Q1 2020 Earnings Call
[music].
Hello, and welcome to the Nokia first quarter 2020 earnings Conference call. All participants will be in listen only mode should you need assistance leasing L. conference specialist by pressing the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions.
Ask a question you made fresh start and then one on your telephone keypad.
Withdraw your questions you May press star into.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Mr., Matt Shimao head of Investor Relations. Sir you may begin.
Thank you.
Ladies and gentlemen, welcome to Nokia is first quarter conference call.
Got you know head of Nokia Investor Relations.
<unk>, President and CEO of Nokia and Christian pull up CFO Nokia are here with me conference call today.
During this call will be making forward looking statements regarding the future business astronaut's performance of Nokia and industry.
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 such a general economic and industry conditions as well as internal operating factors rubber identified such risks in more detail in the section titled operating and financial review and Prospect list factors.
Our 20 my team annual reports on form 20-F prefer not to report for Q1 published today on form 6K, where we have added see covert 19 risk factor.
Well, that's our other filings with the U.S. Securities and Exchange Commission.
Please note that our results release, the complete interim report with tables and the presentation on our web sites include our rest results information. In addition to the reported results implementation.
Our complete financial report with tables available on our website includes a detailed explanation of the contents of them on their first information and it reconciliation between phenomenon for us and the reported information.
That's right geez over to you.
Thanks, Matt and thanks to all of you for joining.
I hope that you're all keeping railing safe in these unprecedented times.
As we all know events related to the cold at 19 pandemic are moving quickly and the global economic outlook remains uncertain.
I want to start by briefly making full high level points about Nokia slows cool.
Well, we made steady progress in our mobile access business as our transformation and brought a cost reduction that books got to take hold.
Second our Q1 should broad you're on your profitability improvements thanks to strong performance across our portfolio, including enterprise and software supported by continued disciplined on costs.
So we remain highly focused on generating cash and took a number of actions in Q1 to improve oddball, who cash position in what is a seasonally slow cool and.
And fourth we are adjusting the midpoints within our previously disclosed outlook ranges for full year twentytwenty to reflect the increase risks and uncertainty presented by the ongoing Corbett 19, Italy [noise].
[noise], we expect the majority of this cold in Nigeria.
Uhhuh and believe that our industry is fairly resilient to the crisis, although not a meal.
With that as an introduction I will focus the rest of my remarks on two main areas. One our Q1 highlights and the progress we're making in mobile access in other parts of our business and to the unusual situation with regard to covert Nike.
Now to the quarter.
When I spoke to you when you announced off Q4 results I said I expected to see progressive performance improvement over the course of 22 already in Q1 was largely consistent with this expectation.
And on our part of this Nokia level operating margin was up significantly from Q1, 2019, rising 3.6 percentage points, while non I apologize operating profit landed at 160 million euros.
An important driver behind that with the improvement in the networks business groups gross margin, which increased year on year by 3.5 percentage points largely driven by gross margin expansion in mobile access.
In addition, the Nokia level operating margin was also improved by the profitability these trends to Nokia software and a decrease in Nokia level operating costs, including both as Ginny.
And R&D costs.
The decrease particularly in networks R&D expenses was primarily due to progress related to Nokia's cost savings program, which was partially offset by additional critical fiveg investments to accelerate our product roadmaps and cost competitiveness in mobile access.
Looking at enterprise again delivered double digit year on year constant currency sales growth and Nokia software demonstrated again, how to drive topline growth with a key focus on operational discipline and excellent profitability.
Importantly, we enhanced our total cash position in the quarter. The 6.3 billion euros up sequentially by 300 million euros, and Christian will address in more detail, both our cash position that Nokia technologies later on.
Now to the problems in mobile access, which is the combination of our product focus mobile networks business group and our global services organization.
In our Q4 2019, but thoughts I spoke about how we continue to have a sharp focus on executing in our mobile access business.
And that we expect it make good progress in October of this year.
I'm pleased to say that off first quarter performance continues to support this expectation notwithstanding the adjustment of the Midpoints of Nokia's full year guidance today due to the risk and uncertainty presented by the coven Cobot 19 situation.
Mobile access saw improvements driven by product cost reductions regional mix strengthened operational performance in services and supported by continued competitive scale.
Despite the majority of our R&D employees working from home are going maps are on track and.
And in fact, some key software releases are proceeding ahead of schedule.
As I said in Q4, our focus in mobile access is on four key areas.
Well, just improving profitability through consistent product cost reductions.
Second maintaining scale to be competitive.
Hi, good enhancing commercial management and view discipline and fourth further strengthening operational performance and services.
Let me touch on each of these in more detail.
As of today, we are tracking in line against our original plan with Fiveg powered by be shocked products accounting for 70% of Fiveg shipments in Q1.
