Nokia Oyj Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 14 speakers on the call.

Operator

Hi, everyone, and welcome to the Nokia Q1 2023 Results Call. I'm David Mulholland, Head of Investor Relations. And today with me is Pekka Lundmark, our President and CEO along with Marco Verren, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties.

Operator

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 risks in the Risk Factors section of our Annual Report on Form 20 F, which is available on our Investor Relations website. Within today's presentation, references to growth rates will mostly be on a constant currency basis and margins will be based on our comparable reporting. Please note that our Q1 report and the presentation that accompanies this call are published on our website.

Operator

The report includes both reported and comparable financial results and reconciliation between the two. In terms of the agenda for today, Pekka will give a quick overview on our financial and strategic progress in the quarter and then Marco will go into a bit more detail for the key factors impacting our financial performance along with our outlook for 2023. With that, let me hand over to Pekka.

Speaker 1

Thank you, David, and good morning, everybody. Q1 has been a busy and exciting quarter for us. We started this year with the unveiling of renewed corporate strategy and as you remember refresh brand at Mobile World Congress in Barcelona. We shared the 6 pillars of our updated strategy in Q4, which you see on this slide. So I won't go into detail about them again.

Speaker 1

But in general, in Q1, we have executed well on gaining market share in the CSP space, which is the 1st pillar. You can see that very clearly when you look at our growth rates. And we have also seen enterprise, Pillar number 2 continued to rise as a share of the group sales and was another quarter at close to 10% of the group growing 62%. Regarding Pillar 3 and actively managing our portfolio, there were some actions taken in Q1. We have signed agreements to divest part of our RFS business and we have sold our vital QIP business.

Speaker 1

Also, we recently agreed to sell our stake in the joint venture TD Tech subject to closing conditions. These actions won't significantly impact our financials, but are important proof Underneath the 6 pillars are 4 enablers: Talent, which is about developing future fit talent. Long term research is important. We believe that sustained technology leadership It is a key driver of our success. Digitalization, we are increasing the digitalization of our own operations to increase our own performance and productivity and finally, Grant.

Speaker 1

The new branding reflects who we are today, a B2B Technology innovation leader unleashing the exponential potential of networks. So with that, let's now turn to the financials. We delivered a solid start to 2023 with Q1 net sales growing 9% in constant currency. We saw double digit growth in both network infrastructure and mobile networks, reflecting the ramp up of 5 gs deployments in India as expected. We also saw growth in CNS, and I will come back to the decline in Technologies later.

Speaker 1

Our comparable operating margin was 8.2%, decline of 2 70 basis points year on year, which was primarily due to expected greater seasonality in mobile networks profitability, a weaker contribution from Nokia Technologies in the quarter and a negative impact from venture fund investments. As we look forward, we are starting to see some signs of the economic environment impacting customer spending. However, given the ongoing need to invest in 5 gs and fiber, we believe this uncertainty is primarily a question of timing. We will maintain our cost discipline to ensure we can successfully navigate this uncertainty, and we remain on track to deliver another year of growth 2023 with our outlook unchanged. If we now turn to address each of the business groups in more detail.

Speaker 1

And first, looking at the performance of Network Infrastructure, we delivered 13% growth year on year in constant currency. Optical Networks grew 45% with good engagement for our PSC Fine solutions and with some benefits from catch up sales from the supply chain challenges we saw in 2022. IP Networks grew 13%, driven by North America and also a strong performance in Enterprise. Our new FP5 based routing products are now shipping, and we accept the gradual transition to the new platform in the coming years. We saw a small decline of 5% in fixed networks against a tough year on year comparison.

Speaker 1

Weakness in fixed wireless access offset continued robust demand for fiber. Summary Networks grew 11% as web scale driven project deployments continue to drive growth. Gross margin expanded 3.30 basis points as a result of product mix benefits and lower costs in areas such as logistics, which have declined versus last year. Operating margin of 15.3% was up 540 basis points versus last year, reflecting our gross margin expansion, which was only partially offset by higher OpEx. Going forward, growth rates are expected to slow in the coming quarters as Q1 benefited from some catch up as supply chains normalized and with comparisons becoming more challenging, but we remain confident in our competitive positioning.

Speaker 1

I'd also like to highlight the product launch we made in optical networks in Q1. Just before Mobile World Congress, we unveiled PSC 6S, Nokia's 6th generation super coherent optical engine for high performance optical networks. With this product, PSC 6S, Nokia brings to market new optical transport capabilities, including the ability to deploy solutions with 1.2 terabits per second for wavelength And because we are able to connect 2 chips together on a single line card, we can support up to 2.4 terabits per second, which is an unmatched capacity on the market. We have also set a new benchmark in performance enabling reach over 2,000 kilometers at 800 gigabits per second. Sustainable network evolution with 60% less power consumption per bit compared to previous generations.

