Nokia Oyj (NOKIA) Earnings Call Transcript

Absolutely. And we'll circle up maybe later come back to optical medium term later in the session. But just quickly to round off the near-term discussion. You talked about availability of components, Pekka. And if you had more, you could ship more. Could you comment on how do you see that situation coming back to normality if I could use that word? Does it come by the end of this year, middle of next year? And by that token, we talk about shortage of components. There's also a shortage of talent out there. And a lot of companies are talking about the war for talent in a very tight market. So maybe you could address those 2 elements as a part of maybe a near-term discussion before we go into the longer-term topics.

Okay. So the component situation, first, I think I've said in connection with the Q2 report that it's a real fight out there. We have done pretty well in that fight, but that is something that you have to focus on every single day on all levels of the organization. How long will it continue? I mean there are very different opinions depending on who you talk to. And I believe that there will also be differences between different suppliers. There's a lot of capacity investment going on all the way into new foundry capacity and substrate capacity and so on. It takes time before those investments will hit the market because even the lead times for machines needed are long at the moment. In some segments, we could actually be facing a turning point already during Q3, Q4. In some segments, this could continue well into '22 or even into early '23. By later '23 and then '24, it's quite likely that there will be significantly more capacity available out there. The important thing here is that you have to take a pretty -- in the short term, pretty operational approach to this because most of the suppliers are in allocation mode at the moment. And then it's very important that you make it clear to them that the relations is important. You are important to them. They are important to you. It's a mutual dependency, that both need each other, not only in the short term but also in the long term when, then, the capacity situation has again turned for the better. And again, we've been putting a lot of time and resources into this, myself included, and we've been doing fairly well in a difficult situation.

As you've gone past the halfway mark in this fireside chat, let's maybe move on to talking about some of the longer-term topics as, Pekka, you and your team continue to pivot the wider group. So again, I go back to Mobile Networks now and take a more longer-term view. And you touched upon North America earlier and some of the near-term demand dynamics. Help us understand how are you thinking about your medium- to longer-term demand prospects across different geographies and key customers. There's obviously North America where it's clearly off to the races. You got Europe, which is starting to come through. Interestingly, in China, where you've made a comeback. Please help us understand how you think about your opportunities in each of the key geographies and maybe comment on some of the key customers, if you may wish to do so.

Well, I won't repeat what I already went through earlier about the product competitiveness because that's, of course, fundamental to the market share, and again, we expect to have 25% to 26% market share in Mobile Networks excluding China this year. As we all know, the investments have progressed furthest in North America, Korea, Japan as well. Now with the new frequency bands, the mid-band, especially in North America, as you have seen, the operators have actually increased their investment plan. So that market looks pretty robust at the moment. But then the interesting thing is that Europe, which has been behind in 5G investments, including 5G coverage as percentage of the total population is now speeding up, which is a very good thing. And then gradually, then also now when we get to the end of this year and then 2022, those parts of the world who have actually had very limited 5G investments so far. Latin America, Africa, India, of course, being one big target going forward. They will gradually start making investment decisions. And we are so glad that now in this -- in a way, next wave of 5G decisions will come. We will have a fundamentally stronger product competitiveness than we had when some of the first decisions were made. On top of this come then the big new opportunity, which is difficult to quantify, which is the industrial 5G, the 5G networks that will support automated manufacturing, robot control, logistics control, transportation, mining, you name it. There is so much productivity improvement that can be gained with next-generation technology connectivity investment in this industry that we do believe that this will be driving some of these investments for many years to come. You mentioned China. That deal is something that we are proud of because of the fact that, of course, the technical requirements that Chinese customers have on 5G are extremely tough, and we are proud to have been selected as a vendor as, in that particular case, as the largest foreign supplier.

Noted. And in terms of -- you talked about your competitive sort of competitiveness, your product portfolio. Specific to Europe, how do you see that sort of I guess, to some degree, Huawei replacement, but how do you see sort of the demand dynamic playing out in Europe between the real demand and say, call it the swap-out demand, if I could put it that way?

It is clearly both. We have estimated that we have won about 50% of these opportunities where operators have decided to do swaps because of various reasons. So we have clearly taken our share of that. But of course, it's not only that. As I said earlier, if you take the 5G coverage as a percentage of population in Europe and compare that to the U.S. or even more so to Korea, we are still quite far behind. So there is a lot of catch-up to be done and that's, of course, kind of completely new investment. It has nothing to do with any swaps.

