Nokia Oyj (NOKIA) Earnings Call Transcript

I guess the reason the investors are also particularly keen to get your views on this is, obviously, because Ciena's comment was quite interesting, right? They talked about broad-based weakness across customers, across geographies, guided October quarter down 15% sequentially. So it does not completely gel with some of the optimism or the strength or resilience that you are seeing out there in terms of demand?

We are a bit more broad-based, I would say. So in other words, our customer base, I would guess, we have less customer concentration than Ciena. That might be part of the explanation. When they say broad-based, it's very different than when we say broad-based, I would imagine, because we have -- the number of customers and this size -- the relative size of those customers principally because of the massive North American concentration where you have some very big customers that buy a quite large percentage of the TAM in North America. Whereas in Europe, for instance, and some of the other countries, there's -- there are some quite big players like Deutsche and like British Telecom, and I can name them, but there's also hundreds of long tail -- considerably long tail. So I think we have a bit more of a broad-based business. I'm speculating here. I can't speak to what Ciena is saying here.

Sure. I appreciate that. Moving on maybe from the near-term dynamics. Talking a little bit about some of the megatrends that we are seeing out there. Does this -- yes, we talk a lot about 5G from a RAN perspective, but could you help us understand how 5G actually plays in and benefits your direct business. So IP and optical. And there's this whole idea now of mobile edge compute. So for example, how is your portfolio positioned for that?

It's -- I mean, there's a good saying, which many of you may have heard already, the wireless network is the biggest wired network in the world. And the point is that in the wireless network, you get to a cell tower, you drop into the terrestrial network as quickly as you possibly can. So any increase in the interface, 4G to 5G, additional carriers, carrier aggregation. These things all drive bandwidth and the bandwidth all shows up at these cell towers. And the network behind the cell towers is a very fundamental part. So if you think about mobile. First, you think about the -- of course, the air interface and the connection to your handset and getting to the cell tower. We have to understand that the rest of the network is super critical as well. And whenever there's a generational switch, like to 5G. There's big implications for that -- the rest of that network. So as an example, the capacity, just the capacity -- not just capacity, but the capacity between the cell tower and the gateway goes up. So generally, our customers tend to retool the backhaul, they call that the backhaul network. They tend to retool the backhaul network in preparation for a new generation, and that is going on. So there's a super cycle happening right now globally in our business because we're probably the largest -- the only other player would be Huawei that competes with us for, let's say, the scale in mobile backhaul because we innovated mobile backhaul. Mobile backhaul used to be -- the traffic used to be carried by SONET/SDH back to the main network over T1 and E1s. And we changed that to an MPLS equation a long time ago. And we were one of the first companies to do that if not -- the first one at scale. So basically, we have a huge footprint in mobile backhaul. And I can tell you that, that has been -- right now, we are in a lot of big deployments of new generation and mobile backhaul equipment to carry higher capacities and all that stuff. I'll get to mobile edge computing in a minute. The next step is the gateway. So your traffic has taken off the cell tower across mobile backhaul and has dropped into a gateway. The gateway is where we figure out are you -- validate that you have, authenticate you, make sure that you have a service plan and implement any potential attributes of your service plan that need to be implemented at the gateway. That's -- sometimes you might have heard of 5G core, which used to be called the GGSN, then it was called the EPC. These platforms are the gateway, the mobile gateway. And so that full thing, which is also in my division, is going through a retool because we're going from 4G to 5G. These are -- so there's all these changes. There's one more change in 5G or actually 2 that are really interesting, one is mobile edge computing. And what effectively is I think of it this way. Right now, when you want to go to a resource from your cell phone, generally speaking, it's pre-centralized. You're going to 1 of 10 or 12 or whatever massive data center somewhere around the world. Over time, as with video caching for like a Netflix service, it's economical to start to move that compute or that storage closer to the user, just so you don't have to transport the bits across the network or perhaps for latency reasons. That's creating a new industry potentially or a new, let's say, opportunity called Mobile Edge Computing. I was on a phone call this morning with a major Middle Eastern carrier, and they're very in the middle -- they're in the middle of their strategic evolution with us on how to build those Mobile Edge Computing nodes. I think it's early. It's early days. It's still a little speculative, but I think it's real. And we're going to see more and more compute finding its way to the edge of the network, not to replace centralized data centers, not at all, to augment them in some way. And I have a lot to say about that, it's a completely separate conversation, but that's another change. The last thing I would say, 5G brings, which has not been here before, is there's a concept called slicing, and I apologize for those of you that don't really want to know that much about and how it works, but think of it this way. It's one big physical network, and our customers would like to, at times, give one of their enterprise customers some hard service level agreements on a slice of the network, including the air interface, so they'll carve-out a piece of the spectrum. This is really not the spectrum, but give them some time slots. Then they will give them a piece of the physical network. So they have what appears to be really their own -- for all intents and purposes, their own network, their own wireless network. Even though it's just a slice of the service provider network. All of those things, by the way, every one of them, drives activity, scale, new purchases. And so for our business, since we're one of the leaders here, it's quite good.