Speaker 1

We have had Great take up of our PSC V solutions already, and we see good potential to continue that momentum with PSC VCS. Our interactions with customers have been extremely positive so far. Then Turning to the next business group, Mobile Networks. Also there, it was great to see a 13% growth in the Q1. It was driven as we expected by the ramp up of 5 gs deployments in India.

Speaker 1

But we also saw good traction in Europe. Together, these more than offset the expected softening in North America sales in the quarter. North America had seen a front end loaded investment profile in 2022. So this quarter marked a normalization of customer spending and also reflected some inventory depletion. With respect to gross margin, the regional shift had an impact as expected, A disciplined cost control partially offset this at the operating margin level.

Speaker 1

As we look forward, we expect to see broadly Similar trends in the Q2 with continued pressure on gross margin from regional mix before we see this start to progressively improve in the second half of the year. As I mentioned earlier, it's clear that there is some economic uncertainty impacting customer spending plans. In that regard, it is worth noting that if we look globally, excluding China, only about 20% of sites, mobile based testing sites, I mean, are currently active for mid band 5 gs, which should help illustrate how much investment still needs to be made. And even if we look at some markets like North America, which had invested earlier, mid band site penetration is still only around 50%. At Mobile World Congress, we also unveiled Habrok, our latest generation of industry linear scale radios, which deliver future ready for farmers.

Speaker 1

Habrok has high output power for increased coverage, while its lower power consumption improves energy efficiency by 30%, lowering total cost of ownership. This new generation of radios enables form factor improvements over earlier generations, while the Havrok 64 weighing only 24 kilograms, making them fast and easy to install. And of course, they are all powered by our cutting edge reef truck chipset, some of which are based on 5 nanometer technology. These optimized products refined radio performance with ultrafast5 gs speeds and capacity where it's needed. And then moving to Cloud and Network Services Business.

Speaker 1

CMS grew by 3% in the quarter with growth in both Works and Enterprise. Gross margin declined as we saw a shift from software sales to lower margin hardware sales in the quarter. So that was primarily a mix question. Operating margin was minus 2.6%, resulting from lower gross margin with some increases in SG and A and R and D expenses as we continue to invest to strengthen leadership, especially in Campus Wireless. Our rebalancing work in CNS continues.

Speaker 1

And in the quarter, we divested Vital QIP, a relatively small IP address management product, which was within CNS. For the full year, we continue to assume a 5% to 5% to 8% to 5% operating margin, keeping in mind this remains a business with Significant seasonality in Q4. Nokia Technologies net sales declined by 22% in the quarter. On a year over year basis, there were 3 factors driving this decline. The fact we no longer benefit from the license that had an option exercised in Q4, lower net sales from a in Q4, lower net sales from a smartphone vendor whose market share meaningfully declined and finally, lower brand licensing.

Speaker 1

Excluding these three factors, our licensing income was essentially stable, also accounting for the renewed agreement with Samsung. We know there have been many questions around our technologies business in the past year as we navigate smartphone license renewal cycle. And with this slide, we wanted to give you some more detail on the moving parts. We start from the $1,400,000,000 to $1,500,000,000 run rate we talked about back in Q2 2021 before some agreements started expiring. You can see the moving pieces from then to the €1,000,000,000 run rate you now see in Q1.

Speaker 1

The two biggest factors are the deals that are currently in litigation or renewal and the 10 year license, which was signed in 2014, but then saw an option exercised in Q4 2022, which meant all outstanding revenue was recognized for that license. Consequently, this agreement no longer benefits our income statement. There have also been some agreements with smartphone vendors that are no longer active or whose market share has meaningfully declined, which need to be reflected as we go through the renewal cycle. You can also see the benefits we have seen from our progress in growth areas like Automotive and Consumer Electronics. And finally, there is the impact of brand licensing, which was weak in Q1.

Speaker 1

This brings you to the current €1,000,000,000 run rate. We remain confident we will return to the $1,400,000,000 to $1,500,000,000 run rate. The biggest step to getting there is smartphone license renewals. As you know, we are in active litigation on some of those. We remain confident in our position and that we will see a good resolution to these deals.

Speaker 1

We also continue to see opportunities in the future to continue to expand in our focused growth areas. Looking now at another one of our focus areas, the enterprise customer segment. In Q1, we saw continued momentum in our enterprise sales with growth of 62%, and it was almost 10% of group sales for the 2nd quarter in a row. Growth was particularly strong in webscale, where sales more than doubled in the quarter. Private wireless continued to grow strongly double digit and now has more than 5 95 customers.

Speaker 1

Customer engagement also remains positive as we added 73 new enterprise customers in the quarter. And with that, Let me hand over to Marco, who will take us through the financials in a bit more detail.

