Nokia Oyj (NOKIA) Earnings Call Transcript

Hello, and welcome to the Nokia Strategy Update teleconference and video call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's Strategy and Operating Model Update. I'm Matt Shimao, Head of Nokia Investor Relations. Pekka Lundmark, President and CEO of Nokia; and Marco Wiren, CFO of Nokia, are here with me via teleconference and video today. During this call, we'll be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may, therefore, differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risk in more detail in the section titled, Operating and Financial Review and Prospects, Risk Factors of our 2019 annual report on Form 20-F, our financial report for Q1 published on April 30 on Form 6-K as well as our other filings with the U.S. Securities and Exchange Commission. Please note that our presentation includes comparable figures in addition to the reported results information. Today's stock exchange release and presentation can be found on the Investor Relations section of the Nokia website. With that, I would now like to turn the call over to Pekka.

Thank you very much, Matt, and thank you, everybody, for joining us today. We've been looking forward to this event quite a lot because as promised, we are today, going to provide an update on the strategy and operational model work. We gave you some basic kind of principles in connection with the Q3 results a few weeks ago, and this is one step, in a way, midway update on our road towards the Capital Market Day in March. I'm going to be talking about the world around us, then I will explain to you what's the current positioning and, in a way, the key drivers in our business groups are. And then after that, Marco will zoom deeper into the principles of the operational model and capital allocation or some other financial matters as well. Before I talk about the world around us, I would like to emphasize that this is going to be a longer journey. This is going to be a 3-year journey. And as I have said earlier, as we have said earlier, next year will be challenging. Of course, 7% to 10% expected comparable operating margin is not a bad starting point for this journey. But, of course, our longer-term ambition is higher than that. But the interesting thing is that we expect to achieve that 7% to 10% despite the fact that we are investing a lot in Mobile Networks. And as you will have seen earlier in our release today, we expect Mobile Networks to approximately breakeven in terms of profitability next year. So despite that, we expect 7% to 10% for the group. But before talking about the businesses and profitability drivers, a couple of comments about the world around us and especially what's going on in terms of the role of technology. Because unfortunately, as we all know, COVID-19 is not the only challenge that the world is facing. Pressure on the planet is increasing. We have far too high CO2 emissions. COVID-19 is only temporarily taking them down. But when the world comes to normal, hopefully, sometime next year, we are back to the same old story. There is an urgent need to reduce emissions, but it's not the only issue we are facing. We have serious issues about biodiversity, over usage of natural scarce resources of the planet and many consequences that could, in the mid- to long-term, be quite severe to the conditions of living on the planet. At the same time, productivity is stalling. When you look at the big picture and compare how fast the productivity growth in the world was 20, 30 years ago, it's now 90% slower than it was then. So we do have a productivity challenge in the world. And then very importantly, a third issue is that access to opportunity remains very unequal. When we talk about opportunities to work, opportunities to get health care, education and so on. But the interesting thing is that technology will be, if not the only solution, but it will be a significant part of the solution. 5G is expected to add $8 trillion, USD 8,000 billion to, well, global GDP by 2030. These technologies that we are talking about will be vital to dealing with the climate problems and many of the other problems that I mentioned. And we do believe that Nokia will have an opportunity to play a significant role in all of this. We have developed a concept of 6 strategic beliefs that I'm now going to go through with you. And the first one is really that, referring to what I just said, networks play an increasingly important role in society. And they have a direct connection to solving some of these challenges that I mentioned. This means, for us, that we will be able to extend our focus to serving so-called critical networks beyond the traditional CSP networks that we are, today, serving. And then the question is that, okay, what are these critical networks then that we are going to focus on? Critical networks deliver carrier-grade performance, high availability and resilience. But in addition, they are elastic and self-defined to offer tailor-made performance on demand. So they will have very high requirements. And in a way, they are advanced networks that run mission-critical services for companies and societies. And they combine the best features of carrier-grade resilience and then what we have seen on the IT and Internet webscale service side, elasticity and flexibility. This type of networks will be in very high demand in the future. We will be talking about precision manufacturing, we will be talking about automated driving, we will be talking about transportation, logistics, new generation of energy networks, new generation networks for high frequency trading. Even then, a little bit in longer-term, remote surgery, new types of applications for delivering, for example, health care, to remote places of the world. These are becoming increasingly important, and they will -- over the years to come, they will extend to all corners of society. And this does mean that Nokia's addressable market, as I explained, will extend from what today is known as the CSP market and then, as separate thing, enterprise market. It will evolve towards critical networks that sometimes are run directly by enterprises and industries of this world, but very, very often, they will be run by their partners that could be either current CSPs or new types of CSPs that we also expect to emerge on the market in the future. These are challenging networks to run. And because they require carrier-grade resilience, ultra-low latency and high degree of safety and security, very often, I believe that enterprises and industries will opt not to run these networks themselves, but rely on a partner. This is