Nokia Capital Markets Day 2021, 2nd Q&A session

Welcome everyone to the second Q&A session. This session will include all of today's speakers. For our sell-side analysts, let me remind you about two items. First, please limit yourself to one question only as a courtesy to everyone else in the queue. And second, please remember to unmute your microphone and turn on your video after we place you into the live call. With that, let's start the Q&A session. Please raise your hand if you would like to ask a question.

And our first question will come from Akshat Sutania at Credit Suisse.

Hi, good afternoon. Maybe a question for Raghav on the CNS business. Raghav, you talked about a lot of things that are going to help improve the margins over time. You're starting from a very low base of minus two percent last year. I'm just trying to understand what's going to be the biggest delta driver for improvement in margins. You have quite an ambitious target of reaching ten percent over time. We've seen with one of your peer group companies that margin improvement in this part of the business is proving to be challenging. So if we were to pick one or two items of all the measures you're trying to take, what can we focus on to give us confidence on that big improvement?

Thank you. And for our next question, we'll go to Sami Sarcomas from Nordea.

Hello, thanks for taking my question. This will go to Tommy with Mobile Networks. Can you help us understand why the EBIT margin target stands at only five to eight percent for '23 following all the planned measures, as you were already at that level last year? And then when looking at your closest peer Ericsson, they were at 15 percent excluding IPR revenues last year and are targeting even higher levels going forward. What explains such a big difference in margin level?

Thank you, Sami. In my presentation I shared with you why we moved from last year's eight percent to around break-even this year, from minus one to positive two percent. Most of this is due to the headwind suffered in North America last year, part of it is because our 4G volumes in China are going down but not replaced by the same amount of 5G, and partly because we have increased R&D investment in 5G. That takes us to around break-even, which is a tough starting point, and this is the year of the reset. Going forward, there are many levers we are pulling to get to five to eight percent. The margin improvement from '21 to '23 comes from many sources: volume increase from winning more customers and increasing share, growth in private wireless, cost of goods sold reduction through SoCs designed for serviceability and digitalization of service delivery, more selective mix away from low-margin deployment services, central cost of sales improvements reducing fixed production overheads, and OpEx reductions in support functions and administration. Beyond '23, the ambition is to get to ten percent or better operating margin.

Thank you. Thank you, Sami. Let's go to Frederick Littell at Danske Bank for our next question.

Thank you very much for taking my question. Thanks for the interesting presentations. Could I stay with Tommy for a second question? You described the falling volumes in China on 4G and that you're not really participating to the same extent on 5G, which happened during 2020. What do you see as your possibilities to come back in China? Is there another situation now, or is that decision complete for the long term? I felt you alluded to keeping a foot in China because it's a very advanced market.

Thank you, Frederick, good question. Let's first look at the starting point. We had never made a decision not to participate in 5G radio access in China. In fact, we did participate and won some market share in 5G with China Mobile and the joint venture of China Telecom, even if much smaller than our 4G share. We supplied our 2.5 gigahertz 5G to China Mobile and 3.5 gigahertz to CTC/CUC, both in macro and small cells, including important cities like Shanghai. But at the time of the first central purchasing rounds, we were still in the middle of the product turnaround and didn't have fully competitive product, especially in bandwidth. When you don't score well in technical evaluation in China, you have to give very significant discounts, which is why we decided to take very little share at the time. But that was back then. Today, we are participating in the next central purchasing rounds of 5G with China Mobile, China Telecom, China Unicom, and China Broadcast Network. Our product is more competitive after two years of turnaround and continues to improve. The 700 megahertz 5G product offered to CBN was largely developed by our R&D in Hangzhou and Nanjing. We are also the first supplier to complete tests in 26 gigahertz millimeter wave with MIIT. We are trying to increase our share, though it is challenging in later rounds when most market share was awarded in the first rounds.

Thank you very much, very good answer. Thank you, Frederick. And for our next question, let's move to Rob Sanders at Deutsche Bank.

Hi, thanks for taking my question. More questions for Tommy, I'm afraid. Could I ask about the Verizon impact and a bit about margins? On the Verizon impact, is there a residual services impact into next year from that contract? Any residual nagging impact from services revenue falling away? And then on margins by region, typically the US was the most profitable region, but you've been highlighting more aggressive pricing. Presumably European margins are improving given Huawei's issues. Is that what you're seeing, a kind of equalization of margin by region, or even European margins ahead of the US?

