Q3 2021 Nokia Oyj Earnings Presentation
I'm, David Mulholland <unk> head of Nokia Investor Relations and today and I spoke with me as Pekka Lundmark, our president and CEO, along with Mark <unk> our CFO.
During this call we will be making forward looking statements regarding our future business 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.
Factors that could cause such differences can be both external as well as internal operating factors.
We have identified such risks in more detail in the section titled operating and financial review and prospects risk factors of our 2020 annual report on form 20-F, that's why the other as well as other filings with the U S Securities and Exchange Commission.
Within the presentation today, unless otherwise stated references to growth rates will be mostly on a constant currency basis and margins will be on a comparable reporting basis. Please.
Please note that our results release, the complete report with tables and the presentation on our website include comparable results information. In addition to the reported results, including a detailed explanation and reconciliation between the two.
So with that in terms of what we'll go through today I will shortly hand over to Pekka he'll go through a brief overview of our financial performance before giving an update on the project progress that we're making in terms of the strategic objectives. We've given each business will then run through a quick word on enterprise along with how we see the supply chain constraints, and then hand over to Marco who will go through.
The financial performance in more detail before we get to Q&A, so with that over to Pekka.
Thank you very much David and thank you everybody for joining today.
We had another great quarter third quarter, 'twenty, 'twenty, one and strong execution.
Also some headwinds.
Headwinds that are I want to highlight especially when it comes to topline because.
Because of the components that are available and I'll come back to that soon because in the big picture. When we look at our when we look at our numbers in the quarter, we had a 2% top line growth, it's 6% year to date, but.
What is interesting is that actually we could grow faster.
The supply chain constraints. So the main point here is that we're currently not constrained by market demand or our own production capacity, but what east coast training aircraft at the moment this availability of components.
A 2% growth.
Couple of highlights first of all.
Our most important and largest market North America, we had excellent 9% growth. Despite some of these earlier communicated headwinds that we had in mobile.
It works the other businesses in North America, very well compensated for for that decline that we had in our mobile networks, which was very much expected.
Then couple of other highlights cloud and network services had really good 12% growth and Nokia technologies also double digit 11% Trust and network infrastructure.
Overall against a pretty.
Our strong Q3 last year had 6% growth and.
Within the networking infrastructure group.
Group the fixed networks division was really the standout this quarter with fantastic, 29% growth, so overall pretty good quarter front.
From top line point of view, then if we move to profitability.
Gross margin first this is really a testimony to our improving product competitiveness, we had comparable gross margin expanding by 340 basis points.
And this is pretty much.
Across the board at the moment, and particularly pleasing to see that our mobile networks had a 220 basis points expansion in gross margin our group margin 48%.
As I said earlier on a 40 basis points improvement mobile networks 220 basis points.
We also had very strong year over year gross margin expansion in cloud and network services.
Even if we were to exclude some of the projects related provisions that we made in Q3 last year. This is very important to note.
C N S.
These two quarters Q3, this year and last year, they are not entirely apples there.
<unk>.
So very good development in gross margin and that's of course, then reflected in the in the operating margin, where we had 250 basis points of expansion to do a pretty decent level of 11, 7% and here. Its again worth noting that this is of course after the investment.
Increasing investment that we have put into research and development to strengthen our technology leadership.
So pretty good operating margin.
And then the last point about the kind of financial highlights Israeli.
Cash conversion, we not only did have good operating margin, but also good cash conversion.
Slightly over 700 million Euro free cash flow and the result of that is that we're now at the end of the third quarter, we have 4.3 billion euro.
Our net cash on our balance sheet.
Then I move to some other highlights.
Businesses, and I'll I'll be talking quite a bit of technology because it is really the fundamental thing that is driving our competitiveness and I want to start with that.
Perhaps the most important technology a highlight of this quarter, which was the launch of the next generation F. B five routing silicon.
In our IP routing business, we have actually gained market share with every generation of product that we have a that we have brought to the market that we believe that this will continue what we have now launched this industry's most advanced network processing silicon with 4.8 Terabits per second capacity this gifts.
Operators performance without compromise for service provider IP networks and this capacity that this.
Platform gave says approximately three times more compared to the previous generation.
At the same time with that when we are increasing capacity three times, we are actually reducing power consumption per bit by 75%. So there is more capacity there is less power consumption for a bit and one very important a detail about the product or the platform.
Is that it is the first in the world to provide 800 gigabit Ethernet.
Interfaces.
Yeah.
Uh huh.
It's not the only power efficient and and has a lot of capacity, but it's also extremely flexible in terms of programming capabilities to support the constantly evolving network.
Network needs network evolution network structural evolution and on top of everything it has.
Very advanced security and encryption capability as a tip, which are actually in the built directly on the chipset level to protect the network against the various types of attacks.