a segment that will provide very interesting opportunities for us going forward. So this is first strategic belief, critical networks, then -- and the concept of typical networks. Then the second belief is that these networks will be built by our customers on a so-called best-of-breed approach, which means that they will select different network elements and different parts of the network, usually separately based on a very careful and competitive analysis on total cost of ownership in relation to the expected performance parameters. Of course, there can be cases, and there will be cases where the customer buys the whole network in one project or in one deal, but we believe that this will be a clear minority of the case. We're happy to participate in such cases, but we believe that most of the cases will be built on best-of-breed type of approach. Which then leads to the third strategic belief, which is that technology leadership is absolutely necessary if we want to deliver economic value. We are seeing that today in Nokia's portfolio, in those segments where we can clearly show that we have technology leadership, that can be, in a way, hardwired and anchored in technical facts and getting the technology generations and their timing right, we immediately have a strong competitiveness. But if we do not have that technology leadership, then you don't have pricing power, you are bound to have a lower market share. So technology leadership is paramount if you want to deliver economic value. It varies between segments that how many companies will have space on the market to deliver economic value. Usually, it's 2, sometimes 3; in exceptional cases, maybe 4. But leadership, in practice, will mean #1 or #2 position or sometimes #3 position. That's absolutely necessary. So we want to reestablish technology leadership in those segments where we do not have it currently. We have it in many segments that I will go through soon. But then a very critical belief that we will apply is that in cases where we will not be able to establish or show path to economic value creation, we will reassess our segment participation. So we will not automatically be in all different segments in cases we cannot show economic value creation. Then number five, another very important thing. When we look at how these networks are constructed and how they are built and how the different parts of the network develop, we do believe that over time, value in these networks will migrate away from, in a way, monolithic systems towards silicon, on one hand, and then software and services on the other hand. So you can choose different strategies to play for different segments, different ways to focus, if you want to deliver value, but you have to be really strong in some of these sub-segments because that's where the value will be shifting to. Important is also that when we look at the development of the network architectures, there's a lot of moves towards open architectures, disaggregation of network layers. And that means that there will be opportunities to capture this value through new types of business models. As we have seen in many other industries, a general shift towards as-a-service type of business is something that we believe that will be increasingly visible in our case as well. And then number six, another important point, which is not only of a general importance for our businesses, that's long-term technology research to secure, first of all, our technology, intellectual property portfolio but also to make sure that in addition to the road maps that the businesses are deciding -- designing, that we have enough long-term innovation going on that we can secure technology leadership, not only in the short and midterm, but also in the longer term. So these would be the 6 strategic beliefs that are innovate -- guiding our work when we continue to work towards the Capital Market Day in March. What we can say already today is that this will mean that our focus area will be to become a trusted partner for critical networks for our customers. And, of course, once we do that, the ultimate goal will then be to deliver value to our shareholders. And I already said that we will have a pretty rigid and systematic approach to selecting where to play and where not to play, and we will only accept plays that have a path to shareholder value creation. I already, a little bit, touched on the what side, secure technology leadership that can be -- mean many things. In many cases, we are seeing a direct connection between our ability to deliver competitive customer silicon that will be the kind of the core of some of the products that we are making and our competitiveness. We are actually seeing that today, very well, that in cases, like in IP routing and now also in Fixed Access, where we are getting it right in terms of the generations for custom silicon. We are actually extremely competitive on technology, and that then gives us pricing power and market share and economic value. But we are also making a strong pivot to cloud and software, and I will talk more about that when I talk about the new business that we are starting on the 1st of January, which is called Cloud and Network Services. And then the third element, we will continue to strengthen our long-term research and patent portfolio. That is, of course, a business that is highly profitable. And it is really one of the best places for us to invest in order to deliver good shareholder returns going forward. So that would be some of the strategic principles. And then I will move to the 4 businesses that we will be reporting from the beginning of next year. And the first one, is our Mobile Networks business that will be led by Tommi Uitto. For the last 12 months, ending at the third quarter of this year, this business was approximately EUR 10 billion in size. And here, our main objective in the short to midterm is very clear, that we want to repeat our 4G success in 5G. And I'll talk about that actually quite a bit because that's clearly the #1 goal that we have here. But before that, I will talk a little bit about the current market position. Mobile Networks market. This is excluding the core network, which will be part of the Cloud and Network Services market. This market is currently roughly EUR 43 billion, and it's expected to grow about 1% per year. There are growth pockets inside this market, and the enterprise wireless is clearly something that is expected to grow much faster than the overall market. And then over time, we also expect that ORAN and vRAN segments of this market will also be growth drivers. We have -- currently, if we exclude