Thank you. Actually there were three questions but I'm happy to answer all three. First, most of the headwind impact from North America is already visible in the quarters of this year in 2021. Going forward, we will have very important business in North America with many carriers. Earlier this year we announced a five-year deal with T-Mobile USA, and today we announced an expansion deal with AT&T including the very important C-band. We can offset the earlier headwind with wins scored in the rest of the world over the past two years. On US pricing, the market has been more competitive during recent deal rounds, but we've been able to secure our share and move ahead. In terms of European margins, we've gained market share partly in Europe but also in Japan, Australia, New Zealand, and Canada. According to Dell'Oro, we've reached a tied number one position in Europe in 5G market share, now tied with Ericsson and Huawei. The market is of course very competitive.

Thank you, Robert. Next, let's go to the line of Frank Mile from DNB.

Thanks for taking the question. A follow-up on the footprint in North America. First, I'd like to ask about your CSP market outlook, which seems perhaps a bit cautious compared to other market researchers such as Dell'Oro, indicating good momentum coming out of 2020 with some four percent growth in 2021. Looking forward to 2023, given the flatness you see in the CSP market, what are the headwinds at the market level? Also, with the AT&T contract secured, could you confirm you expect no further material footprint loss in North America? Finally, what do you see as the main swing factors driving the quite wide range of ten to thirteen percent at group level?

That is correct, yeah.

Let's do so. First, the market size. What we showed as our estimate for the addressable market development for mobile networks is a one percent growth CAGR for the next couple of years with current exchange rates. Dell'Oro uses constant currency and reports in USD, which gives a bit more than two percent, so there's a small difference. We are still analyzing the news from the US from last week, but it's important to note that Dell'Oro has also restated the 2020 market value upward, which impacts the growth rate from '21 onwards. C-band deployment in the US will accelerate during the second half of the year as spectrum becomes available from year-end. On market share, our product competitiveness has improved over the past two years, and we believe the risk of further major market share or footprint loss has significantly reduced. On the swing factors in the ten to thirteen percent range, market development is very important, as is geography and product mix. As a technology company, product leadership matters. Being present in mature markets with good margins is extremely important. There are many factors still somewhat unknown for choosing between ten and thirteen percent. Today's AT&T deal and our US wins are comforting, but there is still some way to go to 2023.

I fully agree with Marco. It actually boils down very much to one question, which is what we called market development in the release today, meaning our top-line development. Our guidance is that by 2023 we want to go faster than the market. I hope you captured the optimism and enthusiasm from the business group presidents' presentations. When we say we've got to grow faster than the market, that gives a lot of room to maneuver as to where we will finally land. We roughly understand where OpEx will go, we're starting to understand where gross margin will go, and there is pretty good leverage if the top line grows faster than in more conservative plans. That would be the most important driver between the ten and thirteen percent extremes.

Thank you, that's very clear. Thank you for your question, Frank. For our next question, let's go to Alex Paterk at SG.

Hi, thanks. I have two questions. The first is for Tommy on the phasing of the US impact. You have quite a painful impact this year on the margins. Is that going to come through immediately from Q1, or how does it develop in terms of linearity over the year? When is the point of maximum pain? And then a second one for Federico on optics. Do you see market share gains opportunities? Some competitors are saying Huawei is losing share there on security concerns. Do you see anything coming through, and why haven't you been able to capitalize on that until now?

Thank you. The headwind we suffered in North America, the impact is immediately visible. Most of that impact is hitting the quarters Q1 through Q4 for this year.

As for us on optics, we're having a good ride in the last months. We expect to show market share growth in the next reports. We've had growth in some markets in analyst research, but it has to materialize in revenues before they can report it. We have several important wins in the last months of 2020 and the first months of '21, so we expect to see some market share growth.

Thank you, Alex. And now let's go to the line of Sandeep Deshpande from JPMorgan.

Hi, thank you for letting me on. Two quick questions. Firstly, for Tommy on mobile networks, your product is more competitive today and you still have all that 4G footprint that you've lost in the US. Is there no possibility that the better product will allow you to keep some of that footprint in radio that you might lose? And my second question is regarding the IP market. In 2023 or 2024, you might lose some business associated with the Microsoft deal. Is there other business coming through which will compensate that?

Thank you, Sandeep. While I cannot speak on behalf of Verizon or share details of any ongoing discussions, what I can say is that Verizon remains a strategically important customer to all of Nokia, including Mobile Networks. Verizon has a lot of Nokia radio equipment in its network, and we are working closely with them to support their 5G network evolution. Now that our product competitiveness has improved and continues to improve, we will obviously keep looking for ways to do more business with Verizon.

