Nokia - Earnings Call - Q1 2025

Transcript

David Mulholland (Head of Investor Relations)

Good morning, ladies and gentlemen. Welcome to Nokia's first quarter 2025 results call. I'm David Mulholland, Head of Nokia Investor Relations, and today with me is Justin Hotard, our President and CEO, along with Marco Wirén, our CFO. Before we get started, a quick disclaimer: during this call, we will be making forward-looking statements regarding our future business, transactions, 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. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the risk factor 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 be mostly on a constant currency and portfolio basis, and this is basically to take into account both acquisitions that we've done and looked at on a like-for-like basis if they've been present in both periods, along with any disposals. Where we refer to margins, it 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. The report includes both reported and comparable financial results and a reconciliation between the two. In terms of the agenda for today's call, Justin will go through some of the key messages from the quarter, and then Marco will go through the financial performance before we move to Q&A. With that, let me hand over to Justin.

Justin Hotard (President and CEO)

Thank you, David. Let me also welcome you to our conference call today. I'm honored to have been given the opportunity to lead Nokia. Nokia is a true global leader in connectivity with a strong heritage in technology. While I will share my initial observations with you today, please bear in mind it has only been three weeks since I started. I look forward to sharing more with you in the coming months and ultimately presenting our complete value creation vision for Nokia at a Capital Markets Day that we will hold in November. I also look forward to meeting with many of our shareholders and analysts in the coming months as I ramp up. I've already had some great engagements with some of our customers, employees, and other key stakeholders.

I'm impressed by our core technology base and the strength of our portfolio, including in RAN and Core, as well as across IP Optical and Fiber networking technologies. We have a very strong base of products and services, and I think that is well recognized by our customers. It is also clear from my initial customer conversations that we are a critical trusted partner for their mobile and fixed infrastructure. In addition, we have significant potential to expand our presence in hyperscale, enterprise, and defense markets. In the time I've spent with our employees, I've been impressed with their innovative spirit, energy, and drive to unlock Nokia's full potential. Going forward, I will be focusing on our approach to capital allocation. I will ensure that we continue to both drive for efficiency and invest sufficiently in the right growth segments to deliver long-term value.

I see opportunities across our portfolio to accelerate the transformation that is already underway. Turning to our Q1 financial performance, we continued to see encouraging signs of market recovery with solid order growth across the businesses. In the first quarter, our net sales declined 3% year over year. However, when you adjust for the over EUR 400 million of catch-up net sales in Nokia Technologies, net sales grew 7%. Specifically, we grew 11% in Network Infrastructure with all units growing and particularly had strong growth in Optical Networks at 15%. Cloud and Network Services grew 8% with strong demand for 5G Core and had significant wins at AT&T, Boost Mobile, Ooredoo Qatar, and Telefónica. Mobile Networks continued to see sales stabilize, growing 2% in the quarter. I'm pleased to share that today we've also announced an extension of our RAN agreement with T-Mobile US.

Our profitability in the quarter was impacted by the catch-up net sales in Nokia Technologies in the prior year, along with a one-time contract settlement in Mobile Networks of EUR 120 million. Operating margin in Network Infrastructure expanded 190 basis points, and Cloud and Network Services expanded 930 basis points. Our free cash flow performance in the quarter was also strong at over EUR 700 million, resulting in a net cash position of EUR 3 billion at the end of the quarter. Let me now touch on the current environment. While we are not immune to the evolving global trade landscape, my initial customer feedback indicates that our markets should prove to be relatively resilient. Considering this, we continue to expect strong growth in Network Infrastructure, growth in Cloud and Network Services, and largely stable net sales in Mobile Networks. We are actively monitoring the situation and staying closely engaged with our customers.

With the visibility we have today, we expect tariffs could have a EUR 20 million-EUR 30 million impact to our operating profit in Q2. Our supply chain teams are proactively working to further mitigate the exposure, leveraging our global manufacturing network. Therefore, our guidance remains unchanged. It should be noted, however, that considering the unexpected charge that impacted Mobile Networks in the quarter, achieving the top end of the operating profit range will now be more challenging. For clarity, considering the volatility of the situation, we have not taken an assumption related to tariffs in our second half of 2025, and the integration of Infinera does not meaningfully impact the range. The final topic I want to touch on this morning is the Infinera acquisition. Based on my initial assessment, I'm convinced of its value creation potential and confident we will achieve the expected synergies.

As a quick reminder, this acquisition brings a number of significant benefits. It gives us the scale to accelerate our product roadmaps and to drive more innovation. It also increases our access to hyperscale customers, which are a key growth driver in both cloud and AI data center investments. Finally, it's a complementary acquisition in terms of the customer, geographic, and technology profile. The Q1 performance illustrated a number of these points clearly, with strong momentum in the business. Optical Networks grew 15% in the quarter, as I mentioned, and with a book-to-bill above one. As a part of the integration, we've already made many portfolio decisions and communicated them to customers. Their feedback continues to be positive, and we are on track to achieve the synergy targets. While this progress is encouraging, there is still a lot of work ahead of us.

