Nokia Corporation

Hello and welcome to the Nokia second quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal 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 then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to... Hello, Mr. Chimao, you may begin.

Okay, wonderful. Ladies and gentlemen, welcome to Nokia's second quarter conference call. I'm Matt Chimao, 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 industries. These statements are predictions that involve risk and uncertainties. After 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 risk in more detail in the section titled Operating and Financial Review and Prospects, Risk Factors, of our 2019 Annual Report on Form 20F, Our financial report for Q1 published on April 30th on Form 6-K as well as our other filings with the U.S. Securities and Exchange Commission. Please note that our results release, the complete interim report with tables, and the presentation on our website include non-R4S 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 today. I hope you are continuing to stay well and safe amid the COVID-19 pandemic. I'm pleased to say that our second quarter is another proof point that we continue to make strong and meaningful improvements in our business performance. We have been consistent in saying that we are taking the right steps to deliver progressive improvement over the course of this year, and in my view, we remain on the right path to deliver on that promise. In fact, we went into the second quarter with some concern given the ongoing pandemic, but we ended being quite pleased with where we landed. Consider the following highlights. First, year-on-year profitability was up. Non-IFRS diluted earnings per share was 6 euro cents, up 1 cent. Nokia-level non-IFRS operating margin was up 40 basis points. Nokia-level gross margin was back to around 40%. Networks gross margin was up 450 basis points, following a 350 basis point gain in Q1. And mobile access gross margin was up significantly. Second, we saw significant improvement in cash generation. We ended Q2 with 1.6 billion euros in net cash, up from 1.3 billion in the previous quarter, and total cash of 7.5 billion euros. Pre-cash flow in the quarter was positive 265 million euros versus negative 1 billion in Q2 2019. Given our strong first half improvement, we now expect pre-cash flow for full year 2020 to be clearly positive compared to our earlier guidance of positive. Third, even if revenue was down by 11%, the majority of that decline was the result of the impact on our business from COVID-19, as well as a significant drop in sales in China, given the prudent approach we have taken in that market. We also saw a reduction driven by our proactive steps to reduce the volume of low margin services business. In terms of the pandemic, we saw a top line impact of about 300 million euros in the quarter, and most of that we expect will be shifted to future periods. Based on this solid improvement, I would like to spend some time talking about the underlying why, about the drivers that we believe have supported this outcome. We had both a favorable product mix, more capacity, less deployment services, as well as regional mix with more North America and less China. While some of this will likely continue in the near term, we would expect it to be slightly less pronounced compared to the just ended quarter. I would note on the capacity topic that we saw better than expected results from our 4G LTE business in the quarter. What has been a capacity phase in some markets has now become a worldwide development. This has happened slightly faster than we anticipated, possibly driven by network requirements during the pandemic, and we expect it is here to stay for some time. Ultimately, however, we believe that a key driver of the gains we have seen so far this year are based on underlying structural improvements. To give more perspective on this topic, I would like to spend the rest of my time on four key areas. One, mobile access and the improvements in that business. Two, our actions to strengthen cash generation. Three, progress within our business groups. and four, progress in our strategic diversification in enterprise and software. Let's start with mobile access. We have said that executing in mobile access is one of our top two priorities for 2020. To do that, we said we would improve profitability through consistent product cost reduction, maintain the scale necessary to be competitive, enhance commercial management and deal discipline, and strengthen operational performance in services. In each area, progress continues and results are becoming more and more apparent. In terms of product cost reductions, our shipments of our 5G powered by ReefShark continue to grow. In Q1, those shipments were 17% of our total 5G deliveries. In Q2, we landed at 25%. We believe that we remain on track to reach 35% or more by year end. And more is very possible. although that is dependent on the speed of customers transitioning to new technology during the pandemic. In terms of roadmaps for our mobile radio products, we are making meaningful progress in closing gaps to the competition where they exist. Those gaps are certainly not everywhere, and in some areas we are ahead. And I've seen that perspective validated in recent customer assessments. As examples, when you look at the next generation technologies that will be critical for the future, such as VRAN, Cloud RAN and Open RAN, Nokia is in a leadership position with our globally available solutions. We're also differentiated by the breadth of our massive MIMO and 5G small sales portfolios. You may also have seen that in June, we announced our collaboration with Broadcom on system-on-chip technology that will be integrated into our 5G powered by ReefShark portfolio. This builds on earlier agreements with Intel and Marvell and completes our efforts to diversify our supplier base in this critical area. For those of you interested in more details on our progress in mobile radio, I would encourage you to go to Nokia.com and look at the blog that Tommy Uito, president of our mobile network business has posted today. In his blog, Tommy covers some key changes we have made, including a doubling of system on chip developers, increased R&D velocity by approximately 