It should be noted that Nokia and its businesses are exposed to various risks and uncertainties and certain statements herein that are not historical facts are forward-looking statements, including, without limitation, those regarding:

These statements are based on management’s best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors, including risks and uncertainties that could cause these differences include, but are not limited to:

Introduction and use of certain terms

Nokia Corporation is a public limited liability company incorporated under the laws of the Republic of Finland. In this annual report on Form 20-F, any reference to “we,” “us,” “the Group,” “the company” or “Nokia” means Nokia Corporation and its consolidated subsidiaries and generally to Nokia’s Continuing operations, except where we separately specify that the term means Nokia Corporation or a particular subsidiary or business segment only or our Discontinued operations. References to “our shares”, matters relating to our shares or matters of corporate governance refer to the shares and corporate governance of Nokia Corporation.

Nokia Corporation has published its consolidated financial statements in euro for periods beginning on or after January 1, 1999. In this annual report on Form 20-F, references to “EUR,” “euro” or “€” are to the common currency of the European Economic and Monetary Union, and references to “dollars”, “U.S. dollars”, “USD” or “$” are to the currency of the United States. Solely for the convenience of the reader, this annual report on Form 20-F contains conversions of selected euro amounts into U.S. dollars at specified rates or, if not so specified, at the rate of 1.0552 U.S. dollars per euro, which was the noon buying rate in New York City for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2016. No representation is made that the amounts have been, could have been or could be converted into U.S. dollars at the rates indicated or at any other rates.

The information contained in, or accessible through, the websites linked throughout this annual report on form 20-F is not incorporated by reference into this document and should not be considered a part of this document.

Nokia Corporation furnishes Citibank, N.A., as Depositary, with its consolidated financial statements and a related audit opinion of our independent auditors annually. These financial statements are prepared on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with IFRS as adopted by the European Union (“IFRS”). In accordance with the rules and regulations of the SEC, we do not provide a reconciliation of net income and shareholders’ equity in our consolidated financial statements to accounting principles generally accepted in the United States, or U.S. GAAP. We also furnish the Depositary with quarterly reports containing unaudited financial information prepared on the basis of IFRS, as well as all notices of shareholders’ meetings and other reports and communications that are made available generally to our shareholders. The Depositary makes these notices, reports and communications available for inspection by record holders of American Depositary Receipts (“ADRs”), evidencing American Depositary Shares (“ADSs”), and distributes to all record holders of ADRs notices of shareholders’ meetings received by the Depositary.

In addition to the materials delivered to holders of ADRs by the Depositary, holders can access our consolidated financial statements, and other information included in our annual reports and proxy materials, at nokia.com/financials. This annual report on Form 20-F is also available at nokia.com/ financials as well as on Citibank’s website at http://citibank.ar.wilink.com (enter “Nokia” in the Company Name Search). Holders may also request a hard copy of this annual report by calling the toll-free number 1-877-NOKIA-ADR (1-877-665-4223), or by directing a written request to Citibank, N.A., Shareholder Services, PO Box 43077, Providence, RI 02940-3081, United States. With each annual distribution of our proxy materials, we offer our record holders of ADRs the option of receiving all of these documents electronically in the future.

Since the closing of the Alcatel Lucent acquisition in early January 2016 (the “Acquisition of Alcatel Lucent”), we have combined global leadership in mobile and fixed network infrastructure with the software, services and advanced technologies to serve customers in more than 100 countries around the world. We are driving the transition to smart, virtual networks and connectivity by creating one single network for all services, converging mobile and fixed broadband, IP routing and optical networks, with the software and services to manage them. Our research scientists and engineers continue to invent new technologies that will increasingly transform the way people and things communicate and connect: 5G, ultra broadband access, IP and Software Defined Networking (“SDN”), Cloud applications, IoT and security platforms, data analytics, as well as sensors and imaging.

Through our five business groups, we have a global presence with operations in Europe, the Middle East & Africa, Greater China, North America, Asia-Pacific and Latin America. In 2016, we had sales in approximately 130 countries. We also have research and development (“R&D”) facilities in Europe, North America and Asia, and at the end of 2016, we employed approximately 101 000 people.

We closed 2016 delivering net sales of EUR 23.6 billion. We continued to make significant targeted R&D investments, a bedrock of our success in innovation, with R&D expenditures equaling EUR 4.9 billion in 2016.

Acquisition of Alcatel Lucent

In April 2015, we announced plans to acquire Alcatel Lucent with an aim to create an innovation leader in next generation technology and services. The all-share transaction was agreed on the basis of 0.55 new Nokia shares for every Alcatel Lucent share, a transaction valued at EUR 15.6 billion on a fully diluted basis.

At the end of 2015, our shareholders voted overwhelmingly to approve the Alcatel Lucent acquisition, and in early January 2016 we announced that we had gained control of Alcatel Lucent through the successful public exchange offer for all outstanding Alcatel Lucent securities by holding nearly 80% of outstanding Alcatel Lucent securities.

During the course of the year, we continued to take steps towards gaining full ownership of Alcatel Lucent through the initial and reopened exchange offers and by purchasing Alcatel Lucent shares and OCEANE convertible bonds in privately negotiated transactions, consequently reaching full ownership of Alcatel Lucent in November 2016.

On October 4, 2016, the French stock market authority (Autorité des marchés financiers, the “AMF”) announced that a legal action was filed before the Paris Court of Appeal on September 30, 2016 for annulment of the AMF’s clearance decision regarding our public buy-out offer, which would be followed by a squeeze-out of all remaining securities of Alcatel Lucent. As a result, the public buy-out offer period was extended and the squeeze-out was postponed. We found the legal challenge to be without merit, as we believed that the offer complied with all applicable laws and regulations.

On October 25, 2016, with the legal challenge still pending, the AMF announced the continuation of the timetable of the public buy-out offer followed by a squeeze-out of all remaining securities of Alcatel Lucent, allowing the public buy-out period to end on October 31, 2016 and the squeeze-out to be implemented on November 2, 2016. On November 2, 2016, we achieved 100% ownership of Alcatel Lucent.

On December 15, 2016, the plaintiffs withdrew the complaint they had filed before the Paris Court of Appeal and, consequently, the public buy-out offer followed by a squeeze-out had therefore become definitive, confirming our ownership of 100% of Alcatel Lucent.

Organizational structure and reportable segments

January 14, 2016 was Nokia and Alcatel Lucent’s first day of combined operations.

After the Acquisition of Alcatel Lucent, we organized our networks-oriented businesses into four business groups: Mobile Networks, Fixed Networks, IP/Optical Networks and Applications & Analytics (together the “Networks business”); and kept our driver of future innovation and licensing, Nokia Technologies, as a separate fifth business group. For descriptions of our business groups, refer to “Business overview—Networks business” and “Business overview—Nokia Technologies”.

We have three reportable segments: (i) Ultra Broadband Networks comprising Mobile Networks and Fixed Networks, (ii) IP Networks and Applications comprising IP/Optical Networks and Applications & Analytics (all within our Networks business), and (iii) Nokia Technologies.

Following the changes to our organizational structure announced on March 17, 2017, we will continue to report financial information for Ultra Broadband Networks, IP Networks and Applications and Nokia Technologies. Ultra Broadband Networks will be composed of the Mobile Networks, Global Services and Fixed Networks business groups. IP Networks and Applications is composed of the IP/Optical Networks and Applications & Analytics business groups.

