Nokia Corporation

Good morning, ladies and gentlemen, and welcome to Nokia's second quarter 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 Beran, 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 basis, and on margins we'll be referring to our comparable reporting. Please note that our Q2 report and the presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and a reconciliation between the two. In terms of the agenda for today's call, Pekka will give a quick overview on 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 outlook before Pekka concludes with our outlook for 2023. With that, let me hand over to Pekka.

Thanks to everybody for dialing in today. We highlighted in Q1 that we were starting to see signs of the economic environment impacting customer spending and already in the second quarter, we saw some of those signs materializing as they impact our sales outlook also in network infrastructure. But we still achieved flat year-on-year sales in the quarter as we continue to benefit from market share growth. Despite the regional mix headwinds that are impacting our mobile networks business, we achieved a 38.8% gross margin. and an 11-point operating margin. Considering the 40% drop in North America and even adjusting for the 80 million catch-up net sales in Nokia technologies, that was a pretty resilient result. If we look specifically at network infrastructure, you do see some divergence in the trends in the business. In IP networks, we saw some weakness primarily related to CSP spending in North America, which led to the 11% drop in net sales. In fixed networks, we are seeing two primary effects. Firstly, we are facing some headwinds similar to a fixed wireless access business, which still today remains sensitive to a small number of customers. And then secondly, as we see some inventory digestion, primarily of consumer premise, ONT devices. In optical networks, we saw a further strong performance of plus 16% as we continue to benefit from the improved competitiveness of our products and markets again. In fact, while we are seeing weakness elsewhere, our expectations for optical this year is one area that has actually improved since the start of the year. In summary networks, we saw some project timing effects on revenue growth after years of substantial growth, but the business remains well supported as it executes on its substantial backlog. From a profitability perspective, the business performed very well. Positive product mix notably within fixed networks and proactive management of our costs as the sales outlook deteriorated meant we were still able to improve our operating margin in NI by 160 basis points to 13.1. As we look forward, whilst we see some short-term challenges impacting the business, particularly with a softening environment for CSP spending, we remain highly confident in the opportunities ahead for our network infrastructure business. In optical, we continue to believe we are gaining market share and with the customer traction of both PSE5 and now lately with PSE6, we are very optimistic about the potential to continue to grow in this business. In fixed networks, we understand there might be some concerns that we are now seeing some slowdown in sales, which is why we want to make it clear, as you see in the chart, that the decline is primarily related to fixed wireless due to its sensitivity to a small number of customers. In fiber, after two to three years of significant growth, we are now seeing some moderation in growth rates and some short-term inventory digestion, but the outlook remains strong for this business with a number of government subsidy programs in both the US and Europe only just starting to benefit the market. In IP networks, while the uncertainty in CSP is impacting demand currently, we have been making great progress in expanding into enterprise and web scale, which has increased from 13% to now over 20% of IP net sales. Importantly, we believe we are in a strong position to make further progress into web scale into 2024. This diversification should help improve the structural growth opportunities for our IP networks business, given the enterprise and web scale TAM is expected to grow at around 6% CAGR compared to the 1% growth for CSP customers. Mobile networks saw 5% growth in constant currency year on year as a result of the continuation of the rapid development of 5G in India, where we continued to gain market share. These were partially offset by the expected decline in North America as customers continued to evaluate their spending plans and deplete their inventories in the quarter. Gross margin declined year-on-year, reflecting the regional mix. Given the slower pace of recovery in North America, we now expect the gross margin to only improve towards the end of the year. With respect to operating margin, a decline in operating expenses reflecting swift action on cost discipline meant that we achieved 7.9% operating margin, an improvement on Q1. During the quarter, mobile networks also launched a series of new products, including basements, radios, and network management and optimization solutions that will drive better performance, lower energy consumption, and brings the power of artificial intelligence to mobile networks. Cloud and network services grew 2% on a constant currency basis, mainly driven by core networks and enterprise solutions. Gross margin declined slightly, however, pleasingly operating margin improved year-on-year 290 basis points as a result of lower OPEX and other operating income items. At the end of June, Nokia reached an agreement to transfer cloud infrastructure portfolio to Red Hat and starting in Q1 2024, we will adopt the Red Hat platform as our primary reference cloud infrastructure platform for new customers, gradually transitioning existing customers over from Nokia's core networks portfolio. Over 350 Nokia employees are expected to transition to Red Hat to provide continued roadmap evolution, deployment services, and support on behalf of Nokia to its customers. One thing to highlight is that just a couple of weeks ago, we signed a long-term patent license agreement with Obviously, the terms of the deal are confidential, but it is one of our longest deals, and we are delighted with the outcome. Nokia Technologies saw a 10% increase in constant currency net sales driven by 80 million of catch-up sales related to deals signed in the quarter. Excluding these net sales would have been on a similar level to Q1. We were pleased to sign a number of licensing deals in Q2. Considering our current base of agreements, we now see that our net sales annual run rate would be 1.1 billion euros from January 2024, subject to any other material developments. We also continued to renew our industry-leading patent portfolio, reaching the milestone of 5,500 patent families declared as essential to 5G. Enterprise sales had another successful growth of 27% in constant currency, a key pillar of our strategy. We continued to make good progress towards our near-term target of having at least 10% of our sales from enterprise, which reached 9% on a last 12-month basis. We continued strong growth in both enterprise verticals and in web scale. This is particularly benefiting our IP networks and optical networks businesses, and we remain confident of our opportunity to grow here, as I already mentioned. We now have more than 635 customers in private wireless and added nine new customers. With that, I will now go into a bit more detail on our financial performance, so we're