China, we have approximately 27% combined 4G, 5G market share. This is for the last 12 months. But interestingly, this is not that different between 4G and 5G. The same 25 -- sorry, 27% applies also to 5G outside of China. We are also, in addition to second position -- #2 position in 4G and 5G outside China, we are #2 in rollout services globally. And, of course, as an organizational move, as you may recall, when we are putting together this segment, Mobile Networks, we will include not only the Mobile Access product base stations, et cetera, but we will also include the related network management software and we will also include the deployment services. The expected profitability for this business, as you already -- most of you have seen in our stock exchange release next year, will be around 0. And we will -- and Marco will talk a little bit more about that in his part, but we will introduce a new reporting concept, which will be more transparent than the previous one. We will stop talking about non-IFRS results, but we will introduce a concept of comparable operating profits where we will explain the difference between reported operating profit and comparable operating profit in quite detail. So comparable results will exclude amortization of acquired intangibles, restructuring and other items affecting comparability. And there will be full disclosure on these items. So the expectation is roughly 0 profitability; Longer-term, significant improvement. Next year will be a challenging year. And in connection of our Q3 results, we were talking about some of these issues that are facing us. There is a top line challenge despite of the 27% market share. But we have a top line issue with one of our largest customers in North America. In addition to that, there is quite strong margin pressure and price pressure affecting the whole market in -- especially in North America. And when you combine that with the fact that we are actually increasing our R&D investment in this segment, that creates the combination of top line and cost that will deliver -- it's expected to deliver roughly 0 profitability next year. But on the turnaround, in the development road, but itself, I have to say that I'm really optimistic about how things are going. So when I look at the recent development, we now have 133 commercial 5G deals. We have 65 public 5G references, and we have 42 live 5G networks. And then in addition to this, we have a strong position in private 5G-based wireless networks. We have, really recently, increased our R&D productivity and also R&D velocity a lot. We have increased our 5G R&D capacity with 40% since January 2019. We have tripled the number of system-on-chip engineers and doubled the number of certain segments in software development such as bin forming. The feedback from customers is growingly encouraging. We have closed, as you have seen, significant deals recently. And we have currently CSPs -- or sorry, 5G business with all top 3 CSPs in Japan, all 3 key CSPs in the South Korean market. We are the only non-Korean vendor that is working on 5G with all South Korean operators. And we are also working with almost all top European CSPs. And then, in addition to that, we do have, despite the recent decision by one of the American customers, we continue to have a very strong position in North America. And clearly, the product development is delivering the target for ReefShark system-on-chip share of all shipments by the end of this year is over 35%, and we are on track to achieve this target and the target for the end of 2021 continues to be approximately 70%. So clearly, in those parts of the feature set where there has been gaps that is narrowing, there are already now quite a lot of cases actually where we are either on par or even ahead of competition. This journey is not over yet. And, of course, it will take until '22 before 100% of new shipments will continue to be -- or will be ReefShark-based and that's then the ultimate time when the entire cost challenge that we have had because of the FPGA chipsets instead of systems-on-chip will have been sold. So that's the situation in Mobile Networks target to improve profitability significantly in the longer term. Then the second business that we will report from the beginning of next year, that will be called Network Infrastructure. You may recall that there was an earlier name, IP and Fixed Networks, but there is also Optical Networks, and there is the Submarine Networks. So we decided to call this business group Network Infrastructure. And the objective of this is obviously to be the world's most trusted partner with best-of-breed solutions for the most critical networks in the world. And now we want to up our position a little bit more in the various segments that we have. Here, you see that our market share globally in CSP routing is 18%; Optical Networking, 11%; and Fixed Access, 19%. If we take these numbers, excluding China, they would be 25%, 17% and 32%, respectively. In IP routing, we have market-leading routing silicon, routing software and network automation and analytics capabilities. This is a segment where we have a strong position, and it will be further strengthened through the next product introductions that we have in the pipeline. In Optical Networks, our market share is lower, but we have recently made some very important technology introductions. The market, and I'll talk about those just in a second, but the key market driver for Optical Networks is actually very attractive because it is the -- basically the same 5G deployment that is going on, that is driving mobile network demand. But it requires that for the edge cloud architectures, the backhaul, mid-haul and front-haul connections will need to be upgraded in capacity, and this will lead to a lot of investments by the owners of these networks. And then in Fixed Networks, the key driver, obviously, is fiber build-out and fiber-to-the-home build-out, which is not mutually exclusive with 5G. We believe that our customers will invest in both. And then in Alcatel Submarine Networks business, that's an interesting segment as well where we are a leader in the whole world at the moment. And that is a fast-growing business at the moment, which is turning to profitability. We'll give you more information at Capital Market Day. But it is, in a pretty attractive way, driven by the investments in Submarine Networks by the webscale customers of this world. Strategic imperatives for this is, first of all, to expand leadership in IP routing for CSPs and then also to gradually expand the market position that we have in CSPs to enterprise and webscale. We