Nokia Corporation

Good morning, ladies and gentlemen, and welcome to Nokia's third quarter 2021 results call. I'm David Mulholland, head of Nokia's Investor Relations, and today in Expo with me is Pekka Lundmark, our president and CEO, along with Marco Wiren, our CFO. 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. Thank you very much. and margins will be on a comparable reporting basis. 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, including a detailed explanation and reconciliation between the two. So with that, in terms of what we'll go through today, I'll shortly hand over to Pekka, who'll go through a brief overview of our financial performance before giving an update on the project progress that we're making in terms of the strategic objectives we've given each business. We'll then run through a quick word on enterprise, along with how we see the supply chain constraints, and then hand over to Marco, who'll go through the financial performance in more detail before we get to Q&A. So with that, over to Pekka.

Thank you very much, David, and thank you, everybody, for joining today. We had another great quarter, third quarter 2021, strong execution. Also some... Headwinds that I want to highlight, especially when it comes to top line because of component availability. I'll come back to that soon because in the big picture, when we look at our numbers in the quarter, we had 2% top line growth. It's 6% year to date. But what is interesting is that actually we could have grown faster. Thank you very much. Despite some of these earlier communicated headwinds that we had in mobile networks, the other businesses in North America very well compensated for the decline that we had in mobile networks, which was very much expected. Then a couple of other highlights. Cloud and network services had really good 12% growth, and Nokia Technologies also double digit 11% growth. And network infrastructure, Overall, against a pretty strong Q3 last year, had 6% growth. And within the network infrastructure group, the fixed networks division was really the standout of this quarter with fantastic 29% growth. So overall, pretty good quarter from top line point of view. Then if we move to profitability, gross margin growth First, this is really a testimony to our improving product competitiveness. We had comparable gross margin expanding by 340 basis points. And this is pretty much across the board at the moment. And particularly pleasing was to see that mobile networks had 220 basis points expansion in gross margin. Our group margin, 40.8%. as I said 340 basis points improvement, mobile networks 220 basis points. We also had very strong year-over-year gross margin expansion in cloud and network services even if we were to exclude some of the project related provisions that we made in Q3 last year. This is very important to note because CNS these two quarters Q3 this year and last year they are Not entirely apples to apples. So very good development in gross margin. And that's, of course, then reflected in the operating margin where we had 250 basis points expansion to a pretty decent level of 11.7%. And here it's, again, worth noting that this is, of course, after the investment, increasing investment that we have, and many more. The result of that is that we now at the end of the third quarter we have 4.3 billion euro net cash on our balance sheet. Then I move to some other highlights on businesses and I'll be talking quite a bit of technology because it is really the fundamental thing that is driving our competitiveness and I want to start with perhaps the Most important technology highlight of this quarter, which was the launch of the next generation FP5 routing silicon. In our IP routing business, we have actually gained market share with every generation of product that we have brought to the market, and we believe that this will continue. What we have now launched is industry's most advanced network processing silicon with 4.8 terabits per second. Thank you very much. Thank you very much. Network needs, network evolution, network structural evolution. And on top of everything, it has very advanced security and encryption capabilities, which are actually inbuilt directly on the chipset level to protect the network against various types of attacks. Feedback to this launch has been great from customers. What is, of course, important to keep in mind that this is a silicon platform now. And on top of this, we will then be rolling out a whole new generation of products. And these rollouts will begin gradually during the first half of 2022. Then I would like to move on. to another business, and that is fixed networks, because I already said that fixed networks within the network infrastructure division was actually the standout of this whole quarter in terms of growth, 29% year-on-year growth, despite actually quite tough comparables in the third quarter last year. Going forward, comparables will continue to get more challenging, but we actually believe quite a lot in opportunities in this business. They remain substantial. And let me explain why and of course the main key underlying reason is the lasting effect on importance of fast home connectivity because of COVID. That means that broadband is not only about mobile. Operators are actually currently prioritizing fiber investment. And here you can see this is Nokia's product sales excluding services. Gray color here represents copper, which of course is a declining business. The green color is fiber, and you can see the fast expansion in our fiber access volumes over the past couple of years. And then, very importantly, there is a new segment here, which is fixed wireless access, which is still very small today, but expected to grow a lot going forward. Then, of course, comes the question of the sustainability of this. I just want to