Title

Presentation

Nokia Oyj beats earnings expectations. Reported EPS is $0.06, expectations were $0.05.

David Mulholland: Good morning, ladies and gentlemen. Welcome to Nokia’s second quarter 2024 results call. I’m David Mulholland, Head of Nokia investor relations. Today, with me is Pekka Lundmark, our President and CEO, along with Marco Wirén, 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 Factors section of our annual report on Form 20-F, 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. This report includes both reported and comparable financial results, and a reconciliation between the two. In terms of the 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 would 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, 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 webscale and regionally in North America. These transactions will focus on strength in our network infrastructure business with its future built on free market leaning units, fixed networks, IP networks, and optical networks. Moving on to our second quarter performance. Marco will go into more details, 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-bill above 1 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 continued to have good deal traction across the business groups. We won some important deals in NI in the quarter, especially [Technical Difficulty]. For mobile networks, we won some completely new customers such as MEO 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 over 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 billion to €2.9 billion. 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 Marco, who will go into the financials in more detail.

Marco Wirén : 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 in Q2 2024, 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. Gross 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 a decrease in India, reflecting the fact that quarter two in 2023 rips into 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 operating margin assumption from 1% to 4% to now 4% to 7% as we continue to take quick action on costs. 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 3 percentage point negative impact on the net sales in the quarter. Both gross 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%. And Nokia Technologies had a solid quarter and the run rate remains at €1.3 billion after the significant smartphone renewals we had in the first quarter. One thing to highlight in quarter two was that we signed an agreement with a video streaming platform related to our multimedia technology.

And this is an early step for us in this area, but it is an area that we think can become a meaningful opportunity for Nokia. Then if we turn briefly to Nokia’s net sales by region, you will see here that India drove the majority of the net sales decline in quarter two as the year ago quarter was the absolute peak in the 5G deployment in India and hence that minus 69% decline in the quarter. We are pleased to see a return to growth in North America, supported by the one-off AT&T benefit. But aside from that, we also saw a return to growth in our Network Infrastructure business in North America. In other regions, there was softness across most markets. In quarter two, we generated solid free cash flow, which led to a net cash balance of €5.5 billion.

This was driven by operating profit and changes in net working capital as the India receivables, which built up during the deployment, normalized. In addition, our cash benefited from €315 million of disposals, mainly related to both TD Tech and the sale of our device management and service management platforms. We also returned over €300 million to our shareholders through dividends and share buybacks. You will also see in the release that we are now sharing the adjusted free cash flow by business group to help understand the different dynamics of cash flow performance for each business. We are still working to refine the process. And by our full year results, we will provide you with historical data that will allow you to better interpret the performance.

And with that, let me hand back to Pekka.

Pekka Lundmark : Thanks a lot, Marco. So let’s now look at some of the business highlights from the quarter. On 27th of June, as I’m sure you all recall, we announced the definitive agreement for Nokia to acquire Infinera in a deal we believe has strong strategic and financial rationale. We hosted a call about the transaction a few weeks back, so I won’t go again into all the detail on this. But as a quick recap, there are three main reasons for the deal. First, we see a strong strategic and synergistic rationale for the transaction. There is a strong strategic fit with highly complementary customer, geographic and technology profiles between the two companies. The timing is also optimal to build on the strong momentum both businesses have had in recent years and improves our long term growth opportunities.

From a synergy perspective, we target net run rate synergies of €200 million by 2027 at the operating profit level. Second, we believe this transaction will strongly enhance our Network Infrastructure business. The transaction will increase our enterprise exposure in NI, particularly when considering Infinera’s recent webscale design wins in systems and pluggables. The combined business will have over €600 million of annual webscale sales in optical. Finally, in terms of the financials, we expect the transaction to be accretive to Nokia’s comparable operating profit and EPS in year one and to deliver over 10% comparable EPS accretion in 2027, assuming the transaction closes by the first half of 2025. We also expect the acquisition to deliver a return on invested capital comfortably above Nokia’s cost of capital.

I would also just like to add now that it has been a few weeks. The customer reaction to the deal has so far been very positive. Indeed, even some excitement about what the combined business can do for them. We also announced the agreement to divest Submarine Networks, which has previously been part of the Network Infrastructure business group. And going forward, that means that NI will be built on three market leading pillars. Fixed networks continues to be well positioned to benefit from strong demand in the fiber market. This is evident in markets where fiber is not yet highly penetrated and in more mature markets where customers are starting to upgrade to XGS-PON or 25G PON. Elsewhere, government funding projects are expected to start towards the end of this year and Nokia was the first vendor to announce the availability of Buy America compliant products.