continue to invest in custom silicon for high-performance needs, but we also invest in data center switching solutions, which are often based on various software solutions. Then in Optical Networks, we have recently launched a new generation chipset, PSE-V. PSE stands for photonic service engine that will be our kind of key element of driving our transition from the 100-gigabit per second capacity to the 400-gigabit per second capacity. In addition to that, in 2021, the positive effects of the acquisition of Elenion will start to be visible, and that will drive cost efficiencies with silicon photonics, which is obviously a growing technology trend in this segment of the market. Then in fiber access, we have also recently made a very significant technology and product launch with our 25-gigabit per second PON, passive optical network solution, which is now at a pretty attractive time when fiber deployment and fiber-to-the-home is increasing in importance, is taking a technology leadership position, actually in the whole world. And when you combine that with the market shares that you saw earlier, that puts the Fixed Access business in a pretty interesting position. This, in addition to the Fixed Wireless Access, which is also a growing segment. And then last, but not least, for this business, we want to expand our leadership position in Submarine Networks, which I already explained, will be a growth segment going forward as well. Then to the next business, which will be roughly EUR 3 billion -- sorry, I forgot to mention about the previous business. Still, you probably saw it, but the current situation -- or next year, high single-digit for Network Infrastructure and then longer-term goal will be a gradual improvement. But now to Cloud and Network Services business. Approximately, EUR 3 billion business for the last 12 months. The objective is clearly to create value by leading the transition to cloud-native software and as-a-service delivery models that I was talking about earlier. So this is really our pivot to that world. This is also a fairly large market, EUR 26 billion in total today, but it's important to zoom deeper into this market and understand that what the attractive growth segments of this market are. We have a strong starting position. We are #1 in telecommunications, software and services. This is a fragmented market, as you can see on the 7% market share. But we are also a leader in cognitive automation and in private -- industrial private wireless. So our starting point for this is strong, but it's very important to understand that what this EUR 10 billion market, which will grow 17 -- sorry, is expected to grow 14% per year to EUR 16 billion by 2023. What that includes -- and that includes the cloud-native software, advanced cognitive services, as-a-service delivery models and various types of industry product, zero solutions. So that's the list of innovative solutions that we will be focusing on in this market. So this means that from the starting point, which is actually a collection of various businesses where we are in at the moment, about mid-single digit profitability, we see a potential for significant improvement over longer term. And again, strategic imperatives listed here, already mentioned to a large degree, transition to cloud-native leadership in private wireless and transition to as-a-service delivery models. And then the fourth business, approximately EUR 1.4 billion for the last 12 months, our technology licensing business, which is number two, in technology licensing in the world. On this slide, you see a list of various deals that -- or agreements that we have reached over the past few years. There was one more quite important 5G agreement actually signed in the third quarter this year, but unfortunately, we are not able to disclose the name of that customer. But what I can confirm is that we have a portfolio of approximately 20,000 patent families, including -- and this is really important, including about 350 5G standard essential patent families. And recently, an independent report concluded that Nokia is number one, #1 in the world for ownership of granted patents that have been found essential to the 5G standard. So this does give us a strong foundation to build on. And what we are going to do is to continue to invest in 5G and multimedia research and standardization to continue to further develop and renew the patent portfolio. Then, of course, a very important goal is to renew the major mobile device deals at as favorable rates and -- as possible. There are still some uncontracted vendors that we are approaching. And in addition to that, in addition to 5G mobile customers, we have a goal to gradually diversify to new segments. And here, automotive and certain segments of consumer electronics are the most important segments. For example, to leverage our multimedia assets. And then the number four goal of this business is to build brand partnerships to grow the value and develop new opportunities for the Nokia brand. So these are the 4 businesses. And then this whole thing will be supported by quite a big exercise that may perhaps look small when you look from outside, but believe me, this is really, really big. We are refreshing our operational model. It's not only that we are building these 4 business groups that will then be tied together in the customer interface through our account teams and the customer experience organization, but it also means that we are actually building a very lean corporate center, and Marco will talk a little bit more about this. This is a big transformation and it will not be done overnight. This is a fundamental change in philosophy. We want more accountability but more decentralized decision-making and a leaner, competent, yes, but leaner corporate center. We want to decentralize more, not centralize more of the decision-making, really making the business group leaders that you saw on the previous slide, fully accountable for the products that they develop and also the success of the products on the market. Then these 4 businesses will be supported by a strategy and technology organization that will be responsible for the long-term research and working very closely with the technology licensing business. But not only that, also scouting technologies, start-ups, establishing cooperations with research institutes, and then continuously challenging the 4 business groups as to what will be possible on technology. And then for, in a way, a more traditional corporate center functions, the finance organization and corporate affairs, legal and compliance and people. With that, over to Marco.

