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.