Additionally, we report the results of other business activities that are not reportable segments, such as our undersea cables business, Alcatel-Lucent Submarine Networks (“ASN”), and our antenna systems business, Radio Frequency Systems (“RFS”), in aggregate. Both ASN and RFS are being managed as separate businesses.

Year-on-year change is in parentheses.

Derived from our financial statements which were prepared in accordance with IFRS.

2016 was a year of remarkable change for Nokia.

We started the year primarily as a mobile networks and patent licensing company. Today we are a fundamentally different company, with a complete portfolio that spans mobile, fixed, cable, routing, optical, standalone software, services, digital health, and VR, as well as licensing activities covering patents, brand, technology, and more.

During this transformation, we delivered solid financial performance, made significant progress integrating Alcatel Lucent, launched compelling innovations for our customers, moved forward with the execution of our strategy, and are on track to meet our commitment to reduce costs by EUR 1.2 billion in full year 2018.

Financial highlights

In the context of a challenging market and a major integration effort, we performed well in 2016. Our Networks business delivered an operating margin of 8.9% in 2016, and Nokia Technologies’ net sales increased by 3% to EUR 1.1 billion in 2016. While overall sales were down compared to sales of both Nokia and Alcatel Lucent in 2015, profitability held up well. Because of this strong performance, our Board of Directors will propose an increased dividend compared to 2015 and compared to our original capital structure optimization plans.

Integration progress

Despite having only closed the Acquisition of Alcatel Lucent in early January 2016 and gained 100% ownership on November 2,

2016, we have completed the majority of our integration projects. While we have agreed product transition plans with all major customers, execution of those programs will take further time. That said, the speed of progress and quality of work have been considerably higher than I have witnessed in past integrations.

Customers

Customers have responded extremely well to the scope of our new end-to-end portfolio. It has increased our credibility with major communication services providers (“CSPs”), who understand that network performance is based not just on the parts of the networks but on how those parts work together. It has also opened doors for us to new customers in select enterprise segments, who increasingly need the kind of mission-critical networking capability that we provide. In addition, we have successfully agreed product transition plans with all major customers, and implementation is underway in many. This is a remarkable achievement, completed in well under one year.

People

Overall employee engagement scores at Nokia remained high, based on our periodic Cultural Cohesion Tracker. The tracker also pointed to the fact that the Acquisition of Alcatel Lucent created less cultural conflict than might have been expected given the history of acquisitions in our sector. During the year, we also launched a revitalized effort to improve our gender balance within the company. I am confident that we are gaining momentum and within the next two years we will start to see some positive change.

Innovation

We made significant progress in our aspiration to lead in 5G as we began bringing to market innovation from nearly 10 years of research at Nokia Bell Labs. We are preparing the world for 5G with the industry’s best evolutionary path from 4G to 4.5G to 4.5G Pro to 4.9G and finally 5G.

We set records for fiber-like speeds over copper with XG-Fast, delivering 8 gigabits per second in a test with Australia’s National Broadband Network. Our new optical chip sets enabled us to deliver a transmission speed of 1.2 terabits per second over optical fiber in Africa’s first field trial of optical communications technology. In New Zealand, we delivered 200 gigabits per second on a single wavelength over a single fiber.

We introduced our intelligent management platform for all connected things (“IMPACT”) to help our customers deploy new services for IoT applications. Our Nuage SDN platform gained traction helping businesses move to the Cloud, and we continued our development of Cloud service orchestration and network security.

Nokia Bell Labs moved forward with its Future X projects, shaping the network of the future—massively distributed, cognitive, continuously adaptive, learning and optimizing.

Sustainability and corporate responsibility

Reducing our carbon footprint and helping our customers do the same is at the center of our sustainability objectives, as is doing business with integrity. The high standards of our Code

We are innovators of the global nervous system, shaping the future of technology to transform the human experience

Innovating this global nervous system is a role that Nokia is uniquely well placed to play. Our business today is not just focused on meeting extraordinary technological demands, but also on how technology is deployed and used. With the potential of Augmented Intelligence, increasing human and machine interaction, and a supercomputer in every pocket, we believe that current trends will have significant implications for society.

We are shaping a new revolution in technology

We are shaping a new revolution in technology, where intelligent networks augment and aid our daily lives through sensing the world around us and providing the data and analytics needed to make choices that help society thrive. We are innovating this global nervous system with effortless, simple and dependable technology for the IoT, ultra-broadband, Cloud, IP interconnectivity, digital health and immersive VR technologies.

We enable innovative and compelling business models, applications and services

With the advent of new technologies such as the IoT, 5G and Cloud, we believe that enabling new business opportunities for our customers is the key to their rapid transition to new digital networks, capitalizing on the inherent operational benefits of this technology, and generating new services.

We assist our customers in identifying compelling cases for new revenue streams, in addition to enabling the rapid onboarding of new applications and services, scalability and operational efficiency.

We optimize performance to maximize value and customer satisfaction

We believe that agility in today’s fast and constantly evolving marketplace is no longer just an advantage—it is a vital necessity. Agile principles, lean practices and innovative tools are required to successfully survive in the new digital world and enable continuous improvement in quality, value and customer satisfaction.

We enable our customers to move away from an economy-of-scale network operating model to demand-driven operations. We do this by providing the easy programmability and flexible automation needed to support dynamic operations, reduce complexity and improve efficiency.

As a result, our customers can fulfill end user demands—when and where they are needed—by provisioning services in real time while automatically making optimal use of networks assets.

We create disruptive solutions enabling market differentiation and competitive advantage

We believe that innovation is the foundation of everything we do at Nokia. We force the pace of change by pushing technology boundaries, challenging the status quo and working in open collaboration with customers and partners on the next “big idea.” It is through these efforts that Nokia expands and enhances its portfolio, introduces disruptive technologies and identifies new market opportunities for its customers.

We are continually evolving the Nokia portfolio: adding and combining functionality, making it more intuitive and simpler to use. Doing this helps our customers evolve their networks. For instance, by taking the first step towards entering the IoT space with our IMPACT solution; or the next step to transition from LTE to 5G using 4.5G Pro and 4.9G; or perhaps the ultimate step to creating immersive experiences with our OZO VR camera.

It is through innovation that we create paths for our customers—whatever their starting point—to reach the promising new digital world.

We foster a culture of high performance and high integrity, guided by our vision, brand and values.

It is through our people and culture that we shape technology to serve human needs. Our pursuit of performance with integrity and sustainability—a culture that stems from our Finnish roots—is key to why our customers and partners choose to work with us.

Operational excellence is the cultural platform we use to pursue Nokia’s core purpose as a company. It means relentlessly pursuing financial performance by delivering on our end-to-end strategy. It informs our quest for innovation, as we use our insatiable curiosity and deep technical knowledge to share the future for our customers. It also drives our pursuit of continuous improvement, not only over earlier performance, but also in our ability to outperform competitors and be a trusted partner for customers, partners and suppliers.

We pursue high performance, always under the guiding principles of our values:

Respect

Acting with uncompromising integrity, we work openly and collaboratively, seeking to earn respect from others.

Challenge

We are never complacent, ask tough questions, and push for higher performance to deliver the right results.

Achievement

We take responsibility, and are accountable for driving quality, setting high standards, and striving for continuous improvement.

Renewal

We constantly refine our skills, learn and embrace new ways of doing things, and adapt to the world around us.

