Nokia Corporation

Good morning, ladies and gentlemen. Welcome to Nokia's third quarter 2025 results call. I'm David Mulholland, head of Nokia Investor Relations, and today with me is Justin Hotard, our president and CEO, along with Marco Varan, 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 and portfolio basis, and other financial items 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, Justin will go through our key messages from the quarter, and then Marco will go through our financial performance. We'll then move to Q&A. With that, let me hand over to Justin.

Thank you, David. Overall, we delivered a solid performance in the third quarter, in line with our expectations. We grew net sales by 9% with all business groups growing. Order intake was again strong, particularly in optical networks and IP networks driven by AI and cloud customers. Our profitability in the quarter was as expected. Network infrastructure gross margin improved sequentially, though it was impacted slightly by product mix. Cloud and network services had a strong gross margin in the quarter. Product mix impacted the gross margin of mobile networks with a lower mix of software revenue. Our operating margin declined year on year due to a one-time benefit seen in the prior year from a loss provision reversal, without which our operating margin would have been flat. The broader demand environment remains healthy as we move into the fourth quarter. We have seen some improvements in CSP expectations, along with the strong order intake I mentioned in AI and cloud. In fact, entering the fourth quarter, our backlog coverage is stronger than in recent years. We're also pleased with our progress on the Infinera acquisition. We are ahead of schedule with the integration timeline and with synergy expectations. The acquired business contributed strongly to both our net sales growth and order intake growth in Q3. So, after a solid Q3 and continued strong order intake, we are well on track to achieve our four-year outlook. We expect the fourth quarter with net sales growing sequentially and slightly above our historical seasonality of 22%. We are currently tracking towards the midpoint of our operating profit outlook range. Let me now share a few highlights across the business from the third quarter. For our network infrastructure business, the key highlight has been our progress in the AI and cloud customer segment. In Q3, this segment accounted for 6% of our group net sales. Breaking it down, it was 14% of our network infrastructure business, and more specifically, 29% of optical networks. In optical, as mentioned, our 800 gig ZR ZR plus coherent pluggables became available in the quarter and shipped to our first hyperscale customer. Our pipeline in this space is growing as customer investments accelerate and data center architectures evolve. Q3, also saw us announce strategic partnerships with both Nscale and Supermicro. With Nscale, we are now a preferred partner for advanced networking technologies across our NI portfolio. Supermicro is adopting our SR Linux network operating system for their 800-gig Ethernet switches, providing expanded footprint for our network operating system. Finally, we secured two new design wins for our switching platform in the quarter with hyperscalers. The market is growing rapidly, and while I'm pleased with these initial signs of progress in IP networks, clearly we still have a lot of work ahead of us. In our fixed network business, we launched our new 50-gig PON offering. With our unique solution built on our Quillian chipset, operators can easily evolve from GPON to XGS, 25-gig and 50-gig PON on the same fiber. Ready with encryption for the post-quantum era, Nokia's solution also provides enterprises with the bandwidth, security, and reliability they require. Customers like Frontier Communications in the United States are unique PON technology to seamlessly introduce 25-gig PON. Now I want to turn to our mobile businesses, starting with cloud and network services. The team has delivered strong net sales growth and operating profit growth as it continues to focus on autonomous cloud-native architectures. In voice core, we became the market share leader in the first half of 2025, as reported by Del Oro. Approximately 70% of 5G standalone core network deployments outside China use a portion of Nokia's 5G core stack, and network penetration is still less than 30% for 5G standalone core. In mobile networks, we continue to see the market stabilize. We recently announced a deal with Vodafone 3 that will see us enter their new combined network in the UK as a major RAN supplier with approximately 7,000 sites. We are focused on improving the returns in the business over time, delivering for our customers, and differentiating through innovation. In Nokia Technologies, we secured several new agreements in the quarter. the team continues to be disciplined on productivity and operating leverage. While we are now entering the heightened investment phase for 6G standardization, we continue to see stability in our annual operating profit. In Q3, we completed a strategic review of our venture fund investments. We have decided to scale down our passive venture fund investments. Over time, we will substantially reduce the capital deployed in these areas. As a result, our venture fund investments are now reported within financial income and expenses. Going forward, we will consider targeted direct minority investments in companies that help us to accelerate our strategy. An example is the investment we made in Nscale alongside the strategic partnership that I referred to earlier. Because of this change, we are making a technical change to our operating profit guidance. increasing it by €0.1 billion, which is related to the negative impact the venture funds had on our operating profit in the first half. However, operationally, our guidance is unchanged. After a solid Q3 and with recent order trends, we are well on track to achieve our full-year outlook for operating profit. As I mentioned before, we expect fourth-corner net sales to grow sequentially at slightly above our historical seasonality of 22%. And we are tracking towards the midpoint of our operating profit range of 1.7 to 2.2 billion euros. At our Capital Markets Day in New York on November 19th, we will share our strategy to unlock the full potential of our portfolio and the steps we are taking to focus the company to deliver ongoing growth and operating leverage. The AI super cycle is accelerating demand for providers of advanced and trusted connectivity. Nokia is uniquely positioned to be a leader in this market. With that, let me hand it over to Marco to discuss our financial performance.