Thank you, Pekka, and hello from my side as well. And I will touch upon 4 different areas now. And I start with why a strong capital structure is important for us and how we're driving improved focus on capital allocation as well. And the second item is that how we're creating long-term shareholder value by practicing towards the areas where we can lead. And then also, I will get back to that, Pekka just mentioned about the lean corporate structure and why it's important for us. And then, I end my presentations here with that we are highly committed to clear and transparent reporting and communication. So with this, I will start with our capital structure. And actually, customers see a strong capital structure as a sign of strength. And that reflects our ability to invest in R&D as well and drive the technological leadership that we need to do. But in addition to that, also our customers want to have a long-term partner. When they invest in a huge networks, this is a long-term journey, not a one-off deal. And that's why it is important for us that we show that we have that strong capital or financial position over the longer-term as well. And in connection with this, we also have a target that we aim to investment-grade credit rating. And also, we've stated before as well that when it comes to the liquid assets, we want them to be about 30% of our net sales. So -- and how we are working with this? We actually think that each of the capital allocation decisions should be done exactly like any investment decision and thinking, which means that we are looking into, is that right area, and what is the return of that investment. And that's where we allocate our resources as well when it comes to financial resources. And then, of course, we have a very stringent performance management, so we will follow this up just like any other investment. And there's a little bit change in the way we are doing that today. And of course, when we see that businesses are now responsible, they have the clear P&L responsibility, we will also focus more on the capital returns from businesses. So we will assess, basically doing a portfolio analysis on a continuous basis, not only at the group level, but also the same task as given to the new presidents of the businesses. So they will do continuous evaluations of their portfolio and offerings that they have so that we can try that value in this business. Then consistent with our capital structure philosophy, we have a clear set of capital allocation projects as well. And, of course, the primary focus is deploying capital to R&D in the areas where we want to win. We want to drive that technological development and that is primary focus. Then we have also other investments in our core businesses that we can see that they will create shareholder value. So value creation, again, is the key here. And of course, with these we can provide shareholders the capital returns. And of course, when we are now looking into financial targets and coming back to those, the latest, at the Capital Markets Day, we'll also look into the dividend policy. So we will get back to that as well. And then going to value-creating long-term shareholder value and how we [ pride ] that as our capital. Focusing on the best-of-breed vendors, as like Pekka mentioned earlier, is extremely imperative for us. So that's why it is important that the businesses feel they're empowered to do what is needed to improve the businesses step-by-step continuously. And that's why when we set the terms as well, we look what is our capabilities, what is the technological development, how is the market outside looking, and how are customer investment plans evolving. So that's the way we set the targets on businesses. And as I said, the thinking is that they have to improve their business operations continuously. And it's no longer justified to just exist because you're part of end-to-end offering. So this is a very clear change that we have. And when the business leaders have this empowerment, accountability, and responsibility, all the way from top line to bottom line so they have power to change what is needed in the businesses. And this why also we want to change the corporate function cost base. And if we now go to that section as well, so why is it so important in this new personnel model that corporate staff functions are leading? Today, the situation is quite different. We actually have a lot of people in corporate functions. And we are now moving all the costs and headcount to beachheads and keep a lean, focused headquarter functions. And just an example, giving you numbers here, we are moving about 14,000 full-time employees from corporate to beachheads. And how we've been doing this earlier is that we have been allocated that cost based on a key, usually net sales to the business leaders, which means that big part of the cost, they actually haven't been able to influence. But now the situation will be different. And then to the reporting, as I said, clear and transparent reporting is our target. And the ambition is that now we have this new operational model with clear 4 business groups. With committed P&L responsibilities, we aim to report those exactly the same way as we are following it internally. So we will show you P&Ls on these 4 business groups on a quarterly basis in our interim reports. And we hope that all these will be easier for you to assess the value of these different businesses. And especially when you're doing some of the Board's valuations, so we hope that now it's easy to do. Another issue that we will change is that we will implement, again, a regular cadence of Capital Market Days. And I know the last time we had a Capital Markets Day was actually 2016. But now we're going to do those more on a regular basis as well. And the next one is next year, March 18. And I hope that you all can join that meeting as well, and let's see if that's going to be a physical meeting or if it's going to be virtual. And then back to the Pekka's comment about the reporting. So we will now simplify the reports as well. It's clear for you and easy to find the information, which is important for you. And just like Pekka said, we'll not use the term non-IFRS, but we will use term comparable operating profit. And we will show that very easily, just like here on the slide, the bridge between reported results and what is the comparable results and all the items which are affecting the comparability. And we believe that the new reports that we will present from Q1 2021, it will be easier for you to see what is the underlying business performance, but also, it will be easier for you to compare Nokia with our peers. So I end my presentation here and turn back to the -- Matt for Q&A. Thank you, Matt.