make one highlight here. This graph shows in various countries, Germany, UK, Italy, Poland, and France, so forth. First of all, with the yellow-orange color homes with fiber accessibility, homes that could be connected. They are not all connected yet, but they could technically be connected because there is a fiber that is passing the home. And then The light blue color represents homes which have not been passed so today, which means that they cannot even be connected today. So all of this here, the blue color represents in a way the remaining opportunity. So it is substantial across many, many parts of the world. So the market opportunity is clearly there. Then the next question is that how are we able to address that opportunity product-wise? Here I would like to start with exactly in the same way as I was talking about in the second quarter and we've been talking about the system on chip platforms importance for mobile networks business through ReefShark. Now in the second quarter we launched FP5 for routing networks, IP networks. Here also the important source of competitiveness is our chipset, Quillion ASIC, which enables High Density Low Power Solutions, which has led us to actually lead the GPON and now lately XGSPON market. We are currently number one in GPON fixed access and we are very clear leader in XGSPON. XGSPON is the 10 gigabit symmetrical passive optical network which is establishing XGS PON Optical Line Terminals In this segment we believe that we are 18 months ahead of competition. We have one live, this is very new of course all of this, but we have one live network with Proximus in Belgium and over 20 trials. And the best part of this is that this is really available today. If customers want this technology, 25 gig, today we are able to deliver. And one more point about this. 25 gig is directly upgradable from 10 gigs, so operators have a secure investment when they want to do future upgrades to 25 gigahertz per second. And then one more fixed access segment that I want to highlight, which I already mentioned, is fixed wireless access where we are, number one, also in the world at the moment with more than 25 deployments. What you see here is our home access box for fixed wireless. We also continue to innovate with a new approach to make millimeter wave radio viable in fixed wireless access. We have a new clever antenna design and algorithms where we provide extremely high gain, 360 degree field of view and continued optimization of the various propagation paths for the signal. that we can establish a good connection even with weak or reflected signals and still allow for consumer indoor self-install which is of course critical to make the business case work. Then moving on to of course one of our absolute main businesses in addition to network infrastructure which I've now covered is of course mobile networks where we also have pretty good progress. We have now since we launched Our new Airscale portfolio in the second quarter, we have received extremely good customer feedback and a lot of additional traction with customers. And the latest number is 189 commercial 5G deals and 72 live CSP 5G networks. One, it's more than curiosity, actually, that we have now placed the world's first Thank you very much. Thank you very much. A couple of comments on cloud and network services. And of course, as we've been discussing quite a lot earlier, this is in a way a reset year for CNS, where we are in the middle of a pretty big product portfolio rebalancing. And against this backdrop, it was really encouraging to see how this quarter went. We had 12% growth in constant currency. This was driven by very much by the core network business which is 5G core is one of the key focus areas of CSN. We are making good progress overall in the product portfolio rebalancing and while we are doing that we have now decided to focus on six segments within CSN. I already mentioned 5G core which Thank you very much. Thank you very much. is managed security for the network, protect new attack surfaces, handle device proliferation and so on. And in a way, a big directional ambition in this business is to continuously develop towards new business models like network as a service to build recurring business models where you actually offer network functionality and many others. Thank you very much. Growing double digit at the moment. We have already over 380 private wireless customers. This whole market is still in the very early stages. I just earlier mentioned the millions and millions of industrial campuses that will be our targets going forward. And it is so important that we have actually decided to double down our investment. We are ramping our investment in this space to Thank you very much. And then my last comment before I hand over to Marco is about the supply chain because as I already said initially, this is a bit of a challenging situation. And of course the background to all of this is that the global semiconductor demand is greatly exceeding supply at the moment. Here you can see that the demand only between 2020 and 2022 in the world is expected to grow by almost 40%. and this is then combined with the unprecedented component cost inflation for our industry for a long time our industry has been used to a situation where prices are continuously eroding now at least temporarily that trend seems to have turned we are working relentlessly of course with both our suppliers and with our customers it's very hands on Thank you very much. potential in 2022. At least it is fair to say that visibility to Q4 and 2022 is not what it typically has been at this time of the year. So this does cause uncertainty. We have been dealing with this challenging situation fairly well. Thank you very much. And now I would like to hand over to Marco. Thank you, Pekka. And good morning from my side as well.

