Nokia Corporation

Hi everyone, and welcome to the Nokia Q1 2023 results call. I'm David Mulholland, Head of Investor Relations, and today with me is Pekka Lundmark, our President and CEO, along with Marco Wiren, 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 20 Act, which is available on our investor relations website. Within today's presentation, references to growth rates will mostly be on a constant currency basis, and margins will be based on our comparable reporting. Please note that our Q1 report and the 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 on our financial and strategic progress in the quarter, and then Marco will go into a bit more detail for the key factors impacting our financial performance along with our outlook for 2023. With that, let me hand over to Pekka.

Thank you, David, and good morning, everybody. Q1 has been a busy and exciting quarter for us. We started this year with the unveiling of a renewed corporate strategy and, as you remember, refresh brand at Mobile World Congress in Barcelona. We shared the six pillars of our updated strategy in Q4, which you see on this slide, so I won't go into detail about them again. But in general, in Q1, we have executed well on gaining market share in the CSP space, which is the first pillar. You can see that very clearly when you look at our growth rates. And we have also seen enterprise, pillar number two, continue to rise as a share of the group sales and was another quarter at close to 10% of the group growing 62%. Regarding pillar three and actively managing our portfolio, there were some actions taken in Q1. We have signed agreements to divest part of our RFS business and we have sold our vital QIP business. Also, we recently agreed to sell our stake in the joint venture TD Tech subject to closing conditions. These actions won't significantly impact our financials, but are important proof points of how we are managing the portfolio. Underneath the six pillars are four enablers. Talent, which is about developing future fit talent. Long-term research is important. We believe that sustained technology leadership is a key driver of our success. Digitalization, we are increasing the digitalization of our own operations to increase our own performance and productivity. And finally, brand. The new branding reflects who we are today, a B2B technology innovation leader unleashing the exponential potential of networks. So with that, let's now turn to the financials. We delivered a solid start to 2023 with Q1 net sales growing 9% in constant currency. We saw double digit growth in both network infrastructure and mobile networks, reflecting the ramp up of 5G deployments in India as expected. We also saw growth in CNS and I will come back to the decline in technologies later. Our comparable operating margin was 8.2%, a decline of 270 basis points year on year. which was primarily due to expected greater decisionality in mobile networks profitability, a weaker contribution from Nokia Technologies in the quarter, and a negative impact from venture fund investments. As we look forward, we are starting to see some signs of the economic environment impacting customer spending. However, given the ongoing need to invest in 5G and fiber, we believe this uncertainty is primarily A question of timing. We will maintain our course discipline to ensure we can successfully navigate this uncertainty and we remain on track to deliver another year of growth in 2023 with our outlook unchanged. If we now turn to address each of the business groups in more detail. And first, looking at the performance of network infrastructure, we delivered 13% growth year-on-year in constant currency. Optical networks grew 45% with good engagement for our PSE5 solutions and with some benefits from catch-up sales from the supply chain challenges we saw in 2022. IP networks grew 13% driven by North America and also a strong performance in enterprise. Our new FP5 based routing products are now shipping and we accept the gradual transition to the new platform in the coming years. We saw a small decline of 5% in fixed networks against the tough year-on-year comparison. Weakness in fixed wireless access offset continued robust demand for fiber. Summary networks grew 11% as web-scale driven project deployments continued to drive growth. Gross margin expanded 330 basis points as a result of product mix benefits and lower costs in areas such as logistics which have declined versus last year. Operating margin of 15.3% was up 540 basis points versus last year, reflecting our gross margin expansion which was only partially offset by higher OPEX. Going forward, Growth rates are expected to slow in the coming quarters as Q1 benefited from some catch-up as supply chains normalized and with comparisons becoming more challenging. But we remain confident in our competitive positioning. I'd also like to highlight the product launch we made in optical networks in Q1. Just before Mobile World Congress, we unveiled PSC6S, Nokia's sixth generation super coherent optical engine for high performance optical networks. With this product PSC6S, Nokia brings to market new optical transport capabilities including the ability to deploy solutions with 1.2 terabits per second for wavelength and because we are able to connect two chips together on a single line card we can support up to 2.4 terabits per second which is an unmatched capacity on the market. We have also set a new benchmark in performance enabling reach over 2000 kilometers at 800 gigabits per second. Sustainable network evolution with 60 percent less power consumption per bit compared to previous generations. We have had