We still expect to end the year at more than 35%. Despite the prospect of for the Kobin 19 related economic impacts.
As a reminder, we typically see approximately a six month delay between shipments and impact on financial performance.
We saw some important product launches in Q1, including our dynamic spectrum sharing or DSS solution.
Our unique solution goes beyond Fourg to Fiveg to include dynamic sharing between two G threeg and fourg offering a small box to fiveg deployments.
Initial deliveries of Nokia DSS solution for which there has already been significant interest from operators are starting now with volume shipments expected by July.
The second can't be I relates to maintaining scale and specifically scaled related to mobile radio products. In Q4, I stated that we expect Nokia to stabilize it's 40, plus five you market share rocks and maybe 27% by the end of Twentytwenty, excluding China.
Q1 results support the statement and we believe we remain on track we continue to have the scale necessary to remain competitive.
The third Kipp, you I guess I'll fiveg win rate for Q1, Twentytwenty, our fiveg win rate, excluding China continued to be over 100%, reflecting a strong performance across a number of regions and is in the mid 90% range, including China inline with our expectations.
While the overall results did not change we saw a reduced footprint at a customer in Asia Pacific offset by gains with a customer in North America again. This was in line with our expectations as of today with our recent win with this trial. We have 75 do you wins and 21 life networks deployed new.
Customers in Q1 included Chunghwa telecom in Taiwan, or in Slovakia, and Bell, Canada and Pleasingly, we are quite optimistic that we will win a share of fiveg core with China Unicom, Although we have not yet received official notification.
Staying with China, We've consistently said, we would take it prudent approach to put stealing market share given the profitability and cash challenges there.
Given that we have prioritized our fiveg radio.
Liberty's on features that are required globally and for markets with better economics and avoided.
And have avoided specific local requirements.
We will remain a meaningful player in China, we have a large fourg installed base.
Ongoing attached and then independent services.
And continued opportunities in the broader fiveg build out with China's major operators in areas such as fixed.
If you routing and optical.
We also see potentially with the large enterprise customers, we are focusing on and have made particularly good progress providing data center interconnect to the country's leading web scale companies.
If we turn to five you ready to at some point in the future results will not out of the question, but keep in mind that our approach.
Prudent.
Finally, let me now see a few words in services, which reduced substantially expanded eurone or prospects in Q1.
This was driven by structural improvements in deployment services as we successfully drove digitalization and automation efforts services exited several more low performing projects in Q1, and we continue to make progress in turning around other low margin managed services deals.
We expect a high level of network deployment services as new Fiveg builds continue although we do see some corbett 19 risks hampering some technology deployments due to challenges with getting onsite access.
So to conclude on mobile access we are making be expected progress you know four key areas.
Now to our other business groups.
As I alluded to earlier, our strategic focus areas of Nokia enterprise and knocking software maintained strong momentum Nokia enterprise delivered you're on your constant currency revenue growth of 19% enterprise added 30, new logos in the quarter, including infrastructure networks Inc. BGT system.
Meal, Poland and SGP of Paris, Despite the current economic environment. We believe that we have a resilient customer base, an enterprise mission critical networks due to the verticals that we focus on.
In Nokia software I think it. It's also fair to say that the decision. We took a few years ago rewrite our applications onto Nokia's cloud native common software package and the so fiveg and increasingly digital customer needs is paying off when you look at both how Nokia software is performing relative to our competitors in the telco software space.
And at today's environment that is making cloud based digitalization and even more critical business necessary.
Nokia softwares year on year constant currency net sales grew 12% and profitability was up sharply across the board with an operating margin, increasing almost 13 percentage points year over year.
I would caution that software strong performance in Q2, 2090, and the cobot 19 risks related to our business generally give us a tough year on year comparison.
In the second quarter.
Software business execution has been solid and its trajectory is not a part where we want to be.
Now to IP, an optical networks or island, which also continued its strong underlying execution and increased its product leadership credentials in the quarter.
Islands Eurone your constant currency sales declined due to Q1, 2019, being particularly strong quarter, which benefited from pent up demand from for some of our newly introduced at before products. The Q1 sales decline also stem from some supply chain headwinds related corporate 19 that prevented us from delivering to certain customers.
Still the business fundamentals showed continued strength with both IP routing in optical networks holding a strong order book.
IP routing also continue to demonstrate its technology leadership position with Nokia being named in the quarter as a top company globally in IP edge routing, we do see some potential to recover some of what we came up short on in Q1 as we currently see good routing demand in Q2 on the back of traffic growth.
Optical networks year on year constant currency sales dropped 2%, though that was due entirely to supply constraints stemming from Corbett 19, and not related to demand. We expect these constraints to improve in June two.
Our fixed access business salt strongly improved order intake year on year led by North America annually.