Understood. Understood. Moving on to another topic, which I guess gets a lot of attention is the Mobile Networks' margins. Now I appreciate the first half was flattered by one-offs, and you have given the 2023 guidance 6 months ago. There's a lot of uncertainty out there, but let me give it a shot. Is it fair to say that there's more upside than downside risk to your 2023 targets as things stand today?

First of all, as you noted, just for full transparency, we had EUR 80 million one-off positive in Q2, which, of course, helped a lot when it comes to the overall profitability of Mobile Networks. Hey, look, our target is 5% to 8% comparable operating profit in 2023. And if you listen carefully to Tommi Uitto's Capital Market Day presentation, he did say very clearly that, of course, 5% to 8% is not the ultimate target for Mobile Networks. Of course, we want to go double digit. The 5% to 8% target for '23 was set only, as you said, a few months ago. So we are not ready to revisit that at this time. We continue to work on the components situation. We want to continue to deal with the North American headwinds that we've been talking about other parts of the world are progressing well. We are making progress in North America as well. So many things are going to the right direction. So certainly, I will continue to target with Tommi that one time in the future, we will be delivering double digit profitability in Mobile Networks. The catch-up that we've been playing and that will be, to a large extent, completed by the end of this year, as I said, is one step. But of course, then the next step will be to target -- will be to take the lead on the product side. And we have some exciting stuff coming out in the pipeline for '22, '23, '24 as well as I also know our competitors. So the fight will continue. The technology race will never end, but our relative position is increasing. And of course, that will, in due time, be reflected in margins as well.

All right. We will watch out for that. But moving on maybe beyond Mobile Networks, we talked about optical earlier. And of course, we also briefly touched upon IP. In a medium-term context, when I look at those 2 parts within the infrastructure business, how are you thinking about competition for both IP and optical against the likes of Cisco, for example? You've also had losses for Huawei. We talked about Huawei in the Mobile Networks context, but there's also opportunity, for example, on the optical side. So help us understand medium term, how are you thinking about your competitive positioning in IP and optical.

Those are slightly 2 [different ] segments at the moment. And our relative position in IP has been a little bit stronger than in optical, even though we are now making progress in optical as well. Then of course, there's a lot of theories about IP optical convergence that will start happening through pluggables, at times, optical pluggables that are installed directly into routers. And this is, of course, one reason why it makes a lot of sense to be a player in both of these games. The IP networking business is clearly one of our best businesses in Nokia, profitability that is well in double digits. And as we have hinted before, there is some exciting stuff coming out later this year. We had, as you know, a major -- as we discussed, the major product launch in Mobile Networks earlier this year, but there is something to come on network infrastructure side later this year that will then further increase our competitiveness. The routing silicon that we have had in the market, the FP4 has already been market-leading. The routing silicon, routing software and then network automation and analytics capabilities have created a very strong package, but there is more to come. So I have every reason to be optimistic about the future of that business.

Got it. And any particular comment on, say, the opportunity in optical with Huawei's sort of ceding share in Europe?

There are opportunities. And of course, the difference, if you will, between the optical and IP market is that the optical market is still much more fragmented. There's a lot of small players. And in all these segments, of course, Huawei has enjoyed a large market share. So anything that would, one way or another, kind of affect that market share would, of course, be an opportunity for the rest of the players, including ourselves. Some of the recent analyst -- market analyst reports, it has been noted that we actually we're -- took a market leadership, #1 position in optical networks in Europe earlier this year.

Indeed, indeed, I guess moving on to your -- another of your businesses, a bit more of a turnaround story, which is your cloud and network services business. How are you talking about the recovery there in the context of say, quality of portfolio rebalancing. And maybe I could also take this as an opportunity to ask you how do you anticipate the enterprise side of the Nokia story to play out over the medium term?

