Nokia Corporation

Hello and welcome to the Nokia fourth quarter and full year 2020 earnings 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 question, as there is a 30-second delay. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Matt Schimel, Head of Investor Relations. Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's fourth quarter and full year 2020 conference call. I'm Matt Chimao, Head of Nokia Investor Relations. Pekka Lundmark, President and CEO of Nokia. And Mark Arvuden, CFO of Nokia, are here with me via teleconference and video today. During this call, we'll be making forward-looking statements regarding our future business and financial performance. These statements are predictions that involve risk and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external 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 report with tables, and the presentation on our website include non-RFRS and comparable 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. Today's stock exchange release and presentation can be found on the investor relations section of the Nokia website. With that, I would now like to turn the call over to Pekka.

Thank you very much, Matt, and dear investors, welcome to join us today. I'm happy to report that we had a solid Q4 to end 2020. And actually, as you will have seen, we came in at the high end of our previously communicated outlook range. The Nokia-level non-IFRS result, both cross-margin and operating margin, were healthy, and they were up. Non-IFRS operating margin was 16.6%, and that was up. 20 basis points and then of course for the full year the increase was bigger we came in at 9.7 percent and previous year was 8.6 percent and as you have seen gross margin development pretty good non-IFRS gross margin 41.8 percent for the quarter and 40 percent the year before. This was driven by, first of all, regional mix shift towards higher margin North American market. It was also driven by our R&D efforts to enhance product quality and cost competitiveness. And this is, of course, pretty encouraging, all of it. Most of this was in the networks business, and then, of course, this was the last year now when we report in this structure where networks is one business. This year we will zoom a little bit deeper into the different components of the networks business. What we would like to highlight is that Q4, operating profit benefited about 250 million from two drivers, 150 million early payment and then 100 million from Nokia Venture Fund valuation that Markku will talk about a bit more in detail. And if you turn or kind of calculate that how much the EPS effect out of these two items would have been, it would have been three and a half cents. We also reiterated our earlier view on 2021 operating margin outlook, so we keep the 7-10% margin forecast for this year. And then one important thing to note, which Marko will talk more about, is that we have one pretty large item, derecognition of tax asset in Q4, which Marko will talk about, as I said. Then if I – I mean, that was a very quick high-level summary of the result itself. And now I would like to move over to a little bit more details. And I start with the regional picture and the regional situation. And then, of course, when you look at this picture here, you see that clearly – the performer of the quarter was the North American market. For the group, our full year sales were down 5% for the quarter. This was mostly because of currencies. In constant currencies, the quarter was 1% up. But then, of course, for full year 2020, we cannot be happy with the fact that we were down 6% on reported and 4% constant currency. But once again, in Q4, the performer was clearly in North American region, where we had 11% reported and 19% USD, i.e. constant currency-based growth. This partially reflects the recognized net sales, also the item that I highlighted, 150 million earlier this year, earlier, but in general, of course, this is pretty strong performance. Our second largest market, Europe, remained flat, and in constant currencies it was up 2%. One thing that is important to note, and which is partially driving the European market, is the swap opportunities due to geopolitical issues, and the majority of these opportunities opportunities are in Europe. There are some deals in other parts of the world as well but we believe that we have won to date around half of the value of such deals and this of course supports our business specifically including in Europe. What is important then of course from margin point of view is that when you have a swap deal like some of the ones that we have recently won Typically, in the beginning, in the early stages of that deal, first year, sometimes two, the margins are lower and then they pick up when you go further. The other regions are, of course, smaller for us. There we have had some headwinds. In China, we have clearly lost market share. There's no question about that. In the other parts, it's not that much a market share question. There are some tough comparables, as you can see in Asia-Pacific in Q4 last year because of the Rakuten deal in Japan and also in Middle East and Africa because of strong deliveries to Saudi Arabia a year ago. So fairly stable in these parts of the world. But of course, in Latin America, the important thing to keep track on is, of course, the overall economy and the COVID situation, which has clearly delayed some of the investments that would otherwise have taken place in that market. So overall, solid performance by most of our regions. And then I move on to the structure of the customers that we have. And, of course, CSPs are clearly our largest customer group, over 80%. the growth is increasingly on the enterprise side. We can roughly, now I simplify quite a lot, but in general we can expect that the CSP market will remain flattish. Of course, there are structural changes like from 4G to 5G and so on, but the overall market is flattish. But the enterprise market is expected to grow close to double, digit over several years to come. So this is clearly one place where we want to find growth and we are finding it. We had full year sales growth 14% on constant currencies and we have a healthy pipeline of new opportunities. We won 79 new customers in Q4. It was 83 in Q3. We have currently 260 private wireless customers. Of course, the enterprise business is not only private wireless. We are selling a lot of routing