Nokia Corporation

Good morning, ladies and gentlemen, and welcome to Nokia's second quarter 2022 results call. I'm David Mulholland, head of Nokia Invest Relations, and today with me is Pekka Lundmark, our president and CEO, along with Marco Veren, our CFO. You will notice that we switched to an audio-only webcast this quarter. We will continue to use video for events where we see it adding value, such as our business group progress updates. For our quarterly updates, considering we're now on the road meeting many of you in person, we felt it more efficient to return to audio-only. 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 on margins, it will be on our comparable reporting. You can find reconciliation tables in our Q2 report back to our IFRS financials. Please note that our Q2 report and this presentation are published on our website, and both the reconciliation is in there. In terms of the agenda for today, Pekka will give a quick overview on our financial and strategic progress in the quarter, And Marco will then go into a bit more detail with some of the key factors impacting our financial performance and how we see the outlook for 2022. With that, let me hand over to Pekka.

Thank you, David, and good morning to everybody. I'm pleased to say that we continue to execute well in Q2. As you can see on this slide, net sales grew 3% in constant currency. This was in spite of continuing supply chain challenges and timing issues in two contract renewals in Nokia technologies. Gross margin was 40.6% and operating margin 12.2%, reflecting good progress in both mobile networks and network infrastructure. The margins declined slightly year on year due to the contract renewal timing in technologies and And that's one of software dealing mobile networks that, as you may remember, that we highlighted in Q2 2021. If you exclude last year's software deal and Nokia technologies from our results, operating margin would have improved by 330 basis points from 5.6 to 8.9 in Q2. And this does demonstrate the strength of the improvement in our product businesses. Our good Q2 performance was achieved whilst we continued to invest in R&D. On this picture, you can see also on this chart on the screen, you can see that there has been a 13% increase in R&D expenditure since Q3 2020. And this has been funded through our improved gross margins and focus on efficiency in SG&A. We will continue this focus to further strengthen our technology leadership. And then I'll say a few words on the performance across our business groups. First, mobile networks, where I was pleased to see a return to growth with a 1% increase year-on-year in constant currency, in spite of COVID-19-related lockdowns in the Shanghai region, supply chain challenges, and a tough comparison caused by a one-off software deal in Q2 2021. We saw good growth in North America, Middle East and Africa, and Latin America, which counter declines in some other regions, including the impact of our exit from Russia. Overall, this gives us confidence to grow net sales in 2022 at constant currency. While gross margin declined slightly year on year due to the one-off software deal in the previous year, operating margin did increase 70 basis points year on year, and you can see from the chart the progress we continue to make on a 12-month rolling basis, 12-month rolling gross margin on the screen. Also pleasingly, our reef shark penetration increased again and is now at 91%, and we are clearly on the track to the target of reaching 100% by the end of this year. Network infrastructure continued its positive trend with all four divisions showing growth. As you can see, fixed networks and summary networks had, again, a very strong quarter with both delivering double-digit growth. Top-line performance flowed through to both cross-margin and operating margin in NI, which increased by 10 and 240 basis points respectively. There were some supplier-specific shortages impacting optical networks in the quarter, which are expected to improve in the second half. But overall, network infrastructure had another really excellent quarter. Cloud and network services net sales were stable in the quarter. For the first half of the year, we saw growth of 3% and good progress in both gross margin and operating margin. Clearly, second quarter was a bit weaker. first quarter was strong and overall the first half of the year demonstrated good development in CNS. The work to rebalance the portfolio continues, and you hopefully heard the presentation from Raghav just over a month ago where he highlighted some of the longer-term initiatives we have in the business to move towards a more securing SaaS-based revenue stream. Then Nokia Technologies, as mentioned, There we were once again impacted by the ongoing litigation surrounding the Oppo and Vivo renewals. In Q2, three of Nokia's patents were upheld by a German regional court with injunctions granted against Oppo. We will robustly defend the value of our patent portfolio, but we'll do so fairly. And I'm pleased to say the court also recognized we had complied with all negotiation obligations as a standard essential patent holder. In the quarter in Nokia Technologies, we also delivered some new catch-up sales related to new patent license agreements in the automotive and consumer electronics markets. And overall, as it also says on the slide, we do expect to return to the previously communicated annual run rate of 1.4 to 1.5 billion with the assumption that the two ongoing contract renewals are concluded. Then on the customer segments, and of course enterprise, which we have highlighted as a separate segment, I was really pleased to see that enterprise returned to growth this quarter, delivering an 8% increase year on year. This business, of course, like the other businesses, were also impacted by some supply chain challenges, but despite those challenges, we grew 8%. In enterprise, our order intake remains strong, and we expect to see accelerated growth in the second half of the year. As you remember, we have doubled down on our investments in private wireless since the start of this year, to strengthen our leadership, and that is showing results. We added 35 new customers in private wireless during the second quarter, and as you can see on the slide, we now have 485 customers in this space. So overall, good progress in the enterprise segment. And then finally, I'll say a few words about the challenges in our wider operating environment next before handing over to Marko. Of course, the macroeconomic uncertainty is something we all need to pay attention to. So let me make a few points to clarify the current impacts as we see them. First of all, even though our business is not immune to macro trends, we continue to see strong investment trends in connectivity, particularly into 5G and fiber deployments. And those investments are very important for many of our customers to cope with increasing data consumption and the need to increase productivity, which networks enable. Actually, in worse economic times, the need to increase productivity in industrial operations typically increases, which could be good investments. We have not seen any major changes in our demand outlook. Customer demand and order intake remains strong, and we continue to be more supply than demand limited. As you can see on the charts, the global penetration rates for both fiber and 5G, excluding China, remain low. For 5G sites globally, it's around 15%, and even in some of the more developed markets, less than 25%. And you also see the homes connected and homes passed as percentage of total homes in different parts of the world on the charts. But the macro trends could impact the pace at which our customers invest. There can, for example, be some challenges in emerging markets where currency movement could impact the affordability of our products that are effectively priced in US dollars or euros. More specifically on supply chains, As you know, this has been a really challenging situation globally, and we have been dealing with it in a number of ways since the pandemic hit. Towards the end of last year, or actually throughout last year, we were facing constraints across a lot of suppliers in the business. In Q1, we said that the situation was changing a bit towards more supplier-specific challenges that were constraining our businesses. Today that largely remains the case, but we do see signs of the remaining challenges starting to ease in the second half of 22 and into the first half of 23. Last quarter, we also highlighted that we could potentially be impacted by COVID-19 related lockdowns in Q2, which was the case in the Shanghai region. But we did manage the situation quite well and we have more or less recovered from that situation which affected the supply chain in April and May. So with that, over to you, Marko, and then after that I look forward to the Q&A.

