Nokia - Earnings Call - Q2 2025

Transcript

David Mulholland (Head of Investor Relations)

Good morning, ladies and gentlemen. Welcome to Nokia's second quarter 2025 results call. I'm David Mulholland, Head of 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 and financial performance. These statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the risk factor section of our annual report on Form 20F, which is available on our Investor Relations website. Within today's presentation, references to growth rates will mostly be on a constant currency and portfolio basis, and other financial items will be based on our comparable reporting.

Please note that our Q2 report and a presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and reconciliation between the two. In terms of the agenda for today, Justin will go through our key messages from the quarter, and then Marco will go through the financial performance, and we'll then move to Q&A. With that, let me hand over to Justin.

Justin Hotard (President and CEO)

Thanks, David, and good morning. During my first quarter as President and CEO, I've spent significant time engaging with our stakeholders, and it has left me with two conclusions. First, I have increased optimism about our future opportunity. It is clear to me that connectivity will be a critical differentiator in the AI super cycle. That is true not only for hyperscalers where it's visible today, but also for communication service providers and increasingly in areas like defense and national security. With our portfolio in mobile and fiber access, transport, and data center networks, Nokia is uniquely positioned to be a leader in this market transition. We are investing to capitalize on this opportunity, and we are already starting to see success today in areas like optical networking.

Second, our customers expect us to engage with them as one integrated company, as the majority of them partner with us across our portfolio. We benefit greatly from the financial accountability our business group structure gives us. However, we also need to evolve how we work so we can move faster, improve productivity, and focus on what brings value to our customers. As a result, we're unifying our corporate functions to simplify how we work and to build a more cohesive culture to help unlock operating leverage. I'm looking forward to discussing our strategy and full value creation story at our Capital Markets Day in New York on November 19th. Turning to our second quarter results, our performance was mixed.

Good growth in both network infrastructure and cloud and network services was offset by a decline in mobile networks, primarily related to the accelerated revenue recognition seen in the prior year quarter. Our profitability was impacted by currency fluctuations, particularly the weaker US dollar, which was both an operational headwind and a headwind in our venture fund. We had a $50 million non-cash negative impact from our venture funds in the quarter, which included a EUR 60 million non-negative impact from currency. Excluding currency, our profitability in the quarter would have been in line with our expectations, and we continued to make investments in longer-term growth opportunities. The second quarter was the first full quarter since we acquired Infinera. The combined optical networks business has been performing well, with a book-to-bill well above one, showing continued strong commercial momentum through our growth.

Though our growth was tempered somewhat by supply constraints, and we're on track to achieve our committed synergies from the acquisition. Looking forward, the demand environment remains broadly consistent with what we said last quarter. Customers are largely continuing with the plans they laid out at the start of the year, and there has not been any major impact from geopolitical uncertainty. As a result, for the full year, we continue to expect strong growth in network infrastructure, growth in cloud and network services, and largely stable net sales in mobile networks. In Nokia Technologies, we still expect EUR 1.1 billion of operating profit. Let me share a few highlights from the quarter across our business groups. In Network Infrastructure, we continue to see a strong demand environment in Optical Networks and a positive reception to the Infinera acquisition from customers.

Two deals I'd like to highlight in Optical are first, an award from a hyper scaler for 800G ZR+ pluggables, and a deal with a large U.S. communication service provider. hyperscalers are one of the biggest drivers of our order intake in the quarter and remain a significant growth opportunity for our Network Infrastructure business. Across the whole of hyperscalers accounted for 5% of net sales in the second quarter. In IP Networks, we continued our leading position in the market, remaining number one in edge routing and number two in total routing. We continue to see a long-term opportunity in AI infrastructure and are investing to accelerate growth. Recently, we've been an active participant in consortiums that are bidding to benefit from the EU's EUR 20 billion program to build AI giga factories in Europe.

In Fixed Networks, we still expect strong growth this year, and the appetite for fiber among tier one CSPs remains strong. The past 12 months have seen us strengthen our market leadership position in the operator premise equipment, OLT, and we are continuing to invest in innovation in passive optical networks. Turning to Mobile Networks, at the start of the quarter, we signed an extension to our RAN agreement with T-Mobile US, which we announced in our Q1 earnings. We also announced 5G deals with Elisa in Finland and Optus in Australia. We continue to see good overall commercial momentum, and the competitiveness of our products is resonating with customers. We are optimistic about the potential 3GPP technology we can bring into the defense sector.

In Q2, we announced a partnership with BlackNet, in which Rheinmetall owns a majority stake, and we now have delivered Banshee radio units to the U.S. Marine Corps through Nokia Federal Solutions. Finally, Cloud and Network Services had a strong quarter with new 5G Core win and deployments including across India, Europe, and the Middle East. We're continuing to progress on our open API journey with 57 partners announced for our Network as Code platform, including Telstra and the Bridge Alliance in Asia. We also announced a partnership with Verizon U.K. to provide private 5G networks across multiple terms report sites. Finally, let me turn to our outlook for the full year 2025. As we announced on Tuesday, we decided to take the prudent approach of lowering our full year outlook from EUR 1.9 billion-EUR 2.4 billion to a new range of EUR 1.6 billion-EUR 2.1 billion.