Speaker 2

Thank you, Pekka, and hello from Maesert as well. So looking at our net sales performance by region, our 9% constant currency growth was fueled by India as expected, with 5 gs deployments continuing to ramp up for mobile networks in Q1. But also network infrastructure showed strong growth in the region. In Europe, you see that we had a 30% growth, excluding Nokia Technologies, with strong double digit growth across the other 3 BGS. Elsewhere, we saw growth in both Middle East and Africa and Latin America, these were somewhat offset by North America, which declined 12% overall, driven by mobile networks and partly offset by increases in network infrastructure and Cloud and Network Services.

Speaker 2

Greater China and Asia Pacific also declined somewhat, while submarine networks grew by 11%. So in summary, quarter 1 largely played out as we expected, with 5 gs deployments in India heavily influencing our Q1 top line. Then turning into the operating margin performance in the quarter, and you saw the decline 270 basis points and ended up at 8.2% operating margin. This decline largely reflects the impact of regional and product mix, especially in mobile networks and cloud and network services. We did see some benefit from the 9% group net sales growth, which provided some operating leverage.

Speaker 2

You can also see that the lower overall level of net sales in Technologies had a negative impact on operating margin. And finally, our venture fund had a year on year negative impact of €70,000,000 which is recorded in other operating income and expense. And the low value in this quarter of 30,000,000 was evenly split between FX fluctuations and revaluations. And then looking briefly at operating profit performance by business group. Without repeating what Pekka already said in his remarks, you will see that the strong profit expansion in network infrastructure was somewhat offset by lower profits in Cloud and Network Services and Mobile Networks.

Speaker 2

Also Nokia Technologies declined, as we explained, and drive profits lower and also the Group Common, which is negatively impacted by the Nokia Venture Funds, as I mentioned in the previous slide. Then moving to cash. Free cash flow in the quarter was negative €147,000,000 And the main driver of this was a decrease in accounts payable driven by quarter on quarter decrease in cost of sales within net working capital. Cash was also negatively impacted by cash taxes, CapEx and restructuring costs. And I'm pleased to see as well that we returned about $190,000,000 to our shareholders through both dividends and share buybacks.

Speaker 2

This all led to net cash balance of €4,300,000,000 at the end of the quarter. And then if you look at our addressable market, we have updated this to show our latest view across business groups. And the adjustment we've done is on our V mobile networks, and we've taken down that from 5% 4% as we start to see some impact of the economic situation on customer spending. And CNS has also reduced slightly from 4% to 3%, while network infrastructure remains at 4%. And then turning to our outlook for the year, which remains unchanged in constant currency.

Speaker 2

We did adjust our net sales outlook to reflect latest FX rates with the range now at €24,600,000,000 to €26,200,000,000 And we also reiterated our comparable operating margin guidance of between 11.5% to 14%. And notably, we updated 2 of our outlook assumptions today. The first one is the group common and other operating profit, which is now expected to be negative €350,000,000 to €400,000,000 And this is driven by the negative impact that we had from Nokia Venture Funds in quarter 1 and how the valuations have developed in venture markets. And the second is around our CapEx assumptions. We have increased our expectations for this year to 700,000,000 euros.

Speaker 2

And finally, a mention of our updated capital management policy, which we announced earlier in Q1. Nokia's previous target in terms Cash management was to maintain a gross cash position equivalent to at least 30% of net sales. And going forward now, we will target to maintain a net cash position in the range of 10% to 15% of net sales, so change from gross cash to net cash. And this is to answer that we can continue to invest and the necessary R and D to maintain and further improve our technology leadership, Also fund working capital requirements in support of our growth ambitions and to maintain some flexibility and maintain some flexibility for bolt on acquisitions. And considering the ongoing macro uncertainty, Our expected growth and working capital requirements in 2023, along with already announced shareholder returns, we are not imminently planning to take action to align with this target.

Speaker 2

However, assuming the expected significant improvement in cash generation in 2024, we would then look to start acting to align the Natgas position with the long term target. And this can be done, for example, through increased shareholder returns and or potential bolt on acquisitions. And with that, I will hand over back to Pekka for a few concluding remarks.

Speaker 1

Thank you, Marko. If I can just very briefly summarize how we see our Q1 performance before we turn to Q and A. So we have said 2023 would be another year of growth and we started the year strongly in that regard with 9% net sales growth. We are executing on both our ambition to gain share in the CSP space and grow enterprise as a percentage of our net sales. As we have said previously, seasonality will be different this year to the last 2 years, but it is playing out largely as we expected, and we remain on track for our full year targets.

Speaker 1

Looking forward, there are some signs of the economic outlook impacting some customer spending plans. But if we maintain our cost discipline and execute on our strategy, I believe we are in a strong position to navigate the challenges ahead. And with that, I'll hand it back to David for the Q and A.

Operator

Thank you, Pekka and Marco for your remarks. Before we move to the Q and A session, I just wanted to highlight that we will be hosting our next progress update presentation on the 15th June, which will be on our Network Infrastructure business. The event will be in the afternoon in London, and it will be a hybrid event for those who aren't able to join in person, so it will also be webcast. But with that, let's start the Q and A. And as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up?