Thank you, Pekka, and good morning from my side as well. If we now look a little bit deeper of financial results and starting with the regional performance, and at the group level in reported currencies, the growth was 11%, and of course, FX had a strong impact here, and 3% on a constant currency basis. And also here on the chart and on the report, you can see that we now provide the regional performance excluding submarine networks, and this is due to the fact that the nature of the business and the volatility that it has between different regions, we feel that And it's better to show the actual demand trends we see across our regions. And we also have submarines separately, so you can see that there. And if we start with looking at North America, we saw 19% year-on-year growth, which reflected the double-digit growth in network infrastructure, where both fixed networks and IP networks had double-digit growth. Also, mobile networks had a double-G growth in North America. Then when it comes to Europe, you can see a decline. But remember, the large portion of this was related to the fact that we include all of our Nokia Technologies business in this region. And because the decision to exit Russia, that will impact it also Europe. And Russia impact was about 100 million year-on-year impact. And lastly, as you see, submarines had a very good growth, 27% year-on-year. So next, moving over to operating profit development. Once again, we saw a good improvement in mobile networks and network infrastructure businesses. where both operating profit and margin expanded. And impressively, the improvement in mobile networks came despite the one-off software deal that helped quarter two in 2021. However, these were largely masked by the fact that Nokia Technologies had a litigation with these two customers and had also impact our operating profit. Group Common also benefited from a positive currency revelation related to our venture funds. And as Pekka mentioned, if we exclude the one-off software deal from Q2 last year and technologies as well, this year and last year, the remaining business operating margin would have improved from 5.6 to 8.9%, which is quite impressive. And looking briefly at our cash flow performance in the quarter, the free cash flow was negative in the quarter, and this was mainly due to the change in net working capital, which offset our adjusted profits. If you look to the slide, you can see that we have broken out the components of the change in net working capital, which mainly related to liabilities and more notably the payment of our 2021 related employee variable pay, which we flagged already in quarter one. We also managed to increase inventories in the quarter in the middle of ongoing component situation And these were somewhat offset by lower receivables, partially due to the higher sale of receivables in the quarter. We also saw about 200 million Euro outflow related to payment of our quarterly dividend and the repurchase of shares. So these all led to a net gas position of 4.5 billion at the end of the quarter. Shifting over to our addressable market, we have provided our usual quarterly upgrade here. While there were some movements between BGs, we continue to expect our targeted addressable market to grow at 4% at constant currencies in 2022. Our estimate for mobile networks increased from 4% to 5%. And this is driven mainly by increased expectations for both North America and Europe. When it comes to network infrastructure, we estimate the market increase from 3% to 5%, and this is largely reflected in the strong demand we have seen in fixed networks, mainly related to upcoming broadband initiatives and fixed wireless access. When it comes to cloud and network services, growth declined somewhat due to some adjustments we've made to the market to better reflect the areas we are prioritizing. And if we now look at our outlook for 2022, the demand environment remains strong, but uncertainties are now around technologies contract renewals or the timing of that. potential additional COVID-19 lockdowns in China, and of course the supply chain situation. Our full year net sales guidance remains unchanged in constant currencies, and reflecting our current assumed EURUSD rate of 1.04, our net sales outlook is now 23.5 billion to 24.7 billion. And we are currently tracking towards the higher end of this range. And our comparable operating margin guidance remains as earlier between 11 to 13.5%. And here we are currently tracking towards the midpoint of this range. as we manage the ongoing inflation, currency headwinds, which I will explain in the next slide. So let's go there. So this year has seen significant currency volatility with the US dollar strengthening around 10%. So we want to help you to understand our currency exposures here as well. Operationally, as you can see on the slide as well, we are relatively well balanced between net sales and cost exposures in different currencies. The largest currency exposure we have is US dollar, and in quarter two, we had about 55% of net sales in USD compared to 50% to the cost. which is reinforcing my point that we are largely naturally hedged. And as a rule of thumb, a 10% strengthening of the USD would see an approximately 5% benefit to our net sales. And from operator margin perspective, before hedging, it would be slightly positive. But we have the hedging program with a 12-month horizon to dampen the impact of currency fluctuations in our financial results. And this means in the current financial year, our operating profit in absolute terms is largely unaffected by changes in the USD. Given the immediate benefit, we see the net sales with operating profit unchanged. This will result in a negative impact to our operating margin in the short term. And then just to summarize that we had a strong start to 2022, and we are well on track to deliver on our full year targets. And clearly compared to what we have expected at the start of the year, we are facing issues we didn't expect from a geopolitical standpoint, and inflation has continued to gather pace as well. Despite these issues, we are still tracking towards the midpoint of our operating margin range, which emphasizes also the progress we've been making in the business. So with that, I hand back to David for Q&A.