Nokia Oyj (NOKIA) Earnings Call Transcript
November 29, 2022
Earnings Call Speaker Segments
So good afternoon, guys, and thank you for coming. I know we've got tough competition with the U.S. versus Iran game out side. So I really appreciate you being here. I'm Adi Metuku, and I cover European technology hardware stocks at Credit Suisse. I'm pleased to have with us today, Pekka Lundmark, CEO of Nokia. And in terms of the format of the session, I have a few questions that I'll be going through. And towards the end of the session, we will open it up to the audience for Q&A. So without further ado, let's begin. So firstly, thank you, Pekka, for coming. I'm not looking at the football on my [ pad ]. I'm looking at my questions. But since you guided, I just wanted to hear thoughts on how things have trended. Have things moved in line with your expectations on the supply and the demand side? Any color there would be helpful.
Well, there's -- first of all, thank you for inviting me. It's great to be here. There is no change after we guided. We are looking at top line between EUR 23.9 billion to EUR 25.1 billion, comparable operating margin between 11% and 13.5% that we have said that we are trending towards the midpoint of that range. And then on the supply side, things are gradually easing up. We are not -- I guess, the industry as a whole is not out of the woods yet, but we do expect that when we get to H1 next year, that things would go pretty close back to normal.
Got it. And maybe just then shifting gears and looking at the different divisions. Firstly, focusing on mobile networks. I think a lot of investors are currently focused on the brand market growth for next year. So can you talk a bit about how you see the brand market developing next year? And especially if you could focus on what's happening in the U.S., what's happening in India? And how should we think about Nokia's outperformance or underperformance versus the brand market?
As a whole, we actually -- of course, we recognize the macroeconomic uncertainties and this industry will certainly not be immune. But despite all that, we expect the market to continue to grow next year. And on top of that, we back to take -- continue to take market share. We have now in mobile networks outside of China, we have for the last 12 months, we have a 24% market share. And actually, in Q3 isolated, I think it was 27% according to [indiscernible]. So it's -- we -- a couple of years ago, we stopped the market share decline and now we are climbing back up, and we expect that trend to continue next year. Structurally, I mean the U.S. market has been very strong, and it is prudent to expect some normalization of the market there. But then at the same time, there are other markets in the world, especially India, which are now ramping up extremely fast.
Got it. Now when I look at the CapEx numbers, India is roughly around 3% of global CapEx, 3% to 4%, and U.S. is a much bigger portion. So in a CapEx -- it feels like CapEx will be going down wireless CapEx for 2023. So how do you kind of join the dots between expecting RAN spending to remain constant versus CapEx going down?
Well, we are analyzing the market from our point of view. And this is actually supported by the external analysts also that the market would still go up next year. And we have just factored in all the information that we have. We do recognize, of course, that all carriers have not yet announced their CapEx plans for next year. Some U.S. carriers have done it, and some have indicated some normalization or some slightly ongoing CapEx next year. But you need to be a little bit careful when you look at the carrier CapEx announcements because they have everything there. And our portion is only 1 part of that total CapEx.
Got it. Now recently, there's been some news flow in the U.S. about the FCC actually banning the approval of kit from Huawei and ZTE. Now obviously, they were banned a while back. But do you think this announcement will have any effect at all, maybe in terms of accelerating some of the smaller carriers to move away from the Chinese vendors?
Well, when we talk about mobile, that had already been happening in -- I mean, in both the U.S. and Canada. What could then, of course -- and this is a different question is then that to what extent that would be happening in other parts of the network as well. We have been gaining market share in mobile in North America recently through some swap projects that we've been engaging in with the Tier 2 and Tier 3 operators.
Got it. Now maybe shifting gears and looking at what's happening in Europe. You've seen Vodafone Italy talk a bit about how they intend to -- they're worried about energy costs and they intend to push out CapEx to save their free cash flow. Are you seeing that come up with more carriers? Or is that an isolated occurrence? Does that worry you at all as you go into 2023?
Of course, that is something that we are watching very carefully because electricity is a key OpEx component in a carrier network and I mean you have seen where the energy prices have gone, in some cases, it does mean 5x or 10x compared to what it was just a year or 2 years ago. So it will have consequences, obviously, but we have not as of today, seeing any kind of big waves of announcements of reduced CapEx. You're right, I mean there has been some announcements. But again, looking at the market as a whole, based on what we are seeing today, we expect the market to continue to grow next year. Again, something to be watched very carefully all the time.
Got it. Now your main peer in Europe, they talk about how electricity consumption is better with the next-gen products, and this could actually lead to network upgrades. Is that something that could happen or is that more of a mid- to long-term thing that could come later on, maybe not in the short term?