The change has been driven by two factors that are largely outside of our control. The first impact is currency. When we first issued our guidance for 2025, the euro-dollar rate was 1.04, and it has now moved significantly to 1.17. Altogether, this currency movement is posing a EUR 230 million headwind to our operating profit outlook for 2025. Of which EUR 90 million is related to the non-cash currency impact in our venture fund portfolio. Marco will provide you additional detail on this in his comments. The second is the tariff situation. For the full year 2025, we now expect to see an impact of between EUR 50 million and EUR 80 million tied to fulfillment of pre-existing customer orders. The underlying performance across the business is in line with our expectations at the start of the year.

Therefore, it is these two factors that lead us to change comparable operating profit outlook. Our guidance for free cash flow conversion remains unchanged at 50%-80% of comparable operating profit. With that, let me hand over to Marco.

Marco Wirén (CFO)

Thank you, Justin, and hello from my side as well. I will start by discussing our overall group performance. Quarter two net sales were EUR 4.55 billion, and that's a 1% decline on constant currency and portfolio basis. Our gross margin was stable versus the year-ago quarter at 44.7%. Mobile Networks and Network Infrastructure gross margins were broadly stable, while Cloud and Network Services delivered an improvement of 520 basis points driven by top-line growth. Operating margin declined to 6.6% as a result of the negative currency impact to our venture funds, as well as the impact of tariffs, which were within the EUR 20-30 million range we had expected. Assuming existing tariff rates, we now expect an impact to our full year operating profit of around EUR 50-80 million.

We generated EUR 88 million of free cash flow in the quarter and ended the quarter with EUR 2.9 billion of net cash. Now, turning to our business group performance. Network Infrastructure delivered 8% growth, and each business unit grew, with Fixed Networks having a particularly strong quarter growing 17%. Optical Networks grew 6%, and IP Networks grew 3%. Optical Networks' growth was hampered by some modest supply chain constraints and could have grown over 10%. We expect these issues to improve in the second half. Gross margin was relatively stable despite the 110 basis points impact from tariffs, in line with what we have expected. Operating margin declined slightly by 70 basis points year on year to 5.7%. This was mainly the result of higher operating expenses associated with the Infinera acquisition, as well as increased investments into growth opportunities.

It is worth noting that the ex-Infinera business was diluted to operating margin in the quarter, although the integration process continues, and we are moving quickly to deliver on our committed synergies. Net sales in Mobile Networks declined by 13% in the quarter. As mentioned, much of this decline was because of the EUR 150 million in accelerated revenue recognition from a contract settlement that benefited the year-ago quarter. Regionally, we saw mixed trends in Mobile Networks. The pause in rollouts impacted India; however, we did see some growth in Europe. Mobile Networks' gross margin was 41.1% in the quarter, a 70 basis points decline year over year, as favorable product and regional mix helped offset a difficult comparison related to the settlement that benefited the prior year. These factors led to operating profit and margin declining, despite lower operating expenses.

As we look to quarter three, we expect gross margin to be below the normal run rate level, as we expect an unfavorable product mix shift in the quarter. For the full year, Mobile Networks' gross margin should remain in the normalized 37-38% range when excluding the one-time impact we saw in quarter one. Cloud and Network Services net sales grew by 14% in the quarter, reflecting continued momentum in core networks. From a regional perspective, CNS saw growth driven by North America and Asia-Pacific and Japan. A higher level of net sales drove strong expansion in both gross and operating margin, which improved 520 and 850 basis points respectively. Nokia Technologies' net sales increased by 3% on a constant currency basis. We signed several new agreements as we continue to make progress in our growth areas of automotive, consumer electronics, IoT, and multimedia.

Our net sales run rate remains approximately at EUR 1.4 billion. Now, let's look at the net sales by region. We saw a decline in North America, although this reflects mixed trends. Mobile networks declined because of the settlement in the year-ago quarter, while we saw double-digit growth in both network infrastructure and cloud and network services. Within APAC, India's sales were flat, reflecting a pause in investment in mobile networks, which was offset by growth in fixed networks within network infrastructure, as well as cloud and network services. Greater China continued to decline as expected based on the current market trends. We saw strength in Europe with growth across all businesses. Now, turning to our cash performance, we ended the quarter with a net cash position of EUR 2.9 billion.

You can see on the slide that working capital was well managed in the quarter, as the expected payment of 2024-related incentives was largely offset by a strong collection in receivables. Free cash flow was positive at EUR 88 million, leading to over EUR 800 million of free cash flow in the first half. As Justin noted, we continued to target 50-80% free cash flow conversion from comparable operating profit for the full year. The last topic I want to cover is our currency exposure, as I know there have been some questions following our announcement on Tuesday. First of all, we typically generate about 55% of our net sales and have 50% of our total costs in US dollars, but we report in euros.

We have said in the past that we have a high degree of natural hedging with our operating business protecting our operating margin, but we still have an impact on an absolute basis when you convert USD profit back to euros for reporting purposes. On top of that, we have a hedging program, which helps to shield us on a short-term basis. What happens this year? When we first provided our guidance in January, the EUR/USD rate was at 1.04. Now, the currency rate is around 1.17, and our guidance is assuming it remains there for the rest of the year. That is a significant 13 US cent movement. There has also been significant strengthening in the euro against other currencies, including the Indian rupee.