I will dig deeper into the financial performance of Nokia during the quarter three. And I will start with the market estimates. The overall market is pretty much stable compared to our previous view as well. But there's a couple items that I would like to highlight. And the first one is the mobile networks. And as you see, we actually estimate that The addressable market will grow about 5% instead of 6% as we had in a previous estimate. And the main driver here is that we believe that the supply chain situation that Pekka just mentioned will impact this market. And also what comes to the network infrastructure, we believe that this market is also affected by the supply chain constraints. But considering the year-to-date growth, we believe that this market is actually growing 5% instead of 4%. And we especially see in the fixed networks and IP network side with the CSP customers where the market is very strong. And then if we look at the 2% growth that we had in quarter three, we can see that there's a lot of changes in between different geographies. And if we start with the North America, you can see that we had a 9% growth. And we had headwinds in mobile networks, just like we have been mentioning those earlier. But these were offset by the WG growth that we saw in network infrastructure and cloud and network services. And just to mention also that all the three businesses in network infrastructure had WG growth numbers in North America. and now I exclude ASN because ASN is a different type of business and it's between the geographies quite a lot. Then the second area I would like to highlight is Asia Pacific. As you can see, we had 18% growth in Asia Pacific and the main driver here was very strong 5G investments in Japan. And Thank you very much. and this is more related to network infrastructure business. While mobile networks business was more stable. And year to day figure for Europe is plus 2%. And if we look at what has happened in our operating margin development and as Pekka mentioned already that the new operational model has definitely strengthened our focus on the accountability within the BGs. And that's why it's very nice to see that we had this 250 basis points expansion in our operating margin in Q3. And if we look at the different factors that have affected this, we had a negative impact from product mix. And I would say that basically two factors here is it ASN and CNS growth that has an impact on our overall and that's why we saw this negative impact in group level. The next one is regional mix where we had a positive impact and this is basically coming from North America and Asia Pacific. And then if you look at the cost side, we have definitely done a lot of improvements in our cost competitiveness in mobile networks. These have been offset by increased R&D investments, but also some higher incentive accruals that we've done this year compared to last year. Then there's two items that I would like to highlight that have impact on our development here as well. The first one is the venture fund investments that we have. We actually had a plus 40 million impact in the third quarter. And if you compare with the last year, the same quarter, we had a minus 20 million impact. And then the lost provisions, just like Pekka mentioned already, we had in our CNS business last year, project-related lost provisions. And of course, that had a positive impact now because we don't have those this year. And if we dig deeper into each of the businesses and look their performance during the quarter and starting with the mobile networks, Pekka already mentioned the very good 220 basis points expansion across margin in mobile networks. And of course, we can see here that the cost competitiveness that we've been focusing on is giving results. But also we had a good regional mix that gave benefits here. And of course, when it comes to operator margin, you see those investments in R&D that is affecting our operator margin and also some incentive accruals here. Then going into network infrastructure, you can see that we had a 6% growth and the major drivers here were, just like Pekka mentioned, that fixed networks, 29% growth in the quarter. It's remarkable. but also ASN had a 20% growth in this quarter. While IP networks was about flat and optical had a 12% decline but here we have to remember that last year optical was benefited by the pent-up demand followed by the COVID and we had actually all-time high quarter three sales in last year and that's why we saw this decline. and then of course if we look at the operating margin that was declining compared to last year and the main reasons here are basically the mix that has a negative impact but also that we have ramped up our R&D investments during this period. And remember that year-to-date figure is pretty good and expansion from last year year-to-date Operating margin is 470 basis points. So I would say pretty good development here. And then if we look at cloud and network services, we had a 12% growth and this growth is basically coming from those two key focus areas that we have, which is 5G core and enterprise solutions. and of course when you look at the year-on-year development on the operating margin you can see that there's a huge increase. But remember that just about above half of that expansion is due to these project-related loss provisions. But also excluding that we see that the improvement is 10 percentage points. So it is definitely good work here as well and we've been Getting results out of those operational improvements and top line growth that we've been seeing here. Then Nokia technologies had 11% growth and of course these are benefiting from the contracts that we've been signing since last year, end of last year until now. And we believe that annualized run rate sales is about 1.4 to 1.5 billion. And if we look at our cash performance, we can say that now we have sixth quarter in a row with a positive free cash flow. And also the fact that we converted almost all adjusted profit into cash. And that's why the quarter end net cash balance was 4.3 billion. When it comes to working capital, I can say that the inventories increased Only 70 million in the quarter. And of course, in the situation we're in today, we perhaps would have liked to see a little bit more increase to get more visibility and security on the supply side when it comes to semiconductors. And if we take a step back and look a little bit longer trend when it comes to cash generation, it used to be a little bit more volatile. Now we actually see more consistent track record of free cash flow generation. and of course this is reflecting all the actions that we have taken on the past quarters to secure very good focus on networking capital and at the same time we have doing restructurings and significantly reducing the sale of residuals and this has led to a very strong liquidity position. Then I would like to just highlight that when it comes to dividend Just like we said in our Capital Markets Day already, that our ambition is to get back to a dividend paying position. But remember, this is a Board of Directors decision. And after the quarter four, Board will assess the possibility of proposing a dividend to the AGM based on our dividend policy. And We want to also say that we are reiterating our full year outlook and we expect that we on the operating margin side that we will be in the upper end of this range. And seasonality we have been mentioning as well that we believe it's different in this year and those headwinds that we have communicated will impact that. But also the fact that Thank you very much. Thank you, Marco.