The higher gross margin and fixed access was primarily due to a more favorable product mix with less digital home net sales in China as well as a higher gross margin in digital home driven in part by improved product cost.
Now to the regions and I am to be brief here given that I've already addressed China, Let me start with North America, our biggest market by seems.
Despite merger related uncertainty during most of Q1 topline in North America remained flat in constant currency, reflecting customer demands for strengthening network infrastructure do people working from home.
We see this from certain operators, who have recently announced increases and capital expenditure and across different businesses from IP routing to Nokia software.
Middle Eastern Africa had a strong quarter with topline growth of 8% year on year in constant currency with particular strength in Saudi Arabia, where we have large fiveg network rollouts ongoing with Mobily.
STC and thing.
Then, India, which we report within our Asia Pacific region constant currency sales sell stemming in part from the uncertainty following a Supreme Court ruling that with recently upheld requiring telco operators to pay back taxes, and we see pressure continuing into two.
While uncertainty in this market remains high you may have seen in the media that we announced this week together with Bharti Airtel, a multiyear deal in India.
The second largest telecoms market by subscribers.
This deal will boost Bharti Airtel network capacity lay the foundations of Fiveg in India and includes Nokia's single radio access network that is.
Scale radio access and baseband services. In addition, Nokia Global services will play a crucial role in the installation planning deployment of the project.
Excluding India, the Asia Pacific region saw strong growth would telco operators.
You're on your sales in Europe declined 4% in constant currency with Q1 last year being tough compare.
Now to what we see ahead in the corporate 19 impact your to which we deemed prudent to adjust the midpoints within our previously disclosed outlook ranges. Let me start by saying that this crisis has made vividly clear the importance of connectivity to keep society functioning. It is literally a matter of life and death, we feel we have a.
Sense of duty to our customers and the communities they serve to keep vital communication networks running accommodate the explosion demand all over the world.
Good luck to thank all our people as well as customers and suppliers, who are working so hard to keep everyone connected across the world.
Naturally Nokia's first focus in this is our employees we are working round the clock to keep them safe and we're doing everything we can to support them through this crisis, we have put in place trips protocols for Nokia facilities and have provided clear advice to our employees about how they can mitigate the risks of covered 19 in situations.
Where they have to go about critical work.
I'm very proud of the world Nokia's, playing in supporting our customers and their communities the products and services that we provide have never been more critical enabling the world to continue to function in an orderly way, we're providing the capacity and continuity for vital medical social and financial systems that are experiencing extreme stress.
Our global manufacturing footprint is designed to optimize our global supply chain and mitigate against risks such as.
Local disruptive events transportation capacity problems and political risks.
Supply network consists of 25 factories around the globe and six hubs for customer fulfillment as a result, we are not dependent on one location or entity.
Telecom infrastructure as it's an essential service in most jurisdictions, most network see 30% to 45% traffic volume growth over a year, but to our operator customer base, we saw similar and sometimes even larger overall increases and locked out impacted regions and just a matter of weak sometimes even days immediately.
After the beginning of locked out.
The most impactful effect on the network was made by bandwidth intensive applications, such as screaming and subscription video on demand for example, Netflix and Disney plus.
And video conferencing application, such as all Microsoft teams and Webex with some telecommunications and video conferencing applications going by 700 or 800% in a matter of days I've analyzed by our Nokia decrease.
The trends were similar across China, Asia Pacific Europe, and the Americas as of last week, we are seeing a plateau in Europe the growth in some regions, which is likely to a combination of big video consumption, reaching practical maximum levels and the lowering of video streaming quality by service providers.
We're working with our customers to provide real time and granular information about their networks and enabling them to meet increases in demand and expand capacity where needed.
We're all aware that lockdowns of shuttering factories in many parts of the world, including issue and this caused pockets of supply chain issues in Q1 that limited our ability to completely meet the needs of a small number of customers.
In Q1, the impact was approximately 200 million you on the net sales and this was partly the result of supply issues associated with disruptions in China and other parts of Asia, We expect those net sales to be pushed to future periods rather than being lost.
Let me explain in more detail some of what we are seeing.
Getting customer acceptances for new product deployments as being delayed in some cases do the critical factors such as onsite access being currently booked during the Lockdowns and we do see this continuing further into Q2.
Additionally, we are seeing shop foreign exchange wage rate fluctuations in places like Latin America, driven by covered 90. This is causing operator customers to reduce capex to conserve cash in order to offset rising production costs.
I've mentioned that offsetting some of those negative impacts is the fact that our primary addressable market with telecom operators as well as our chosen enterprise verticals is expected to be more resilient than the broader economy, given high network capacity demands and longer term demand for superior networking capabilities and cloud computing capabilities.
Going forward, we believe the risks and uncertainties.
