Nokia Corporation

Hello and welcome to the Nokia third quarter teleconference and video 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. If you are also viewing the video webcast, please remember to mute the audio on your computer before asking your questions as there is a 30-second delay. 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 Mr. Matt Chimao, Head of Investor Relations. Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's third quarter teleconference and video call. I'm Matt Chimao, Head of Nokia Investor Relations. Pekka Lundmark, President and CEO of Nokia, and Marco Wiren, CFO of Nokia, are here with me via teleconference and video today. During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia and this industry. These statements are predictions that involve risk and uncertainties. Our true 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 6K, 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-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. Please also note that we have a lot of content today, and to ensure we have a good amount of time for Q&A, we may decide to let this call run five minutes over. With that, Pekka, over to you.

Thank you very much, Matt. And it's a pleasure to talk to all of you on my first quarterly call at Nokia. We actually do have a lot to cover today, so let's get right to it, starting with our third quarter results first. Overall, the quarter was solid and we did see progress in many parts of the business. We also saw some developments that while not impacting the quarter will provide some potential headwinds in the future. When we look at market conditions, we believe that our primary addressable market, excluding China, will decline this year on a constant currency basis. We expect that we will slightly underperform the market driven mostly by global services. And then from a top line perspective, it's clear that Q3 Thank you very much. Several Nokia level profitability metrics were, however, up year on year, including operating margin and operating profit. As you have seen, we had 80 basis points improvement in non-FIRs operating margin and 200 basis points improvement in IFRS reported operating margin. In the sign of the progress that we are making, I would also note that our network's gross margin was up strongly, 370 basis points to be accurate, from the same quarter last year. Overall, we saw solid operational and commercial discipline and low non-IFRS operating expenses, largely resulting from less travel due to the ongoing pandemic. And then in terms of net cash, We ended the quarter with 1.9 billion euros up 139 million euros from Q4 2019 to mark the fifth consecutive quarter of solid free cash flow. So this is a quick group summary and then to our businesses and I would like to start with mobile access. I'm of course well aware that many of you have expressed concern about our situation in mobile access and with our mobile radio products in particular. I understand that concern and as we noted when we announced our Q4 2019 results, we have lost share in the segment in recent years. We also have important milestones we need to hit in the coming months and there is still some risk that remains. But the underlying progress is real. We saw healthy single-digit sales growth in mobile networks driven by 5G deployments and we have now won more than 100 5G deals. I think the exact number is 101 at the moment. Our 5G powered by ReefShark shipments are tracking well and we continue to expect stable 4G plus 5G market share in 2020 of 27% excluding China. We did see a decline in our conversion rate in Q3 driven by changes at Verizon, where we expect our mobile radio share to trend down over the coming years. Despite this, Verizon remains a top three customer and our relationship is strong and strategic. We are seeing some offsetting gains with operators who are reconsidering their vendors as a result of geopolitical issues. We estimate that we have won approximately 43% of the value of such deals available to date. In short, we are making progress but there is no overnight route to success and we will invest whatever it takes to be a leader in 5G just as we have been a leader in 4G. In fact, let me reiterate this point. We will do whatever it takes to win in mobile networks and more specifically in 5G. If that means we need to sacrifice some short-term profitability to do so, that's what we will do. Our customers are counting on us and we will be there for them. Then the other parts of mobile access, global services, which had a difficult quarter with year-on-year sales down significantly. Margins were negatively impacted by a large provision for a poor project that was contracted several years ago. Without that impact, actually, the profitability of global services would have been quite strong in the quarter, reflecting significant operational improvements. From a top line perspective, the decline was driven by three regions where the issues are clearly understood. In North America, Our deploy services were down substantially. We are heavily dependent on one large customer where activities have been on hold as they focus on future planning. Our Latin America and Asia-Pacific regions have both been hit heavily by the coronavirus. India, which we reported as part of Asia-Pacific, had also faced difficult regulatory issues. Let me now turn to Nokia Enterprise which had another excellent quarter and once again posted double digit year on year constant currency sales growth. Demand for mission critical networking solutions in industries including utilities and the public sector remains robust and Nokia remains well positioned to serve this market. In the quarter we added 83 new Enterprise customers with most of those in private wireless. and then to Nokia Software, which had unfortunately a weak quarter. Constant currency sales were down year on year, as was operating margin. We saw a number of project delays and slower than expected capex decisions with some customers. Orders, however, remained strong, including the win of one of the telco software industry's largest ever deals with a key North American customer. Pleasingly, Analysis Mason again ranked Nokia as the number one telco software player by revenue for the third year in a row. IP routing had one of its best ever third quarters for sales and for operating profit. Our market-leading FP4 technology continues to provide us with strong differentiation and we have now secured