With that, let me hand over to Marco to go through the financials in more detail.

Marco Wirén (CFO)

Thanks, Justin, and hello from my side as well. I will start by discussing our overall group performance. Q1 net sales declined 3% on a constant currency and portfolio basis. As Justin explained, we saw strong growth in both Network Infrastructure and Cloud and Network Services, while mobile networks also grew somewhat. These were offset by a challenging comparison in Nokia Technologies, as the year-ago quarter benefited from over EUR 400 million of catch-up net sales related to licensing deals signed in the quarter. Our gross margin decreased by 820 basis points to 42.3%, and this was mainly a result of the lower Nokia Technologies net sales, and it was also impacted by the one-off settlement charge in mobile networks. This, in addition to higher OPEX and a currency-related loss in Nokia Venture Funds, led to a 3.6% operating margin in Q1.

Pleasingly, we generated over EUR 700 million of free cash flow in the quarter and ended the quarter with EUR 3 billion of net cash, which I will go into more detail on shortly. Now, turning to financial performance per business group, first, Network Infrastructure. They delivered a strong 11% growth. This reflected growth across each of the business units, as Optical Networks had a particularly strong quarter, growing Fixed Networks and IP Networks grew 9% and 7%, respectively. Gross margin was relatively stable, while operating margin expanded 190 basis points year on year to 7.8%. This was mainly the result of the higher net sales offsetting increased investments into growth opportunities. The stabilization in Mobile Networks continued in Q1, with the net sales growing 2%. The net sales in North America grew at a double-digit pace, as there were low levels of investment activity in the year-ago quarter.

India also returned to growth within the APEC region, while EMEA sales declined. Gross margin declined 10 percentage points to 30.9%, reflecting the one-off contract settlement, which had a net impact of EUR 120 million. If you exclude this, mobile networks' gross margin would have been more aligned with the normalized gross margin range of 38-39% we had seen during 2024. Operating margin was negative 8.8%, mainly the result of the low gross margin. Turning to Cloud and Network Services, the net sales grew by 8% in the quarter, reflecting continued momentum in core networks and mainly in 5G Core. From a regional perspective, CNS saw broad-based growth with strength in India. The higher level of net sales drove strong expansion in both gross and operating margin, giving the business a strong start to the year.

Turning now to Nokia Technologies, net sales declined 52%, but this was entirely due to a challenging comparison in the year-ago quarter, which benefited from over EUR 400 million of catch-up net sales. This was somewhat offset by the deals signed over the past 12 months and catch-up net sales booked in the quarter related to agreements signed in Q1. Nokia Technologies continued to execute and sign a deal with Amazon in addition to other smaller deals. The annual net sales run rate has now increased to approximately EUR 1.4 billion, despite a headwind from recent currency movements. Let's now look at the net sales per region and a few things to point out here.

First, you can see that North America was once again one of the biggest contributors to the net sales growth, and we saw strong growth across each of the network's business groups, with particular strength in Network Infrastructure and Mobile Networks. India returned to growth mainly through Mobile Network Infrastructure and especially Fixed Networks, where we benefited from a strong Fixed Wireless Access demand. India also grew in Mobile Networks and Cloud and Network Services. Europe saw a sizable decline, but this was mostly driven by Nokia Technologies, as all its net sales are booked in this region. Excluding this, net sales in Europe would have declined 7%. A couple of words about our cash performance.

In quarter one, we generated over EUR 700 million in free cash flow, and as we saw sizable inflows related net working capital, and this came mainly from the seasonal decline in receivables we typically see in Q1. We ended the quarter with EUR 3 billion in net cash. As you can see on the slide, the decline in net cash mainly reflected the acquisition of Infinera with cash outflows in the quarter, and this consisted of cash proceeds related to Infinera Equity, the convertibles, as well as the share buybacks we did to offset the dilution from the Nokia shares issued as part of the deal. As a reminder, when modeling Q2 cash, this is when you see the outflows related to our 2024 performance-related employee variable pay.

Finally, moving to our 2025 outlook, which remains unchanged, we continue to expect our 2025 comparable operating profit to be in the range of EUR 1.9 billion-EUR 2.4 billion. However, given the unexpected charge that impacted Mobile Networks, it will be more challenging to achieve the top end of this range. We continue to expect free cash flow conversion to be 50%-80% of comparable operating profit. With that, let me hand it over to David for Q&A.

David Mulholland (Head of Investor Relations)

Thank you, Justin and Marco, for your comments. As usual for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up? Sasha, could you please give the instructions?

Operator (participant)

We now begin the question and answer session. If you're also viewing the webcast, please remember to mute the audio on your computer before asking your question, as there is a 30-second delay. To ask a question, you may press star and one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and two. I will hand back the call to Mr. David Mulholland.

David Mulholland (Head of Investor Relations)

Thanks, Sasha. We'll take the first question from Alexander Duval from Goldman Sachs. Alex, please go ahead.