Related to corporate 19 may continue to have an impact and that is why we adjusted the non high as far as Midpoints.
Within our full year 2020 guidance ranges for EPS, an operating margin to 23, your sense and 9% respectively.
We believe that the majority of this cobot 19 impact to be in Q2.
While not immune we also believe that our industry is fairly resilient to the crisis and I have just provided some examples of why we hold this belief.
Before handing over to Christian I want to change gears and briefly discuss another important that.
I wanted to say a few words about our corporate sustainability performance I've mentioned that connectivity has never been as important as now when people find themselves physically isolated from others doing lockdown in what has quickly become the new normal Nokia as well as a critical connectivity enabler has never been so important this is a responsibility that.
We take seriously remote working remote schooling remote services and smart deliveries are just some examples that have been enabled by conductivity and digitalization solutions.
As we move into the future sustainability will play a large part in shaping our industry and we believe that technology will further improve people's lives and we will therefore be focusing on those areas. We expect to have the biggest impact on sustainable development and our profitability those areas, our climate integrity and culture.
We continue to develop and maintained solid processor than principles on other sustainability area, ensuring compliance with all necessary standards and requirements with that over your question.
Thank you Rajiv.
Today, I would like to start by walking you through our current LER liquidity position and our cash performance in Q1 I will then continue with a brief summary of our financial results for both Nokia technologies and group common another.
Then take you through group level results for the first quarter and finally.
I will quickly provide an update on our cost savings program and close with some remarks on our guidance.
Okay, let's start with our liquidity position our cash performance, we close Q1 with a solid total cash position of 6.3 billion euros, a sequential increase of approximately 310 million.
The primary driver for the increase was related to a drawdown of a 500 million euro loan from the Europe European investment Bank in February which will mature in 2025. The facility was signed in August 2018, and had a drawdown period of 18 months.
Addition to our solid cash position. We also have a 1.5 billion euro revolving credit facility.
Mailable to us that remains undrawn.
Looking at our debt, we have approximately 5 billion euro and outstanding all of which is financial covenant free with an average maturity of six years and a smooth repayment schedule. We do not have long term debt repayments due in 2020 and the next maturity.
The maturity, which told those 500 million is due in March 2021.
Additionally, we continue to explore prudent opportunities to further strengthen our liquidity position in a proactive manner.
I'm confident that the conservative management of our balance sheet has positioned us well from a liquidity standpoint to run the business and to continue to fund the R&D investments needed to position us as a leader in Fiveg and beyond.
While our total cash increased in the quarter Nokia's net cash decreased by approximately 410 million euro to a quarter end balance of approximately 1.3 billion. This approximately.
700 million Euro difference between the change in total and net cash was primarily driven by the 500 million. He I'd be loan, which I just mentioned and approximately 140 million euro related to the fair valuation of certain issued bonds as a result of unusual.
Interest rate fluctuations.
Free cash flow was approximately breakeven in Q1 disrupt largely reflected.
Solid adjusted net profit and a onetime benefit as a result of settling certain interest rate derivatives, both of which were offset by capex restructuring outflows.
Cash taxes and networking capital.
In Q1, net working capital excluding restructuring cash outflows resulted in an approximately 50 million euro decrease in net cash in the quarter.
Within net working capital we saw offsetting drivers receivables declined approximately 420 million primarily due to a seasonal decrease inventories declined approximately.
Hundred million during June mainly due to temporary supply challenges as a result of Corbett as well as improved inventory management.
These benefits were offset by an approximately 570 million decreasing liabilities primarily related to a seasonal decrease in accounts payable and lower material purchases due to Colby 19, and the inventory optimization.
Overall I'm pleased with the progress, we're making with our free free cash flow program and while our Q1 performance benefited from the said settling of certain interest rate.
We have attempts I feel our internal focus on this topic is really starting to starting to bear fruit, having said that it's not yet time to declare victory and we will continue to put focus here and improve further.
Looking forward to Q2, it is important to highlight that our cash will be negatively impacted by bonuses paid under our annual employee incentive plans.
Now turning to our financial results, starting with Nokia technologies.
Q1, net sales declined 7% in constant currency, largely reflecting lower onetime sales in the quarter and lower brand licensing net sales. These were partly offset by higher net sales related to a new.
Related to new licensing agreements, excluding one time sales Nokia technologies topline would have increased slightly year on year.
As of Q1 hour annualized licensing run rate continued to be approximately 1.4 billion euros.
From a profitability perspective, Q1 operating margin in Nokia technologies improved 200 basis points year on year to 83.6%.
This was primarily due to improved gross margin as a result of the absence of onetime costs, which negatively affected the year ago quarter.
This quarter I would like to expand my commentary on Nokia technologies as there are several highlights what spending some time on first regarding our overall patent portfolio and the excellent join work joint work being done by Nokia technologies are Nokia Bell apps, we have been ranked number one in several independent.