The vision of the Programmable World continues to guide our corporate strategy. We have identified six global megatrends that drive the Programmable World. These megatrends create massive technological requirements, impact our current and potential customers, change the lives of people and impact business operations on a global scale and ultimately provide opportunities for Nokia to diversify into new growth areas.

The megatrends we have identified are:

These megatrends are driving massive new technology requirements, and end-to-end networks are a central enabler for all aforementioned megatrends, which create a multitude of opportunities for us. Nokia Bell Labs has developed a vision of a future network architecture that fulfills all of these requirements in a holistic way—the Future X network vision. This is our guide not just to how things will change, but also to what we need to do to meet the future needs of our customers and to address these megatrends. The Future X vision encompasses the key domains of future networks: massive scale access, converged edge cloud, smart network fabric, universal adaptive core, programmable network operating systems, augmented cognition systems, digital value platforms and dynamic data security.

Simultaneously, driven by the identified megatrends and the increasing relevance of networks, we are seeing a shift in who is investing in technology. Our primary market, comprised of CSPs, in which we have a leadership position, is expected to remain challenging with a limited estimated growth opportunity over the next five years. However, the megatrends are increasing the demand for large high-performance networks in other key areas, which we define as our select vertical markets. Webscale companies—such as Google, Microsoft, and Alibaba—are investing in Cloud technology and network infrastructure on an increasing scale. As other vertical markets such as energy, transportation and government digitize their operations, they will need massive mission-critical networks. The same is true for TXLEs—technically sophisticated companies, such as banks, that invest heavily in their own network infrastructures to gain a key competitive advantage. Consequently, we have identified attractive growth opportunities in new domains outside our primary market with CSPs, which remains a significant market.

We are addressing both our primary CSP market and the newly identified growth opportunities in our adjacent market with our “Rebalancing for Growth” strategy. This strategy builds on our core strength of delivering large high-performance networks by methodically expanding our business into targeted, higher-growth and higher-margin vertical markets. Our ambition is to grow the share of our revenue that is derived from outside the CSPs.

Lead in high-performance, end-to-end networks with CSPs

Nokia is a leader in this area today and we will use our main competitive advantage—a near 100% end-to-end portfolio that we can deliver on a global scale—to maintain our leadership while managing for profitability. Within this first priority, we are focused on:

Expand network sales to select vertical markets

We will expand into five select vertical markets with carrier-grade needs: energy, transportation, public sector, TXLEs and Webscales. As the world becomes ever more digital, the kind of massive, high-performance networks once used almost exclusively in telecommunications are now needed by other organizations. Webscale customers will increasingly require high-performance networks to improve customer experiences and to expand their primary business models.

Build a strong standalone software business

While Nokia has a large software business today, much of that is attached to our hardware products. Our ambition is to move beyond that approach in the medium term and ultimately to create a large global software player that has the margin profile consistent with large software companies. We have three priorities to achieve this ambition:

Create new business and licensing opportunities in the consumer ecosystem

In addition to renewing existing patent licenses on favorable terms, our aim is to add new licensees from the mobile industry, and we continue to expand patent licensing into new segments, such as automotive and consumer electronics. Our brand licensing efforts are well underway—we see value creation opportunities in the mobile devices industry leveraging our strong brand. Our exclusive brand licensee for mobile phones and tablets, HMD Global, has already launched new Nokia branded feature phones and smartphones.

In addition to our licensing businesses, we intend to return to the consumer market with two select new businesses in Digital Media and Digital Health. Our current focus in the fast-growing area of VR is to expand the range of OZO cameras as part of creating an industry-leading VR ecosystem. Technology licensing and strategic partnerships will form an essential element of this work, in order to accelerate VR content creation and mass adoption.

In Digital Health, we entered the market through our acquisition of Withings, a pioneer in consumer-focused connected health devices. In the future, we see opportunities to scale globally by building on the powerful reach of the Nokia brand, expanding into corporate wellness and assessing opportunities to transition into business-to-business healthcare, in areas such as connected patient care.

The diversity of business backgrounds of the Nokia Group Leadership Team (the “Group Leadership Team”) members has been integral to the transformation of Nokia into an industry and innovation leader in next-generation technology and services in recent years.

The Group Leadership Team is responsible for the operative management of Nokia, including decisions concerning our strategy and the overall business portfolio. The Chair and members of the Group Leadership Team are appointed by the Board. The Group Leadership Team is chaired by the President and Chief Executive Officer (the “President and CEO”).

Market overview

Through our comprehensive end-to-end portfolio of products and services, we are addressing a market that encompasses mobile and fixed network access infrastructure, IP routing and optical networks as well as software platforms and applications.

We define our primary market as a network and IP infrastructure, software and related services market for CSPs. We estimate that our primary market was EUR 113 billion in 2016. In addition, we have an adjacent market, including a vertical market that includes our Networks businesses expansion areas in both a customer and product dimension. The adjacent market includes customer segments such as Webscales, energy, transport, public sector and TXLEs. In the product dimension, this includes solutions like Nuage Networks, SDN, Analytics, IoT and Security. The adjacent market was estimated at EUR 18 billion in 2016.

Demand for our portfolio is driven by exponentially increasing growth in data traffic as people’s lives and enterprises become ever more digitized. This drives the demand for highly reliable networks for  massive connectivity.

Competition

The competitors in our primary market are Huawei and Ericsson. We also compete with technology experts in some of our other market segments, such as Juniper and Cisco in the routing segment, and Ciena, Adtran, and Calix in the optical networks and fixed access segments. Both the optical networks and the applications and analytics market segments are still highly fragmented markets.

Mobile

Networks

Market overview

The primary market for our Mobile Networks business group includes technologies for mobile access, converged core and microwave transport as well as related services. This encompasses access and core technologies ranging from 2G to 5G licensed spectrum for both macro and small cell deployments. The services market includes implementation, care and professional services for mobile networks in addition to managed services for both mobile and fixed networks. The primary market for Mobile Networks was estimated at EUR 64 billion in 2016.

The vertical market for Mobile Networks includes solutions for the public sector, TXLEs and Webscales, and drives expansion into domains such as IoT connectivity, LTE for public safety, private LTE and unlicensed radio access. The vertical market, including verticals, was estimated at EUR 2 billion in 2016.

Business overview and organization

Our aim is to lead with traditional telecommunications operators, as well as expand into select attractive, vertical segments. This is accomplished by delivering a comprehensive end-to-end portfolio of mobile products and services across Radio Networks, Converged Core, Advanced Mobile Networks Solutions and Global Services businesses.

Radio Networks has the task of driving leadership in radio access and specifically has end-to-end responsibility for one of the most important areas for Nokia’s future: 5G. We believe that 5G will change the way in which mobile technology is used in virtually every sphere of life. As we move along the path towards making 5G a commercial reality, we aim to extend our leadership in LTE with a smooth evolution path comprising successive generations of 4.5G, 4.5G Pro and 4.9G offerings. Mobile Networks’ rationalized portfolio, featuring the 5G-ready AirScale radio access, is setting the standard for scalability, openness, energy efficiency and multitechnology support (“Single RAN”). AirScale is the platform to enable 4.5G Pro/4.9G, Cloud and IoT connectivity.