Operator

Dallas, could you please give the instructions?

Speaker 3

We will now begin the question and answer session. I will now hand the call back to Mr. David Mulholland.

Operator

Thanks, Alice. We'll take our first question today from Andrew Gardiner from Citi. Andrew, please go ahead.

Speaker 4

Thank you, David. Good morning, Pekka. Good morning, Marco. Mine was on sort of the relationship between technologies and your full year guidance. Clearly, we've had a slower start to the year in technologies similar to how we did last year where we were working for some of the license agreements to come through, which of course didn't, the added pressure this year now from Microsoft and from Austin from the handset market, but it's still incredibly important factor for you with your full year group level guidance.

Speaker 4

Can you just give us a sense as to your Visibility into things improving here for the back half of the year and how that key profit driver is going to improve and allow you to meet that group level profit Thank you.

Speaker 2

Yes. Thank you, Andrew. And yes, that's correct that we have, I would say, 2 because it builds us the agreement that you mentioned, legacy agreement for 2014 that was recognized in the end of last year. And of course, the 2 big ones, which are in litigation and renewal. And just like Pekka showed in his slide, we have some agreements with smartphone on vendors that are no longer active or ones that have lost market share.

Speaker 2

And then this will be reflected as we go through the renewal cycle as well. But we believe that the underlying fundamentals remains strong. And I would say that the Samsung deal that we made is a good example of that. And that's why we are confident that our portfolio is very strong, and we will get back to the annual run rate of €1,400,000,000 to €1,500,000,000 net sales after we have concluded these current licensee renewal cycles.

Speaker 1

Can I add, Andrew, just one point to reinforce The importance of the Samsung renewal? We, of course, when we created this plan to get to this €1,400,000,000 to €1,500,000,000 run rate. We had made certain assumptions as to what deals that run rate would consist of with then value allocated to it. And I'm happy to confirm that the Samsung deal is in that ballpark where it is expected to be. So that is an important part of this €1,400,000,000 to €1,500,000,000 strategy.

Operator

Did you have a follow-up, Andrew?

Speaker 4

No. Thank you very much.

Operator

We'll now take our next question from Alex Duvall from Goldman Sachs. Alex, please go ahead.

Speaker 5

Yes, Meny, thanks for the question. I wanted to focus on network infrastructure where you had another very strong quarter in the context of some peers actually talking about weakness. I wondered if you could explain the delta there and how sustainable is the momentum for the balance of this year and perhaps even into 2024? I think you did state that some of the catch up from supply constraints will fade in some of the areas. So to what extent do you think underlying strength will continue?

Speaker 5

Thanks.

Speaker 1

Yes. Thanks, Alex. And of course, as we have discussed many times, the fundamental thing that is driving all this that we are seeing in network infrastructure is the technology investment that we have made and the incredible strength of the portfolio as we are seeing in IP Networks in fixed broadband now perhaps a bit more lately also in optical networks and of course in some marine network. So that is the fundamental driver that is helping us to take market share and that definitely continues to be our goal also going forward. Now We have seen 2.5 years of excellent execution from network infrastructure.

Speaker 1

And of course, this Q1 is a fantastic testimony of the strength of the portfolio. Just a little bit of caution here because there was some strong ordering last year because of worries that people had regarding supply chain capabilities and so on, ships at semiconductor supply chain problems, etcetera. And there is some catch up deliveries and catch up sales now in this. And that is the reason why we are just saying that even though our position is strong, it continues to be strong. We need to be a little bit careful that you don't just extrapolate from Q1 towards the rest of the year.

Speaker 1

Of course, Also in this business, we have a lot of customers who are currently thinking that when should they invest, how much should they invest, the economic uncertainty is showing also in this business. So just a little bit of caution, while, of course, The overall picture in this business continues to be extremely positive.

Operator

Thank you, Alex. Did you Thank

Speaker 1

you very much. All good. Thank you.

Operator

Thanks, Alex. We'll take our next question from Daniel Jureburg from Handelsbanken. Daniel, go ahead.

Speaker 6

Thank you very much, David, and good morning. Yes, my question would be a little bit if you could give an update on the competitive landscape. We've heard a The landscape, we heard a little bit of rumors from Samsung taking share in perhaps in the U. S. And also An update on the Ryugu PN landscape would be great with regards to Huawei, etcetera.

Speaker 6

Thank you.

Speaker 1

Well, first of all, we do not comment any rumors. We have a strong position in the U. S. And Actually after some of the decisions that customers made in mid-twenty 20, which led to a lower market share for us, we have not lost any market share in mobile networks in North America. Actually, we have regained.

Speaker 1

We have taken back some market share with some of the Tier 2, Tier 3 suppliers. And our relationship with also T Mobile is extremely strong. We are clearly one of the Key suppliers and we have a long term 5 gs agreement with them. Then the other part of the question, I you broke up a little bit, but Did I understand correctly that you asked about Huawei and swaps and so on?

