Nokia Corporation

good morning ladies and gentlemen welcome to nokia's first quarter 2022 results call i'm david mulholland head of nokia investor relations and today with me is pekka lundmark our president and ceo along with marco viren our cfo before we get started a quick disclaimer 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 risks in the risk factor section of our annual report on Form 20F, which is available on our investor relations website. Within today's presentation, references to growth rates will mostly be on a constant currency basis, and margins will be based on our comparable reporting. Please note that our Q1 report and this presentation are published on our website, and both reported and comparable results and reconciliation between the two are included. In terms of the agenda for today, PECA will give a quick overview of our financial and strategic progress in the quarter, and Marco will then go into a bit more detail of some of the key factors impacting our financial performance, along with our outlook for 2022. With that, let me hand over to PECA.

Thank you, David, and hello, everyone, and thank you very much for joining the call today. Before we start on the actual Q1 performance, let me say a few words about the events that have shocked us all in Q1, namely the Russian invasion of Ukraine. Nokia has strongly condemned the invasion from the start. Our priority has been and continues to be the safety and well-being of our employees. We are supporting our colleagues in Ukraine and providing all available help depending on people's individual needs and circumstances. And I'm proud and impressed by how our team members have continued efforts in Ukraine to maintain our customers networks in the country. It has been clear for us since the early days of the invasion that continuing our presence in Russia would not be possible. We announced on April 12th that we will exit the Russian market. We will do this in a responsible way and aim to provide the necessary support to maintain our customers' networks as we exit. Western governments have highlighted the humanitarian implications for ordinary Russians if food, medicine and critical infrastructure providers like us simply walk away. We will work closely with our customers on a smooth and orderly transition and to complete the exit as quickly as possible, but also responsibly. So with that, let's move on now to our Q1 results. First of all, I'm really pleased with Q1. It was a strong start to the year. Looking at the screen here, we had 1% top line growth in constant currency. This was 5% in reported currencies. We could actually have grown faster because we have a very strong order backlog. Supply chain continued to constrain our growth, notably in mobile networks. And then within network infrastructure business, inside the optical networks business. What was particularly pleasing in this quarter was the strong gross margin, 40.7%, which is 250 basis points up. And this was particularly driven by mobile networks and cloud and network services. So this is really demonstrating that we continue to benefit from our improved product and cost competitiveness that we have achieved through the added R&D investment. The operating margin in the quarter was 10.9%. It was stable. Improvements in gross margin were offset by increased investment in R&D, which we are continuing. But then in addition to that, when you compare this quarter to the corresponding quarter a year ago, we had a little bit lower other operating income because they were positive one-offs last year. And then there were timing effects in the technologies business, zoom deeper later on this call. So then with the help of this chart, I will kind of comment both the top line and margin development. The gray bars that you see here indicate in each quarter the year-on-year growth in comparable currencies. And after the pretty challenging Q4, as you remember, it is now very good that we have returned to growth. And then obviously the margin development has been strong. The blue line here indicates the rolling 12-month comparable operating margin. We are now on the same level as at the end of last year, 12.5%. And obviously here you see the significant improvement that we've been able to deliver since 2020. So now I will say a few words on each business group, and I will start with mobile networks. As already highlighted, we had a top line issue in this business. We have strong order backlog, but because of continued supply chain challenges, we had 4% decline in the top line in comparable currencies. On the semiconductor side, the situation continues tight. There are some areas of improvement here and there, but in the big picture, the situation continues tight. In addition to that, in the short term, we are now facing some supplier specific challenges. And then obviously there is the situation in Shanghai region at the moment in China, which is COVID related that Marko will comment a little bit more. So these were some of the things affecting the top line, despite the fact that we have really, really strong order book, and we expect to return to growth in this business this year. Profitability development. Given the somewhat challenged top line, the profitability development was really, really pleasing. 7.5% operating margin, great expansion in gross margin, 410 basis points improvement in comparable operating margin, over last year. And what is behind this? It is really, first of all, the R&D investment that we have made. Here you see on a 12-month rolling basis, the R&D investment in mobile networks. If I go back here to the third quarter 2020, we were around 1.8 billion euros. Now we are at 2.1, so we have added about 300 million euros annual R&D investment into this business, which is about 16%. So this is significant, and we have done exactly what we said in 2020, that we will invest whatever it takes to repeat the success that we have had in 4G also in 5G. So this R&D investment has helped us to deliver this, which is the gross margin trend. This is also 12-month rolling. We are now at 39% 12-month rolling at the end of the first quarter. And very clearly, the R&D investment and this gross margin development, they go hand in hand. But there is another thing also behind the gross margin, and it is the... mix development that we have been driving inside the services part of the mobile networks business. We are transitioning from low margin deploy services towards a higher share of higher margin technical support and maintenance services. This is a strategic shift that we are driving in the service part of the mobile networks business. And that is the other reason in addition to the product competitiveness itself and the R&D investment that we have made that is driving the gross margin. Then over to the next business, which is network infrastructure. I would say again, fantastic quarter from a top line point of view, 9% growth in constant currency. But zooming into this business a little bit more, 29% growth in fixed networks on top of the already over 30% growth last year. And then submarine networks also very strong growth, 25%. There was one business inside NI with weak top line, and that was the optical business. And that was exactly the business that was hit by some specific supply chain challenges. Also there, we have good product competitiveness, strong order book. So we expect to recover also in this business later in the year. The overall operating margin for the NI business was 9.9%. It fell 90 basis points year over year, largely due to the absence of positive other operating income in the prior year, and also to some extent