Nokia Corporation

Good morning, ladies and gentlemen. Welcome to Nokia's third quarter 2023 results call. I'm David Mulholland, head of Nokia Investor Relations, and today with me here in ESPO is Pekka Lundmark, our president and CEO, along with Mark Averin, 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. Results that could cause 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, the references to growth rates will mostly be on a constant currency basis, and where we refer to margins, it will be based on our comparable reporting. Please note that our Q3 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 of some of the announcements we've made this morning, along with our financial progress in the quarter. Marco will then go into a bit more detail on some of the key factors influencing our financial performance before Pekka gives a brief conclusion and we move to Q&A. With that, let me hand over to Pekka.

Thank you, David, and thank you all for joining us today. Before we talk about our financial performance, I wanted to actually start and explain some other announcements we have made today, because we are taking decisive action on three levels, strategic, operational, and cost. We will accelerate our strategy execution by providing our four business groups with increased operational autonomy and agility. This will enable them to better address opportunities in their distinctive markets. They will be empowered to faster diversify beyond service providers, build new ecosystem partnerships, implement new business models, and invest for technology leadership. We are also streamlining our operating model. We had in 2021 created four P&L responsible business groups structured around unique customer offerings, but supported by a shared sales organization. We will now embed the sales teams into the business group. So the new model is the one that you will see here on the right-hand side on the slide. These dedicated sales teams with a strong product and customer connection will enable business groups to better seize growth opportunities and diversify into enterprise web scale and government sectors. This change will bring highly empowered teams in front of customers that are able to make quicker decisions based on their needs. The company will also move to a leaner corporate center with strategic oversight and guidelines, for instance, for financial performance, portfolio development and compliance. We will continue our strong commitment to long-term research through Nokia Bell Labs. In the face of a more challenging market environment, we will reduce our cost base to secure our profitability. We are moving quickly to lower our cost base on a gross basis by 800 million to 1.2 billion euros by the end of 2026, assuming on-target variable pay in both periods. Nokia expects to act quickly on the program with at least 400 million of in-year savings in 2024 and a further 300 million in 2025. The program is expected to result in a 72,000 to 77,000 employee organization instead of the approximately 86,000 employees Nokia has today. Overall, this represents a 10 to 15% reduction in personnel expenses. The exact scale of the program will depend on the evolution of the market demand in the coming years. We do expect net savings, but the magnitude will depend on how inflation develops. If we now turn to our financial performance in Q3, We saw an increased impact on our business from the macroeconomic challenges, which are pressuring operator spending, and that resulted in a 15% year-on-year decline in net sales. Gross margin at 39.2% declined only slightly versus the previous year, and I'm happy to see a sequential improvement in gross margin in mobile networks. However, it is during such challenging times that the business proves its resilience, and that is exactly what we see when we look at the operating margin, which was 8.5% for the quarter. Network infrastructure sales declined by 14%, with most business lines declining, with the exception of optical networks. IP network sales declined by 24%, reflecting weakness in North America, as customers continued to evaluate their spending as well as small declines in other regions. The 19% decline in fixed networks was broad-based, exacerbated by tough comparisons to the corresponding quarter year ago. Fixed networks was also impacted by customer spending in America, as well as some injury digestion. There was a small decline of 5% in submarine networks, which related to project timings. The growth in optical networks of 4% was primarily driven by India and showed the continuing momentum and customer engagement with our PSC5 solutions. Increasingly, gross margin in network infrastructure improved year over year, while operating margin was somewhat resilient at 0.5%, a decline of 80 basis points. In mobile networks, we saw the regional trends of the first half continuing in Q3, North America sales were impacted by the challenging macro environment and as customers continued to digest inventories. India grew significantly year over year, but the pace of deployment has slowed significantly compared to H1. There were declines in most other regions with the exception of Middle East and Africa, which had modest growth. Growth margin declined year on year, reflecting the regional mix, but we did see sequential improvement and expect further improvement into Q4. Operating margin also declined to a lesser extent as it benefited from positive impacts of other operating income. As you can see in the bottom left of the slide, over the last 18 months, we have gained over three points of market share in the overall RAN market, excluding China, a real testament to the improved competitiveness of our products. Cloud and network services delivered a more stable performance in Q3 with a small top line decline. We are happy to see that the growth in enterprise solutions continued, but was offset by small declines elsewhere. Operating margin in cloud and network services expanded by 290 basis points, somewhat also benefiting from other operating income. We take a moment to To understand the evolution of the digital ecosystem today, we have visualized on the slide that you can see on the screen. This slide brings together the ecosystem of CSPs, hyperscalers, enterprises, and developers working together to bring new capabilities to market to enable Industry 4.0, the metaverse, and many other new types of values. Our network monetization platform, which delivers network as code to the ecosystem launched in September, brings the ecosystem together through APIs to enable seamless connectivity, whereby enabling new use cases to help CSPs and enterprises take advantage of the opportunities created. We have created this platform, which once again we call network as code, organically, bringing deep knowledge and understanding of networks, enterprises, and the developer community, which puts us firmly at the forefront to help operators monetize their advanced 4G and 5G assets using network APIs. We want to empower a new wave of enterprise and industrial applications that can utilize the network in a much more programmable way. We have seen significant interest from operators globally and have already signed for strategic agreements. Raghav will go into more detail on the work we are doing in this space at our investor event in December. Nokia technologies declined 14% as a result of the same two items that have impacted prior quarters in 2023. Our Q3 run rates remained at 1 billion euro stable compared to prior quarters. We remain confident in our ability to return to the 1.4 to 1.5 billion run rate that we had been in the past as we complete the smartphone licensing renewal cycle and further expand into new growth areas. It is worth noting that renewal negotiations also continue with certain other smartphone companies. We also passed a key milestone recently. We now have over 6,000 patents declared essential to 5G. And then turning briefly to our enterprise performance in Q3, net sales grew by 5% in the quarter and have now reached approximately 10% of the group net sales on a four quarters rolling basis. This is well aligned with our ambitions and have no intention to slow down expanding into this area. Private wireless grew at a double digit rate once again, and we now have approximately 675 customers. Overall, enterprise remains a key part of our strategy, and we are pleased with the progress here, despite the macro uncertainty we have been seeing elsewhere in the business. So with that, let me turn it over to Marko to comment on our financial performance in a little bit more detail. Over to you, Marko.

