Nokia Corporation

Welcome to Nokia's second quarter 2021 conference call. I'm David Mulholland, head of Nokia's Invest Relations. Today we have Pekka Lundmark, our president and CEO, along with our CFO, Marco Wiren, connected with us via video and audio from our ESVO offices. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such factors in the section titled Operating and Financial Review and Prospects Risk Factors of our 2020 Annual Report on Form 20F, as well as our other filings with the U.S. Securities and Exchange Commission. Within the presentation today, unless stated otherwise, references to growth rates will mostly be on a constant currency growth rate basis and margins will be based on our comparable reporting. 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 our investor relations website. With that, I would now like to turn the call over to Pekka.

Thank you, David. And hello, everyone, and thanks for joining the call. I hope you and your families remain safe and well. Our great start to 2021 continued in Q2 and this has enabled us to increase our outlook for the full year. My presentation today will include a brief overview of our financial performance followed by an update on the progress we have made in each business group against the strategy we outlined earlier in the year. I will then hand over to Marco to go through the financial performance in more detail. As highlighted on the slide, in the second quarter we delivered 9% constant currency net sales growth. That was primarily driven by network infrastructure with 20% growth in constant currency and strong performance across all product areas. We are benefiting from a robust end market dynamic, particularly in fixed networks. But we are also achieving meaningful market share gains and there is strong demand for submarine networks. Nokia Technologies saw new deals in automotive and some one-off brand licensing deals. In addition, our underlying recurring royalty base expanded double digits year on year. Positively, despite being in the reset phase of their strategy, both mobile networks and cloud and network services also delivered growth in constant currency. Profitability-wise, our comparable gross margin expanded 270 basis points year on year. This benefited from a one-off software deal in mobile networks, but we saw a strong underlying expansion even excluding that deal. Comparable operating margin came in ahead of our expectations as strong growth in network infrastructure and good cost discipline across businesses draw good operating leverage. This shows that the underlying potential of the business exists, but we still see headwinds into the second half of the year, which we will revisit later. Back in March, we announced our new three-phased strategy to achieve sustainable, profitable growth and technology leadership. In Q2, we saw progress in a number of areas against this strategy. The most notable of these in Q2 were our major product launch just over a month ago in mobile networks, our established technology leadership in network infrastructure that has seen us gain market share, and the new automotive licenses signed in Nokia Technologies. I will revert to these highlights in more detail shortly but I just want to emphasize that we are seeing progress in all areas of the business and across all elements of the strategy. I'm grateful and proud of how quickly the Nokia team has adapted to our new operating model, and we are already starting to see some benefits from the new structure. Our business groups are taking clear accountability and ownership for their financial performance, which has helped expand margins. Let's now look into some of the specifics of the quarter, business group by business group, and starting with mobile networks. Earlier in the year, we said we were targeting full portfolio competitiveness through 2021. The launch of our new AirScale radio and baseband product platforms at the end of June was a major piece of that. All the new AirScale product platforms are based on new ReefShark system on chips, and as a result, this launch was key to us remaining on track with our ReefShark targets. As a reminder, we said that by year end we want 70% of shipments to be reef shark based, with the target of increasing to 100% by the end of 2022. The launch included a series of new massive MIMO active antenna radios, all of which have the industry's widest bandwidth support of up to 400 MHz. This can help operators to make efficient use of fragmented spectrum allocations. The new ReefSoc SOCs will also be used in our 8T8R radio in addition to Massive MIMO. I would also like to highlight that our 32 TRX Massive MIMO active antenna, which is typically enjoying the largest volumes in operator deployments, is the industry's lightest. This is a very important factor for customers in terms of ease of deployment and loading of site infrastructure. With the new baseband boards we now can tick the box of having common baseband for 5G and previous radio technologies. The baseband products we have launched can support up to 90 000 connected users with 84 gigabits per second air interface throughput. We expect to have largely caught up with the competition by the end of the year and as you can see from these features in some areas we could even lead the market. Importantly, for both our commitment to efficiency and sustainability, the baseband product