We'll now start the Q&A session. For the Q&A session, please could you limit yourself to one question and as a courtesy to everyone else in the queue. Operator, could you please go ahead and give the instructions?

Thank you. We will now begin the question and answer session. 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. If you are using a speakerphone please pick up your handset before pressing the keys. To withdraw your question please press star then 2. At this time we will pause momentarily to assemble our roster. Your first question comes from Dominic Olszewski from Morgan Stanley. Please go ahead.

Yes, good morning, everyone. Thanks for taking the question. You mentioned the 100 basis points of one-offs this year as a positive to operating margin, as you flagged at the first half as well. But obviously, equally, the supply chain has gone against you this year. So could you maybe quantify how much of a revenue impact or profit impact has that been this year or maybe into Q4? And then secondly, you showed a slide on fiber penetration. Could you just touch on how much operating leverage do you have into that theme? Because it's obviously impressive growth, so how much additional investment does it need? Thanks.

Thank you, Dominik. And what comes to the impacts of semiconductor situation this year, we believe we definitely have seen some impact. And just like we highlighted already in Q2, that we could have had higher sales in Q2 but also now in Q3 and that will affect us Q4 as well. We haven't quantified exact numbers but just like we said that we would have been able to grow faster than we are because the end markets are supporting higher growth.

If I take the Fiber question, the Fiber access business is volume based. Thank you, Dominic. Just a reminder, if you'd keep yourself to one question, please. Rachel, next question.

Thank you. The next question is from Francois Bougenais from UBS. Please go ahead.

Thank you very much. So the question is on your performance by regions and mainly Europe and China down this quarter. I just want to have your thoughts of what should we expect for the next quarters. One, because of Europe, you seem that you have a lot of product launches and with the challenges of Huawei is facing, should we expect some market share maybe again in the next few quarters in Europe and maybe coming back to healthy growth there? And in China, in light of the recent contract announcement there, although small, should we expect the benefit of that in the next quarters also? Thank you very much.

Yeah, what comes to the different regions, we definitely believe that in mobile network side, that if you look at the European area, that we have had very good opportunities when suppliers have changed the supply base, and we've been winning about half of those opportunities. And how exactly this will play out in quarter four, let's see about that. It depends. It's timing issue a little bit as well. What comes to China, those contracts or shipments will start coming from quarter four and forward based on those wins that we did in China, the latest purchase in Brown.

