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spk09: 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.
spk08: 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.
spk17: 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.
spk09: Thank you, Marco, and thank you, Pekka, as well, for the comments you made. Before we move to the Q&A session, I just wanted to give you another date for your diaries. We are planning to hold our next progress update which will focus on our group technology strategy with our Chief Strategy and Technology Officer, Nishant Batra, along with our Nokia Technologies business with its president, Jenny Lucander. The event will shift to being in person in New York on Friday the 9th of September, but the event will also be webcast for those who are unable to join us in person. So with that, let's start the Q&A. As a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up? Darcy, could you please give the instructions?
spk10: Thank you. We will now begin the question and answer session. If you're also viewing the 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're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then 2. I'll now hand the call back to Mr. David Mulholland.
spk09: Thank you, Darcy. We'll take our first question today from Alex Paterk from Societe Generale. Alex, please go ahead.
spk15: Good morning, and thank you for the question. Congratulations for today. Solid results despite the headwinds that we see everywhere. Now, my first question would be on your ability to offset the ongoing inflationary cost pressures to improve pricing. Are there any meaningful differences in this respect among your divisions? And is the frequency of new product releases similar across divisions? And do your longer-duration contracts have any inflation-related repricing clauses? That will be my first question. A brief follow-up would be just If you could give us a trend on your levels of inventory, are you now happy with where you are or do you need to increase the buffer or lower it in the remainder of the year, given what's going on in the supply chain? Thanks a lot.
spk08: Okay, thank you. If I take the first one and Marko takes the second one. First of all, as we all understand, there is a big difference between existing contracts and new contracts when you deal with inflation. we are of course in all our new contract in all our businesses when we are making offers and signing deals we are taking into account all the cost information and the cost development estimates that we have available and I guess good news is that we continue to while doing that we continue to have strong order intake so this is definitely good news then the other side of the coin is that depending on the business and I guess When you asked about the differences between businesses, mobile networks would be the one where the contracts would be an average longer than in other businesses. So it is usually very hard to go back to an existing contract and start changing prices after the fact. We have to remember that this industry has been for a long time kind of thought into a mode where prices go down every year. And now this is quite a big educational effort from us all to change that because we are now an inflationary environment. So this is clearly the reason why we said already at the end of last year that even though we expect the underlying improvements in our profitability and our competitiveness to continue this year, the inflation does dampen some of the profit improvement potential during this year. And this all has been, of course, included and incorporated in our guidance, including what we said today that we are expecting to land somewhere around the midpoint of the 11 to 13.5% range.
spk17: And what comes to the inventory levels and where we want to be, as you've seen, we've been working to build inventories to just have more safety stocks than normal. And the reason for this has been that it has been difficult to understand exactly lead times. They've been quite volatile. And that's why it's good to have some buffers. In quarter two, for example, we increased inventories by 240 million. And we believe that until the supply chain has returned to more normal and we can trust in the lead times that we get from our suppliers, we prefer to have at least the level we have today and have a little bit buffer.
spk09: Thank you, Alex. We'll take our next question from Andre Gardner from Citi. Andre, please go ahead.
spk02: Good morning, David. Good morning, guys. Thank you for taking the question. Just another one to follow up on Alex's point on margins. You know, if I think through the progression through the year based on the guidance you're giving, and if, you know, we assume technologies is in there for the full year in terms of a full complement of licensees, you're effectively implying mobile declines half on half, say, from the 9.5% you've just done for the first half of the year somewhere into the mid-8% range. Network infrastructure declined a bit as well. Now, I hear what you're saying in terms of supply chain constraints and inflation and FX. I was just wondering whether, you know, is there anything specific that you're already seeing in second half costs that is going to drive that? Or, you know, are you just being prudent in terms of the current environment?
spk17: I can start. First of all, we have been executing extremely well. And if you see the first half year, we have had a supply chain situation which has been quite challenging. We see that it should improve in the second half. but it's more supply-specific issues that we still see than a broad-based issue for the whole industry. And what comes to the operating margin, I would highlight at least two main reasons why we are guiding towards the midpoint, and one is the inflation that we have implicated earlier as well, and also the fact that we actually have Our annual salary adjustment will come now from July and onwards. And additionally, we have our hedging program that I mentioned also in the presentation.
