Nokia Corporation

Hello, and welcome to the Nokia First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please tell a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Matt Schmau, Head of Investor Relations. Sir, you may begin.

Thank you. Ladies and gentlemen, welcome to Nokia's first quarter conference call. I'm Matt Schmau, Head of Nokia Investor Relations. Rajiv Suri, President and CEO of Nokia, and Christian Polola, CFO of Nokia, are here with me via conference call today. During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. 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, such as general economic and industry conditions, as well as internal operating factors. We have identified such risks in more detail in the section titled Operating and Financial Review and Prospects, Risk Factors of our 2019 Annual Report on Form 20F, a financial report for Q1 published today on Form 6K where we have added a COVID-19 risk factor, as well as our other filings with the U.S. Securities and Exchange Commission. Please note that our results release, the complete interim report list tables, and the presentation on our website include non-RFRS results information in addition to the reported results information. Our complete financial report with tables available on our website includes a detailed explanation of the content of the non-RFRS information and a reconciliation between the non-RFRS and the reported information. With that, Rajiv, over to you.

Thanks, Matt, and thanks to all of you for joining. I hope that you're all keeping well and safe in these unprecedented times. As we all know, events related to the COVID-19 pandemic are moving quickly and the global economic outlook remains uncertain. I want to start by briefly making four high-level points about Nokia's first quarter. First, we made steady progress in our mobile access business as our transformation and product cost reduction efforts started to take hold. Second, our Q1 showed broad year-on-year profitability improvements thanks to strong performance across our portfolio, including enterprise and software, supported by continued discipline on costs. Third, we remain highly focused on generating cash and took a number of actions in Q1 to improve our total cash position in what is a seasonally slow quarter. and fourth, we're adjusting the midpoints within our previously disclosed outlook ranges for full year 2020 to reflect the increased risks and uncertainty presented by the ongoing COVID-19 situation. We expect the majority of this COVID-19 impact to be true and believe that our industry is fairly resilient to the crisis, although not immune. With that as an introduction, I will focus the rest of my remarks on two main areas. One, our Q1 highlights and the progress we are making in mobile access and other parts of our business. And two, the unusual situation with regard to COVID-19. Now to the quarter. When I spoke to you when we announced our Q4 results, I said I expected to see progressive performance improvement over the course of 2020. And Q1 was largely consistent with this expectation. Non-iVirus Nokia-level operating margin was up significantly from Q1 2019, Rising 3.6 percentage points while non-IFRS operating profit landed at 116 million euros. An important driver behind that was the improvement in the network's business groups cross-margin which increased year-on-year by 3.5 percentage points largely driven by cross-margin expansion in mobile access. In addition, the Nokia level operating margin was also improved by the profitability strength in Nokia software and a decrease in Nokia-level operating costs, including both SG&A and R&D costs. The decrease, particularly in networks R&D expenses, was primarily due to progress related to Nokia's cost savings program, which was partially offset by additional critical 5G investments to accelerate our product roadmaps and cost competitiveness in mobile access. Nokia Enterprise again delivered double-digit year-on-year constant currency sales growth, and Nokia Software demonstrated again how to drive top-line growth with a clear focus on operational discipline and excellent profitability. Importantly, we enhanced our total cash position in the quarter to 6.3 billion euros, up sequentially by 300 million euros, and Christian will address in more detail both our cash position and Nokia technologies later on. Now, to the progress in mobile Thank you very much. Notwithstanding the adjustment of the midpoints of Nokia's folio guidance today due to the risk and uncertainty presented by the current COVID-19 situation, mobile access saw improvements driven by product cost reductions, regional mix, strengthened operational performance and services, and supported by continued competitive scale. Despite the majority of our R&D employees working from home, our roadmaps are on track. and in fact, some key software releases are proceeding ahead of schedule. As I said in Q4, our focus in mobile access is on four key areas. First, improving profitability through consistent product cost reduction. Second, maintaining scale to be competitive. Third, enhancing commercial management and deal discipline. And fourth, further strengthening operational performance and services. Let me touch on each of these in more detail. First, as of today, we are tracking in line against our original plan with 5G powered by ReefShark products accounting for 17% of our 5G shipments in Q1. We still expect to end the year at more than 35% despite the prospect of further COVID-19 related economic impacts. As a reminder, we typically see approximately a six month delay between shipments and impact on financial performance. We saw some important product launches in Q1, including our dynamic spectrum sharing or DSS solution. Our unique solution goes beyond 4G to 5G to include dynamic sharing between 2G, 3G and 4G offering a smooth path to 5G deployments. Initial deliveries of Nokia's DSS solution for which there has already been significant interest from operators are starting now with volume shipments expected by July. The second KPI relates to maintaining scale and specifically scale In Q4, I stated that we expect Nokia to stabilize its 4G plus 5G market share to approximately 27% by the end of 2020, excluding China. Q1 results support this statement