Assuming currency rates remain at the current level for the rest of the year, the currency movement compared to January is a 6-7% impact to our net sales outlook for the full year. We do have a modest in balance between net sales and total cost in our operations, meaning a strengthening euro has a slight negative impact on our operating margin, which is then largely offset short-term by hedging. When you combine all of these together, we see a EUR 140 million operating headwind compared to our expectations at the start of the year. We hedge on a rolling four-quarter basis, such that the first two quarters' net U.S. operational exposure is quite well hedged, and then the degree of hedging drops in the third and fourth quarter.

This means that at the start of the year, we still had exposure to currency fluctuations for the second half, but at this point of the year, we are now largely operationally hedged. Finally, we have currency exposure from our venture fund investments. A lot of these assets are valued in US dollars. These are illiquid investments that are only revalued when there is a capital event. However, under IFRS, we need to mark to market for currency each quarter. This is creating a EUR 90 million impact currently for the full year. Considering this is both non-cash and non-operational to our core businesses, we do not hedge this.

Through the rest of the year, and including the venture fund impact for modeling purposes, we estimate that every one US cent movement in the EUR/USD rate could have about a EUR 10 million-EUR 15 million impact on our operating profit in 2025.

David Mulholland (Head of Investor Relations)

Thank you, Justin and Marco. Before we turn to the Q&A session, one date for your diary. We recently sent out a save the date confirming that Nokia will hold its Capital Markets Day this year in New York on November 19th. We will be sending out a formal registration shortly, and we hope as many of you as possible will be able to join us. 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? Dorvan, could you please give the instructions?

Operator (participant)

Certainly. We will now begin the question and answer session. If you are 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 then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then 2. I will now hand the call back to Mr. David Mulholland.

David Mulholland (Head of Investor Relations)

Thanks, Dorvan. We'll take our first question today from Richard Kramer from Arete. Richard, please go ahead.

Richard Kramer (Managing Director)

Oh, thank you very much. Justin, I asked last call about what you thought was required to win large hyper scaler deals. In your prepared remarks, you mentioned potential integration of business operations, even though a lot of those hyper scaler deals are for products that mostly sit in NI. Given the big increases we've seen from hyper scaler CapEx, I mean, what is the unlock, or what do you see as the key issues for Nokia increasing materially that percentage of sales hyperscalers that you've got now and moving towards double digits and beyond?

Justin Hotard (President and CEO)

Yeah, Richard, thank you for that. I think a couple of things. First of all, the functional changes that we're making are really around functional support organizations. I think there's plenty of companies that have their operating models aligned functionally like we're doing. Again, just to reiterate, if you look at our organizations, our legal team, legal compliance and sustainability was actually operating in this way already, and the other functions were operating in a slightly different manner. We're just driving consistency within the company. Separating that, let's talk about two things that are important hyperscalers. one is a customer relationship and customer intimacy. This is where the BG structure and specifically the sales team we have in NI, including the team that we've integrated from Infinera, is very important.

It's understanding those customers, understanding their being able to work with them around product design, forecasting, planning, and obviously supply chain execution and delivery, as well as negotiating terms and all the things you would expect. As I think about this, for me, the biggest opportunities for us right now, one is continuing the focus and building the intimacy with those hyperscale customers through that team. Two is really the portfolio. I think if you look at just the progress that we're now disclosing in the second quarter, with a book-to-bill that's above that and an award that's not in the second quarter, I think we're making good progress. We need to continue to gear our products and portfolios to exactly what hyperscalers are looking for and then continue to work with them on a very close and intimate basis. I think we've made progress.

There's still work to do. Obviously, we're coming from a position of not having as much exposure there, as you rightfully noted. We're in a bit of a challenger mode. That also requires just investment and time, as I think I commented on last quarter.

Richard Kramer (Managing Director)

Okay, thanks. Just a quick follow-up. I mean, the area that we're hearing a lot about expansions from big U.S. telcos is in their fiber build programs. Is that something you see accelerating into 2026, where these large announcements that have been made by the two largest U.S. carriers to increase fiber builds is something Nokia can directly address?

Justin Hotard (President and CEO)

Yeah, so this is a place where we have a very healthy portfolio, as you rightfully pointed out, Richard. I think the other comment I would make is really encouraged by the announcements. I think it's a very positive sign around the big, beautiful bill in the U.S. that was enacted into law earlier this month that there's going to be continued investment. I'm also cautiously optimistic that there's going to be investment in Europe as well. I think for us, this is two things. One is obviously opportunity for accelerating growth with our core OLT portfolio, the operator line terminals, but also opportunity for us to really think about innovation. How can we continue to help these customers? Back to my macro comments, I think I'm also hearing from customers that we have opportunity to partner with them in a more complete solution area in this space.

That's part of why I commented that we're investing in innovation in this area.

David Mulholland (Head of Investor Relations)

Thanks, Richard. We'll take our next question from Fredrik Lithell from Handelsbanken. Fredrik, please go ahead.

Fredrik Lithell (Senior Research Analyst)

Thank you. Good morning to all. Thanks for taking my question. I have one. We saw yesterday AT&T came with their report, and they talked about their CapEx for the coming years. We also know Trump's big, beautiful bill act. It seems like operators in the U.S. are getting some tax advantages here. Can you talk a little bit about what you see there on the CSP place, if that will be a driver for you? Thank you.