spk08: And maybe, Marko, just to add one thing that is also important. Since you asked specifically about mobile networks, we had a pretty strong mix in H1. And you saw the comments on North America. So this mix is expected to be less favorable in the second half of the year. And again, all this has been incorporated into the forecast of being closer to the midpoint of the range.
spk11: Thanks very much. Did you have a follow-up, Andrew? To find that hedging impact.
spk17: Yeah, what I mean by hedge impact is that we hedge our operating profit in absolute terms. And when we've seen now, for example, very strong USD growth, we will get higher sales, but we will keep the operating profit at the same level, and that will have a negative impact on the operating margin. But this is just a timing issue, so it is step-by-step going in because we have a rolling 12-month hedging program just to dampen the big swings that we see in currency fluctuations.
spk09: Thank you, Andrew. We'll take our next question from Alex Duval from Goldman Sachs. Alex, please go ahead.
spk13: Yes, hi there. Many thanks indeed to the question. We've seen one of your peers talk about a solid 5G backdrop this year, adopting raised market parts. You've talked about a good situation there as well. I just wondered if you could give us some color on the sustainability of the RAN market into next year. Obviously, one tends to think about telco customers being somewhat less macro sensitive. And you've talked today about confidence that you're not going to have a big impact near term from macro. It would be great to get a bit of context on your view into next year. Many thanks.
spk08: Okay. Thanks, Alex. That's obviously an enormously important question. And again, none of us have a crystal ball on this one. But when we look at what we are seeing today, what we are seeing today and hearing from our customers, the plans for 23 seem to be pretty strong. And we have to remember that there are countries and regions which haven't even really started in 5G yet, and obviously India is one of the most important ones here. Latin America, the same thing, it's only starting now. So that's why we do believe that that we are still early in the 5G cycle. As you saw on the slide, the penetration of 5G sites is only 15% outside of China in the world. Again, this does not mean that we would be immune to any macroeconomic cycles. Of course, they do play a role, but all we can comment is what we are seeing today, and we are arguing that the underlying kind of almost secular, not cyclical trend should continue to be there for quite some time.
spk09: Did you have a follow-up, Alex?
spk13: Just very briefly on one of the earlier questions, talking about the supply chain easing the second half. Some investors have been asking about press reports, talking about chip makers taking up prices in some areas, including in communication chips in coming quarters. Just wondered if you can comment at all on that and how you'd factor that into your statement of supply chain easing in the next couple of quarters. Many thanks.
spk08: I mean, supply chain easing comment was more on the availability side. We all know that semiconductor inflation has been strong. We've been able to deal with it reasonably well, as you can see in the numbers. And then, of course, as I said, everything we are we are now seeing from our suppliers, we are taking into account in the new offers that we make. Then the billion dollar question is that if the economy weakens, we are now seeing that demand on some consumer equipment is going down. How much of the relevant semiconductor capacity and the founding capacity, substrate capacity will that release on the market And how will that be reflected on pricing? That remains to be seen. We have seen already that memory prices have come down. But then for the other parts, it still remains to be seen.
spk09: Thank you, Alex. We'll take our next question from Sandeep Deshpande from J.P. Morgan. Sandeep, please go ahead.
spk11: Hi. Sandeep.
spk01: My question is, you know, when you look at your growth in mobile networks in Q1 and Q2, it has been below market growth. Do you think that that growth will accelerate now into the second half and you will begin to take share? Because it looks like you have lost share in the market, maybe because you could not ship. So will the shipments catch up to allow you to take share? which will allow you into the following year to go on to be a share-taker in the market. So now one quick follow-up on that.
