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Nokia CEO Pekka Lundmark at Q2 2022 earnings conference call

“I’m pleased to say that we continue to execute well in Q2. As you can see on this slide, net sales grew 3% in constant currency. This was in spite of continuing supply chain challenges and timing issues in two contract renewals in Nokia Technologies.

Gross margin was 40.6% and operating margin, 12.2%, reflecting good progress in both Mobile Networks and Network Infrastructure. The margins declined slightly year-on-year due to the contract renewal timing and technologies and that one-off software deal in Mobile Networks that as you may remember that we highlighted in Q2 2021. If you exclude last year software deal on Nokia Technologies from our results, operating margin would have improved by 330 basis points from 5.6% to 8.9% in Q2, and this does demonstrate the strength of the improvement in our product businesses.

Our good Q2 performance was achieved whilst we continue to invest in R&D. On this picture, you can see also on this chart on the screen you can see that there has been a 13% increase in R&D expenditure since Q3 2020. And this has been funded through our improved gross margins and focus on efficiency in SG&A. We will continue this focus to further strengthen our technology leadership.

A few words on the performance across our business groups. First, Mobile Networks, where I was pleased to see a return to growth with a 1% increase year-on-year in constant currency in spite of COVID-19 related lockdowns in the Shanghai region, supply chain challenges and a tough comparison caused by a one-off software deal in Q2 2021. We saw good growth in North America, Middle East and Africa and Latin America which counter declines in some other regions, including the impact of our exit from Russia.

Overall, this gives us confidence to grow net sales in 2022 at constant currency. While gross margin declined slightly year-on-year due to the one-off software deal in the previous year, operating margin did increase 70 basis points year-on-year and you can see from the chart, the progress we continue to make on a 12-month rolling basis, 12-month rolling gross margin on the screen. Also pleasingly, our ReefShark penetration increased again and is now at 91% and we are clearly on the track to the target of reaching 100% by the end of this year.

Network Infrastructure continued its positive trend with all four divisions showing growth. As you can see, Fixed Networks and Submarine Networks had again a very strong quarter with both delivering double-digit growth. Top line performance flowed through to both gross margin and operating margin in NI, which increased by 10 and 240 basis points, respectively. There were some supplier-specific shortages impacting Optical Networks in the quarter, which are expected to improve in the second half. But overall Network Infrastructure had another really excellent quarter.

Cloud and Network Services’ net sales were stable in the quarter. For the first half of the year, we saw growth of 3% and good progress in both gross margin and operating margin. Clearly second quarter was a bit weaker, first quarter was strong and overall, the first half of the year demonstrated good development in CNS. The work to rebalance the portfolio continues and you hopefully heard the presentation from Raghav just over a month ago, where he highlighted some of the longer-term initiatives we have in the business to move towards a more securing SaaS-based revenue stream.

At Nokia Technologies we were once again impacted by the ongoing litigation surrounding the Oppo and Vivo renewals. In Q2, three of Nokia’s patents were upheld by a German Regional Court with – injunctions granted against Oppo. We will robustly defend the value of our patent portfolio, but we’ll do so fairly. And I’m pleased to say The Court also recognized we had complied with all negotiation obligations as a standard essential patent holder.

In the quarter in Nokia Technologies, we also delivered some new catch-up sales related to new patent license agreements in the Automotive and Consumer Electronics markets. And overall, as it also says on the slide, we do expect to return to the previously communicated annual run rate of EUR 1.4 billion to EUR 1.5 billion with the assumption that the two ongoing contract renewals are concluded.

Then with the Customer Segments, and of course Enterprise which we have highlighted as a separate segment, I was really pleased to see that the Enterprise returned to growth this quarter, delivering an 8% increase year-on-year. And this business, of course, like the other businesses were also impacted by some supply chain challenges. But this was despite those challenges we grew 8%. In Enterprise, our order intake remains strong and we expect to see accelerated growth in the second half of the year.

As you remember, we have doubled down on our investments in Private Wireless since the start of this year, to strengthen our leadership and that is showing results. We added 35 new customers in Private Wireless during the second quarter. And as you can see on the slide, we now have 485 customers in this space. So overall good progress in the Enterprise segment.

On the challenges in our wider operating environment. The macroeconomic uncertainty is something we all need to pay attention to. A few points to clarify the current impacts as we see them.

First of all, even though our business is not immune to macro trends, we continue to see a strong investment trends in connectivity, particularly into 5G and fiber deployments. And those investments are very important for many of our customers to cope with increasing data consumption and the need to increase productivity, which networks enable. Actually in worst economic times, the need to increase productivity industrial [technical difficulty] typically increases which could be good to investments.

So far, we have not seen any major changes in our demand outlook. Customer demand and order intake remains strong and we continue to be more supply than demand limited. As you can see on the on the charts, the global penetration rates for both fiber and 5G, excluding China remain low. For 5G sites globally it’s around 15%, and even in some of the more developed markets less than 25% and you also see the homes connected and homes passed as a percentage of total homes in different parts of the world on the charts.

But the macro trends could impact the pace at which our customers invest. There can, for example, be some challenges in emerging markets where currency movements could impact the affordability of our products that are effectively priced in US dollars or euros. More specifically on supply chains. As you know, this has been a really challenging situation globally and we have been dealing with it in a number of ways since the pandemic hit. Towards the end of last year or actually throughout last year, we were facing constraints across a lot of suppliers in the business.

In Q1, we said that the situation was changing a bit towards more supplier-specific challenges that were constraining our business. Today that largely remains the case, but we do see signs of the remaining challenges starting to ease in the second half of ‘22 and into the first half of ‘23. Last quarter, we also highlighted that we could potentially be impacted by COVID-19 related lockdowns in Q2, which was the case in the Shanghai region. But we did manage the situation quite well and we have more or less recovered from that situation which affected the supply chain in April and May.”

CT Bureau

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