Feedback to this launch has been great from customers what is of course important to <unk>.
Keep in mind that this is a silicon platform now and on top of this we will then be rolling out.
A whole new generation of products in these rollouts will begin gradually during the first half of 2022.
Yeah.
Then I would like to move.
To another business and that is fixed networks, because I already said that fixed networks within the networking infrastructure division was actually the standout.
This whole quarter in terms of growth, 29% year on year growth, despite actually quite tough comparables in the third quarter last year.
Going forward comparable will continue to get more challenging, but we actually believe quite a lot in opportunities in this business. They remain substantial and let me explain why and and of course. The main key underlying reason is the lasting effect on importance of fast home connectivity because of Covid.
That means that broadband is not only about mobile operators are actually currently prioritizing fiber investment.
And.
Here you can see this is Nokia product sales excluding services the.
Great color here represent Cooper, which of course is a declining business. The green one green color it is fiber and.
And you can see the fast expansion in our our fiber access volumes. So the past couple of years and then <unk>.
Very importantly, there is a new segment here, which is a fixed wireless access which is still very small today, but expect it to grow a lot going forward. Then of course comes to the question on the sustainability of this.
And I just wanted to make one hi.
Highlight here this craft shows in various countries, Germany, U K, Italy, Poland and France. So so forth first of all with the yellow orange color homes with fiber accessibility homes that could be connected they are not all connected yet, but they could technically be connected because there is a.
Fiber that is passing.
The home and then the light blue color represents homes, which have not been passed so today, which means that they cannot even be connected today. So.
All of this here the blue color represent in a way the remaining.
Opportunity. So it is a substantial across many many parts of the world.
So the market opportunity is clearly there.
Then the next question is that how are we able to address that opportunity product wise and here I would like to start with exactly the same way as I was talking about in the second quarter and we've been talking about are they they are system on chip platforms importance for mobile networks business through reef shark now in the second quarter, we launched.
F P five four.
For routing networks IP networks here also the.
Important source of competitiveness, a salad chips at carillon, ASIC, which enables high density low power solutions, which has led us to actually lead the G. PON and now lately XTS one market. We are currently number one in a jeep on a fixed access.
And we are.
Very clear leader in ex U S. On X T. S. PON is the 10 gigabit symmetrical passive optical network, which is establishing itself as the leading technology of choice and it's predicted to overtake cheap one next year, we actually have 40% market share outside of China.
In X G S pawn optical line terminals.
Interesting thing about the quillian chipset tests that are that it is also used as a platform for the next generation after <unk> bundle, which will be at 25 gig PON.
In this segment, we believe that we are 18 months ahead of competition. We have one life. This is very new of course all of this but we have one live network with proximal in Belgium, and now we're 20 trials and the best part of this is that this Israeli available today, if customers want this technology at 25 gig.
Today, we are able to deliver.
And one more point about this.
25 gig is directly Upgradable from 10 gig so operators have a basic cure.
Investment when they want to do future upgrades to twenty-five you guys for a second.
And then one more fixed access segment that I want to highlight which I already mentioned, there's a fixed wireless <unk>.
Access where we are number one are also in the world at the moment with more than 25 deployments.
What you see here is our home access books for fixed wireless. We also continue to innovate with a new approach to make millimeter wave radio viable and fixed wireless access we have a new clever antenna design and algorithms, where we provide extremely high gain 360 degree field of view and continued optimization.
Of the of the various various propagation paths for the for the signal. This means that we can establish a good connection even with weak or reflected signals and still allow for consumer indoor self install which is of course critical to make the business case work.
Then.
Moving on to our of course, one of our absolute main businesses. In addition to network infrastructure, which are now covered is of course mobile networks, where we also have pretty good progress we have.
Now since we launched a new air are scaled portfolio in the second quarter. We have received extremely good customer feedback and a lot of additional traction with customers and the latest number is.
<unk> hundred 89 commercial five G. A deal signed 72 lives GSP Fye J C. S. P. A five G networks one.
It's more that curiosity actually that we have now placed the world's first five G. A carrier aggregation call in a standalone architecture with Taiwan mobile.
We have increased quite a lot of our technology and R&D investment in our five G. S. We have been discussing several times earlier and the encouraging thing is that this investment is delivering result here you can see a 12 month trailing.
Margin development in our mobile networks business and our operating margin development that you will have seen has also been good and that is of course after this pretty strong.
Increase that we have put in the R&D investment our gross margin in the quarter was 37, 8% and.
I said up 220 basis points driven by improvements in our cost.
Pettitte dimness.
Been cut.
A couple of comments on our cloud and network services and of course as we've been discussing quite a lot earlier. This is in a way you reset your four four CNS, where we are in the middle of a pretty big product portfolio rebalancing and against this backdrop. It was really encouraging to see how this quarter.