increased R&D investments. Talking very briefly about the technology development Enna, you remember that we launched the FP5 new generation of routing silicon last year. It's really promising. We are now in the first customer trials. We are seeing strong interest in the 800 gigabit Ethernet support, full backward compatibility and support for current features and services. One very important detail, while we initially committed to 4.8 terabits per second throughput in the chip, what we are now seeing in the field trials is that the chip is actually performing even better, and we are reaching up to six terabits per second throughput, which is 25% more than we had initially estimated. And this is continuing to increase the value proposition to our customers of the FP5 chipset. Our other silicon platforms, in addition to FP5, what you see here, Quillion for the fixed networks, and PSC5 for optical networking, also continue to give us strong differentiation, helping us to gain share. And just as one practical example of the strength of the portfolio, the Microsoft deal that we announced in April, it shows the strength of our data center switching solutions, and it is a good step in entering relationships with web scalers. Then on to cloud and network services, also here a strong quarter, 5% top-line growth. We are rebalancing our investments towards higher growth areas, and that is clearly showing results. We are now seeing it in the top-line development. We had strong growth in one of the focus areas of CNS, which is core networks. CSPs are now transitioning towards 5G core, and that is really driving the CNS business in Nokia. Another driver is private wireless and the campus wireless deployments that we are in at the moment. Also here we had strong gross margin expansion, 520 basis points benefiting from both top line growth and the operational improvements we continue to make. And all this then resulted in a pretty good 570 basis points expansion on the operating margin. On this chart, you see a 12-month rolling operating margin for cloud and network services. And while there was weakness in late 20, early 21, partly because of some provisions that we took related to certain projects, even excluding those effects, you can see that how much the rebalancing is starting to benefit our profitability. And as I said, We are also investing in this business. We are investing a lot. One of the key investment areas is campus wireless, where we are adding R&D investment, which is one of the reasons why I want to caution you now and repeat what we have said earlier, that our assumption for the profitability of this business for the full year 2022 is comparable operating margin between 4% and 7%. And then the fourth of our businesses, which is Nokia Technologies, here you see the quarterly top line in Nokia Technologies. And yes, there was a 17 percent decline year over year in Q1. This was primarily a timing issue. We have two contracts that expired last year that are currently in litigation. and in renewal discussions obviously with these customers. So that affected the top line in the quarter. Another factor was that there is another customer whose license has expired, but they have exited the smartphone market. So obviously that will not continue. But we continue to be confident in the strength of our portfolio. We still expect to be able to deliver to stable operating profit year over year in this business, assuming that these two negotiations that I mentioned are concluded. And I also want to be very clear on one thing in terms of our approach in this business. Our priority, since we do believe in the competitiveness of our portfolio, that it means that our priority will remain protecting the value of our portfolio instead of achieving resolution by a specific deadline. So let's now move on to enterprise next. But before I do that, I want to take a step back and explain the breadth of what we are doing in enterprise. As you remember, Enterprise for us is not a business group. Whatever we sell to this customer segment, we report in the respective business group, depending on the solution that we are talking about. But we do have a dedicated sales organization for Enterprise, and that sales organization is organized along four major opportunities. And the first one is web scalers, primarily our IP routing and optical products for large web scale companies. And of course, the Microsoft data center switching deal is a good example of this. Then the second segment we are focusing on is various verticals delivered by our network infrastructure business. Typically IP networks, optical networks, broadband, fixed broadband connectivity to enterprise sites. In addition to that, this vertical is focusing on governments as a customer group. We actually expect that government spending and government agency spending is going to increase going forward, and that opens up interesting opportunities for this vertical. And then the other side of all of this is then the private wireless networks that we have talked a lot about. And there it's important to see that there are two fundamentally different cases. One is wide area networks, which typically are networks for public safety, transport and utility applications. The logic in this business, how you sell and build these networks, is quite similar to how we are selling mobile networks today. But the difference is, of course, that then the customer is not a service provider. It is something else. It could be a utility or it could be a safety authority. But then there is... from wide area networks a very different case. And this is one of our most important strategic growth opportunities. And that is the millions and millions of industrial campuses that there are in this world who are all seeking ways to improve their productivity through digitalization. And that's where our campus wireless strategy, including edge computing platforms or campus wireless, 5G wireless access through our Endax solution, et cetera, et cetera, comes in. So I just wanted to because enterprise, it's a very wide concept. I want to highlight that these are the four, in a way, opportunities that we are focusing on in this business. It is fair to say that our top line did not meet expectations in Q1. 7% drop in Q1 was affected by supply chain challenges and some order conversion delays. The positive side of this is that, as we already said at the end of last year after Q4, we have a great order intake and a great order backlog. And the good thing is that the strong order intake continued in Q1. We continued to grow double digit. in order so what we're actually doing now is we are growing an order backlog and then the next challenge and the goal obviously that we then have for the remaining quarters for this year is to make sure that we start converting that order backlog at a faster pace and that is definitely our goal We continue to grow our customer base and build what we believe will be a sustainably growing business in the mid-term. And if you recall the previous slide and the campus wireless opportunity I was talking about, here is not only campus, but also private wireless in general, including wide area also. We continued our good pace of growth in those segments. We increased with 30 new customers from 420 to 450 customers. during the quarter. So we continue to focus in the enterprise segment. Our goal continues to be that in the coming years, the relative share of enterprise of our oil sales will grow, meaning that it will grow faster than the service provider side of the business. So, ladies and gentlemen, with that, I would like to hand over to Marko.

