Nokia Corporation

Good morning, ladies and gentlemen. Welcome to Nokia's second quarter 2024 results goal. I'm David Mulholland, head of Nokia Investor Relations. Today with me is Pekka Lundmark, our president and CEO, along with Marco Beren, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business, proposed transactions, 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 margins will be based on 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 reconciliation between the two. In terms of today's agenda for today, Pekka will go through some of the key messages from the quarter, Marco will give you a deeper dive on the financial performance, and then Pekka will make a few comments on a couple of particular highlights from Q2, and then we'll move to Q&A. With that, let me hand over to Pekka.

Thanks, David, and thank you for all dialing in today. Before we discuss Q2, I'd like to give a quick reminder of some important announcements we made recently. We, of course, announced the planned divestment of our submarine networks business to the French state and also our intention to acquire Infinera, a North American optical networking company. The Infinera acquisition will significantly increase the scale and profitability of our optical networks business. It will enable us to deliver faster innovation for customers and expand our position with web scale and regionally in North America. These transactions will focus and strengthen our network infrastructure business with its future built on three market leading units, six networks, IP networks and optical networks. Moving on to our second quarter performance, Marko will go into more detail, but the headlines are that the market remained weak during the quarter. We saw an 18% decline in our top line year on year, but it should be noted that three quarters of that decline was driven by India, with Q2 last year marking the peak of their 5G deployment. We were pleased to see order intake trends continuing to improve in Q2 with the book to be level one and orders growing year on year. Again, this strength was most notable in network infrastructure and supports our expectation of a significant improvement in net sales in the second half of 2024. We also continue to have good deal traction across the business groups. We won some important deals in NI in the quarter, especially for mobile networks. We won some completely new customers such as Mio in Portugal and also expanded our share at many existing customers. In addition, and I'll touch on this later, cloud and network services is also making good progress on winning core network deals and with our network as code platform. Regarding our cost savings program, we've been taking quick action under the program that we announced in October. We have so far actioned 400 million of run rate savings of the targeted 800 million to 1.2 billion in gross savings by 2026. We had another strong quarter of free cash flow with approximately 400 million in Q2. And finally, our full year outlook is unchanged, and we are currently tracking towards the midpoint or slightly below the midpoint of our comparable operating profit guidance of 2.3 to 2.9 billion euro. And regarding our free cash flow guidance of 30 to 60% conversion, we are tracking towards the higher end of that range. With that, let me hand over to Marko, who will go into the financials in more detail.

Thank you, Pekka, and good morning, everyone, and welcome from my side as well. Before I get into numbers, let me make one important comment. Considering the planned sale of Alcatel submarine networks, the business is now reported under discontinued operations and is no longer seen in our network infrastructure unit figures. As Pekka mentioned, the environment remained challenging and Quarter to 24, we saw a sales decline of 18% compared to a year ago quarter. India was really the main driver here, but pleasingly, we returned to modest growth in North America. Cross-margin increased by 450 basis points, mainly driven by mobile networks improvement. in part due to the 150 million of accelerated revenue recognition related to the AT&T contract resolution. Our operating margin at 9.5% was 190 basis points below the prior year. This also benefited from the accelerated revenue recognition. However, the decrease in top line negatively impacted the operating profit. then network infrastructure sales declined by 11% with declines across all three business lines but we did see a sequential improvement from quarter one the net sales decline also impacted our operating margin in the quarter along with somewhat higher indirect cost of sales importantly as we mentioned before we saw a continuation of the improving order intake trends, which support our view of a significant improvement in net sales growth in the second half. On the basis of our current view of the market and the pace of demand recovery, we have revised our net sales planning assumption down from our prior plus 2% to 8% growth to now minus 2% to plus 3%. Our operating margin assumption is 11.5% to 14.5%. And in full transparency, the removal of ASN from NI would have improved profitability by 100 to 150 basis points and the underlying reduction in our margin assumption is due to the slower market recovery. Turning to mobile networks. In mobile networks, the net sales decline was mainly driven by the decrease in India, reflecting the fact that quarter two in 2023 represented the peak of the India 5G deployments. Positively, on a sequential basis, all regions increased compared with quarter one. And Nokia also resolved its outstanding negotiation with AT&T in relation to our existing RAN contracts and ensuring we maintain the values originally agreed in the contract. Part of this resolution led to this 150 million of accelerated revenue recognition, which benefited both net sales and operating profit in the quarter. Based on current commitments, we expect mobile networks net sales to AT&T to remain largely stable year on year in 2024 and then approximately half in 2025. Of course, we will continue to look to win new opportunities with AT&T that can improve this trajectory in mobile networks. And as you know, AT&T is a very important customer to overall Nokia. As a result of the market evolution and what we have seen thus far in the first half, we have changed our net sales planning assumption from a 10% to 15% decline to now a 14% to 19% decline. However, we have increased the operator margin assumption from 1% to 4% to now 4% to 7% as we continue to take quick action on cost. And then moving to cloud and network services, The business declined 16% year on year as it continued to be impacted by the challenging environment. Additionally, the disposal of the device management and service management platform business had a three percentage points negative impact on the net sales in the quarter. Both cross and operating profits were also impacted by lower net sales. And given the market conditions, we have also adjusted our net sales assumptions for cloud and network services to minus 5 to 0% from previous minus 2 to plus 3%, although we left our operating margin assumption unchanged at 6 to 9%.