Nokia Corporation

Good morning, ladies and gentlemen, and welcome to Nokia's fourth quarter 2022 results call and group progress update. I'm David Mulholland, head of Nokia Investor Relations, and today with me in Espo is Pekka Lundmark, our president and CEO, along with Marco Viren, our CFO. Tom. Tom. 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, and we've 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 related to our comparable reporting. In our Q4 report and results presentation are both published on our website and they include both reported and comparable results and a reconciliation between the two. The progress update portion of today should be considered as part of the regular series of progress update events we've been doing. The presentation for that will be available online after the presentation is finished. In terms of the agenda for today, Pekka and Markku will give a quick overview of our financial results for 2022 before moving into the progress update. We will be aiming for the call to last around 90 minutes, but if the presentation runs slightly longer than planned, we will make sure to allow some time for Q&A. With that, let me hand over to Pekka.

Thank you, David, and hello, everyone, and thank you very much for joining us today. So as you have seen in the result, fourth quarter was a solid end to a year of acceleration. We pretty much delivered what we promised at the beginning of the year. For the full year, we had 24.9 billion euro sales, which was 6% growth year over year. And great fourth quarter, which ended the year, 7.4 billion euro, 11% growth year over year. And this is really important because we said in the beginning of the year that this would be a year of acceleration. We had declining revenue in 2020, 3% growth in 2021, and now we had 6% growth in 2022. In terms of profitability, first of all, full year comparable gross margin, which is not here on the screen, increased by 100 basis points to 41.4%. The full year operating margin was stable at 12.5%, which was a very strong result considering the 150 basis points of one-offs that we benefited from in 2021, as we reported a year ago. Q4 was strong. comparable operating margin was 15.5%, up from 14.2% year on year. This was partly due to Nokia technologies, which I will turn to in a moment. So in summary, this chart here shows the progress we made through the year. When we talk about acceleration here, you see for each quarter, our top line growth compared to the same quarter the year before. And you can certainly see acceleration here. Then down here, I hope this is readable. First of all, you have here four quarter rolling comparable gross margin for the whole group. And then this curve here is basically the same trend line without Nokia technologies. And then here you have the same graph for comparable operating margin. What I do want to note is that if you zoom into – I mean, technologies is, of course, one case that we'll talk about. Then there is Group Common, where we have Nokia Ventures. If you take the product businesses, which are mobile networks, network infrastructure, and CNS, On a fuller basis, these three businesses expanded their comparable operating margin by 120 basis points, which is, of course, part of this very good development that you see here. In terms of cash, we had net cash balance of 4.8 billion euros, which was slightly up year on year. Free cash flow for the full year was 840 million euro. Conversion was negatively impacted by networking capital growth, which is due to the accelerating growth. This will continue to be an issue also this year. Mark will cover this part later. in more detail. Cash generation is of course of critical importance for us also going forward. So then let's quickly look into each BG. And I start from network infrastructure. And what you see here is the four divisions of network infrastructure. IP networks, optical networks, fixed networks and summary networks. And these colors here represent the growth in each quarter. So IP networks had 11% and optical networks 21% growth. in Q4, fixed networks 8% and submarine networks 32%. Why is this important? Because so far as you remember, the NI growth, which has been very good growth, has been very much driven by fixed networks and submarine networks. But now what was extremely pleasing to see, and this was partially behind the very good margin development in the business, was that also IP networks and optical networks, who had that slightly lower growth earlier in the year, accelerated their growth. Overall, we had for NI significant margin expansion. Gross margin in Q4, this is cumulative gross margin for the last four quarters, but if you isolate Q4, we had a 560 basis points expansion in NI gross margin, and for the full year, 160 basis point expansion. Also on the operating margin side, which you see here, this is also four quarters rolling. There is a significant expansion. First of all, Q4 isolated margin was almost 16%, 15.9% to be precise, and the full year was 12.2%, which is 200 basis points. year on year. And remember, when the year started, we gave a margin target range of 9.5 to 12.5 to network infrastructure. So we almost hit the upper end of that range at 12.2%. So great year for network infrastructure. Then moving on to Nokia, sorry, mobile networks. What you have here is quarterly growth compared to the same quarter last year. Q4 last year, we had actually declining top line. Now we had both in Q4 and also for the full year, we had 3% growth, which means that the declining top line that mobile networks had been suffering from for some time has now been turning into growth, albeit still at this stage, fairly slow growth. Four-quarter rolling gross margin, you can see here an operating margin here, slight dip in Q4, but on full-year basis, we had 90% expansion in mobile networks operating margin to 8.8%. And also here, if you remember what we had guided in the beginning of the year, we said 6.5% to 9.5%, so we landed at 8.8%. So Q4 came in pretty much as we expected. Lower margin year over year because of regional mix shift. Basically, North America was front-end loaded in 2022. India growth accelerated in Q4, and this mix shift impacted margins pretty much as we expected. And now when we look into 2023 in mobile networks, we expect greater sessionality in our operating margin in 2023 with a slightly softer start to the year. But for full year 2023 in mobile networks, we target operating margin to be largely stable year over year. The range we are now giving is 7 to 10%. CNS work is gradually paying off. We had decent growth in Q4, 5%, 2% only over the full year. But what is very important in this business is that since we've been working on the product portfolio and the product mix, the positive gross margin trend has continued. It continued in Q4. The reason why it's not yet turning to more than five to six percent operating profit is simply that we invest. We have added significant investments in areas like private wireless campus networks, both product side R&D and go to market. And these are investments into the future. They are paying off in terms of faster top line growth, especially in campus wireless at the moment. and also, as you can see, in good gross margin development. So the work to refocus investments and rebalance the portfolio is paying off. Full year margin was 5.3%, and also here, you remember, we said in the beginning of the year that the year would be between 4% and 7%, and we landed at 5.3%. And then last but definitely not least, Nokia Technologies, which had an interesting quarter in many ways. Net sales was up 82% in Q4. The reason is that late in Q4, we received notice from a long-term licensee that wanted to exercise an option to extend their license indefinitely. This meant that all outstanding revenue for this license had to be recognized in the quarter, which amounted to 305 million euros, which we are highlighting here separately. Even excluding that, there was actually revenue growth between Q4 21 and 22. This recognition did not have cash impact on the business, but it meant, again, that operating profit was largely stable in 2022. Still, maybe one final comment on technologies before I hand over to Marko. We remain in two litigation slash renewal discussions. Several court rulings have validated our position in these litigations in Nokia Technologies, giving us confidence in our approach to prioritize the value of our portfolio over achieving specific timelines. And then finally, on a positive note, We renewed our patent license agreement with Samsung on a longer-term basis earlier this week announced. This underscores Nokia Technologies' strong patent portfolio and supports our ability to deliver stable operating profit in Nokia Technologies over the long term. Now I will hand over to Marko.