Justin Hotard (President and CEO)

Yeah, and I think, Fredrik, I just answered this, but absolutely we're optimistic about this. I think anything that's enabling investment in infrastructure is a positive for us and really encouraged by the comments out of some of our major customers in the U.S., including specifically AT&T, where we're a key supplier today. Having said that, I think that doesn't mean we can sit on our hands. We have to invest in innovation, which is why I made the comments I did.

David Mulholland (Head of Investor Relations)

Did you have a follow-up, Frederik?

Fredrik Lithell (Senior Research Analyst)

Yeah, maybe a follow-up. If you could sort of expand a little bit on Europe, it looked quite healthy in the quarter. Is it really broad-based, or could you sort of pick three drivers behind the good momentum you saw in Europe?

Marco Wirén (CFO)

Yeah, hi, this is Marco. We actually saw a quite broad-based development in Europe in all businesses. It was quite healthy and welcomed as well, considering that Europe has been a little bit muted in the past. Of course, we hope that we can see some more development in Europe going forward, just like Justin mentioned, that hopefully the fiber investments also in Europe will take off more. Also, the whole macroeconomic environment would give some improvement here.

David Mulholland (Head of Investor Relations)

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

Yeah, thanks very much. I wanted to ask about the guidance revision two days ago. Just to clarify, you are halfway through the year, but I note that the range was still $500 million as it was at the beginning of the year. Does this mean uncertainties have increased quite materially, doubled essentially, or is there any other reason to keep the range? In this context also, why did you not just indicate the lower end of the prior range, but actually lower the midpoint of the range? Because the range was pretty wide, the downside sort of fits in that, and you could have just said, "Oh, it's now at the low end of the original range." A bit more explanation there would be helpful. Thank you.

Justin Hotard (President and CEO)

Yeah, so Ulrik, thank you for that couple of comments. First of all, I think if you go back to Q1, Marco and I both highlighted that, given the one-time charges we had in MN and then the tariff in Q2, which largely played out as expected, the $20 million-$30 million that we called out. We thought we'd be at the, we thought that the top end of the range would be challenging. Obviously, now we've incorporated a full year look on tariffs and then this currency shift, significant, $90 million of it being non-operational, with the impact of venture funds. With all of that in play, we felt it was prudent to lower the range, as we said. You know, what I would highlight is, what I'd highlight in addition to that is that underlying it, I think we feel pretty good about operations.

Because what you probably noted is we did not actually call down an impact from the one-time charge in mobile. I think that actually probably underscores a little bit of optimism outside of currency and tariffs, which we just felt it was not prudent to assume we could absorb and still meet the guidance range.

David Mulholland (Head of Investor Relations)

Did you have a follow-up, Ulrik?

No, just to come back to part of the question. Thank you for that answer. Why is the range still $500 million when you have six months now reported?

Justin Hotard (President and CEO)

Yeah, maybe just the other point I'll make, and I'll let Marco comment, is in the second, obviously, if you look at our first half versus second half, and particularly in Q4. Other than 2023 and probably 2020, which disruption from COVID, in 2023 we had a significant shift in CapEx from the mobile network side. If you look at the business, we're historically very back-end loaded. As we talked about, we had an expectation this quarter that we'd see more demand from India and mobile networks. That did not happen. We feel very back-end loaded, and we want to be balanced and disciplined in our forecast because so much is in the second half. Marco, anything you want to add there?

Marco Wirén (CFO)

Yeah, just that as well, that we are still a little bit on the fly when it comes to tariffs. We are seeing the situation as today. As we all know, we do not exactly know how these tariffs will land in the end. That is why we want to keep the range a little bit wider so we have flexibility there.

David Mulholland (Head of Investor Relations)

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

Sami Sarkamies (Senior Equity Analyst)

Hi. Could you provide a bit of color on network infrastructure performance in Q2? How do you expect things to develop during the third and fourth quarter for NI? When we look at Q2, we see a bit weak growth at IP and optical combined with gross margin weakness.

Justin Hotard (President and CEO)

Sami, thanks. Yeah, a couple of comments from my end. I think first of all, if you look at us against our U.S. peers, obviously we're showing constant currency. There's a benefit that you have to also consider for currency tailwind that they're reporting. That's one balance that we didn't enjoy. The other thing I would just highlight, and we talked about this, was we had a bit of a shortfall due to supply chain constraints and an increasing demand environment. I'll make two comments on that. We would have expected double just on that alone, on a constant currency basis, we would have expected double-digit growth had we fulfilled that demand to a more consistent historical level. Second comment I would make is even with that, we'd have a strong book-to-bill. That's without the award that I touched on in my comments.

We feel quite good about the opportunity in terms of the second half. Again, this is largely driven off of what we see as an increasing mix in hyperscale and AI data center customers.

David Mulholland (Head of Investor Relations)

Do you have a follow-up, Sami?

Sami Sarkamies (Senior Equity Analyst)

Maybe a quick one. You talk about the need to have a more integrated, fast-moving, and later Nokia. Can you elaborate on this a bit further? Will you be communicating related changes in the near term?

Justin Hotard (President and CEO)

Yeah, so we announced changes today around a single functional organization. Maybe the one I did not touch on as explicitly, but we shared a few weeks back with the team, is in response to customer feedback, we also announced or reinforced the position of the executive account manager. Within each of the businesses today, we have specialist sales forces, but when we made the change a couple of years ago, we did not have a top accounts function. We have built a little bit of that capability. I think this is really important because our customers are not organized by a unified product line.