great take up of our PSC5 solutions already and we see good potential to continue that momentum with PSC6S. Our interactions with customers have been extremely positive so far. Then turning to the next business group, mobile networks. Also there it was great to see a 13% growth in the first quarter. It was driven as we expected by the ramp-up of 5G deployments in India. But we also saw good traction in Europe. Together these more than offset the expected softening in North America sales in the quarter. North America had seen a front-end loaded investment profile in 2022, so this quarter marked the normalization of customer spending and also reflected some inventory depletion. With respect to gross margin, the regional shift had an impact as expected, but disciplined cost control partially offset this at the operating margin level. As we look forward, we expect to see broadly similar trends in the second quarter with continued pressure on gross margin from regional mix before we see this start to progressively improve in the second half of the year. As I mentioned earlier, It's clear that there is some economic uncertainty impacting customer spending plans. In that regard, it is worth noting that if we look globally, excluding China, only about 20% of sites, mobile base station sites I mean, are currently active for mid-band 5G, which should help illustrate how much investment still needs to be made. And even if we look at some markets like North America, which had invested earlier, mid-band side penetration is still only around 50%. At Mobile World Congress we also unveiled Habrock, our latest generation of industry-leading air-scale radios which deliver future-ready performance. Habrock has high output power for increased coverage while its lower power consumption improves energy efficiency by 30% lowering total cost of ownership. This new generation of radios enables form factor improvements over earlier generations, while the Havrock 64 weighing only 24 kilograms, making them fast and easy to install. And of course, they are all powered by our cutting edge Refrag chipset, some of which are based on 5 nanometer technology. These optimized products refined radio performance with ultra-fast 5G speeds and capacity where it's needed. And then moving to cloud and network services business. CNS grew by 3% in the quarter with growth in both core networks and enterprise. Gross margin declined as we saw a shift from software sales to lower margin hardware sales in the quarter. So that was primarily a mixed question. Operating margin was minus 2.6% resulting from lower gross margin with some increases in SG&A and R&D expenses as we continue to invest to strengthen leadership, especially in campus wireless. Our rebalancing work in CNS continues and in the quarter we divested Vital QIP, a relatively small IP address management product, which was within CNS. For the full year, we continue to assume a 5-5% to 8-5% operating margin, keeping in mind this remains a business with significant seasonality in Q4. Nokia Technologies net sales declined by 22% in the quarter. On a year-on-year basis, there were three factors driving this decline. The fact we no longer benefit from the license that had an option exercised in Q4, lower net sales from a smartphone vendor whose market share meaningfully declined, and finally, lower brand licensing. Excluding these three factors, our licensing income was essentially stable also accounting for the renewed agreement with Samsung. We know there have been many questions around our technologies business in the past year as we navigate the smartphone license renewal cycle and with this slide we wanted to give you some more detail on the moving parts. We start from the 1.4 to 1.5 billion run rate we talked about back in Q2 2021 before some agreements started expiring. You can see the moving pieces from then to the 1 billion run rate you now see in Q1 The two biggest factors are the deals that are currently in litigation or renewal and the 10-year license which was signed in 2014 but then saw an option exercised in Q4 2022 which meant all outstanding revenue was recognized for that license Consequently, this agreement no longer benefits our income statement. There have also been some agreements with smartphone vendors that are no longer active or whose market share has meaningfully declined, which need to be reflected as we go through the renewal cycle. You can also see the benefits we have seen from our progress in growth areas like automotive and consumer electronics. And finally, there is the impact of brand licensing, which was weak in Q1. This brings you to the current 1 billion run rate. We remain confident we will return to the 1.4 to 1.5 billion run rate. The biggest step to getting there is smartphone license renewals. As you know, we are in active litigation on some of those. We remain confident in our position and that we will see a good resolution to these deals. We also continue to see opportunities in the future to continue to expand in our focus growth areas. Looking now at another one of our focus areas, the enterprise customer segment. In Q1, we saw continued momentum in our enterprise sales with growth of 62% and it was almost 10% of group sales for the second quarter in a row. Growth was particularly strong in web scale where sales more than doubled in the quarter. Private Wireless continued to grow strongly double-digit and now has more than 595 customers. Customer engagement also remains positive as we added 73 new enterprise customers in the quarter. And with that, let me hand over to Marco who will take us through the financials in a bit more detail.