Given these dynamics and opportunities, we target mid-single-digit growth for fixed networks. Our IP networks business continues to see the ramp up of FP5 and FPCX routing products and the expansion into new markets like data center switching. It has been showing continued momentum in expanding its presence beyond CSPs into the enterprise and webscale markets and we expect this to continue. In this business, we are also targeting mid-single-digit growth. With respect to our newly strengthened position in optical, we believe this now has at least a mid-single-digit growth opportunity and now a compelling path to a mid-teens operating margin. These businesses combined will give us a unique position in Network Infrastructure. On a pro forma basis, for the two transactions in 2023, Network Infrastructure would be €8.4 billion revenue business that targets mid-single-digit net sales growth, with margins that would pro forma be around 12%, but we believe can expand over time to mid to high teens.

One other topic I wanted to discuss is our customer momentum in Mobile Networks. Clearly, as you know, we had a setback in December with AT&T’s decision to actually single source their network, their radio network to a different vendor for commercial reasons. Now, as Marco mentioned, we have concluded negotiations with AT&T related to our existing RAN contracts, which gives us clarity on the path forward. But more importantly, if we take a step back and look at the overall development, we continue to make significant progress with customers in our Mobile Networks business. Since 2019, we have won a total of 55 new RAN customers and we have increased our share at another 33 customers. This drove the significant increase in market share that we saw between 2021 and 2023.

We have won a significant number of deals this year, including completely new customers, such as MEO in Portugal, and maintaining our position at other key operators in Europe, as there has been a lot of customer tendering activity. I continue to firmly see the AT&T decision was a very customer specific situation. We have a compelling product offering for customers that is resonating and helping us to build a stronger future for our Mobile Networks business. We are also making strong progress with our Open RAN and Cloud RAN projects. And we remain the most open vendor in the market, as I highlighted last quarter. In Q2, we partnered with Vodafone to introduce Open RAN into their network in Italy. With stc, we completed the world’s first trial of an O-RAN-based private 5G network using Microsoft Azure Operator Nexus.

And finally, our solutions have been validated with an ecosystem of leading industry partners across hardware and software. I would note that this continues to be a highly competitive market. And we see intense competition in regions that Chinese vendors are still able to compete in. But we have continued to win deals. We will remain disciplined on pricing, however, as we have done in recent years. And that has helped us to significantly improve our gross margin in Mobile Networks, particularly on a relative basis. Turning to Cloud and Network Services, where we continue to make great progress on Network as Code. This is the business we are building organically to help CSPs monetize network APIs and help developers access new network capabilities for their applications.

This is an ecosystem play, and we are proud to now have 16 signed agreements with partners across the ecosystem. This includes new CSP partners, such as Orange, Telefonica, and Turkcell. Importantly, we signed agreements in Q2 with Infobip and Google. Both of those partnerships will enable access to a wider range of developers, consequently driving demand and usage of network APIs through our platform. On that topic, we continue to make good R&D progress on the platform itself, and in Q2, we launched the Network Exposure platform to empower CSPs to expose their network capabilities to the ecosystems of their choice. We look forward to sharing more exciting news over the course of the year. Additionally, within Cloud and Network Services, we have been seeing recent traction around core networks, particularly in Europe.

This is evidenced by announcements we have made, including with O2, Telefonica, and Germany with the deployment of 5G standalone core software on Amazon Web Services, as well as other deals with Norlys of Denmark and Aire Networks in Spain. Next, I wanted to highlight some of the results of the fast action we have taken to reduce our cost base. As a reminder, in October, we announced a target to lower our cost base on a gross basis by between €800 million and €1.2 billion by the end of 2026. This represented a 10% to 15% reduction in our personnel expenses. You can see in the slide the progress we have made so far on the October program. We have already actioned €400 million of savings by Q2, and we will continue to make further progress in the second half to reach the €400 million euro of in-year savings we have committed to.

The program is expected to lead to a 72,000 to 77,000 employee organization compared to 86,000 employees Nokia had when the program was announced. As of the end of June, our headcount was just under 80,000. Please remember that these numbers are on a like-for-like basis and do not reflect the recent announcements regarding ASN and Infinera. So we are making good progress on this program and we’ll continue to do so as we navigate the current market environment. Then on to our outlook. We believe the industry is stabilizing. And given the order intake seen in recent quarters, we expect a significant acceleration in net sales growth in the second half. However, the net sales recovery is happening somewhat later than we previously expected, impacting our business group net sales assumptions for 2024, which Marco highlighted in his commentary.

