Nokia Oyj Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Nokia's Second Quarter 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 Buren, 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. Actual results may therefore differ materially from the results we currently expect.

Operator

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 on margins, we'll be referring to our comparable reporting. Please note that our Q2 report and the presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and a reconciliation between the two.

Operator

In terms of the agenda for today's call, Becca will give a quick overview on our financial and strategic progress in the quarter. Marco will then go into a bit more detail of some of the key factors impacting our outlook before Pekka concludes with our outlook for 2023. With that, let me hand over to Pekka.

Speaker 1

Thanks to everybody for dialing in today. We highlighted in Q1 that we were starting to see signs of the economic environment impacting customer spending. And already in the second quarter, we saw some Those signs materializing are starting to impact our sales outlook also in network infrastructure. But we still achieved flat year on year sales in the quarter as we continue to benefit from market share growth. Despite the regional mix headwinds that are impacting our mobile networks business, we achieved a 38.8 percent gross margin and an 11 point operating margin.

Speaker 1

Considering the 40% Drop in North America and even adjusting for the $80,000,000 catch up net sales in Nokia Technologies, that was a pretty resilient result. If we look specifically at network infrastructure, you do see some divergence in the trends in the business. In IP Networks, we saw some weakness primarily related to CSP spending in North America, which led to the 11% drop in net sales. In fixed networks, we are seeing 2 primary effects. Firstly, we are facing some headwinds similar to our fixed wireless access business, which still today remains sensitive to a small number of customers.

Speaker 1

And then secondly, as we see some inventory digestion, primarily of consumer premise ONT devices. In Optical Networks, we saw a further strong performance of plus 16% as we continue to benefit from the improved competitiveness of our products and market share gains. In fact, while we are seeing weakness elsewhere, our expectations for optical this year is one area that has actually improved Since the start of the year. In summary, Networks, we saw some project timing effects and revenue growth after years of substantial growth, that the business remains well supported as it executes on its substantial backlog. From a profitability perspective, the business performed very well.

Speaker 1

Positive product mix, notably within fixed networks and proactive management of our costs as the sales outlook deteriorated meant we were still able to improve our operating margin in NI by 160 basis points to 13.1. As we look forward, whilst we see some short term challenges impacting the business, particularly with a softening environment for CSP spending, we remain highly confident in the opportunities ahead for our network infrastructure business. In optical, we continue to believe we are gaining market share with the customer traction of both PSC5 and now lately with PSC6, we are very optimistic about the potential to continue to grow in business. In Fixed Networks, we understand there might be some concerns that we are now seeing some slowdown in sales, Which is why we want to make it clear, as you see in the chart, that the decline is primarily related to fixed wireless due to its sensitivity to a small number of customers. In fiber, after 2 to 3 years of significant growth, we are now seeing some moderation in growth rates and some short term inventory digestion, but the outlook remains strong for this business with a number of government subsidy programs in both the U.

Speaker 1

S. And Europe only just starting to benefit the market. In IP Networks, while the uncertainty in CSP is impacting demand currently, we have been making great progress in expanding into enterprise and web scale, which has increased from 13% to now over 20% of IP net sales. Importantly, we believe we are in strong position to make further progress into webscale into 2024. This diversification should help improve the structural growth opportunities for our IP Networks business given the enterprise and webscale TAM is expected to grow at around 6% CAGR compared to the 1% growth for CSP customers.

Speaker 1

Mobile Networks saw 5% growth in constant currency year on year as a result of the continuation of the rapid development 5 gs in India, where we continue to gain market share. These were partially offset by the expected decline in North America as customers continue to evaluate their spending plans and deplete their inventories in the quarter. Gross margin declined year on year, reflecting the regional mix. Given the slower pace of recovery in North America, we now expect the gross margin to only improve towards the end of the year. With respect to operating margin, a decline in operating expenses reflecting swift action on cost discipline meant that we achieved 7.9% operating margin, an improvement on Q1.

Speaker 1

During the quarter, Mobile Networks also launched a series of new products, including basebands, radios and network management and optimization solutions that will drive better performance, lower energy consumption and brings the power of artificial intelligence to mobile networks. Cloud and Network Services grew 2% on a constant currency basis, mainly driven by Works on Enterprise Solutions. Gross margin declined slightly. However, pleasingly, operating margin improved year on year 2 90 basis points as a result of lower OpEx and other operating income items. At the end of June, Nokia reached an agreement to transfer cloud infrastructure portfolio to Red Hat.