While there are differences in each of our product groups, and they are important, and they are important not only because they touch areas of technology we invest in, the business model, and how we monetize the technology—think of core versus mobile network with radio and RAN versus optical and IP, let alone broadband and fiber access networks. While that is important, it is also important to understand that our customers are thinking about things on a more integrated basis because they are also considering their customers, who are. Many of our customers are increasingly addressing them in a more integrated manner. Strategically, from a technology roadmap perspective, we need to be thinking about it end-to-end. If you think about things like security, obviously platforms and services, AI and automation, there are clear opportunities end-to-end. I have heard that from many of our customers, both strategically and tactically.

That felt very important. Better service for customers, number one. Underneath that, I think if you look at some of the industry players, certainly some of our partners—I spent time studying our partners as well—and if you look at some of our partners that have announced continued operating leverage opportunities, both using AI for their operations, many of them have focused on productivity and agility as the key north stars. For us, I feel like it is similar that we need to have that kind of mindset of functional excellence. We talked about this quite a bit as a leadership team and made the decision that this was the right step for the company: a consistent operating model across the functions and a mindset around excellence so that we can improve agility and unlock operating leverage.

Marco Wirén (CFO)

Just building on what Justin said, we believe that it's important that all the businesses will have the P&L responsibility. Our ambition is not to increase the headquarters. If we want to do something, it's actually decrease the number or the cost level of headquarters, just to be clear here as well.

David Mulholland (Head of Investor Relations)

Thanks, Sami. We'll take our next question from Simon Leopold from Raymond James. Simon, please go ahead.

Simon Leopold (Managing Director)

Thank you very much for taking the question. Justin, you have been at the firm now for roughly 100 days. You have talked a little bit about sort of priorities. I guess what I would like to get a sort of understanding of here is, having had sort of this period to learn and adjust, and you have talked about some organizational shifts, how do you characterize your priorities going forward versus what you thought when you first took the job and started?

Justin Hotard (President and CEO)

Yeah, thanks, Simon. I think probably a few key learnings, and maybe I'll talk about them across customers, technology, and then operational and financial execution. I think first of all, from a customer perspective, I think there's a real opportunity to partner and to co-innovate with our customers. Obviously, every customer has a slightly different strategy and value position and how they compete. I think there's been a number of conversations where I've been really encouraged about the opportunity to be innovating with our customers in a way that perhaps we haven't. On the technology side, look, I think what's important here is we have a lot of great technology and great people in the organization, particularly within our engineering and R&D teams. I think what we have opportunity to do is continue to be better members in the tech ecosystem.

What I mean by that is partner externally, think outside in, and collaborate more with what's happening in tech and across the industries that we play in. I'll make the other comment of just focusing, and not only the comments I made at the top around mobile and fixed access networks, transport, and data center, but also as you think about in the stack, where does it make sense to partner versus where does it make sense to invest in core technology? Last comment I'll make is just around financials and operations. I think this is maybe the thing I haven't emphasized in the comments I just made on the functions that Marco and I touched on, is that specifically, I think we have an opportunity also to be more predictable and more productive.

I think that's one of the objectives I have, is not only to drive growth, but to drive a level of predictability in growth. Because obviously, when you look back historically, as you all well know, we haven't been as predictable as certainly we would expect ourselves to be.

UnKnown Speaker (participant)

Thanks. As a follow-up,

Sami Sarkamies (Senior Equity Analyst)

yes, please. At the end of June, there were some press reports suggesting that Nokia might be taking some actions to reduce headcount and to do some cost cutting. I know it sounds like a little bit of reorganizational efforts on your part, but it doesn't sound like there were any major initiatives. Could you update us on really what you're thinking about in terms of any initiatives around staffing, cost structure that might be related to those press reports? Thank you.

Justin Hotard (President and CEO)

Yeah, thanks, Simon. I'd just make a couple of comments there. I think first of all, we had a major restructuring program in 2023 that we announced that we're still executing. I think that's important to understand. We set some targets around that and obviously a range around the restructuring charges. At that time, we're still within that point of execution of that program. We're still within the window there. Second comment I would make is that not having been in this situation before, I don't think going forward our objective should be to announce a big program, but much more building the muscle and the capability around driving productivity and operating leverage as a discipline. There's nothing new to update today on our restructuring program. In addition, I think if you look at best practice, it will be around making announcements around continuing productivity.

I think you'll see that in our results over time versus me telling you it's going to happen. Marco, you want to?

Marco Wirén (CFO)

No, I think just what you've just answered several times is continuous improvement is something that we have to have in our genes. There is something that every part of the company has to work on, that thesis as well. This is something that we will focus on very much and hopefully see improvements in our efficiency and productivity in the company.

David Mulholland (Head of Investor Relations)

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

Rob Sanders (Senior Equity Analyst)

Yeah, hi. Justin, can you discuss your view of the mobile networks business? I mean, is this a business where you're okay being relatively subscale and treading water, or do you have strong ambitions to build back scale and recover share in 6G? I guess another way of asking this question is relative to your 5% of sales that's hyperscaler-led, how much of your R&D budget is going to go towards hyperscalers? Because I'm just trying to see, trying to understand how you're going to orient the business going forward. Thanks.

