Nokia Corporation

Hello and welcome to the Nokia first quarter 2021 earnings teleconference and video call. All participants will be in a 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're 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 that this event is being recorded. I would now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's first quarter 2021 conference call. I'm Matt Shimao, 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 our future business and financial performance, and 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 2020 Annual Report on Form 20-F 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 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 comparable information and a reconciliation between the comparable 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, Matt, and hello, everyone. And thanks for joining the call, and I hope you and your families remain safe and well Well, we have had a great start to the year. It shows we are on track to deliver on the three-phase plan to return us to sustainable, profitable growth. We delivered 9% top-line growth in constant currency and a 10.9% comparable operating margin, a clear improvement year on year. The standout was our network infrastructure business which had a fantastic quarter with 28% net sales growth in constant currency and a double digit comparable operating margin. This business group builds on strong technology leadership and we see robust demand for its products. Solid progress also in mobile networks with increased profitability, growing sales in 5G and good steps taken towards securing full portfolio competitiveness. So today I want to take you through our performance with an emphasis on how we are attaining technology leadership, adapting to new business models, and addressing new and emerging areas of growth. My presentation will begin with the overall picture, looking at our Nokia-level sales, margins, cash, and guidance. I will then drill down into our four business groups to explain the underlying drivers. And finally, I will talk about how this quarter, this first quarter relates to the three-phased plan which we outlined at Capital Markets Day. But let's begin with the Nokia level numbers. And all the net sales and addressable market figures in my speech today will be in constant currency. And for margins, I will focus on those on a comparable basis. First, sales. As you can see from this slide, we made good year-on-year progress in Q1. Net sales increased by 9% to 5.1 billion euro, driven by strong growth in network infrastructure and solid growth in mobile networks. In 2021, we expect our total addressable market growth to be 3% year-on-year. This is driven by increasing consumer capacity demand served by 5G rollouts and by the increasing focus on residential broadband. We also see growth opportunities in the market for enterprise and web scale with IoT, edge and industrial digitalization. These market drivers were reflected in our first quarter results, in particular in the growth of 5G sales, demand for our network infrastructure solutions, and 18% net sales growth with enterprise customers, which you can see on this slide. This enterprise growth was driven by securing 63 new customers in Q1, more than double the number we secured in Q1 last year. Approximately half of these customers bought our private wireless solutions, meaning we now have over 290 private wireless customers. And regionally, we saw double-digit net sales growth in North America, driven by network infrastructure. We also saw double-digit sales growth in Greater China and in India. This was partially offset by net sales declines in Asia Pacific and Middle Eastern Africa. Nevertheless, we believe our market position is stable in Asia Pacific and improving in Middle Eastern Africa. We were pleased to see gross margin and gross profit increase in both regions this quarter. Timing was also a factor here. For example, in Japan, a major service provider is deploying 5G on our competitor's footprint first, and the deployment on our footprint will happen later. Now, moving to our key figures, which you can see on this slide. And I was particularly pleased by the strength of our comparable operating margin, which hit 10.9% up, 8.5 percentage points year on year. The improvement in comparable gross and operating margins was primarily driven by higher sales volumes, favorable product and regional mix, lower SG&A expenses, and Nokia's venture fund investments. From a business group perspective, the improvement was driven by mobile networks and network infrastructure. Compatible earnings per share was 7 euro cents compared to 1 cent in Q1 2020. Reported EPS was 5 euro cents compared to negative 2 cents a year ago. On cash, we delivered our fourth consecutive quarter of positive free cash flow in Q1 2020. We generated 1.2 billion euros of free cash flow and ended the quarter with net cash of 3.7 billion and a total cash of 8.8 billion euros. So how does that relate to our guidance? It is clear We are off to a strong start for the year and there is a lot to be excited about. Net sales growth, improved gross margin, strong operating margin and cash flow. At this point we are maintaining our outlook for the full year as we want to see how 2021 continues to develop. The solid first quarter provides a good foundation for achieving the higher end of the 7% to 10% comparable operating margin range. What is important to understand is that we