The turnaround, if you want to -- and I guess it's fair to call it turnaround in cloud and network services. It's really an important one for us. And Raghav Sahgal and his team, they are in the middle of a major portfolio assessment at the moment. There's a lot of products there who are ending or getting close to the end of their lifetime. There's a lot of products that will need to be phased out in the coming years and then replaced with something new. And Raghav was actually talking about this quite a lot at the Capital Market Day. And we are now kind of focusing this business around 5 to 6 key areas where, of course, 5G core is an extremely important focus area going, of course, very well together with the Mobile Networks business. Then analytics and AI-based services, for example, network quality analytics, automatic fault detection, performance optimization with the help of artificial intelligence is another focus area then private wireless and industrial automation, which I already earlier said is a major product area, not only for the radio network, but also for the core network or the data center part. Then digital operations and closed-loop automation, automated deployment of services, zero-touch management of services, service quality assurance being one focus area and then managed security increasing in importance all the time. And last but not least, monetization and billing systems. So this would be, in a way, the high-level focus of cloud and network services and perhaps to zoom a little bit more into the enterprise side of it, since you asked, the enterprise customers represented 7% of Nokia's overall sales in the latest report. And structurally, of course, there can be, because of comparables and so on, bumps up and down in individual quarters, but the general direction of travel in the enterprise business is that we wanted to go faster -- grow faster than the CSP service provider business. And without giving any guidance as to how quickly that would grow, but that market a whole is growing perhaps 10% a year. So that gives you an idea of what the ambition level roughly would be in that part of the business also. Also remembering that there can be then swings between individual quarters.

Got it. As we are probably coming towards the end, the critical component that we haven't talked about, but absolutely the top of the mind is your technologies revenue stream. I guess, as a CEO, a question for you is how do you balance timely renewal of these deals versus maximizing the value for shareholders because investors are often worried when things get into a legislation or a litigation kind of a stage, sorry, but how do you go about doing that? And you've commented on technologies being stable. Why wouldn't it grow longer term given the need for greater connectivity in the world?

Of course, now we are in the middle of the shift 5G, which from IP licensing point of view, still has been a very small part of the market. And of course, now we have a full emphasis on now starting to leverage our strong 5G patent portfolio. We have made one major 5G patent license agreement. It was made earlier, actually at the end of last year. And this is exactly now the time where you have to strike that balance because if you are not ready to litigate, if needed, you will not get the best deals. Litigation is always the last resort. I mean, of course, we always try to negotiate first. But we have, of course, very clear target as to what the value of our technology is, and we have invested billions in technology development. So we believe that it is fair to have a firm approach as to how it is to be monetized. And that is a balance that you have to strike all the time. And I understand that people are nervous if they see news on litigations. We were in litigation with Daimler earlier, as you know, and now that has been settled. And there has been others as well. So that is even though unfortunate, but it seems to be part of the nature of this business. In terms of the forecast, there is a lot of new opportunities. And then, of course, in a patent portfolio, there are always patents whose value will go down over time. And then there is new stuff coming in. And the question is that how quickly and how well do these balance each other out. The optimistic side of me when you talked about growth opportunities, of course, is the fact that there will be tens of billions of different types of devices, IoT included, that will be 5G connected in the future, and we will have a strong play in all of that over time. When it comes to guidance, we are -- at any given time, we are incorporating all the information that we have and then we give the guidance. If there is a reason in the future to change it, then, of course, we do. But we, again, here want to be as transparent as possible.

Got it, Pekka. And maybe just one final one as I realize that we are almost out of time. We talked about the Mobile Networks margins earlier, but I guess expanding to the wider group margins. Given the impressive performance so far this year, and again, I appreciate you've given the 2023 target just 6 months ago, what are maybe some of the key puts and takes that need to fall in place for you to maybe give us update if I could call it that, on the wider group margins, given how critical that is to the Nokia investment case.

The 23% margin target still valid, they look, they were actually published only 4 to 5 months ago or something like that. And we are still pretty early in our strategy execution. As you remember, we are talking about a 3-phase strategy: reset, accelerate and scale. And we are still putting many of the fundamentals in place. H1 benefited from some positive one-offs. And then we do have this market share and pricing-related headwinds that will be more visible in the second half of the year. So while we are confident that we are on the right way and we are clearly making progress on the product side, and there is promising news on the new deals, we do not want to get ahead of things. We want to take this one step at a time and only 4 months since '23 targets were published. So it's too early to talk about or speculate about revisiting them today.

Got it, Pekka. Well, on that note, we are definitely out of time. On behalf of Citi and its clients, thank you for joining us, Pekka. Best wishes to you and the rest of the Nokia team. Ladies and gentlemen, this concludes the session on Nokia.

Thank you very much.