Alexander Duval (Head of Europe Technology Hardware and Semiconductors Equity Research)

Yes, many thanks for the question. You mentioned the T-Mobile US contract extension. I wondered if you could give some color on duration and how important this is and what it implies for Nokia product positioning. Perhaps as a quick follow-up, you highlighted a growing backlog in the Network Infrastructure segment, clearly against uncertain macro. It would be helpful to get a sense of what the key factors have been in this regard and how you see this going forward.

Justin Hotard (President and CEO)

Yeah, absolutely, Alex. A couple of things. I'll start with T-Mobile. First of all, we have a broad and deep partnership across the group company with T-Mobile in the US. While we aren't sharing a lot of details on the contract, what we can share is it's a significant multi-year extension in our RAN contract. We think that this is a great opportunity for us to shape the next chapter of mobile connectivity in the US with T-Mobile, who's clearly an innovative leader in this space. We're optimistic that this will continue to drive growth for us with T-Mobile. Regarding Network Infrastructure, your second question, I think this is obviously very consistent with the rationale that we've shared on the Infinera acquisition and the comments that I made.

This is about giving us incremental access in the U.S., which is a high-growth geography, and of course, with hyperscale customers who are driving much of the AI and data center build. The way I think about the market in AI, particularly with optical, is if you look at the build-out of data center, what's happening with AI is it's driving, as we all know, significant new data center build, but it's also driving new connectivity demands between data centers, both whether it's for training or inference or some of the convergence we're seeing with AI reasoning models. This is a favorable trend for us. It's also notable that we're starting to see optical come into the data center, and you're seeing that as you listen and look to some of the industry spend.

The other key thing I'll highlight is when you think networking as a whole, and now I'm talking about our optical and IP Networks business, if you think networking and AI, it's actually the second largest bucket of technology spend behind GPUs. This probably doesn't get emphasized enough, but from our perspective, this is why we felt that Infinera was so strategic. The net of all of that is if you look at our growth in the quarter, what was as encouraging was the point that I touched on, that our book-to-bill was above one, both for NI as a whole and for Optical Networks.

David Mulholland (Head of Investor Relations)

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

Daniel Djurberg (Senior Equity Analyst)

Thank you very much, and good morning, gentlemen, and welcome aboard, Justin. A question first, a detail on Infinera: it was reported from the 28th of February to the 31st of March, and it did a loss of EUR 31 million. That surprised me a bit, at least, given that I thought March was holding on to roughly 60% of revenues in the quarter and should be supported to margins. My question is, did you do any kitchen sinking in this EUR 31 million loss, or should we have this level in our estimates going forward, or higher or even lower, I should say?

Marco Wirén (CFO)

Yeah, thank you, Daniel. This is Marco. I will take this one. As we have now, trying to give you as good a picture of the run rate basis, and that's why we have basically given these Infinera figures in our report also in a pro forma basis, so you can compare how would that look like if we would have had that already from the 1st of January 2024 in all comparisons as well. That loss that you're referring to is Q1. We closed the deal on the 28th of February, so we actually booked only March month in our books. In March, actually, they had positive results. I would say that if you look at how Infinera was performing in 2024, including the stock-based compensation in their operating profit level, then actually you see that they were loss-making last year.

This was something that we explained as well when we acquired, that there's a scale issue with Infinera and together with Nokia and our optical, we get a totally different scale. That is why we are quite confident about the synergies of EUR 200 million that we have explained as well that we will target to receive here in three years' time. We believe that we will definitely see acceleration in 2025 as well in Infinera's performance and our optical. As we mentioned also, Infinera itself is not the needle-mover for our operating profit in 2025.

David Mulholland (Head of Investor Relations)

Thank you, Daniel. Did you have a quick follow-up?

Daniel Djurberg (Senior Equity Analyst)

The mobile networks on the... Can you hear me?

Yep.

David Mulholland (Head of Investor Relations)

Yes, go ahead.

Daniel Djurberg (Senior Equity Analyst)

Perfect. Yeah, a short follow-up on Mobile Networks. Can you give some light on the quite dramatic one-time contract settlement of EUR 120 million in the quarter? Should we correlate this with the news of T-Mobile US extension? Also, can this happen again? How worried should we be as shareholders here?

Justin Hotard (President and CEO)

Yeah, thank you, Daniel. It's nice to meet you as well. Let me unpack this a little bit. First of all, we're not disclosing the customer related to this. This was a customer-specific project that was from 2019. I think, as probably you're aware, we've had a significant amount of work and a significant amount of investment we've made to stabilize and bring back the competitiveness of our portfolio really over the last four to five years. This actually goes back and predates that. The surprise here was that as this has been going on and we've been working on remediating this issue, the discussions were ongoing, but we did not have full visibility to the total cost. This was a gap in terms of our assessment of the cost.

As we spent time with the customer, the cost became clear to remediate the issue. Therefore, we made the decision to take a charge. In fact, this was something, as I looked at it, I felt it was important to do a couple of things. One was take a charge that fully addresses the situation, as importantly, if not more importantly. Number two was make sure we're doing what the customer needs so that with this specific project, we're addressing their needs fully to their satisfaction given the issue. Number three, obviously, put this into our comparable operating profit because it's not a... while it's a one-time issue, it's not something that's non-operating. That was important for me in terms of the principles. In addition, I'll make a couple of other comments. Again, this was a customer-specific project.