is also up to 75% more power efficient. This is important not only for us, but for our customers as well as we all work to reduce our environmental footprint. Nokia remains committed to our stated goal of reducing our greenhouse gas emissions, including in the use of our products by 50% between 2019 and 2030. The new Airscale products will really help us to hit that figure. The customer response to the launch has so far been very strong. If you watch the launch video on our website, you can see a number of the customer endorsements we have received. The basement products are already shipping with general availability later in the year. And meanwhile, our radio products are expected to start shipping later in the year with general availability coming early in 2022. In fact, the introduction of the new baseband board has been the fastest from the time of making the product decision to shipping products in at least two decades, and it may be the fastest ever in Nokia's wireless business. This is due to improvements in product development processes and tooling. Regarding progress on our 5G KPIs, we continued to see a good improvement in our ReefShark SOC-based deployment with 54% of 5G shipments in Q2. As said, that is on track to reach our 70% goal by the end of this year. On conversion rate excluding China, or the conversion rate that we are targeting and forecasting excluding China remains approximately 90%, but it has improved slightly in the quarter. We believe this number is now stabilizing and we see opportunities for it to improve, although the timing of those deals is uncertain. and finally I would like to note the progress we have made with customers including winning back a customer in Canada and the recently announced share we have provisionally won in the China mobile tender. In China As you will have seen, we were recently awarded 4% market share in the China Mobile and China Broadcast Network 700 MHz 5G joint bid, positioning us as the third vendor. We believe this is a good endorsement of our improved product quality. Moving on to network infrastructure. We have seen extremely strong growth in this business group in the first half, with growth driven by all the businesses. Our fixed networks business continues to benefit from what we believe is a structural shift from operators across the globe to increase home broadband connectivity. This has been accelerated as many workforces are likely to move to a hybrid home office working model in the future. Nokia will actually be doing the same. We have also seen a significant acceleration in demand for our fixed wireless access solutions. I would also note that we are seeing good market share momentum in many areas of network infrastructure. This has been key to enabling our growth performance this year and we have continued to work hard to deliver on our customers increasing demand despite the global semiconductor shortage. As we look towards the second half of the year, we face tougher year-on-year comparisons from a growth perspective. But we feel confident about our mid-term opportunities as we see a strong opportunity pipeline, which combined with new product launches to come in the second half of the year, should increase our product differentiation further. I want to highlight two other points from Q2 for network infrastructure. The first is that our optical business continues to make good progress. And the second is that we are also seeing strong momentum in submarine networks as our previously mentioned backlog continues to flow through into sales as deployments progress. Next is our cloud and network services business, which continues to make good progress on its portfolio rebalancing. As a reminder, that includes focusing our R&D efforts on areas where we see strong growth opportunities in the midterm. I would highlight good progress in two areas already. Our 5G core product now has over 150 customers and over 200 networks. We also made good progress with our private wireless enterprise solutions and now have more than 340 customers. Work is clearly still continuing in cloud and network services as we refine our focus areas for the business to improve its financial performance. But I was pleased with the progress we saw in Q2. And finally, on to Nokia Technologies. As already mentioned, we signed two automotive licensing agreements in Q2, including with Daimler. This shows the underlying strength of our portfolio and the growth prospects in the increasingly connected automotive market. We also continue to renew our industry-leading patent portfolio with investment in 5G, 6G and multimedia R&D. Before I hand over to Marco to look at the financials in more detail, I wanted to touch on our progress with enterprise customers. For many years, we have been working to expand into the enterprise market, and this has paid off with double-digit growth in both the last two years. In Q2, we saw a slight decline in enterprise sales, although in the first half we still achieved solid 9% growth in constant currency. This slowdown in Q2 was largely a reflection of tough year-on-year comparisons and the lumpiness that can be present in some of the larger enterprise deals. However, we continued to make good progress in the business. We signed 63 new customers in Q2 and continue to have confidence in the pipeline for the full year. I will now hand over to Marco for a little more detail.