That is right. And if I add just quickly a couple of kind of macro comments on both regions. In general, in 5G investment and also in many segments of fixed broadband, Europe has actually been lagging behind some other parts of the world. There is always some lumpiness in deliveries, which is now mainly explaining the minus 5% in Q3, but structurally we continue to believe in the European market potential. There is a lot to be gained there. and then when it comes to China structurally it continues to be of course a large and important market. There we have to be realistic that it is a fact that the market share that is available to non-Chinese vendors there is currently small and it's prudent to expect that that would not change anytime soon.

Thank you Francois. Rachel, next question please.

Thank you. The next question is from Sami Saakames from Nordea Markets. Please go ahead.

Hi. Thanks for taking my question. I would actually continue on the component shortages. Can you still elaborate on the extent these limited-year sales in the second and third quarter? Are we talking about one to two percentage points or something more meaningful? and do you anticipate potential larger headwind in Q4 and in the first half next year? Thanks.

I'm thinking how to answer that question without giving you a number because we have decided not to quantify this. It's also partially commercially sensitive but it is meaningful and It is actually increasing. As I said, it's quite possible that this situation will get worse before it gets better. Of course, structurally, it will get better one day. Semiconductor industry is currently investing heavily, but there is quite a long time lag before some of that capacity starts coming online. So We can be fairly confident that when we get to 23 and then 24, this situation could completely reverse itself and there could be excess capacity, which would then be reflected on prices. But 22 will be the big, in a way, inflection point where everybody currently is still wondering that what will really happen. And that's why we are saying that there are uncertainties. We've been doing fairly well in this war about semiconductors so far, but it is getting more challenging.

Thank you. Sami, Rachel, next question, please.

Thank you. The next question is from Alex Duvall from Goldman Sachs. Please go ahead.

Yes, hi, everyone, and many thanks for the question. Congrats on the strong results. There's been some debate in the market as to whether we're approaching mid or late cycle as pertains to 5G. Clearly you've been talking about some opportunities in various regions. Some of those seem to relate to market share. So as we think about demand into 2022 and potentially 2023, can you talk about which regions you see growth and how you think about the drivers there? Obviously cognizant of these component issues you've talked about, but how are you thinking about the cycle and demand? Many thanks.

We believe that we are still Thank you very much. Thank you very much. Thank you very much. Significant industrial productivity improvement that will be possible with the combination of 5G and cloud and artificial intelligence. And when we are talking to our customers and observing what serious, big, heavy industrial actors are planning at the moment, it's actually quite encouraging. Almost all of them are one way or another going to invest in next generation connectivity, especially in 5G. There are 15 million industrial campuses in this world. That's an amazing number. And when you start to think about what kind of services, network infrastructure, and then different types of edge cloud platforms they will invest in, I believe that that will create a significant opportunity for several years to come.

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

Thank you. The next question is from Peter Nelson from ABG. Please go ahead.

Thank you very much. Morning, gentlemen, and thank you for the presentation. I'd like to turn to North America, please, where you obviously had a strong quarter overall. Looking at mobile, Pekka, I interpret your comments on that we've seen the full brunt of the impact of the headwinds you have sort of talked about before in North America, that we've seen those in Q3, and perhaps, if I interpret correctly, it's not getting worse in Q4. Could you give us any indication on how you're doing on mobile in North America. Marco kindly gave us a number for Europe. But how you're doing in North America on mobile, that would be very helpful. And if you have any outlook you want to share for next year. Thank you.

Okay. What we have said earlier is, of course, that we have had certain issues with market shares and price erosion. Those refer to decisions that some of our customers made over time. Thank you very much. I don't think it's going to get in a way any worse. We've been doing well in North America in terms of new decisions and our product competitiveness and our market position after actually all the way after those negative decisions were made sometime mid last year. So from that point of view I believe that we have in a way now been able to stabilize the situation and then of course our goal is to then Thank you Peter. Rachel, next question please.

Thank you. The next question comes from Simon Leopold from Raymond James. Please go ahead.