We don't see risk with other customers. Obviously, as I've come in and I made this decision, one of the key questions I have for the MN team is making sure we have learnings from this and we improve visibility. At this time, we don't foresee any other issues like this. Of course, this goes back to a project that, again, was during a time where we know we had some portfolio issues that we've subsequently addressed. I'm confident that this is a one-time issue specific to this project. However, obviously, there are things that I will be looking at for how we continue to improve our operational visibility as I come in and continue to spend time with the team. Thanks, Daniel. We'll take our next question from Richard Kramer from Arete. Richard, please go ahead.

Richard Kramer (Senior Analyst)

Thanks very much. Justin, we heard for many years from Basil and then Pekka and others about long-promised hyperscaler deals. What do you, from your perspective, think is required to win these large AI sort of data center deals? Is it money in terms of incremental R&D and product investment? Is it time to test new products like your switching products? What's the unlock for those deals? Thanks.

Justin Hotard (President and CEO)

Thank you, Richard. First of all, I think there's a couple of things. One is our portfolio, particularly in IP Networks and to a large extent Optical Networks, has really been oriented towards the telecommunication service providers. I think there's a couple of things that have happened. Certainly, if you look at it versus, let's say, legacy enterprise IP networks. One is the scale and the bandwidth that customers are demanding in hyperscale, largely driven not only by AI, but also by cloud, has started to come into a more consistent technology stack with our traditional telecommunications solutions. The second thing there is the reliability and the performance, which is just much higher. I think the cloud and AI build with our hyperscale customers, they're now expecting and demanding the same kinds of capabilities. I think this has opened up opportunities that make us more relevant.

I think further, candidly, is we're now investing much more aggressively in this opportunity, and that's witnessed by the Infinera acquisition and optical. I do think in your question, you touched on something that's insightful and important, which is the cycle with these customers is different. It's a different cycle. It requires some collaboration and co-development upfront, and it takes time to see the revenue come in and grow. While this is a more transactional business on specific orders, getting designed in, getting support takes time. I think that's obviously going back to Infinera. That's one of the things that was attractive about Infinera was their work and their development of some of these customers and the investments they made on the optical side. I do think there's a lot of learnings and leverage there as we look at the IP Networks.

David Mulholland (Head of Investor Relations)

Did you have a quick follow-up, Richard?

Richard Kramer (Senior Analyst)

Marco, with the Amazon licensing deal as a positive example, will Nokia be increasing the long-standing sort of EUR 100 million of non-smartphone IP sales guidance in technologies? Thanks.

Marco Wirén (CFO)

Yeah, thank you. I think in December 2023, we mentioned that we had about EUR 150 million level of non-smartphone licensing deals. We have not updated that figure since then, but most likely at the capital markets day later this year, we will give you more flavor on that as well. We are quite happy to see how these other segments have been increasing and developing. This latest deal is one of those proof points as well. We are quite happy.

David Mulholland (Head of Investor Relations)

Thanks, Richard. We'll take our next question from Ulrik Roth from Bernstein. Ulrik, please go ahead.

Yeah, thank you. I wanted to ask on a sort of bit of color on the EUR 20 million-EUR 30 million tariff impact. What are the underlying assumptions? What are the puts and takes? Can you flex or reassign the capacity you have in the Infinera facilities? What is the demand situation for the relatively limited contract manufacturing base that is actually located within the U.S.? I mean, I suppose everyone who's doing similar things is currently sort of trying to talk to those people. Could you just unravel that a little bit in terms of where the limits are and what you're doing, what you can do, and really what you have assumed there with the EUR 20 million-EUR 30 million?

Justin Hotard (President and CEO)

Yeah, absolutely. I think let me just maybe touch on a couple of things to make sure we're breaking out our assumptions. Our focus in the EUR 20 million-EUR 30 million is really around the cost impact. We've not assumed anything in pricing in this assessment. It is just on our own cost. That is the first point. The second point is this is based on what we've seen today or what our current perspective is on the situation. That is why we're so focused on Q2, because obviously, this is a very dynamic situation. My message to the team and Marco's as well is let's make sure we focus on what we can control. We are really looking at the impact based on a short-term impact given the supply chain and the manufacturing network we have.

Obviously, we're looking at things we can do to mitigate it both in the short term and strategically. One thing I will just also note is we actually have five manufacturing facilities in the U.S. today, two that are coming with Infinera with the acquisition and three others pre-existing. The key thing for us is making sure we're mitigating the impact short term so we can provide supply continuity to our customers. One of the reasons we've not provided visibility in the second half is given the dynamic situation, we're unclear on exactly what the situation will be going into the second half. There's a set of mitigation that we're evaluating and pursuing that's beyond just the second quarter. We're evaluating longer-term strategic options as well. Though I will tell you, I was planning on that anyway as we think about our...

