Nokia Corporation

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 and portfolio basis, and other financial items will be based on our comparable reporting. Please note that our Q2 report and a 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, Justin will go through our key messages from the quarter, and then Marco will go through the financial performance, and we'll then move to Q&A. With that, let me hand over to Justin.

Thanks, David, and good morning. During my first quarter as president and CEO, I've spent significant time engaging with our stakeholders. and it has left me with two conclusions. First, I have increased optimism about our future opportunity. It is clear to me that connectivity will be a critical differentiator in the AI super cycle. That is true not only for the hyperscalers where it's visible today, but also for communication service providers and increasingly in areas like defense and national security. With our portfolio in mobile and fiber access, transport and data center networks. Nokia is uniquely positioned to be a leader in this market transition. We are investing to capitalize on this opportunity, and we are already starting to see success today in areas like optical networking. Second, our customers expect us to engage with them as one integrated company, as the majority of them partner with us across our portfolio. We benefit greatly from the financial accountability our business group structure gives us. However, we also need to evolve how we work so we can move faster, improve productivity, and focus on what brings value to our customers. As a result, we're unifying our corporate functions to simplify how we work and to build a more cohesive culture to help unlock operating leverage. I'm looking forward to discussing our strategy and full value creation story at our Capital Markets Day in New York on November 19th. Turning to our second quarter results, our performance was mixed. Good growth in both network infrastructure and cloud and network services was offset by a decline in mobile networks, primarily related to the accelerated revenue recognition seen in the prior year quarter. Our profitability was impacted by currency fluctuations, particularly the weaker U.S. dollar, which was both an operational headwind and a headwind in our venture fund. We had a 50 million non-cash negative impact from our venture funds in the quarter, which included a 60 million euro non-negative impact from currency. Excluding currency, our profitability in the quarter would have been in line with our expectations, and we continued to make investments in longer-term growth opportunities. The second quarter was the first full quarter since we acquired Infinera. The combined optical networks business has been performing well, with a book to bill well above one, showing continued strong commercial momentum through our growth, though our growth was tempered somewhat by supply constraints. And we're on track to achieve our committed synergies from the acquisition. Looking forward, the demand environment remains broadly consistent with what we said last quarter. Customers are largely continuing with the plans they laid out at the start of the year, and there has not been any major impact from geopolitical uncertainty. As a result, for the full year, we continue to expect strong growth in network infrastructure, growth in cloud and network services, and largely stable net sales in mobile networks. In Nokia Technologies, we still expect 1.1 billion euros of operating profit. Let me share a few highlights from the quarter across our business groups. In network infrastructure, we continue to see a strong demand environment in optical networks and a positive reception to the Infinera acquisition from customers. Two deals I'd like to highlight in optical, our first award from a hyperscaler for 800 gig ZR, ZR plus pluggables and a deal with a large US communication service provider. Overall, hyperscalers are one of the biggest drivers of our order intake in the quarter and remain a significant growth opportunity for our network infrastructure business. Across the whole of Nokia, hyperscalers accounted for 5% of net sales in the second quarter. In IP networks, we continued our leading position in the market, remaining number one in edge routing and number two in total routing. We continue to see a long-term opportunity in AI infrastructure and are investing to accelerate growth. Recently, we've been an active participant in consortiums that are bidding to benefit from the EU's 20 billion euro program to build AI gigafactories in Europe. In fixed networks, we still expect strong growth this year, and the appetite for fiber among Tier 1 CSPs remains strong. The past 12 months have seen us strengthen our market leadership position in the operator premise equipment, OLT, and we are continuing to invest in innovation in passive optical networks. Turning to mobile networks, at the start of the quarter, we signed an extension to our RAN agreement with T-Mobile US, which we announced in our Q1 earnings. We also announced 5G deals with ELISA in Finland and Optus in Australia. We continue to see good overall commercial momentum, and the competitiveness of our products is resonating with customers. We are optimistic about the potential 3GPP technology can bring into the defense sector. In Q2, we announced a partnership with BlackNet in which Ryan Mattel owns a majority stake. And we now have delivered Banshee radio units to the US Marine Corps through Nokia Federal Solutions. Finally, cloud and network services had a strong quarter with new 5G core winds and deployments, including across India, Europe, and the Middle East. We're continuing to progress on our open API journey with 57 partners announced for our network as code platform, including Telstra and the Bridge Alliance in Asia. We also announced a partnership with Verizon in the UK to provide private 5G networks across multiple Thames report sites. Finally, let me turn to our outlook for the full year 2025. As we announced on Tuesday, we decided to take the prudent approach of lowering our full year outlook from 1.9 to 2.4 billion euros to a new range of 1.6 to 2.1 billion euros. The change has been driven by two factors that are largely outside of our control. The first impact is currency. When we first issued our guidance for 2025, the euro dollar rate was 1.04 and it has now moved significantly to 1.17. Altogether, this currency movement is posing a 230 million euro headwind to our operating profit outlook for 2025. of which 90 million euros is related to the non-cash currency impact in our venture fund portfolio. Marco will provide you additional detail on this in his comments. The second is the tariff situation. For the full year 2025, we now expect to see an impact of between 50 and 80 million euros tied to fulfillment of pre-existing customer orders. The underlying performance across the business is in line with our expectations at the start of the year. Therefore, it is these two factors that lead us to change comparable operating profit outlook. Our guidance for free cash flow conversion remains unchanged at 50% to 80% of comparable operating profit. With that, let me hand over to Marco.