spk08: Yeah, thank you, Sonali. The statement that we made at the capital market day already more than a year ago is still valid, that we did admit then that we had lost market share in the early stages of 5G. That is now changing. We have caught up on technology. Now, in this quarter, as you saw, we have returned to growth. And especially if you were to exclude that 80 million one-off software deal in the comparison quarter, the growth would actually have been stronger. And we do expect this trend to continue, positive trend in terms of top line and market share to continue in the second half of the year.
spk17: And just to build on what Pekka said, Sandeep, also if you look at the quarter two mobile network sales, we had a very good development on the RAN side, the equipment side, and we liberally actually have been taking down deploy services in certain geographies and certain customers. where we don't believe that we are profitable enough. So this is also impacting the mix.
spk08: This is, Sandeep, a very important point that Marko is raising. The equipment and software growth is much higher, actually, than the headline figure on mobile networks. And on the services side, Marko mentioned deployed services. There we are. kind of becoming more and more selective when it comes to the types of deals that we make, and we are moving priority in services to higher margin support and customer care services from Deploy, which is de facto low margin installation work.
spk01: Thank you. Just one follow-up on that was when we look at the market, I mean, you know, when investors All of them talk about, you know, are we at peak 5G, and you presented some data on how many base stations have been installed in terms of, you know, how many need to be installed. Is that the case in North America as well, where 5G rollout started before other parts of your market?
spk08: North America is obviously ahead of some other markets, and I refer to India, which has not even started yet. I mean, you have seen, everybody has seen North American operators' comments on their CapEx. It continues strong in 23, and then for obvious reasons, we probably start to see some normalization in 24. But then, of course, in addition to that, there is then the enterprise side, the enterprise digitalization side, which is only now picking up. I mean, there's multiple factors playing into this equation.
spk09: Thank you, Sandeep. We'll take our next question from Francois Bouvenier from UBS. Francois, please go ahead.
spk16: Thank you very much. I was just wondering what is your sales goals excluding technology and Russia in Europe, just to have a feel of where you are in terms of gross weight and market share, given maybe there is some swap out with Huawei at My first question.
spk17: Yeah, I can start. What comes to Europe, just like I mentioned in the presentation as well, that we have, remember that on those figures we have technology, the whole technology sales, and then we had about 100 million impact from Russia, exiting Russia, so that's impacting. What comes to the otherwise Europe, I would say that we have been quite successful in those cases where our customers have been replacing the supplier base, and we won about half of those cases. Just to remember here as well that in the beginning of that contract, we do the swaps, and that's when we don't see that big impact in our P&L, in our profit line. It takes some time before that starts to come through.
spk09: Do you have a follow-up, François?
spk16: Yeah, quick follow-up is on the 5G penetration of what you discussed, 15% excluding China. I was just wondering how you think about this percentage penetration, 5G, given maybe the lack of penetration, maybe more use for urban areas. I mean, do you expect this penetration to be... like 100% or is it going to be a lower focusing on urban in the first stage and maybe more rural but in the longer term? Just trying to feel about how should we think about the site penetration level in the near future?
spk08: That's of course a very good question but also very difficult to give a detailed answer. The way it of course goes is that that the installations start in urban areas, you build first urban coverage, and then at the same time when you start adding capacity in the urban areas, more rural coverage, and this goes gradually. But of course, there is a lot of areas in the world, rural areas, where it will take a long, long time before there will be coverage, so it will never go to 100%. But the pace of this, with which this will happen, of course, would require a longer and more detailed conversation than what is possible at this time.
spk09: Thank you, Francois. We'll take our next question from Peter Nielsen from ABG. Peter, please go ahead.
spk14: Thanks very much. I'd like to return to North America if I may, please. Can we take your comments, previous comments, about growth going forward to imply that the issues which hampered your sales in North America, the latter part of last year and again in Q1, are now behind you completely. And we're sort of looking at more growth in line with the market, sort of based on market dynamics and competition, et cetera. But there should be no structural factors hampering your sales in North America going forward, if I understand your comments correctly. And my quick follow-up would just be, Becca, you mentioned accelerated growth in enterprises in the second half. Can we also assume that the investments in enterprises will also accelerate going forward and perhaps the profit contribution in the near term will be more negative in the near term? Thank you.