Despite this, we remain solidly on track to achieve our outlook for 2024, supported by the quick actions we have taken to reduce our costs. We are now trending towards the midpoint or slightly below the midpoint of the operating profit range of €2.3 billion to €2.9 billion and towards the higher end of the cash conversion range of 30% to 60%. So in conclusion, the weak market environment has continued. However, we have seen a third quarter of order intake momentum and we expect to see net sales growth in H2 weighted towards Q4. We have also been encouraged by the level of customer engagement and tendering activities across all business groups. We have moved quickly on the cost savings program which we announced in October of last year and this continues to support our outlook, which we have reiterated this quarter.

The quarter saw another period of strong cash flow generation, ending the quarter with the net cash balance of €5.5 billion. The board intends to accelerate the previously announced buybacks, which will now be executed by the end of 2024, a year ahead of the original schedule. Thank you. And with that, I think we can now move on to your questions.

David Mulholland: Thank you, Pekka and Marco. Before we move to the Q&A session, please let me give you one date for your diary. We’re planning to hold our next business group progress update on our Network Infrastructure business on Tuesday, the 3rd of September. We plan to hold the event virtually and we will send out a save-the-date in the coming days. We hope you’ll all be able to join us. As usual, for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up. Alice, could you please give the instructions.

Operator: [Operator Instructions]. I will now hand the call back to David Mulholland.

David Mulholland: We’ll take our first question from Francois Bouvignies from UBS.

Francois-Xavier Bouvignies: My question would be on the Network Infrastructure specifically. So when we look at your fiscal or full year EBIT margins for NI and the group EBIT margin, if we assume it’s similar Q2 versus Q3 based on what you said on the seasonality, this would imply NI EBIT margins on the high-single-digit 10% range in Q3. And to get to full year, to get to your 11-plus EBIT margins for NI, you would need like 20% plus of EBIT margins in Q4 with a very, very high top line growth. So maybe can you explain us how can we model such steep recovery when in H1 you did 6% NI EBIT margins and we need to put, like, mid-teens to 20% in the second half of the year. That would be my first question.

Marco Wirén: As we mentioned also in the release, the quarter three margin is a balance between a weaker Mobile Networks margin and we won’t have the benefit of the accelerated revenue [indiscernible] due to the AT&T deal resolution that we had in quarter two and then, of course, a good improvement in Network Infrastructure. Then, yes, we expect a very strong quarter four, primarily driven by leverage from the sales volume we expect in the quarter.

David Mulholland: We’ll take our next question from Sandeep Deshpande from J.P. Morgan.

Sandeep Deshpande: My question is you’re talking about this very strong again – back again to the strong revival in the second half, better than normal seasonal. Is there a reason for this much better than normal seasonal behavior in the second half? Is it just the revival or is it new projects or is it anything else which is causing the better than seasonal Q3 and Q4 top lines?

Pekka Lundmark: First of all, you have to remember that the comparables, of course, get significantly easier because last year was a bit of an exception when you look at seasonality that beginning of the year was strong and then the end of the year was weak. This year, we are expecting this whole thing to reverse itself. And again, we have had now three quarters of strong order intake, which has been building order backlog and that’s what we have modeled into the forecast. Of course, this still requires that the good momentum in orders will continue in Q3 because there will be – especially in Network Infrastructure, will be orders that will be needed in Q3 and to be delivered in Q4. So it’s not yet in order backlog, but it is supported by the existing order backlog, the funnel that we have across the businesses and then the expected delivery times.

This is also supported by – when you look at kind of the general comments from our competitors and market analysts that are all highlighting that, yes, the market is starting to recover. Most of them are also saying that, even though it recovers, the recovery is more slow than we originally thought, which you can see in us taking down the assumptions for this year. And then, the assumption is that that the market recovery will continue into 2025. So as a summary, the Q4, it’s not there yet in terms of order backlog. It requires that the good order momentum continues in Q3, but that is what we are expecting based on the funnel that we have.

Sandeep Deshpande: Just quick follow-up, Marco, on the costs. You’ve talked about this €400 million of the cost cutting, which you have implemented. Is this being implemented mostly gross margin, operating margin? When will we begin to see it in your margin as such really?

Marco Wirén: Remember, the €400 million that we mentioned is a run rate basis. And as we said originally that one third is coming on cost of sales and two thirds is coming from OpEx. So this would be our – still estimating that that’s the way that we are going to go forward as well. We have now, just like Pekka mentioned in his presentations, while taking down a number of employees, more than 6,000 since we started this project and our program, we have been very fast in taking these actions. So we are quite confident that we are on the right track what comes to the cost saving program.