50%, new leadership and clarified accountability. A transition to a large-scale agile development model with end-to-end feature teams, resulting in better software quality and faster time to market with the flexibility to adapt to changing market requirements and much more. These efforts have resulted in a broad-based improvement across essentially all of our key operational KPIs for the business, including Software Release Delivery Accuracy, Hardware and Software Quality, Feature Development Efficiency, and as I've noted, Roadmap Competitiveness. In short, we are moving fast to ensure that our entire mobile product portfolio is extremely competitive. Then, maintaining scale, where we continue to track to our plan to have 4G plus 5G market share excluding China at around 27% at the end of 2020. We are now at 83 commercial 5G deals and 32 live network deployments with more to come shortly in book. We're also well positioned in large-scale mid-band radio with products deployed to 55 customers and the first live C-band network demonstrated in the U.S. This means that we have a solution ready to go for when spectrum auctions are completed in the U.S. later this year. Our confidence is supported by our win rate. At the end of Q2, our 5G win rate remained strong at over 100% outside of China. Including China, we moved into the low 90th percentile from the midpoint of that range, given our continued prioritization of our R&D to meet future requirements in more profitable markets. The next point I want to make about mobile access relates to enhancing commercial management and deal discipline. As I've discussed before, we have strengthened many of our core processes and reinvigorated governance for deal approval. This methodical approach is particularly important as vendors seek to maximize footprint gains in the early stages of 5G. At Nokia, we will take steps to maintain sustainable market share, but we will not do so by going down the rabbit hole of pursuing deals that make no sense over the longer term. We are seeing the results from this strengthened approach. When we look at approved deals that will be executed in the future, we see an uptick in projected gross margin, operating profit, and return on capital employed compared to earlier periods. This is not just a one-quarter event, as we have seen similar developments going back to Q4 2019. It is another factor that gives us confidence that we are creating sustainable change. My final point on mobile access is improving operational performance in services. Mobile access services saw a revenue decline in the second quarter, but some of that was the result of a conscious strategy to exit unprofitable projects and reduce future low margin business. We also saw a significant COVID-19 impact to our services business in the quarter, as well as an expected slow ramp up with a key customer in North America. That ramp up should accelerate in the second half. Pleasingly, despite the revenue decline, profitability in services was down just slightly in the quarter. which testifies not just to our strict deal approach, but to the underlying work we are doing to ensure stronger operational discipline, better project execution, and increased automation. Not only has this work benefited our performance, but it has driven better customer satisfaction with our most recent survey showing a significant upswing in our ratings. The second topic I want to talk about, albeit briefly, is our other top priority for 2020. strengthening cash generation. I already talked about our much improved outcome in the second quarter. This was driven by the structured program that we put in place some time ago that included a centralized war room to drive a company-wide focus on free cash flow and release of working capital, project asset optimization, strengthen contractual terms with customers and suppliers, reinforce controls across our supply chain, ensuring the right people have the right incentive targets, optimizing inventory and more. Our discipline and focus in this area is clearly delivering results. We believe the work we have done has put in place the right processes to deliver sustainable progress in this critical area. The third topic I want to cover is about the progress we are making in the performance of our various business groups. While I talked about mobile access already, I would like to cover some other developments, starting with fixed networks. where we are clearly seeing signs of improved execution. Our fixed business grew in mid single digits in Q2 excluding China with robust profitability. Orders improved on a year-on-year basis and we have visibility to longer term opportunities particularly in fiber deployments that stem from the response to COVID-19. We've also taken the step, as you have seen earlier this week, to streamline the fixed network business by selling part of our cable industry portfolio to Beth Emma Networks. This asset sale concerns our gain speed portfolio, although we will continue to serve existing cable customers with fiber, software, routing, transport, mobile, and fixed wireless access solutions. The fixed team logged some good wins in the quarter, including one with open reach. that significantly extends the operator's full fiber network capacity and coverage in 20 million homes in the UK. And one with National Broadband Ireland to deploy fiber broadband solution for 540,000 rural premises in Ireland. Then, our IP routing and optical networks, our ION business group. On the IP routing side, sales were down in Q2 versus last year, but it is important to remember that in the first half of last year, we were catching up from the supply chain shortages we experienced towards the end of 2018. When you adjust for those catch-up sales, routing would have been roughly flat year on year. We are confident that our position in routing remains very strong, with excellent Q2 profitability, clear product leadership, and healthy market momentum. As one example, we ended the quarter with more than 220 customer projects underway using our new FP4 chipset, and around two-thirds of those projects involved either new footprint for Nokia or Nokia displacing a competitor. As we have said in previous quarters, we believe we are clearly gaining market share. I hope you all saw our