Thanks, Justin, and hello from my side as well. In quarter three, we saw net sales increase by 9%, and we are pleased to see growth across all of our business groups. First margin for the group declined 150 basis points year-on-year, This was largely as we have expected. And this is because of the product mix within both network infrastructure and mobile networks. Operating margin was 9%, 220 basis points below the prior year, although this was mainly due to a one-time impact from the reversal of loss allowance for trade receivables in the prior year. Without this, the operating profit of operating margin would have been flat year on year. and we generated 429 million of free cash flow and ended the quarter with 3 billion of net cash. I would like to update you on our cost savings program, which we introduced in 2023. We expect to get about 450 million savings in 2025. And going forward, we will focus on delivering operational leverage through continuous productivity improvement IT simplification, digital instrumentation, and organizational efficiency, rather than using large restructuring programs. Ultimately, this means a cultural shift towards consistent cost discipline and efficiency to help us deliver our strategic goals. Turning to business groups now, starting with network infrastructure, which had another strong quarter with 11% growth, Optical Networks was the standout performer with 19% sales growth and continued to see strong order trends with Book the Bill well above 1. IP networks also saw strong growth in orders in the quarter as we start to see an increased traction with AI and cloud, as Justin mentioned. IP networks sales grew 4% and fixed networks grew 8% in the quarter. Cross-margin was impacted by product mix and declined 190 basis points, although it did increase from the level we had in quarter two. Operating margin declined because of lower cross-margin along with the increased investments in R&D and acquisition of Infinera. In the quarter, we did see a small positive contribution to operating profit from Infinera as we start to see some initial benefit from Synergies along with the growth in the business. Cloud and network services sales grew by 13% in the quarter as we continue to see strong demand for our cloud-based core platforms. First margin increased 380 basis points as we improved cost of delivery along with the operating leverage benefit of higher sales. Operating margin also increased by 250 basis points, with some of the cross-margin strength partially offset by higher R&D expenses. And mobile networks net sales increased by 4% year-on-year, trimmed by growth in Vietnam and Middle East and Africa. In quarter two, we said we expect quarter three cross-margin to be lower than normal, reflecting a lower software contribution, and this was indeed the case. Year on year, we saw 370 basis points decline. With respect to operating margin, although operating expenses declined, the reversal of a loss allowance in the prior year meant that operating margin declined. Without this, the operating margin would have only slightly declined despite this being a quarter with a low software contribution in the mix. Turning now to Nokia Technologies, net sales grew by 14% in the quarter, and we signed several new deals in quarter three. Our annual net sales run rate remains at approximately 1.4 billion. Operating expenses in quarter three saw some timing benefits, and therefore will increase slightly in quarter four. we continue to expect 1.1 billion operating profit for the full year in Nokia technologies. Now let's look at the net sales per region. In North America, we saw strong growth in network infrastructure and cloud and network services, while mobile networks declined slightly. In APAC, India's sales grew in network infrastructure, driven by strong demand for fixed wireless, while mobile network sales returned to some modest growth. Outside of the benefit we saw from Nokia technologies, Europe was stable in quarter three. Now, turning to our cash performance, we ended the quarter with a net cash position of €3 billion. Free cash flow was positive €429 million, consistent with our profit generation and well-managed working capital. We continue to target 50% to 80% free cash flow conversion from comparable operating profit for the full year.