Speaker 6

Yes, yes, correct. And European markets mostly.

Speaker 1

Yes. Okay. European market. So as Marco said, we are growing in mobile networks in Europe. We had double digit growth there.

Speaker 1

Overall, if you exclude Nokia Technologies from the figures, as you should, we had 13% growth in Europe in Q1, which was across the board, including in mobile networks. So we are clearly taking market share in Europe at the moment. And the big picture when it comes to Huawei swaps continues to be roughly the same as we have Said before that we have taken about 50% of those opportunities.

Operator

Thanks, Daniel. We will take Question from Simon Leopold from Raymond James. Simon, please.

Speaker 7

Thank you for taking the questions. I appreciate you're not explicitly guiding for the June quarter and you've remained, I think, upbeat, relative We're speaking on the full year, but given what we're hearing about inventory activity at the operators, And I think you've alluded to this, but if we could get a little insight on how you're thinking about the absorption of Capacity by carriers in the June quarter and how to think about what you really mean by not exactly seasonal. And then I've got a quick

Speaker 1

follow-up. Okay. If I start then, Marco, feel to add if there's anything missing. But this whole inventory question. First of all, when we look at the big picture, this has been pretty much a North American story and very much a mobile network story.

Speaker 1

So we are talking about mobile networks in North America. We do believe that mobile networks second quarter will see similar trends as the first quarter. But then again, since we are maintaining our full year assumption at 7% to 10% comparable operating margin. There you see that we are expecting a recovery then during the second half of the year. But again, this is a mobile network story.

Speaker 1

We are not seeing similar trends in the other businesses.

Speaker 7

Thanks. And just as the follow-up, you continue to sound, I think, somewhat more upbeat on mobility than some of your Peers as well as some of the market research. And I know we talked about this at Mobile World Congress, but I'd like to sort of revisit how you're thinking about your business for the full year and beyond in terms of this idea that we peaked and this is A difficult year. Could you maybe unpack a little bit about sort of the Nokia specific views on mobility trends?

Speaker 1

I think the difference between what we are saying that what both market analysts and To some extent, some of our competitors are saying, I mean, the difference could be the pace of deployment in India. The North American view is pretty similar. I can't see any kind of big differences there, whether you compare us to what our competitors are saying or what market analysts are saying. We are seeing similar trends, including the fact that these issues will continue in the second quarter. But then especially comparing us to, for example, Del Oro, we seem to be more bullish on the size of the India market this year.

Speaker 1

And we believe that this pretty much explains the difference between our estimates and what they are saying. Thanks for that.

Operator

Thanks, Simon. We'll take our next question from Alexander Peterk from Societe Generale.

Speaker 8

Yes, good morning and thank you for taking the question. I would have just two questions. The first one would be in the phasing of mobile networks margin that you cited for this year, Could you help us understand what will be the key drivers for the better gross margin in the second half? Is it a function of better geographic mix With North America recovering or is it lower contribution from low margin network growth in India? And then I have a follow-up.

Speaker 1

Well, first of all, the Indian rollout will continue. That will be a story that you will see throughout The year, clearly, the biggest needle mover compared to H1 and H2, which is driving the 7% to 10% full year forecast is North America. We do expect, as I said earlier, North American volumes to recover in H2.

Speaker 2

Just to add, like I said, we said earlier as well that we believe that the volume will give us leverage on the cost side. And that's why we focus on the operating margin and not on gross margins.

Speaker 8

Excellent. Thank you very much. And as a follow-up, please, on network infrastructure, so we understand there was a catch up related to the easing of supply chain constraints. Would you be able in any way to quantify this for us or maybe indicate If we should see much lower than usual seasonality in the Q2 versus first, I know you don't quite guide the quarters, but it It's quite important to know if NII is going to go down in revenue terms in Q2 versus Q1. Thank you.

Speaker 1

Nokia, I actually finally answered this question already earlier, but I'm not going to go into details when it comes to Q2. We made an exception when it comes to mobile networks because we Clearly see similar trends there as in Q1. Without repeating what I said about NI earlier, we maintained the full year 11% to 15% for the reasons that I described. There was some catch up sales in Q1. There is some general uncertainty on the market and that leads us to maintain the full year 11% to 14%.

Speaker 8

Thanks, Elias. Very clear. Thank you very much. Thank you.

Operator

We'll take our next question from Francois Bouvier from UBS. Francois, please go ahead.

Speaker 9

Hi, thank you very much. My question is more you mentioned the trend in 2023 and the H2 recovery Dynamics with the U. S. May be coming back and India is still strong, if I remember if I interpret correctly. So the margin should get better.

Speaker 9

If we look a bit beyond, I mean, 2024 specifically, when you look at the U. S. CapEx comments still subdued, I would say, I mean, just by looking at public comments from Verizon. So we are looking big recovery in the U. S.

