Q1 2022 Nokia Oyj Earnings Call
Good morning, ladies and gentlemen, welcome to Nokia's first quarter 2022 results call I'm, David Mulholland head of Nokia Investor Relations.
Today with me as Pekka Lundmark, our president and CEO , along with Mark <unk> our CFO .
Before we get started a quick disclaimer. 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 that could cause such differences can be both external as well as internal operating factors. We've identified such risks in the risk factor section of our annual report on form 20-F, which is available on our Investor Relations website.
Within today's presentation references to growth rates will mostly be on a constant currency basis.
And margins will be based on our comparable reporting.
Please note that our Q1 report and this presentation are published on our website on both reported and comparable results and a reconciliation between the two are included.
In terms of the agenda for today Pekka will give a quick overview of our financial and strategic progress in the quarter. Our market will then go into a bit more detail of some of the key factors impacting our financial performance along with our outlook for 2022 with that let me hand over to Pekka.
Thank you, David and Hello, everyone and thank you very much for joining the call today.
Before we start on the actual Q1 performance, let me say a few words about the events that have shocked that's all in Q1, namely the Russian invasion of Ukraine.
Nokia has strongly condemned invasion from the start our priority has been and continues to be the safety and well being of already in place.
We are supporting our colleagues and Ukraine, and providing all available help depending on people's individual needs, how circumstances and I'm proud and impressed by how our team members have continued efforts in Ukraine to maintain our customers' networks in the country.
It has been clear for a since the early days of the invasion of that continuing our presence in Russia, I would not be possible.
We announced on April 12th that's we will exit the Russian market we.
We will do this in a responsible way and aim to provide the necessary support to maintain our customers' networks as we exit.
Western governments have highlighted the humanitarian implications for ordinary irrational sea food medicine, and critical infrastructure providers like us simply walk away with.
He will work closely with our customers on a smooth and orderly transition and just to complete the exit as quickly as possible, but also responsibly.
So with that let's move on now to our Q1 results.
First of all.
I'm really pleased with the Q1 it was a strong start to the year.
Looking at the screen here we had.
One per cent topline growth in constant currency. This was 5% in reported currency, we could actually have grown faster because we have a very strong order backlog supply chain continued to constrained our growth, notably in mobile networks, and then within network infrastructure business.
Inside the optical networks business.
What was particularly pleasing in this quarter was the strong gross margin, 47%, which is 250 basis points up and they supposed to particularly driven by mobile networks.
Cloud and network services. So this is really demonstrating that we continue to benefit from our improved product and cost competitiveness that we have achieved through the added R&D investments.
The operating margin in the quarter was 10, 9% it was up a stable.
The improvements in gross margin were offset by increased investment in R&D, which we are continuing but then in addition to that when you compare this quarter to the corresponding quarter a year ago, we had a little bit lower other operating income because they were a positive one offs last year and then there were timing.
<unk> effects in the technologies business, which we will zoom deeper later on this call.
Yeah.
So then with.
With the help of this chart I will I will kind of comment the both the topline and margin development. The gray bars that you see here indicate the nice quarter the year on year growth in.
Comparable currencies and after the pretty challenging Q4 as you remember it is now very good that we have returned to growth and then obviously the margin development. That's been strung. The Blue line here indicates the rolling 12 months, our comparable operating margin.
We are now on the same level as at the end of last year, a 12.5% then obviously here you see the significant improvement that we've been able to deliver since 2020.
So now I will say a few words on each of our business group and I will start with.
Mobile networks as already highlighted we had a a top line issue in this business, we have strong order backlog, but because of our continued supply chain challenges, we had a 4% decline in the topline incompatible currencies.
On the semiconductor side, that's the chase and continuous tight there are some areas of improvement here and there but in the big picture this chest and continuous tight in addition to that in the short term. We are now facing some supplier specific challenges and then obviously there is a this is Jason are in.
Shanghai region at the moment in China, which is Covid related death medical will comment a little bit more. So these were some of the things affecting the top line. Despite the fact that we have really really strong order book and we expect to return to growth in this business this year.
[noise] profitability development, given that are somewhat challenged top line. The profitability development was really really placing seven 5% operating margin great expansion in gross margin 400, and then base at 410 basis points improvement in comparable operating margin over last year.
And what is behind this.
It is really first of all the R&D investment that we have made here you'll see on a 12 month rolling basis. The R&D investment in mobile networks. If I go back here to the third quarter 'twenty 'twenty, we were around $1 8 billion euros. Now we are at 2.1. So we have added about 300.
Million annual R&D investment into this business, which is about 16%. So this is significant and we have done exactly what we said in 2020 that we will invest whatever it takes to repeat the success that we have had in four G. Also in five G.
So.
These R&D investment.
Has helped us to deliver this which is the gross margin trend. We are now. This is also a 12 month rolling we are now at a 39% 12 month rolling at the end of the first quarter and very clearly the R&D investment in this growing gross margin development day. They go hand in hand, but.
There is another thing also behind the gross margin and it is the <unk>.
Mix development that we have been driving inside the services part of the mobile networks business, we are transitioning from low margin.