Speaker 1

And starting in Q1 2024, we will adopt the Red Hat platform as our primary reference cloud infrastructure platform for new customers, gradually transitioning existing customers over from Nokia's core networks portfolio. Over 350 Nokia employees are expected to transition to Red Hat to provide continued roadmap Evolution Deployment Services and Support on behalf of Nokia to its customers. One thing to highlight is that just a couple of weeks ago, we signed a long term patent license agreement with Apple. Obviously, the net sales driven by $80,000,000 of catch up sales related to deals signed in the quarter. Excluding this, net sales would have been on a similar level to Q1.

Speaker 1

We were pleased to sign a number of licensing deals in Q2. Considering our current base of agreements, we now see that our net sales annual run rate would be EUR 1,100,000,000 from January 2024, subject to any other material developments. We also continued to renew our industry leading patent portfolio, reaching the milestone with 5,500 patent families cleared as essential to 5 gs. Enterprise sales had another successful quarter with growth of 27% in constant currency, a key pillar of our strategy. We continue to make good progress towards our near term target of having at least 10% of our sales from Eddypros, we've reached 9% on a last 12 month basis.

Speaker 1

We continued strong growth in both enterprise verticals and in webscale. This is particularly benefiting our IP Networks and Optical Networks businesses, and we remain confident of our opportunity to grow here, as I already mentioned. We now have more than 6.35 customers in private wireless and added 9 with our new customers. With that, I will now turn the call over to Michael to go will go into a bit more detail on our financial performance. So with

Speaker 2

Thanks, Beck, and good morning for my second as well. Looking at our net sales performance by region, also driven again by the rapid ramp up sales in India, in Europe, sales grew by 11% even excluding the increase in tech, which is recorded in Europe, And we had strong growth in business growth. And the growth in Middle East and Africa was mainly driven by Cloud and Network Services and Network Infrastructure. There were declines in Asia Pacific, Latin America and Greater China with mixed performance across the business growth. And then the 40% decline in North America was a result of declines across all business groups as inventory digestion continued and CSPs reevaluated their spending plans.

Speaker 2

In summary, Q2 reflected the trends we had expected to see with rapid India ramp up being offset by a slowdown in North America. And if we now move to our P and L performance in the quarter, our comparable operating margin declined 120 basis points earlier. And as expected, we saw the negative impact from regional mix continue in the quarter as India since grew strongly and North America continued to be weak. However, overall margins were rather resilient, benefiting from both quick actions in cost discipline that we took across the businesses as well as the Nokia Technologies catch up net sales. We also saw a year on year increase operating income was mainly related to hedging in addition to income from the sale of certain digital assets good quarter.

Speaker 2

And if we now turn to the operating margin performance by this As we already mentioned, we were pleased to see the margin performance given the headwinds While Pekka already touched upon many of the drivers, the increases in And cloud and network services and Nokia Technologies were offset by the decline in mobile networks margin. Group common was a net negative on a year on year basis. So this is mainly related to venture fund positive that we had last year of $40,000,000 compared to a negative revaluation of $10,000,000 this year. Moving to our cash flow performance in the quarter. We ended quarter 2 with €3,700,000,000 of net cash, sequential decline of roughly €600,000,000 our free cash flow in the quarter was negative €380,000,000 As you can see on this slide, the main driver for the cash burn in the quarter was related to performance related employee variable pay, which is included in the liabilities line within net working capital.

Speaker 2

Otherwise, there were small movements in both receivables and inventories within net working capital. We also returned €250,000,000 of capital to shareholders Through our increased dividend and our ongoing share buyback program. And perhaps most importantly, we believe our strong balance sheet, including the €3,700,000,000 net cash, provides us with a firm foundation pleased to indicate this period of uncertainty. And the final slide for me before Pekka updates you on our outlook for 2023, I wanted to revisit a slide that we showed at the start of the year around our cash conversion. So we continue to expect at the end of the year with a free cash flow conversion of 20% to 50% of comparable operating profit.

Speaker 2

However, through the first half, we have seen some slight adjustments within this envelope that we wanted to point out. The 2 main items are net working capital, which has continued to be a use of cash this year, reflecting the large 5 gs deployments in India and their impact of receivables and inventories. The second item is around the gap between Nokia Technologies operating profit and cash, Which is also reported in Netbrooke at all. Originally, we expected this to be slightly positive in 2023. And given the deals that we have signed thus far in 2023, we now expect cash flows to be meaningfully higher than operating profit.

Speaker 2

Some of the new deals we've signed are coming with some modest prepayments for what would have otherwise been received in 2024. And considering there are still a number of details to work out here, we will give you more quantitative outlook later in the year. Our long term our vision to have greater alignment between operating profit and cash remains unchanged. And we would expect to move towards much greater alignment from 2025 and onwards. So beyond this year, we continue to expect significantly stronger cash flow in 2024 as we work towards our longer term targets of 55% to 85% conversion.