Thank you, Marco. [Operator Instructions] Cole, please go ahead.

[Operator Instructions] First question will come from Dominik Olszewski with Morgan Stanley.

Just one question focused on the philosophy for R&D spending. Obviously, today, you've emphasized the value of R&D and the importance of technology leadership. So are you protecting the R&D budget spend next year? To put the question another way, are you willing to accept a negative operating margin in Mobile Networks? Or is the R&D spend effectively limited by the ability of Mobile Networks to show a flat margin?

Well, the reality, when you talk about R&D is that those costs are something that you can very easily drive up or down. So we are looking at a certain R&D target, which, of course, can be flexed a little bit up or down, but it's still fairly rigid because you're talking about people and you're talking about hiring people. I mean, that expected profitability for Mobile Networks is approximately 0%. But, of course, there is always a potential swing factor. And there are uncertainties up or down because we do not know exactly yet how much next year's top line will be. There are still deals to make to complete the volume picture for next year.

Our next question will come from Sebastien Sztabowicz with Kepler Cheuvreux.

This is Sebastien from Kepler Cheuvreux. Your -- the competitor has started IP contracts renegotiation with a couple of its large potential relationships, notably to include 5G technology into patent agreements. Have you started renegotiations with your licenses around 5G? And any data will be very helpful.

Thank you for the question. And I understand the question based on what you've seen, Ericsson. But actually, what we believe is that we have a very good patent portfolio. And just like we mentioned earlier, on the 5G, we have 3,500 SEP patents, and we are leading actor there. And we believe that we have very good base here. And, of course, litigations are never something that we want to enter in, but sometimes it happens. But it's very difficult to also say what is the outcome of this. When it comes to the specific deals and so forth, we cannot go into details. And I believe that, so far, we've been quite successful in those cases that we have had litigations. And usually, we do a very good evaluation before we enter the litigation, what is our ability to win. And that's why I think we've been quite successful so far.