Thank you, Pekka, and hello from my side as well. So looking at our net sales performance per region, our 9% constant current growth, was built by India as expected with 5G deployments continuing to ramp up for mobile networks in Q1. But also network infrastructure showed strong growth in the region. In Europe, you see that we had a 30% growth excluding Nokia technologies with strong WGC growth across the other three BGs. Elsewhere, we saw growth in both Middle East and Africa and Latin America. These were somewhat offset by North America, which declined 12% overall, driven by mobile networks and partly offset by increases in network infrastructure and cloud and network services. Greatest China and Asia Pacific also declined somewhat, while submarine networks grew by 11%. So in summary, Quarter one largely played out as we expected with 5G deployments in India heavily influencing our Q1 top line. Then turning into the operating margin performance in the quarter and you saw the decline 270 basis points and ended up at 8.2% operating margin. This decline largely reflects the impact of regional and product mix, especially mobile networks and cloud and network services. We did see some benefit from the 9% group net sales growth, which provided some operating leverage. You can also see that the lower overall level of net sales and technologies had a negative impact on operating margin. and finally our venture fund had a year-on-year negative impact of 70 million euros which is recorded in other operating income and expense and the low value in this quarter of 30 million was evenly split between FX fluctuations and revaluations. And then Looking briefly at offering profit performance by business group. Without repeating what Pekka already said in his remarks, you will see that the strong profit expansion in network infrastructure was somewhat offset by lower profits in cloud and network services and mobile networks. Also, Nokia technologies declined as we explained. and drive profits lower and also the Group Common which is negatively impacted by the Nokia Venture funds as I mentioned in the previous slide. Then moving to cash, free cash flow in the quarter was negative 147 million euros and the main driver of this was a decrease in accounts payable driven by quarter on quarter decrease in cost of sales within networking capital Cash was also negatively impacted by cash taxes, capex, and restructuring costs. And I'm pleased to see as well that we returned about 190 million to our shareholders through both dividends and share buybacks. This all led to net cash balance of 4.3 billion euros at the end of the quarter. And then if you look, our addressable market and we have updated this to show our latest view across business groups and the adjustment we've done is on our view on mobile networks and we've taken down that from five percent to four percent as we start to see some impact of the economic situation on customer spending and CNS has also reduced slightly from four to three percent while network infrastructure remains at 4%. And then turning to our outlook for the year, which remains unchanged in constant currency, we did adjust our net sales outlook to reflect latest FX rates with the range now at 24.6 billion to 26.2 billion euros. and we also reiterated our comparable operating margin guidance of between 11.5 to 14 percent and notably we updated two of our output assumptions today. The first one is the group common and other operating profit which is now expected to be negative 350 to 400 million and this is driven by the negative impact that we had from Nokia Venture Funds in Q1 and how the valuations have developed in venture markets.

And the second is around our CapEx assumptions.

We have increased our expectations for this year to 700 million euros.

And finally, a mention of our updated Capital Management Policy, which we announced earlier in quarter one. Nokia's previous target in terms of cash management was to maintain a cross-cash position equivalent to at least 30% of net sales. And going forward now, we will target to maintain a net cash position in the range of 10 to 15% of net sales. So change from cross-cash to net cash. And this is to ensure that we can continue to invest in the necessary R&D to maintain and further improve our technology leadership, also fund working capital requirements in support of our growth ambitions, and to maintain some flexibility for Bolton acquisitions. And considering the ongoing macro uncertainty Our expected growth and working capital requirements in 2023, along with already announced shareholder returns, we are not imminently planning to take action to align with this target. However, assuming the expected significant improvement in cash generation in 2024, we would then look to start acting to align the net cash position with the long-term target. and this can be done for example through increased shareholder returns and or potential bolt-on acquisitions. And with that I will hand over back to Pekka for a few concluding remarks.