Third party studies for our two Jade Threeg Fourg and Fiveg patents that have been declared essential for seller standards second an independent patent analytics company IP lipsticks rank Nokia and number two in January 2024 ownership of Fiveg.
Standard essential patents declared as essential for Fiveg and granted at least in one country.
Now, we'll Nokia has declared more than.
303000 patent families as essential for Fiveg and we achieved this less than six months after declaring our previous milestone of 2000 patent declarations.
Next looking at group common and other where net sales declined 8% year on year on a constant currency basis, we estimate that probably 19 had an approximately 50 million euro negative impact on Q1 net sales primarily related to Asap.
On a year on year basis. The net sales decline was driven primarily by radio frequency systems or RFS due to lower net sales in North America.
This was partly offset by growth in Alcatel submarine networks or HSN driven by new projects.
Airsense order intake continued to reflect a strong demand environment and a lesson ended the quarter with a record order book.
During Q1, probably 90, it had an impact on it's business as do production Felipe facilities, where closer towards the end of the quarter. While this had some impact on any airsense Q1 results. It is it is expected to have a more significant impact on Q2, having said that we buy.
I believe that the underlying business momentum for HSN will continue as capacity requirements for subsea transport continued to grow.
The operating loss for group comment on other worsened year on year, primarily reflecting net negative fluctuations in venture venture fund investments and to a lesser extent lower gross profit.
The negative outcome from venture fund investments reflect the.
Act that some of the company is that we have invested in operate in industrial end markets hit by copied 19.
Further net negative fluctuations in Q2 and beyond cannot be ruled out if the impacted companies are unable to secure.
For additional funding to work through the copied 19 crises.
Then looking at Nokia group level results Q1, non IFRS net sales were down 4% on a constant currency basis, when excluding greater China, which.
It's how we measure our performance against our primary addressable markets net sales would've been approximately flat as Rajiv mentioned copied 19 had an approximately 200 million euro negative impact on Q1 sales, which.
We expect to be a shift in future periods within that 200 million networks represented approximately 150 million Euro and group common accounted for.
For the other approximately 50 million as I just noted.
This was primarily due to supply chain constraints and we by no means think there's net sales are lost given the right.
The resilience of our customer base the timing of when we can realize the net sales will depend on a number of factors, including the.
He is seeing of supply chain challenges, our ability to deliver and our ability to get customer acceptances group level No Niobrara gross profit on gross margin improved significantly year on year to 36.
<unk>, 0.4%. This improvement reflects two items that I wanted to touch upon first hi.
Our gross margin in networks and more specifically mobile access as the transformation continues continued to take hold.
As evidenced by the good progress against our KBR is the second driver was Nokia software, which delivered strong net sales growth and operating margin expansion as the rest as a result of great sales execution.
The comprehensiveness of our portfolio and delivery efficiency.
Disapprove this improvement in group known IRS gross margin. In addition to continued progress on on our cost reduction program led to a 2.4% no now for us operating margin compared to a negative 1.2% in the year about quarter looking at financial income annex.
Spencer is the year on year improvement was driven primarily by improved FX results and lower interest tax.
Interest expenses these were partly offset by losses incurred on certain financial assets caused by market volatility.
Our Q1, non I first tax rate was 27% and remains.
Generally in line with our full year expectation of approximately 26% our non I first diluted EPS was one euro sent for Q1 2020 compared to negative two cents in the year ago quarter.
Next the brief update on our cost savings program. We believe we are on track to realize the the 500 million euro target of which 300 million Euro of cost savings is expected in 2020, it it's worth noting that since the announcement of the plan in October 2018, net foreign exchange.
Fluctuations.
Has resulted in an increase over estimated full year 2020 fixed cost of approximately 100.
Yes.
For no Nye for us operating margin and non my first diluted MBS.
First.
We now expect our primary addressable market, excluding China to decline in 2020 as a result of copied 19 headwinds and we expect to perform approximately in line with this market.
While we continue to expect.
Seasonality in 2020 to be similar through 2019, we now expect Q2 to bear the majority of the covered 90, an impact beyond Q2, we expect we continue to expect that the majority of.
Operating profit on free cash flow to be generated in the fourth quarter.
For similar to 29 team.
As I said last quarter, we attend to provide updates each quarter to our progress against our outlook ranges and that we would adjust the midpoints accordingly, if necessary.
Given the risks and uncertainties presented by Kobe, we have adjusted for 2020 volt hour no now first operating margin and diluted EPS expectations within the previously provided ranges. We now expect no now for us operating too.
Operating margin to be 9%, plus minus one percentage points and non IRS dilute the appears to be.
23 cents.
Plus minus five cents.