Speaker 2

And with that, let me pass it back to Pekka to go through our revised outlook.

Speaker 1

Thank you, Marco. Let me start by talking about how we see the dynamics unfolding in our market in 2023. We have mentioned a few times already that we see that Current macro uncertainty really impacting customer demand this year as inflation and rising interest rates create a creative focus within CSP is on short term cash flow. This is primarily impacting our network infrastructure and mobile networks addressable markets. I want to be clear that this is an industry wide challenge we face right now, and particularly within CSPs And the changes we have made are primarily related to North America.

Speaker 1

We now forecast 1% constant currency growth in our network infrastructure addressable market, down from +4 percent, minus 2% in mobile networks market, also down from plus 4%, and our outlook for CNS addressable market remains unchanged, that was 3%. So while we have clearly seen a deterioration in the outlook for our markets in 2023, it should be remembered that there are a number of dynamics that clearly support the need to invest in many of our key end markets, which I wanted to revisit. For all of this short term uncertainty, one thing remains clear, data consumption growth will continue. According to Bellab's consulting study, data consumption is forecast to grow at between 20% 30% CAGR we're through the end of the decade. Considering all of the data rich applications we see, such as generative AI And also new augmented reality devices coming, we see data consumption growth is a given.

Speaker 1

2nd, if we look at how 5 gs has been deployed on mid band sites across the world, excluding China, we still see plenty of potential. Approximately only 25% of sites now have 5 gs mid band deployed on them. While penetration rates vary by region, even in markets like North America, where significant deployments have already been made, the region is only 55% complete. Other regions like Europe, Latin America, Middle East and Africa are still in the very early stages. So still significant investments needed around the world.

Speaker 1

Then looking at fiber penetration, you will see that There is still substantial amount of fiber that needs to be deployed around the world. And perhaps Even more importantly, once that fiber is laid, investments will continue for that same fiber for many years to continually drive higher capacity on these lines. Then turning to our full year outlook that we revised last week. We reduced our net sales outlook for 2023 to $23,200,000,000 to $24,600,000,000 from the prior year $24,600,000,000 to $26,200,000,000 Proactive action by our business groups to manage Cost is largely mitigating the impact to our operating margin, and hence, we only narrowed the range to 11.5% to 13% from the prior 11.5 14%. You can also see in our report, we have also revised the assumptions by business group for 2023.

Speaker 1

The main driver here has been around the macro challenges that I've already explained in my commentary. In the second half, we expect these trends to continue to impact our business, meaning we now see 2nd half net sales broadly similar to the first half in both network infrastructure and mobile networks with some sequential improvement visible into Q4.

Operator

Thank you, Marco and Pekka. With that, let's start the Q and A. Maria, could you please give the instructions?

Speaker 3

Thank you. We will now begin the question and answer session. If you're also viewing the webcast, please remember to mute the audio on your computer I will now hand the call back to Mr. David Mulholland.

Operator

Thank you, Maria. We'll take our first question today from Alex Peturk from Societe Generale. Alex, please go ahead.

Speaker 4

Yes. Good morning. Thank you for taking my question. I hope you can hear me well. Yes.

Speaker 4

Thank you. Excellent. So my first question would be on the good OpEx that you demonstrated in your Q2 that's protected margins very well. Do you have any specific new restructuring measures in place? And if so, are there any upfront costs that we should be aware of?

Speaker 4

Or are you using previously planned and provisioned restructuring budgets? And do you see from here any need for more comprehensive new restructuring plans in the coming quarters? That will be your first one and then I have a follow-up. Thank you.

Speaker 2

Thank you, Alex. To start with, I want to point out also that the 5% reduction on year on year OpEx is mainly coming from FX. And excluding the FX, it is largely stable pleased with the income in the efficient environment where we are in. In terms of the actions, I just want to highlight that we have taking different actions on short term, what comes to hiring, travel and also the supply chain costs. And considering the change in our outlook, we also have seen benefit from lower variable pay accruals.

Speaker 2

The gross provision earnings are continuing to second half of this year. And I also want to point out that the operational model that we have with decentralized responsibilities the different businesses, the business leaders in these entities are seeing and taking actions whenever they were seeing need for them. So the speed of actions are fast in this new model that we have. What can be any future restructurings, we will obviously continue to analyze our cost base In light of the demand outlook that we have.

Operator

Do you have a follow-up, Alex?

Speaker 4

Yes. Thank you very much. It's very clear. My follow-up would be on the sheathing problem at U. S.