Thank you Marco. If I can just very briefly summarize how we see our Q1 performance before we turn to Q&A. So we had said 2023 would be another year of growth and we have started the year strongly in that regard with 9% net sales growth. We are executing on both our ambition to gain share in the CSB space and grow enterprise as a percentage of our net sales. As we had said previously, seasonality will be different this year to the last two years, but it is playing out largely as we expected and we remain on track for our full year targets. Looking forward, there are some signs of the economic outlook impacting some customer spending plans. But if we maintain our cost discipline and execute on our strategy, I believe we are in a strong position to navigate the challenges ahead. And with that, I'll hand it back to David for the Q&A.

Thank you, Pekka and Marco, for your remarks. Before we move to the Q&A session, I just wanted to highlight that we will be hosting our next progress update presentation on the 15th of June, which will be on our network infrastructure business.

The event will be in the afternoon in London, and it will be a hybrid event for those who aren't able to join in person. So we'll also be webcast.

But with that, let's start the Q&A. And as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow up? Alice, could you please give the instructions?

We will now begin the question and answer session. If you are 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 and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. I will now hand the call back to Mr. David Mulholland.

Thanks, Alice. We'll take our first question today from Andrew Gardner from the city. Andrew, please go ahead.

Thank you, David. Good morning, Pekka. Good morning, Marco. Mine was on sort of the relationship between technology and your four-year guidance. Clearly, we've had a slow start to the year in technologies, similar to how we did last year where we were working for some of the license agreements to come through, which of course didn't. Thank you. Thank you, Andrew.

That's correct that we have, I would say, two biggest filters. The agreement that you mentioned, legacy agreement for 2014, that was recognized in the end of last year. And of course, the two big ones which are in litigation and renewal. And just like Pekka showed in his slide, we have some agreements with smartphone and others. We believe that the underlying fundamentals remains strong and I would say that the Samsung deal that we made is a good example of that and that's why we are confident that our Our portfolio is very strong and we will get back to the annual run rate of 1.4 to 1.5 billion net sales after we have concluded these current licensee renewal cycles.

Can I add, André, just one point to reinforce the importance of the Samsung renewal. We, of course, when we created this plan to get to this 1.4 to 1.5 billion run rate. We had made certain assumptions as to what deals that run rate would consist of with then value allocated to it. And I'm happy to confirm that the Samsung deal is in that ballpark where it is expected to be. So that is an important part of this 1.4 to 1.5 billion strategy.

Did you have a follow-up, Andrew?

No, thank you very much.

Thank you, Andrew. We'll now take our next question from Alex Duval from Goldman Sachs. Alex, please go ahead.

Yes, many thanks for the question. I wanted to focus on network infrastructure, where you had another very strong quarter in the context of some peers actually talking about weakness. So I wondered if you could explain the delta there and how sustainable is the momentum for the balance of this year and perhaps even into 2024, I think you did state that some of the catch-up from supply constraints will fade in some of the areas. So to what extent do you think underlying strength will continue? Many thanks.

Yes, thanks, Alex. And of course, as we have discussed many times, the fundamental thing that is driving all this that we are seeing in network infrastructure is the technology investment that we have. and the incredible strength of the portfolio as we are seeing in IP networks in fixed broadband now perhaps a bit more lately also in optical networks and of course in submarine networks. So that is the fundamental driver that is helping us to take market share and that definitely continues to be our goal also going forward. We have seen two and a half years of excellent execution from network infrastructure and of course this Q1 is a fantastic testimony of the strength of the portfolio. Just a little bit of caution here because there was Some strong ordering last year because of worries that people had regarding supply chain capabilities and so on, chipset, semiconductor, supply chain problems, etc. And there is some catch-up deliveries and catch-up sales now in this. And that is the reason why we are just saying that even though our position is strong, it continues to be strong. We need to be a little bit careful that you don't just extrapolate from Q1 towards the rest of the year. Of course, also in this business, we have a lot of customers who are currently thinking that when should they invest, how much should they invest. The economic uncertainty is showing also in this business. So just a little bit of caution while, of course, the overall picture in this business continues to be extremely positive.

Thank you very much.

All good, thank you.

Thanks, Alex. We'll take our next question from Daniel Gerberg from Handelsbanken. Daniel, go ahead.