Yeah, thanks, Pekka. And let me start by committing the regional performance of our business. And we saw continued year-on-year growth in India, where the net sales grew 121% in the quarter, and this was driven by both mobile networks and network infrastructure. And as we indicated last quarter as well, we have seen some normalization in the region in quarter three, and we expect the pace of deployment to continue to slow. We saw declines in most regions, and notably in North America, where we saw the largest impact from the macroeconomic as well as from inventory digestion that Petka referred to as well. And this led to decline of 40% year on year. And then if we look at the operating profit in the quarter, you can see here that the maturity of the decline was driven by mobile networks. And this reflected the regional mix that has been impacting the business through the year. namely due to increased levels of sales in India, and then, of course, the lower sales in North America. And also, network infrastructure, we can see here that it was rather resilient, despite the overall top-line decline. Cloud and network services showed some progress in the quarter while Nokia technologies declined, and the group-common change was minimal, as venture fund performance was flat year on year. And turning to our cash performance, free cash flow was negative 400 million a quarter and was mainly driven by continued outflows in networking capital. And this largely reflected an increase in receivables and an increase in liabilities while inventories declined In the quarter, we returned 260 million euros to shareholders through dividends and share buybacks. And we ended the quarter with 3 billion of net cash. And while our cash performance has been quite weak year to date, we do expect net working capital headwinds to ease in quarter four and for cash performance to improve. And next, looking at our total addressable markets, we saw further deterioration in the quarter, namely in mobile networks and to a lesser extent network infrastructure. Mobile networks addressable market is now expected to decline 9% as the macro uncertainty continued to adversely impact our view. Clearly, our market has seen a challenging environment this year, but we do still believe in the mid- to long-term attractiveness of this space. And then finally, turning to our outlook, while our third quarter net sales were impacted by the ongoing uncertainty, we expect to see a more normal seasonal improvement in our network business in the fourth quarter. And based on this, and assuming also that we saw the outstanding renewals impacting Nokia technologies, we are tracking towards the lower end of our 23.2 to 24.6 billion euro net sales range for 2023. And we continue to track towards the midpoint of our comparable operating margin range of 11.5 to 13%. And with that, back to you, Pekka, for some final remarks.