, and this is the fact that, not all 4G contracts will be converted into 5G. And also, we see some price pressure in North America.
Then, we see growth in Networks Infrastructure and Nokia Technologies, which is offsetting this decline in Mobile Networks. And if we look at the FX again, just some kind of rule of thumb, you can see that, if we have a 10% increase in euro-USD, that would give about 4% to 5% negative impact on the top line and quite neutral impact on the operating profit side.
And when it comes to the operating profit guidance, we keep our previous guidance between 7% to 10%. And, of course, key drivers here again are the challenging environment in North America, specifically on Mobile Networks side. And then we will increase the R&D investments in the 5G. And then, of course, there are some uncertainties due to the COVID as well.
And if you look the outlook for cash and dividend, we guide on the free cash flow basis a positive cash flow and we will give more information about this at the Capital Markets Day as well. Capex is going to be a little bit higher, about EUR700 million and there is basically two drivers here: one is that, we will have a little bit more capex on the real estate side; and then we will invest a little bit more on the Alcatel Submarine Networks side to be able to deliver that big order book that we have in our end of last year. So we have to increase the capacity a little bit.
And just like Pekka mentioned already, also the Board is proposing no dividend based on 2020 profits. And just giving you some flavor, Board is very pleased to see the operational performance that we have and also the cash performance, and we have strengthened our cash position. But, of course, because we want to secure that we can increase our investments in 5G, but also other strategic areas and secure that we continue with a very good track record on sustainable cash generation, Board decided not to give any dividend. And, of course, after this year, again Board will make a new assessment as normal practices. And I also want to assure you that we are assessing our current dividend policy and we indicated early as well that at the Capital Markets Day we will give you more information about the dividend policy.
And just want to give you a reminder that we have a Capital Markets Day on March 18, and you are all welcomed. I’m definitely hope that you can call in as well. And we will focus on — much more on the different businesses, give more light into the discipline portfolio management of those businesses, and the clear path for value creation for business as well. And also, we want to give you more information about the turnaround in Mobile Networks and which steps we are taking going forward. And maintaining the strength in Network Infrastructure and clear path to maintain the technological leadership in IP Routing and related market share gains as well.
And also, when it comes to Cloud and Network Services, both when it comes to CSP and Enterprise markets, we will give you a value creation path for that business as well. And, of course, we will give you some more light on the sustainable technology licensing, and I really hope that you will get the information you expect and have opportunity to call in.
With that, I would like to now hand over to Matt for Q&As.
Matt Shimao — Head of Investor Relations
Thank you, Marco. For the Q&A session, please limit yourself to one question only as a courtesy to everyone else in the queue. Cole, please go ahead.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question today will come from Andrew Gardiner with Barclays. Please go ahead.
Andrew Gardiner — Barclays Capital — Analyst
Thanks very much. Good afternoon. I was hoping to go into a little bit more detail on some of the comments you made on the mobile market share and the — and therefore the revenue you expect within the Mobile Access business. So, Pekka, you said that you expect to drop from about 27% to 28% 4G, 5G market share ex-China last year to 25% to 27% this year. And I suppose, if I sort of then think about what is expected for the Mobile Access market, yes [Phonetic], going to grow this year quite clearly given 5G led by China. But I think even without that, with North America and Europe, it should be growing by low-single digits.
And so, if I consider your slight market growth offset by your market share pressure, the middle of the range I get to something around the low-single-digit decline, maybe at mid-single-digit when we consider the FX headwinds you guys face. It sounds, however, when you talk about significant decline that it’s more than that. Just can you give us a bit more detail there? Do you think you’re facing more price pressure than others given some of the technology issues you faced in the past? And just a bit more detail in terms of what specifically you’re expecting in Mobile Networks revenue would be helpful?
Pekka Lundmark — President and Chief Executive Officer
Okay. Okay. Thank you. I mean, that’s, of course, one of the most essential questions that — and issues that we are facing this year. If I comment market shares first, the expectation is clearly that in China and in North America this year we will have lower market shares, and of course, that 25% to 27% that you referred to, that’s excluding China, but then overall, when we take top line, of course, China is in that game as well.
We do not believe that we would be facing a situation where we would have to sell our product cheaper than competitors. There is price erosion in the market. We certainly do not want to be the one who would be driving prices down, but it is a reality that the prices are eroding and the price erosion is stronger in the North American market than it is in other parts of the world. So, from that point of view, the top line and then it comes to the definition of this significant, there are three components: there is the volume, which is driven by market share; then there is price erosion, which together with volume drives top line; and then on top of that, there is the currency headwind, which is actually going to be quite significant this year. So, these three components together add up to significant.
Then, of course, what you should note and hopefully, this is then the positive side of the story is that, when you take our guidance for top line — Group top line this year, and we are not guiding any midpoints or anything like that. But just for the sake of argument, if you mathematically take the midpoint and then eliminate the effect of currency headwind, that would lead to roughly flat top line for the Group this year, which would mean that then, excluding currency effects, the other businesses would actually compensate for the drop in Mobile Networks top line.