When we had a 12% growth in constant currency. This was driven by a very much by the core network business, which is five <unk> CT as one of the key focus areas of a C. S. A N.
We are making good progress overall in the product portfolio rebalancing.
And while we are doing that we have now decided to focus on six.
Segments within a C S N I.
I already mentioned, our five core which are of course enables new use cases drives capacity and cost efficiency than we are focusing on analytics and AI to optimize network efficiency quality of experience then very importantly, private wireless to accelerate digitalization in order.
Formation of enterprises, all the millions and millions of industrial accomplish this are of this world.
This is all operations a very important segment automated provision of services managing the complexity of the service delivery.
Enabling slicing of the network just to give a couple of examples.
Monetization slash billing offer five Joost said news new five G. A new use cases service models in a way more to monetize everything that our that the customers are investing in and then last but definitely not least the big focus area is managed security for their network protect new attack surface.
Handle device proliferation and and so on.
And in a way a big.
Directional.
Ambition in this business is to continuously develop towards new business models like network as a service to build recurring business models, where you actually offer network functionality.
Implemented with software on a cloud as a service.
Then a couple of comments on the enterprise business, which is not a lot of course are reported as a separate business group because the product comes from different business groups, but we have a we have one system solution approach in one go to market approach in this business we cannot.
Cannot of course be happy with a 4% decline in enterprise sales. This year it was 3% a year to date.
There were some bulky nestea in there, especially with large web scale or what I do want to emphasize is that we are currently building a strong backlog for this business for 2022.
One of the key segments in our enterprise Tech that is of course private wireless S. I said, then that part of the business is clearly.
Driving double digit at the moment, we have already over 380, a wireless private wireless customers. This whole market is still in the very early stages suggest earlier mentioned the millions and millions of industrial campuses that will be our targets going forward and it is so important.
We have actually decided to double down.
Our investment we are ramping our investment in this space to further extend our market.
Leadership, we have recently launched a.
A product platform called M X industrial edge, which actually takes the industrial edge opportunity beyond pure connectivity. We are now launching an application platform with open interfaces for application developers to create a full ecosystem for our industrial digitalization.
And then my last comment before I hand over tomorrow of course about the supply chain because as I already sent a initially this is a bit of a challenging situation and of course the background to all of this is that the global semiconductor demand is greatly exceeding.
Apply at the moment here you can see that the demand only between 2020 and 2022 in the world.
Do you expect it to grow.
By almost 40%.
And.
This is then combined with the unprecedented component cost inflation for our industry for a long time, our industry has been used to with test dress and where prices are continuously eroding now at least temporarily that trend seems to have a seems to have a tent.
We are working relentlessly of course with our both our suppliers and with our customers. It's very handsome everyday work with two goals in mind two goals in mind to ensure component availability to make sure that our customers get what they.
What they need and then number two to deal with the cost inflation and of course, our goal is to minimize the impact on our margins, but we do.
We expect that this will have an effect on Q4 and it also could limit our margin expansion.
Potential in 2022 at least it is fair to say that limit that visibility to Q4 and 2022 is.
Not what it typically has been at this time of the year. So that's caused uncertainty we have been dealing with this challenging situation fairly well in the future. This is not a Nokia specific issue. This is an industry issue, but it would not it would be naive to say that it would not affect us as well it will.
And it is possible that the situation will get more challenging before it then starts getting better.
Okay. Thank you very much and now I would like to hand over to Mark.
Thank you Pekka and good morning from my side as well.
I will <expletive>.
Dig deeper into the financial performance of Nokia dealings of quarter, three and I will start with the market.
Estimates.
Oh, the overall market is pretty much stable compared to our previous views wall.
There's a couple of items that I would like to highlight and the first one is the mobile networks and as you see we actually estimate that.
The addressable market will grow about 5% instead of 6% as we had in our previous estimate.
And the main driver here is that we believe that the supply chain situation, a tech or just mentioned will impact this market.
And.
Also what comes to that.
Network infrastructure, we believe that this market is also affected by the.
The supply chain constraints.
But considering the year to date growth. We believe that this market is actually growing at 5% instead of 4%.
And we especially see in the fixed networks and IP network side with the CSP customers, where the market is very strong.
Yeah.
And then if we looked at the 2% growth that we had in in quarter. Three we can see it there's a lot of changes in between different geographies and he was not with the North America you can see that we had a 9% growth.
And we had headwinds in mobile networks, just like we have been I mentioned those earlier, but these were offset by the double digit growth that we saw in network infrastructure and cloud and network services and just to mention also that all the three businesses in network infrastructure.
Double digit growth numbers in North America, and now exclude a S N because isn't as is.
A different type of business and its between the geographies quite a lot.
Then the second area I would like to highlight is Asia Pacific as you can see we had 18% growth in in any specific and the main driver here.