The further evolution of 4G, and ultimately 5G, requires a continuous transformation of the core network. Mobile Networks’ Converged Core is designing a radically simplified, robust and scalable core network based on its concept of a Cloud Native Core. Mobile Networks is already executing on this path and distinguishing its offer through its superior Shared Data Layer and AirFrame data center infrastructure solutions, which enable a Telco Cloud architecture that combines the best of both a centralized and a distributed approach. Using truly open interfaces and open source software building blocks, Mobile Networks can provide excellent performance for its customers in and beyond traditional telecommunications operators. Mobile Networks aims for a leading market position in end-to-end IP multimedia subsystem (“IMS”)/voice over LTE (“VoLTE”), subscriber data management and other virtualized software infrastructure solutions, putting together the key building blocks which will enable new digital business models.

Advanced Mobile Networks Solutions spearheads Mobile Networks’ expansion beyond traditional telecommunications operators to vertical markets in public safety; connectivity for IoT and connected automotive; and private LTE networks for, for example, transportation and energy companies. With a leading small cells portfolio and strong positions in unlicensed LTE and fixed wireless access—as well as innovative backhaul solutions, including a strong microwave offering—Mobile Networks aims to meet the need for increasingly dense networks to supply the capacity demands of our changing world.

Finally, through our Global Services offering, we aim to be the most innovative and complete service provider for the connected world. Our services, solutions and multivendor capabilities help our customers navigate through the evolving technology landscape, network complexity and data growth as well as improve personalized end user experience while supporting them in day-to-day network planning, implementation, operations and maintenance. We differentiate strategically through our service delivery by driving speed, quality and efficiency with the right combination of local expertise and globalized delivery centers, as well as advanced analytics, virtualization and automation using the Nokia AVA platform.

Competition

The mobile networks market is a highly consolidated market and our main competitors are Huawei and Ericsson. Additionally, there are two regional vendors, ZTE and Samsung, that operate with a below 10% market share. As network infrastructure gets virtualized and cloudified, we expect IT companies to emerge, such as HP Enterprise.

Fixed

Networks

Market overview

The primary market for our Fixed Network business group includes technologies for fixed access and related services in addition to fixed network transformation services with focus on transformation of legacy fixed switching networks. The primary market for Fixed Networks was estimated at EUR 9 billion in 2016. In this market, we see a shift from copper to fiber technologies. The copper market is currently stable partially due to Nokia-driven innovations that improve the performance of the existing copper networks.

The adjacent market, including verticals, for Fixed Networks includes virtualization solutions for cable access platforms, Digital Home (IoT) and passive optical LAN. The vertical market, including verticals, was estimated at EUR 3 billion in 2016, including related services.

Business overview and organization

The adjacent market, including verticals, for Fixed business group provides copper, fiber and coax access products, solutions and services to deliver more bandwidth to more people, faster and in a cost-efficient way. The portfolio allows for a customized combination of technologies that brings fiber to the most economical point for our customers. It consists of advanced copper-based solutions to boost capacity on existing copper infrastructure, such as VDSL2 Vectoring, Vplus and G.fast.

The Fixed Networks business group is also a leader in fiber-to-the-home solutions, such as Ethernet point-to-point, and all versions of Passive Optical Networks (“PON”), including EPON and GPON, as well as 10 gigabit next generation fiber technologies (XGS-PON and TWDM-PON). Together with Nokia Bell Labs, we continue innovation and development of even higher-capacity technologies like XG-Fast, which allows 10 Gb/s over copper, and XLG-PON enabling 40 Gb/s symmetrical bandwidth over fiber.

With our acquisition of Gainspeed, a California-based start-up specializing in DAA solutions for the cable industry via its Virtual Converged Cable Access Platform (“Virtual CCAP”) product line, we have complemented our fiber access technologies for cable multiple-system operators. With this enhanced product portfolio, we provide cable operators with the end-to-end technology capabilities needed to support growing capacity requirements today and into the future. With this acquisition, we are able to offer a turnkey solution for the cable industry that includes products for routing, transport, wireless and analytics.

Additionally, our smart home solution supports digital home devices that enable communication providers to provide enriched customer experiences and diversify their offering.

The Fixed Networks services portfolio is based on our unparalleled expertise and experience and is comprised of deployment, maintenance and professional services such as copper and fiber broadband evolution, public switched telephone network transformation, ultra-broadband network design, deployment and operation, site implementation and outside plant, as well as multivendor maintenance.

Competition

The competitive landscape in fixed access has similar characteristics to the mobile access where the market is dominated by three main vendors, Huawei, Nokia and ZTE and a handful of other vendors with less than 10% market share.

IP/Optical

Networks

Market overview

The primary market for our IP/Optical Networks business group includes routing and optical technologies and related services sold to CSPs. This market includes technologies such as IP edge and core routing, mobile packet core and Wave Division Multiplex and Optical Multi-Service Network solutions. The primary market for IP/Optical Networks was estimated at EUR 28 billion in 2016.

A significant portion of IP/Optical Networks revenue is derived from its vertical market, which includes customer segments like Webscales, energy, transport, public sector and TXLEs. We have also included technologies like SDN controllers, addressed with our Nuage portfolio, in this market. The vertical market was estimated at EUR 6 billion in 2016.

Business overview and organization

The IP/Optical Networks business group provides the high-performance and massively scalable networks that underpin the digital world’s dynamic interconnectivity. IP/Optical Networks portfolio of carrier-grade software, systems and services play across multiple domains, from programmable IP and optical transport networks for the smart fabric to software-defined capabilities for the programmable network operating system and more.

The networks of CSPs are under tremendous pressure from Cloud-based applications, ultra-broadband evolution and the IoT. IP/Optical Networks solutions reduce CSPs time-to-market and risk in launching new services, enabling rapid scaling to meet surging demands in the most optimized configurations. The solutions further assure that network services are delivered with consistent quality, reliability and security and that restorative actions are automatically initiated when any parameter varies beyond set limits. These carrier-grade attributes also benefit—and are valued by—the needs of vertical markets including internet content providers, public sector and verticals, and TXLEs.

The IP/Optical Networks product portfolio includes:

Competition

The competitive landscape is dominated by Cisco, Juniper, Huawei and Nokia in addition to various specialized players in optics such as Ciena.

Applications

& Analytics

Market overview

The Applications & Analytics market is focused on software platforms and applications that help CSPs to optimize their operations, monetize services and improve customer experiences. Applications & Analytics’ primary businesses include Business Support Systems (“BSS”), Operational Support Systems (“OSS”) and Service Delivery Platforms (“SDP”). The primary market for Applications & Analytics and associated professional services was estimated at EUR 12 billion in 2016.

The adjacent market, including verticals, for Applications & Analytics includes emerging software and services for Self-Organizing Networks (“SON”), Cloud, Analytics, Security and IoT. From a customer perspective this market also includes Webscales, digital enterprises and IoT verticals. The adjacent market, including verticals, was estimated at EUR 6 billion in 2016.

Business overview and organization

The Applications & Analytics business group is our dedicated software business. We have long-standing positions in its primary markets: our BSS solutions support hundreds of millions of subscribers and manage over 1.5 billion devices each day; we lead in LTE network management; we have thousands of OSS deployments with differentiated capabilities in service assurance, automation, analytics and Cloud; and our Session Border Controller, a SDP that secures network borders and connects an exploding number of devices, stands out for its virtualization capabilities.

These markets are being reshaped by four trends: the transition to the Cloud, the growth of the IoT, the increased need for security and privacy, and the impact of augmented intelligence and machine learning. These trends impact the way networks will operate, how new services and business models will be monetized, how customer expectations will evolve and the speed at which CSPs and TXLEs will need to innovate.