I think about some of the options for the business as I come in and assess the business. That's something I would look at naturally. Did you have a quick follow-up, Ulrik?

Yeah, that's very helpful. My follow-up would be on the divisional guidance, not guidance, how would you call it, divisional indications that you gave with the fourth quarter. I know you haven't repeated them. Does that mean you have changed your views on the divisions at this point already, or is this still in place, or can you give us additional color on these divisional items that you talked about at the fourth quarter? Thank you.

Yeah, thank you. We continue to reiterate what we said in the fourth quarter as well, that we believe that in Network Infrastructure, we see strong growth in 2025. Of course, we are investing also additional EUR 100 million for the IP side to capture those opportunities in hyperscale and data center segments. What comes to mobile networks, we see a stable development, even if we had this headwind in AT&T, as you remember. On Cloud and Network Services, we see a good growth momentum, specifically on the core side. What comes to Nokia Technologies, we are giving approximately EUR 1.1 billion operating profit assumption.

David Mulholland (Head of Investor Relations)

Thanks, Ulrik. We will take our next question from Simon Leopold from Raymond James. Simon, please go ahead.

Simon Leopold (Managing Director)

Thank you very much, David. Justin, welcome to Nokia. Justin, I wanted to see what you thought would be maybe any contrast between your views and your predecessor's views. I guess within this context, what surprised you most since joining Nokia? I have a quick follow-up.

Justin Hotard (President and CEO)

Thanks, Simon. Good to speak with you again. I think a couple of things. I touched on some of these observations in my commentary, but I was pleasantly surprised by the technology base. We have talked a lot about the product technology, the product portfolio that we have. I also was able to spend a day at Nokia Bell Labs during the centennial celebration and tour some of the labs. I was actually very impressed with some of the longer-term technology that we have under research there as well and the potential for that. Just seeing this across, obviously, a few different companies and knowing the broader landscape like I do, I was pleasantly surprised with the progress that we have made around commercialization. I think that goes back to some of the principles of Nokia Bell Labs and their heritage.

The other thing is I've been very impressed with the employee base. I touched on this in my comments, but maybe just to underscore it, I think the passion that the employees have, the team's mindset around really taking advantage of some of these opportunities, and the openness and learning mindset they have around continuing to evolve the business. I think for me, that's probably key things I'd say in terms of highlights. As I think about, and again, I touched a little bit on some comments, but maybe just to underscore it a little bit, Simon, as I think about opportunities, for me, there's always been two focuses. If you certainly go back to some of the companies I've worked for before, one of the things is around driving efficiencies. Driving efficiencies in areas that are not core to our growth.

The areas that are core to our growth are going to be R&D investment and go-to-market investment, whether it's organic, which is obviously always the preference, or inorganic, where we have opportunities to make smart acquisitions that we can synergize both in terms of cost structure and revenue. I think the other thing I look at quite a bit is where are the opportunities for us to drive meaningful scale value in the company. This is a $20 billion company. Therefore, as we look at growth segments and we look at investments we need to make, I'm going to look at things that really move the needle and drive material growth. Obviously, with the profit profile we have, and if you look at our current guidance, we need things over time.

They're going to be additive to the overall profit such that drive meaningful cash flow for the business. Those two things are really where I think, as I come in, I think that's where you're going to probably see a little bit of focus for me is making sure we have the discipline to say, "Hey, this may be an exciting opportunity, but it's not going to be material enough to impact our business. These may be things that we could actually spend a little bit more on." I think that's another thing that we see quite a bit with technology companies that win. They spend enough to win. Are there places where we can spend more in these areas to really differentiate ourselves or get an advantage vis-à-vis our competitors and provide value to our customers that's unique? On your follow-up, Simon?

Simon Leopold (Managing Director)

Yeah. I wanted to see if we could double-click on the traction with the hyperscale cloud customers. Since you include that within your enterprise numbers, I believe that with the Infinera acquisition, it would roughly double the past run rate. So I want to check on where you stand in this business and the trajectory. Particularly interested in whether you're gaining traction in switching use cases yet or the timing of that particular traction. Thank you.

Justin Hotard (President and CEO)

Yeah. I think a couple of things I'll just touch on, Simon. I think, first of all, obviously, we reported in an enterprise bucket. It's very clear to me coming in that hyperscale enterprise are two different markets, right? Just to make sure that I'm articulating that clearly to you, hyperscale for me is a hyperscale and AI data center in particular are a key focus for us. Obviously, when you talk about some of the growth that we had, we talked about it quite a bit in the context of the networking business and our portfolio that we acquired through Infinera. I think these are clearly where we're seeing the most growth today. I do believe there is opportunity and some early activity in IP networks.

As I touched on earlier in an answer to the earlier question, I do think there's a bit of a longer cycle that we need to expect in terms of IP Networks and seeing that revenue grow vis-à-vis the customers in this space. Those investments have happened already in Optical, and particularly with some of the things that attracted us to Infinera. The one other comment I'll make is in the fourth quarter earnings call, Pekka and Marco talked about the investment of EUR 100 million per year to drive an incremental billion in sales in 2028, specifically around networking opportunity. I think as I look at the portfolio, one of my questions, obviously, is how big is that opportunity for us? How much more can we do there? Candidly, do we have the right technology stack to maximize value to customers?