and fixed access products to these customers as well. But this is a promising case, and a couple of highlights perhaps worth mentioning, private wireless partnerships with both AT&T and Verizon that we published during the quarter. So overall, solid job and great promise in this segment, which will be further driven by then the next steps in a way, the mission-critical network, serious industrial digitalization that is gradually taking speed. We really believe that we will be in the heart of the fourth industrial revolution through our enterprise position, which is already now a solid one with good potential for the future. Cash flow is, of course, an extremely important measure, and Marko will talk a bit more about that. I just highlight that we had 2.5 billion euros net cash at the end of the year. Here also, just because we just want to be as transparent as possible, we do want to highlight that in the very last days of the year, we had a 500 million payment from a customer. Sometimes one day or two can make a difference. Had it been on on the January side, the end result today would have been the same, but then this figure would have been 2 billion instead of 2.5. You will also have seen the board's proposal that there would be no dividend for the financial year 2020, and this is also something that Marko will address in a bit more detail in a moment. Then I move to the next angle to the performance, and that is then the business-specific performance. And I start from the largest business, which is networks, and then again reminding ourselves of the fact that this is the last quarter when we report using this type of a unit called networks. But overall, we had 7% reported and 2% constant currency Q4 sales decline, and that constant currency decline was 5% for the full year. This decline was in Q4 mainly driven by mobile access and optical networks in mobile access, not by the products, but more by deployment services. This is important to note that the product part actually did pretty well. In Q4, IP routing and fixed access net sales grew on constant currency basis and declined on a reported basis. And we had 280 basis points gross margin improvement in the network business, primarily due to the progress in mobile access. And here I would like to highlight the promising progress that we have made in 5G product cost reductions. I'll come back to that in a second. which is, of course, something that will carry us also in the future, because the product development in 5G has been actually delivering in a pretty promising manner. Operating profit decreased somewhat due to some of the loss allowances and problems. project cost allowances that we have put on the balance sheet at the end of the quarter. And once again this business benefited positively about 150 million at the end of the quarter from this timing of a transaction with one particular customer. One thing to note for the network business going forward is the global component market situation where there's been a lot of talk about shortages, some of that highlighted by the car makers. We believe that our situation is manageable, but it requires a lot of attention. There are here and there some point-to-point delivery risks in queue. One, nothing that would change the big picture, but this is something that our businesses are paying a lot of attention to. We are intensifying our contacts and discussions with the key vendors, discussing forecasts, reservations, inventories, and everything. This is something that will most likely be there. This is not a Nokia-specific issue in any way, but a world issue for the next year or two. Difficult to say exactly where it will all lead to, but requires a lot of attention. Then inside the networks business, a couple of comments on mobile access. First, I already mentioned that we had clear improvements on the product side, but also in the Q4 and full year result due to stronger competitiveness and cost position of mobile radio. As I said, the top line challenge in this business did not come From the product side, from the deployment services side, we had growth in radio access products in Q4 and also full year. And the 5G growth was partially offset by decreases in legacy radio access products. 5G gross margin was up due to product cost reduction, partly helped by higher reef shock volumes. And this is really important and also encouraging that we actually increased our own target or exceeded our own target on reef shock. 43% was the share of 5G. deliveries in Q4 when our earlier communicated target was 35% and we are reiterating the target of 70% at the end of this year and then 100% at the end of next year. So this gives us confidence that the turnaround which started already a year and a half ago, is on the right track. But however, there is still obviously a lot of work to do. And as I've said earlier, one of the important things, which then also will be reflected in this year's mobile networks result, is that we will continue to invest. We will actually increase our R&D investment to make sure that we repeat the success of 4G also in 5G. Our 5G conversion rate, excluding China, is currently at 90%, and that's negatively impacted by our market share development in North America. This is a bit controversial because 2020 and the end of 2020, as you saw, we had strong growth rates. in North America, but now going into this year, exactly as we have highlighted earlier, we are facing some headwinds in mobile networks in terms of top line. because of North America and also China. And then there is a price erosion challenge also that we are facing, and the combined effect of all of this will lead to this year, to this earlier communicated zero expected comparable operating profit for the new mobile networks business. But market share-wise, again, on balance, 4G, 5G market share in 2020, excluding China, we estimate at 27% to 28%. And now... For this year, we are targeting 25% to 27% market share. So it's not that dramatic, but still there is a small drop. We have currently 195 commercial 5G engagements, including paid trials, and 45 live 5G networks. You will have noted some of the recent highlights, the 5G deal with T-Mobile, U.S. federal 5G cybersecurity project, cloud-native core software deal with M1 in Singapore, and many, many more. I don't have time to go through all of them at the moment. We noted in the outlook assumptions as a continuation of what we have said