over 250 FP4-based projects. Almost half of these are new customers where we previously did not have a routing footprint. We have a strong pipeline of new products set for 2021 and believe we remain well positioned to maintain our momentum in this business. Orders in the quarter were somewhat soft which may be related to slowing spend as a result of uncertainties associated with the coronavirus. This is not yet at the level of being a significant concern, and intense sales efforts are underway to expand our pipeline. Optical networks had a strong sales quarter, in part due to an easening of temporary supply chain constraints related to coronavirus. Profitability for this business remains roughly at the break-even level on an annual basis. Next year we will start to benefit, and I'm still talking now about the optical business, we will start to benefit from product cost reductions driven by our acquisition of Elenion. But the competitive landscape remains challenging. Fixed access had year-on-year sales growth of 2% and healthy operating margins in Q3. We also saw good progress with our portfolio with the launch of our industry-leading 25 gigabit passive optical network products. The transition from copper to fiber and fixed wireless access remains underway. As a sign of this change, Q3 was the first quarter ever in which our fiber sales were higher than copper. Many customers, including AT&T, have stated that fiber is a top priority, particularly given the coronavirus. There is also an important regional shift in fiber deployments underway from China to other parts of the world. and finally Nokia Technologies whose sales declined in the quarter largely driven by lower brand licensing royalties. Our brand partner HMD Global had been hit hard by the coronavirus. While HMD has recently completed a fundraising round and taken steps to stabilize its business, we expect the full recovery to take some time. Importantly, We successfully renewed one major patent license agreement in the quarter and did so in a way that demonstrates the strength of our portfolio and the fact that we now have 5G patents to offer. With all of that as background, let me now turn to our full year 2020 guidance. With our current assessment of the balance of opportunities and risks, including some footprint and pricing challenges in North America, We have decided to adjust the midpoints of our guidance and narrow our guidance ranges. We now expect our non-IFRS EPS to be 23 euro cents plus or minus 3 cents and our non-IFRS operating margin to be 9% plus or minus 1 percentage point. We are also providing more transparent guidance for 2020 recurring free cash flow and Marco will say more on this shortly. With that let me now turn to our strategy and new operating model. We plan to share our strategy with you in three phases. Today I'll talk about some of the conclusions, fairly high level conclusions we have reached to date and related changes we are making to our operating model. We will then hold a call with you on December 16th. Thank you very much. Before talking about some of the principles that will define our strategic direction, let me give a perspective on some broader trends that set the context for our thinking. First, telco operators will continue to need to support massive capacity demands without commensurate cost increases. As a result, we expect capex to remain constrained as operators will look to drive a step change in cost effectiveness. Within their total spend, however, we believe there will be shifts that will benefit us over time. Second, the broad trend towards open architectures with increasing virtualization will accelerate. This will be driven by cost pressures as well as the need to increase speed and agility. Adoption will vary widely and the full transition is more than a decade away, but the shift to more open interfaces, virtualization and cloudification Network function disaggregation, AI driven automation and optimization is well underway. Third, enterprise demand for high performance networks will increase as overall digitization and automation accelerate. The early benefits of enterprise digitization have been important but are so far limited. But going forward, physical industries of all kinds will accelerate their digital transformation built on networks that meet their stringest performance needs. And fourth, as a service offerings will keep expanding in mission-critical networks for enterprises and telco operators. This will continue to be driven by industrial automation, the shift from static ownership to instant access, the move of web scale companies into the edge cloud, and Nokia's own move into cloud native functionality that can be deployed on cloud infrastructure from any major cloud provider. Fifth, trust and security will grow even further in importance. Telco operators and enterprises alike will insist not just that all products and services are designed to be secure from the start, but that vendors are trusted. Governments will continue to drive this change and enterprises will seek to ensure that their intellectual property is secure as they move to a more digital world. And finally, we see value migrating from integrated systems to cloud native software and systems on one hand and to enabling silicon and photonics on the other hand. In a way, value splitting migrating into these two parts of the system. Both of them, of course, offering interesting opportunities. I have already mentioned the cloudification of networks. Equally important is the technology necessary to meet future demands for massive capacity and efficiency as digital transformation happens in every sector. Investments in the underlying silicon devices and optical components are essential to achieve the highest performance at the desired cost and will remain a critical component to cloud native capabilities going forward. With that brief overview of the changes we see underway, let me now make four key points that will be critical to our future strategy. First, we are a technology company, and that means technology leadership. In those areas where we choose to compete, we will play to win. All our businesses will need to have a path of being one of the market leaders in both revenue and profitability. If there is not a path to reach these goals, we will reassess our options. Achieving this will mean prioritization and ensuring that our capital allocation is clearly aligned to our strategy and where we have a credible