David Mulholland: And I’ll maybe just add one comment on the year-on-year challenge that we obviously had much lower variable pay accruals in Q2 last year that are more normal this year and that also influences the year-on-year comparison. We’ll take our next question from Janardan Menon from Jefferies.

Janardan Menon: I have a similar sort of question on your second half, but this time more on the Cloud and Network Services division because, as you say, the other divisions had lower seasonality in last year and into the second half of the year and so they have some benefit on the growth side. But this division did quite well in the third and fourth quarters of last year. And if I look at your current guidance for Cloud and Network Services at minus 5% to 0%, which is your updated guidance, you still need, in my calculation, more than 50% growth from Q2 to Q4 to achieve something like that. Just wondering what is driving that? Is it to the core network wins that you talked about in Europe that you alluded in your opening remarks?

And similarly, will that increase in sales lead to an improvement in gross margin as well on a year-on-year comparison, given that you had you know sort of good gross margins in the second half of last year? Would it meaningfully improve from that as well?

Pekka Lundmark: When you look at the seasonality of the CNS business this year, unlike in NI, in CNS, this year’s seasonality will be similar to the previous years. We had pretty much the same situation last year that the full year result was made during Q4 and that’s what we are expecting this year as well. Then if you get into the fine detail, of course, now the effect of the disposal is like 3 percentage points on top line, which needs to be taken into account in the comparison. But this is supported by the deal momentum that we have had. Core networks is an interesting market at the moment. This is part of the dynamic. So I mentioned traction in core networks in Europe. The core network market is consolidating. You may have seen the Microsoft announcement that they are they are reconsidering, affirmed a meta switch, i.e. their core network approach.

Core network is a market where also, even in those countries that have not restricted specifically Chinese out, they are making moves on the core network in terms of high risk vendors. So this should be actually driving the core network to a situation where there will be a smaller number of vendors and clearly this is one of our strengths and we are starting to see this in the recent deal momentum. Now the thing in core networks, when you look at the whole CNS which makes the comparison always challenging, is that we have had a strong position in 3G core network, which has still been there in CNS numbers because it’s software revenue. That market is declining quickly and that is being gradually replaced then by the 5G core network market. And that is the reason why even though the 5G core network has been increasing rapidly, it has been compensated then by the loss of the 3G market, and that is the reason why you have not really seen growth in CNS in the last two to three years.

But, again, we continue to believe in a very strong Q4 also this year in CNS.

Janardan Menon: Just on the AT&T contract resolution fee, you said it’s a portion of contract resolution, so can you give us an idea how much of the total this was and when we can expect any further payments from AT&T?

Marco Wirén: We have still the agreement that we signed in 2021 which ends by end of 2025. And what we have now concluded with the AT&T, how will we deliver those services and software upgrades and whatever they need from us during this period and this €150 million was more acceleration of the revenue recognition that would otherwise happen later. So we continue to deliver as we go until the end of 2025, but just like we guide as well that this year will be approximately at the same level as last year, while next year will be about the half of the volume that we have this year.

Pekka Lundmark: To follow up, to continue – build on that, after 2025, AT&T mobile networks will definitely not go to zero because there is ongoing indoor base station and microwave radio business in MN, AT&T. And then depending on for how long time they will be continued to be operational Nokia base stations in the network, that is not for us to comment what that base is. But assuming that there will be also Nokia base stations the network after 2026, that will continue to generate some revenue for us. So it will drop to about half, as Marco said, in 2025. This year, about the same level as last year, significant drop next year and then another drop in 2026, but definitely not to zero. And still, just to be 100% clear on that acceleration, so what that means that we will be able to realize the original full value of the contract until the end of 2025, but this acceleration in a way reduces 2025 and increases 2024. That’s what’s going to happen there.

Marco Wirén: And just building also that what comes to 2026 and forward, then, of course, there’s new opportunities that we definitely are fighting for and secure that we will get a good opportunity to win those as well. So it doesn’t mean that that ends there.

Janardan Menon: So the €150 million is the acceleration fee to compensate for the sharp decline into next year.

Marco Wirén: No, it’s not a fee. Based on the contract that we have with AT&T, that €150 million would have been recognized later. Because we concluded the negotiations, according to IFRS, we have to take that €150 million part already in quarter two instead of later periods.

David Mulholland: We’ll take our next question from Simon Leopold from Raymond James.