We also acknowledge that there are potential risks and uncertainties related to Bob made that we have not factored into our outlook morphis more specifically it is difficult to assess the scope and duration of the crisis as well as the base and shape of Onec of an echo.
Gnomic recovery of of how an economic recovery could look like this implications on customer did demand are hard to predict with certainty.
Additionally, we see opportunities and risks in North America. Following the completion of a merger.
While we recognize that there are increased Max macroeconomic uncertainty, we have confidence not only in our in our risk.
Julien customer base, which includes communication service providers as well as large enterprise customer customers, but also in our strong liquidity position.
With that I hand over to Matt for QNX.
Thank you Christian.
One quick thing, which is the operating margin guidance. We now expect our non ARCUS operating margin to be 9% plus or minus 1.5 percentage points.
Perfect Una session. Please limit yourself to one question only as a courtesy to everyone else in the queue.
Jamie Please go ahead.
Okay.
Ladies and gentlemen, we will now begin the question answer session.
Ask a question you May press Star and then one if you are using a speakerphone.
You asked you please pick up your handset before pressing the keys.
So it's all your questions you May press star into.
Once again, we do ask you please limit yourselves to one question.
At this time, we'll pause momentarily to assemble the roster.
And our first question today comes from David Mulholland from US. Please go ahead with your question.
All right. Thanks for taking the questions just wanted to come back in the point you've made around the supply chain, obviously had some constraints impacting Q1 and you fiber still some risk going on into Q2, but where are we with the supply chain I think from with Ericsson was showing the other rig it seems like from their side to manage the quite well.
We're still able to mostly supply customers. So how much of an issue should we still expect going forward from that.
In terms of supply chain issues.
Thanks, David we saw those issues.
Limited to.
Very few number of customers.
Supplied initial flow from like I said.
China and sort of parts of Asia.
As you might come to.
Tier two tier three component vendors.
Going into Q2, we see some supply risk.
But we also see risk related to really the physical site.
Taxes part in country, the locked down so that.
Engineers can go and access those looks likes to do the installation and commissioning even if we are an essential service at the sector logistically It is more challenge.
On the ground due to low.
Yeah, because you say that India really any are gradually this morning that is going to be worse or are you say that the working back leasing.
In the second quarter, so does that mean that they've already more than 200 million euros of impact in the second quarter and then is these.
The supply chain disruptions and Jeff, causing these issues in the flattened the second quarter will we see those made up in the second half as the locked down then.
Thank you.
So maybe I'll start here. So we do see overall for the year that there will be a net impact from Colby.
We have reflected that both in in our.
Guidance for the overall market, where we shifted the guidance for be from being flat due now being.
Being down.
And we also adjusted for four for that.
By bringing down our the midpoint for both our operating margin and as well as for for Smbs.
Slightly.
We do think that the majority of the SAP this impact compared to what we expected earlier will come true in.
In that in the second quarter, and then some of that but still with the net impact that I I talked about.
Well that will be offset into in the second half.
Thank you Sandy Jamie we'll take our next question. Please.
Next question comes from Robert Sanders from Deutsche Bank. Please go ahead with your question.
Yes, hi, good afternoon and.
My question is just about dynamic spectrum shown.
Given you now launched that offering I'm just wondering in peak can you try and Concorde contrast, the approach youre, making to DSS nothing bad companies like Ericsson and what is the feedback you're getting on from key customers on a relative strengths and weaknesses of your approach.
Thanks, Rob So first of all.
DSS is an important feature we will be on time in line with commercial devices. So.
On July will be volume deliveries.
Thats, a fourg to fiveg.
We assess the you know.
Many customers needs such as the North America and elsewhere. We also have this you know all the way from Twog to Threeg Fourg.
Yes, yes, including five you, but also to Threeg fourg ideas.
That is required.
In many emerging market trends required in Latin America is required and middle Eastern Africa, It will be required and other parts of Asia Pacific do the same thing you see in 45, you sort of get the spectral efficiency into would you to Fourg DSS until we feel we are unique in and we are getting a lot of interest from customers. So therefore.
If I do.
Our country that month market, but do you suppose you will be leaving a lot of other places in the run up to Fiveg.
Thank you Rob Jamie next question please.
Our next question comes from Ashar Santiago, So Tanya from Credit Suisse. Please go ahead with your question.
Hi, good afternoon.
I think you mentioned the.
Strong data traffic growth.
Starting because of covert end.
Operator, stealing the need to upgrade networks.
It seems like you've had some benefit of tight on gross margins along with the product cost decline.
Now you also mentioned that data traffic is kind of plateauing in a lot of market. So how should we think about the business mix.
Going into Q2 and Q3.
Do we actually see the benefit of what we saw in Q1 continue into the next couple of quarters or is it mainly going to be.
We are focused on product cost decline.
Which gives you the benefit on.