Was very strong five key investments in Japan.
And the third item I would like to highlight is India as you see we had a negative development.
Development, there about 7%.
But here I would say that it's more of a timing issue.
If you look the year to date growth in India, It's 26% so it's quite remarkable development there.
And the last geography that I would like to highlight is Europe, we see a 5% decline.
And this is more related to network infrastructure business.
The mobile networks business was more stable and year to date figure for Europe is plus 2%.
And if we look at.
What has happened in our operating margin development on an aspect convention Dole raise that.
The new operational model has definitely strengthened our.
Our focus on accountability within the beaches.
And that's why it's very nice to see that we had these 250 basis points expansion you know operating margin in Q3.
And if we look at the different factors that have affected this and we had a negative impact from.
Our product mix.
And I would say that basically two.
Two factors here is it isn't and CNS and.
That hasnt impact on our overall group operating margin and that's why we saw these negative impact.
In a group level.
The next one is regional mix when we had a positive impact and this is basically coming from North America and Asia Pacific.
And then if you look at the cost side.
We have definitely done a lot of improvements in our cost competitiveness in mobile networks.
These have been offset by increased R&D investments, but also some how your.
Incentive.
Accruals that we've done this year compared to last year.
Then there's the two items that I would like to highlight.
That has had an impact on our development heroes wall and the first one is the venture fund investments that we have we actually had a plus 40 million impact in the third quarter and if you compare with last year's same quarter, we had a minus 200 million impact.
And then the loss provisions just like Pekka mentioned already we had in our CNS business last year.
Project related loss provisions and of course that had a positive impact now because we just don't have those this year.
And if we dig deeper into each of the businesses and look there before months.
During the quarter and starting with the mobile networks picked gallery mentioned that they're very good at 220 basis points expansion on gross margin in mobile networks.
And of course, we can see here that the cost competitiveness and that we've been focusing on is giving results. But also we had a good regional mix that gave benefits here.
And of course, when it comes to operating margin you see those investments in R&D that is affecting our operating margin and also some incentive accruals here.
Then going into network infrastructure, you can see that we had a 6% growth and.
The major drivers here were just like Pekka mentioned that fixed networks, 29% growth in the quarter. It's a remarkable but also a S. N had a 20% growth in this quarter.
While IP networks.
About flat and optical had a 12.
12% decline, but here, we have to remember that last year optical must benefited by the pent up demand.
Followed by the Covid and we had actually all time high quarter three sales in.
In last year, and that's why we saw this decline.
And.
Then of course, we'll look.
Yeah.
The operating margin that was declining compared to last year and the main reasons here are basically the mix that has a negative impact but also that we have ramped up our R&D investments during this period.
And remember that year to date figure.
<unk> is pretty acute and expansion from last year year to date operating margin is 470 basis points. So I would say.
Pretty good development here.
And then if we look at.
Cloud and network services.
We had a 12% growth and this growth is basically coming from those two key focus areas that we have which is five core Pfizer core and enterprise solutions.
And of course, when you look at the year on year development on the operating margin you can see that as a huge yeah inquiries.
But remember that just about above half of that expansion is due to these project related loss provisions.
But also excluding that we.
We see that the improvement is 10 percentage points. So it is definitely good work here as well and we've been getting results out of those operational improvements and top line growth that we've been seeing here.
Then Nokia technologies had a 11% growth and of course these are.
Benefiting from the contracts that we've been signing things.
At last year end of last year until now and we believe that the annualized run rate sales is about one four to one 5 billion.
And if you look our cash before months at.
We can say that now we have six quarter in a role with a positive free cash flow.
And also the fact that we converted almost all adjusted profit into cash.
And that's why the.
At quarter end net cash balance was $4 3 billion.
What comes to working capital I can say that the inventories increased only $70 million in the quarter and of course in the sea change some worry about today, we perhaps would have liked to see a little bit more increase to get more visibility and security on the supplies.
Syed what comes to semiconductors.
And if we take a step back and look a little bit longer trend what comes to cash generation. It used to be a little bit more volatile now and we actually see more consistent track record of free cash flow generation and of course. This is reflecting all the actions that we have taking all the past quarters to secure.
Very good focus on networking capital.
And at the same time, we have doing restructurings and significantly reducing the sale of receivables.
And this has led to a very strong liquidity position.
Then I'd like to just that.
Highlights that when it comes to dividend just.
Just like we said in our capital markets day already that our ambition is to get back to a dividend paying position, but remember this is a board of directors decision and after quarter four at board will assess the possibility of proposing a dividend to.
Two the H M based on our dividend policy.
And we want to also say that we are reiterating our full year outlook.
And we expect.
That we on the operating margin side that we would be in the upper end of this range.