and we believe we remain on track. We continue to have the scale necessary to remain competitive. The third KPI is our 5G win rate. For Q1 2020, our 5G win rate, excluding China, continued to be over 100%. reflecting a strong performance across a number of regions and is in the mid-90% range, including China, in line with our expectations. While the overall result did not change, we saw a reduced footprint at a customer in Asia-Pacific, offset by gains with a customer in North America. Again, this was in line with our expectations. As of today, with our recent win with Konstanty Owczarek, we have 70 5G deal wins and 21 live networks deployed. New customers in Q1 included Chungua Telecom in Taiwan, Orange Slovakia, and Bell Canada. And pleasingly, we are quite optimistic that we will win a share of 5G core with China Unicom, although we have not yet received official notification. Staying with China, we have consistently said we would take a prudent approach to pursuing market share, given the profitability and cash challenges there. Given that, we have prioritized our 5G radio We will remain a meaningful player in China. We have a large 4G install base, ongoing attached and independent services, and continued opportunities in the broader 5G build out with China's major operators in areas such as fixed, IP routing and optical. We also see potential with the large enterprise customers we are focusing on and have made particularly good progress providing data center interconnect to the country's leading web-scale companies. A return to 5G radio at some point in the future is also not out of the question, but keep in mind that our approach has simply been prudent. Finally, let me now say a few words in services, which produced substantially expanded year-on-year profits in Q1. This was driven by structural improvements in deployment services as we successfully drove digitalization and automation efforts. Services exited several more low performing projects in Q1 and we continue to make progress in turning around other low margin managed services deals. We expect a high level of network deployment services as new 5G builds continue, although we do see some COVID-19 risk hampering some technology deployments due to challenges with getting on-site access. So to conclude on mobile access, we are making the expected progress in our four key areas. Now to our other business groups. As I alluded to earlier, our strategic focus areas of Nokia Enterprise and Nokia Software maintain strong momentum. Nokia Enterprise delivered year-on-year constant currency revenue growth of 19%. Enterprise added 30 new logos in the quarter including Infrastructure Networks Inc., PGE Systeme of Poland, and SGP of Paris. Despite the current economic environment, we believe that we have a resilient customer base and enterprise of mission-critical networks due to the verticals that we focus on. In Nokia software, I think it is also fair to say that the decision we took a few years ago to rewrite our applications onto Nokia's cloud-native common software foundation to serve 5G and increasingly digital customer needs is paying off when you look at both how Nokia software is performing relative to our competitors in the telco software space and at today's environment that is making cloud-based digitalization an even more critical business necessity. Nokia Software's year-on-year constant currency net sales grew 12% and profitability was up sharply across the board with an operating margin increasing almost 13 percentage points year-on-year. I would caution that software's strong performance in Q2 2019 and the COVID-19 risks related to our business generally give us a tough year-on-year comparison in the second quarter. Still, Software's business execution has been solid, and its trajectory is on a path where we want it to be. Now to IP and optical networks, or ION, which also continued its strong underlying execution and increased its product leadership credentials in the quarter. ION's year-on-year constant currency sales declined due to Q1 2019 being a particularly strong quarter, which benefited from pent-up demand from for some of our newly introduced FP4 products. The Q1 sales decline also stemmed from some supply chain headwinds related to COVID-19 that prevented us from delivering to certain customers. Still, the business fundamentals showed continued strength with both IP routing and optical networks holding a strong order book. IP routing also continued to demonstrate its technology leadership position with Nokia being named in the quarter as a top company globally in IP edge routing. We do see some potential to recover some of what we came up short on in Q1 as we currently see good routing demand in Q2 on the back of traffic growth. In optical networks, year on year constant currency sales dropped 2%, though that was due entirely to supply constraints stemming from COVID-19 and not related to demand. We expect these constraints to improve in Q2. Our fixed access business saw strongly improved order intake year-on-year led by North America and Europe. The higher gross margin in fixed access was primarily due to a more favorable product mix with less digital home net sales in China, as well as a higher gross margin in digital home driven in part by improved product cost. Now to the regions, and I aim to be brief here. Given that I've already addressed China, let me start with North America, our biggest market by sales. Despite merger-related uncertainty during most of Q1, the top line in North America remained flat in constant currency, reflecting customer demands for strengthening network infrastructure due to people working from home. We see this from certain operators who have recently announced increases in capital expenditure and across different businesses, from IP routing to Nokia software. Middle East and Africa had a strong quarter with top-line growth of 8% year-on-year in constant currency with particular strength in Saudi Arabia where we have large 5G network rollouts ongoing with Mobily, STC, and Zain. Then India, which we report within our Asia-Pacific region, Konstanty Owczarek, Lise Karstensen lay the foundations of 5G in India and includes Nokia's single radio access network, air-scale radio access and baseband services. In addition, Nokia global