Thank you, thank you Sandeep.

For your question about the Microsoft agreement, let me start by saying that we have successfully generated recurring revenue streams from most major mobile device players in the past years. We have a number of deals ending and coming up for renewal over the next five years. At the same time, we keep expanding our licensing base to grow in other segments. Microsoft is just one of our licensees, and their agreement and its term is taken into account in our current guidance.

Thank you, Sandeep. For our next question, let's move to Daniel Derberg at Handelsbanken.

Thank you so much for taking my question. I have a question for Nishant on network as a service, the WaveFree. How fast, or do we have any timeline, when we should expect this to start to materialize? And on the competitive side, do you see a big risk that you compete with your own customers in terms of private networks for enterprises?

Great question, two answers. First, it depends on the domain. There is already quite a bit of discussion around some of the cloud and network services business evolving towards an as-a-service model, and our expectation is that impetus will continue. Specifically around private wireless, we see the next two waves. When we move towards a model where it's about software, our conviction is that the move towards as-a-service would be rather quick after that, because the industry expects it and we've seen it work in the IT industry. For go-to-market for private wireless, we'll look at both models, working through CSP customers and going to enterprises directly where more apt. But I'd also like to give the floor to Raghav to comment.

Thank you so much. Thank you, Daniel. For our next question, let's move to the line of Richard Kramer from Arete.

Thanks very much. I have one for Yenni and one for Federico. Yenni, you've been deep in some very contentious litigation in the auto space with additional angles through Avanci. Can you help us size both the costs you're currently facing and the overall addressable market for technology licensing income from the auto market? And with brand licensing, HMD has not been a huge success. Do you see brand licensing remaining a material component of Technologies over time? And then for Federico, how are you planning to replace, if possible, the driving forces...

...behind the IP routing and optics business when Basil and [name] move on at the end of the year.

Thanks.

As for your question on how to replace Basil and [name] — listen, in the end, they are two people that I know for 15 years, and I have a high respect for them. They are still working with us, as you know, helping us with the strategy, and not only that — with delivering the great roadmap we have in front of us for the next quarters. But there is a great team behind. So in fact, you see that when I had to appoint the leaders of my new organization, I took leaders coming from the ranks into those positions, and they were part of the success of the IP routing and optical division so far. So I'm not worried, because the talent pool that I have is good enough, and the team is stepping up.

Thank you, Richard. For our next question, let's go to Andrew Gardner from Barclays.

Thank you very much. Tommy, in his presentation, gave a long-term target for Mobile Networks, indicating that there was still some expansion to come beyond the 2023 time frame. Speaking of 10%+, I'm just wondering, for Federico and Raghav in NI and Cloud Network Services, the margins that you guys have set out for 2023 — is that almost an endpoint or a sustainable level? If not, what would your aspirational margin targets be beyond that time frame? Thank you.

And my answer to you is very much in line with what Raghav just said. Of course, we are guiding 9 to 12 for 2023 for NI business. Of course, we're constantly looking for opportunities to improve. We're constantly challenging ourselves if that is good or we can do more. And we cannot talk today about the aspirations, but the guidance is what it is. But we will continue looking for more improvements, of course.

And if I — just before we take the next question, I would just like to confirm this from a group point of view. For example, if we take Federico's business, as we have said earlier, the IP routing business is already well into double digits. Optical network has been low, but it's now clearly improving. Fixed networks has some pretty attractive trajectories going on as well, as also submarine networks. And you heard what Tommy said about his ambition. And when you then see what some of these cloud players have been able to achieve through various types of as-a-service business models, you will understand that Raghav's ambition will not stop at 2023 either on the group level. The corridor that we are given — it increases by, in a way, average one and a half percentage points per year. I think that is a pretty good trajectory. It's too early today to comment on anything that will happen after 2023, but as you can see, we have no intention to stop there.

Thank you very much. Thank you, Andrew. For our next question, let's go to Peter Kurt Nielsen from ABG. Hi Peter, please go ahead. Hi Peter Kurt. Oh, did we lose Peter Kurt?

I'm on here, sorry. Sorry Matt, there was an issue here. Um, a question related to enterprises, please. Judging from your confident comments on your position in enterprises, it sounds like you believe you have the necessary skills in-house. Is that correct, or would you anticipate needing to make some bolt-on acquisitions in order to strengthen your position in the enterprise area? And if I can just follow up on the private wireless outlook for Tommy — you talked about the two sales models, the direct one and the one via CSPs. Is there any material difference in profitability for Nokia in these two sales channels, respectively? Thank you.