announcement shortly after the end of the quarter that we were expanding our IP routing business into the data center networking market. Our approach is unique, a true clean sheet rethink designed to give control back to cloud builders. We co-developed our solution with leading global web scale companies, including Apple, who is deploying our technology at its data centers. We also have strong support from BT, Equinix, London Internet Exchange, or Lynx, Turkcell, and others. On the optical side, Q2 sales were soft, but orders in the first half of the year were excellent. We have faced some supply issues with a key vendor hit by COVID-19, but see that situation easing in Q3. Christian will cover Nokia technology, so I will limit my comments to note that gross margin was robust, although operating profit was hit by a sales decline driven by a one-off payment last year and the impact of the pandemic on brand licensing royalties. We continue to generate new intellectual property at a robust rate and expect to remain in the top two in 5G standard essential patents. Diversification continues as well, and as one example, we are seeing growing consumer electronics wins for Ozo Audio, which is now in 31 devices, including Panasonic, OnePlus, and Asus. Finally, let me cover the progress we are making in our strategic focus areas of Nokia Enterprise and Nokia Software. First, Nokia Enterprise, which had a terrific quarter. Constant currency sales growth of 18% was solidly in the double digits and margins expanded nicely. Driving this momentum was our web scale and private wireless business, particularly in the energy, manufacturing, and logistics sectors. In addition, we now have more than 180 private 4G and 5G deals and 83 new enterprise customers have been added so far this year as we continue to expand our footprint. Overall, I remain very pleased with the trajectory of this business. So far, our enterprise customer base has remained relatively resilient during the pandemic, and we continue to see a path to double-digit growth on a full-year basis. Next, Nokia Software, which had headwinds that we flagged in our Q1 commentary due to a particularly strong Q2 2019 comparison. When you look at software more broadly on a first half basis, constant currency sales were up in all its key growth markets, including North America, and down just in China and India, and its margins were healthy as well for the first six months. Nokia software continues to progress well against its strategy and against the competition, underpinned by strong execution and the comprehensiveness of our portfolio and common software foundations. This platform offers the industry's leading cloud-native multi-vendor and multi-network solutions combined with a robust partner ecosystem, and we continue to see the proof of that in our deal win rate. For the sake of time, I will keep my regional comments very short. In China, sales declined significantly based on the prudent approach we have taken to the market. While year-on-year sales were down 2% in Europe, there are early signs of a recovery in that market as the COVID-19 pandemic becomes more under control and transition to 5G accelerates. In India, part of our reported Asia-Pacific business, we saw some negative impact due to ongoing market uncertainty, although we continue to believe we are number one in India. In APJ, excluding India, we grew in the quarter, showing our widespread strength in the region. Latin America has been hit very hard by the COVID-19 pandemic, and that had a significant impact on our sales in the region. Middle East and Africa is facing a somewhat similar situation, although to a lesser extent. In North America, sales were down 4% year on year, a better result than the company as a whole. This region was unfortunately hit by supply issues resulting from COVID-19. There is a considerable amount of activity in the market related to the now completed merger of T-Mobile and Sprint, preparation for the release of additional mid-band spectrum, operators assessing their cloud strategies, and more. Enterprise demand also remains robust, especially wide area network builds by utilities, and we are preparing to expand into the US federal business in the coming quarters. Even if we had some challenges with US customers related to our radio portfolio in the past, many of those issues are now largely history. Despite those issues, if you look purely at mobile radio product capability, we think we are well positioned given our robust mid-band radio portfolio and announced plans to accelerate in ORAN and VRAN. My last comment about regions is related to geopolitical trends. In the past, we have said that we were watching the situation closely and were ready to meet customer needs. That remains true today, although unlike what we have seen before, we are now seeing concrete mid-term opportunities emerging. As those develop further, we believe we are well positioned in terms of both product capability and capacity. The underlying issue remains a topic for governments to resolve, but we are ready and able to provide any necessary support. Last quarter, I finished my remarks by touching upon our sustainability strategy, and I want to do the same again today. At Nokia, we strongly believe that connectivity and technology will play a key role in helping solve future challenges. Sustainability is a broad topic, and as a company, we have chosen to focus on climate, integrity, and culture. On climate, we continued our project to recalibrate our existing science-based targets according to the 1.5 degree Celsius warming scenario, and we are seeing progress in commercializing solutions that decrease network-related emissions. With regard to integrity, in addition to our well-established processes, we launched new training in the quarter covering our human rights policy. Additionally, following the launch of our COVID-19 donation fund in Q1, we continued to engage with local organizations such as hospitals, community groups, and NGOs in nearly 50 countries, helping them fight the pandemic and mitigate its impacts. And regarding culture, we continue to promote a culture of inclusion and diversity with a focus on accelerating our progress on increasing the share of women in leadership. With that, let me hand over to Christian.