spk08: At least when it comes to North America, I can confirm that what we are hearing from customers now is that we are now fully competitive when it comes to comes to a technology. Then of course there is always new deals to be made on a continuous basis and of course our goal is now that we would at least grow with the market and in any business of course we want to, if we have lost market share in the market our goal would be to win it back. So that's at least the fundamental basis for competitiveness which is technology. is there, which gives us good possibilities to then fight even harder on the market. Then on the enterprise side, yes, we do see enterprise investment accelerating. As a whole, the service provider market has always been and will be a low-growth market, but the enterprise market in many cases grows double-digit. As we have said many times, only a small part of the enterprise or industrial digitalization potential has been captured yet. And this is something that we expect to be a megatrend in the world that is driving that part of the market throughout this decade, actually. And that's why, well, enterprise is now 7%, roughly, of our sales, our goal absolutely is to make that relative share grow growing forward so that we would get it into double digit in the coming years.
spk09: Thank you, Peter. We'll take our next question from Richard Kramer from Arete. Richard, please go ahead.
spk06: Thanks very much. I'd like to ask this very specifically because I'm just trying to understand the shortfall in technologies Are you currently in dispute with any other large licensees beyond OPPO Vivo that might be impacting the technologies business? And do you anticipate any potential license renewals between now and the end of the year having an impact on those numbers? Because they obviously have a huge impact on profitability. Thanks.
spk17: Thank you. And it's OPPO and Vivo, just like we've been saying as well. So we have in several countries. We have litigation with them. And I suppose you saw also the latest outcome from Germany that it seems that at least the German court was very positive how we have been handling these negotiations. So we just want to emphasize once again that we want to protect the value of our patent portfolio before specific timing, and we are very confident that we have a very good patent portfolio as well.
spk06: Did you have a follow-up? Yes, please. And just a quick follow-up on Sandeep's question about the U.S. and whether it might have a peak in CapEx in 2023. Can you lay out whether you're still expecting that you can win back market share at Verizon, since that's obviously has been a 10% plus customer of Nokia in the past. And can you talk a little bit about the competitiveness of your products at the 3.5 gig level on the radio side? Thanks.
spk08: We believe that we have a fully competitive product on 3.5 and in 5G overall. I mean, just as one example, if you If you look at the recent measurements in North America and how they are rating the different carriers and our largest or one of the large customers that we have T-Mobile and the performance of their network where a significant part of that network is the competitiveness. This is true to both 3.5 and then the other frequencies as well. Then when it comes to specific customers and the market shares or win-backs, as I said on a general level, of course, our goal is to maximize our market share. And if we have lost market share somewhere, our goal is to win it back. But if those things would happen, that's something that I do not want to speculate on.
spk09: Thank you, Richard. We'll take our next question from Artem Baletsky from SEB. Artem, please go ahead.
spk07: Yes, hi, and thank you for taking my question. I would like to ask about network infrastructure growth that continues to surprise us positively, and whether you see that this type of double-digit development could be sustained going forward, or would there come some type of capacity limitations to you? And I guess, like, fixed networks is particularly the part that has been showing good development, and maybe my quick follow-up is relating to supply chain-related issues. revenue impact, would you provide some type of indication how big this impact has been in first half of this year, just to get a clue how big acceleration we could see going forward if situation normalizes?
spk08: For network infrastructure, we do see the underlying strong trends to continue, and you saw on that slide one KPI, which is the homes passed and homes connected. But the interesting thing for NI is that now when we are building home broadband and building 5G base stations, that is driving the backhauling market, it's driving the IP routing market, and it's starting to drive the optical regional and then optical backbone market as well. And typically the access markets take off first. That we have seen both for base stations and and fixed broadband access, and then the natural assumption would be that then next we would see an acceleration in IP and optical, and the good thing is that we have a pretty strong technology position here. Of course, then, if you ask that how long will the double-digit growth continue, it's impossible to say. The comparables are, of course, getting better, tougher if you take fixed access or fixed broadband. It grew 35 percent last year, 29 percent in Q1, and 22 percent in Q2. So, yes, comparables are getting tough. But we have good market share. The market share has grown in GPON or XGS-PON optical line terminals. We have more than 50 percent market share. And that is one of the strongholds that we have in that business. And again, even on this access network level, there is a lot of work to do that remains. So that's why we are really proud of what MI has achieved in the last couple of years. And there is every reason to be optimistic about the future as well.