The Applications & Analytics business group is driving an aggressive innovation agenda that includes an Emerging Business unit that is developing software for IoT, security, Cloud, SON, and analytics. These advances are helping our customers:

Growing this business into a standalone software business at scale is a key tenet of our strategy. Please refer to “—Our strategy” for more information on our strategy.

Competition

The Applications & Analytics business group operates in a highly fragmented market in which very few players have a market share above 10%. Our main competitors are Ericsson, Huawei, Amdocs, Oracle, HPE, Cisco and Netcracker.

Services

Our Services are focused on developing innovative services, solutions and multivendor capabilities around the mobile, fixed and IP networks and beyond. With our full service portfolio we address the current and future needs of our customers, including network operators, public sector, TXLEs and transportation. Customer satisfaction, quality and efficiency are key in service delivery. To achieve that, we leverage a combination of local engagement with the customers, the network of Global Delivery Centers, and Nokia AVA, the next-generation delivery platform. Altogether, our service portfolio and delivery are powered by 38 000 services experts around the globe.

Sales and marketing

The Customer Operations (“CO”) organization is responsible for sales and account management across the four network-oriented business groups. The CO teams are active in approximately 130 countries to ensure that we are close to our customers, both physically and in terms of understanding the local markets, thus helping us build and maintain our customer relationships. Refer to “General facts on Nokia—Production of infrastructure equipment and products” for more information on our manufacturing facilities globally.

The CO organization is divided into seven markets:

We have close technology cooperation with leading operators in Korea and Japan as well as two Service Delivery Hubs located in Japan and Indonesia.

In addition, we have a dedicated sales organization focused on driving mission-critical communications sales to organizations outside the telecommunications operator market. This structure is targeted at allowing us to gain speed and efficiency in dealing with customer requirements and cultivating new and existing customer relationships.

The Global Enterprise and Public Sector organization focuses on four segments vertical to the telecommunications operators that require mission-critical communications networks: Public Safety, Transportation, Energy and TXLEs. This global sales organization is dedicated to serving the needs of customers such as Nedaa in Dubai, which provides telecommunication

services to all specialized governmental, semi-governmental and private institutions; the Swiss railway company SBB (Swiss BundesBahn); the Swiss electricity transmission system operator Swissgrid; Smart City initiatives e.g. ‘Bristol is open’, which aim at exploring solutions to make cities smarter, safer and more sustainable; and name-brand banks such as BBVA and Santander that are transforming complex legacy environments into leading-edge Clouds that improve their global customer experience.

Research and development

Our Networks business is one of the industry’s largest R&D investors in information communication technology and we expect it to drive innovation across telecommunications and vertical industries to meet the needs of a digitally connected world. Product development is continually underway to meet the highly programmable, agile and efficiency requirements of the next generation software-defined networks that will accommodate the IoT, intelligent analytics, and automation used to forge new human possibilities.

Our four networks-focused business groups are responsible for product R&D within the Networks business. The Networks business has a global network of R&D centers, each with individual technology and competence specialties. The main R&D centers are located in Belgium, Canada, China, Finland, France, Germany, Greece, Hungary, India, Italy, Japan, Poland, the Philippines, Portugal, Romania, the United Kingdom and the United States. We believe that the geographical diversity of our R&D network is an important competitive advantage for us. In addition, the ecosystem around each R&D center helps us to connect with experts on a global scale and our R&D network is further complemented by cooperation with universities and other research facilities.

Innovation steering within our Networks business is carried out by the Chief Innovation and Operating Office (“CIOO”). For R&D activities of our Nokia Technologies business group refer to “Nokia Technologies—Research and development”. Within the CIOO, the Chief Technology Office (“CTO”) and Nokia Bell Labs organization are responsible for our research agenda and research portfolio along with group services for architecture, compliance, reliability and standards. The CIOO develops disruptive technologies, incubates these technologies into novel prototype systems and solutions and then launches them through our business groups to generate growth and differentiation across our entire portfolio. The CIOO organization also steers innovation externally with customers, partners and governments, and has new solutions tested in collaboration with customers and our business groups.

In response to the six megatrends identified by Nokia as driving the Programmable World (for a more detailed description refer to “Our strategy” above), Nokia Bell Labs has defined the Future X network architecture—a massively distributed, cognitive, continuously adaptive, learning and optimizing network connecting humans, senses, things, systems, infrastructure, and processes. All of our Networks business groups—and also Nokia Technologies—are committed to this single architecture view and are developing products in their respective domains to build seamless end-to-end solutions in the future:

Patents and licenses

Intellectual property assets are fundamental to Nokia, which owns a large patent portfolio of more than 26 000 patent families, originating from three distinct organizations (Nokia Technologies, Nokia Solutions and Networks and Alcatel Lucent). The Patent Business in Nokia Technologies is the primary monetization entity for patent assets. Refer to “Nokia Technologies—Patents and licenses” for a description of the patent licensing activities of Nokia Technologies.

Our Networks business, including Nokia Bell Labs, generates valuable patents from their industry leading R&D in fields, such as wireless, IP networking, ultra-broadband access and Cloud technologies and applications.

Our patent portfolio includes high-quality standard-essential patents (“SEPs”) and patent applications which have been declared to the European Telecommunications Standards Institute and other Standards Developing Organizations as essential to standards including LTE, WCDMA, GSM and other standards. We continue to drive new patent generation.

Our Networks business has patent license agreements in place with a number of third parties as part of its ordinary course of business.

Nokia Technologies develops advanced consumer and professional technology products in Digital Health and Digital Media, and licenses our industry-leading innovations as well as the Nokia brand for mobile devices. Nokia Technologies is determined to explore, discover and develop the ways in which technology can transform our lives. Whether taking steps towards a healthier life or sharing experiences like never before, Nokia Technologies makes our vision for a connected future your reality for today. Nokia Technologies’ mission is to create effortless and impactful technological products and solutions that expand human possibilities.

Market overview

Nokia Technologies is driving innovation and product development in two key growing sectors of consumer technology—VR and digital health—as well as overseeing the reintroduction of the Nokia brand to handsets through a licensing agreement with HMD Global and the expansion of our patent licensing business based on decades of innovation and R&D leadership in enabling technologies used in virtually all mobile devices used today.

The market for VR products and technologies remains at a very early stage, with estimates of the total market as high as EUR 65 billion by 2020, with significant growth expected over the next five to ten years. We believe the solutions we develop today, the standards we establish and the patents associated with them, will position us as a leading player in this market as adoption grows in products as well as in technology licensing.

The global digital health market is expected to grow exponentially over the next five to seven years, up to EUR 220 billion by 2020. Within that market, we are focused on the segments fueling the most significant growth: 1) connected devices that go beyond trackers and smart watches to include scales and blood pressure monitors; and 2) remote patient monitoring.

Smartphones, feature phones, and tablets had a global estimated market of over EUR 400 billion in 2016, accounting for nearly 40% of the total consumer electronics segment. In the automotive industry, expectations are that around half of the approximately 100 million new cars sold annually around the world will have connectivity in the next five years.

Business overview and organization

Nokia Technologies consists of a portfolio of four growing businesses.

In Digital Media, we are pioneers of the technology enabling VR, an exciting new medium that is transporting people to places, events and experiences like never before.

In Digital Health, we are entering the market through our acquisition of Withings with a portfolio of premium, intuitive products designed to inspire the individual to take control of their own health.