Thank you very much, David, and good morning. Yeah, my question would be a little bit if you could give an update on the competitive landscape. We heard a little bit of rumors from Samsung taking share in perhaps in the U.S. and also An update on the European landscape would be great with regards to Huawei etc. Thank you.

Well, first of all, we do not comment any rumors. We have a strong position in the US and actually after some of the decisions that customers made in mid 2020, which led to a lower market share for us, we have not lost any market share in mobile networks in North America. Actually, we have regained, we have taken back some market share with some of the tier two, tier three suppliers and our relationship with also Also T-Mobile is extremely strong. We are clearly one of the key suppliers and we have a long-term 5G agreement with them. Then the other part of the question, you broke up a little bit, but did I understand correctly that you asked about Huawei and swaps and so on?

Yeah, correct, and European markets mostly.

Yeah, okay, European markets. So as Marco said, we are We are growing in mobile networks in Europe. We had double digit growth there overall. If you exclude Nokia technologies from the figures, as you should, we had 13% growth in Europe in Q1, which was across the board, including in mobile networks. So we are clearly taking market share in Europe at the moment. And the big picture when it comes to and so on. Huawei swaps continues to be roughly the same as we have said before that we have taken about 50% of those opportunities.

Thanks, Daniel. We'll take a question from Simon Leopold from Raymond James. Simon, please. Thank you for taking the question.

I appreciate you're not explicitly guiding for the June quarter and you've remain, I think, upbeat, relatively speaking, on the full year. But given what we're hearing about inventory activity at the operators, and I think you've alluded to this, but if we could get a little bit of insight on how you're thinking about the absorption of capacity by carriers in the June quarter and how to think about what you really mean by Not exactly seasonal. And then I've got a quick follow-up.

Okay, if I start, then Marco will feel to add if there's anything to mention. But this whole inventory question, first of all, when we look at the big picture, this has been pretty much a North American story and very much a mobile network story. So we are talking about mobile networks in North America. We do believe that mobile networks second quarter will see similar trends as the first quarter. But then again, since we are maintaining our full year assumption at 7 to 10 percent comparable operating margin, there you see that we are expecting a recovery than during the second half of the year. But again, this is a mobile network story. We are not seeing similar trends in the other businesses.

Thanks. And just as the follow-up, you continue to sound, I think, somewhat more upbeat on mobility than some of your peers as well as some of the market research. And I know we talked about this at Mobile World Congress, but I'd like to sort of revisit how you're thinking about your business for the full year and beyond in terms of this idea that, you know, we peaked and this is a difficult year. Could you maybe unpack a little bit about sort of the Nokia specific views on mobility trends?

I think the difference between what we are saying that what both market analysts and to some extent some of our competitors are saying, I mean, the difference could be the pace of deployment in India. The North American view is pretty similar. I can't see any kind of big differences. Whether you compare us to what our competitors are saying or what market analysts are saying, we are seeing similar trends, including the fact that these issues will continue in the second quarter. But then, especially comparing us to, for example, Deloro, we seem to be and more bullish on the size of the Indian market this year. And we believe that this pretty much explains the difference between our estimates and what they are saying. Thanks for that.

Thanks, Amit. We'll take our next question from Alexander Petert from Société Générale.

Yes, good morning and thank you for taking the question. I would have just two questions. The first one would be Thank you very much. Thank you very much.

That will be a study that you will see throughout the year. Clearly the biggest needle mover compared to H1 and H2, which is driving the 7-10% full year forecast, is North America. We do expect, as I said earlier, North American volumes to recover in H2.

Just to add to what Pekka said, we said earlier as well that we believe that The volume will give us leverage on the cost side and that's why we focus on the operating margin and not on gross margins.

Excellent, thank you very much. As a follow-up, please, on network infrastructure, we understand there was a catch-up related to the easing of supply chain constraints. Would you be able in any way to quantify this for us or maybe indicate If we should see much lower than usual seasonality in the second quarter versus first, I know you don't quite guide the quarters, but it would be quite important to know if NI is going to go down in revenue terms in Q2 versus Q1. Thank you.

I actually answered this question already earlier, but I'm not going to go into details when it comes to second quarter. We made an exception when it comes to mobile networks because we clearly see similar trends there as in Q1. Without repeating what I said about NI earlier, we maintain the full year 11% to 14% for the reasons that I described. There was some catch-up. In catch-up sales in Q1 there is some general uncertainty on the market and that leads us to maintain the full year 11 to 14 percent.

