Nokia Capital Markets Day 2021, Federico Guillén

Thank you, Tommy. Hello everyone, it's a pleasure to have the opportunity to talk to you today, even though circumstances mean we cannot meet in person. I'd like to start by introducing you to Nokia's new Network Infrastructure business group. You might have heard the expression: if you want to go fast, go alone; if you want to go far, go together. And NI is able to do both. We do this by bringing together four complementary business divisions that share best practice and collaborate on technology and operations while maintaining a specialized and highly customer-centric approach. In doing that, we strive to be the world's most trusted systems partner for the world's most critical networks.

These networks support consumers, enterprises, and web scales. They provide applications and services to established telecom operators and new players. They are enabling the new wave of industrial digitalization spanning the globe, both on land and under the sea. Our networks are the capillaries of connectivity. To do this, we invest in our people, aiming to attract the best and brightest talents and to drive customer-focused innovation faster and further. Together with the other business groups, we are helping Nokia create technology that helps the world act together.

To deliver on our ambition, we have built a strong foundation for growth and value creation. In 2020, the divisions that now make up Network Infrastructure together delivered revenue of about 7 billion euros at a respectable 7% operating profit. However, we are not really interested in only having respectable margins. We intend to leverage our advantages of technology leadership, scale, and customer focus to exceed our current performance and build on our solid foundation in the CSP market to deliver higher growth and profitability. And we want to do that through projects that will have a direct and positive effect on people's working and personal lives.

We are a global leader in service provider routing, optical transport, next-generation fiber, and global turnkey submarine cable solutions. Today, 99 out of the top 100 telecom operators, seven of the top eight cloud providers, and over 1,500 enterprises rely on us for their network infrastructure. From this base, we see plenty of opportunities for future growth through targeted cross-selling, market share increase, and new customer acquisition in the non-CSP market.

Let's now look at each division in more detail. The IP Networks division reported 2.8 billion euros in revenue in 2020. It's a global leader in IP routing networks and services, and we have shipped more than a million routers. Our Optical Networks division delivered 1.7 billion euros in revenue in 2020. It is a leader in optical transport networks for metro, regional, long-haul, and ultra-long-haul applications. Our optical network portfolio helps network operators build smarter, more automated transport networks for streamlined service delivery and lower network total cost of ownership. The IP Networks and Optical Networks organizations have new leaders in both cases, internal appointments of individuals with a long history within the Nokia family. They both bring tremendous technology, business, and leadership skills.

The Fixed Networks division reported 1.8 billion euros in revenue in 2020. Fixed Networks is a global leader in the fast-growing fiber access and established copper segments, with over 100 million passive optical network access connections shipped to date. The team is also an emerging leader in the fixed wireless access segment. Our Submarine Networks division is the market leader in this vital and highly specialized field. This division provides undersea cable transmission for service providers and the largest cloud providers. It is benefiting from a surge in investment by these customers, while we are also introducing new products to strengthen ongoing diversification in the oil and gas industries.

That's where we stand today, but how do we intend to shape the future? Several industry dynamics are important to critical network infrastructure, and they are in many ways interrelated. Let's take a look at each. First, 5G will drive the need for more capacity, and this translates into investment in mobile transport, including anyhaul and network slicing. At the same time, it has created a new market in 5G fixed wireless access. Second is enterprise digital transformation. This drives demand for capacity in IP and optical network backbones and submarine cables. It's also a relatively green field, which means that new business models such as cloud-enabled as-a-service models are finally gaining traction in our industry.

The ongoing pandemic has thrown the importance of telecommunication networks into sharp relief. We don't see this trend reversing entirely post-pandemic. Access investment with 5G and fiber will only become more critical. Service migration to cloud will only accelerate. We expect more demand for lower latency, higher resiliency, and of course bandwidth. There's really no looking back. Finally, the transformation of enterprise verticals, including manufacturing through Industry 4.0 initiatives, presents another opportunity for network revolution and for new solutions.

As a result, we believe the addressable market for NI, excluding submarine and data center networks, will grow more than 2% annually from 42.3 billion in 2020 to 45.1 billion by 2023. This takes into account a broadly flat telecom operator market combined with a higher growth enterprise market driven mainly by industrial networks and cloud providers.