Justin Hotard (President and CEO)

Thank you. First of all, there are sort of two questions there. Let me ask, you are sort of asking, I think, an implicit capital allocation question as well. Let me answer the Mobile Networks business. I think, first of all, I believe this is a unique and highly strategic asset. There are four scale players in the world. Two are in the West, us and Ericsson. What I think is important, and I have said this consistently, is I do not think it is just about Mobile Networks. I understand how we report, but I think you have to look at Mobility, Co. Every one of the scaled players, including the two competitors we have out of China, have the core networks business, Mobile Networks assets, radios and RAN, and a robust IP portfolio.

I think you have to look at the business in totality, even as you report the segments. That is really critical. Second, I would say when you look at our customer base, it is very clear to me, and I hear from my customers, that we have opportunity to do more with them. Third, as I have said before, I believe the AI supercycle is going to drive a refreshed wave of investment in this space. It is not there today, but I think we have to have a view over the longer term of whether it is smart glasses, drones, autonomous vehicles, obviously innovations that I think we will see even in the traditional mobile handset business. There is going to be a set of innovations that drive opportunity for us and opportunity for our customers.

This is where also being a thoughtful partner to our customers, as I touched on earlier, is going to be important. In terms of capital allocation, I think what has happened in NI, and I would just emphasize this as one of the reasons I think Infinera was a very, very good acquisition for us, is the market has shifted to cloud and AI driving the investment. The investment and the innovation curve on Fixed Networks, it used to be a lot of this innovation was out of transport networks. That is now more and more transport networks and data center driving the left edge, whether you think about Ethernet switching speeds or obviously optical technology, what is happening with pluggables inside the data center, which we just talked about. The innovation curve has shifted. By default, our R&D has to be invested in that area.

It is not just in that. I think if you look at the hyperscalers and public cloud, they set an expectation for security. They set an expectation for ease of use and deployment of technology and performance. There are a number of areas where I think we, as we are targeting those customers in NI, have opportunity to enable them, to enable advantages for us across our customer base and that portfolio. That's been reconfirmed with some of my customer conversations. Back to core and mobile, if you look at the portfolio on the mobile side, many of those cloud players and those hyperscalers are partners for us on mobile. We've talked about announcements in our core business as we've moved much more to a cloud-first strategy for core in terms of the tech stack, but also in terms of where we run those platforms.

I think over time, we're going to see some of those things move even into RAN. I think we need to be a partner there. If I look at capital allocation, that's one element. As I think about these partners as being broad partners across our business, I think there's significant opportunity.

David Mulholland (Head of Investor Relations)

Did you have a quick follow-up, Rob?

Rob Sanders (Senior Equity Analyst)

Just quickly on the fixed wireless access rollout in India, how long can this last in terms of being a tailwind for your business? Thanks.

David Mulholland (Head of Investor Relations)

Yeah, you want to talk about this, Mark?

Marco Wirén (CFO)

Yeah, I guess. Thank you. I would say that many operators globally are looking into opportunities to utilize fixed wireless access, especially in areas where they see that the mobile networks are not utilized fully, which is usually outside of the city centers. That is one way for them to capture more opportunities and customer base. If and when there would be any fiber connection later, then they have already that customer connection, and they can just swap over that customer from fixed wireless access into a fiber customer. Different operators see these opportunities coming at different timelines as well. Right now, we've seen that Indian operators have been quite active and seen this opportunity to capture the customer base, and that's why we've seen the tailwind there.

Justin Hotard (President and CEO)

I would just add. On that front, I think when we look at this, there's a couple of opportunities here. I think first of all, broadband access, wireless or fiber, are opportunities for growth for us. Second, there's opportunities on the operator side. You think about that as OLT, as I touched on in my comments, but also it's actually innovation and services and technology we can deliver at the radio layer. We see that not only in India, but in North America as well, that there's probably more we can do there. I would just say third, obviously, it's hard to predict exactly where the demand will go. Marco rightfully pointed out that there's usually a balance between how much wireless access you want to provide before you want to lay fiber.

I think the good thing, the unique thing for us is we can potentially benefit on both sides.

David Mulholland (Head of Investor Relations)

Thanks, Rob. We'll take our next question from Sandeep Deshpande from JPMorgan. Sandeep, please go ahead. Sandeep, we can't hear you.

Sandeep Deshpande (Stock Analyst)

Hello, sorry. Can you hear me?

David Mulholland (Head of Investor Relations)

Yes, go ahead.

Sandeep Deshpande (Stock Analyst)

Yeah, yeah, hi. My question is on network infrastructure. In the network infrastructure business, you're seeing this very strong growth in the fixed network business. I mean, and you've talked about that in the earlier questions. I want to go back to the optical business where you highlighted the 6% organic growth. I mean, given the strength in the hyperscalers, why is that business not growing stronger at this point? Is it that you need to expand your footprint at the customer base more? Following up on that, where are you in terms of the routing and switching in the hyperscalers? In terms of expanding your footprint with the hyperscalers?