Speaker 4

Fixed operators in their last mile copper network that we heard about in recent days. Now I'd just like to hear your take on the situation. Is this a big liability with a lot of cleanup and legal costs some major operators in North America that may put a pressure on their ability to spend on CapEx or is it On the contrary, in your view, a catalyst for a thorough fixed access overhaul should be beneficial to you as the market leader in this geography and this market area. Thank you.

Speaker 1

Yes. Thanks, Alex. I mean, I'm, of course, aware of this reporting and we've been following the a bit Story, but however, we don't have enough information to really be able to comment your question. Of course, environmental impact must always be a priority. And I also note that the companies mentioned in the reporting have issued robust statements in response.

Speaker 1

But a specific answer to your question in terms of the impact should really come from the U. S. Operators and not from us. We cannot comment that.

Operator

Thanks, Oliver.

Speaker 4

Thank you very much.

Operator

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

Speaker 5

Hi, thank you very much. So I have 2 quick ones and one is very high level. So Pega, you mentioned in the video and in fairness, you're not the only one, Ericsson as well your competitors talking about this data traffic as a driver of demand and investment in the future. And you have this chart as well of data traffic. Now if we take a step back and look in the past, I mean, the data traffic has been quite strong.

Speaker 5

I mean and yet the revenues has been barely growing for Nokia as a whole at the group level. Of course, you have different mix, but you saw differences of data traffic and revenues Basically, growth. And this is true as well for Ericsson in fairness. So is it the right way to look at data traffic as with a growth driver for the business or maybe what could change in the future that you Monetize more the data traffic, maybe that's my first question, very high level.

Speaker 1

Okay. I mean, obviously monetizing the data I think it's a highly significant question for operators and through that also for us, and it is fair to say that operators have not been particularly good in monetizing their data traffic and today, we've Traffic growth in the past. And now, of course, there are new tools available like 5 gs slicing and different types of industrial applications, we certainly hope and we work with operators to help them to monetize it better this time. But then there is another angle to this question too, which actually does not have that much to do with the monetization itself. If simply the data traffic continues to grow, operators, if they want to stay in the business, they will have to continue to invest.

Speaker 1

And this is the reason why we believe that this slowdown in investments in some parts of the world, especially in North America, Has to be primarily a question of timing because if one particular operator would not continue to invest, their competitors would. And this is a highly relevant question, both in Mobile Networks and also in Fixed Access. Now in North America, especially when the new funding it's available for the broadband for all programs. There will be even more competition between operators who are scrambling to offer new services as quickly as possible once the funding gradually gets available. So the monetization question is a relevant one, but we believe that investments will be driven by the growing data traffic even in the case, Which would be unfortunate, where operators would not be able to significantly better monetize the growth in the future.

Speaker 2

Thank you,

Operator

Vincent. You have a follow-up.

Speaker 5

Yes. Thank you. Very clear, Pega. And the second one is on The 25% of 5 gs deployed on the mid band, again, very consistent with what your competitors are saying. Now you have this interesting Charts about the penetration by regions and North America seems to be more than 50%.

Speaker 5

So we would assume that Most of the deployment would be from excluding North America, India, Asia, Middle East, Africa, Latin America, Which as we see this year is the mix seems to be negative on market side, the ex North America. So does it mean that from a mix perspective, as we look going forward, this negative mix should continue say, in the medium term, as the growth is coming from other than North America. Thank you.

Speaker 1

Well, if you assume that the end result, it would be that every market would be at X percent. Of course, this will not go to 100%, but it will go much Higher compared to where it is today. Of course, if the end result would be the same everywhere, then your conclusion would be correct. But we are suggesting that even the North American market is far from complete. So that's why we are expecting recovery also in that market at the same time when the deployment will continue in other parts of the world.

Operator

Thank you, Francois. We'll take our next question from Sebastian Stavowicz from Kepler Cheuvreux. Sebastian, please go ahead.

Speaker 6

Yes. Hello, everyone, and thanks for taking my question. What are the assumptions beyond your guidance for 2023? And notably on the margin front, Do you assume to resign the unlicensed Chinese smartphone OEM that you have there to reach your margin guidance for this year? And could you please make an update on your litigation today with OPPO and BIVO, where you're standing?

Speaker 6

And the second question is on the pricing condition. On the pricing, do you see any change in pricing dynamics now that the market is getting a little bit weaker or you still see our feasible pricing condition. Thank you.

Speaker 2

Yes. Thank you. What counts to Opland Vivo litigation The negotiations, those are continuing. And we remain confident that we will have a positive outcome on those as well. And of course, we are working on to resolve these disputes as soon as possible.