While the market presents a number of opportunities, we know that we must take active steps to ensure that we seize these chances and capitalize on the prospects we see opening up. We'll do this in three ways. First, we will continue to drive intense innovation in our portfolio across all our divisions. Second, we will focus on the needs of our largest customer group, the service providers. We continue to focus intensively on the evolving requirements of these customers, and we are building the right core technologies including custom routing, optical, and active silicon to address their needs for performance and service delivery. As a result, we are aiming to gain share with existing customers and take share from competition in this customer segment. Finally, we will increase our business with non-CSP customers by leveraging the same core technologies that differentiate us in the service space into verticals that highly value our approach to deterministic performance, rock-solid reliability, and simplified operations.

Through deep engagements in vertical industries such as utilities, transportation, and mining, we have developed solutions to address industry-specific needs. Examples include networks for air traffic control, mission-critical power transmission grid communications, and mission-critical communications for the oil and gas industry. We will continue developing our solutions, and we will continue to derive value from our R&D investments, for example by adapting a solution developed for one vertical industry to suit another. We are also making a specific investment in solutions designed particularly for web-scale companies and cloud builders. Network Infrastructure hosts, on behalf of all Nokia, our verticalized team focused on web scalers, and we will drive success with these customers in areas like data center switching, data center interconnect, and submarine cables.

Now I'd like to take that first point, portfolio innovation, and explore how it applies to each of the Network Infrastructure divisions. In IP Networks, our success has been based on driving innovation. We will continue to focus on innovation in our core technologies, including our in-house developed IP routing silicon. FP4 is our current generation and broad range of systems that allow us to deliver the right cost and performance to the right place in the network. Our deep commitment to excellence will also continue. This is an essential differentiator for us and is acknowledged by customers. It is also one of our paths into the data center switching market. Finally, with all the drivers for change in the market today, our core technology innovation complemented by our investment in network automation and tools will help our customers remain a step ahead and ready for the unexpected.

In our Optical Networks division, we intend to drive growth and continue to scale the business. We will do that partly by delivering next-generation DSPs to increase capacity eventually to its technical limits, and increasing our investment in silicon photonics, photonic switching, and network automation tools which are essential to helping improve overall total cost of ownership in optical networks through increased efficiency and cost saving in network operations. As attention moves from cost per bit to the overall cost of the network, this is of increasing importance. Our next-generation PSE-5 DSP will be our fifth generation of coherent optical technology and will enable service providers to combine higher spectral efficiency with the lowest power consumption in the industry. Our acquisition of Elenion, a silicon photonics specialist, also gives us the ability to closely link our DSPs with a highly efficient optical front-end, enabling us to bring yet more competitive solutions to the market.

We heard Pekka talk about the importance of fiber in our journey, and that is very much reflected in the way we steer our Fixed Networks division. Here we are number one in 10 gig, and we were the first in the industry to offer a 25 gig PON commercial product. The recent commitment of such a large and influential player as AT&T to the multi-source agreement group highlights the importance of 25G PON to the telecommunications industry. Our investment here will be targeted at driving and increasing our technology leadership with in-house silicon and optical modules development. We'll complement that with continued cost optimization to ensure that our products remain highly competitive. We will continue to drive the adoption of cloud-native server by our customer install base. In the relatively new area of 5G fixed wireless access, we have established a leadership position based on innovative solutions that bring high usability and performance. We are already working with tier 1 customers in this area, and we are currently running the largest 5G fixed wireless access network in the world.

Our Submarine Networks division represents a different kind of business, with a large physical infrastructure and a strongly cyclical business pattern. At the moment, with web scales and other companies building out submarine capacity, the market is strong and Nokia is the leader. We will capitalize on this situation and smooth out the business cycle by consolidating our leadership position in turnkey subsea cables while taking the opportunity to update our fleet and convert a strong backlog of orders into revenues.

While each of our divisions will be a strong business in its own right, we are by no means overlooking the advantages offered by bringing these four divisions together into Network Infrastructure. We will find areas of collaboration and best practice in business operations and in research and development that will enable us to maximize the number of projects we can take on efficiently. That is, we aim to do more with the same. For example, there is great potential for IP and optical convergence to explore with the advent of pluggable optical modules for routers and the associated need to provide coordinated management and operations across both IP and optical layers. In a further example of cross-NI collaboration, we are leveraging our proven and globally deployed IP routing software in our Fixed Networks platforms. Portfolio innovation is the first part of our strategy in Network Infrastructure.