Matt Shimao — Head of Investor Relations
Thank you for your question, Andrew. Cole, next question, please.
Operator
And our next question will come from Sami Sarkamies with Nordea Markets. Please go ahead.
Sami Sarkamies — Nordea Markets — Analyst
Hi, thanks. I want to understand a bit better what happened in Q4 with regards to your product mix at Mobile Access? At the third quarter, you were prepared for lower share of ReefShark-based sales in Q4, but this was not the case as we benefited from earlier-than-anticipated product releases. Are you running ahead of your targets thinking of System-on-Chip transition? And was the EUR150 million tailwind from early revenue recognition driven by this matter?
Pekka Lundmark — President and Chief Executive Officer
Sorry. Thank you, Sami. The EUR150 million thing is unrelated to this one. That was a customer-specific issue. I would not draw the conclusion that the 43% share would be an indication of the overall program being ahead of targets. We maintain the 70% target by the end of this year and 100% target by the end of next year. These percentages jump up and down, always dependent on the mixture of customer deliveries in that specific quarter. Actually, the way it’s measured is deliveries from the factory to customer, but then there is a further delay often six months between that event and then until the revenue is recognized. After it’s typically installed and take commissioned and taken into use, that’s when the revenue is recognized. So, I know that there is a temptation to draw that conclusion, but that would be pushing it a little bit.
Matt Shimao — Head of Investor Relations
Thank you, Sami. Cole, next question, please.
Operator
And our next question will come from Alex Duval with Goldman Sachs. Please go ahead.
Alexander Duval — Goldman Sachs — Analyst
Good afternoon, everyone, and thanks for the question. You obviously had solid cash generation in the quarter relative to your prior guidance, even with that EUR500 million early payment of cash. Just wondered if you could expand a bit more as to why you got that early payment. And then, also be interesting to know in terms of the underlying improvement which was better-than-expected, what were the main operational drivers and how sustainable is that as we look forward to the coming year?
Pekka Lundmark — President and Chief Executive Officer
Yeah. Thank you. Very good point. And I would say that reason for this early payment from the customer side, which was due in Q1 2021 is only the customer that can actually answer that question. We didn’t expect that. It came. And it could be just banking days error [Phonetic] here as well.
For the other part, I would say that, if you look how we have been able to reduce the net working capital, which is the main driver on how we can improve our efficiency in collecting cash, two-thirds of the improvements that we’ve seen now in the latter part of the year is actually totally coming from higher efficiency on net working capital and only one-third is coming from volume-based. So, I would say, that we have been able to increase the efficiency in net working capital, and we mentioned this in rotation days and we’ve seen that they have been improving.
Matt Shimao — Head of Investor Relations
Thank you, Alex for your question. Cole, we’ll take the next question, please.
Operator
And our next question will come from Alexander Peterc with Societe Generale CIB. Please go ahead.
Alexander Peterc — Societe Generale Corporate and Investment Banking — Analyst
Yes, hi. Good afternoon and thank you for the question. I just had a question really on back-to-market shares on the timing of the market share shift that you see. So, if you help me understand, I was thinking maybe China share loss was a 2020 affair. And then we don’t have further impacts from China in ’21 or am I mistaken. And then the same for North America, is that only ’21 impacts or we’re going to be having this share loss hampering growth in North America for four more years than just the current year? And then, obviously, for Europe, you have some gains here, have those already transpired and what we saw in the final quarter, or is there more to come in ’21 and beyond? Thanks.
Pekka Lundmark — President and Chief Executive Officer
Yes. The overall market share, excluding China, remember, there’s 25% to 27% this year and 27% to 28% last year was excluding China. So that effect is eliminated. Clearly, the negative driver this year is North America and then Europe is actually supporting this, mitigating some of that negative effect. We have guided only this year’s market share and it’s actually very difficult to say anything yet about 2022 or 2023. We may be able to shed some light on this question at the Capital Markets Day. But there is still so many deals to be negotiated and hopefully, one during this year that will then affect next year’s and 2023’s market share that it’s simply too early to comment at.
Matt Shimao — Head of Investor Relations
Thank you, Alex. Cole, next question, please.
Operator
And our next question will come from David Mulholland with UBS. Please go ahead.
David Mulholland — UBS — Analyst
Hi, thanks. Just following on from the last question. I know it’s probably a bit early to try and touch on this. But with what you’re seeing in terms of your customer engagements and I knowing the Verizon and North America issues are largely behind us. Do you feel confident that you’re holding your share in the rest of your North America base? And if that’s the case, we’re not past the issues in China and you’re gaining share in Europe. Do you think that we will, at the very least, be troughing in terms of market share in 2021 given the engagement you see with your customers with the product today? Or is it too early to have that confidence and you need to see a bit more of customer interaction and success on winning this year?