And seasonality, we have been mentioning as wall that we believe it is a different in this year and those headwinds that we have communicated will impact that but also the fact that.
The uncertainty of the cold global semiconductor markets will limit our visibility not only in Q4, but also what comes to choose in 'twenty two.
And that's why the semiconductor situation.
And the one offs that we have had this year.
May limit margin.
Margin expansion potential in choosing between the two.
Cause year today, one off so far we have had a.
They are about 100 basis points.
Our operating margin.
But at the same time, we believe we are well positioned to capitalize the strong demand that we see in all end markets.
Through those technology investments and technical leadership that we have and also the improved cost competitiveness that we have.
No.
It was all from my side I. Thank you and back to you David Thank you Marco.
We will now start the Q&A session.
For the Q&A session. Please could you limit yourself to one question and that's it.
Courtesy to everyone else in the queue.
Operator could you. Please go ahead and give the instructions.
Thank you.
Well now begin the question.
The video webcast.
Thank you.
In your question I think.
Thank you.
No.
I'll ask a question.
And then one on your telephone keypad.
Thank you Johan.
Can.
Can withdraw your question please.
At this time, we will pause momentarily.
Yeah.
Your first question comes from Germany.
Morgan Stanley.
Ed.
Yes, good morning, everyone. Thanks for taking my question.
You mentioned, the 100 basis points, one offs this year as a positive to operating margin.
You flagged it at the first half as well, but obviously equally the supply chain has gone against you this year.
Could you maybe discuss how much and quantify how much of a revenue impact or profit impact has that been.
Year or maybe into Q4.
And then secondly, you showed a slide on fiber penetration can you just touch on how much operating leverage do you have into that theme because obviously impressive growth so how much additional business. Thanks.
Thank you Dominic and what counts to them.
Impacts of all.
Semiconductor situation this year.
We believe we definitely have seen some impact on just like we highlighted already in Q2 that we could have had higher sales.
In Q2, but also now in Q3 and that will affect US Q4 is wall.
Yeah, we haven't quantified exact numbers, but just like we said that we would have been able to grow faster than we are because the end markets or.
Supporting our higher growth.
If I if I take the fiber the fiber question that the fiber <unk>.
<unk> business is volume sensitive you need high volumes to get the good margins and that's exactly where we are getting lower and you are seeing actually very south coming through and when we have had this type of growth we have.
It had been increasing and will most likely continue to slightly increase the R&D investment there, but not in such a way that it would in a way it away all the good things that we would get through the volume.
Thank you Dominic just a reminder, if you'd keep yourself to one question. Please Rachel next question.
Thank you. The next question is from Bob Thank.
Thank you.
Please go ahead.
Thank you very much. So the question is on the.
Your performance by regions, and mainly Europe and China.
Don.
Quarter. Additionally, two of your <unk>.
Sort of what what should we expect for the next quarters when because of Europe, you assume that you have a lot of product launches and with the challenges.
Well, where he's facing should we expect some market share maybe again in the next few quarters in Europe, and maybe coming back to a healthy growth there and in China in <unk>.
Eight of the recent.
Contract.
Instrument there, although small should we expect the benefit of that in the next quarters also thank you very much.
Yeah, well counts to the Ah.
Different regions, we definitely believe that in mobile networks side that if look the European area that we have had very good opportunities one suppliers have changed the supply base and we've been winning about half of those opportunities.
And how.
How exactly this will play out here in quarter four that's the let's see about that it depends its timing issue labor just ball.
Boot camps to China those co.
Contracts or shipments will start coming.
From quarter, four and full bore.
Based on those wins that we did.
In China latest purchasing brown.
That is right and if I if I add just the.
Quickly a couple of kind of macro comments on both.
Reagents.
In general in <unk> investment in <unk> and also in many segments of broadband fixed broadband Europe has actually been lagging behind some other parts of the world. There is always some lumpiness in deliveries, which is now mainly explaining the minus 5% in Q3, but structurally we continue to believe.
In the European market the potential there is a lot to be gained.
There and then when it comes to China structurally it continues to be of course, a large and important market. There we have to be realistic that it is a fact that the market share that is available to non Chinese vendors. There is currently a small and it's prudent to expect that our.
Expect that that would not change anytime soon.
Thank you Francois Rachel next question please.
Thank you the next question.
And it all comes from Nordea.
Our market is going.
Go ahead.
Hi, Thanks for taking my question I would actually continue on the component shortages.
Can you still elaborate on the extent this limited your sales in the second half third quarter or are we talking about one to two percentage points or something more meaningful and do you anticipate potentially a larger headwind in Q4 and in the first half next year.
I'm thinking how to answer that question without giving you a number because we have decided not to quantify this it's also partially a commercially sensitive but.
It is meaningful.
It is.
Actually.
<unk>.
It's.