Speaker 2

And as you've seen also, there's been several court cases like Germany, UK, India, Brazil and Netherlands, which have ruled in our favor in the past year. So the trend is quite clear here. And when it comes to our current outlook assumptions, we say in the for the technology part that we expect largely stable operating profit in 2023. And this is assuming that we will close these disputes also. And with that said, we will continue to prioritize protecting the value of our intellectual property we're achieving a certain time line.

Speaker 2

But remember also that we will have catch up payments in this one visa sought. At the same time, we are very confident that we see opportunities in the new growth areas in the technologies, live video streaming and audio and IoT and automotive and so on.

Speaker 1

When it comes to pricing, I mean, in our market, there are always on case by case basis, cases where there are international pricing actions by some Competitors, but in the big picture, no, we have not seen such a change. And what I would like to point out is that we actually have an interest to increase pricing discipline in our industry in order to not only protect our gross margins, but also to push them up and at least make sure that all the inflation and rather costs are related to prices and then We gradually structurally improve them also going forward.

Operator

Thank you, Sebastian. We'll take our next question from Artem Beletsky from SEB. Artem, please go ahead.

Speaker 7

Yes. Hi. Thank you for the presentation and also taking my question. I would like to ask about North America and this 40% decline in Q2 year over year. Could you maybe provide some color whether there has been any significant differences between main segments, so basically mobile networks or NI.

Speaker 7

And just looking at the past quarter, Has there been any significant shift what comes to the pace of decline in the region? Thank you.

Speaker 1

Thank you, Artemvi. The weakness was clearly visible in both businesses, But the decline was slightly greater in mobile networks and in network infrastructure, slightly less. So when we talk about the and this is Q2. And then when we talk about the Outlook, we see as I said, we see some recovery in the second half of the year, but it will be slower than previously And while I already discussed the reasons that customer spending plans are increasingly impacted by high inflation, rising interest rates. And what we are clearly Seeing and you can see this in operator's public statements also is that they have strong actions going on to optimize their free cash flow for this year often connected to their financial covenants and so on.

Speaker 1

And one lever that they are pulling is their short term CapEx, which is not connected to the mid- to long term investment needs as we see them. So after a few years of heavy investment in North America, it is natural These conditions to expect and then see some normalization, but we do continue to believe that it is a question of timing. And Once again, slightly more on the mobile network side, slightly less on the NI side.

Operator

Did you have a follow-up, Arjun?

Speaker 7

Yes. Thank you. And I will continue on the regional discussions. So when it comes to this astonishing growth in India, what you also recorded in Q2, have you any insight when do you expect the Indian market to peak in terms of basically investment activity?

Speaker 1

Yes. I mean, of course, 355% growth is not something that you should expect to continue forever. It has been an incredible growth period in India. Of course, the investments continue, but we would expect there to be a moderation in the second half. And The overall result, I guess, will be that 2023 will be an exceptional year in India for sure.

Speaker 1

We will see some normalization in 2024, but we have to remember, but if you compare this to the past that we have taken market share, Because we broke into big time into Reliance Jio, which was 100% Samsung previously. So despite the fact that there will, of course, be normalization in 2024, we believe that in a way, the new normal, The new run rate that we will see for our businesses in India will be clearly higher than what was the case before.

Operator

Thank you, Arten. We'll take our next question from Daniel Gerberg from Handelsbanken. Daniel, please go ahead.

Speaker 8

Thank you, David. Hi, Pek Again, Marco. Yes, a question on, you can say, other early high margin 5 gs countries such as Japan and Yes, South Korea, etcetera. What do you see there in the outlook? Looking at KDDI, for example, it seems that they are You sound kind of 5 gs2.0 rollout, me at least.

Speaker 8

And also if you can comment a bit on Western Europe and The trend in the replacement of Chinese gear would be interesting. Thank you.

Speaker 1

Okay. Thank you, Daniel. If I take the Asia Pacific Question first, I mean, we are in a strong position in many of the operators there, including KDDI. And we are seeing some improvements in the outlook over the next 12 months. Too early to quantify, of course, but it is going to the right direction.

Speaker 1

In Europe, we did have pretty good growth. And there, we are taking market And I think we have all the possibilities to continue to take market share in Europe. We have to remember that, Of course, there is always a connection to the overall economic activity. Some of the operators in Europe are not That's strong in terms of their financial strength at the moment, which is clearly affecting their investments at the moment, but we are taking market share. Fundamentals in Europe, if we compare that to the other parts of the world, is the fact that Europe is significantly behind 5 gs rollout compared to many other parts of the world.

Speaker 1

So sooner or later, if and when Europe wants to take care of its competitiveness, Europe will have to start investing more in 5 gs. This is also something that I believe Brussels have understood very well and we would assume that the various regulatory and other questions would develop to a direction where more investments would be encouraged going forward because this is clearly something that Europe would need big time.