Thanks, Beck, and good morning from my side as well. Looking at our net sales performance by region, we're driven again by the rapid ramp-up sales in India, which increased significantly year-on-year in mobile networks, but also saw growth in network infrastructure. In Europe, sales grew by 11%, even excluding the increase in tech, which is recorded in Europe. and we had strong growth in business groups. And the growth in Middle East and Africa was mainly driven by cloud and network services and network infrastructure. There were declines in Asia Pacific, Latin America, and Greater China, with mixed performance across the business groups. And then the 40% decline in North America was the result of declines across all business groups as inventory digestion continued and CSPs re-evaluated their spending plans. So in summary, Q2 reflected the trends we had expected to see with rapid India ramp up being offset by slowdown in North America. And if we now move to our P&L performance in the quarter, our comparable operating margin declined 120 basis points earlier. And as expected, we saw the negative impact from regional mix continue in the quarter, as India since grew strongly and North America continued to be weak. However, overall margins were rather resilient, benefiting from both quick actions in cost discipline that we took across the businesses, as well as the Nokia technologies catch up net sales. We also saw a year-on-year increase in operating income. This was mainly related to hedging in addition to income from the sale of certain digital assets in the quarter. And if we now turn to the operating margin performance by this. As we already mentioned, we were pleased to see the margin performance given the headwinds of that growth and regional mix. While PEC already touched upon many of the drivers, the increases in network and cloud and network services and local technologies were offset by the declining mobile networks margins. Group common was a net negative on a year-on-year basis, so this is mainly related to venture fund positive that we had last year of 40 million, going to a negative revelation of 10 million this year. Moving to our cash flow performance in the quarter, we ended quarter two with 3.7 billion euro of net cash, sequential decline of roughly 600 million. Our free cash flow in the quarter was negative 380 million euros. As you can see on this slide, The main driver for the cash burn in the quarter was related to performance-related employee variable pay, which is included in the liabilities line within networking capital. Otherwise, there were small movements in both receivables and inventories within networking capital. We also returned 250 million euros of capital to shareholders, through our increased dividend and our ongoing share buyback program. And perhaps most importantly, we believe our strong balance sheet, including the 3.7 billion euro net cash, provides us with a firm foundation to mitigate this period of uncertainty. And the final slide for me before Pekka updates you on our output for 2020. I wanted to revisit a slide that we showed at the start of the year around our cash conversion. So we continue to expect the end of the year with a free cash flow conversion of 20% to 50% of comparable operating profits. However, through the first half, we have seen some slight adjustments within this envelope that we wanted to point out. The two main items are net profit capital, which has continued to be a use of cash this year, reflecting the large 5G deployments in India and their impact on receivables and inventories. The second item is around the gap between Nokia technologies operating profit and cash. which is also reported in net profit middle. Originally, we expected this to be slightly positive in 2023, and given the deals that we have signed thus far in 2023, we now expect cash flows to be meaningfully higher than operating profit. Some of the new deals we've signed are coming with some modest prepayments for what would have otherwise been received in 2024. And considering there are still a number of details to work out here, we will give you more conductive outlook later in the year. Our long-term vision to have greater alignment between operating profit and cash remains unchanged, and we would expect to move toward much greater alignment from 2025 onwards. So beyond this year, we continue to expect significantly strong cash flow in 2024 as we work towards our longer-term targets of 55% to 85% conversion. And with that, let me pass it back to Pekka to go through our revised outlook.