Simon Leopold: First one, I wanted to ask you about your interpretation and thoughts of the news out of Germany regarding the government taking some action against Chinese vendors. How do you see that opportunity? And is it your interpretation that it’s limited to mobile core or does this present an opportunity for accelerating RAN replacement in Germany?

Pekka Lundmark: Obviously, we have noted the news in Germany. There are some clear parts in the announcement and then there is also some ambiguity which we are still trying to understand what it means. The mobile core part is pretty clear. On the other hand, the market share of Chinese players in mobile core has been fairly limited also so far. So that is not a huge needle mover as such, but of course, it means that there will be no opportunities for them to enter the mobile core as that market will, of course, be a very important market when they are moving to 5G standalone core and so on. Then the RAN part, that’s where the ambiguity is and we still need more information on what exactly those statements will mean in terms of management software and what it will mean or will not mean to base station hardware and base station software. We do not yet have enough information to make a definitive assessment. So, we need to get back to this one.

Simon Leopold: Follow-up is that I’d like to see if you could update us on the progress and efforts to diversify, particularly into enterprise and including the hyper scale, thoughts on where that stands and how you’re thinking about that prospect.

Pekka Lundmark: That obviously continues to be a key element in our strategy. When you look at the second quarter, non-CSP business was now or enterprise net sales were 11.6% of group net sales. So that’s been trending continuously up. Of course, now enterprise has not been immune to the general market weakness, but when you look at the kind of the delta between our top line trajectory in enterprise and then CSP, there has continued to be a significant difference in Q2. I think that was pretty much 20 percentage points, that top line trajectory difference. So this continues to be a key part. We are making good progress. And the very important thing, of course, is that the Q4 acquisition of Fenix is targeted to accelerate the defense business that we have and then the Infinera acquisition is targeted to accelerate our webscale business, and especially the data center business, which, of course, unlike the core CSP business, the data center market will be an attractive growth market for many years to come and that’s what we will get into much more strongly through the Infinera acquisition.

So we are looking forward to these opportunities and, of course, we continue to look for additional opportunities, some of which we are working on organically, including the data center switching opportunities in our IP networks of NI.

David Mulholland: We will take our next question from Artem Beletski from SEB.

Artem Beletski: I actually would like to ask on NI and could you maybe provide some further color on pace of recovery business/subsegment as you, for example, made some comments in accordance with Q1 results and what comes to lower revenue outlook for the business wherefrom it is predominantly coming or what are key puts and takes there? And then I have a follow up.

Pekka Lundmark: There is, Artem, no huge difference between the three segments in terms of the revised outlook. We continue to have good orders momentum in all of them. We had good orders actually in Fixed Broadband in Q2, particularly in North America, which is a promising sign because we received now the first bid related orders in North America, some of which will be already supporting Q4 revenue, although it will not be a huge needle mover yet in Q4 as we have said earlier, but we will get some already this year. I believe that we will be the first one to benefit, hence we have made already in the previous quarter kind of optimistic comments about the Fixed Networks outlook and then, of course, the bid will be much more a 2025, 2026 story. But, really, to answer the main question that you had, it’s fairly balanced between the three units in NI.

Artem Beletski: Maybe just a quick follow-up on the buyback program and acceleration decision being done there or to be done. What is actually driving it? Is it purely strong cash position what we have in place or is it already a preparation for Infinera ideal completion, so to speak, as the amount of shares is likely to increase and any thought at this stage by the board in terms of its continuation looking beyond 2024?

Marco Wirén: As you remember, we introduced, in the beginning of this year, a share buyback program and the ambition was that €300 million will be done this year and €300 million additional next year. But the board of directors decided that we will accelerate that program and now do the whole €600 million in 2024. And this is, of course, based on the shareholder distribution policy and the strengthened cash position that we have. And what comes to Infinera, remember as well that ambition is that we will finance this totally from our cash on hands. And we have also said when we presented the deal that we will acquire additional shares or buy additional shares to secure that there will not be any dilution because of these deals. And after the shareholder meeting in Infinera, we know exactly what is the amount of shares that we need to buy back as well.

Pekka Lundmark: So that means that whatever the Infinera dilution will be, that will be executed through buybacks on top of the €600 million program.

David Mulholland: We’ll take our next question from Joseph Zhou from Barclays.