Speaker 2

Yes, I agree. May I have

Speaker 8

a follow-up on IP Networks? I think you said that it's expected to grow with 6 today with hyperscale is while some roughly flattish or 1% with CSPs. Can you comment a bit on the competitive differences Between these segments, I. E, your ability to get gross margins out of those 2?

Speaker 1

Dave, obviously, the different segments, operators, hyperscalers and then various enterprise verticals in terms of IP routing, they vary. Our focus has clearly been traditionally in CSP routing And namely within CSP Routing in CSP Edge Routing. So now we have two trends, which is then also connected to Our R and D priorities, one thing is that we are kind of leveraging our natural strength to expand from edge routing to core routing in CSP Networks, and we have some really promising traction here. Sales cycles are often fairly long here, but with the help of FP5 and the other new stuff that we have, I believe that we have good possibilities there, because in Edge routing, our market share is in the high 20s. In core routing, it is single digits.

Speaker 1

So there is a lot of opportunities to improve there. So this is one thing. Then the other thing is then webscalers where we see a lot of traction, we are investing a lot in that in our R and D to not only increase our differentiation, but then also increase our added value. In relative terms, so far in webscalers, we have been using a larger share of merchant components compared tailored silicon, we are investing a lot in this development at the moment. And gradually, we target to increase our share also in conventional enterprise routing.

Speaker 1

Also, they are starting from larger enterprises where carrier grade quality, carrier grade flexibility And security is required. And the good thing for this is that looking at how the data security demands are growing in these networks. There is a trend in demand towards more carrier grade equipment, which is clearly supporting our growth ambition. As I showed in that chart in the presentation, Enterprise now represents 20% Of our IP sales, while it was only 10% sometime ago. And this is, of course, a big difference When we compare ourselves to some of the key routing competitors that we have, they are much more enterprise Driven and that is clearly the direction we also want to take in this business.

Operator

Perfect. Thank you. Have a good day. We'll take our next question from Simon Leopold from Raymond James. Simon, please go ahead.

Speaker 9

Great. Thanks for taking the question. First, I wanted to discuss the longer term expectations for operating margin. I think you've talked about getting 14 percent or higher. And I'd wonder if you could give us maybe a bridge sort of like what you have on your Slide 12 as to what are the primary elements that help you get to that in terms of issues like resolving your IPR issues, geographic mix, product mix, if you could help us sort of walk to that, what gets you to 14% or higher?

Speaker 9

Thank you.

Speaker 1

Okay. Thank you. This is, of course, a very large question and it should I mean, it is worth a deeper discussion that is what is possible right here. But as a starting point, I would refer to the progress update that we provided in Q4, we provided you with the aspirations we have for the operating margins across each of our businesses. So hopefully, that provides you with some Context.

Speaker 1

But then in terms of the bridge, if I comment the 4 businesses just very briefly and then I'm sure that there is an opportunity to go deeper later. But in MN, we have already meaningfully improved our product cost And General Technology Competitiveness. And that is, of course, fundamental to all of this. And that has been clearly going to the right Correction, we are now receiving significantly better feedback from our customers compared to a couple of years ago. So now utilizing both the improved technology competitiveness and cost position.

Speaker 1

We have a clear ambition to gain market share and improve our scale And of course, remaining disciplined on cost. And these factors combined with the maturing 5 gs product with gross margins typically improving as each generation matures, gives us a foundation for going have to be double digit margin target that we have for MN. In Network Infrastructure, we are very much focused on growth. We have strong product position even in the challenging year we are seeing in 2023, as you can see from our margin assumption, which is 12% to 14% after 12.2% last year, we are hoping to see some improvement. So beyond that, it really comes down to achieving further scale and commercial discipline, especially in areas like optical and Samreen Networks.

Speaker 1

In addition to that, I already as part of the previous answer, I talked about the strategy to expand in IP Networks. So NI clearly going to the right direction despite the short term challenges we are seeing with some large customers, especially in North America this year. CNS, we have been working through our portfolio rebalancing efforts. The latest one you now saw, which was the partnership with Red Hat. And this is putting us on a path to improve our margins in the business.

Speaker 1

And of course, we have strong margin improvement targets going forward as we communicated as part of the Q4 results. CNS obviously is a software business, which is developing towards new business models such as as a service software as a service. And then finally, Technologies. Obviously, we plan to get back to the €1,400,000,000 to €1,500,000,000 Run rate, we have to remember that this is 100% gross margin business. So there is a direct contribution from any additional sales and as Marco mentioned, what we need To get to that 1.4 to 1.5, remembering that we are currently at 1.1 now after the latest deals that we have signed $1,100,000 from the beginning of 'twenty four.