I think there's positive indications, but obviously, I'll be looking at what we may need to evolve or do incrementally to accelerate that growth.

David Mulholland (Head of Investor Relations)

Thanks, Simon. We'll take our next question from Artem Beletski from SEB. Artem, please go ahead.

Artem Beletski (Head of Equity Research)

Yes, hi. Thank you for taking my questions. I would like to ask about NI and outlook for this year. You are still anticipating strong growth this year. Could you maybe provide some further color? How do you see the progress by subdivisions? What we have seen in Q1 is really Optical Networks showing the best growth on an organic basis. How do you view the year for different areas here?

Justin Hotard (President and CEO)

Yeah, maybe I'll start and let Marco add some comments. I think from my perspective, I think if you look at the businesses, and I've been talking around this to just make it very explicit in the different questions, I think we see the biggest opportunity for growth this year in optical. I believe IP Networks is the next largest opportunity for us. I think for IP, I'm as focused on seeing traction and momentum with hyperscalers in terms of orders as well as revenue in the year. I do think it's the next Fixed Networks is a more predictable, stable growing business, right? We are continuing to see demand for fiber. We talked a little bit about Fixed Wireless Access as well as something that contributed to our growth in the first quarter.

This is an area where I think we also need to realize that that business is not growing at the pace of optical or IP given from an end market perspective. And so from a TAM, as we think about TAM and how we're addressing it, I think it's optical Fixed Networks. marco, anything you would add to?

Marco Wirén (CFO)

Yeah, I think just to build on what you said when it comes to optical and Infinera, we were quite pleased to see as well that in quarter one, optical order intake Infinera side was very good and very strong from the hyperscaler side, actually better than what we expected as well. When it comes Fixed Networks this year, we will definitely see India coming back again. You saw already in quarter one that fixed wireless growth of 9% was partly driven by fixed wireless access in India. We will see that will continue as well. Of course, we continue to pursue those hyperscaler and CSP opportunities in IP side as we go and invest more specifically on the IP data center side.

David Mulholland (Head of Investor Relations)

Did you have a quick follow-up, Artem?

Artem Beletski (Head of Equity Research)

Yes, I had. It was a quick follow-up, essentially relating to mobile networks. One metric you have been providing more recently is net footprint gains. I think the latest commentary at Mobile World Congress was plus 30,000 compared to the situation at the year end of 2023. Are you willing to provide some update on this front, especially given T-Mobile renewal?

Marco Wirén (CFO)

Yeah, thank you. What we have now said is that what we see for this year growth-wise, and we said that Mobile Networks is stabilizing. Otherwise, we have not given any more indication on Mobile Networks. We will have a Capital Markets Day later this year, and we will give you more understanding of the Mobile Networks business as a whole. I hope that you will get more food for thought from that event as well.

David Mulholland (Head of Investor Relations)

Thanks, Artem. We'll take the next question.

Artem Beletski (Head of Equity Research)

Thank you.

David Mulholland (Head of Investor Relations)

We'll take the next question from Sami Sarkamies from Danske Bank. Sami, please go ahead.

Sami Sakarmies (Head of Equity Research)

Hi. I would like to get a bit more color on enterprise sales, which were the bright spot in the report with 27% organic growth. Can you be a bit more specific on what drove the growth in terms of product areas or regions? Do you expect to maintain this momentum in the coming quarters as well?

Justin Hotard (President and CEO)

Yeah, Sami. Enterprise sales, as I just touched on in a previous question, in our definition has included hyperscale, which is really what the growth driver was. This was really driven by optical and more acutely by Infinera, right? This is right back to the core thesis of what we talked about. The other point geographically is that this was largely in the U.S. As you think about this, a lot of the growth and really validating your early thesis on Infinera came in that segment. Did you have a quick follow-up, Sami?

Sami Sakarmies (Head of Equity Research)

Yeah, maybe related to the Amazon video IPR licensing deal. Can you explain why it didn't contain any catch-up elements, even though they've been violating Nokia IPR for a number of years? Is the implication that we will not be seeing those in the future deals either?

Alexander Duval (Head of Europe Technology Hardware and Semiconductors Equity Research)

Yeah. As you know, Sami, usually these deals are confidential when it comes to terms and conditions. We cannot go into details of those. We can just say that we are happy to see that we amicably signed the deal. This also ended all litigation issues that we had with Amazon. We said that in quarter one, we had some catch-up payments related to this agreement, but we cannot give any more details on that. Justin, do you want to add anything?

Justin Hotard (President and CEO)

Yeah, just two things. I think one is we're pleased overall with Tech's net sales run rate. Nokia Technologies has now increased to EUR 1.4 billion in terms of a net sales run rate. This is in line with our EUR 1.4 billion-EUR 1.5 billion guide. I think that's a good thing. Just back to Amazon. This is a very important customer, very important hyperscale customer for us across certainly our NI business as well. They're also an important partner for us in terms of our Cloud and Network Services business as well as a public cloud where we're running certain platforms and services, and there's been announcements around that publicly. I think for me, I really look at this as sort of a 360 relationship. Obviously, this is one element.