earlier about the profitability of this business this year that there will be a significant decline in top line of this business this year. And that is one key reason why the profitability is so challenging. It's important to highlight this because the reason for that expected decline zero comparable operating margin in mobile networks this year is not our technology competitiveness, which is improving quickly. It is some customers earlier made decisions about market shares, which will affect our top line in 2021. Then to the next business in networks, which is fixed access technology. I'm quite encouraged by Jason in this business. We had a 5% decrease in reported net sales, but 1% growth in constant currencies decreases because of copper access and services. But then there is pretty strong growth in digital home and fiber access. and the interesting detail about this business which is very important is that we had record high order book for this business at the end of the year and when it comes to technology we launched our 25g pon passive optical network technology which has received an excellent reception on the market and there's a lot of customers who consider deployments of 25G solutions. And just as one highlight, one large customer, AT&T, recently joined the 25G PON MSA, an industry organization to promote and accelerate 25G PON. This is a technology where we currently, roughly speaking, believe that we have 18 months advantage to the closest competitor. IP routing is, of course, a great business. We had actually top line-wise the best quarter since the Alcatel-Lucent acquisition. We had on constant currency basis an increase in top line of 5%, and that makes this quarter higher than the year before if you take it on constant currency basis. We had a lot of key wins, and of course the FP4 routing silicon platform is the key technology driver in this, and we have had a lot of wins recently, Deutsche Telekom, TELUS in Canada, Pelinda 4 in Indonesia, and then the California-based data platform. networking or data center, an internet service company, Equinix, a global company. Some of the examples of this wins. In short, we are well placed for the next steps in IP routing business going into 2021. And obviously, you have not seen everything on the product side yet. Optical networks had a challenging year from under quarter, from top line perspective. Q4 last year was a really tough comparison, as you can see here, but we were down 10% even in constant currency. Also here... Even though this business has had its share of challenges, there is now promising developments on the technology side. We have launched our wave fabric elements portfolio with PSE 5 and then the Elenion acquisition all supporting PSE. the development into 2021 and beyond. So we do expect improvement in this business this year and then going forward as well. The next business is software business. Great 5% constant currency sales growth in the quarter. Reported basis, unfortunately, because of currency decrease by 1%. Great and solid 2021 order book and several cloud core businesses. including SoftBank. And one thing I would like to highlight is in January, which of course is after the reporting quarter ended, we announced the software partnership with Google to jointly develop cloud-native 5G core solutions for CSPs and enterprises. So the comprehensiveness of our cloud-native multi-vendor, multi-network portfolio continues to give us a strong position in the telco software market. And finally then, Nokia Technologies, 2% increase in net sales and 3% in constant currencies. This growth was primarily due to patent licensing and higher catch-up net sales from a renewed patent licensing agreement that we delivered in Q4. Of course, full-year sales decreased a little bit, largely due to a reduction in brand licensing revenue and certain one-offs brand licensing revenue, mostly because of the declined handset market because of COVID-19. We have increased our R&D expenses a little bit to continue to develop our intellectual property portfolio and to maintain it. And this is also something that we are focusing on in the future, not only monetizing the portfolio that we currently have, but really taking advantage of our research organization, the fact that we have already now 1,350 declared 5G essential patents and then ongoing expansion to new areas such as consumer products, IoT solutions going forward, automotive segment, et cetera. So this is pretty solid performance in this business as well. And then before I hand it over to Marko, a couple of comments on the leadership team and the operational model. The old leadership team was 17 members. The new one will be 11, and it's almost complete. Now there is only one appointment still to be made, which is the pipeline, which is our chief corporate affairs officer, but everything else is now in place. This organization has been effective now for one month, so it's, of course, very early stage. Fundamental principle here is, of course, full P&L accountability to the businesses. for businesses led by a business group president. This does, of course, not mean that these businesses would operate in silos in the customer interface, and that's why we have a customer experience organization led by Rikki Koker, who is responsible for the account teams that are facing the customer. But this should not be mixed with the P&L responsibility, which is very clear. It is in the BGs led by the BG president. Another very important detail that I want to highlight here is the appointment of Nishant Batra as our chief strategy and technology officer. His task is really to drive our technology strategy across businesses, challenge businesses in terms of technology, but also then take care of our network architecture and our product architecture across businesses, and very importantly to drive our long-term research, including Bell Labs. This whole thing that we have done to the organization and the operational model is a major simplification from the previous one. As I have said before, just one example. In the previous model, a fairly simple mobile access deal required five management team members to participate. Now it is only five. And that simplifies things greatly. Then I actually believe that this is enough for my part. Marko will now go through the financials in more detail, and then after that, we are ready for your questions. So now I'm happy to hand over to you, Marko.