Speaker 1

What we really need to get there is to finalized the smartphone renewal cycle, including finalizing the or solving the ongoing litigations with Oppo and Vivo and their expected continued progress in some of the growth segments where we have really promising stuff going on as well. And this would take us to the 1.4% to 1.5%. So roughly, I mean, these are the elements In the bridge that would take us to that at least 14% group margin. But I understand there is a lot more detail that we could discuss, but Unfortunate leaders. We have to do that another time.

Operator

Did you have a quick follow-up?

Speaker 9

Yes. Quick follow-up, please. In terms of the IP routing segment's a relative shortfall this quarter and tough comp to last year, what do you attribute that to in terms of issues like customers absorbing inventory, customer concentration or changes in the competitive environment. Thank you.

Speaker 1

It is not the last one, it is not. It is not a change in the competitive environment. If anything, our relative competitiveness has increased in that. We have an issue with customer concentration. I think it's fair to say that we are still in this business.

Speaker 1

We are too dependent on a small number of large customers. And then when you see investment slowdowns in a A region like North America and the largest operators there, the result is the one that you now see This is why it is crucially important for the future outlook for the IP business that we do exactly what I was explaining earlier that we need to diversify the customer base to enterprise verticals to web scalers. What we need in that business is a larger number of customers and with a smaller concentration of our dependence on a small number of large customers.

Speaker 2

Thank you, Simon.

Operator

Thank you, Simon. We'll take our next question from Joseph Hsu from Redburn. Joseph, please go ahead.

Speaker 10

Hi. I have two questions. Thank you for taking my questions. I'll go one at a time. So firstly, for North America, which had a huge decline, and can you compare the current customer inventory level for mobile networks, comparing that to the fixed networks side and also specifically within the fixed networks, with the FWA versus fiber.

Speaker 10

And I think one of your peers suggested as for the mobile side, the CSPs, their inventories have come down from up to 4 quarters at a peak to 1 to 2 quarters, which is a historical average now. And are you seeing the same? Are you seeing the lean inventory level at those customers at the kind of historical level now or not yet? With the first question.

Speaker 1

If I comment mobile networks, first, of course, we have been seeing the same trend. We saw progress in their inventory digestion during the Q2. At some customers, we believe they have returned to more normal inventory levels already, but they are the customers Which will impact the second half. So the trend is clear, but we do not believe that we are

Speaker 2

we're going to fix it.

Speaker 1

Of course, we have to remember, when you go Back with respect to 'twenty one and 'twenty two, you would have seen extremely strong numbers in fixed networks. So that's why it's natural to expect some normalization in spending, and that's exactly what we are seeing right now. One of the main drivers In the presentation, you saw the chart, which kind of highlighted the relative contribution of different product segments in fixed access, it's clearly fixed wireless access. And in our case, that has been highly sensitive to a very small number of customers. And Now, especially in North America, now when those deployments are significantly more slow, there is inherent to some volatility here.

Speaker 1

But overall, the demand for fiber outlook is healthy across the world for fiber. That is clearly one of our strongest segments. We are market leader in optical hotels. And over the coming years, we will start to see the benefit from government Funding, and I already referred to earlier, for example, to the bid program that the U. S.

Speaker 1

Government he's putting in investment of tens of 1,000,000,000 that will benefit these investments.

Operator

Did you have a quick follow-up, Joseph?

Speaker 10

Yes. Just a quick follow-up on the Opel Vivo situation. And there has been a recent court ruling by the Indian Delhi High Court against OpCo, it has ordered OpCo to pay the India portion Of the last page in licensing fees. And do you expect this to materialize? And what's the timing of this?

Speaker 10

Can you talk about the implications? Thanks.

Speaker 2

Yes. Thank you, Jose. Yes, that's correct. There was a positive outcome from Indian court. And as I said earlier, we remain confident about that we will have a positive outcome of OPPO and VIVO negotiations and mitigations.

Speaker 2

And we are working to resolve these disputes with both companies. And I mentioned also earlier that not only India, but other courts in different parts of the world have had a positive outlook for our part. So we hope that the more we get these polygraphs, the more clear it could be that we are

Speaker 1

I think it's really important what Marco said here to understand that when it comes to Opland Vivo, we are not asking anything more than what we are asking from other customers. And the deals that we have made this year with Samsung and Apple are on those levels, which we have assumed as healthy targets when we put together this €1,400,000,000 to €1,500,000,000 target for Run rate for mobile, not mobile, but for technology. So those both of those deals are on a level that supports those targets and we feel that it's fair to require similar levels from OpCo and BY as well.

Operator

Thanks, Joseph. We'll take our next question from Richard Kramer from Arete. Richard, please go ahead.