Justin Hotard (President and CEO)

Yeah, thanks, Sandeep. I think a couple of things. On optical, again, I think if you look at that, largely, pre-acquisition, Nokia was not penetrated heavily in optical within the AI and cloud space. With Infinera, we've gained footprint there, but we're behind our competition in terms of market share penetration. I believe we have opportunity. That's why things like what we announced with the 800G pluggable platform are important because that gets us back to being competitive. You'll note that we were behind in that space. I think the work that David and the team have done to start to catch up there is very important, and we need to continue to do work to make sure we hit the future product intercepts. Second thing I would comment on there is your question on IP and switching and routing. We've had some traction in routing.

I think more work to do in that space, switching less traction. Obviously, this is a place to focus for us. Traditionally, we hadn't made this a priority. It's one of the things I think David and the team are looking at to see how much potential is there, and we'll give you more of a fulsome view on what we believe we can do there as we come to capital markets today.

David Mulholland (Head of Investor Relations)

Thanks, Sandeep. Could you have a quick follow-up?

Sandeep Deshpande (Stock Analyst)

No, I'm that's it. Thank you.

David Mulholland (Head of Investor Relations)

Thanks, Sandeep. We'll take our next question from Felix Henriksen from Nordea. Felix, please go ahead.

Hi, yeah, thanks for taking my question. It's one on the Q3 outlook where you flagged somewhat stable operating margins sequentially, partly reflecting a bit weaker business mix. Is this reflective of just MN, which you highlighted, or do you also see weaker mix in the other segments? Also, do you have any visibility on mix improvement for the fourth quarter of the year?

Marco Wirén (CFO)

Yeah, thank you, Felix. I would say that if you look at normal seasonality that we've seen in the past years as well, we have had quite strong quarter four. The seasonality we believe that we see this year as well, getting back more to normal seasonality. What comes to the second half, we believe that we have a stronger performance in the second half compared to the first half. Also, if you look in the past, I think 8 to 10 years, seasonality between quarter two to quarter three, the sales has been flat. This is something that is also quite typical seasonality in the company. We want to highlight what comes to quarter three specifically is that in mobile networks, we see less software compared to quarter two, and that will have, of course, impact on the margins as well in quarter three.

David Mulholland (Head of Investor Relations)

Thanks, Felix. Did you have a follow-up?

Yeah, just a quick one on the cost base in technologies because I guess if we play around with the numbers, it seems like your $1.1 billion EBIT guidance for technologies for the year assumes a step down in OpEx for the back half of the year, assuming that your sort of sales run rate keeps at the current level. Could you just discuss that a little bit? Why should we expect lower OpEx for technologies in the second half of the year?

Justin Hotard (President and CEO)

Yeah, thanks, Felix. I think the key thing here is OpEx is expected to be flat. We have some optimism on what we'll do in the second half in terms of revenue.

David Mulholland (Head of Investor Relations)

Thanks, Felix. We'll take our next question from Sébastien Sztabowicz from Kepler Cheuvreux. Sebastian, please go ahead.

Sébastien Sztabowicz (Equity Analyst)

Yeah, hello everyone, and thanks for taking my question. Have you seen any kind of pulling orders affecting any of your businesses over the past few months? Or you think the order intake has been tracking fairly a normal evolution? That would be the first question. A second one is linked to competition because your Nordic competitor was blaming stronger price competition in the RAN market over the past few months. Have you seen any kind of change in pricing dynamic or competitive landscapes over the past few months in mobile networks? Thank you.

Justin Hotard (President and CEO)

Yeah, I think on your first question, again, adjusting for, if you look at it on a constant currency basis, I think we feel pretty good about the forecast. I think it's pretty consistent. Nothing in terms of pull-ins. I think probably more what Marco and I are looking at is just given some of the news, particularly, which was a question earlier about the U.S., is there more opportunity? Though that feels like it's more a 2026 and beyond thing based on some of the announcements that have been made. In terms of your second question around pricing, I wouldn't say there's anything that we see that's abnormal at this point. As you know, the market regionally has very different dynamics. In terms of pricing dynamics or specific competitive situations, it very much depends on the individual opportunity.

I think we feel pretty good about what we see in terms of the market.

David Mulholland (Head of Investor Relations)

Thanks, Sebastian. We'll take our next question from Jakob Bluestone from BNP Paribas Exime. Jacob, please go ahead.

Jakob Bluestone (Senior Equity Analyst)

Thanks, David. Just to come back to the sort of phasing, as you've mentioned a few times, it's a very Q4-loaded year. I guess if you can first of all just explain a little bit more, why is it quite so heavily skewed into Q4? If you can maybe also help us understand just around your confidence, is the midpoint of that guide covered out of your existing order book? Or how far away are you from sort of, in terms of your orders?

Marco Wirén (CFO)

Yeah, thank you. I can start, and then Justin can build on. What comes to the seasonality in this industry is pretty much driven actually by how customer behavior is and how they see what needs they do have when they are investing in their networks. Usually towards the latter part of the year in quarter four as well, if they see that there's some opportunities for them to do any upgrades or additional investments in the CapEx frame that they have, that's when they usually come and ask us to do. This has been the pattern in the market quite a long time. In general, I would say that different sectors behave a little bit differently. This is more the CSP side. What comes to the hyperscaler side, they are perhaps more focusing on gradual investments and not always thinking like CSP that quarter four would be very heavy.