path to value creation. As part of this approach, we will be careful not to overextend ourselves. It makes no sense to do things halfway. We either need to be all in to win, Thank you very much. to new open architectures with increasing virtualization and the focus on top-line growth through value-added use cases including industrial applications. It is our goal not just to support this transition, but to lead it. With enterprises, the demand is clear given the double-digit revenue growth we have delivered in recent quarters. We are well positioned to maintain strong momentum in this business as digitization and automation in industrial segments drive increased investments in technologies such as private wireless and cloud solutions. Third, we see a longer term opportunity to lead in network as a service business models for operators, enterprises and web scale customers. This change offers a broad opportunity for Nokia to provide a trusted, software-led and cloud-based network capability that can be rapidly integrated, deployed and self-managed as a complete service. On top of this, we can move up the value chain and provide additional Network Plus value-adding services. We would expect enterprises to be the first adapters of such Network Plus as a service capabilities. Our view is that this should be provided in partnership with telco operators or directly by Nokia in areas that operators choose not to address. This is not something that will happen overnight. It will take years to develop, but the train is leaving the station today and coronavirus will most likely serve as an accelerant. We plan to be at the front of that train as we are uniquely positioned given our deep experience in delivering carrier-grade network performance and our extensive work with web-scale companies and enterprises. And finally, and this is really important, we will shift from End-to-end as a core strategic idea to a more focused approach with our new business groups each having clear and distinct roles that are aligned to how customers buy. Aligned to how our customers buy. We will still provide integrated solutions to customers who want such an offering but each business will have its own P&L and operational accountability. and they have to demonstrate the path to delivering shareholder value, each of them. Return on capital employed will be a key metric and justifying subpar performance by being part of an end-to-end offer will no longer be acceptable. This last point takes me to our operating model and there are immediate moves we will make to improve and align with our expected future direction. These changes, which will be effective January 1st, 2021, have five key goals. First, better aligned to our customers' buy. Our new business groups will be focused on the offer they bring to customers. They are structured to shrink the distance between sales and R&D so we can respond to customer needs faster and more effectively. There is also limited deal overlap between the groups, less than 20% of cases, and this will further reduce complexity. Second, improve accountability. In our new model, P&L responsibility will sit with our business groups. Those organizations will be led by members of the company's group leadership team who will own all the relevant product, service, sales, supply chain and all the core activities necessary to execute and develop their respective business. Third, increase simplicity and cost efficiency. The fragmented accountability we have today has resulted in heavy corporate overlay processes. With our new model we can strip much of this back and become more cost efficient and better empower business groups to move fast and effectively. Fourth, ensure a consistent strategic logic. In the four new business groups there is a clear link to our future strategic goals and plans, how we will manage each business, where we will target growth and so on. And fifth, Very important, improve transparency. We want to ensure that we provide investors and analysts with the clarity needed to understand our business. To do that, we will align our future external reporting with our new internal structure. So with that, let me turn to our new business groups. The first is mobile networks. This business group will include our mobile network products, network deployment and technical support services, and related network management. The net sales in the last four quarters for this business group were approximately 10 billion euros. We will continue to drive this business with a turnaround mindset, and it will have the full portfolio for addressing customer needs in mobile access networks. It will target leadership in key future technologies such as Ouran and Viran, and as I said earlier, we will increase our investment to ensure we lead in 5G just as we did in 4G. I also believe that this new model will put us in a position to better address some of the challenges we face. As we look at the root causes of those past challenges, they have largely come from three main areas. The first was the worldwide acceleration of 3GPP compliant 5G while we were still migrating the Alcatel Lucent 4G portfolio to the market leading Nokia AirScale platform. This delayed the ramp up of our 5G investments. The second was growth by acquisitions which helped drive our market share growth but meant that we had to support multiple platforms for many years. This situation has largely been resolved and what is left will be addressed in 2021 as additional new system of chip-based products become available. The third challenge and one that this new organizational model will help resolve is that we have had an insufficient link between product development and requirements for installation and serviceability. By better aligning the product teams with those who sell, install and service, we believe we can make significant improvements. As we announced in the press release this morning, Tommi Uitto has been appointed president of this business, effective January 1st. The second business group is IP and fixed networks, which will include IP routing, optical networks and fixed networks groups as well as Alcatel Submarine Networks business currently reported under Group Common. The net sales in the last four quarters for this group were approximately 7 billion euros and it also has a very strong portfolio. We see ever increasing demand for higher capacity, greater reliability, faster speeds and cost efficiencies in the areas covered by this