spk17: And just building on what Pekka said, if you look at the US government and also European Union, are heavily focusing on this area when it comes to connectivity. And we see a lot of good opportunities for us as a market leader and to capture a good share here as well.
spk09: Thank you, Orton. We'll take our next question from Simon Leopold from Raymond James. Simon, please go ahead.
spk04: Thank you very much. I just want to get a really easy clarification on my question. On the clarification, I just want to verify that the rationale for the higher revenue outlook for the full year is fully reflective of currency and not other factors. And in terms of my question, I want to get a better understanding of your goals and opportunities for non-telco revenue as we look out into the future, whether it's coming from routing, private wireless, what kind of verticals, government versus hyperscale. If we could unpack what's driving that. I did hear earlier the 7% base and the goal for double digits. I want to get a better understanding of what drives it and where does it come from. Thank you.
spk17: Yeah, I can start. And what comes to the guidance on the top line, this is purely adjustment to the current FX rates that we have. So we keep the guidance as we had earlier. The only thing that we now narrow down a little bit, we say that on the upper end of that interval, so we give a little bit more understanding where we are in that guidance. What comes to the ambitions to grow beyond operators? Today, we have about 18% sales outside of CSPs. And just like Pekka mentioned earlier, we believe that within this market, enterprise sector has definitely much higher growth outlooks than CSP market. And we believe that A big part of that growth that we see in the coming years is coming from the enterprise sector and web scalers.
spk08: Just to build on that, I mean, one, in addition to, I mean, when we talk about non-Telco, it's important to qualify what that means because there are several different types or quite different types of business opportunities. Obviously, in that 18%, which is non-Telco, for us, yes, we have the submarine networks for web scalers, for example. We have the licensing business, but the real enterprise, one business case is clearly enterprise network infrastructure, optical and routing for enterprise. Then the other business case is web scalers, which is a fast-growing market. When you look at the market growth estimates while, again, while telco growth is slow, when you look at what web scalers are estimated to invest in connectivity and in networking, it's really growing fast. And from that point of view, the breakthrough that we made into the Microsoft switching is really an important one. And we have a similar attempts going on on the optical side with some of the web scalers as well. And then of course there is this big opportunity of private wireless, campus wireless networks that we are getting into. Then another opportunity is authority networks which are getting modernized and new generations with additional security for authorities and public services such as police fire brigades ambulance and so on and so on there's a lot of going on there as well and then of course government's own networks u.s government is investing a lot we have started a special unit unit for that a lot of opportunities there as well so this is quite when we talk about enterprise or non-telco it's really broad based and we are moving on several fronts there.
spk09: Thank you, Simon. We'll take our next question from Sami Sarkomiz from Danske Bank. Sami, please go ahead.
spk03: Good afternoon. Thanks for being very clear with the guidance. I would still like to check one more thing. When you say that you're expecting to be around the midpoint of the guidance range in terms of EBIT margin, Do you think you will be able to reach the midpoint even if the pending IPR renewals don't happen this year?
spk17: Thank you. The assumption that we have in the outlook is that these two deals that we are in litigation right now will be solved. So this is baked in in our outlook as well.
spk03: Okay. And as a follow-up, Could you please disclose the IPR catch-up payments you recorded now in the second quarter and a year ago?
spk17: They were about the same level this quarter than last year. Which was? We haven't actually disclosed the number itself, and the reason is that if there's one specific deal that we signed, we're not allowed to disclose any details of those deals, and you could calculate backwards also in that case what is the value of the deal. And unfortunately, we are not in a position to be able to do that.