It could happen because as we discussed, electricity is such an important part of the network. And when you look at the OpEx of the network and when you look at especially the earlier generations and the first 5G installations in some parts of the world, they were done with earlier technology. And now when you look at what's available today, very much including from us. And then what is yet to come next year and year after, we are looking at a big difference in electricity consumption. On top of the hardware itself, there is -- we always need to remember that there is a lot that you can do with software. Also intelligent software, self-learning, self-organizing networks. We have now a new solution out there, a software service that is using machine learning to optimize the power consumption of the network. I mean, simple observation, if there is not a lot of traffic, there is no need to keep all the resources of the base station up and running, and you can adjust that dynamically and you can actually achieve quite encouraging results and consumption with software.
Got it. Understood. Now maybe again, coming back to the U.S., if I go back to 4G, there was a bit of a gap after the network was deployed before densification happened and capacity-related spending ramp. So when you look at 5G, now we are talking about CapEx potentially going down next year in the U.S., but do you see scope for densification to start anytime soon? And if so, is it a 1-year thing, 2-year thing? When do you expect that spending to come back?
Well, first of all, when we look at the shape of the 5G market, we do believe that it will behave a bit differently compared to 4G. 4G market had a strong growth and it peaked and then it started almost immediately to go down. First of all, 5G market is a larger market than 4G ever was. It has grown to a high level already now, and we expect it to continue on that high-level plateau for actually several years. And there are multiple drivers for that. One is the densification that you mentioned. Then there is 5G advanced and upgrades. The new applications that 5G advanced will start enabling in a couple of years' time. And then there is the whole industrial side. The fact that finally, we start to see this long discussed serious industrial digitalization of mission-critical applications and the marriage between operational technology and IT to happen. And that will continue to drive the 5G markets for many years to come.
Got it. Now we've talked about the RAN market. Now given all the restrictions that have been put on the Chinese vendors, can you talk a bit about how that's affected your non-RAN business, so your wireline business? Have you seen any share gains from the likes of Huawei, et cetera in your optical networking or your fixed network business?
In the same way as we have seen in mobile networks, not yet in such a way that it would have been any kind of a needle mover on the market. And I do want to again emphasize that we are not a political player. We are not driving any of these decisions. But there are 2 aspects to this, and we have seen it in mobile networks. One is, of course, politically driven decisions to restrict some vendors out from certain markets, which obviously has happened in many countries, especially in 5G and now latest in India, for example. That is 1 thing. But then the other thing, which is then affecting all segments of the network is then the various export control restrictions that are being exposed on semiconductors and then now lately also on design tools. And that is not something that is likely to have an overnight effect. But gradually, it will most likely creep in and start affecting the competitiveness of certain vendors because they may not get access to the latest semiconductor generations. But this is gradual development. This is something that will not happen overnight.
Got it. So I mean it feels a bit like the brand share gains happen to a large extent. They'll still come through over time, but there is a lot more to go on the wireline side. Would you agree with that?
Well, I mean, all you need to look at is the market shares of the different players and the Chinese vendors have in many segments of the network in routing, optical networks, fixed broadband, [ 20, 30 ], sometimes even higher market shares in some parts of the world. So of course, what will happen to that market share, what will happen to their position on the market will have a big impact on the relative positions of the other players.
Got it. And then maybe slightly looking a bit more longer term on the RAN side. Open RAN is, there's a lot of talk about Open RAN. India was meant to be a big adopter of Open RAN; hasn't really happened with 5G. So can you talk a bit about how you see Open RAN in -- are you worried about it? When do you think adoption will happen? Is that a 6G thing, late 2020s, or could it happen earlier? Any -- your thoughts around Open RAN?
It seems to be coming more slowly than we originally thought. I mean we have been a supporter of ORAN from the beginning. We are one of the largest contributors to the ORAN Alliance in terms of technical standards. And we have said from the beginning that somebody wants Open RAN, we are ready to deliver. So we are perfectly fine with that. We do not see it as a threat. But what we have kept saying and we are actually seeing that happening in reality now is that you have to be a little bit careful in terms of expectation management. But today, it is a fact that if you want to do Open RAN, you pretty easily end up sacrificing in performance in features backwards compatibility, sometimes in power consumption also depending on the configuration. So there are some trade-offs. And then we have seen many carriers analyzing the pros and cons. They have actually come to a conclusion that it does not make sense at this stage. You have to remember that what was the original idea when Open RAN was created by and driven by certain operators, especially in Europe. The idea was that by opening up the interface between the radio parts and the baseband parts of the base station that there would be more competition and the prices would go down. But the thing is that there's nothing inherent in the ORAN architecture today that would lower the cost of the network. You still have the same development cost and manufacturing cost to the radio and the baseband. You actually add a little bit cost because somebody needs to take care of interoperability across the interface. Then cloud RAN or virtualization of certain parts of the baseband compute, that is a different thing. That may have structural advantages going forward. Also, that is coming more slowly than I at least personally thought still a couple of years ago. So it may simply be that it comes a little bit too late for 5G architecture to be more than a niche. But then you mentioned 6G. For 6G, it could be totally different. I mean the whole architecture could be designed for cloud in a much better way in 6G than was the case in 5G.