It is important to recognize that there is other value in the partnership beyond just a tech licensing agreement. Thanks, Sami.

David Mulholland (Head of Investor Relations)

We will take our next question from François Bouvignies from UBS. François, please go ahead.

François Bouvignies (Equity Research and Executive Director)

Thank you very much. My first question would be on a very high level. I mean, Justin, you talk about capital allocation as your main priority and focusing on growth. Now, Nokia, before you joined, was already focusing a lot on Network Infrastructure. Obviously, what you reported today is still a fairly growth sector. On top of that, you have your background coming from these hyperscalers' side of things, so mostly Network Infrastructure. How does it fit your capital allocation priority with your mobile network assets in a way that you focus on growth, but it's an excursive market effectively when you look at the RAN forecast? It seemed difficult to get a lot of growth out of this market, but maybe I'm wrong. Maybe you can highlight some you can get. How important mobile network is for you in your capital allocation strategy?

In a broader question, is it something in your discussion with you of the business? Mobile Networks is also part of your discussion. How important is it for Nokia for the group?

David Mulholland (Head of Investor Relations)

Thank you, François. A couple of comments. I think there were a couple of questions embedded in there, so I'm going to answer sort of two questions if I can. One is on capital allocation. I think, first of all, this is one of the most important parts of a CEO's role is capital allocation. When I think about capital allocation, I think about it in terms of how we allocate capital for R&D, capital for go-to-market, and also our intellectual capital. I think that's just as important, right, as how we apply our talent and cultivate and develop our talent. My focus is always going to be around investing resources that maximize value. There's always going to be different stages in businesses where R&D intensity is higher versus lower and the cycles that we go through.

Justin Hotard (President and CEO)

I think if you look at our businesses, and this is where I'll get to the answer to your question on MN, I think in my early observations on the businesses, these are very different businesses. The way I think about it is if you look at NI, NI is a business that is on a pretty aggressive cycle of investment right now because of the AI and hyperscale build. Also, if you look at the product cycles traditionally networking and optical, they've moved at a faster pace. There is a lot of work we can do through solutions and through continued R&D and then close collaboration with our customers around that investment, particularly, I believe, in hyperscale. There is more opportunity to do some of that and around AI cloud.

If I look at MN, and I think it's also important, if you look at MN, the way I'm starting to think about the business is I think MN is a RAN is one part of the business. What makes us unique is that we are really one of two European players and two Western players that have a full portfolio in this space. We have a robust RAN portfolio. We have a robust core portfolio, which is a critical part of the mobile networks solution for our customers. We have a robust IP portfolio in this space as well. When I look at that holistically, and that's the way I would think about it, I think there are significant areas for us to drive value capture.

I'm very encouraged by the growth we're seeing in core and the work that the Cloud and Network Services team is doing. When I look at the RAN business, I think the other thing I've observed is this is obviously a heavily project-based business because of the way these deals are sold and committed and then deployed. It is also a scale business. That scale business on the RAN side is a little bit different than what we see on NI. I have some early thoughts. I'm sharing a little bit with you transparently in terms of how I'm thinking about the businesses.

As I spend more time with our customers, obviously with our employees, digging in more deeply into the technology stack, spending time obviously with our shareholders, I'll continue to refine my view of where do I think the optimal value capture opportunities are. It's probably important to note as well, I didn't touch on it, but we've talked about some interesting emerging opportunities in enterprise and defense around RAN. I am encouraged by what I think will be some favorable trends in RAN around defense, as I'm encouraged long-term that AI will drive new investment, new services, new value opportunities in the broader RAN marketplace, so both for defense and I think through traditional telecommunication services. As you think about things in AI like augmented reality, virtual reality, autonomous vehicles, robotics, all of them are going to need wireless communications.

That wireless communications will need to be performant. It will need to be reliable. It will need to be secure. Those are things that are going to require investment. I think while the business cycles are a little bit different, I do think there's a lot of value to be captured over time in the mobile networks business.

Thanks, François. Did you have a quick follow-up? All right. I think we'll move to our next question from Felix Henriksson from Nordea. Felix, please go ahead.

Felix Henriksen (Analyst)

Hi. Thanks for taking my questions. I wanted to ask if you witnessed any sort of a demand pull forward in MN or NI from your US customers during the first quarter in anticipation to the tariffs?

Justin Hotard (President and CEO)

Yeah. I think, Felix, we did not see anything that we would classify as a material impact in Q1. Obviously, we're spending a lot of time in looking at this for Q2. Today, we don't see a material shift in demand in Q2, but this is something, as I mentioned in my comments, we're spending time with our customers, both at my level and obviously our broader team's levels to understand and assess and be very responsive around that need. That is something that we're also considering in terms of leveraging our global manufacturing network. Did you have a quick follow-up, Felix?