<unk> said, it's quite possible that this situation will get worse before it gets better of course structurally it will get better one day semiconductor industry is currently investing heavily but there is a quite a long time like before some of that capacity starts coming coming online. So.
We can be fairly confident that when we get to 'twenty three and then 24 the situation could completely reverse itself and there could be excess capacity, which would then be reflected on prices by 'twenty two it will be the big gap.
And in a way inflexion point, where everybody currently still wondering that what will really happen and that's why we are saying that that there are uncertainties, we've been doing fairly well in this war about semiconductor so far but it is getting more challenging.
Thank you Sami Richard next question. Please.
Thank you.
Tim It's Jim.
From Goldman Sachs. Please go.
No.
Hello, everyone and many thanks for the question Congrats on the strong results there's been some debate in the market as to whether we're.
Approaching mid or late.
Late cycle as it pertains to <unk>.
<unk> been talking about some opportunities in various regions some of those seem to relate to market share.
So as we think about demand.
Into 2022, and potentially 2023 can you talk about which regions you see growth and how you think about the drivers there obviously cognizant of these component as <unk> talked about.
How you're thinking about the cycle and demand.
We believe that that we are still maybe at two to three years.
Away from the.
The peer called the <unk> market and then when we look at the kind of the development of the market from there.
The <unk> market peaked and then it started to decline quite quickly after that we believe that there are good reasons to believe that this peak could actually last for a longer period of time and then it would trade deal to start declining towards 2030, when our then six J will start hitting the market in the region.
Is clearly that there are there will be so many new use cases compared to the previous generations of course.
Consumer side is one thing on that one since you asked about reagents clearly Europe has been lagging behind in investment compared to the United States did North America in General and Korea, and Japan, and China. So Europe is now clearly.
Up on this investment, but then there is this big thing about the industrial digitalization and as I have said so many times. It seems now that are with five G. This longstanding promise of of moving the operational technology of enterprises.
Two networks onto cloud and start realizing the longstanding promise of a fourth industrial revolution and significant industrial productivity improvement that that will be possible with the combination of five gen cloud and artificial intelligence and when we are talking to our customers and observing what serious big.
Heavy industrial actors are planning at the moment, they sexually quite encouraging almost all of them are one way or another going to invest in next generation connectivity, especially in <unk>. There are 15 million <unk>.
10 million industrial accomplishes in this world.
That's an amazing number and when you start to think about what kind of services network infrastructure and then different types of.
Edge cloud platform stable invest and I believe that that will create a significant opportunity for several years to come.
Thank you Alex Rachel next question please.
Thank you.
Hey, Danielle.
Please go ahead.
Thank you very much good morning, gentlemen, and thank you for the presentation I'd like to turn to North America, where you obviously had a strong quarter.
And looking at mobile Tech.
Interpret your comments on.
That we've seen the full brunt of the impact of the headwinds you have sort of talked about before in North America that we've seen in Q3, and perhaps if I can.
Terrific correctly, it's not getting worse in Q4 could you give us any indication on how you're doing on mobile in North America.
Kindly gave us.
Number for Europe, but how are you doing in North America on more but that would be very helpful.
And if you have any outlook you want your share for for next year. Thank you okay.
What we have said earlier is of course that we have had certain issues with market share. Some price erosion. Those are referred to the shear sense that some of our customers made over than a year ago around mid 'twenty 'twenty and that is now of course reflected in the.
In the numbers and that creates a tough Q3 of this year comparison compared to Q3 last year, we are not disclosing our regional numbers by business, but when you look at the mobile networks up top line development. For example, you get an idea because the main reason for that is actually not north American situation.
Sequentially.
I don't think it's going to get in a way and any worse, we have been doing well.
With America in terms of new decisions in our product competitiveness and our market position after actually all the way after their those negative decisions were made sometime mid last year. So from that point of view.
I believe that our that we have eaten away now being able to stabilize the situation and then of course. Our goal is to then turn to a more positive development. After after this Q4 this year compared to Q4 last year of course steel will continue to be a challenge and this is one of the reasons why why.
We expect that we will not see the typical seasonality or at least the seasonality will be less pronounced this year than it has typically been in our results.
Thank you Peter Rachel next question. Please.
Thank you.
Can you find a loophole.
Raymond James Please go ahead.
Thanks for taking the question I wanted to see how you're considering the opportunities from government stimulus projects if.
If we could hear specific views regarding the art off program that is in the U S. The rural development opportunity fund as well as global thoughts you highlighted fixed access.
I think thats, probably the most affected but if we could get your perspective. Thank you.
It's it's very clear that this stimulus programs are they.
Actually a lot of opportunities for us all the decisions have not been made and there are still there are still a final decisions to be made especially ended up in the U S. Regarding the chips are accident and various funds for example of Aurora and development and <unk> and so on but on balance there.