We have established a brand licensing business, and our exclusive brand licensee for mobile phones and tablets, HMD Global, has already launched new Nokia branded feature phones and smartphones.

Nokia Technologies continues to grow its successful patent licensing business, which drives most of its revenue today, giving us the ability to invest in our new businesses in a disciplined, venture capital-like manner.

Sales and marketing

Nokia Technologies has significant ongoing R&D activities and an established patent licensing business. Nokia Technologies manages intellectual property as a technology asset and seeks a return on its investments by making its innovations available to the markets through licensing activities and transactions. Nokia Technologies currently has more than 100 licensees, mainly for our SEPs. Nokia Technologies is actively engaged in sales and marketing in support of the OZO VR camera and related technology solutions that enable fully immersive audio and video experiences.

Nokia Technologies is also engaged in sales and marketing activities to support the Withings portfolio of connected heath products in global markets, which span the regulated and non-regulated segments of the market.

Nokia Technologies introduced the OZO VR camera and related technologies including the OZO Live solution in the United States, European and Asian markets in 2016 and is engaged in marketing these solutions to professional content creators in industries including film and entertainment, music, sport, news, travel and education.

Nokia Technologies sees further opportunities in licensing its proprietary technologies, intellectual property and brand assets into telecommunications and vertical industries.

Research and development

The applied nature of our R&D in Nokia Technologies has resulted in various relevant and valuable inventions in areas that we believe are important for emerging consumer experiences in the Programmable World, such as underlying connectivity and sensing technologies, as well as codecs for VR video and audio and advanced machine learning-based health analytics.

Nokia Technologies has R&D centers in Finland, France, the United Kingdom and the United States.

Patents and licenses

For more than 20 years, we have defined many of the fundamental technologies used in virtually all mobile devices and taken a leadership role in standards setting. As a result, we own a leading share of essential patents for GSM, 3G radio and 4G LTE technologies. These, together with others for Wi-Fi and video standards, form the core of our patent portfolio for monetization purposes. As mentioned above, Nokia Technologies currently has more than 100 licensees, mainly for our SEPs.

With the acquisition of Nokia Siemens Networks (“NSN”) in 2013 and the Acquisition of Alcatel Lucent, we have added the results of their sustained innovation, including that of Nokia Bell Labs, creating a larger and more valuable IP portfolio than ever before. The portfolio spans more than 26 000 patent families, built on combined R&D investments of more than EUR 119 billion over the last two decades.

We continue to refresh our portfolio from R&D activities across all of our businesses, filing patent applications on more than 1 300 new inventions in 2016. Continuing our focus on communications standards, we also expect to have a leading position in 5G. In 2016, we were a leading contributor to the development of 5G standards. As part of our active portfolio management approach, we are continuously evaluating our collective assets and taking actions to optimize the size of our overall portfolio while preserving the high quality of our patents.

Competition

While several major technology companies are entering the VR market, it is still nascent, and long-term trends for capture and playback solutions have not yet been identified. We expect opportunities for technology licensing within the VR ecosystem to grow over time.

In Digital Health, we are focused on high growth segments of the total market, including consumer products in both regulated and non-regulated markets, and going beyond fitness trackers to blood pressure monitors, scales and thermometers, as well as remote patient monitoring. In this area, Koninklijke Philips N.V. (Philips) is most notable for its competing products. While Fitbit is primarily focused on fitness trackers, they have also pointed to the broader digital health value proposition as part of their evolution.

Number of new filings in 2016

1300+

R&D investment over the last two decades

~EUR119bn

Number of patent licensees

100+

Business-specific trends

Networks business

We are a leading vendor in the network and IP infrastructure, software, and related services market. We provide a broad range of different products, from the hardware components of networks used by network operators and increasingly by customers in other select verticals, to software solutions supporting the efficient interaction of networks, as well as services to plan, optimize, implement, run and upgrade networks. Our Networks business is conducted through four business groups: Mobile Networks, Fixed Networks, IP/Optical Networks and Applications & Analytics. These business groups provide an end-to-end portfolio of hardware, software and services to enable us to deliver the next generation of leading networks solutions and services to our customers. We aim for all four business groups to be innovation leaders, drawing on our frontline R&D capabilities to deliver leading products and services for our customers, and ultimately ensure the company’s long-term value creation. For more information on the Networks business refer to “Business overview—Networks business” above.

Industry trends

The networks industry has witnessed certain prominent trends in recent years, which have also affected our Networks business. First, the increase in the use of data services and the resulting exponential increase in data traffic has resulted in an increased need for high-performance, high-quality and highly reliable networks. The continuing increase in data traffic has, however, not been directly reflected in operators’ revenue. Consequently, there is an increased need for efficiency for both operators and network infrastructure and services vendors.

Second, we are witnessing more operator consolidation driven by operators’ needs to provide a wider scope of services, especially through the convergence of disparate network technologies across mobile, fixed, and IP and optical networks. In order to improve networks in terms of coverage, capacity and quality, network operators are continuing their transition to all-IP architectures, with an emphasis on fast access to their networks through copper, fiber, LTE and new digital services delivery. We are also seeing similar trends with cable operators, who are investing in the deployment of high-speed networks. Both the fixed mobile convergence and the transition to all-IP architectures were major rationales behind our Acquisition of Alcatel Lucent and creating our end-to-end portfolio of products and services.

Third, we see an increasing demand for large high-performance networks in some key areas outside the traditional CSPs space, which we define as our select vertical markets. Webscales—such as Google, Microsoft and Alibaba—are investing in Cloud technology and network infrastructure an increasing scale. In addition, other vertical markets such as energy, transportation, government and TXLEs are investing in their own network infrastructure, to connect data centers and provide seamless IP interconnection and digital services delivery.

Pricing and price erosion

In 2016, we did not witness a dramatic change in the overall pricing environment. The environment remained similar to what we witnessed in the prior year, when competition intensified in the first quarter of 2015 and impacted the net sales and profitability of our Networks business.

Product mix

The profitability of our Networks business is also affected by our product mix, including the share of software in the sales mix. Products and services have varying profitability profiles. For instance, our Ultra Broadband Networks reportable segment offers a combination of hardware, software and services. Hardware, and especially software products, generally have higher gross margins, but also require significant R&D investment, whereas the service offerings are typically labor-intensive, while carrying low R&D investment, and have relatively low gross margins compared to the hardware and software products.

Seasonality and cyclical nature of projects

Our Networks business’ sales are affected by seasonality in the network operators’ spending cycles, with generally higher sales in the fourth quarter, as compared to the first quarter of the following year. In addition to normal industry seasonality, there are normal peaks and troughs in the deployment of large infrastructure projects. The timing of these projects depends on new radio spectrum allocation, network upgrade cycles and the availability of new consumer devices and services, which in turn affects our Networks’ business sales. As an example, during the last couple of years some of the major LTE roll-outs have been largely completed. The next major technology cycle is expected to begin in 2017 when early use-case trials of 5G technology are expected to start, with the initial commercial deployments currently expected to start in 2018. Another example of cyclicality is the IP/Optical Networks market, where network operators often first deploy optical capacity into their networks, which is then followed by investments in routing equipment.