expect the seasonality we usually see between quarters to be less pronounced in 2021. The first quarter has typically been one of the weaker quarters for us and volatility throughout the year has tended to be significant. In addition, there is now less visibility to the semiconductor market in the second half of the year. Due to our robust supply chain management, we have been able to successfully deliver to our customers during the global shortage. But we want to see how the situation develops and continue to give it our full attention in close dialogue with our suppliers. So that sums up the Nokia level results. And I'll now turn to the performance of our business groups. First, mobile networks. As I have mentioned before, our top priority here for 2021 is securing full portfolio competitiveness. So we were pleased to see a solid first quarter with an uptick in profitability and good progress across the business groups focus areas. Net sales rose by 2%. This was driven by continued momentum in 5G rollouts across all geographies, especially North America and Greater China, offset by a decline in mature radio technologies and deployment services. Comparable gross margin in mobile networks reached 33.2%, up 2.1 percentage points year-on-year. The improvement came mainly from 5G and a favorable product mix with a lower proportion of deployment services. The same drivers helped to raise comparable operating margin to 3.4%, up 2.8 percentage points year-on-year. I mentioned that mobile networks made progress across all their priority areas. As a reminder, there are three. First, expand our technology leadership for critical networks. Our 5G powered by ReefShark system on chip shipments hit 44% this quarter, remaining on track to end the year around 70%. Second, build and maintain scale through good deal momentum. This quarter we achieved good wins with, for example, AT&T, DOO and the MI startup joint venture in Singapore, just to mention three examples. As you can see from the slide, we are on track with our KPIs, including our targeted market share of 25 to 27% for 4G and 5G in 2021, excluding China. We now have 160 commercial 5G deals and 63 live 5G network deployments and if we add paid trials the number exceeds 220 total 5G agreements. And third, we actively shape the market. The Nokia Edge automation solution allows customers to manage multiple cloud deployments supporting new 5G use cases. And we announced partnerships with major web scales, including Google, Amazon, and Microsoft. Overall, this marks a solid start to the year, and we are on track with the objectives laid out at the Capital Markets Day, including plans to increase investments in 5G, ORAN, and VIRAN. We expect 5G and enterprise private wireless to continue to drive mobile networks' addressable market growth in 2021, with strong 5G radio growth expected this year in North America, Japan, Europe, and also elsewhere. Then moving on to network infrastructure, which had a fantastic quarter across its businesses with net sales increasing by 28%. In part, this was due to a favorable year-on-year comparison as Q1 2020 was at the height of COVID in China, which had an impact on both supply chain and delivery. Our strong performance in this quarter was driven by good supply chain execution and by areas of continued technology leadership. Comparable gross margin improvements stemmed mainly from IP, optical and submarine networks. Strong comparable operating margin up 13 percentage points year on year was primarily driven by higher volumes and lower SG&A expenses. As we said at Capital Markets Day, next generation access is a big opportunity for us. Consumers, businesses and governments are all pushing for ultra-fast connections to homes and workplaces as working from home looks like it is here to stay. We expect demand in the addressable market for network infrastructure to have solid growth of 4% in 2021. Next, I'll give you a bit more color on each of the four units within network infrastructure. Fixed network sales were strung up 49% year-on-year, driven by fiber access technologies and broadband devices, partially offset by a natural decline in copper access technologies. In IP networks, net sales increased by 22% year-on-year, primarily driven by ongoing technology leadership and strong supply chain execution. The 7% net sales growth in optical networks was primarily driven by India and Greater China. This is partially due to a favorable year-on-year comparison, while acceleration of some sales in North America also contributed to the increase. Exceptional 57% net sales growth in submarine networks was mainly driven by a continuation of robust deployment activity and also partly due to a weak Q1 2020 impacted by COVID. We also ended the quarter with a strong order backlog and overall a great performance and I do want for the whole network infrastructure business group and that's why I do want to thank Federico and his team for this excellent performance. And then next I move over to cloud and network services and I want to say a few words about the markets here first. As discussed at our Capital Markets Day 2021 will be a year of transition in which cloud and network services transforms its business to better capture growth opportunities. This business is centered on driving our success in five focus areas. 