Thank you very much. Thank you. We'll take our next question from François Bouvier from UBS. François, please go ahead.

Hi, thank you very much. My question is more, you mentioned the trend in 2023 and the H2 recovery. Thank you very much. Thank you very much.

Of course, in mobile networks, as I said, the fundamental driver as we see it in 5G is is that how big part of the networks have been upgraded to things like mid-band capacity which is really the thing that is driving the data capacity in the network because the data traffic will continue to grow we are not seeing that slowing down despite of the economic uncertainty so the big picture remains healthy the operators will have to continue to invest if they want to stay competitive Right now there is some hesitation because of the economic uncertainty because higher interest rates and then also some of the supply chain normalization which means that some of the inventories that they have built they are coming to a conclusion that they will not need them anymore but the fundamentals in this business we do believe remain healthy. Then of course Every operator need to make their own public comments about their capex and you will have seen what the Americans have said about 2024 capex. Again, as I said earlier, only 50% of the North American 5G sites are currently have been upgraded to mid band. So there's a lot of work to do there as well. I'm not going to get into 24 guidance today. What we said in the progress update after Q4 obviously remains that our very clear ambition is to drive mobile networks into double-digit profitability.

Thank you. And maybe my follow-up would be on Europe specifically and your market share there with Huawei getting into maybe We move from part of the network accelerating in some regions like Germany potentially. How is your market share now? I mean, what is your market share in Europe today? And what is your market share in the deals you sign? I mean, do you see strong drivers? Is it visible really in your P&L, this dynamic, and how long it will last would be great. Thank you.

Do you have, Marco, the market share?

Yeah, what comes to 4G, 5G market share, so we believe that in Europe we are around 29-30% somewhere there. And just like we said earlier, on those deals where customers have changed the vendor base, we have won about half of those. So we believe we have a very good position and just a You saw as well in quarter one, we continue to grow in Europe again in mobile network side with a very good growth rate. And this is evidence that we are taking market share in Europe as well.

If you take Dell Auto figures in Europe, which we do not believe that would be far from the truth, they are saying this is at the end of 2022. 29.2% and that is 2.9 percentage points increase in one year. So in mobile networks we now have four to five quarters behind us where we have taken market share globally outside of China. So this is a strong proof point of the return on investment that we are getting on the R&D and of course the latest Thank you for taking my questions. I have two. I will go one at a time. And firstly, just on your network infrastructure business,

which had a very strong margin again this quarter but with the lower margin optical business grew the strongest and how should we understand the very strong year-on-year margin progression this quarter given the, I would argue, the slightly unfavorable mix for that division. Which business within ANAI had the strongest improvement in margin?

Well, first of all, because we now have great top-line growth in in IP networks, 13% constant currency growth, and because that business has the best profitability in that business group, such drive the margin. So that's the mix between businesses inside NI. But I also would like to highlight optical networks because there is, as in all these businesses, there is a heavy R&D cost, and then there is SG&A as well, So when you have like in this quarter 45% growth, that delivers a pretty healthy operating margin leverage as well. So those would be the two things that I would highlight as drivers behind the NI margin.

Thank you. Yes, my follow-up is we have seen quite a significant decoupling of growth trajectory between Wireless and wired networks equipment spend in North America. And would you attribute this more to the high inventory level related to 5G or simply operators is shifting CapEx towards wired following the big 5G in North America? Obviously, I think it's probably both, but would you attribute this more to customer stocking?

The latter one is something that actually operators should comment. We are seeing, as we commented in the report, we saw strong development in network infrastructure in North America at the same time when we saw weakness in mobile networks. And again, that mobile networks weakness in a way is a double whammy that you have both and a slightly slower construction pace, and then you have inventory depletion. So it's a combination of the two, but right now we are not seeing this in the same way in NI.

Thank you, Joseph. We'll take our next question. Thank you. Stefan Slilinski from BNP Paribas. Stefan, please go ahead.