Thank you, Rajiv. Today I would like to kick things off by walking you through our current liquidity position and our cash performance in Q2. I will then briefly touch upon our financial results for both Nokia Technologies and Group Common and Other, and then take you through a few group-level highlights, including an update on our cost savings program. And finally, close with some remarks on our guidance. Let's start with our liquidity position and cash performance. both of which exemplify the strong progress we have made over the last year. We closed the quarter with a strong total cash position of 7.5 billion euros, a sequential increase of approximately 1.2 billion euros. There were two primary drivers for this increase. First, the proceeds from the debt issuance that we successfully completed in early May and second, strong cash performance in the quarter. In addition to our cash position, We continue to have a 1.5 billion euro revolving credit facility available to us. This facility remains undrawn and in June we exercised our option to extend the maturity date by one year into 2025. Looking at our debt, we now have approximately 6 billion outstanding, all of which is financial covenant free and with an average maturity of six years and a smooth repayment schedule. This includes the 1 billion euro debt raised in Q2 on a net basis. I am confident that we have taken the right actions to conservatively manage our balance sheet. This positions us well from a liquidity standpoint in these uncertain economic times. Sequentially, Nokia's net cash increased by approximately 230 million euros to a quarter-end balance of 1.6 billion. This increase was attributable to a positive free cash flow in the quarter, which was largely driven by our solid adjusted net profit. In Q2, networking capital excluding restructuring cash outflows resulted in an approximately 90 million euro decrease in net cash in the quarter. Within networking capital, we saw the following largely offsetting drivers. Liabilities declined by approximately 230 million euros due to the payment of 2019 performance-related incentives to employees, partly offset by a seasonal increase in accounts payable. Inventories increased by approximately 80 million euros, primarily due to a seasonal increase in inventory, partly offset by temporary supply chain disruptions related to COVID-19. Receivables declined by approximately 220 million euro, primarily due to improved collections, partly offset by a seasonal increase in receivables, as well as a sequential lower balance sheet impact related to the sale of receivables. In addition to this, there were two other cash-related items I wanted to touch upon. First, capex. which came in lower than expected at approximately 90 million euro. In Q2, our spending was affected by the timing of CAPEX due to temporary COVID-19 disruptions. Consequently, we have reduced our outlook assumption for CAPEX to 550 million for 2020 from 600 million euros. The second item was cash taxes which were also 90 million euro and benefited from COVID tax-related tax reliefs. Because of this, we have also updated our cash tax assumption and now expect 2020 cash taxes to be approximately 400 million euros or 50 million euros lower than previously expected. Q2 marks the fourth quarter in a row where we have shown progress in turning our cash performance around. which gives me confidence that we are driving the right rigor and making the right decisions when it comes to especially working capital management. Since we established the free cash flow program in 2019, we have put in place actions to strengthen contractual terms with customers and suppliers, reinforce controls across our supply chain and optimize inventories. These actions are now taking hold strongly and there is further potential for improvement. Moving on to our financial results within Nokia Technologies. A combination of lower one-time net sales, lower brand licensing, and lower patent licensing net sales due to expired patent licensing agreements led to a 11% year-on-year decline in constant currency. Excluding the one-time net sales, Nokia Technologies' top line would have been down 6% year-on-year. At the end of Q2, Our annualized licensing run rate rounded down to approximately 1.3 billion euros. This was related to normal quarterly fluctuations as well as small reductions due to lower brand licensing which was driven by COVID-19 as well as the expiration of some small patent licensing agreements. Profits remained strong in Q2 but declined significantly and many others. From an operational perspective, our existing licensing agreements continue to provide us with near-term stability. Nokia continues to invest in fundamental R&D, which enables us to maintain our market-leading patent portfolio during the 5G transition and positions us well for the renewals to come. Moving on to Group Common and Other, where net sales declined 21% year-on-year on a constant currency basis. As expected, we experienced headwinds related to COVID, which totaled approximately 150 million euros. The net sales decline was primarily related to radio frequency systems due to lower net sales of remote radio head cables and lower net sales to a number of customers in North America. Alcatel Submarine Networks or ASN also declined as the impact of the closure of production facilities due to COVID-19 was almost entirely offset by the ramp up of new projects. ASN's order book and underlying business momentum remained very solid. ASN would have delivered good financial performance in Q2 if not for these COVID-related disruptions. Furthermore, production has returned to a more normal state and thus we feel very well positioned in this business as we enter the second half. The operating loss for Group Common and other worsened year on year, primarily reflecting a gross loss compared to a gross profit last year, as well as a net negative fluctuation in the value of our venture fund investments. The gross loss was primarily driven by ASN. Then on the venture funds, the net negative outcome reflected mainly changes in foreign exchange rates as most of our venture fund investments are US dollar based. Looking at Nokia group level results, as Rajiv already touched upon a number of key financial highlights, there are just a few group level topics that I would like to point out. Both Nokia non-IFRS gross and operating margin expanded in the quarter, primarily driven by strong results in mobile access within networks. We are very encouraged by the traction we have established, but there is still a lot of work ahead of ourselves. Group-level operating expenses were down year on year, reflecting continued progress related to Nokia's cost savings program and lower travel expenses due to COVID-19. This was partly offset by higher investments in 5G R&D to accelerate our product roadmaps and cost competitiveness in mobile access, which is clearly paying off. We have said that we would continue to invest in R&D and this is exactly what we are doing. Looking at financial income and expenses, the year-on-year improvement was driven primarily by lower costs related to the sale of receivables and improved foreign exchange results. Please note for your models that we have updated our outlook assumption also for financial income and expenses and we now expect that to be an expense of 300 million for the full year 2020 as well as for the long term. This update is due to our expectation for two items. First, lower cost related to sale of receivables as we have put in place improved processes that are working well and that are sustainable over time. Second, as a result of improved foreign exchange results. Both of these items have been positively impacted by the lower US dollar LIBOR rates. Our Q2 non-IFRS tax rate was 22, which was lower due to COVID-19 related tax relief. Our non-IFRS EPS was 6 cents, in Q2 2020 compared to 5 cents in the year-ago quarter. Next, a brief update on our cost savings program. We believe that we are on track to realize the 500 million euro target. Our expectation for restructuring charges and cash outflows continue to remain the same. It is worth noting that since the announcement of the plan in October 2018, net foreign exchange fluctuations have resulted in an increase in estimated full-year 2020 fixed cost of approximately 70 million euros. This has created an additional headwind to achieve our planned savings. Despite this, we remain confident that we will hit our targets. As we have said in the past, when modeling 2020, we request CellSight to model our non-IFRS operating expenses for 2020 as follows. The number for your 2020 models should be approximately 50 million higher than our non-IFRS operating expenses in 2019, which were approximately 6.52 billion euros. Keep in mind our operating expenses and fixed production overheads benefited from reduced incentive accruals in the second half of 2019, consistent with our business performance. This consisted of first, an approximately 200 million euro benefit to operating expenses, and second, an approximately 100 million euro benefit to gross margin. It is important that you consider these headwinds as you model for the second half results for 2020. Then finally, let's turn to our outlook. where we have again made a number of adjustments following our Q2 results. First, we have updated our view on our primary addressable market for 2020. We now expect the market to be flattish excluding China following a lower than expected market impact due to COVID in the second quarter. However, we now expect to slightly underperform our primary addressable market due to lower network deployment services within mobile access. Our expectation for operating profit seasonality remains unchanged for 2020. The majority of operating profit expected to be generated in the fourth quarter. However, given our strong free cash flow results in the first half and the work we have done to improve our networking capital, we no longer expect free cash flow seasonality to be similar to last year. If you recall, last year our cash flow performance in the first half was quite weak. Following the intention to provide updates each quarter to our progress against the midpoints of our outlook ranges and given the strong first half results, we have adjusted the midpoints of both our non-IFRS operating margin and diluted EPS expectations for 2020 within the previously provided ranges. We now expect our non-IFRS operating margin and our non-IFRS deleted EPS to be 25 cents plus minus 5 cents. Finally, and very pleasingly, as we have delivered better than expected free cash flow in the first half of the year, we now expect recurring free cash flow to be clearly positive for 2020. Despite the ongoing macroeconomic changes Thank you very much. I care deeply about this company and I know many of you also care a lot about Nokia's future success. I cherish the relationships we have built over the years and I'm grateful over the many learning experiences that we have shared together. Thank you. With that I hand over the call back to Matt for Q&A.