Thank you, Pekka. Good morning from my side as well. And I will briefly go through some financial performance breaches and cash flow, and then also touch upon our targeted addressable market and outlook. So starting with the growth, just like Pekka mentioned, we had a very good growth in quarter four, 11% in constant currencies. And if you look, you can see that most of the geographies actually had a very good positive growth. And North America, just like we expected, because of the very front-end heavy load investments in our CSP customers, we expected that the quarter four will be a little bit muted, and exactly what happened. Just a couple of words about a few regions. Starting with Europe, you can see a very good growth. But as we report, the whole technology is here. So even excluding that, you can see that we had a 13% growth in Europe. And this is actually coming both from NI and MN had double-digit growth in Europe. What comes to India, this is, of course, propelled by the heavy deployments of 5G. And here we see very heavy growth in mobile networks. But I must say that also network infrastructure had a very high double digit growth rates in India. And in Asia Pacific, actually all businesses had a good growth. Then going looking to our comparable operating profit bridge from quarter four last year and seeing what has happened. And of course, you can see that Nokia technologies had a very big impact in quarter four. But also I want to highlight the 560 basis points improvement that network infrastructure had in quarter four compared to same quarter in 21. And mobile networks, of course, this regional shift, but also the fact that their OPEX increased slightly because of R&D mainly. You can see that it was slightly below a year before. And then in group common, I just want to mention that the venture fund is reported here and they actually had a minus 90 million negative impact in operating profit in quarter four. And last year we had a plus 60. And this 90 million, I would say that big part of that is actually currency fluctuations because of the funds are reported in USD. And if looking the full year now, so Pekka mentioned the 150 basis points, one of that we had in 21. So the starting point for 22 was actually 11%. And here you can see that both mobile networks and NI had a huge contribution in the development towards 22 operating profit margins. And we had some headwinds in FX, and the reason is that we hedged our operating profit. So while in 2022, we saw an increase in USD, and that boosts our top line, but keeps the operating profit intact. So that's why there's a negative impact on our margin. And then turning into cash flow, and you can see here that we had some negatives in our cash flow development during the year. We built up networking capital, and this has been the reason that, first of all, our growth is tidying up more networking capital, but also inventories, because the lead times in supply chains has been very long, and we want to secure that we have the products that we need to deliver to our customers. So this is the reason I'm driving this. In Nokia technologies, just like Pekka mentioned, the 305 million was non-cash. So that's why actually the difference between operating profit and cash flow was 800 million in technologies. And the cash conversion ratio ended up at 27%. And this is a low end of the guidance that we had between 25 to 55%. In total, the full year cash flow was 841 million. And just like Pekka mentioned as well, the net cash ended up at 4.8 billion. And looking forward now in 2023, you can see the different parameters here and how they are impacting our cash flow, what we expect, that conversion ratio will be between 20 and 50%. And again, networking capital, due to the big growth that we have, and also the regions we were growing, is actually tying up capital. in net working capital. Another issue is that we see that taxes are actually higher cash taxes, and this is based on the legislative change in US where you have to capitalize R&D costs. And this means that cash out in those early years are increasing. But looking beyond 23, we believe that 24 cash flow will be significantly stronger than 23. And while we are working towards our longer term targets between 55 to 85% conversion. And then a couple of words about the market estimates from our side. We believe that in network infrastructure markets, and this is now excluding submarine, that our growth will be about 4%. When it comes to mobile networks, and this is now excluding China, so we believe that growth will be about 5%. And of course, this is also heavily impacted by the rapid growth in India. And then cloud and network services, you can see a 4% growth expectations on that market. And before turning back to Pekka about the progress update, I just want to give you some color on our guidance. Net sales between 24.9 to 26.5 billion. And this means that we expect the growth to be between 2 to 8% in constant currencies. And, of course, the range is a little bit wider than normally, and there's some macroeconomic uncertainties as well, and this is the reason for the wider range here. When it comes to operating margin, we guide between 11.5% to 14%, and free cash flow, I already mentioned, between 20% to 50% conversion ratio. And here, as I mentioned, we believe that the... accelerated growth that we have and the regions where we grow are tidying up more networking capital. So this is the reason. So I hand back over to Pekka now for progress update. Thank you.