On gross margin.
Thanks, Joel so.
It is evidenced by delta to growth and.
The college preparedness for the future, even if it's flat doing people of nonetheless, and they want to prepare for the future. So we're seeing that in our order intake in fixed access optics networks.
Talked about a significant increase in order intake that we're seeing a good order bit order booking.
An IP and optical.
Both in Q1 and going into this.
This quarter.
And then.
Overall traffic is also going up in mobile.
Even if the centers are changing rather than business center Thats more you know the home, yes, mobility is reducing and over the leasing but the patent going up. So there is also that that potential office.
I have to scratch. So it sort of this is where our end to end portfolio really helps from a long term.
Thank you Charles.
Jamie well take our next question please.
Our next question comes from Tal Liani from Bank of America. Please go ahead with your question.
Hi, guys.
I have.
Two questions.
The first one is would you consider.
Changing the company structure, meaning.
Selling assets.
Given the continued decline in routing or what were seeing with optical what's the value of keeping the company still as a combined.
And company of multiple assets.
In the second question, if you can relate to China.
We are seeing Ericsson reporting.
Better numbers in China, and I want to understand the sustainability of the trends in China for you. How do you think it's going to play out over time. Thanks.
Thank you actually routing and optical.
Routing is just to compare issue compared to last year.
But otherwise fundamental but very very strong in routing in particular.
We've got.
Some supply headwinds that as well.
The future and quoted the way to penetrate enterprise as well as Webscale companies, where we have been successful.
So when it comes to the broader question, where we sell assets and so on no. Our end to end strategy is intact at this point in time and there's no change to that our chairman also confirmed our second of March when we were together, Nebraska constant obviously its.
Possible, the Nucleonics would come in and and review strategy and that's very normal.
I think than Youre your second question with around China and.
From this point of view, we have baked in the impact from what we'll see.
In in our guidance and also.
Not just 2020, but also the long term.
And with the reason decisions in China. It will have some top line impact, but much more limited impact on operating profit and then I just want to quickly book situation in China in the back end perspective, we've consistently said that we take a prudent approach to to share in China, given the profitability and cash challenges in the car.
Street ultimately strategies.
Our our choices, we're making choices and second we also said that we will.
Prioritize our five year radio activities.
On globally required features as opposed to goals that you know award.
Being required for specific local requirements we've avoided.
Then you can also see that non Chinese players.
And with the of considerably less share in recent round and that's notable and that has continued happened with every generation of technology and finally, I would say that we continue to expect to remain in meaningful player in China. We've had some victories recently, we understand yesterday. According to China Unicom that we won the core deal.
As a lot of the Virtualized Imus.
And then in greater China overall in Taiwan, we're doing very well, we're winning big in Taiwan in terms of Fiveg just want to recent sole supplier deal.
The Beatty when Colin in now.
And with Taiwan Star engine was earlier and then with web scale, we're winning a lot with with all three that goes in terms of data center interconnect again back with the optical question. So our strategy will be around continuing to supply to operators.
And it will focus on fixed IP routing optical.
Ultimate to large enterprise customers, such as railways and state grid in China, and other large enterprise customer and then continue the progress with web scale companies, so business mix change and a customer mix change and I.
I think a return to fight delayed was also possible at some point in the future.
Thank you tell Jamie well take our next question.
Our next question comes from Alexander.
Petr from Society General. Please go ahead with your question.
Yes, thanks for the question.
Can we come back a little bit on Fiveg powered by reef shop.
The year to increase the share thank you.
Thanks, Alex.
So.
Were 10% at the end of Q4, we are started shipping the some of the radio.
As sources.
The massive mimo and now we've expanded that too.
Range of Fiveg.
The base band SSD will come later in the year.
Putting us in a significantly stronger position in 2021, and it doesn't have to be linear necessarily can be non linear from wants you to the other but we're confident we can get to that 35% by of regulatory pipe and by the end of the.
So.
So, yes, but progress.
Thank you Alex Jamie next question. Please.
Our next question comes from Dominic also see from Morgan Stanley. Please go ahead with your question.
Yes, hi, thank everyone for taking the question.
Just one land, which is on the software business could you figure with even on determined under what's been performing so well.
To drive the margins so high in this quarter. Please thank you.
Well, particularly good execution in the quarter.
Operational efficiency, but I think you step back and see what's happening in software because we are consistently putting underperformance in this area diversification is.
When we decided to rewrite our software on a cloud native portfolio to rewrite on common software foundation and make a cloud native.
That just allowed US you know the ability to become more agile in that R&D piece get better time to market, but also expand lock margins.
And so thats delever the other one they've been driving it services just real solid portfolio. We are ahead of the car compared to others cloud native common softer foundation and just good execution.
Okay.
Thank you Don Jamie well take our next question. Please.