Yes.
Very positive development for us and we believe that not only our mobile business, but also a fixed broadband access business will benefit from this decision is the same is true.
Europe, the recovery and resilience, especially.
The European Union, which is now gradually being rolled out to implementation and different member member States, There's definitely a net positive for us.
Thank you Simon Rachel next question please.
Okay. Thanks.
Welcome.
From Deutsche Bank. Please go ahead.
Yeah. Good morning, Hi, Thanks for taking my question I.
I guess.
I know you don't want to give a specific outlook for 2022 sales, but can you at least rank your segments in terms of growth potential and which segments within this sort of three.
Cloud network and mobile will be most affected by that.
Supply issues, you're facing thanks a lot.
An easy way to answer that would be that that CNS will not be affected because it's software.
And this is actually a relevant point because.
Because we are overall, we see growth opportunities in all three businesses next year, but we are not going to be.
Limited by demand by demand side next year this whole game will be more.
The supply.
<unk> game.
Third to what it has typically typically being a C. N. S is of course different because there there are no limitations as to as to delivery capacity. So.
In terms of market and in terms of our product competitiveness, we believe that the direction of travel and the underlying development is positive the uncertainties caused by the.
By the supply side and there I do not see big differences between mobile networks and network infrastructure because this fundamental challenges are not even.
Things that would be there with individual chipmakers. They go all the way to wafer production.
Availability of substrates for before the components and so on so it did affect it will affect everybody.
Thank you Rob Rachel next question please.
Thank you.
Excellent.
Please go ahead.
Yes, Hi, John Thank you for.
For taking the question.
So I was wondering if you could talk a little bit of ball poly cost inflation challenges panel for them a little more.
Practical level I mean.
<unk>.
Also Uh huh.
In terms of the types of the supply chain bottlenecks whole lot.
If you can unpack what's kind of of.
Bottlenecks, you're most worried about is it semis with kind of semis, you mentioned substrates, but also.
Could there be issues around have you seen typically alongside stick with one more thing.
From third parties there in place at the time cables in brackets. So batteries. So we'll talk to you. All if you could talk a little bit that give us some color around what kind of gear, but as it gets more.
As more and more challenged just to semi parcels. So all this stuff and the related to that what's what's kind of is the length of the contract with our suppliers to manage the bill of materials impact of all the cost inflation, which is coming from this.
Services.
Do you have typically.
Have longer contracts with LG.
Try to smooth out.
10, or 20% increase in spot prices.
For example for semiconductors.
So that's one question. Thank you.
Typically these contracts would be would it be annual contracts and this is one of the reason why.
Why.
The uncertainty for example regarding 2022 is there because a lot of these negotiations are actually undergoing for 'twenty to 'twenty two at the moment.
For commercially sensitive reasons I will not go into detail as to which suppliers are it would be and which segments are as I already said earlier it is fairly broad based affecting all semiconductors.
And to some extent it could have a little bit different for memories, but but still the whole industrial semiconductor so is being affected.
And again.
It's commercially sensitive that's why I will not discuss that what type of price increases we are.
We are seeing and of course it is continuous discussion with both our.
Suppliers, and then of course, our customers and our goal is to find the right balance between being able to deliver and then also optimize our margins.
Thank you Frank Rachel next question. Please.
Thank you.
In terms of Sandy Thanks, Tom.
Hey, Morgan. Please go ahead.
Yeah, Hi.
Just coming back to the issues on semiconductors et cetera.
If I may ask I mean, if you look at the router market today, I mean, particularly in west in the way in the west.
There isn't that much competition between in the market given the geopolitical issues that are ongoing and customers typically gone change supply is just because you can't supply this quarter and youll be able to supply next quarter. So it doesn't it's not just mean that your demand is delayed into next year.
And once you can get the supply of semiconductors that your sales would be much higher because you will probably not lose business because of the semiconductor situations.
I think sandy if that is the right. The right assessment of course, there can be individual individual cases, where where are the reality it would be different but in majority of the cases I believe that's exactly what would what would happen that it would be more more of a delay of delivery then than losing.
Sale completely.
Thank you Sandeep Rachel next question please.
Thank you the next question from Cole.
Please go ahead.
Thank you I appreciate you taking the question simple question.
So your opportunities for greater upside with respect to your margin structure pudding.
Fly changed challenges aside which presumably are transitory.
Yeah, we are working quite heavily on two fronts of this.
I would say one is of course, securing that we have the technological leadership because what we believe is that when you have the technological leadership than you have much better ability to have a higher margins as well and the other one is securing that we have the best most optimal cost base and and you've seen also that we incur.
Freezing the R&D the same time, we actually been able to reduce our cost base in other areas.
To mitigate that.
Got it.
The increase that we have in R&D.