Pekka Lundmark — President and Chief Executive Officer
Yeah. We do need to see more customer interaction before we are able to say anything about 2022 or 2023 market share. Of course, some of the recent deal activity that we have had, especially the ones that we have published is promising. But it’s still too early to call. And then, of course, when it comes to individual customers, customer names, including in North America, we never comment individual customers’ speculations in terms of what they might or what they might not decide in the future. So, into that we cannot unfortunately go. So, it’s still too early to call 2022 or 2023 market share.
Matt Shimao — Head of Investor Relations
Thank you, David for your question. Cole, we’ll take the next one.
Operator
And the next question will come from Robert Sanders with Deutsche Bank. Please go ahead.
Robert Sanders — Deutsche Bank — Analyst
Yeah, hi. Good afternoon. I just had a question about Europe. If you look at the historical RAN [Phonetic] share in Europe of 50% for the Chinese vendors in 4G. How much of that share would you say is already up for grabs in 5G? And related to this, after you complete the swaps you’re doing, do you think actually Europe could end up becoming a more attractive market from a pricing point of view over time?
Pekka Lundmark — President and Chief Executive Officer
I do believe that Europe will be an attractive market, but it’s not possible. I’m sorry, to answer your question through any numbers or anything like that. We are not able to simply estimate that we are looking at our market share in Europe, which is trending up at the moment. But it is not up to us to speculate on where that would be coming from.
And then, especially when it comes to the comments about geopolitics, as I have said earlier, we are a business, we are not politicians. So we are not participating in any political speculations. We are focusing on our business and what we are seeing in our customers. And as I said, we have seen a positive market share trend in Europe.
Matt Shimao — Head of Investor Relations
Thank you, Rob. Cole, next question, please.
Operator
And our next question will come from Simon Leopold with Raymond James. Please go ahead.
Simon Leopold — Raymond James — Analyst
Thanks for taking the question. I wanted to see if maybe you could offer some thoughts on how the C-band auction that’s underway in the United States might affect Nokia. For example, there are some that are arguing that the money spent on the auction will reduce what operators will spend on the networks, while other arguments are saying, no, it demonstrates large intentions to spend and it’s a good thing. And on top of that, I would like to get a better understanding of your product competitive positioning with mid-band. Thank you.
Pekka Lundmark — President and Chief Executive Officer
Yeah. I mean, those are exactly the two ways to look at that thing. But, I mean, hey, look, if somebody spends a lot of money on something, makes a big investment, shouldn’t that lead to a very high interest to do everything possible to maximize the return on that investment. And how do you maximize that return? You need to maximize the spectrum efficiency, you need to maximize the investment into your service, which would indicate that it would be the latter one of the two alternatives that we are — that you are highlighting.
Then when it comes to our product competitiveness in C-band, now, when we are making quick progress on ReefShark and System-on-Chip, we are seeing a pretty strong competitiveness when we complete the road map during this year. So we are ready.
Matt Shimao — Head of Investor Relations
Okay. Thank you, Simon for your question. Unfortunately, it looks like we won’t be able to get through the entire queue. So, Cole, we’ll take our last question for today.
Operator
And that question will come from Peter Nielsen with ABG. Please go ahead.
Peter Kurt Nielsen — ABG Sundal Collier — Analyst
Thank you very much. You’ve made some comments that you are — have improved your competitiveness on the product side. Could you elaborate a little bit on — and where more — where specifically you feel sort of that you have improved your 5G competitiveness? And also, has these encouraging comments and terms you’re seeing made you believe that you can perhaps catch-up a bit sooner than you had anticipated and spoke to us about three months ago? Thank you.
Pekka Lundmark — President and Chief Executive Officer
Well, it’s — there is no big difference to what we said three months ago. We were pretty confident on our ability to catch-up back then and I would like to repeat that confidence today. We are now already in the second month of 2021 and, as I’ve said earlier, 2021 is the year during which we believe that, for all relevant and significant parts, we will complete the catch-up. So, we are optimistic and this is, of course — I mean, this is a matter of both silicon customer and, in some cases, merchant silicon, but then it’s very much the software features and software functionality. There are clearly areas where we don’t need any catch-up anymore. We are one of the leaders and one of the examples is clearly, end-to-end network slicing, which cuts across the whole network and also across 4G and 5G and makes it possible for operators to offer specific enterprise — enterprise-specific slices when they are doing their industrial applications. And there is more to come. So, we are approaching a situation where there is no need to talk about catch-up anymore, but there is a lot of work still to do this year. But once we get through this year, I believe we will get there.
Matt Shimao — Head of Investor Relations
Thank you, Peter Kurt. And thank you to all of you for your questions today. Thank you also, Pekka and Marco.
Ladies and gentlemen, this concludes today’s call. I would like to remind you that during the call today we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external and internal factors. We have identified these in more detail in the section titled Operating and Financial Review and Prospects-Risk Factors of our 2019 Annual Report on Form 20-F, our Financial Report for Q1 published on April 30 on Form 6-K, as well as our other filings with the US Securities and Exchange Commission. Thank you.
Operator
[Operator Closing Remarks]