Thank you, Christian. For the Q&A session, please limit yourself to one question only. as a courtesy to everyone else in the queue. Cole, please go ahead.

And we will now begin the question and answer session. To ask a question, you may press stars and one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press stars and two. Please limit yourself to one question only. And our first question today will come from Sandeep Deshpande with JP Morgan. Please go ahead.

Yeah, hi. Thanks for letting me on. And all the best to you, Rajiv and Christian, in your future endeavors. My question, you know, you've had a very good second quarter in terms of your margin. If one looks at your gross margin in networks, there is almost 500 bps or more than 500 bps improvement from the first quarter. Clearly, I mean, your product itself is improving. You've seen data points from the supply chain of, you know, your suppliers beginning to supply to you on the A6. So I'm trying to understand here that if one projects this gross margin into the second half of the year, your guidance should be much higher than what you have guided the market to at this point. So why are you saying at this point that your gross margin is going to decline into the second half of the year given this significant improvement you've seen in the current quarter? Or is it that there was a huge mix shift in the current quarter which is not going to be sustained into the second half of the year? Thank you.

Thanks, Sandeep, and thanks also for the good wishes. So first of all, Sandeep, I think we have put in place this strong centralized commercial management deal discipline last year, and that is helping us with these underlying structural improvements. And so if you think about where that margin strength came from, the first is 4G LTE, because 4G LTE is now Pretty much on a worldwide basis entering this capacity phase. The second, of course, because of our 5G system on chip, it helps us in 4G LTE when we are bidding for these combined deals which have 4G and 5G. Having said that, we haven't yet felt the impact in any meaningful way from the 5G SOC, which will come in due course because, remember, there's a six-month lag between shipments and actually banking some of the benefits The other areas where we benefited was IP routing, fixed, and IP routing because of the technology leadership we have there. Still, that window remains open for us. But there was also this product and regional mix issue that we benefited from in the quarter, which will be slightly less pronounced as you move forward. So those are kind of the puts and takes. 4G, routing, fixed, and then this product regional mix that will be less pronounced in water.