Joseph Zhou: I have one and then a follow-up. So my question is on AT&T. And thanks for the clarification about the impact now. Now, we’ve got much better visibility. But just to understand, one is, do you actually get any compensation from AT&T at all? And number two is the quarterly phasing of the AT&T contribution or run rate, how do we think about it, i.e. did you recognize a normal revenue from AT&T in Q1 and then you overall recognized €150 million in Q2 and how should we think about Q3 and Q4 [indiscernible] AT&T revenue run rate?

Pekka Lundmark: The underlying contract is stipulating what we deliver to AT&T. And based on that deliveries what we do, we recognize just like to any other customer as well. And the €150 million is acceleration only because of the accounting loss that we have to do it in Q2 when we concluded the new amendment to the deal that we have already with AT&T. So as we go, we recognize the revenue based on what they buy and what we deliver them.

Joseph Zhou: It’s a normal kind of a run rate in the second half, Q3 and Q4 based on AT&T.

Pekka Lundmark: Just like to any other customers, whatever they buy, so we recognize the revenue based on that.

Marco Wirén: My follow-up is really on Vodafone Idea. Obviously, you took a small stake, an exit stake in Vodafone Idea. And I believe partly to help them finance the 5G route, which they have yet to deploy in India. And just to understand, one is, what’s the kind of expected margin of that project compared to the normal kind of India margin that you saw last year and also the timing of it. Are we expecting to see the start of the roll out at the end of the year or next year or second half of the next year, etc.

Marco Wirén: We never comment specific margins per customer. And just like Pekka mentioned earlier as well that our ambition is to have a good margin on all deals that we do. So this is the ambition we have. And Vodafone Idea or any other customer is a specific contract and margins vary always depending what they buy and different other conditions in the agreements. But our ambition is always to make deals that we believe are supporting the shareholder value creation. And based on that, we make the decisions on each deal.

Pekka Lundmark: The key thing in India, in addition to Bharti and Reliance Jio is really that Vodafone Idea have made progress on their financing and the deal to convert some of the debt to shares, which we did in the same way as some others, was obviously part of their capital structure development. We do not intend to become an operator in India. That small share that we have in them, there is a lockup period, but after that we will be free to do whatever we want with that. So that is purely in a way a tactical move from us. But then the key thing for our future in India will be to understand that how much will Vodafone Idea be investing in their network, especially in their 5G expansion. And that is clearly an opportunity for us, assuming that they get their funding arranged. And as I said, there is now promising progress on that. Assuming that that really happens, there is good potential for us, for revenue in their 5G going forward.

David Mulholland: We’ll take our next question from Sami Sarkamies from Danske Bank.

Sami Sarkamies: You have increased margin guidance for Mobile Networks by 3 percentage points. Is this revision fully explained by the AT&T settlements? And do you assume more high margin revenues in the second half of the year or next year?

Marco Wirén: It’s really a combination of that €150 million, which you can mathematically, of course, calculate how much that is. But it’s not only that. It’s also good progress on the cost side. It’s a combination of these two.

Sami Sarkamies: I would ask about your thinking regarding portfolio management. Are you interested in making additional bolt-on acquisitions to Infinera? And why did you think it was a good time to divest ASN now?

Pekka Lundmark: Well, if I take ASN now, first, obviously, it’s a well-known fact that we’ve been contemplating that divestment for a long time. Fact number one. Fact number two, as part of the original Alcatel-Lucent acquisition deal in 2016, the French State has had a veto right on a number of strategic decisions, which then always limited our freedom to maneuver the business. So we just now were able to finally find a solution with the French State that now is a good time for them to acquire the business. It was more tactical that, after quite lengthy discussions, we were able to find each other on the terms and conditions. There’s not more than that into that. We are pleased with the acquisition prices, especially when you – for the divestment prices, especially when you look at the profit multiple, which is a good multiple, and also keeping in mind that it’s a capital-intensive business that requires cash flow to be invested in CapEx. And remembering that if you want to significantly increase the revenue in the future, that, of course, then requires outgoing CapEx into capacity build.

So we believe that everything considered, it was both a good timing for the divestment and also a good price that we received. Then when it comes to additional deals, we continue to be extremely prudent. There could be bolt-on acquisitions, but any acquisitions would have to follow extremely strong and compelling industrial logic. Strong synergies, strong logic. That will always be a prerequisite for any acquisition, as we have now seen in the Infinera case with €200 million synergies and exceptionally strong customer and market position complementarity.

David Mulholland: We’ll take our next question from Jakob Bluestone from BNP Paribas Exane.