Okay, thanks Peter. Actually, Raghav has the go-to-market and the channel for the private wireless network, so you want to take that, or should I take the second question?

Yeah, I think you've pretty much laid it out. I think we continue to see healthy margins when you look at private wireless, campus networks, and wide area networks. And these margins will only get better as we bring more industrial automation use cases as value addition over the private wireless network to really solve for very specific industrial automation use cases. And so that reinforces the value of the private wireless network to drive more value creation, and that's part of our enterprise strategy.

That's helpful, thank you. Thank you, Peter Kurt. Next, let's go to the line of Stephan Slowinski from Exane.

Great, thank you. I had a question around the Google relationship in particular, because it seems increasingly strategic. First, from an operational standpoint, will you be shutting down all of your data centers, either owned or co-located, and go completely into Google Cloud Platform? And what impact do you see that having on CapEx going forward? What Google technologies will Nokia be adopting internally or embedding into your own products? And then secondly, what are those joint product or service initiatives that you're working on together, and how will those work in practice? Will you have go-to-market collaboration in edge computing or 5G core or other areas? Any insight you can provide on that relationship would be appreciated. Thank you.

Yeah, happy to. Just to complement one more thing that Raghav talked about — it is important to note, and you can pick several studies, the traffic for a lot of enterprise use cases would be run off the edge. And we are really thinking about what edge platform is best suited, because we sit on a gold mine of workloads, and Google may play a part in that. So there's an aspect of that as well. Then there is the internal digitalization strategy. And to your question, we will not shut down all of our private data centers. It will be a balance. We want to make sure that applications which require, from a security and privacy perspective, we keep some on the private cloud, and then migrate the rest to Google Cloud. The strategy is twofold: we're looking at the applications as well as data center-to-data center migration. We're looking at how we can shut down a few where the applications are non-core and we can move them to Google Cloud. Of course, applications like enterprise resource planning would take much longer than some of the fringe applications, but we're well on our way on that migration as well. And the CapEx impact — it's all already factored in. So what you see in terms of guidance that we provided, we don't see anything above and beyond that. In terms of our IT CapEx, it's also factored in. And what Marco talked about — unless Marco, you want to add some more there.

No, in terms of CapEx in general, we have guided for 2021 at €1,700 million, so it's a little bit increased compared to 2020. We had just south of €500 million, but this is quite small compared to the total CapEx. So the big increases that we have are actually coming from real estate, but also investments in capacity, especially in ASM, where we have an extremely good order book and order intake increase in 2020. So we have to increase the capacity in that entity.

Thanks, Marco. Thank you very much. Thank you, Stephan. Now let's move to the line of Simon Leopold from Raymond James.

Thanks for taking this question. I wanted to follow up on the concept of Open RAN and get your perspectives, thinking out perhaps two to three years, of how material do you see the market opportunity for Nokia in Open RAN? And I'd also like maybe for Federico to follow up in terms of how you might have some follow-through in optical and routing based on Open RAN opening up perhaps some new market opportunities, maybe with the hyperscalers for example. But broadly, your take on Open RAN. Thank you.

All right, I think this one comes to me. So, thanks Simon. It's too early to forecast exactly how big the Open RAN market will be, but Dell'Oro is estimating that Open RAN would represent some 10% of the overall RAN market in 2024-25, and maybe 25% a couple of years later. We see Open RAN as an angle to take share. There are 27 strong operators in the O-RAN Alliance today, and they will be requiring Open RAN compliance from their radio suppliers. If the suppliers are not O-RAN compliant, they risk losing share. For us to be strong in Open RAN gives us the ability to compete for more share. And then you have some operators who may need to adjust their supplier base, and Open RAN is a good mechanism for them to do that and increase supplier diversity. When that happens, the market share will be spread across, and the question is who is O-RAN compliant and making that commitment. For us, we can win radio business, we can win baseband, we can win both. We expect that even if some operators require O-RAN compliance in contracts, they may still be buying RF and baseband from the same supplier for some time. We keep an eye on that because any hole this might bring is still to be assessed, but it could give us an opportunity. And also for fixed, by the way — that's one of the reasons we are bringing 25-gig PON, because eventually when the number of cell sites grows with millimeter wave, you're going to need point-to-multipoint solutions as well in the front.

Thank you. And now, thank you Simon. So our final question for today will come from Amit Harchandani from Citi. Please go ahead, Amit. Thank you.