Thanks for taking the question. I wanted to see how you're considering the opportunities from government stimulus projects. If we can hear specific news regarding the RDOF program, that is, in the U.S., the Rural Development Opportunity Fund, as well as global thoughts. You highlighted fixed access. I think that's probably the most effective, but if we could get your perspective.

Thank you. It's very clear that these stimulus programs, they create actually a lot of opportunities for us. All the decisions have not been made and there are still final decisions to be made, especially in the U.S. regarding the CHIPS Act and various funds, for example, for oren development and so on. but on balance this is very positive development for us and we believe that not only our mobile business but also fixed broadband access business will benefit from these decisions. The same is true to Europe. The recovery and resilience facility of the European Union which is now gradually being rolled out to implementation in different member states is definitely a net positive for us.

Thank you Simon. Rachel, next question please.

The next question is from Robert Sanders from Deutsche Bank. Please go ahead.

Yeah, good morning. Hi, thanks for taking my question. I guess, you know, I know you don't want to give a specific outlook for 2022 sales, but can you at least rank your segments in terms of growth potential and which segments within the sort of three cloud network and mobile will be most affected by the supply issues you're facing? Thanks a lot.

An easy way to answer that would be that CNS will not be affected because it's software. And this is actually a relevant point because overall we see growth opportunities in all three businesses next year, but we are not going to be limited by demand side. Next year this whole game will be more supply chain. and many others. by the supply side. And there I do not see big differences between mobile networks and network infrastructure because these fundamental challenges are not even things that would be there with individual chip makers. They go all the way to wafer production and availability of substrates for the components and so on. So it will affect everybody.

Thank you, Rob. Rachel, next question, please.

Thank you. The next question is from Frank Mayo from D&B.

Yes, hi, gentlemen. Thank you for taking the question. So I was wondering if you'd talk a little bit about how the cost inflation challenges pan out on a more practical level. I mean... and also in terms of the supply chain bottlenecks, how that can unpack what kind of problems What makes you most worried about, you know, is it semis, what kind of semis, you mentioned substrates, but also, you know, could there be issues around, have you seen typically around site equipment not being from third parties there in place at the time, you know, cables and brackets or batteries or whatever? If you could talk a little bit, give some color around what kind of gear basically is more It's more challenged if it's just the semi-partials or other stuff. And related to that, what kind of is the length of the contract with the suppliers to manage the bill of materials impact of the cost inflation which is coming from these disturbances? Do you typically have long contracts that allow you to kind of smooth out, say, a 10 or 20% increase in spot prices, for example, for its demo conductors? That's one question. Thank you.

Typically, these contracts would be annual contracts, and this is one of the reasons why the uncertainty, for example, regarding 2022 is there, because a lot of these negotiations are actually ongoing for 2022 at the moment. For commercially sensitive reasons, I will not go into details as to which suppliers it would be and which segments As I already said earlier, it is fairly broad-based, affecting all semiconductors, and to some extent it could behave a little bit different for memories, but still the whole industry of semiconductors is being affected. And again, it's commercially sensitive. That's why I will not discuss what type of price increases we are and of course it is continuous discussion with both suppliers and then of course our customers and our goal is to find the right balance between being able to deliver and then also optimize our margins.

Thank you Frank. Rachel, next question please.

Thank you. The next question is from Sandy Deshtande from JP Morgan. Please go ahead.

Yes, hi. Thank you very much. So does this not just mean that your demand is delayed into next year and once you can get the supply of semiconductors that your sales will be much higher because you will probably not lose business because of the semiconductor situation?

I think, Sandeep, that is the right assessment. Of course, there can be individual cases where the reality would be different. But in majority of the cases, I believe that's exactly what would happen. What would happen that it would be more of a delay of delivery than losing the sale completely?

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

Thank you. The next question is from Paul Silverstein from Talon. Please go ahead.

Thank you. I appreciate the question. Simple question. Where is the opportunity or opportunities for greatest upside with respect to your margin structure putting Supply chain challenges aside, which presumably are transitory.