Speaker 11

Thanks very much. You know, Pekka, you really had visibility of the mix shift in mobile towards India and what That has done to the gross margin, but one thing we haven't heard you talk about is the extent to which the new product portfolio you announced will bake in cost reductions that support churn or resumption of the kind of gross margins we saw last year, in other words, is the gross margin recovery in mobile dependent on regional mix Or is there a product element to it with the new portfolio that you announced? And then I've got a quick follow-up on

Speaker 1

There is absolutely also a product in this. There is procurement cost and procurement actions, obviously, then there is fundamental R and D actions. And of course, The new product generations that we have launched, they will continue to improve our cost position. But I don't think that these regional differences in margin profiles will go away. So the geographical component will also be there, but it's definitely not the only component.

Speaker 11

Okay. And then my follow-up is on you've talked before about the book to bill. Can you talk about where that stands in the enterprise side given that you're still growing, but lapping good growth numbers from a year ago and you're increasing customer numbers. I'm just conscious that maybe these Private wireless customers that you're announcing are much smaller deals, but maybe the book to bill extends much further into the future. Thanks.

Speaker 1

We have a healthy pipeline of opportunity and a good backlog. Of course, like in any business, there can be some swings up and down. We saw really, really strong, as you remember, Q1 in terms of Enterprise. Now we saw some normalization, But this is the business that we expect to continue to grow. And our goal is to see continued double digit growth in enterprise to reached at least double digit percent of our sales.

Speaker 1

And as you saw in the rolling 12 month Graph that we had, we are pretty close already to that. And that's what we announced as a short term target last January. And then I think the way I put it in the presentation in January was that first, we wanted to go to 10% and then to 20% and then to 30%. So this Growth is definitely expected to continue going forward.

Operator

Thank you, Richard. Will take our last question from Sami Sarkomis from Danske Bank. Sami, please go ahead.

Speaker 12

Hi, thanks. Tayo, just wanted to get some color on the product segments for Network Infrastructure. We are now estimating 1% market growth and sales growth below the group average. Do you expect sales growth in any of the segments on a full year basis? And at which segments should we expect a material decline relative to last year, I think you mentioned, for example, that you have become more positive on optical networks.

Speaker 1

Yes. I mean, we don't really give detailed guidance for the full year On the sub segment level, but what I can say is that if we look at how our expectations have changed during this year and also from Q1, our expectations for optical have increased, while the macro environment has led to a deterioration in the outlook for IP and fixed, so there is a structural change in our expectations within the NI business.

Operator

Did you have a quick follow-up, Sami?

Speaker 12

Yes. Maybe regarding the new IPR deals that were recorded in Q2, how come this didn't sort of what's

Speaker 4

the impact the IPR run rate?

Speaker 2

Yes. Thank you, Sami. We signed a number of deals during the quarter and different deals has a different starting point as well. And that's why we are now saying that the annual run rate would be $1,100,000,000 considering the deals that we have signed during the quarter instead of the $1,000,000,000 that we had in the end of quarter 1, And that's how we of course, this is not considering additional deals that we haven't signed yet.

Speaker 12

That's okay. I'm just maybe wondering this €80,000,000 catch up payment that did that actually result in higher IPR run rate During the Q2 relative to what you had in Q1.

Speaker 2

Yes. This is a catch up. So this is referring to previous periods or other sales, so that's why we are saying that it's the deals that we signed in the quarter that is affecting

Speaker 1

the $1,100,000,000 run rate that we have now starting from January because of the different timings. So Sami, the €80,000,000 It's excluded from the run rate. That is the point here.

Speaker 12

Yes, yes. I understand that. But I meant that did you have somewhat higher run rate in Q2 than in Q1.

Speaker 2

Yes. Based on the new deals that we signed in quarter 2, the new run rate from 1st January next year would imply that the new run rate is SEK 1,100,000,000. And as I said, we have different starting points and different agreements, and that's why we are referring to 1st January. Of course, our ambition is higher than 1.1, and that's why we are saying that this is subject to any other material developments, Such as closing some of the outstanding litigation and renewal discussions that we have. Okay.

Speaker 4

Thank you.

Operator

Thank you, Sami, and thank you, everyone, for joining the call today and for Peck and Marco for your time. Ladies and gentlemen, this does conclude today's call. I would like to remind you that during the call today, we have made a number of forward looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors.

Operator

We have identified such risks in the Risk Factors section of our Annual Report on Forms 20 F, which is available on our Investor Relations website. Thank you all for joining us today.

Speaker 1

Thank you. Thank

Operator

you.

Powered by Quartr
Earnings Conference Call
Nokia Oyj Q2 2023
00:00 / 00:00