Speaker 9

At least for 2024. India, given the Strong year, strong rollout pace. I mean, we can also argue the sustainability into 2024. So maybe can you help us quantify or maybe qualitatively give us some drivers into next year? I mean, do you still expect to grow your end market after the dynamic of this year?

Speaker 9

That would be very helpful.

Speaker 1

Of course, in mobile networks, as I said, the fundamental driver as we see it in 5 gs is that how big part of the networks have been upgraded to things like mid band capacity, which is really the thing that is driving the data capacity in the network because the data traffic will continue to grow. We are not seeing that slowing down despite of the economic uncertainty. So The big picture remains healthy. The operators will have to continue to invest if they want to stay competitive. Right now, there is some hesitation because of the economic uncertainty, because higher interest rates and then also some of the supply chain normalization, which means that Some of the inventories that they have built, they are coming to a conclusion that they will not need them anymore.

Speaker 1

But The fundamentals in this business, we do believe remain healthy. Then of course, every operator need to make their own public comments about their CapEx. And you will have seen what the Americans have said about 2024 CapEx. Again, As I said earlier, only 50% of the North American 5 gs sites are currently have been upgraded to mid band. So there's a lot of work to do there as well.

Speaker 1

I'm not going to get into 'twenty four guidance today. What we said in the progress update after Q4, obviously remains that our very clear Our ambition is to drive mobile networks into double digit profitability.

Speaker 9

Thank you. And maybe my follow-up would be on Europe, specifically and your market share there with Huawei Getting into maybe removed from part of the network accelerating in some regions like Germany potentially. How is your market share now? I mean, what is your market share in Europe today? And what is your market share in the deals you signed?

Speaker 9

I mean, do you see strong drivers? So is it like visible really in your P and L this dynamic? And how long it would last would be great? Thank you.

Speaker 1

Do you have, Marco, the market share?

Speaker 2

Yes. We what comes to 4 gs, 5 gs market share, So we believe that in Europe, we are around 29%, 30%, somewhere there. And just like we said earlier, on those deals where customers have changed the vendor base, we have won about half of those. So we believe we have a very good position. And just as you saw as well in quarter 1, we continued to grow in Europe,

Speaker 1

again, in mobile network side with a very good growth rate. And this is evidence that we are taking market share in Europe as well. When you take if you take Del Oro figures in Europe, which we do not believe that would be far from the truth, they are saying for the this is at the end of 'twenty two, 29.2 percent, and that is 2.9 percentage points increase in 1 year. So in mobile networks, we now have 4 to 5 quarters behind us, where we have taken market share globally outside of China. So this is a strong proof point of the return on investment that we are getting on the R and D.

Speaker 1

And of course, the latest product, which further increases our competitiveness, which is the Havrok generation that we launched in Mobile World Congress. That has not even started to deliver yet.

Speaker 9

Great. Thank you very much.

Operator

Thanks, Francois. We'll take our next question from Joseph Xu from Redburn. Joseph, please go ahead.

Speaker 10

Yes. Thank you for taking my questions. I have 2. I will go one at a time. And firstly, just on your network infrastructure business, which had a very strong margin again this quarter, but with the lower margin optical business grew the strongest.

Speaker 10

And how should we understand The very strong year on year margin progression this quarter given the, I would argue, the slightly unfavorable mix for that division. Which business within NII had the strongest improvement in margin?

Speaker 2

Well, first

Speaker 1

of all, because we Now have great top line growth in IP Networks, 13% constant currency growth. And because that business has the best profitability in that business group of the platform, such drive the margin. So that's the mix between businesses inside NI. But I also would like to highlight optical networks because there is As in all these businesses, there is a heavy R and D cost and then there is SG and A as well. So when you have like in this quarter 45% growth, that delivers a pretty healthy operating margin leverage as well.

Speaker 1

So those would be the 2 things that I would highlight as drivers for the NI behind the NI margin.

Operator

Did you have another one?

Speaker 10

Yes. My follow-up is we have seen quite a significant decoupling of growth trajectory between Wireless and Wired Networks equipment spend in North America. And would you attribute this more to the high inventory level related to 5 gs or simply operators is shifting CapEx towards wired following the big 5 gs rollouts in North America? Obviously, I think it's probably both. But would you attribute this more to customer destocking?

Speaker 1

Yes. The latter one is something that actually operator Good comment. We are seeing as we commented in the report, we saw Strong development in network infrastructure in North America at the same time when we saw weakness in mobile networks. And again, that mobile networks weakness in a way is a double whammy that you have both Slightly lower slower construction pace and then you have inventory depletion. So it's a combination of the 2.

Speaker 1

But right now, we are not seeing this in the same way in NI.

Operator

Thank you, Josef. We'll take our next question Stefan Slowinski from BNP Paribas. Stefan, please go ahead.

Speaker 11

Great. Thanks, David. And hello, Becca and Marco. Just wanted to get a clarification on the comment during the prepared remarks around the net cash longer term only required to be 15% of sales. Did you say that it was after 2024 that you would look to put that into place?