Great. Thanks, David. And hello, Pekka and Marco. Just wanted to get a clarification on the comment during the prepared remarks around the net cash longer term only required to be 15% of sales. Did you say that it was after 2024 that you would look to put that into place? And I think you said you could do that either through substantial M&A or buyback. So just kind of wondering how you would decide between the two. and if it was more substantial M&A, what areas you might be considering for that. So that would be my first question and just a quick follow-up is considering some of the early signs we're seeing about a broadening weaker macro environment, just wondering if there's any more cost-cutting initiatives that you're taking or could take in order to ensure that margins are preserved going into next year. Thank you.

Yeah, thank you. and what comes to the capital management policy I would say that first of all we want to sustain and secure that we have a solid overall financial position and what counts the timing of reaching the target we've said that we don't take any immediate actions due to the fact that that we see a growth in 2023 which is tidying up more working capital at the same time there's macroeconomic uncertainties as well and and that's why we said that we will look into that look into taking actions in 2024 where we expect that cash generation will improve what counts to our M&A activities and we We've said bulk on acquisitions could be one way and or more returns to shareholders. We haven't specified more than that. And what comes to M&A in general, we don't have any plans to make any big acquisitions. It's more targeted to secure our technology leadership and offering towards our customers and looking those kind of acquisitions.

and then just to follow up on me of course you should not forget that we just increased our dividend from two cents to three cents per quarter that's a 50% increase and then we are continuing into the second 300 million year of this 600 million buyback program so we are returning and remember this free cash flow conversion guidance of 20 to 50 percent of of Net Sales this year is something that we need to keep in mind as well.

Thank you, Stephan. We'll take our next question from Richard. Sorry, we didn't answer the question in restructuring.

Sorry, what was the other question?

Stephan, I guess if you want to repeat it, but if our follow is... Of course, yes.

Any cost-cutting initiatives either underway or could be planned if the macro environment does continue to weaken throughout the year to preserve margins for next year? Thank you.

First of all, we still have this 600 million program ongoing that we said that would continue until the end of 2023. So it means that we are continuously trimming the cost base. So this is even without any new announcements or anything like that, this is something that we do all the time and the businesses have full responsibility for keeping their cost base in shape and of course the businesses and we in group management we are paying a lot of attention to the macro environment and we are adjusting the cost management accordingly. We are not making any new announcements today on this one but I just want to highlight that this does not mean that there would not be actions ongoing all the time.

Thank you, Stephan. We'll take the next question from Richard Kramer from Arezzo. Richard, please go ahead.

Thanks, guys. Good morning. Pekka, can you give us a little bit more visibility or update us on the sustainability of that growth rate in enterprise given the new customer wins? We've seen that have fits and starts in the past. where you had a very good growth rate one quarter and then it tailed off the quarter after and maybe can you give us a bit more detail of you mentioned web scale and hyperscalers can you give us a sense of what portion of that enterprise business is now focused on the very large hyperscalers versus the long tail of private wireless and enterprise customers and then I'll have a quick follow-up. Thanks.

The web scale part, we are not disclosing it in monetary terms, but what I can say is that it is still a fairly small part of the overall enterprise business, which obviously was the total enterprise 2 billion euro last year. Am I going to promise that the 62% growth rates will but remember Q4 was 40 what was it 49% I think and Q3 was was it over 20% yeah 20 something percent so we start to have some track record on this and of course this is important because and we said that we will have a strong double-digit full-year growth this year. But again, there could be jumps up and down also on individual quarters because some of the deliveries can also have some bulkiness because there is, remember, in addition to the web scale deals and campus networks, there is also wide area private networks in that mix for authorities. for example for utilities and so on. So you could see some lumpiness but the general direction is good. We have a strong pipeline of new opportunities and of course the difference between this customer segment and the CSP segment is that here it's really up to us and take it. I mean there are thousands and thousands of potential customers whereas on the CSP side we are fairly dependent on a small number of customers.

And then a quick follow up for Marco, very helpful slide number 11 with the bridge of Nokia Technologies. But with such a huge amount sitting in these smartphone agreement renewals, can you just help us understand how you're handling the costs of all that litigation against those renewals right now? Are those costs being taken through the P&L today? or are they being put off until an agreement is reached and that might have a big impact on profitability when you finally are able to reach terms?