As we said, only 5% of our sales is in hyperscalers today. That's why we are quite dependent on the cycles that CSPs have. Yeah, I can mention what comes to order coverage. It depends also between different businesses. When you go to a project business like Mobile Networks is, usually your order book is longer and you have more coverage a couple of quarters ahead. While when you are in more short-term business like in Network Infrastructure, then your coverage is lower. I would say that we do not see any deviations from the normal pattern that we normally have in this year.

David Mulholland (Head of Investor Relations)

Thanks, Jacob. We'll take our next question from Emil Immonen from Carnegie. Emil, please go ahead.

Emil Immonen (Equity Analyst)

Hi, thanks for taking my questions. Just a couple more, maybe on the order book. Could you go into a little bit of detail on what the order book looks like as a whole in Network Infrastructure and how it has developed year on year and Q&Q?

Justin Hotard (President and CEO)

Yeah, I think just a couple of comments on this. We obviously do not break this down in detail, but overall group book-to-bill was well above one. Optical was well above one. As I touched on, even would have remained well above one had we fulfilled all of the orders we would historically have fulfilled based on traditional conversion rates. As I touched on, the 800G order, the 800G award that we disclosed, that order has not been booked. I think, again, as you look at the overall funnel, we believe it is quite healthy. Having said that, as I touched on earlier, we have a lot of work to do to continue to grow and scale and hyperscale because, as Marco highlighted, we are at 5% of the overall revenue mix. There is much more opportunity for us.

David Mulholland (Head of Investor Relations)

Did you have a quick follow-up, Emil?

Emil Immonen (Equity Analyst)

Yeah, thanks for that. On mobile networks, I just wanted to know, how do you think about the segment in terms of what is needed for that to return to revenue growth?

Justin Hotard (President and CEO)

Yeah, I think first of all, obviously, this has been a challenging business for us over the last few years. Second of all, the market is flat. If you look at the market that's addressable to us, and I'm really focused on geos where we can actually sell, we get to participate. The market's largely flat. That's largely because data consumption is somewhat flat. Subscriber growth has flattened out, and customer metrics are there. I think what we shared at MWC, or the team shared at MWC, was that we were starting to see recovered share from what we had lost in terms of sell sites. From my perspective, what I'm focused on is, to your point, is overall revenue growth.

I think right now, though, it's about making sure we preserve market share in a flat market and then looking at where the opportunities are for us to gain share.

David Mulholland (Head of Investor Relations)

Thanks, Emil. We'll take our next question from François Bouvignies from UBS. François, please go ahead.

François Bouvignies (Research Analyst)

Thank you very much. I have a quick question on the strategy, Justin, this. More integrated end-to-end maybe. Nokia did that in the past at Rajeev at the time when he acquired Alcatel. The idea was to do an end-to-end. Then Pekka came and then realized that maybe it was not the good solution, so we went back to best of breed. Now you seem to go back again to the integrated part, end-to-end. How different is it from the previous work of Nokia? What would make it work this time? Is there anything you can see in the past about what has been done and how you can be differently? Just trying to understand this strategy given it did not work in the past.

Justin Hotard (President and CEO)

Yeah, thank you, François. First of all, I'd say a few things. One is, in my career, I've worked in many different models. I've quite spent a lot of time understanding this and probably studied it pretty deeply in terms of my own companies and others. There is no perfect model. It's really about being customer-in, marketing-oriented, and then being focused on core innovation. For me, there's a couple of things that are really important. I think it's also important not to say we're going back to something that was there before. That's not the case. What's important here, and I think what we're building on, is BG accountability is very important. The businesses have different cycles. They have different investment areas. CNS is very focused on cloud-native software, building a fabric and platform. We talk about APIs.

That's very different than a fixed broadband business, where we're focused on OLT customers and in places where it makes sense, obviously selling consumer premise equipment. Very, very different businesses. What's important is that we have the accountability around that. The other thing is our customers are one customer set. I think sometimes from a model perspective, you can get caught up in having too many. Being so focused on the portfolio, you miss that the customer wants to engage with you in one way because there's one procurement organization, there's one group CTO, there's one customer portfolio that they're engaging with. I think we need to orient to our customers. That's why we're making a bit of the balance on the customer-facing side. On the functional excellence piece, I think I covered this in my comments.

The steps that we took in the past were the right steps at the time, and they've delivered value for the company. The reality is, as we look ahead, we felt like there were a different set of steps we needed to take. In spending time with the team, I made the decision that we needed to really drive a consistency across the functions. Because again, as I'll point out, when I came in, we had different operating models depending on the function. The reintegration of MVS, the alignment of the functions to a consistent model, I think is going to be valuable. I think it's better for our people. I think it'll ultimately unlock operating leverage. Those were really my two key decisions in this. I would spend, obviously, I study history. I'm a student of history of what's happened. Studied other models.

I wouldn't say that we're dropping the prior model for the model that was two generations ago. I don't think that's the case at all. I think we're taking a step in evolution that's setting us up to be better positioned. Early feedback from customers, and candidly from our people, has been very positive around this more integrated approach, particularly on the go-to-market side.

François Bouvignies (Research Analyst)

Thank you.

David Mulholland (Head of Investor Relations)

Thanks, Francis. Did you have a quick follow-up?

François Bouvignies (Research Analyst)

No, that's fine. Conscious of time. Thank you.

David Mulholland (Head of Investor Relations)

Thank you all. That is our last question for today. 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 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 20F, which is available on our investor relations website. Thank you all for joining us.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.