Jakob Bluestone: I had a question on your cash flow. You cut your CapEx from €600 million to €550 million. So, if you could maybe just talk us through that. And then also just had a follow-up on the AT&T impact. Can you maybe just comment on the cash flow as opposed to P&L impact of the €150 million accelerated revenue recognition? Is it correct that that would lead to a negative working capital movement? And if so, if you can maybe just comment around your working capital, which was plus €100 million in the quarter. So would that have been plus €260 million kind of ex-AT&T?

Marco Wirén: When it comes to €150 million, we recognize that revenue now and that payment will come accordingly as well according to those payment terms that we have. Cash flow has been extremely good in the first half, as you’ve seen, thanks to the, first of all, normalization of the net working capital and also the India payments that we have received, but also due to the actions that we have taken internally to secure that we have optimization of the net working capital and improve the processes within the company. So we’ve seen the rotation days improving in net working capital, and that’s resulting all of these different actions and reasons resulted very good cash generation in the first half year.

David Mulholland: Do you have a quick follow-up, Jakob?

Jakob Bluestone: I guess just to confirm the cash flow impact. So you have a working capital outflow – or you had a working capital outflow in Q2 and then we’ll have working capital inflows subsequently. Is that correct?

Marco Wirén: No, we had a very good positive impact of working capital. And what comes to – if you look at the rest of the year, specifically in Q4 when we have a huge sales increase estimated, and of course, that is tidying up accounts receivables and will, of course, impact the cash generation in the fourth quarter.

David Mulholland: We’ll take our next question from Daniel Djurberg from Handelsbanken.

Daniel Djurberg: I would like to ask a little bit on the growth. And except for India that stand for two thirds of the weakness and also other weak markets, you also have this reduction. I think you said 6,000 so far, planning for 9,000 to 14,000 versus the initial 86,000. So my question is really, this also under the new organizational structure. How much of the impact on the revenue decline comes from this, i.e. the right-sizing?

Pekka Lundmark: I would not say that there is any negative revenue impact from the organization change or downsizing. This is really – this is the market and this is the funnel. We are fully competitive in terms of our offering and we are fully resourced when it comes to sales and customer interface. So this is not the reason. And if I may do a small correction, you said that two thirds of the revenue decline would come from India. It was actually three quarters came from India. So almost all was India related, but definitely not related to the operational model change. We are pleased with the pace, as I said, on the cost cuts and the over 6,000 reduction in headcount, especially when you look on the relative terms. It has been a fast pace, but that is not the reason for the revenue hit.

Marco Wirén: Building on that, last year, India had a huge and very rapid deployment of 5G network and our peak was in quarter two last year and, of course, this year, they have been normalizing their deployment and slow down as well quite heavily and that is why we see this huge difference in quarter two.

Pekka Lundmark: India, first, to confirm the numbers, which are, of course, in the report, but so that you pay attention to them, so we had revenue acceleration in India in Q2 sequentially. We had €329 million in India in Q1 and we have €600 million year to date. But the important is that we continue to expect what we earlier said that have full-year revenue in India between €1.5 billion to €2 billion and this is not only a mobile game in India. This is also Network Infrastructure. And just as one proof point, this is a contract that will start delivering significant revenues in Q4 and that is a fixed wireless contract that we have with an operator in India, which we actually announced earlier. We were talking about an APAC fixed wireless contract that we can now confirm that it is with an Indian operator.

Daniel Djurberg: May I have a short follow up? And that is a little bit on EMEA and the future RAN opportunities. You touched upon Vodafone win in Italy, for example. How should we look at the opportunities within, for example, Vodaphone, the spring procurement? I guess they have 100,000 sites in Europe, which 30% should go with Open RAN or something. Any indication of this happening now? Any news?

Pekka Lundmark: Regardless of how much of it would be Open or any other RAN, there’s a lot of different permutations on the network architecture development. We are ready. We can do Open RAN, we can do Cloud RAN, we can do any RAN. We have, of course, a high ambition level in terms of spring six, but it is an ongoing project at the moment, so I am not in a position to give any kind of comments as to how it looks or anything like that, other than that, of course, we are participating.

David Mulholland: We’ll take our next question from Andrew Gardiner from Citi.

Andrew Gardiner: I was interested in your perspective on the order intake and what that’s going to mean in terms of the ultimate sales trajectory. Pekka, you’ve talked about how you’ve had all the momentum now for three straight quarters, so clearly improving across the business unit. Yet, they’re not translating into quite as much revenue as you would have hoped in the second half of this year. In terms of what you’re hearing from the customers, what they’re actually ordering, is that because the deals are outright smaller in magnitude than you’d anticipated, or is it a timing issue and actually the ramps are a little bit slower, so fine, second half is a bit weaker than you’d hoped, but ultimately you’re going to win some of that back, or not win, but it will just take longer to achieve it. You’ll see more of it in 2025.