Felix Henriksen (Analyst)

Yeah. Yeah, quick follow-up relating to hyperscaler spend. Obviously, you called out strong growth in that part of the business within enterprise. I wanted to ask, in light of this sort of talk about some of the hyperscalers such as Microsoft and Amazon freezing data center leasing talks, if you'd observed any sort of hesitancy in customer spend in this segment in your sales pipeline. Thank you.

Justin Hotard (President and CEO)

Yeah. I think as we talked about, we're pleased with both the revenue performance in optical, which is where we have the highest exposure to hyperscale today, and the order growth, which had a book-to-bill above one. Strong growth with strong order growth. A couple of comments I'll make on this is I think, first of all, and for those of you that know the hyperscale market, you know this. Pausing leasing talks doesn't necessarily indicate a change to their CapEx plans because hyperscalers have multiple investment options with data centers, which include through colocation facilities as well as their own builds. The other thing I would say is we should probably anticipate, if we go back and look at history, we should probably anticipate some of the similar trends that we saw in cloud in the past playing through in AI.

David Mulholland (Head of Investor Relations)

Specifically, what I mean on that is where we saw massive capital builds, we also saw short-term periods of digestion around technology transitions. Of course, if you think about the GPU market today, we're in a period of technology transition. None of this surprises me. Again, if I look back to our portfolio where we have been getting the most investment and traction with hyperscale customers, I think our order book and our pipeline appear to indicate that there's not a long-term shift to the investment thesis that this market segment has.

Thanks, Felix. We'll take our next question from Rob Sanders from Deutsche Bank. Rob, please go ahead.

Robert Sanders (Head of Tech Hardware Research)

Yeah. Hi. I just have a question about your EMS partners. I'm interested just to sort of understand how quickly they could re-domicile their production from Mexico to Southeast Asia to back to Mexico, maybe into the U.S. if there's enough labor. Assuming that plays out, that tariffs do happen, do you have the ability to pass on higher costs under the contracts you have with your customers? Thank you.

Justin Hotard (President and CEO)

Yeah. What I'll say on this is that, again, this is a dynamic situation. It's something we're monitoring closely. Our focus is on what we can control. Obviously, we're evaluating all mitigation options. The key thing I'll emphasize in our global manufacturing network is I think we've been pretty flexible and pretty agile in this in the past. Certainly, if you look back at the supply chain shortages that happened during COVID and spending time with the team, I think one of the things that was clear was that we had some real strength in those areas. Obviously, this is something we're going to continue to work on. As we see the situation play out, we'll provide updates and clarity on the actions we're taking.

Robert Sanders (Head of Tech Hardware Research)

Got it. Just as a follow-up, could you just update on the BEAD program? Obviously, a lot of spend expected next year. How is it visible? There has been some push-out in the last sort of few quarters. Where are we in terms of seeing the big uptick in orders? Is that in the first half of next year, or is it sooner? Thanks.

Justin Hotard (President and CEO)

Yeah. I think this is something we're obviously following closely. I think we've been clear that it's not something we expected impact from this year. I don't think our view has changed on that. Obviously, we think that fiber will continue to be a compelling technology. We think it'll continue to be a driver. As I mentioned, as I looked at the growth segments within NI, I think fiber continues to probably be the slowest grower of the three just because it's a more stable market. We are anticipating continued growth in the business, albeit not at the, certainly from a TAM perspective, not at the same potential that we see with optical and IP networking.

Thanks, Rob. We'll take our last question today from Jakob Bluestone from BNP Paribas. Jakob, please go ahead.

Jakob Bluestone (Senior Equity Analyst)

Great. Thanks for taking the question. Very quick question, just to clarify a little bit how your contracts work when it comes to tariffs. Is it you that carries the cost of any potential tariffs, or is that automatically passed on to customers? I presume from your guidance it's the former. If you can just clarify who's contractually actually carrying the cost.

Justin Hotard (President and CEO)

Yeah. I think the key thing here is we have contracts across very many different businesses and different contracts in different businesses, as I touched on some of the dynamics between our businesses. Obviously, the businesses have varying exposure to tariffs as well. I think there's probably not one simple answer. Again, as I mentioned, we're looking at every alternative around how we mitigate the impact of tariffs.

Jakob Bluestone (Senior Equity Analyst)

Understood. Thanks, Tasca. Very quick follow-up as well. Just on the TMUS contract, if you can just give any color on when does it kick in, and are there any things that we should be aware of in terms of how it might sort of if it's lower margin, higher margin initially, just so we can think about any modeling around that, just given the size. Thank you.

Justin Hotard (President and CEO)

Yeah. I appreciate that. Obviously, I think we've shared an overview of the T-Mobile deal. It's a significant multi-year extension. For me, it's also a signal of the important partnership that we have with T-Mobile US and their commitment to continuing to being a leader in innovation in the market. There is nothing else we'll say about the details of the contract.

Thanks, Jakob.

David Mulholland (Head of Investor Relations)

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

We have identified such risks in the risk factor section of our annual report on Form 20-F, which is available on our Investor Relations website. Thank you all for joining us today.