Now I'd like to look at the two other areas covered by the strategy: our customer-focused CSP and non-CSP approaches. In both areas, we recognize the opportunities ahead. We have also identified the challenges we are likely to face, and we have plans to maximize our success and minimize risks. First, let's look at the large data center switching market, where we have taken our first steps and where we can bring our reputation for building massive-scale, complex, and highly reliable IP networks. This market features well-established players and is challenging for a new entrant. Nevertheless, over the past three years we have been able to partner with leaders in the webscale space and learn about their real-life issues. We work with them to build from scratch a totally new and robust foundation for data center networking, one that can be easily tailored to any operating environment. Early endorsement came from a win with Apple, and we intend rapidly to increase our customer list in this area.

5G fixed wireless access is an area that is beginning to take off this year. We expect this market to grow, although from a modest starting position, at nearly 100% CAGR between now and 2023. Nokia's solution is highly in demand, and a significant challenge will be to meet the demand with the limited diversity of silicon suppliers. Across our portfolio, the current pressure on component suppliers represents a threat. However, Network Infrastructure intends to convert this threat into an opportunity through our investment capacity and superior planning and forecasting jointly undertaken with our customers. We believe that supply chain is going to be a competitive battlefield and that it can be a competitive advantage for us.

Coming to the third box on the slide, we see a global trend for new builders in the form of companies with fiber assets to build networks. They are taking advantage of the demand for bandwidth driven by cloud and digitalization. We will adjust our sales engagement model to convert as many of them as possible into Nokia customers. We aim to take on the role of network and technology partners to these businesses. We also see increasing interest in new network architecture models as open and disaggregated structures become available. This is an important trend in our market, and we are ready to support customers who choose this route. We are positioning ourselves for these moves with openness built into our solution where that makes sense, and we are supporting disaggregated solutions such as the separation of control and user plane where this adds value to customers.

Finally, on the topic of global trends, we are all aware of the geopolitical trends in our markets. This cannot be seen in simple terms; the market is interconnected in many ways. We will ensure that customers are aware of the advantages Nokia offers as they look for alternative suppliers, while at the same time remaining aware of the changes driven by geopolitics in, for example, supply chains. We believe that our strategy provides a firm foundation for financial success for our business group. We intend to grow faster than the market by taking share among operator customers and by closing new business in the growing enterprise segments in which we play. We will do this through our own webscale-focused verticalized team and by collaborating with Nokia's dedicated enterprise sales team in CNS. NI products already represent a sizable proportion of Nokia's enterprise revenue, and there is opportunity to drive that higher.

As a result, we are targeting net sales substantially higher than the estimated 2% CAGR growth in our total addressable market. Achieving these results and maintaining a technology leadership position will require increased investment in R&D to cover the areas of portfolio innovation I've outlined. We will also need to make initial investment in new sales engagement models to ensure we are able to serve our customer base as we plan. As a result, we will take steps to defend and gradually increase our profitability while we grow. Our aim is simple: do more with the same. We will keep our operating expenses flat as a percentage of sales, partly by leveraging Nokia's new operating model. As a result, we believe we will be able to streamline sales, general, and administrative costs in the range of 1.3 points as a percentage of sales. Taking all these factors into consideration, we expect to deliver operating profit in the range of 9% to 12% by 2023, ensuring that Network Infrastructure remains a strong driver of profitability for Nokia as a whole.

In Network Infrastructure, we are leveraging our experience, our market position, our technology foundation, and our customer relationships to accelerate our performance. We see opportunities for value creation based on our strong foundation with a global customer base, portfolio leadership, and innovative technology combined with market growth and opportunity driven by increased demand for network transformation and capacity. Market dynamics are driving ongoing demand for network transformation and capacity expansion. By following our strategy of intense customer focus both in the CSP and non-CSP customer segments, we will not only take advantage of this growth but will fuel and accelerate it. In doing this, we will scale our business to take advantage of new opportunities. Finally, we will fund this growth strategy with smart efficiency drivers. These include making the most of Nokia's new operating model, combining our forces to cover more customers and solutions with the same cost, investing in our people to drive innovation and customer focus, and finding new ways to enable Nokia to create technology that helps the world act together.