So the more R&D, we can we can you know our focus on and get the right output because it's not the only money put into R&D, but also the efficiency of R&D and we have been extremely yeah. Good on on actually increasing the output and mobile networks is very good example, how we.
In Missouri, how much output we can get.
Based on the same amount of money that we put in and.
And we continue to do that in all areas.
Yeah.
Thank you Paul Rachel next question please.
Thank you.
It's Alexander.
Yeah.
Please go ahead.
Yes, hi, good morning, and thanks for taking the question.
Just like to focus a little bit on on cloud networks are the things that CNS.
Would you tell us how advanced you are with addressing the poorly performing projects that that's maybe still weigh on margin. So should we expect any benefit one stat that one of those issues.
Fully resolved.
And how sustainable is the some gross margin improvement that we saw here.
You mentioned, a 10 percentage point improvement outside of.
Last years.
Uh huh.
The loss is so bad.
How much of this we should continue to model going forward. Thanks.
Basically we are we're doing two things in CNS at the moment. We are first of all we are addressing certain.
The old nonperforming contracts, which is one part of this and then in addition to that.
Which is perhaps even more important strategically as then the complete re.
Reassessment and reshuffling of the portfolio and as I explained in my presentation. We have now defined the six focus.
Areas.
Invested which will then be driving CNS growth going forward.
The.
Gross margin improvement in Q3, I would be a bit careful when you look at the year on year on year because of those big one off project provisions that we had last year, which we did not have.
This year.
Of course, our goal is that I.
We believe we will get there.
That once we clean up the old portfolio that projects and then focus the business on the.
Right growth segments are the goal is that that would be structurally driving up margins, but again, one quarter is too short and now we have this exception exceptional suggestion, where the big provisions last year, So I would be a little bit careful as to not to draw too quick conclusions on Q3.
Thank you Alex Rachel next question please.
Thank you the next question.
Okay.
Please go ahead.
Yes.
Taking my question.
I would like to ask you about.
Vessel Opex trends going forward.
Basically what comes to R&D. So we have seen increased.
Increase there as you have been highlighting previously so is now basically at full impact reasonable on the it side and maybe Tim So SG&A prints.
And potential for incentive accrual impact and other factors could you provide some color on the development going forward also there. Thank you.
Yeah. Thank you for the question and yeah.
Yeah definitely we have said that this year, we will definitely doubled down in R&D, especially in mobile networks, but we also have increased R&D in EM.
The network infrastructure.
As you saw the new F. B five chip that we launched so these have created more costly in the R&D side.
What comes through them.
Future.
Investments in R&D and that we've been asked always based on what we believe is needed to secure that we have the technological leadership position at.
When it comes to SG&A.
Cost we there we continuously see what opportunities do we have to be most optimal and get out of that.
That kind of service that we need in the company as a whole and secure there'll be a competitive compared to our peer so small.
Yeah.
I will not go into.
Estimations of next coming years R&D levels.
We will get back to you.
When we guide next year's CCAR, so small.
Thanks, Rich who can we now take our last question. Please.
Thank you the final question.
Cleanup for me to be sacks. Please go ahead.
Thanks very much.
Just wanted to dig in on the enterprise area for a little while because we look at the run rate of sales in the 380 million customers.
You may still be ramping with many of them. It averages out to a very small amount for customers sort of less than 4 million euros. Obviously, you mentioned some large hyperscale is in there can you lay out how you are planning to go to market in this space because what we've seen with many of your peers in the past is that it.
I haven't got that go to market right.
And also since you seem to be sticking purely strictly to budgeted spend levels in areas like sales and marketing. This year. So how do you plan to realize that enterprise opportunity next year without building a large sales force channel channel organization thinks there there are a couple of different segments, which.
Have to be dealt with differently.
The large web scale or if it's actually fairly R&D intensive discussion of that unit to need to have with them. So it's very straightforward and of course the number number of these customers is a fairly fairly limited. So that's in a way a case, okay. So its own.
Then when we talk about private wireless there are two different types of private wireless there are are they.
Wide area networks for utilities, and railways and public services those deals are actually conceptually fairly close to what we are doing in mobile networks. So similar type of approach to those customers works fairly.
Well, but then a completely different case is this.
So for industrial.
Campuses and there we are currently developing the distribution model you cannot have your own sales force that would visit 50 million industrial campuses do you need to have a.
A distribution network or layers of distribution. So that you don't need to invest in fixed cost for that sales force.
So that's what we are currently building.
Thank you Richard Ladies and gentlemen, this concludes today's call I would like to remind you that during the call. Today. We have 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 these in.
More detail in the section titled operating and financial review and prospects risk factors of our 2020 annual report on form 20-F, as well as other filings with the U S Securities and Exchange Commission. Thank.
Thank you for joining us.
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