And would you say the 6G will also be designed for Open RAN? Would it be -- I mean, let's talk of that becoming a part of the standard? Do you see that happening?
Well, the specification work will still be underway for several years, but I think it's likely that there will be open interface specified, absolutely. And then very much so at that certain parts of the especially baseband processing, will, for the most part, be done in data centers. That does not take away the need for dedicated hardware or hardware accelerators or radio SoCs, for example. Everything will not be in the cloud running just on standard x86 hardware. You need a lot of other solutions. So it will be a mixture of different alternatives. And the name of the game will be more decentralized, more open architectures, which is a good thing.
Yes. Got it. Since you talked about x86, I just wondered if you could give any color on -- you have 3 chip suppliers at the moment, Marvell, Intel and Broadcom, I believe. Can you talk a bit about are they all doing the same thing for you? Are they redundant suppliers as in are they introducing -- are they less second and third sources? Or are they doing different bids? How did you decide who you want to partner with...
They are doing a little bit different things, and I do not want to go too much into detail. But for example, Marvell has been our partner in baseband processing. They have done a great job in that. Broadcom has been more on the radio side and so on. But the point here I want to make is that we are seeing that custom silicon is very often the way to go if you want to maximize performance, if you want to minimize power consumption, if you want to minimize your cost. And our approach that we are taking with many of these vendors, including the ones mentioned is that when we do a chip design project, we provide some IP blocks. We have a strong silicon design team of our own. They provide some blocks and then they often package together for us and deliver as a package. But we want to have -- we believe it's very important for us, a company like ours to have a foot in the silicon design ourselves.
Got it. And maybe just moving on to Network Infrastructure division, I just wondered if you could talk a bit about how you see the growth prospects for that division vis-a-vis the Mobile Networks division. So would it be fair to say that, a, it could grow a bit faster than the Mobile Networks business, partly because there's concerns of RAN peaking in the U.S. at least? And secondly, or maybe if you address that, then I'll come to the second point around it.
It is possible that it could grow a little faster -- I think somebody scored a goal. It sounds like that.
Maybe -- I can't imagine there being too many Iranian supporters in this building, so that's got to be the Americans.
That's right. So now I almost forgot your question. So yes, the Network Infrastructure growth. In our market size predictions, we are actually addressing a slightly higher growth rate to the Network Infrastructure market compared to Mobile Networks market. There is not a big difference. But what often happens in these networks is that the access comes first, and we have seen tremendous growth in Mobile Access, and we have seen tremendous growth in fixed broadband access. And you have seen the numbers in our Fixed Access. Then you do this first, and then after that, that starts creating demand on the IP and optical layers of the network, which should logically come next, and that should be driving D&I, demand going forward. And on top of this, the fixed broadband market is far from peaking or saturating either. We are looking at broadband homes passed or homes connected rates that are in many parts of the world, even in the highest penetrated parts of the world, they are not more than 20% to 40%. And then we are typically not looking at very fast broadband connections. If the ultimate goal -- or there's no ultimate goal in this, but the next logical goal, as many governments are talking about that every home should have a gigabit connection, we have only scratched the surface of this. And there is more and more bandwidth-hungry applications coming. There will be more gaming, AR, VR type of interfaces. There will be next generations of remote work applications, videoconferencing that will be much more bandwidth hungry than the current one. So we believe that this mega-trend of home broadband will continue for quite a long time, and it will then fuel the IP and optical networks. And then there is 1 more application of passive optical networks that is starting to get interesting and that's mobile front hauling and mobile backhauling. So base station, 5G base station connections back to the network.
Now there's been some talk of fixed wireless access cannibalizing demand for optical fiber connectivity. Are you seeing that at all maybe in certain parts of the world? What are you seeing on that front?
We have participated strongly in the fixed wireless access business. We have been a clear market leader in that. And I don't actually see it. When you look at a little bit longer term, I don't see that it's mutually exclusive with fiber. Of course, the application is more or less the same, but they will both have their own growth. And fixed wireless will most likely have the highest presence in those regions where it is not economically viable to dig fiber all the way to the home. And then it makes perfect sense. On the other hand, if you put fixed wireless and then fiber side by side, of course, there is no question which one has more long-term potential in terms of capacity.
Got it. Now as we look out to next year, optical in your mobile -- in your Network Infrastructure business has had supply constraints this year. So do you think the supply constraints will be eased? And maybe if you could also give us some color on what exactly is it that is causing these constraints? Is it a particular node? Is it a particular chip?