Speaker 11

And I think you said you could do that either through substantial M and A or buyback. So just kind of wondering how you would decide between the 2. And if it was more substantial M and A, what areas you might be considering for that? So that will be my first question. And just a quick follow-up is, considering some of the early signs we're seeing about a broadening weaker macro environment.

Speaker 11

Just wondering if there's any more cost cutting initiatives that you're taking or could take in order to ensure that margins are preserved going into next year? Thank you.

Speaker 2

Yes. Thank you, And when it comes to the capital management policy, I would say that, first of all, we want to sustain and secure that we have a solid overall financial position. And what comes to timing of reaching the target, we've said that we don't take any imminent actions due to the fact that we see a growth in 2023, which is tidying up more working capital. At the same time, there's macroeconomic uncertainties as well. And that's why we said that we will look into that look into taking actions in 2024, where we expect that cash generation will improve.

Speaker 2

What counts to Our M and A activities, we have said bolt on acquisitions could be one way and or more returns to shareholders. We haven't specified more than that. And what comes to M and A in general, we don't have any plans to make any big acquisitions. It's more targeted to secure our technology leadership and offering towards our customers and looking at

Speaker 1

those kind of acquisitions. And then just to follow-up, I mean, of course, you should not forget that we just increased our dividend from 0 point 0 $2 to $0.03 per quarter, that's a 50% increase. And then we are continuing into the second $300,000,000 year of this €600,000,000 buyback program. So we are returning and remember this Free cash flow conversion guidance of 20% to 50% of net sales this year is something that we need to keep in mind as well.

Operator

We'll take our next question from Richard sorry, we had answered the question on restructuring.

Speaker 1

Sorry, what was the question?

Operator

Stefan, I guess, if you want to repeat it, but deferral, that was

Speaker 1

Of course, yes. Yes, yes. Of course, yes, sorry.

Speaker 11

Any cost cutting initiatives either underway or could be planned if the macro environment does continue to weaken throughout the year to preserve margins for next year? Thank you.

Speaker 1

First of all, we still have this €600,000,000 program ongoing that we said that would continue until the end of 2023. So It means that we are continuously trimming the cost base. So this is even without any new announcements or anything like that, this is something that We do all the time, and the businesses have full responsibility for keeping their cost base in shape. And of course, the businesses and we in group management, we are paying a lot of attention to the macro environment, and we are adjusting the cost management accordingly. We are not making any new announcements today on this one, but I just Want to highlight that this does not mean that there would not be actions ongoing all the time.

Operator

Thank you, Stefan. Thank you. We'll take our next question from Richard Kramer from Arete. Richard, please go ahead.

Speaker 12

Thanks, guys. Good morning. Pekka, can you give us a little bit more visibility or update us on the sustainability of that growth rate in enterprise given the new customer wins? We've seen that have fits and starts in the past, where you had a very good growth rate 1 quarter and then it tailed off the quarter after. And maybe can you give us a bit more detail of you mentioned webscale and hyperscalers.

Speaker 12

Can you give us a sense of What portion of that enterprise business is now focused on the very large hyperscalers versus the long tail of private wireless and enterprise And then I'll have a quick follow-up. Thanks.

Speaker 1

It is the webscale part, we are not disclosing it in monetary terms. But what I can say is that it is still a fairly small part of the overall enterprise business, which obviously was the total enterprise €2,000,000,000 last year. Am I going to promise that the 62% growth rate will remain But remember, Q4 was 40 what was it, 49%, I think. So we and Q3 Was it over 20%? Yes, 20 something percent.

Speaker 1

So we start to have some track record on this. And of course, this is important because and we said that we will have a strong double digit full year growth this year. But again, there could be jumps up and down also in individual quarters because some of the deliveries can also have some bulkiness because there is remember, in addition to the webscale deals and campus networks. There is also wide area private networks in that mix for authorities, for example, for utilities and so on. So you could see some lumpiness, but the general interaction is good.

Speaker 1

We have a strong pipeline of new opportunities. And of course, the difference between this customer segment and the CSP segment is that Here, it's really up to us and take it. I mean, there are thousands and thousands of potential customers, whereas on the CSP side, We are fairly dependent on a small number of customers.

Speaker 12

And then a quick follow-up for Marco, very helpful Slide number 11 with the bridge of Nokia Technologies. But with such a huge amount sitting in these smartphone agreement renewals, Can you just help us understand how you're handling the costs of all that litigation against those renewals right now? Are those costs being taken through the P and L today? Or are they being put off until an agreement is reached and that might have a big impact on profitability when you finally are able to reach terms? Yes.

Speaker 2

Thank you. Yes, we take litigation cost in our P and L immediately. And now, of course, when we have these 2 litigations, you see a bit more litigation costs. But of course, we have other costs in the Technologies OpEx as well as we have R and D, different patent portfolio cost is in development and other licensing related expenses that we have there. But we always take those immediately in our P and L.