And Marco, maybe just to add one thing since you specifically asked about 5G patent deals. Yes, we do have already signed deals in 5G. So we have been able to demonstrate our capability to kind of migrate from the era of 4G to 5G also in the patent licensing business.

And the next question will come from David Mulholland with UBS.

Just in terms of the reorganization within the business, one of the challenges, I guess, Nokia's faced for the last few years is driving coordination between what were historically separate business units even within Alcatel and Alcatel-Lucent and then combining with Nokia within Mobile Networks. Where do you think you are on that and the ability of the company to move forward with -- I guess, with one agenda and everyone singing from the same hymn sheet? I'd love to just get your take on, yes, where we are in that transition.

That's a great question. And I believe that this simplification of the whole operational model will play a really key role in this. Because what we have done is really designed this 4 businesses around customers' typical buying situations. The current organization that is still valid until the end of the year, in many parts of it, it's actually fairly complicated. And the current management team is 17 people. It's very large. From the beginning of next year, it will be 11 people. And a couple of concrete examples. One is that in today's model, even in a fairly straightforward mobile access deal, there are 5 management team members that are, in a way, partially responsible for that deal. And that takes a lot of coordination and effort in everything . From the beginning of next year, it will be very simple. It will be in one business group, that whole part of the network. And the same logic follows to the other parts of the network as well. So each business has its clear strategic role. That's my first point. But then the second point is that, of course, as I said, these businesses will not operate in silos. And there are 2 places where breaking these silos will be extremely important, and the structure will make it easier than today. The first one is the customer interface where we are -- account teams that will be working with the businesses when they serve their customers. And as I said, we are more than happy to engage in end-to-end type of network architecture or technology discussions with the customer. And then the second thing is that I said that in addition to businesses in the leadership team, there will be a role called strategy and technology. And one key task of that role and that organization will be the overall network and technology architecture, including the harmonization and management of the software stack architectures across the businesses. So that's a great question, and I believe that this new model will be a fundamental element in addressing that challenge.

And your next question will come from Sami Sarkamies with Nordea Markets.

You made it very clear that you would be ready to consider divestments in case businesses were not able to reach competitive margin levels. You did also discuss the margin upside in various business groups. My question would be that do the targeted improvements in profitability include potential impacts from divestments? Or would those represent additional margin upside?

These targets that we have now -- as we have now presented them is more or less following the current business structure. Then it's very important now, what I said in the beginning, that this will be a 3-year journey. And now these businesses will start, remember, they will start on the 1st of January. So now it's very important that we give them time to work on the strategies, value creation strategies. And then as we said in the beginning of the presentation, we will then discuss with the businesses to the extent there are segments where we cannot see a path for value creation. And that's then the point when, of course, reassessing the strategy for that particular segment comes into question. Also, there, you mentioned divestments, but we have to remember that when we talk about strategic reassessment, there can be other ways as well. There can be partnering, there can be different types of portfolio arrangements with some other players, you do this and you do that. So there's a multiple of different strategic routes that can be taken for those businesses that may not have a stand-alone path to value creation.

And your next question will come from Sandeep Deshpande with JPMorgan.

My question is regarding, again, back again to your mobile infrastructure business. Your product has been less competitive over the last few years, which has caused some share losses. But there is huge opportunity in terms of share gains because of various geopolitical issues. How are you seeing that progressing at this point? Or do you need that product to be at the 2022 level of productivity to be able to win significant footprint as is becoming available because of the issues in the market?

We don't need to wait until 2022 for that. And we are actually seeing a lot of opportunities today. There has been some deals where these factors have been part of the logic behind. And our estimate is that we have actually caught over 40% of the value of such opportunities. So we are getting there right now with -- even with the current portfolio. No need to wait until 2022.

And the next question will come from Achal Sultania with Credit Suisse.

Can you just help us clarify one of the comments on the patents business. So when you talk about keeping that business profitability at a stable level long term, can you just help us understand how much in that -- of -- on the contribution today is coming from the amortized portion of some of the deals that you have done in the past where you've received an upfront licensing payment for future periods? And if that's the case, does keeping that business stable in the long term, does it mean that you have to win a lot more deals to offset the headwind as those amortized portion of revenues go away in the future at some point?