Marco Wirén: This is exactly the two sides of the same coin that we are seeing that – well, we are saying that the order intake has been good now for three quarters, but we did say, after Q1, that the full year revenue outlook requires really strong order intake in Q2 and also Q3 for that matter. So while Q2 order intake was good, but it was still not good enough so that we would have been able to maintain the full year outlook. And remember, very importantly, part of the order intake that we are now receiving or received in Q2 is already going to be recognized as revenue in 2025, not in this year.

Andrew Gardiner: I suppose related to that, does it make you rethink the cost saving program? You’ve got a fairly wide range around that €800 million to €1.2 billion. Does that make you think you actually – the slower ramp here makes you keen to hit the top end of that range as opposed to the lower or midpoint?

Pekka Lundmark: Well, what we have actually done is that we have accelerated the program. When you look at – when we started the program, we did not expect to be under 80,000 employees by the end of Q2. So we have executed extremely quickly. Then how it will continue, and we are now – and just as a reminder, we are targeting 72,000 to 77,000 employees at the end of 2026. And where we are going to go from here after this acceleration, we’ll be following very carefully now the pace of the market recovery. And it’s clear that, if that recovery is fast and if our market share development is good, then, of course, it’s likely that we would end up closer to the upper end of that employee range. But we are very kind of prepared, if needed, to go to the lower end of that range also, should the market recovery be or continue to be very slow.

Kind of as a general comment, we are currently still targeting, in our planning, as a base assumption, somewhere around the midpoint of that. But we are prepared to move either up or down, depending on how the market and our share develops.

David Mulholland: We’ll take our last question from Richard Kramer from Arete Research.

Richard Kramer: A couple of things that maybe haven’t been touched on yet. Pekka, my wider question would be on the operating model. Both yourselves and peers have talked a lot about moving to software, more enterprise sales. You have an extensive fabless chip design effort in NI. But the gross margin profile of the business that we see, excluding tech, is still stuck in the sort of mid-30s. What is it about product pricing or your cost structure where Nokia can start showing the kind of margins profile, let’s say, a 50% or 60% gross margin and higher operating margins that the software and fabless chip design would imply your business model should be showing?

Pekka Lundmark: That’s a very good question. And we have some examples in our portfolio where we are getting to that type of margins already today. But when it comes to large scale infrastructure project margins there, that’s where the drag has really been. Key part of the answer is that we need to move more and more value to software, we need to move to cloud, we need to move to software as service models gradually in overall business. Of course, first in CNS and then gradually also in the other businesses. That’s one part of the answer. Then the other part of the answer is that, despite the importance of software, we continue to believe that the importance of silicon continues to be extremely important and domain specific compute as we are seeing in NI, as we are seeing in cloud, will be extremely important going forward also in networks.

So the stronger we are in silicon, the stronger IPR we have in domain specific compute for things like L1 processing in radio, packet forwarding in routing and so on, the stronger potential we have for margins. Then another part of the answer is, this has to do with the general kind of reduction of the importance of the dependency of large CSPs. There are other segments where the margin profiles, by their very nature, are better. There are enterprise segments where that is clearly the case and then gradually also the defense sector. That is a sector where there is significantly better margin profile potential compared to large scale system projects with CSPs. The challenge in the whole margin discussion is really large scale system projects with CSPs where there is a specification coming from somewhere and then the CSPs make you and your competitors compete on price.

We need to reduce our relative dependency on that type of projects alone.

Richard Kramer: A quick very quick follow-up on IPR and tech. We’ve heard Jenni talk about non-smartphone IPR deals in autos and consumer and so forth, but we don’t really see the run rate moving up. Maybe, Marco, you want to answer that. Are these deals simply not yet materializing into real income or is there something in the pipeline that we can look for where that super high margin tech revenue starts to accelerate a little bit?

Marco Wirén: We were very pleased to sign a first video streaming deal in quarter two and this is definitely an area that we believe that this could be a good opportunity for Nokia going forward as well. If you look in December, we gave you a run rate as well. We said that, on the new growth areas, the run rate was €150 million and, of course, there is some that we are following quite carefully and ambition is that we will continue to gain traction in these new areas.

David Mulholland: Ladies and gentlemen, this concludes today’s call. I would like to remind you that, during the call today, we’ve made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. 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 20-F, which is available on our Investor Relations website. Thank you all for joining us today.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.