Speaker 10

Okay. Thanks guys.

Operator

We'll take our next question from Sebastian Stavlovitz from Kepler Cheuvreux. Sebastian, please go ahead.

Speaker 13

Yes. Hello and thanks for taking my question. One follow-up on one question previously on the market growth or market outlook for 2024. You answered on the mobile network, but what is your view on the market trends for NI and the different business within N9 and also on CNS, how do you see the demand developing beyond 2023? And the second question would be on this patent litigation with Chinese smartphone OEM.

Speaker 13

Could you please make an update and tell us a little bit Where your litigation are standing right now? Have you made any kind of progress? How the situation is evolving on these specific litigations? Thank you.

Speaker 1

Okay. If I take the first one and Marco takes the second one. So NI market growth rates, we actually gave Some estimations in connection with the Q4 progress update, IP Networks, CAGR 3%, fixed networks CAGR 4% and optical networks CAGR 2%. So those these would be the overall Market growth rates, we have not looked into specifically 2024 at this time. These are kind of longer term growth underlying growth rates.

Speaker 1

So of course, what means longer term in This case 2022, 2025, that's what we said in January for the next 3 years CAGR at constant currency. That's what we are looking at, at the moment. But of course, this is something that we are following up all the time depending on how the general economy develops from here.

Speaker 2

Yes. And what comes to the litigations on those two cases, I suppose you are referring to, We have continuous wins also in different restrictions. The latest one came from Germany, where we had a positive outcome from against VIVO. And then What comes to OPPO, I think latest one came from U. K, where the court ruled in our favor there as well.

Speaker 2

And what comes to court in Brazil, they also trended as a preliminary injunction there. So we Step by step, we are proceeding here when it comes to the litigation proceedings. And but at the same time, of course, we continue to negotiate with both parties to find suitable solution. But as we said before, We are not targeting any specific time line here. We want to defend the value of our portfolio because we believe that we have Very good portfolio, and we are following those international rules when it comes to trend in these as well.

Operator

Thank you, Sebastian. We'll take our next question from Sami Sarkomis from Danske Bank. Sami, please go ahead. Hi.

Speaker 2

Can you please talk about developments at CNS in Q1? You did flag weak mix with higher hardware sales. Is this temporary in nature? And is it related to 5 gs core or the enterprise business? And then maybe as Follow-up, what is the margin impact from strong enterprise growth during the past few quarters on CNS?

Speaker 2

Okay. Thank you, Sami. First of all, I would say that the margin Shift that we had in quarter 1 is not due to the enterprise sales. It is purely, I would say, mix between software and hardware. And in quarter 1, we had larger share of hardware shipments than we normally have and a little bit lower software.

Speaker 2

So this was the reason. And We expect the mix having a little bit headwind in quarter 2 as well. But remember also this is software type of business. So So normal seasonality is that most of the profit is always coming towards the end of the year. And this is exactly what we expect here as well, and that's why we have a full year guidance.

Speaker 2

And we reiterated that again as well that what comes to our guidance assumptions, specifically for CNS, we assume to have 5.5 percent to 8.5 percent operating margin for the full year.

Speaker 1

Okay. Thanks.

Operator

We'll take our last question from Sandeep Deshpande from JPMorgan. Sandeep, please go ahead.

Speaker 3

Yes, hi. Thanks for letting me on. My question is sorry, I don't know whether this was asked before, but is the weakness I mean, you've seen 2 consecutive quarters in which your gross margin has been impacted in mobile networks. I mean, you talked just now about Software hardware mix. Is this what is going to change into the second half of the year, which will improve the margin in mobile networks?

Speaker 3

Because geographically, the mix has changed and that is probably not going to change into the second half of the year.

Speaker 1

Well, the reason for the gross margin drop is specifically the geographical mix and That was actually there already in Q4 last year. So we now have sorry, 2 quarters of weaker volumes in North America and mobile networks. And that is expected to continue, as I said earlier, through the Q2. And then we are expecting a recovery in the second half of the year, which then explains why we are maintaining the 7% to 10% full year operating margin guidance for Mobile Networks.

Speaker 3

So the improvement in mobile networks, Pekka, in the second half will occur because, again, geographical mix shift rather than Some adjustment associated with software hardware as such really?

Speaker 1

That is correct. This is not the software hardware question. This is a geographical mix or I should say specifically North American volume question, where we expect recovery in the second half of the year.

Speaker 2

And the software hardware, that was on the CNS cloud infrastructure.

Speaker 3

Understood. Yes. Okay. Thank you so much.

Operator

Yes. Thank you. Thanks, Sandeep. And thank you, everyone, for joining us today. This does conclude today's call.

Operator

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 as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20 F, which is available on the Investor Relations website. Thank you for joining us.

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Earnings Conference Call
Nokia Oyj Q1 2023
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