Nokia Corporation

Good morning, ladies and gentlemen. Welcome to Nokia's third 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 Marko Varen, 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 growth rate, and margins will be on our comparable reporting. Please note that our Q3 report and a presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and reconciliation between the two. In terms of the agenda for today, Pekka will give a quick overview of our financial and strategic progress in the quarter. 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 Pekka.

Thank you, David, and good morning, everybody. The third quarter marked a very important step for our company in the execution of our three-phase strategy. If you recall, in the beginning of this year, we said we had completed our reset in 2021 and that we were moving into accelerate in 2022, where we would focus on accelerating our sales growth and expanding our margins. For the first half of this year, the supply chain has really constrained us from delivering on that growth. But as we start to see some improvements in the supply chain, we are also seeing good progress on growth. In the third quarter, our growth accelerated to 6% year-on-year, up from the 3% that we delivered in Q2. Importantly, this was driven by a strong improvement in mobile networks as we start to see benefits of our renewed competitiveness. From a profitability perspective, our margins continue to be impacted by the timing effects of outstanding deals in Nokia Technologies, which meant that our gross margin declined 40 basis points year-on-year and our operating margin declined 120 basis points. To better understand the margin progress in our business without the volatility of the timing of Nokia Technologies' deals, you can see on the slide the progress of our gross margin and operating margin both including and excluding Nokia technologies. The charts clearly illustrate the progress we are making in our underlying product business, with our operating margin up 70 basis points year-over-year in Q3. Clearly, we remain focused on resolving the outstanding deals in Nokia technologies, but we are also focused on protecting the value of our patent portfolio over achieving any specific time frame. I will now turn to each of the business groups performances in more detail. Starting with mobile networks, you will know the challenges that impacted our financial performance and particularly our top line performance in 2021. But we are now really starting to see the benefits of our new products and renewed competitiveness. We delivered 12% net sales growth in Q3, representing a strong acceleration. We are starting to see some improvements in the supply chain, with it becoming less of a constraint on the business. We did benefit from an element of catch-up sales in the quarter, which we could have shipped earlier in the year. But the overriding point here is that we are now clearly on a path to grow on a full year basis in mobile networks. On top of the sales growth we are already seeing, we also signed some significant contracts in India in Q3. With Varti Airtel, we've been awarded a 45% share of their planned 5G network, continuing our longstanding good partnership. On top of that, just this week, we announced a deal with Reliance Jio, where we will be a major supplier for their planned 5G network deployments. As you know, we have not been a radio access supplier to Reliance Jio previously, so this is a very meaningful new customer engagement for us, and an important market share gain. We have stated previously that our ambition is to grow faster than the market in mobile networks and to gain share. And it is deals like this which we believe will firmly put us on a path to deliver that. Our margins also continue to improve in Q3 with operating margin up 250 basis points year over year. Although we did continue to benefit from a favorable regional mix in the quarter, which we expect will somewhat reverse in Q4. Turning to network infrastructure, where we continue to see robust growth despite increasingly challenging comparisons. This was particularly the case in our fixed networks business, which still delivered 7% growth. We also continue to extend our technology leadership with the announcement of our LightSpan MF14 platform earlier this week, which gives us a clear roadmap all the way towards 50G and 100G solutions. It will obviously be many years before these are in wider commercial use, but it gives customers the confidence in our future roadmap for them to invest in today. Our optical networks business still faces some specific supply chain constraints, but it's doing a good job managing the situation and demand remains strong. We believe the supply situation should continue to improve through Q4 and into the first half of 2023. In IP networks, we continue to progress well on our FP5 ramp up and are also making encouraging progress in web scale. And finally, in submarine networks, we continue to execute against its substantial backlog of subsea fiber deployments. While gross margin was stable, operating margin for network infrastructure was up 50 basis points due to operating leverage on fixed costs. In cloud and network services, there was a slight decline in net sales, but we continued to make progress with our portfolio rebalancing. Gross margin continued to show improvements, expanding by 140 basis points, while our increased investments in private wireless meant that operating margins showed a decline of 210 basis points. Yet, we saw continued momentum in our enterprise solutions business, which grew at a double-digit rate in the quarter. In Nokia Technologies, there was good progress in their new growth areas, including in consumer electronics and automotive, which have achieved more than 100 million euros in net sales over the last 12 months. from being negligible in 2018. The ongoing timing of contract renewals we have referred to previously continues to adversely impact the quarter. These renewals continue to progress and we remain confident in our ability to return to a run rate of 1.4 to 1.5 billion euros once these renewal discussions have closed. One of the biggest opportunities we have in the mid-term is to grow our business beyond CSPs into the enterprise segment. We believe this will be the fastest growing portion of our addressable market and our products are increasingly compelling. In recent quarters, we have highlighted how strong our order growth has been. In Q3, I was pleased to see enterprise accelerate strongly, delivering 22% growth in constant currency year over year, supported by the improving supply chain situation. We continue to have great momentum in the private wireless space where we added another 30 customers in Q3. We are building the engagements we need with our partner network to really scale this business for the future. I should also mention that we signed a new web scale customer for our IP routing products in the quarter. All of these points are very important for our longer-term strategy, as it's critical that we build momentum in enterprise to deliver on our longer-term growth ambitions. From what I have seen so far, I'm confident this will remain our fastest-growing customer segment over time. Two other topics I want to touch on before handing over to Marko. Supply chain and how we plan to navigate the ongoing macro uncertainty. On supply chain, The situation is improving, but remains tight. In many areas of the business, it's now becoming less of a constraint. In some areas, we were even able to catch up on some of our backlog from prior quarters. However, in other areas, such as in optical networks, it remains an issue. So overall, the picture is improving, but we still believe it will not be before the first half of 2023, before there are no longer material constraints on any part of the business. Finally, we fully recognize the ongoing macro and geopolitical uncertainty. If anything, those uncertainties have increased in recent months. There is clearly a risk that this could start to impact the capex spending of some of our customers. However, as we look ahead to 2023, considering the significant ramp-ups that are expected in regions like India, which are just beginning their 5G journeys, the ongoing fiber rollout, which is also now supported by a number of government funding programs, and the opportunities we see in enterprise, we currently expect our addressable market will grow on a constant currency basis. Against this backdrop, we believe we are putting ourselves firmly on a path to outperform the market and gain market share. We will not become complacent. and we will continue to evolve our plans as the outlook for our end markets become clearer. But I'm talking today about what we are currently seeing from a bottom-up perspective. With that, I'll hand over to Marko and look forward to your questions.