Yeah, we are working quite heavily on two fronts of this side, I would say. One is, of course, securing that we have the technological leadership, because what we believe is that when you have the technological leadership, then you have much better ability to have a higher margins as well. And the other one is securing that we have the best, most optimal cost base. and you've seen also that we are increasing the R&D but at the same time we've actually been able to reduce our cost base in other areas to mitigate that increase that we have in R&D. So the more R&D we can focus on and get the right output because it's not only money put into R&D but also the efficiency of R&D. and we have been extremely good on actually increasing the output and mobile networks is a very good example how we've been measuring how much output we can get based on the same amount of money that we put in and we continue to do that in all areas.

Thank you Paul. Rachel, next question please.

Thank you. The next question is from Alexander Patek from Societe Generale CIB. Please go ahead.

Good morning and thanks for taking the question. I'd just like to focus a little bit on cloud network services at CNS. Could you tell us how advanced you are with addressing the poorly performing projects there that may be still way on margin? So should we expect any benefit once all of those issues are fully resolved? and how sustainable is the sharp growth margin improvement that we saw here? You mentioned the 10 percentage point improvement outside of last year's losses. So basically, how much of this we should continue to model going forward? Thanks.

Basically, we are doing two things in CNS at the moment. First of all, we are addressing certain and all the non-performing contracts which is one part of this and then in addition to that which is perhaps even more important strategically is then the complete reassessment and reshuffling of the portfolio and as I explained in my presentation we have now defined the six focus areas to invest in which will then be driving CNS growth going forward. Gross margin improvement in Q3, I would be a bit careful when you look at the year on year because of those big one-off project provisions that we had last year, which we did not have this year. Of course, our goal is that, and I believe we will get there, that once we clean up the old portfolio of bad projects and then focus the business on On the right growth segments, the goal is that that would be structurally driving up margins. But again, one quarter is too short, and now we have this exceptional situation with the big provisions last year. So I would be a little bit careful as to not to draw too quick conclusions on Q3.

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

Thank you. The next question is from Artem Beledsky from S&B. Please go ahead.

Yes, hi, and thank you for taking my question. I would like to ask you about OPEX trends going forward and basically what comes to R&D. So we have seen increase there, as you have been highlighting previously. So is now basically full impact visible on Z side and maybe in terms of SG&A trends and potential, so to say, incentive accrual impacts and other factors. Could you provide some color on the development going forward also there? Thank you.

Thank you for the question and yeah definitely we have said that this year we will definitely double down on R&D especially in mobile networks but we also have increased R&D in network infrastructure as you saw the new FP5 chip that we launched so these have created more cost in the R&D side. What comes to the future investments in R&D That we balance always based on what we believe is needed to secure that we have the technological leadership position. When it comes to HCNAs cost, there we continuously see what opportunities do we have to be most optimal and get out of that kind of service that we need in the company as a whole and secure that we are competitive compared to our peers as well. So I will not go into, you know, estimations of next coming year's R&D levels that we will get back to you when we guide next year's figures as well.

Thanks, Artem. Rachel, can we now take our last question, please?

Thank you. The final question is from Richard Kramer from Rwet Research. Please go ahead.

Thanks very much. Just want to dig in on the enterprise area for a little while, because if we look at the run rate of sales and the 380 million customers, and I know you may still be ramping with many of them, it averages out to a very small amount for customers, sort of less than 4 million euros, and obviously you mentioned some large hyperscalers in there. Can you lay out how you're planning to go to market in this space? Because what we've seen with many of your peers in the past is that they haven't got that go-to-market right. and also since you seem to be sticking fairly strictly to budget and spend levels in areas like sales and marketing this year. So how do you plan to realize that enterprise opportunity next year without building a large sales force and channel organization?

Thanks. There are a couple of different segments which have to be dealt with differently. The large web scalers, it's actually fairly R&D intensive discussion that you need to Thank you very much. Thank you very much. Thank you very much.

We have identified these in more detail in the section titled Operating and Financial Review and Prospects Risk Factors of our 2020 Annual Report on Form 20F as well as other filings with the US Securities and Exchange Commission. Thank you for joining us.