Since I'm the last one, if you don't mind me asking two quick clarifications and a question. My first clarification is on the Technologies business: why is the margin being guided at greater than 75% and not greater than 80%, given that it's been above 80% over the last three years? A second quick clarification with regards to Mobile Networks: are you factoring in the degree of pricing flexibility in order to offset your product, which is still being developed until it ends up becoming fully competitive? And for my main question — I've heard the word 'pivot' being mentioned across different sessions, and you have in fact pivoted the whole organizational structure. Clearly, a lot needs to go right for you to hit some of your longer-term targets out to 2023. But if some of these pivots are not happening at the pace you need, are you willing to undertake more drastic measures, including further restructuring, potentially divestitures? What's the degree of options on the table for you to hit the margin target for 2023? Or is this the plan you're working with and there are no further steps you could take? Thank you.

So thanks, Amit, for your question. It was about the operating margin. Indeed, we guided today that the comparable operating margin for 2021 to 2023 will be more than 75%. Additionally, we have said that we continue to maintain our expectation for Nokia Technologies to deliver a slight improvement in comparable operating profit in full-year 2021 relative to 2020, and then stable performance over the long term with possible ups and downs from year to year. Our current guidance is based on our current visibility of the market. We have successfully expanded our licensing base in recent years, and I believe that we will continue to do so going forward. At the same time, there are some uncertainties relating to the market and deal timing, which make it difficult to make predictions. But as you can see from our guidance, we see Nokia Technologies as a highly profitable and sustainable licensing business, and we feel very good about it going forward.

Yeah, I mean, I'm not sure if I understood your question properly, but if by 'factoring in pricing flexibility' you mean whether we have had to sell our product at a discount because in 5G it hasn't been as competitive as we wanted, then the answer is not really. What I said about China is actually quite specific to China, because of the mechanics of how the central purchasing rounds work — you have the technical ranking and then the commercial round, etc. So, not really.

And then the question that you call the main question — of course, now in this model, the business groups are highly empowered to execute, and they will control all the resources they will need to execute this plan. But with that empowerment comes also a very high degree of accountability. We will not tolerate businesses with sub-scale performance, and in case there would be businesses within these groups that would not meet the targets, we would immediately assess our options. We will have a pretty high degree of performance management and accountability applied to all our businesses. And then, as a final comment from a group strategy point of view — this is now the main plan, accountable business groups. You have heard the plans. On top of that, we will always keep our options open and engage in active portfolio management. That is not the primary plan in our case, but you can be assured that in case this plan does not lead to results, there will be other options considered. And you will have seen in the restructuring announcement — 80 to 85 thousand, there is a 5,000 gap. The better we succeed in this plan, the better the top line develops, the better the gross margin develops, the closer most likely we will be at the 5,000 reduction. That already shows that if this plan does not get executed well enough, we already have a readiness to do more, and that's why we put the 10,000 number there as well.

Thank you all. Thank you, Amit. And thank you again to all of you for your questions today. This concludes our second Q&A session and our event for today. To wrap up our Capital Markets Day, I would now like to turn the call back over to Pekka for closing remarks.

Thank you, Matt. And hey, sincerely, thank you everyone for joining and asking all these highly relevant questions and playing your part in this day, which has been a big day for us. I fully understand if some of you suffer from information overload. In case you want to revisit anything that we said today, all these presentations will very soon be available on nokia.com. Before then, I would like to recap the very key points. First, our four new commitments: we are a trusted partner for critical networks, we focus on technology leadership in each of our business groups, we capture the value shift to cloud and new business models, and we create value with long-term research and intellectual property. Then, the three-phase journey of reset, accelerate, and scale that you could see on the group level and in all business group presentations. This structure will help us deliver on those commitments and return to sustainable profitable growth. In fact, the reset phase began on day one of my time as President and CEO. And then all our business groups and functions are contributing to this journey and addressing it in ways specific to them. They are all accountable and highly empowered, united by Nokia's new purpose and refreshed culture. As I said at the beginning, Nokia really is a great company. We have so much to be proud of. And the measures we have outlined today will help us build on that pride and create technology that helps the world act together — for customers, for investors, and for our planet. Thank you.

I would like to remind everyone that during today's event, we have made forward-looking statements, including but not limited to our future performance and financial results. Forward-looking statements are inherently subject to risk, uncertainties, and assumptions, and they are not guarantees of performance. I encourage you to read Nokia's filings with the SEC for a discussion of the risks that can affect Nokia's business, operations, and performance. We are under no obligation and expressly disclaim any obligation to update, alter, or otherwise revise any forward-looking statements, except as required by law. Thank you for joining us today.