There are 2 things, of course, in general, in the semiconductor industry, there has been a lot of capacity constraints as we all know. But then in optical networks, it has been a vendor-specific issue or actually a vendor of a vendor. I do not want to mention any names here, but we have been suffering somewhat from that, but we have also done a pretty good job in diversification of our supply chain. And that is starting to help now. So we had -- in Q3, we had flat year-on-year growth in optical networks in constant currency. In reported currencies, we had, I think it was 9% growth or something, but 0 in comparable currencies. But that is now going to accelerate from here. Demand is looking good. We have a strong competitive product offering, and we are getting really, really positive feedback from our customers on the latest product generation that we are delivering.
Got it. I know we've got 5 minutes left. So are there any questions in the audience? Could be that one I think.
Thank you. I suppose with respect to heading into '23, could you talk about the puts and takes on margin for Nokia? Because I'm just thinking if the U.S. is maybe weaker, India is very strong, at least in my long memory of Nokia, no, never made any money out of the Indian market really. And so I'm curious, is that under a very, very significant negative mix shift if you go to new build-outs in India versus the U.S. declining? And is that a headwind to profitability? And what would you do about, what actions could you take? And then also just an update on how we should think about your licensing business and how that might -- what the opportunities are for growth or to renew with the 2 vendors you are all in dispute with?
Thank you. First, the margin question and the geographical mix. There will be a mixed geographical mix shift in Mobile Networks business between '22 and then '23 and -- especially driven by high strong growth in India because the 5G rollout is now accelerating, quickly accelerating in India, '23 will be already a big year in Indian 5G. So there will be a mix shift. At the same time, we were talking about U.S. carriers' CapEx, even though they have not made all the announcements yet, but we are expecting that there will be at least some normalization. So there will be a mix shift that will put the pressure on gross margins of the business. But then at the same time, the volumes in India will be so big. We are talking about some of the largest networks in the world that we will actually get a pretty good leverage on the big high fixed cost through R&D that we're putting in, and that will actually support the operating margin. So that's the Mobile Network mix question. Then when it comes to the other businesses, we are not seeing any meaningful mix shift actually at all between '22 and '23. Then your other question was about IP licensing. We are now entering a quite big renewal cycle of the key licenses that we -- we have been discussing quite a lot the ongoing negotiations and also litigation with 2 customers. We continue to negotiate, and we hope to be able to close those deals in not too distant future. But I do want to emphasize that it's more important for us to defend the value of our portfolio than close any particular deals by any given deadline. We have a strong portfolio. We continue to invest in that portfolio. We have a strong portfolio of 5G standard essential patents. And on top of that, we are developing new segments for IP licensing with revenue about EUR 100 million for the last 12 months. So there is new growth businesses also on the licensing side coming up.
Are there any major licensing beyond the 2 that you got in dispute? Are there any other licensing deals that are up for renewal in the next -- significant ones, in the next 12, 24 months? So for example, the 2 people that aren't paying, you might -- but either one might call off or something. Is there anything like that we should think about in '23 or '24?
I'm not going to mention any names here, but as I said, we are entering a really big renewal cycle. So yes, there will be others as well.
Any other questions in the audience? Okay, so maybe I'll continue with a few more. We've got -- well, 2 minutes left. So maybe just briefly, firstly, just on the pension asset. I don't think many people in the market recognize the -- or many amongst the buy side, recognize the value, how big a pension asset you've got. So I just wondered, are there any plans to crystallize it? Is there a way you can crystallize it? Any commentary around that, if you're able to.
That's overall a very complicated thing because there are so many countries, so many funds, so many rules and -- sets of rules and regulations that are affecting it. But perhaps the positive thing is the fact that we are over EUR 5 billion overfunded in those assets. So at least the risk that there would be need to, in a way, do some additional funding because we underfunded in a downturn, that seems pretty low.
Got it. And maybe just in the last 30 seconds. There's been a lot of talk about the stand-alone 5G driving core revenue growth. Now I just wondered if you could briefly talk a bit about how the economics change when you go from non-stand-alone to stand-alone 5G core. Is it -- do you get more per customer? Is it -- is the model different? What changes and how would that help you as 5G stand-alone core ramps?
Well, the key thing in 5G stand-alone, and this is important for operators, is really that stand-alone enables some kind of things that really were meant to be there in 5G. One operator once told me that a non-stand-alone is just like running a faster 4G, but that's it. But when you do stand-alone 5G, you enable things like slicing, for example, in a totally different way. You can do it also in previous generations, but it's much more complicated. It's much more straightforward, if you do it in 5G. And of course, I mean ultimately for us, the key thing will be that how well are we going to be able to help operators to monetize 5G stand-alone because that will then also affect how much -- how big part of that pie will ultimately come to us.
Got it. Very clear. I think we're out of time. So let's end it here. Thank you very much for coming, and thanks to the audience with the patronage. We'll end it here. Thank you, Pekka.
Thank you.
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