Fantastic. I've seen a couple of questions come in on this particular topic. I was planning to take it a bit later, but let me touch upon it. China. We are all aware that China has been deemphasized by Nokia from a RAN perspective, if I could use that language, but clearly, outside RAN, Nokia is playing in the China market, and it still remains a very large opportunity. So help us get a sense for how do you view China as it relates to your business within Nokia and where do you think the opportunity lies for you?

So I mean, China is an interesting market. First of all, it's massive. Of course, we all know that. But the challenge is -- the danger in China is just making that your strategic lens. It's massive. Therefore, I must do it. It's not a smart strategy. It is massive, that's true. But therefore, I must do it is you have to be careful about. Because playing inside of China, as many of you I'm sure know, it's not easy. And so you have to be thoughtful about what -- first of all, do you have the assets, do you have the people, the structure and also the product differentiation needed to really carve out a business there? So we have -- we do offer products in China, and we do have some good business in China, but we're -- I would say, maybe a bit opportunistic in this way. We're not looking for scale at any cost. We're not interested in losing money in China. We're interested in helping the service prides there. And importantly, the web scale customers there who are now buying our equipment as well to build their infrastructures. So we'll continue to do that. It's a difficult -- it's a challenging market because the local companies are so strong. And oftentimes, you find yourself at disadvantage, not for technical reasons, but for other reasons. And those are things you have to be aware of when you're trying to build a business in China. So there's a -- I think it's important to continue to engage in China. There's a lot of innovation happening. One of the other things, though, that's a little bit of a complexity of China nowadays, which is relatively new, is the standards that we all use around the world for networks. China is starting to diverge a little bit in that regard. So there's -- they have their own standards for -- like for instance, the packet core, there's an architecture called CUPS, which is control and user plane separation where you take 2 pieces of the packet core and you separate them. In China, there's a push to use what they call CUSP, which is just the last 2 letters reversed, but it's a different architecture. And so you have to commit R&D for that. And so you have to be a little careful. It's not as global as it used to be in that regard. There's more standardization efforts going on in China. So you have to be a little thoughtful about when do you invest, when do you not? This is -- it's becoming a little more interesting in that regard.

Thank you, Basil. Let's maybe, I guess, move on to another topic, and I guess this is -- yes, slightly technical, but I think is an important aspect of the discussion here, which is the silicon. So Nokia, obviously, again, on the RAN side, has had some challenges as it relates to chipsets, but actually, on the routing side, it has a very strong heritage. I mean the FP4, for example. So can you help us understand future trends for your business as it relates to the silicon road map? What are the benefits of using custom silicon versus merchant silicon in the networking space?