Next question is from Richard Kramer from.
Research. Please go ahead with your question.
Thanks, very much guys I'd like to ask you both about the topic of capital.
Location.
Rajiv It feels like you cross to Rubicon in China were you chose not to allocate capital there to radio and that kind of begs the question for yourself and Christian our weather shareholder should be concerned with the 640 million euro level three liabilities for the put option around NFC and on the flip side given that Nokia now has to.
Sort of overlapping growth businesses between enterprise and software.
What ways can you can we look forward to that you could allocate more capital to those areas since they're seeing rising margins and rising sales in the current climate. Thanks.
Yeah, Richard I think as Rajiv.
Described we continued to see China, Sir as a key market our business mix in China will that will change we'll continue to work on the market together with the existing.
Partner that we have in the in the country.
And then on Richard your question on Nokia software and anyway. Thanks for that so it's not overlapping.
These are two different diversification areas.
But we are doing that we are absolutely thats, where you see the performance in Q4 last year enterprise grew 33% overall strong double digit growth last year, 18% portfolio, 19% in Q1, knocking software now 13% it might vary between quarters monarchists offer given the nature of that business.
We are putting all of the attention there were absolutely focused on diversification the monies available to them, we will allocate capital to them I'm a big believer in software.
Thank you Richard Jamie we're ready for our next question. Please.
Our next question comes from Stefan fluency from Exane BNP Paribas. Please go ahead with your question.
Yes, Thank you and thanks for taking my question just for Christian After the Q4, you gave a pretty specific opex outlook talking about Opex and Twentytwenty being 50 million greater than 2019, I didn't see if you had reiterated that today or with the currency moves you mentioned, if you can give us an update on on what that.
Number is and then I guess on the topline.
You've talked about the addressable market being being lower this year can you help quantify that so we can think about.
How much lower we should be modeling our topline. Thank you.
Yeah, I think on the on the Opex question nothing has really really change we feel confident that we will be.
Able to hit the 500 100 million overall reductions, which will bring a 300 million of the of savings this year.
Some of those savings will be offset then by.
Hopefully how higher.
Incentive accrual.
Well this year and and thus the same.
Opex year on year logic.
Holds as soon as after Q4.
When it comes to.
Marquette and topline changed the way to think about that is that while we havent quantified.
How much we believe that the the the market will decline. This year, you should really kind of look at the.
The changes that we made to the midpoint of our operating margin and S. Due to be a good proxy of.
You know how much the topline would that would be down.
Because there that's actually the main driver why we are adjusting our outlook.
For a margin and any BS.
Okay. Thank you Stefan Jamie next question. Please.
Our next question comes from Sammy Sarcomas from Nordea markets. Please go ahead with your question.
Thanks, I have question on your IP, our lighting business, where royalties were flattish in Q1, even though the smartphone market severely impacted by Covington.
19.
Last night or completed for about 30% lower lighting revenues in the June quarter, but you're not flying in headwinds and you. Please explain why youre. This model seems more stable given the situation.
Yes, I think.
The the big reason for that is that.
A big portion of our.
Agreements are actually fixed.
Fixed price and and fixed cost over overtime and as a result of that.
We havent seen a lot of growth when the market was growing the now we don't see any decline when the market. This is declining.
Thank you Simon Jamie next question. Please.
Our next question comes from Simon Leopold from Raymond James. Please go ahead with your question.
And in Europe, how you think about those opportunities in how we should think about the full year for fixed access. Thank you.
Yeah. Thanks, Simon the business has benefited greatly from.
Strong order intake growth.
But overall this industry is going to advance transition from copper to fiber and that's been taking time, because some of the operators don't yet seen for business case for for fiber.
I think the growth drivers here are going to be that transition potentially access.
Generating, especially with what everybody's loan through the pandemic.
Evidenced a little bit lower order intake at this point.
But then fixed wireless access for those operators that.
Do not have fixed.
Good revenue opportunity and there we are seeing some momentum so profitable drivers of our compound declared effective thing and the acceleration of fiber.
Thank you Simon Jamie I think we have I think we'll take our last question today for today.
Last question comes from.
Pierre Ferragu from New Street Research. Please go ahead with your question.
Hey, Thank you for your question Rajiv.
I'd like to to get an update from you on how Nokia and in the open Ron and the Ron.
Hey, guys you guys had been active with record 10 in Japan I. So.
And then announcement.
The way you will be one of the main fiveg supplier to them.
Along with.
We'd like to staff for playing like an open.
Trinity runs solution as well.
And at the same timing the debate in the U.S. suites.
Getting ministration you seem to be.
Pushing back on the on the legislation that is.
Turning to tweak those.
Right.
Okay.
So.
It looks like.
Yes.
Fairly positivity.
Minded on the on the topic.