Thank you, Sandeep. Cole, next question, please.

And our next question will come from Robert Sanders with Deutsche Bank. Please go ahead.

Yeah, hi, good afternoon, and my best wishes to you guys as well. My question is just about Huawei, Huawei dominant footprint. What are you actually hearing from operators in terms of you getting a second look, and how are you going about engaging with these operators that maybe you haven't engaged with for a while? And within that, are you seeing any particular region where those operators that were previously dependent on Huawei are now coming to you? Is it Europe, Middle East, or is it even Asia and LATAM as well?

Thank you. Thanks, Rob. Yes, we're seeing several countries consider their 5G technology vendor options. I think Europe is clearly one of them, where there's probably most of that momentum. Now, whatever the government's decisions are, we are ready to help our customers wherever they are in the world. So we have the capacity, we have the scalability, we've got the products. And to me, it isn't just about radio. It is also about core, that being sensitive. But it's also about transport, so routing in particular. I mean, that's also considered IP core. and then to a lesser degree also fixed. So I think it's going beyond the evaluation or re-evaluation of vendor selection. It's resulting in concrete medium-term opportunities, the emphasis on medium-term. And that's where things are. So we've seen already before in Canada that we were able to expand our share. We saw that in Japan with SoftBank, with KDDI. We've seen Vodafone Hatches in Australia where we've entered where we were not a supplier at all and now we are a sole supplier in terms of both radio and transport. Thanks for the wishes.

Thank you, Rob. Cole, we'll take our next question, please.

And our next question will come from David Mulholland with UBS. Please go ahead.

Hi, thanks for taking the question and good luck for me as well. Just on the country around win rate and market share, Thanks, David.

So at this point, based on the visibility we have, we believe that that 4G plus 5G market share of 27% and the win rate of above 100% excluding China is what we're looking at. That's what we're seeing. And then the upwards intakes as always in this business, there's some win-backs, there's some stresses, but so far that's the number we're seeing.

Thank you, David. Call next question, please.

and the next question will come from Achal Sultania with Credit Suisse. Please go ahead.

Hi, good afternoon. All the best Rajiv and Christian from my side as well. Maybe I think Rajiv if you touched upon this topic in the US highlighting that one of the key customer was still seeing slow ramp in Q2 and obviously you're talking about the acceleration in the second half of the year. Can you help us understand, is it going to be across the board, or is it going to be with one specific customer when we think about second half? And then, what exactly kind of products is this customer looking to deploy in the U.S.? Is it mainly focused around mid-band, or is it a combination of macro, mid-band, and small cells, and then software upgrades as well? Thank you.

Yeah, thanks. So what we've seen so far in the U.S. is that there's been refarming, preparation for dynamic spectrum sharing, so that means low-band 5G, right, 850, 900, and so on. What we saw last year was millimeter wave, but also low-band in the case of T-Mobile, 600. And now I think with this merger coming together and clarity in terms of second half, We see that the ramp up will increase in both a low band with that particular operator But also also the mid band right that that's a spectrum that they've now got And and so there's in queue to it with a bit soft especially in services and now as the sites come on come online and if they get clarity of of their own roadmap then that'll accelerate in the second half when you talk about C band and which is the broader auction space. That will happen at the end of this year. Results should happen at some point in Q1 next year and that spectrum will be cleared for use by the operators that are the winners in that space only by the end of next year. And then, of course, on a different related note, the CBRS band opens up opportunities for enterprise players, particularly utilities, that will look to drive field area networks. And, of course, from our enterprise business, we're super keen on that opportunity as well.

Thank you, Charles. Cole, next question, please.

And the next question will come from Simon Leopold with Raymond James. Please go ahead.

Well, thank you for taking the question, Rajiv. Good luck on your next venture. Just wanted to maybe get to a key point here. Given the 2020 outlook you've provided, can we consider this evidence that your relationship with Verizon, likely one of your biggest customers, remain solid and that your plans with that customer on 5G are on track per your prior plans. Thank you.

Thanks, Simon. We do not comment on our customers' vendor strategy. Nokia is proud to serve Verizon, and we are committed to continuing to help them build the best, reliable, and highest-performing network. We work with them across multiple technologies of our end-to-end portfolio, if not all. and we have a long-standing strategic partnership in key technologies and we play a critical role in Verizon's 4G networks and continue to work with them to accelerate innovation around 5G technology.

Thank you, Simon. Cole, we'll take our next question, please.

And the next question will come from Alex Duvall with Goldman Sachs. Please go ahead.