Yes. It's a great question. And it's a misunderstood many times. Some people are like silicon belongs to silicon companies. So therefore, the natural thing to do is over time, just use -- it's really kind of interesting because it's quite the opposite in some ways. If you think about it from a what has really happened in silicon in general. When I was in the silicon business, it was very vertically integrated. And if you wanted to build a chip, you had to work with a silicon company because they own the fab, they own the tools, they own the libraries, they owned everything and they were closed systems. So you'd have to work with one of them and use their tools and their fab. And famously, actually, Jerry Sanders at Advanced Market Devices, his quote was real men have fabs. It's kind of a funny thing to say at the time, but he was very [indiscernible] staying in that business. Now as fast forward, this many years and no silicon companies, very -- only handful intel and few have fabs. The tools are third-party. They've all been disaggregated. The libraries are still relatively specific, sometimes to be silicon. The point I'm making is that silicon actually -- to build competitive silicon is a level playing field now. It doesn't matter whether you're a system company or whether you're a chip company, it doesn't really matter. You can -- if you want to, you can build. What has changed, however, is the barrier to entry and the cost of building a new generation 7-nanometer, 5-nanometer chip. It's extremely expensive. And so you can't justify it anymore without a very good reason, and good reason means an economic reason. If you can't create sufficient differentiation by building a chip, such that your product sells better or you get better margin. For Heaven's sakes, don't do that. There's really no reason. There's a couple of reasons why you might want to consider doing it, however, FP4 is a great example. There -- we innovate. We are generally one generation ahead of the industry in bringing out network processors. FP4 was the first 16-nanometer network processor from anybody, including the silicon companies. So we tend to push the limits of what can be done. Second, we really focus -- the silicon companies, by virtue of their business model, it's all about the volume. It's volume-driven. So they really want to be in the handset. They want to be in the very edge of the network. They want to be in the data center equipment. But if you get to the core of the network, which is where our business is centered, there's not enough volume for a silicon company to consider that entry. It's not that they won't play there if it -- they can use the same chip, and it happens to work great, but they're not going to focus their energy there. So from our point of view, for our customers, we look at it this way. Silicon is just -- you shouldn't be religious about any invest. Should you use merchant silicon all day long. Should you build your own? Absolutely, if you can make a case for it. And we've been -- and we consider the design point that we take here to be very important. So we build the world's best platforms for the core of the Internet and for the gateways, bar none. You cannot build what we build with an off-the-shelf chip. There is no off-the-shelf chip that will let you do that in the same way. Now when we built our data center equipment, what do we choose to do there? We use Broadcom for that because we looked at, we said, hey, that chip is pretty good. Could we make a chip like that? Yes. Would it be meaningfully better? Maybe, maybe not. So then it comes down just a pure question of price, again. So my overall message is this, it still makes sense in certain industries to build chips. You just have to have a really good reason. And for the foreseeable future, there's going to be multiple design points in networking silicon, not just one. There isn't just one networking chip. There's going to be kind of the data center design point and what we call -- we call them Internet exchange routers, they're basically our IXR family. It's just moving massive amounts of traffic. It's not particularly sophisticated about how it does it. And then there's this other design point, which we call, which is our SRS family of routing platforms. It's very sophisticated. If you want to know whether -- why there was not an outage or there was a packet dropped down to the detail on a flow. And our -- and these platforms, you can do it. And you need some of those platforms, too. And I believe this part of the conversation was one observation. The network is only getting more important. It's not getting less important. We're running everything on it. So our customers, while they're faced with immense cost pressure are also faced with a need to improve uptime and reliability. And in order to do that, you really have to have good understanding of what's happening in your network. So there's -- that is a way to kind of position these 2 design points from our point of view that are both tools needed to build these big infrastructures.

Thank you, Basil, for that fairly, fairly elaborate explanation. You've got 5 minutes now, and we've got 3 questions that I see. A couple from investors and one from my side. So let's give it a go. So the question that's coming from an investor, and I think it's quite an interesting one is it sort of builds on top of this differentiation point that you've talked about, about custom silicon, merchant silicon. I guess expanding it further, how would you -- what would you call out your competitive strengths and weaknesses in the routing business? You explained to us earlier how you're positioned on the optical side, can you talk about the competitive landscape on the routing side? And what are your strengths and weaknesses?

Yes. I mean I think number one, we have great focus on large infrastructures. We don't bother ourselves with 7 masters. We build large infrastructures where we want our goal and what we try to do is be best. I know that that seems rather symbol and flip, but it's actually pretty important because you end up waking up in the morning, focusing on how do I build these large infrastructures best-in-class. The second thing I would say is we're very technology deep. We're not a system integrator. We're not, hey, grab that protocol stack and grab that chip and put it in a box. For that reason, we can master the design of these systems. And it doesn't mean we won't use third-party silicon. We build all our own protocols, but we really do -- when our customers use our platforms, they are -- and customers tell us this, by the way, we are known as the most stable platform in the industry. They can put it in, and they don't -- they pretty much don't have to worry about it. It's going to work. And when it does, if there is an issue, we're pretty quick to get to the problem and help them sort it out. That's priceless, by the way. That's pretty -- having that reputation matters a lot to us. So I would say from a competitive point of view, we serve -- we're, I think, specialists in large infrastructures. We're not trying to serve many customers. And I specifically, I'm talking about, of course, our large competitor on [indiscernible], who actually principally has and their principal business is, in fact, enterprise. I'm not saying they don't serve service providers in a big way, but if you think -- if you look over time, we have gained share year-in and year-out for more than a decade, actually well more than a decade, going from 0 to where we are now, which is in the 30% -- range depending where we are. We've become #1 globally in edge routing, by the way, by Deloro and the other data vendors. So in edge routing, we're the #1 player now. This is a really big deal. And in routing overall, we're #1 in many of the geographies in Europe, in EMEA, in Lat, we're #1 in routing. So we've really -- we've grown share by being focused and having that deep technology capability to draw so that when we make our choices about product to build, we get it right most of the time, I'll put it that way.