Thank you Pekka and good morning everyone from my side as well. I will now provide some more detail on our financial performance in the second quarter. As Pekka already mentioned, we continue to benefit from strengthening end markets. We have also increased our forecast for addressable market in 2021. And we now estimate that the total addressable market will grow by 5% in constant currency in 2021. And this is up from the previous estimate of 3%. And the increase has primarily been driven by mobile networks, where we have seen rising investments in 5G. Note also that our forecast for mobile RAN growth in US dollars would be consistent with the estimates for 2021 from third parties, just like Delora. If we investigate the drivers of our revenue growth, all of our business groups grew in constant currency. We saw particularly strong growth again from network infrastructure, as Pekka explained earlier, and Nokia Technologies as we signed new automotive licenses. From regional perspective, the largest contributors in absolute terms in our growth were India and Latin America, up 75% and 57%, respectively, in constant currencies. And both regions benefited from stronger LTE deployments and demand for our fixed IP and optical products. In Europe, we saw significant growth in 5G deployments with resilience in most other areas of the business. North America saw a robust performance despite the headwinds on market share and pricing based on the contracts negotiated in 2020. In Greater China, we saw continuation of the strong mobile networks capacity deployments that we saw in Q1. One area we wanted to provide some more visibility on our progress this quarter is our cross margin. And this quarter has shown the importance of cross margin expansion in driving our overall financial performance. At the group level our gross margin saw a slight headwind from product mix as we saw stronger growth in lower margin products including fixed networks and submarine. This was then offset by better regional mix along with volume benefits and good cost control under our new operating model giving much greater accountability to the business groups for their financial performance. Finally, we also benefit from FX and mobile networks one-off software deal, which has been previously mentioned, and that contributed about one-third of our cross-margin expansion. If we then focus specifically on mobile networks, whilst we have seen some financial benefits from our product mix shifting towards 5G, reef shark-based products, there are also other important factors to be aware of that are driving our progress. In mobile networks, regional mix was of limited benefit, but we saw significant improvement from the new operating model. You also see the FX benefit and the impact of the mobile networks one-off in the quarter. And looking at the group comparable operating margin performance, you can clearly see the structural improvements we're making in our operating margin. We did face some one-off benefits in the quarter, but even despite those, we continue to make good structural progress. Our cost base remains well managed. In addition to the benefit of the MN1, we saw positive fluctuation in other operating income and expenses related to both etching and venture fund gains. It is also worth noting that in Q2, the stronger business outlook led to greater incentive accruals that partially offset our efforts on cost. Despite this progress, it is worth noting that we face many headwinds still in the second half of the year, as Pekka will highlight in our guidance. But we are encouraged by the progress we've made. And then moving to the financial performance of our individual BGs. I already touched upon the cross-margin performance in mobile networks earlier. The comparable operating margin in mobile networks, excluding the one-off, would have been essentially stable year-on-year as the improved gross margin was offset by higher R&D investments. In network infrastructure, we saw good evidence on how our plan from the capital markets day is playing out. The growth in the business combined with stable cross-margin and stable OPEX led to strong expansion in operating margins. Now we do expect to see some increased R&D expense in the second half of the year as we continue to invest in the future products to extend our differentiation. But we are pleased to see the operating performance that we have in H1. and Nuke Technologies. Just like Pekka mentioned, we benefited from two automotive licensing agreements signed in the quarter and the underlying revenue run rate grew and is now between 1.4 billion to 1.5 billion per year. The quarter was largely uneventful from a cash perspective. We generated strong operating profit, but then we saw a meaningful net working capital increase as we paid 2020 related performance incentives to employees and also invested in inventory as we continue to see rising demand for our products. And trade tables were largely stable in the quarter. We further reduced the sale of reservoirs in the quarter. And at this point, I'm very pleased with the underlying cash performance in the business. We have now delivered also a fifth quarter of positive free cash flow. And in quarter two, we generated about 80 million euro free cash flow. And the final point I wanted to make today was to remind you of the value Nokia has within our venture funds. In recent quarters, you've seen a positive revaluation gain impacting our other operating income as investments within various funds have matured. Whilst there is never any guarantee of performance, these investments have delivered typically between 15-20% IRRs to Nokia by maturity. There have also been other benefits to Nokia's core business in both licensing opportunities and partnerships with companies within the venture funds. Some of the investments within the venture fund have now seen cash distributions back to Nokia and we continue to have about 760 million book value of assets in our balance sheet that we believe can be a credit to Nokia's value creation going forward. Now back to you, Pekka.