Nokia Technologies

Nokia Technologies pursues new business opportunities building on our innovations and the Nokia brand. Nokia Technologies develops and licenses cutting-edge innovations that are powering the next revolution in computing and mobility. The Nokia Technologies strategy consists of: 1) patent licensing, focused on licensing standard-essential and other patents in the Nokia portfolio to companies in the mobile devices market and beyond; 2) technology licensing, focused on licensing proprietary technologies to enable our customers to build better products; 3) brand partnerships, to help our customers leverage the value of the Nokia brand in consumer devices; and 4) incubation, focused on developing new products and solutions in the areas of digital media and digital health. All of these activities are supported by Nokia Bell Labs, our world-class R&D team. For more information on the Nokia Technologies business, refer to “Business overview—Nokia Technologies”.

Monetization strategies of IPR

Success in the technology industry requires significant R&D investment, with the resulting patents and other IPR utilized to protect and generate a return on those investments and related inventions. In recent years, we have seen new entrants in the mobile device industry, many of which do not have licenses to our patents. Our aim is to approach these companies by potentially using one or more means of monetization. We believe we are well-positioned to protect, and build on, our existing industry-leading patent portfolio, and consequently to increase our shareholders’ value.

We see a number of means of monetizing our innovations: on the one hand, we seek to license our patent portfolio, the Nokia brand and new technological innovations to be integrated into other companies’ products and services. On the other hand, our incubation activities may also, from time to time, lead to concepts that we bring to the market ourselves as products or services like OZO, the extraordinary VR camera designed and built specifically for professional content

General trends in IPR licensing

In general, there has been increased focus on IPR protection and licensing, and this trend is expected to continue. As such, new agreements are generally a product of lengthy negotiations and potential litigation or arbitration, and therefore the timing and outcome may be difficult to forecast. Due to the structure of patent license agreements, the payments may be very infrequent, at times may be partly retrospective, and the lengths of license agreements can vary.

Additionally, there are clear regional differences in the ease of protecting and licensing patented innovations. We have seen some licensees actively avoiding making license payments, and some licensors using aggressive methods to collect them; both behaviors have attracted regulatory attention. We expect discussion of the regulation of licensing to continue at both a global and a regional level. Some of those regulatory developments may be adverse to the interests of technology developers and patent owners, including us.

Research, development and patent portfolio development

As the creation of new technology assets and patented innovations is heavily focused on R&D activities with long lead-times to incremental revenues, we may from time to time see investment opportunities that have strategic importance. This generally affects the operating expenses before sales reflect a return on those investments.

The average currency mix for net sales and total costs:

Net sales

Continuing operations net sales in 2016 were EUR 23 614 million, an increase of EUR 11 115 million, or 89%, compared to EUR 12 499 million in 2015. The increase in Continuing operations net sales was primarily attributable to growth in Nokia’s Networks business and Group Common and Other, primarily related to the Acquisition of Alcatel Lucent and, to a lesser extent, growth in Nokia Technologies.

Nokia’s Networks business net sales in 2016 were EUR 21 800 million, an increase of EUR 10 313 million, or 90%, compared to EUR 11 487 million in 2015. Ultra Broadband Networks net sales were EUR 15 771 million in 2016, an increase of EUR 5 612 million, or 55%, compared to EUR 10 159 million in 2015. IP Networks and Applications net sales were EUR 6 029 million in 2016, an increase of EUR 4 701 million compared to EUR 1 328 million in 2015. The increase in Ultra Broadband Networks net sales is comprised of an increase in Mobile Networks net sales of EUR 3 383 million and an increase in Fixed Networks net sales of EUR 2 229 million. The increase in Mobile Networks net sales was primarily attributable to the Acquisition of Alcatel Lucent, which drove higher net sales in both Radio Networks and Services. This was partially offset by revenue declines from several key customers in Asia-Pacific and North America due to previous build-outs and investments, as well as adverse market conditions in Latin America. The increase in Fixed Networks net sales was primarily attributable to the Acquisition of Alcatel Lucent, and increases in Broadband Access, supported by the completion of a large project in Asia-Pacific.

The increase in IP Networks and Applications net sales is comprised of an increase in IP/Optical Networks net sales of EUR 3 987 million and an increase in Applications & Analytics net sales of EUR 714 million, primarily attributable to the Acquisition of Alcatel Lucent. The increase in IP/Optical Networks net sales was attributable to an increase in IP Routing net sales of EUR 2 425 million and an increase in Optical Networks net sales of EUR 1 562 million. The increase in Applications & Analytics net sales was primarily attributable to the Acquisition of Alcatel Lucent, and increases in Services.

Group Common and Other net sales in 2016 were EUR 1 145 million, an increase of EUR 1 145 million, compared to approximately zero in 2015. The increase in Group Common and Other net sales was primarily due to ASN and RFS net sales.

Nokia Technologies net sales in 2016 were EUR 1 053 million, an increase of EUR 26 million, or 3%, compared to EUR 1 027 million in 2015. The increase in Nokia Technologies net sales was primarily attributable to higher IPR licensing income and the inclusion of Withings’ net sales from June 2016 onwards resulting from the acquisition of Withings, partially offset by the absence of non-recurring adjustments to accrued net sales from existing and new agreements, and lower licensing income from certain existing licensees.

The following table sets forth distribution of net sales by geographical area for the years indicated.

Refer to “—Results of segments—Nokia’s Networks business” for the main changes in regional net sales.

Gross margin

Gross margin for Continuing operations in 2016 was 35.8% compared to 44.3% in 2015. The decrease in gross margin was primarily due to Nokia’s Networks business and, to a lesser extent, Nokia Technologies and Group Common and Other.

Nokia’s Networks business gross margin in 2016 was 38.5%, compared to 39.0% in 2015. The slight decrease in Nokia’s Networks business gross margin was due to decreases in both Ultra Broadband Networks gross margin and IP Networks and Applications gross margin. Ultra Broadband Networks gross margin in 2016 was 36.3%, compared to 37.5% in 2015. The decrease in Ultra Broadband Networks gross margin was primarily attributable to higher central cost of sales in Mobile Networks, partially offset by favorable region and product mix, and the completion of a large Fixed Networks project in the Asia-Pacific region. IP Networks and Applications gross margin in 2016 was 44.1%, compared to 50.9% in 2015. The decrease in IP Networks and Applications gross margin was primarily attributable to changes in the business volume and mix, primarily attributable to the Acquisition of Alcatel Lucent.

Nokia Technologies gross margin in 2016 was 96.0%, compared to 99.3% in 2015. The decrease in Nokia Technologies gross margin in 2016 was primarily attributable to new, lower gross margin business in digital health from Withings, and to a lesser extent, digital media.

Group Common and Other gross margin in 2016 was 16.8%. The Group Common and Other gross margin was attributable to gross margin in ASN and RFS.

In 2016, cost of sales included working capital-related purchase price allocation adjustments of EUR 509 million, which resulted in higher cost of sales and lower gross profit when the inventory was sold; and product portfolio integration-related costs of EUR 274 million.

Operating expenses

Our R&D expenses for Continuing operations in 2016 were EUR 4 904 million, an increase of EUR 2 824 million, or 136%, compared to EUR 2 080 million in 2015. R&D expenses represented 20.8% of our net sales in 2016 compared to 16.6% in 2015. The increase in R&D expenses was primarily attributable to Nokia’s Networks business, amortization of acquired intangible assets and depreciation of acquired property, plant and equipment; and, to a lesser extent, product portfolio integration costs, as well as Group Common and Other, all of which primarily related to the Acquisition of Alcatel Lucent, in addition to Nokia Technologies.