Yes, hi there. Many thanks for the question and thanks for all the help that you've answered questions over the years. Just one, if I may. You talked about continuing to track towards the 35% on Reef Shark shipments by the end of this year. I wanted to talk more broadly about how you assess the latest state of your product in terms of competitiveness and wireless and how many more quarters roughly it could take for you to be on a par with others in the market. I wondered if you could talk about some of the other dimensions to bear in mind.

Thanks, Alex. So by the end of the second quarter, the new ReefShark SLC-based massive MIMO radio unit, this product family was shipping in about 13 variants across the global market in different frequency ranges. And this number continues to rise. So that's the one thing. Remember we said we'll first start with the RS part of the SOC. And then we also have the ReefShark SOCs available for the next generation of Nokia multi-radio baseband. So this is the next thing that we said we would start shipping. And we're on track to start shipping the baseband boards by the end of 2020. and then if you look at next year, we expect that our reef shock SOT baseband and radio units will take the lion's share of our delivery, so reaching at least around 70% by year end. So that's how we see it in terms of the product competitiveness. We are shipping products now with lower power consumption, higher performance and lower product costs. And then when it comes to features, I think the catch-up has accelerated in the last few quarters, and yes, in some features we're a little bit behind in the order of a few months, and then in some other places like small cells, et cetera, we're also ahead. And then when it comes to the next generation, we get this feedback from all of our customers that we're ahead in VRAN, Cloud RAN, and Open RAN, and we are going to continue to accelerate in these next generation areas.

Thank you, Alex. Cole, next question, please.

And the next question will come from Alexander Pederick with Societe Generale CIB. Please go ahead.

Yes, hi, and thank you for taking my question. Best wishes to both of you as well on my side and your future endeavors. Can you just provide a little bit of color on the margin recovery, the gross margin recovery in the networks business, particularly in mobile? If you could tell us if it's more on the hardware side or in service delivery, what's the contribution of both of these to improvement? Thanks.

Thank you too, Alex. Yeah. So, yeah, it was three things from mobile access. One, a reduction in low margin services, right? So exiting some unprofitable managed services contracts and reduction of deployment services proactively out of choice. Second, 4G LTE being in the capacity phase so we saw an uplift in margins in 4G LTE and we will not see it to the same extent in future quarters it'll be to a slightly lower extent but the fact that 4G LTE is in this capacity phase worldwide it's just going to remain as a reality now for the you know medium to long term and then the third was of course in 5G SOC when you have more of these SOC's shipping system on chip products with lower product costs that makes you competitive in in bids. And that means that you are more competitive and retain more margins in 4G as well. So you get that indirect benefit. We haven't yet seen 5G system on chip material benefits yet because we only had 10% run rate at the end of Q4. And remember, there's a six-month lag, and that is yet to come. So I think what I'm saying is that with both the commercial management and deal discipline, as well as some of these product benefits now, we're seeing for the most part structural improvements on an underlying basis with the exception of Q2 where we saw a little bit better regional mix and product mix that might not recur to the same extent.

Thank you, Alex.

Cole, next question, please. And the next question will come from Dominic Olszewski with Morgan Stanley. Please go ahead.

Hi, everyone. Thanks for taking my question and I'll add my best wishes too. My question is around the recent news reports on exports from China. Maybe could you discuss Nokia's ability to service the rest of your global customers should you see export controls be put in place, for example, in China, but elsewhere? And how independent and modularized is your internal supply chain more broadly?

Thanks, Dominic. Look, as a global company operating in a multitude of regions, if we have more than 31 Network of 31 factories without EMS suppliers. We have a number of fulfillment hubs for logistics So we are mindful of the geopolitical environment and the risks and opportunities that it creates for us We have a global supply chain footprint and it is designed for optimized global supply and it's designed to you know mitigate against risks such as local disruptive events or transportation capacity and actually it's become even more agile because we've had to do this in the pandemic more than ever and because, you know, we were seeing effects in lockdown in some countries. You had to move factory capacity to other countries and so on. So literally on a week-by-week basis, you had to have this agility. So we are continuously reviewing our supply chain strategy. And given both COVID-19 and the geopolitical situation, that this is receiving greater than usual attention with, you know, multiple scenarios and so on that we are working on. And the key word is agility.

Thank you, Dominic. Cole, next question, please.

And the next question will come from Richard Kramer with RSA Research. Please go ahead.

Thank you very much. It feels like an end of an era, guys. Right now the industry discussion seems to be dominated by Open RAN, and indeed Tommy's blog post talked about it as creating the future rather than protecting the past, but one of the big questions for investors who've seen the impact of white box vendors in areas like networking and server is the implications for Nokia's profit pools in network equipment, given your chipset investment, and specifically also for the future of your services business. where you still have a lot of headcount. So can you talk through how you might transition to Open RAN and protect your profit pool when we've seen similar moves decimate the profit pools in other sectors? Thanks. Thanks, Richard.