Thank you, Pekka. And hello from my side as well. I will give a little bit more flavor on the financials. And starting with the top line development, as Pekka mentioned, we had 1% growth on constant currency basis. And if you look at the different geographies, what has happened, starting with Asia Pacific, you can see the 15% growth there. And this was growth in all business groups. While North America, that was driven by network infrastructure. And if you look at Europe growth, 2%, we actually had a very good growth in mobile networks. But also in Europe, we actually record the revenues from technologies. And as you saw, Pekka showed as well that we have a decline of 17%. And this is actually offsetting the good growth that we had in mobile networks. But also optical and IP had some decline in Europe. Then if we look at the red ones, starting with Latin America, and actually in Latin America, all business groups, but also the business division within network infrastructure, optical, IP, and FN, fixed networks, they all grew in Latin America. The only one that didn't was submarine. Submarine business that is more project-based business, and they do certain projects going from region to region. And that's where we saw the decline in Latin America. And then lastly, I just want to highlight India, as you see, minus 24%. And the reason here is more timing issue. As you all know, the rollouts of 5G will happen later this year. And then going over to operating margin development, and I would say that we had a good development in Q1, and very pleased to see the mobile networks operating margin expansion of 410 basis points. We had a very strong cross-margin development, while we also invested in R&D at the same time. The next area, network infrastructure, with a small operating profit growth, while operating margin had a decline of 90 basis points, just like Pekka mentioned. And this is where we invest in R&D as well, but also the absence of the one-off in other operating income last year. CNS 570 basis points expansion in the operating margin is a great achievement, and it's good to see that also here we had a very good year-on-year improvement, and this was expansion on cross margins. Then we have two areas where we saw the offset of these good developments and technologies is one of those. And of course, these more delays in the revenues and because of those litigations and negotiations that we had with two customers. And the other one is the group common. Last year, we had in our venture funds, 90 million income. And this year in quarter one, we have 40 million. So this is the big impact here. And then if you look at our cash performance, we had a good performance in quarter one. We generated 326 million free cash flow. And this is mainly coming from a strong adjusted profits, but also you can see a positive impact from our networking capital. And here, of course, in quarter four, when we have a higher sales, part of that is collected in Q1. So that's why the trade receivables declined in Q1 and gave a positive impact of 350 million. Offsetting that was that we actually increased our inventories about 200 million. And this is just like we mentioned earlier. We want to build some buffers considering the supply chain constraint situation where we are. And also in Q1, we initiated the share buyback program. And so far in Q1, we actually purchased about 10.5 million shares, and that's about 50 million impacting Q1. Just looking forward when it comes to Q2, keep in mind that in Q2, cash flow will be impacted by the outflows related to employee variable pay. And that's why the Q2 cash flow will be different. Then if you go to market outlook and how the market has been changed, we've done two main changes here. And this is affecting that the market is now growing about 4% instead of 3%. And the two adjustments that we made here is actually, in the first, we see a better market in North America, especially in mobile networks area. And this is slightly offset by other adjust that we made, and that's the situation in Russia, Ukraine. And the outcome of these two adjustment is that mobile networks market is now expected to increase by 4% instead of three, while the CNS market is expected to grow 4% instead of five. And here you can see in the CNS area that the Russia, Ukraine is impacting slightly. but our ambition remains to grow faster in the market. And then just looking to outlook and our guidance a little bit more detail. First of all, I want to emphasis that demand environment continues to be very strong while the supply chain and inflation challenges remain as well. We are confident that we can deliver our 2020 outlook. Just like Pekka also referred to a COVID situation in China that could pose some short term challenges considering the lockdowns we've seen there. But we do not expect that to impact our full year. Overall, our outlook is unchanged. And the only change that we've done is adjusting the top line guidance because of the FX movements during the quarter. So it's a 300 million adjustment. So now the top line is expected to be between 22.9 billion to 24.1 billion, while the operating margin and cash flow are the same. And then just to give you a reminder of our guidance and how we have built it up, if we start from 2021 operating margin, which ended up at 12.5%, and we had about 150 basis points, one offs in that. So the comparable starting point is actually 11%. But we expect that the sales growth and the operational improvements that we are working on will actually offset the inflation and supply chain challenges that we see, and also our investments in R&D. So with that, I thank you for my part and turn back to David.