All right. I think you're certainly impressing the audience with some of your big picture perspective because I've had a big picture question come in that -- I mean, I would like you to have -- take a stab at the question is, if the networks are getting so important, why is all the value flowing away from the likes of Nokia and Ericssons of the world to the Internet companies? I guess it's a big picture question.

I mean, it's a great question. What's crazy about our business is, a long time ago, I had a slide at one of my presentations about the value chain that we're involved in. The great news is it's an amazingly strong value chain. I mean, look at the stuff that's running on the Internet, Holy cow. The problem is our layer in it, of course, is [indiscernible] and this is a function of the Internet. When we standard -- when applications became decoupled from the network and you could run any application anywhere and you don't have to have an infrastructure to do it, all of a sudden, bit transport became more of a commodity. I won't call it a commodity, well, but it's certainly more of a commodity and that has created pressure. Now the good news about this is, to be fair, if we didn't drive the cost per bit down, we wouldn't be having this video conference right now. The intense reduction of cost per bit has allowed this to happen. And has allowed, for instance, video in general. The digital domain is consuming all communications in large part because of this trend line. Having said that, it's a fair observation. We're involved in an incredibly strong value chain, but our portion of the value chain is under pretty good pressure always. Having said that, I will say this about Nokia and Ericsson and the like. There's a long-term stable position being the, let's say, one of the big, big companies that owns this space, in my opinion. And I think you can -- it has good prospects, but you no longer can assume, like in the old days, that just because you own the network technology, you can own the application layer. The application layer is where a tremendous amount of value is, and that's -- the good news about IP is it's a free platform for innovation.

Interesting. And I guess you can talk on this topic for an extended period of time, but cognizant of time, I have to slip in one final question, which is probably a big picture question on Nokia now. We appreciate Nokia is in the midst of a transition, Basil, but it's been now over a month since the new CEO, Pekka Lundmark has started. I realize it's quite early in his tenure, but from your perspective maybe, can you give us a sense of the new areas of strategic focus under Mr. Lundmark?

It's early. As you might imagine, Pekka has come in and he's doing his -- what you -- what is expected, which is a very deep look at everything. And I think it's good. A fresh pair of eyes is a good thing. The company has been through a lot, right? The combination of Alcatel-Lucent and Nokia was not -- was a tough road in our core business, as you -- I'm sure a few people -- our customer -- investors know, well, maybe you don't. We took a decision, which I think was long term, the right decision, but not an easy one, to consolidate all of our R&D onto a single -- singular platform. We had a huge installed base. So we had -- that was a big multiyear effort to get customers onto one platform. With that behind us, which is largely behind us at this point, we can just innovate on one platform. If we had not done that, we might not have had quite as much disruption, but we'd be still sitting here doing 2 completely separate developments for the same product set. So it's -- that's what I mentioned earlier, how hard it is to do consolidation in our industry. These are the reasons. So Pekka comes in at a good time in some ways because that very heavy lift is mostly behind us now. Having said that, I think it's a fresh pair of eyes to look at critically at where can we do better? Where can we do different things? And I'm engaged in that, of course, I can't comment on it any further than that, but I would say that the initial discussions are good, and they're the right discussions to have, I would say it that way.

All right. I think we have over short time. So we'll probably need to bring this to a close. But thank you so much, Basil, for joining us, sharing your thoughts, your insights, giving us a lot to think about, actually. And of course, supporting our conference. Thank you. Thank you to all the listeners. Stay safe, stay healthy all. Thank you.