unit and we will continue to focus on providing our customers with exactly those things. These are relatively stable businesses with potential for growth in low single digits and solid cash generation. Their products and services are typically purchased separately from mobile networks, so the complexity related to deal overlap is limited. To give a quick snapshot of each business and what I see today, IP routing first is all about delivering double-digit profitability, strong cash flow and gaining market share. This is a business with momentum, a strong presence with web-scale companies, new growth potential in data center switching, strong technology leadership and a robust product pipeline for 2021. In optical networks, we have a turnaround ongoing, a strong market position and a target to deliver mid-single-digit operating margins in two to three years. In fixed networks, we are managing through a market transition with accelerating growth in fiber and the regional shift away from China. Our focus is delivering fiber to the most economic point and leveraging fixed wireless access. Our goal is to deliver near-term single-digit margins and better than that in the longer term. And then the fourth part of this business will be Alcatel Submarine Networks, which is number one in its segment, has a very strong order book, and is on a path to profitability. It has been reported as part of Group Common, and we will change that in our new model. Federico Guyen has been appointed president of this business, effective January 1st. And then the third is cloud and network services which will contain our existing Nokia software business excluding mobile networks network management and our enterprise solutions. It will also include voice and packet core and managed and advanced services from our current global services unit. This unit will also act as a delivery channel of certain products from other business groups to enterprise customers. We want this business group to deliver growth by leveraging the transition in our industry to cloud-based delivery, network as a service business models and software-led value creation. The net sales in the last four quarters for this group were approximately 3 billion euros. The potential of the areas covered by this business is significant and we have created this structure with an eye to the future. Most of the revenue from this group comes today from telco operators, but we see an opportunity to leverage the transition with both operators and enterprises to a world where software is the key value driver, where cloud delivery is the norm, where as a service models prevail, where industrial digitization is a must, where private wireless is a key enabling technology, and where use cases we have not even thought of today come to the fore. Raghav Sahkal has been appointed as president of this business, effective January 1st. And fourth is our highly profitable licensing business in Nokia Technologies. The net sales in the last four quarters for this group were approximately 1.4 billion euros. We expect this unit to remain largely unchanged as its strategic direction is clear, both to generate royalties from mobile devices, particularly as we add 5G patents and renew deals, and second, to continue the work to expand into new segments such as consumer electronics, automotive and IoT. The unit is also responsible for licensing the Nokia brand. Jenni Lukander will continue as president of this business. Equally important to the business groups will be our new customer experience organization. Customer experience will provide a common interface to customers, act as a company-wide voice of our customers and support the building of strong relationships and new business opportunities. We already have world-class customer teams who have ensured that we have strong trusted customer relationships. We intend to keep this as an essential strength going forward. Customer experience will also include our regional country management as well as marketing. This group will be led by Rikki Kocker. And then, of course, in addition to the four business groups and the customer experience organization, we will have four corporate functions, finance, legal and compliance, people, and then strategy and technology, a very important function, which will include long-term research, our strategic planning, and and very importantly Nokia Bell Labs. You can see more about these functions and their leaders in today's press release. With these changes we will significantly improve accountability, increase simplicity and provide new cost efficiency opportunities. We are actually moving from a fairly complicated group-wide matrix organization Thank you very much. With that as perspective about where we are going, let me come back to the topic of our guidance for 2021. We expect next year to be challenging. A year of transition with meaningful headwinds from North America, as I have already mentioned, and further investment requirements in 5G. Coronavirus and its related economic impact are also a concern. Given this, our current view of 2021 is that we will deliver a Nokia-level operating margin, non-IFRS operating margin of 7-10%. We intend to provide an update on our long-term outlook at the latest on Capital Markets Day. Our goal now is to ensure that our strategic framework is supported by concrete operational plans from the businesses. Factors that support our ability to generate stronger margins include An expected successful turnaround in mobile access. Plan to target new value creation from software-led digital services with both CSPs and enterprises. A clear path to maintain technology leadership in IP routing and related ongoing market share gains. More disciplined portfolio management with each business required to show a clear path to value creation and not rely on end-to-end strategy justification. and better accountability, productivity and cost structure through our simplified operating model. I recognize that this is a lot to digest, which is why we will have more time to discuss these topics in December and March. I want to be very clear that I believe the potential of Nokia is substantial, but delivering on that promise will not happen overnight. We expect to stabilize our financial performance in 2021 and deliver progressive improvement towards our long-term goals after that. I'm sure that you have plenty of questions, but before we turn to that, let me hand over to Marco for comments. Marco.