Nokia’s Networks business R&D expenses were EUR 3 691 million in 2016, an increase of EUR 1 953 million, or 112%, compared to EUR 1 738 million in 2015. The increase in Nokia’s Networks business R&D expenses was primarily attributable to an increase in headcount, partially offset by operational and synergy savings. Group Common and Other R&D expenses in 2016 were EUR 282 million, an increase of EUR 198 million, compared to EUR 84 million in 2015. Group Common and Other R&D expenses increased, primarily attributable to Nokia Bell Labs. Nokia Technologies R&D expenses in 2016 were EUR 250 million, an increase of EUR 30 million, or 14%, compared to EUR 220 million in 2015. The increase in R&D expenses in Nokia Technologies was primarily attributable to the inclusion of Bell Labs’ patent portfolio costs, resulting from the Acquisition of Alcatel Lucent, and higher investments in the areas of digital media and digital health. R&D expenses included amortization and depreciation of acquired intangible assets, and property, plant and equipment of EUR 619 million in 2016 compared to EUR 35 million in 2015, as well as product portfolio integration-related costs of EUR 61 million in 2016.

Our selling, general and administrative expenses for Continuing operations in 2016 were EUR 3 819 million, an increase of EUR 2 047 million, or 116%, compared to EUR 1 772 million in 2015. Selling, general and administrative expenses represented 16.2% of our net sales in 2016 compared to 14.2% in 2015. The increase in selling, general and administrative expenses was primarily attributable to Nokia’s Networks business, amortization of acquired intangible assets and depreciation of acquired property, plant and equipment, and transaction and integration-related costs and Group Common and Other, all of which primarily related to the Acquisition of Alcatel Lucent, as well as Nokia Technologies.

Nokia’s Networks business selling, general and administrative expenses were EUR 2 720 million in 2016, an increase of EUR 1 300 million, or 92%, compared to EUR 1 420 million in 2015. The increase in Nokia’s Networks business selling, general and administrative expenses was primarily attributable to an increase in headcount, partially offset by operational and synergy savings. Group Common and Other selling, general and administrative expenses in 2016 were EUR 231 million, an increase of EUR 134 million compared to EUR 97 million in 2015. Nokia Technologies selling, general and administrative expenses in 2016 were EUR 183 million, an increase of EUR 74 million, or 68%, compared to EUR 109 million in 2015. The increase in Nokia Technologies selling, general and administrative expenses was primarily attributable to the ramp-up of Digital Health and Digital Media, higher business support costs and increased licensing. Selling, general and administrative expenses included amortization and depreciation of acquired intangible assets, and property, plant and equipment of EUR 385 million in 2016 compared to EUR 44 million in 2015, as well as transaction and integration-related costs of EUR 294 million in 2016.

Other income and expenses for Continuing operations in 2016 was a net expense of EUR 833 million, a change of EUR 846 million, compared to a net income of EUR 13 million in 2015. The change was primarily attributable to higher restructuring and associated charges and, to a lesser extent, the absence of realized gains related to certain investments made through venture funds. Other income and expenses included restructuring and associated charges of EUR 759 million in 2016 compared to EUR 121 million in 2015.

Operating loss/profit

Our operating loss for Continuing operations in 2016 was EUR 1 100 million, a change of EUR 2 797 million, compared to an operating profit of EUR 1 697 million in 2015. The change in operating result was primarily attributable to higher R&D expenses and selling, general and administrative expenses, and a net negative fluctuation in other income and expenses, partially offset by higher gross profit. Our operating margin in 2016 was negative 4.7% compared to positive 13.6% in 2015.

The following table sets forth the impact of unallocated items on operating loss/profit:

Financial income and expenses

Financial income and expenses for Continuing operations was a net expense of EUR 287 million in 2016 compared to a net expense of EUR 186 million in 2015, an increase of EUR 101 million, or 54%. The change in financial income and expenses was primarily attributable to higher interest expenses, including charges of EUR 41 million related to the redemption of Alcatel Lucent bonds, net interest expenses of EUR 65 million for defined benefit pensions, and impairments of EUR 108 million for certain investments in private funds; partially offset by higher interest income, significantly lower foreign exchange losses and realized gains from venture fund distributions.

Refer to “—Liquidity and capital resources” below.

Loss/profit before tax

Our loss before tax for Continuing operations in 2016 was EUR 1 369 million, a change of EUR 2 909 million compared to a profit of EUR 1 540 million in 2015.

Income tax

Income taxes for Continuing operations was a net benefit of EUR 457 million in 2016, a change of EUR 803 million compared to a net expense of EUR 346 million in 2015. In 2016, net income tax benefit was primarily related to two factors. Firstly, we recorded a loss before tax compared to profit before tax in 2015. Secondly, following the completion of the squeeze-out of the remaining Alcatel Lucent securities, we launched actions to integrate the former Alcatel Lucent and Nokia operating models. In 2016, in connection with these integration activities, we transferred certain intellectual property to our operations in the United States, recording a tax benefit and additional deferred tax assets of EUR 348 million. In addition, we elected to treat the Acquisition of Alcatel Lucent’s operations in the United States as an asset purchase for United States tax purposes. The impact of this election was to utilize or forfeit existing deferred tax assets and record new deferred tax assets with a longer amortization period than the life of those forfeited assets. As a result of this we recorded EUR 91 million additional deferred tax assets in 2016.

Following the acquisition of Alcatel Lucent, we now have a strong presence in three jurisdictions: Finland, France and the United States, which had an impact on our effective tax rate in 2016. The local corporate tax rate in the United States and France is significantly higher compared to Finland. In addition, we do not recognize deferred tax assets for tax losses and temporary differences in France as our ability to utilize unrecognized deferred tax assets is currently uncertain. As of December 31, 2016 we have unrecognized deferred tax assets in France of EUR 4.8 billion.

We will continue to make changes in our operating model in 2017 and expect this to have an impact on our effective tax rate in 2017 and going forward (refer to Note 37, Subsequent events, of our consolidated financial statements included in this annual report on Form 20-F).

Loss/profit attributable to equity holders of the parent and earnings per share

The loss attributable to equity holders of the parent in 2016 was EUR 766 million, a change of EUR 3 232 million, compared to a profit of EUR 2 466 million in 2015. Continuing operations generated a loss attributable to equity holders of the parent in 2016 of EUR 751 million compared to a profit of EUR 1 192 million in 2015. The change in profit attributable to equity holders of the parent was primarily attributable to the operating loss in 2016, compared to an operating profit in 2015 and, to a lesser extent, a net negative fluctuation in financial income and expenses, both of which primarily related to the Acquisition of Alcatel Lucent. This was partially offset by an income tax benefit, resulting from the Acquisition of Alcatel Lucent, compared to an income tax expense in 2015. In addition, the loss attributable to the non-controlling interests was higher, as a result of the Acquisition of Alcatel Lucent. Our total basic EPS in 2016 decreased to negative EUR 0.13 (basic) and negative EUR 0.13 (diluted) compared to EUR 0.67 (basic) and EUR 0.63 (diluted) in 2015. In 2015, profit for the year included EUR 1 178 million gain on the Sale of the HERE Business recorded in Discontinued operations. From Continuing operations, EPS in 2016 decreased to negative EUR 0.13 (basic) and negative EUR 0.13 (diluted) compared to EUR 0.32 (basic) and EUR 0.31 (diluted) in 2015.