Thanks, Pekka, and hello from my side as well. If we now look a bit deeper into our financial results, Group net sales growth accelerated in Q3 to 16% on reported basis and 6% at constant currency. While FX had a clear positive impact on our net sales, we also saw constant currency growth across many of our regions. Once again, we had a strong growth in North America, increasing 10% year over year as ongoing 5G deployment in the region from WG growth in mobile networks. This was somewhat muted by network infrastructure, which declined, mostly due to the fixed networks, as continuous strength in fiber was not enough to offset declines in fixed wireless access, which is quite sensitive to a small number of customers. In Europe, net sales grew slightly in the quarter, and excluding the impact from Nokia technologies, which is entirely reported in this region, Europe would have grown at a double-digit rate. This largely reflected strength in both mobile networks and network infrastructure. Elsewhere, we saw growth in Latin America, Greater China, and Middle East and Africa, while Asia Pacific and India declined. India was impacted by 5G license timing with expected deployments to ramp up in the coming quarters. If we then turn to profitability, you can see the changes on the slide by business group. In mobile networks, our operating margin expanded by 250 basis points year over year, as the strong net sales growth also translated into good margin expansion. We continued to see a shift towards product sales and away from services, and the business also had a strong regional mix in the quarter, which we do assume will become less favorable in the fourth quarter. Network infrastructure continued the strong execution we've seen over the past couple of years, with operating margin up 50 basis points year over year. And this is largely thanks to the growth we saw in the business. Cloud and network services had a slight decline in profitability year over year, but this was due to the investments we are making into private wireless to ensure we capitalize on our early market leadership. And we continue to see strong double-digit growth in net sales in this area. And we are confident these investments into both our competitiveness and going market channels will pay off. And on Nokia technologies, the effects of closing some outstanding deals continue to impact us in the quarter. As we have stated before, we will prioritize making sure that we achieve the right deal instead of achieving specific timing, such as by the end of the year. In Group Common, we saw a net positive impact from venture funds of about 20 million as some underlying downward revaluations were offset by the continued strengthening of the US dollar. So overall, considering the progress of both mobile networks and network infrastructure, we delivered a good performance in terms of operating margins in quarter three. And now turning to our cash performance, we generated €266 million of free cash flow in quarter three, as outflows related to networking capital, taxes and restructurings were more than offset by adjusted profits. Within networking capital, we saw large movements across the individual components. Inventories increased €480 million in the quarter, as we continue to build inventory given the challenging supply chain environment, and as we anticipate the ramp-up of India 5G deployments. Receivables increased in the quarter, part of which was driven by a decrease of the sale of receivables. Liabilities also increased, which reflect the higher accounts payable and accruals for employee variable pay. Once again, we saw outflows of around 200 million euros related to payments of our dividend and continuation of our share repurchase program. In turn, this led to a net cash position of 4.7 billion euros at the end of quarter. And now looking at our total addressable market, we have updated this to show our latest view across business groups. While they have not been any major changes to any specific business group, we have seen some slight uplift across each, which led to higher rounding of the overall addressable market to now be 5%, which is up from the previous 4%. Pleasingly, we see robust demand across markets. Before turning to Q&A, I want to touch briefly on our outlook for 2022. Our full year net sales guidance remains unchanged in constant currency, reflecting the Euro-USD rate of 0.97. As of end of September, our net sales outlook is now 23.9 to 25.1 billion euros. We have also reiterated our comparable operating margin guidance, which is expected to be between 11 to 13.5%. While risks remain around the timing of outstanding licensing deals, assuming these close, we continue to track towards the higher end of our net sales range and towards the midpoint of the comparable operating margin range. We also updated two of our outlook assumptions today. The first one is financial income and expenses, which we now expect to be between 50 and 150 million euros this year and over the longer term, given the recent foreign exchange volatility and its related impact. And the second is around our CapEx assumptions. We have lowered our expectation for this year to 600 million euros and continue to expect around 600 million euro over the longer term. Of course, with some year to year variation. So with that, I will hand it back to the David for Q&A.