Thank you. Yes, we take litigation costs in our P&L immediately. And now, of course, when we have these two litigations, you see a bit more litigation costs. But of course, we have other costs in the technologies, OPEX as well, as we have R&D, different patent portfolio costs, decent development, and other licensing-related expenses that we have there. But we always take those immediately in our P&L. Okay. Thanks, guys.

We'll take our next question from Sebastian Stavlovits from Capital Shibre. Sebastian, please go ahead.

Hello and thanks for taking my question. One follow-up on one question previously on the market growth or market outlook for 2024. You answered on a mobile network, but what is your view on the market trends for NI and the different business within NI and also on CNS? How do you see the demand developing beyond 2023? And a second question would be on this patent litigation with the Chinese smartphone OEMs. Could you please make an update and tell us a little bit where your litigation are standing right now? Have you made any kind of progress? How the situation is evolving on these specific litigations? Thank you.

Okay, if I take the first one and Marco takes the second one. So, in our market growth rates, we actually gave some estimations in connection with the Q4 progress update. IP networks CAGR 3%, fixed networks CAGR 4%, and optical networks CAGR 2%. So these would be the overall market growth rates. We have not looked into specifically 2024 at this time. These are kind of longer-term underlying growth rates. Of course, What means longer term in this case, 2022-25, that's what we said in January for the next three years, CAGR at constant currency. That's what we are looking at at the moment. But of course, this is something that we are following up all the time, depending on how the general economy develops from here.

Yeah, and what comes to the litigations on those two cases, I suppose you are referring to, we have... Continuous wins also in different jurisdictions. The latest one came from Germany where we had a positive outcome from against Vivo and then what comes to OPPO I think the latest one came from UK where the court ruled in our favor there as well and What comes to court in Brazil, they also granted us a preliminary injunction there. So we, step by step, we are proceeding here what comes to the litigation proceedings. But at the same time, of course, we continue to negotiate with both parties to find a suitable solution. But as we said before, we are not targeting any specific timeline here. We want to Thank you, Sebastian. We'll take our next question. Sami Sarkemi is from Danske Bank. Sami, please go ahead. Hi. Can you please talk about developments at CNS and Q1?

You did flag a weak mix with higher hardware sales. Is this temporary in nature and is it related to 5G core or the enterprise business? And then maybe as a follow-up, what is the margin impact from strong enterprise growth during the past few quarters on CNS?

Okay, thank you Sami. First of all, I would say that the The margin shift that we had in quota one is not due to the enterprise sales. It is purely I would say mixed between software and hardware and in quota one we had larger share of hardware shipments than we normally have and a little bit lower software so this was the reason and we expect and the mix having a little bit headwind in quarter two as well. But remember also this is software type of business so normal seasonality is that most of the profit is always coming towards the end of the year and this is exactly what we expect here as well and that's why we have the full year guidance and we reiterated that again as well that that what comes to our guidance assumptions specifically for CNS, we assume to have 5.5 to 8.5% operating margin for the full year.

Okay, thanks. We'll take our last question from Sandeep Deshpande from JP Morgan. Sandeep, please go ahead.

Yeah, hi. Thanks for letting me on. My question is, sorry, I don't know whether this was asked before, Is the weakness... I mean, you've seen two consecutive quarters in which your gross margin has been impacted in mobile networks. I mean, you talked just now about software-hardware mix. Is this what is going to change into the second half of the year, which will improve the margin in mobile networks? Because geographically, the mix has changed, and that is probably not going to change into the second half of the year.

Well... The reason for the gross margin drop is specifically the geographical mix and that was actually there already in Q4 last year. So we now have two quarters of weaker volumes in North America and mobile networks. and that is expected to continue as I said earlier through the second quarter and then we are expecting a recovery in the second half of the year which then explains why we are maintaining the seven to ten percent full year operating margin guidance for mobile networks.

So the improvement in mobile networks, Pekka, in the second half will occur because again geographical makeshift rather than Some adjustment associated with software hardware.

That is correct. This is not the software hardware question. This is a geographical mix or I should say specifically North American volume question where we expect recovery in the second half of the year.

And the software hardware that was on the CNS cloud. Understood. Okay. Thank you so much. Thank you.

Thanks indeed. Thank you everyone for joining us today. 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 that 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 on POM20F which is available on the Investor Relations website. Thank you for joining us.

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