Thank you, Justin, and hello from my side as well. I will start by discussing our overall group performance. For the two, net sales were 4.55 billion euros, That's a 1% decline on constant currency and portfolio basis. Our cross-margin was stable versus the year-ago quarter at 44.7%. Mobile networks and network infrastructure cross-margins were broadly stable, while cloud and network services delivered an improvement of 520 basis points, driven by top-line growth. Operator margin declined to 6.6%. a result of the negative currency impact to our venture funds as well as the impact of tariffs which were within the 20 to 30 million range we had expected assuming existing tariff rates we now expect an impact to our four-year operating profit of around 50 to 80 million and we generated 88 million euros of free cash flow in a quarter and ended the quarter with 2.9 billion of net cash. Now turning to our business growth performance. Network infrastructure delivered 8% growth and each business unit grew with fixed networks having a particularly strong quarter growing 17%. Optical networks grew 6% and IP networks grew 3%. Optical network's growth was hampered by some modest supply chain constraints and could have grown over 10%, and we expect these issues to improve in the second half. First margin was relatively stable despite the 110 basis points impact from tariffs in line with what we have expected. Operating margin declined slightly by 70 basis points year-on-year to 5.7%. And this was mainly the result of higher operating expenses associated with the Infinera acquisition, as well as increased investments into growth opportunities. It is worth noting that the ex-Infinera business was dilutive to operate a margin in the quarter, although the integration process continues and we are moving quickly to deliver on our committed synergies. Net sales in mobile networks declined by 13% in the quarter. As mentioned, much of this decline was because of the 150 million euro in accelerated revenue recognition from a contract settlement that benefited the year-ago quarter. Regionally, we saw mixed trends in mobile networks. The pause in rollouts impacted India. However, we did see some growth in Europe. Mobile networks cost margin was 41.1% in the quarter, a 70 basis points decline year over year as favorable product and regional mix helped offset a difficult comparison related to the settlement that benefited the prior year. These factors led to operating profit and margin declining despite lower operating expenses. As we look to quarter three, we expect cross margin to be below the normal run rate level, as we expect an unfavorable product mix shift in the quarter. For the full year, mobile networks cross-margin should remain in the normalized 37% to 38% range, when excluding the one-time impact we saw in quarter one. Cloud and network services, net sales by 14% in the quarter, reflecting continued momentum in core networks. From a regional perspective, CNS saw growth driven by North America and Asia Pacific and Japan. The higher level of net sales drove strong expansion in both cross and operating margin, which improved 520 and 850 basis points, respectively. Nokia Technologies net sales increased by 3% on a constant currency basis. We signed several new agreements as we continue to make progress in our growth areas of automotive, consumer electronics, IoT, and multimedia. Our net sales run rate remains approximately at 1.4 billion euros. Now let's look at the net sales by region. We saw a decline in North America, although this reflects mixed trends. Mobile networks declined because of the settlement in the year-ago quarter, while we saw double-digit growth in both network infrastructure and cloud and network services. Within APEC, India's sales were flat, reflecting a pause in investment in mobile networks, which was offset by growth in fixed networks within network infrastructure. as well as cloud and network services. And credit China continued to decline as expected based on the current market trends. We saw strength in Europe with growth across all businesses. Now turning to our cash performance, we ended the quarter with a net cash position of 2.9 billion euros. You can see on the slide that working capital was well managed in the quarter, as the expected payment of 2024 related incentives was largely offset by a strong collection in receivables. Free cash flow was positive €88 million, leading to over €800 million of free cash flow in the first half. As Justin noted, we continued to target 50% to 80% free cash flow conversion from comparable operating profit for the full year. The last topic I want to cover is our currency exposure. As I know, there have been some questions following our announcement on Tuesday. First of all, we typically generate about 55% of our net sales and have 50% of our total costs in US dollars, but we report in euros. We have said in the past that we have a high degree of natural hedging without operating business protecting our operating margin, but we still have an impact on an absolute basis when you convert USD profit back to euros for reporting purposes. Then on top of that, we have a hedging program which helps to shield us on a short-term basis. What happens this year? When we first provided our guidance in January, the Euro-USD rate was at 1.04. Now the currency rate is around 1.17, and our guidance is assuming it remains there for the rest of the year. That is a significant 13 US cent movement There has also been significant strengthening in the euro against other currencies, including the Indian rupee. Assuming currency rates remain at the current level for the rest of the year, the currency movement compared to January is a 6% to 7% impact to our net sales outlook for the full year. We do have a modest imbalance between net sales and total cost in our operations, meaning a strengthening euro has a slight negative impact on our operating margin, which is then largely offset short-term by hedging. When you combine all of these together, we see a 140 million euro operating headwind compared to our expectations at the start of the year. And we hedged on a rolling four-quarter basis, such that the first two quarters net US operational exposure is quite well hedged, and then the degree of hedging drops the third and fourth quarter. And this means that at the start of the year, we still had exposure to currency fluctuations for the second half, but that at this point of the year, we are now largely operationally Finally, we have currency exposure from our venture fund investments. A lot of these assets are valued in US dollars. These are illiquid investments that are only revalued when there is a capital event. However, under IFRS, we need to mark the market for currency each quarter. And this is creating a 90 million impact currently for the full year. Considering this is both non-cash and non-operational to our core businesses, we don't hedge this. Through the rest of the year, and including the venture fund impact, for modeling purposes, we estimate that every one US cent movement in the Euro-USD rate could have about 10 to 15 million euro impact on our operating profit in 2025.