Very good question. And what comes to the structure of deals we have given you information earlier as well that about EUR 600 million is the difference between what we have as a profit and what is the cash flow. And that's because of the prepayments that we have received earlier years, and this is varying a lot. We don't know how that's going to continue going forward. Will we get the prepayments again? Or will they pay as we go? So that is still still open, and we see that on a deal basis, actually. When it comes to the portfolio itself. As we already mentioned as well, we have over 3,500 5G patents already. And if you just look at the development of 5G mobile phones, there's a huge development and estimates and all that. In 2023, for example, half of the mobile phones that are sold will be 5G mobile phones. So we see very good opportunities. But in addition to that, also video and IoT and in the automotive side, we see different opportunities and consumer electronics, just like we said earlier. So there's definitely a lot of opportunities going forward. Now what we are guiding here is what we see right now. And this will definitely develop, and we will get back to you as well. So if you just look at the current patent portfolio, we have -- actually, these very long-term opportunities here. So it's not only the next 5 years. It's actually more than that. It's up to 10 years and so forth. And these are very good patents, and these will be needed as well by many, many other companies.

And your next question will come from Andrew Gardiner with Barclays.

I just had another one on timing. So first, a clarification. Pekka, when you say 3-year journey, just want to make sure we're all on the same page. I mean, are you therefore, intending to achieve whatever your eventual target profitability and returns might be, say, late 2023, early 2024? And then to the point you made on the sort of continuous review of your competitive positions, in an earlier answer, you obviously acknowledged that this plan is going to begin on the 1st of January. You've got to give them some time to execute the business plan. But how long do you give them with a 3-year journey in mind? I mean, are these businesses going to have a year, 18 months? At what point should we expect to see some action around that -- sort of those reviews?

I understand the question, but there is no definitive deadline that I could quote. I mean this will be a continuous discussion between Marco and myself and the leaders of the business. And there can be different situations also in -- from timing perspective. Then, that 3-year journey was not an indication that, that would be anything particular about profitability guidance. It's more of an indication that we are now building or starting to build a solid foundation for the next years, and this is something that will take time. And 3 years, what does that mean? That is the period of time within which when you start from the basics and start investing in new operational model and getting the products right, increasing investment in R&D, getting the focus -- technology focus in a sharp order, that's roughly what it takes before you can produce or expect any meaningful results. I'm not saying that there could not be improvements before that, but that's not a specific deadline for any of the targets that were published today, if you talk about the longer-term targets that we were quoting for the different businesses. It's a continuous journey.

And your next question will come from Frank Maao with DNB.

So my question will be relating to the Mobile Networks, building on a previous question, where you talked about several factors. But would like, if you may, if you're able to break down on what the main levers of margin improvement will be that you're pointing towards from today's kind of breakeven level in the longer term. Will that, for instance, be more related to scale? Or do you see improvements on the gross margin side as the business transitions more to software, for instance? Or do you see efficiency gains on the OpEx side, for instance? So if you could give us some more color on exactly what kind of drivers you see for -- on that side of the business to get to a more acceptable level of margins.

Actually, all those drivers that you mentioned are important. Of course, top line and volume is extremely important. And there, again, we are still in the very early phases of the 5G cycle. Gross margin drivers, clearly, product cost, which has a connection to the system-on-chip road map and some other development initiatives that we have ongoing. But it's not only these 2. Then it's also SG&A, which will be under a lot of scrutiny. And this new operational model will be also there, I would say, an enabler, as Marco explained. We are pushing quite a much more direct responsibility of fixed cost S&A, in general, to the businesses. But I will have to ask you to wait for the Capital Market Day before we may be able to give you more granularity as to where the future improvement would come from. I'm not able to -- or I do not want to go into more detail on this one today.

And the next question will come from Stefan Slowinski with Exane BNP Paribas.

I just wanted to come back to the question around that journey and maybe the destination of the margin. Can you say that it would be at least kind of in line with the targets the company has had in the past of around 12% to 14%? And I think just based on your previous comments there, are we right to assume that, that won't be a linear progression, and that even if we get improvements coming through in the near-term from ReefShark deployment, those will be reinvested and more of the benefits could come in the later part of that journey?

The only annual or year-specific guidances that we are currently giving is, of course, for this year and the next year. And then we, as you saw, we opened up ourselves a little bit in terms of our longer-term ambition. But more than that, we are not going to provide today. Capital Markets Day will then be the opportunity to get and introduce more detailed longer-term targets, but we are not going to make comments on the longer-term in a more detailed manner than what we said today.