I think the first thing I'll start with is that we have seen the same thing happen in core networks, right? We saw that when it started to shift to virtualized and now cloud native. So we have some experience with navigating that space and What I would say is I'll give you some puts and takes. First of all, we started this early. We have a long history of involvement in open initiatives, in CGPP, the Linux Foundation's own app initiative, multi-access edge computing, working with Rakuten. We took a step in that direction already in 4G, ahead of Open RAN and 5G. We joined the Open RAN policy coalition because it gives us the opportunity to promote open standards at a strategic and policy level, as well as from a technology standpoint. If we do this well, the opportunity is that services could grow, there could be more software, and my favorite one is that we'll stop swapping each other because, you know, mix and match is not a bad thing, right? So we swap each other's fairly modern equipment sometimes because there's an entry barrier if you're not in the game in that network. And then I'll remind us all that The amount of features that we have in our operators need by way of feature parity, it isn't what some of the smaller vendors are offering. I mean, they have 50, 60, 70 features, maybe more suited for enterprise. But when it comes to the service providers with thousands of features that they want to carry over from 4G to 5G and next generation 5G, and then system on chip will be a key determinant there as well. It may not be as much for VRAN, but absolutely will be for for Open RAN because a lot of the network performance, lower power consumption, the better product cost efficiency all comes from SOC. So those are some of the advantages. Of course, there's also a threat in the install base. If you have a strong install base, there's naturally a threat. But I think that hopefully is a good perspective of pros and cons. And we want to lead and not protect because with or without us, Open RAN is coming. It will come over a period in time. Some of the forward-leaning operators will start first. But the reality is, and Greenfields are already doing it, The reality is that it's happening over time and we want to leave rather than protect.

Thank you, Richard. Cole, we'll take our next question.

And the next question will come from Stephan Flowinski with Exane BNP Partibus. Please go ahead.

Great, and thank you for taking my question. Just with the setback from China, the U.S. is obviously becoming an even more important market for you. and this is a question on the mobile access side there. You've confirmed sort of the outlook for 2020. If we look to 2021, the market's still expected to be quite healthy. How do you see your share in the US on the mobile access side evolving into 2021? Is there opportunity for you to increase share in that growing market or is there a risk that you could see some share loss? Thank you.

Again, as I said, we're supplying to all of the operators there. And we've got our C-band product. We have supplied 55 customers out of our 83 5G networks on mid-band, basically. C-band is mid-band. So we're ready for that game. The spectrum options will take time. and of course T-Mobile is happening as we speak. So hard to say how share will evolve. Some of the C-band tendering activity will, some of it is in motion, some of it will begin to happen but all we can say is that we have a strong position today. It's a focus area and outside of the service provider space there are also other opportunities that we're focused on. So, so far it's fine. We just need to keep up the good work in terms of our roadmap competitively.

Thank you, Stephan. Cole, looking at the time, I think we have time for one more question for today's call.

And that question will come from Sami Sarkhani with Nordea Markets. Please go ahead.

Hi, thanks for taking my question. You're not expecting to underperform slightly your addressable market, excluding China.

Can you elaborate on the assumptions that have changed during the second quarter I'm especially interested in whether this is any way related to U.S. market developments.

Thanks, Sami. As we said also in our press release, that's related to a reduction of low-margin services, deployment services in particular, but also managed services is one meaningful example.

Thank you all for your great questions today. I'm sorry we weren't able to get completely through the queue. But with this, I'd now like to turn the call back to Rajiv.

Thanks all for the good wishes. Very much appreciate it. It's been great working with you all. I mentioned in my remarks that we were pleased with where we landed overall this quarter given the impact of the COVID-19 pandemic and that it underlines the trend we are seeing in making meaningful improvements to our business performance. Of course, the pandemic is far from over and many parts of the world are currently in a very tough situation. The health and safety of our employees remains at the top of our priority list. While I'm satisfied with the work we have done so far to keep our people safe, we will remain extremely vigilant as the situation develops. And finally, this is my last working day as CEO, my last quarterly announcement, and I want to close with a note of thanks A lot of warm wishes to all of you. I leave knowing that you will be in good hands with Pekka Lundmark with whom the transition is proceeding in an orderly manner and who will talk to you next quarter. It has been a great privilege and an honor to lead this incredible company in the past six years and Nokia Siemens Networks before that for five years and to be a part of the Nokia family over the past 25 years. Thanks to our shareholders, thanks to our customers, thanks to our many other stakeholders and particularly thanks to the great employees of Nokia. You have constantly made me proud and I expect that you will continue to do so in the many years to come. Thank you all. It has been a pleasure and an honor. With that, I will hand the call back over to Matt.

Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today, we have made a number of forward-looking statements that involve risk and uncertainties. Actual results may therefore differ materially from the results currently expected. 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 these in more detail in the section titled Operational and Financial Review and Prospects, Risk Factors, of our 2019 annual report on Form 20F, our financial report for Q1 published on April 30th on Form 6K, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.