5G core, analytics and AI, private wireless and industrial automation, digital operations and automation, and managed security. These priorities will also guide their R&D focus and capital allocation. Cloud and network services net sales decreased 5%. This was primarily driven by a comparison to a particularly strong Q1 2020 and by cloud and cognitive services where we continued to exit poorly performing projects. There are early indications of our ability to lead in our chosen focus areas. CNS has a strong book-to-bill ratio and secured over 80 new CSP deals in the quarter, reflecting our technology strengths in telecommunications software and private wireless solutions. For instance, DISH is using Nokia's NetGuide suite for security automation and orchestration, while Telenet in Belgium has chosen us to deliver cloud-native core infrastructure products. And in the next few weeks, we will launch another addition to the Nokia 4G, 5G network slicing solution where we will add the complete software automation stack to design, deploy and assure services at scale. Comparable gross margin was down 0.9 percentage points year on year. Comparable operating loss was negative 3% of net sales compared to an operating loss of negative 5.2%. This year on year improvement was largely driven by SG&A expenses and a positive currency impact. In summary, some positive steps in the quarter and a lot of necessary work underway to transform cloud and network services to where it needs to be. Although transition is never easy, I believe the team is on plan. Order intake is good and the cloud and network services portfolio review is well underway with rebalancing R&D spent. And then finally, Nokia Technologies. You will remember that building upon and protecting our intellectual property is a key part of our strategic commitments. This was reflected in a strong set of Q1 results in which net sales were up 6%. The annualized net sales run rate was in the region of 1.4 to 1.5 billion euro. Comparable operating profit also rose up 2% year on year. Comparable operating margins saw a slight drop due to increased investments in R&D, business development, patent portfolio costs, and licensing-related expenses. We announced new licensing agreements with Lenovo and Samsung, which underline the strength of our cellular and multimedia patent portfolios and highlight the growth opportunities from licensing our award-winning innovations in video standards. We continue to be a leading contributor to the development of future cellular and multimedia standards and to renew our industrial leading patent portfolio with over 3,500 patent families now declared as essential to 5G. And in fact only yesterday we were named once again as the industry leader in 5G standard essential patents by PA Consulting in their latest independent study. That concludes our business groups. Together, these results show that we are on a good path to deliver on our three-phase plan we announced at Capital Markets Day. As a reminder, that plan began with the reset which commenced last August. It consists of moving away from end-to-end as a cornerstone of our equity story, a new operating model, securing full portfolio competitiveness in mobile networks, Resetting our cost base, refreshing our purpose and ways of working, and getting a strong unified leadership team in place. On that note, I'm pleased to say that the 11th and final member of our group leadership team, Melissa Sjöb, is now in post as our Chief Corporate Affairs Officer. Once reset is complete, we will move on to accelerating our performance by increasing the digitalization of our own operations, and our improved portfolio competitiveness and investments in technology leadership gained through the reset phase will provide margin enhancement and growth opportunities through new products and services. As we can see from their Q1 results, actually our network infrastructure and Nokia Technologies business groups are already entering the accelerate phase. After accelerating, we scale. That means setting our sights on the new value that stems from next generation critical networks. Of course, we want our business success to be matched by our environmental and ethical success. You will be aware that we launched our new purpose at Capital Markets Day. We create technology that helps the world act together. This purpose reflects Nokia's role not only as a responsible and conscious actor ourselves, but as an enabler for other industries and organizations to become cleaner, more productive, and more equal. This quarter, Nokia announced that we aim to halve our emissions from 2019 to 2030. This target is in line with a 1.5 degree global warming scenario and it applies to our own operations as well as so-called scope 3 emissions covering our entire supply chain and also the use of our products by our customers. We are also directing 30% of our corporate social responsibility spent towards improving diversity. As one example, we announced in Q1 that we are targeting a minimum of 26% female hires in global external recruits by the end of this year. So, that was a summary of our overall results. Business groups and how our results relate to our three-phase plan. To conclude, I'm very pleased with our strong start to the year. With an increase in net sales, profitability and cash, we have a good foundation to build on. And while we still have significant work to do, we can all be proud of this really good quarter. We have the portfolio, the ability and the confidence to drive consistent execution in all our business groups. Thank you. And now I will turn the call over to Marco.