services will play a crucial role in the installation, planning and deployment of the project. Excluding India, the Asia-Pacific region saw strong growth with telco operators. Year-on-year sales in Europe declined 4% in constant currency, with Q1 last year being a tough compare. Now, to what we see ahead in the COVID-19 impact, due to which we deemed it prudent to adjust the midpoints within our previously disclosed outlook ranges. Let me start by saying that this crisis has made vividly clear the importance of connectivity to keep society functioning. It is literally a matter of life and death. We feel we have a sense of duty to our customers and the communities they serve to keep vital communication networks running and accommodate the explosion in demand all over the world. I would like to thank all our people as well as customers and suppliers who are working so hard to keep everyone connected across the world. Naturally, Nokia's first focus in this is our employees. We are working around the clock to keep them safe and we're doing everything we can to support them through this crisis. We have put in place strict protocols for Nokia facilities and have provided Clear advice to our employees about how they can mitigate the risks of COVID-19 in situations where they have to go about critical work. I am very proud of the role Nokia is playing in supporting our customers and their communities. The products and services that we provide have never been more critical in enabling the world to continue to function in an orderly way. We are providing the capacity and continuity for vital medical, social, and financial systems that are experiencing extreme stress. Our global manufacturing footprint is designed to optimize our global supply chain and mitigate against risks such as local disruptive events, transportation capacity problems, and political risks. Our supply network consists of 25 factories around the globe and six hubs for customer fulfillment. As a result, we are not dependent on one location or entity. Telecom infrastructure is an essential service in most jurisdictions. Most networks see 30 to 45% traffic volume growth over a year, but through our operator customer base, we saw similar and sometimes even larger overall increases in lockdown-impacted regions in just a matter of weeks, sometimes even days, immediately after the beginning of lockdowns. The most impactful effect on the network was made by bandwidth-intensive applications such as streaming and subscription video on demand, for example, Netflix and Disney+. and video conferencing applications such as Zoom, Microsoft Teams and WebEx, with some telecommunications and video conferencing applications growing by 700 or 800% in a matter of days, as analyzed by our Nokia Deep Field team. The trends were similar across China, Asia Pacific, Europe and the Americas. As of last week, we are seeing a plateauing of the growth in some regions, which is likely due to a combination of peak video consumption reaching practical maximum levels and the lowering of video streaming quality by service providers. We are working with our customers to provide real-time and granular information about their networks and enabling them to meet increases in demand and expand capacity where needed. We're all aware that lockdowns have shuttered factories in many parts of the world, including Asia, and this caused pockets of supply chain issues in Q1 that limited our ability to completely meet the needs of a small number of customers. In Q1, the impact was approximately 200 million euros in net sales, and this was partly the result of supply issues associated with disruptions in China and other parts of Asia. We expect those net sales to be pushed to future periods rather than being lost. Let me explain in more detail some of what we are seeing. Getting customer acceptances for new product deployments is being delayed in some cases due to physical factors such as on-site access being currently blocked due to the lockdowns. And we do see this continuing further into Q2. Additionally, we are seeing sharp foreign exchange rate fluctuations in places like Latin America driven by COVID-19. This is causing operator customers to reduce capex to conserve cash in order to offset rising production costs. I've mentioned that offsetting some of those negative impacts is the fact that our primary addressable market with telecom operators, as well as our chosen enterprise verticals, is expected to be more resilient than the broader economy, given high network capacity demands and longer term demand for superior networking capabilities and cloud computing capabilities. Going forward, we believe the risks and uncertainties related to COVID-19 may continue to have an impact and that is why we adjusted the non-IFRS midpoints within our full year 2020 guidance ranges for EPS and operating margin to 23 euro cents and 9% respectively. We believe that the majority of this COVID-19 impact to be in Q2. While not immune, we also believe that our industry is fairly resilient to the crisis, and I have just provided some examples of why we hold this belief. Before handing over to Kristen, I want to change gears and briefly discuss another important matter. I wanted to say a few words about our corporate sustainability performance. I've mentioned that connectivity has never been as important as now, when people find themselves physically isolated from others during lockdown. In what has quickly become the new normal, Nokia's role as a critical connectivity enabler has never been so important. This is a responsibility that we take seriously. Remote working, remote schooling, remote services and smart deliveries are just some examples that have been enabled by connectivity and digitalization solutions. As we move into the future, sustainability will play a large part in shaping our industry, and we believe that technology will further improve people's lives and we will therefore be focusing on those areas we expect to have the biggest impact on sustainable development and our profitability. Those areas are climate, integrity and culture. We continue to develop and maintain solid processes and principles on other sustainability areas, ensuring compliance with all necessary standards and requirements. With that, over to you, Christian.