spk09: Okay, thank you. We'll take our next question from Paul Silverstein from Cowan. Paul, please go ahead.
spk12: I appreciate you all squeezing me in. Peck and Marco, I appreciate your comments about ongoing strength of demand, but concerns about macro. My specific question is, can you give me insight on linearity in terms of orders? Have you seen consistent strength in your order book throughout the quarter through the end of the quarter and into the beginning of this quarter?
spk08: We have not seen any major changes. Our order intake and the number of new opportunities that we have in the pipeline has remained strong. Again, I'm not implying that we would be immune to anything that happens in the macro. We are all seeing the worrying development in macro, but we don't have a crystal ball. All we can comment is what we are seeing. from our customers and there is no, on the kind of aggregate level, there is no change. There has been cases, especially in emerging markets where there have been countries hit by weak currencies and or high inflation. where capex plans have been indicated to be lower, but at this time, these have been more exceptions than rules. In the big picture, we have not seen at this time any meaningful change.
spk12: For my follow-up, I have a similar question regarding supply chain improvement and inflation. Relative to your comments, are you just allowing an impact for the obvious, or have you actually seen inflation already just start to have an impact on your cost structure? And same thing with your comments about supply chain improvement. Is that based on hope, or are you actually seeing points that incoming improvement in the second half?
spk08: Now the line was breaking up, so I'm not sure if I... He was asking on have we seen concrete
spk09: evidence of the impact of inflation on our business? And do we have something concrete on the supply chain improvement in the second half?
spk08: I mean, well, absolutely, we are seeing inflation in our business. The semiconductor prices have gone up. There is inflation in pretty much everything that you touch in the world at the moment. And all of that has, of course, been incorporated in the guidance that we have given We've been able to mitigate some of that with the technology improvement, with productivity improvement, and so on. And that's why we've been able to maintain a pretty solid profitability despite inflation. And then when it comes to new deals, as I explained earlier, of course, in all new deals that we make, we take into account all cost information that we are seeing and what we are expecting to see in the coming years. specifically on semiconductors, the concrete evidence that you asked for. I mean, hey, this is very tactical. We are in day-to-day discussions with all key suppliers, and little by little, there are more cases where we see more components becoming available, and this is what we are expecting to see in the second half of the year. Then, just to complete the answer on the cost of semiconductors, as I said earlier, We have seen that memory prices have turned. They have actually dropped, but this is not yet true to the broader component supplier base.
spk09: Thank you, Paul. We'll take our last question from Felix Hendrickson from Nordea. Felix, please go ahead.
spk05: Hi, thanks for taking my question. Just given that your research penetration rose to only the one mobile networks and you're safe to achieve your 100% target by the year end, How should we think about the gross margin upside in mobile networks heading towards the year end and into the 2023 as the inflationary headwinds are mounting? How should we think about the different components? Thanks.
spk08: We are, of course, not giving any specific gross margin guidance. I mean, this is always like in any business, this is a game that you want to play between volume and margin so that you optimize the outcome for your for your shareholders, and that's what we are doing. Top line is important. Margin is important. We are working with our suppliers to deal with the inflation. We are, of course, negotiating best possible prices in the deals and, as I said, optimizing volume and margin so that we get the best possible outcome. I'm not really sure if I'm able to get into any more details than this. It depends a lot on the overall semiconductor cost development, overall inflationary development. Regardless of all that, we still have potential to improve our technology position, our internal efficiency, our R&D productivity, and so on. So there's a lot to do. in addition to working on the supply chain cost.
spk09: Did you have a very quick follow-up, Felix?
spk05: No, that's all for me. Thanks.
spk09: That was our last question for today. Thank you for everyone for your questions. Thank you, Pekka and Marco, for your answers. Ladies and gentlemen, this does conclude today's call. I would like to remind you that during the call today, we have made a number of forward-looking statements. involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. 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 in Form 20F, which is available on our Investor Relations website. Thank you for listening.
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