Deploy services towards a higher share of higher margin technical support and maintenance services. This is a strategic shift that we are driving in the service part of the mobile networks business and that is the other reason in addition to the product competitiveness itself and they the R&D investment.
We have made that is driving the gross margin.
They know where to next business, which is a network infrastructure I.
I would say again fantastic quarter from a top line point of view, 9% growth in constant currency, but zooming into this business a little bit more 29% growth in fixed networks on top of the already over 30% growth last year and then somebody in networks.
Also a very strong growth, 25% there was one business inside ni with weak top line that that was the optical business and that was exactly the business that was hit by some specific supply chain challenges. So also there we have good product competitiveness strong order book, So we expect to recover all.
So in this business later in the year.
The overall operating margin for the.
<unk> business was nine 9% at a fail 90 basis points year over year, largely due to the upset absence of positive other operating income in the prior year and also to some extent the increased R&D investments.
Talking very briefly about the technology development then.
And you remember that we launched are they F. B five a new generation of routing silicon last year. Its really promising we are now in the first customer trials. We are seeing strong interest in the 800 gigabit Ethernet support full backward compatibility on support for current features and services one.
Very important detail why we initially committed to 4.8 terabits per second throughput in the chip. Once we are now seeing in the field trials is that the chip is actually performing even better and we are reaching up to six terabits per second throughput, which is 25.
Per cent more than we had initially estimated and this is continuing to increase the value proposition to our customers of the F. B five chipsets.
Our other silicon platforms. In addition to SB five of what you see here quealy underscore the fixed networks.
And PSC five for optical networking also continued to give us strong differentiation, helping us to gain share and just that's one practical example of the strength of the portfolio. The Microsoft deal that we announced in April it shows the strength of our data center switching solutions and it is a good step.
In entering our relationships with our web scale.
Then onto our cloud and network services also here a strong quarter, 5% topline growth, we are rebalancing our investment towards investments towards higher growth areas and that is clearly showing results. We are now seeing gets into the top line.
Development, we had strong growth in one of the focus areas of CNS, which is core networks CSP is now transitioning towards five G core and that is really driving the CNS business in Nokia.
Another driver is a private wireless and accomplished wireless deployments are that we are in at the moment.
Also here, we had strong gross margin expansion of 520 basis points.
Benefiting from both topline growth and the operational improvements we continue to make in all of this then resulted in in a pretty good 570 basis points expansion on the operating margin.
On this chart, you'll see a 12 month rolling or better margin for our cloud and network services and while there was weakness in in late 'twenty early 'twenty one.
Largely because of some provisions that we took related to certain projects are even excluding those effects you can see that our that are how much. The rebalancing is starting to benefit our profitability and as I said.
We are also investing in this business we are investing a lot in one of the key investment areas is accomplished wireless where we are adding R&D investment, which is one of the reasons why why I want to caution you know that that doesn't repeat what we have said earlier that our assumption.
The assumption for the profitability of this business for this for the full year 'twenty to 'twenty two is operating comparable operating margin between four and 7%.
And then the fourth of our businesses, which is Nokia technologies here, you'll see the quarterly.
Topline in Nokia technologies, and yes, there was a 17% decline.
Year over year in Q1. This was primarily a timing issue we have two contracts that expired last year that are currently in litigation.
And in renewal discussions obviously with this customers.
So that affected the top line in the quarter another factor.
Factor was that there is another customer whose license has expired, but they have exited the smartphone market. So obviously that will not continue but we continue to be confident in the strength of our portfolio, we still expect to be able to deliver to stable operating profit year over year in this business assuming.
These two negotiations that I mentioned are concluded and I also want to be very clear on one thing in terms of our approach in this business our priority since we do believe in the competitiveness of our portfolio that it means that our priority will remain protecting the value of our portfolio instead of.
Achieving Russia loosened by a specific deadline.
So, let's now move on to enterprise next but before I do that I want to take a step back and explain the breadth of what we are doing in enterprise.
As you remember enterprise for US is not a business group whatever we sell to this customer segment. We report in the respective business group, depending on the solution that we are talking about but we do have a dedicated sales organization for enterprise and that sales organization is organized.
Along four major opportunities and the first one.
He is web scalar is primarily our IP routing and optical products for a large web scale companies and of course the Microsoft.
Data Center switching daily say, Good example of this than the second segments, we are focusing on its various vertical loss.
<unk> delivered by our network infrastructure business.
Typically.
IP networks optical networks broadband.
Fixed fixed broadband connectivity to our enterprise about sites.
In addition to that this vertical is focusing on a.
Governments assay customer group, we actually expect that our government spending on government agency spending is going to increase going forward and that opens up interesting opportunities for this this vertical and then the other side of all of this is then the private wireless networks that we have thought.
But a lot about tenda there it's important to see that there are two fundamentally different cases, one is wide area networks, which typically are networks for public safety transport and utility applications. The logic in this business, how you build sell and build these networks.
Is quite similar to how we are selling mobile networks today, but the difference is of course that then the customer is not a service provider. It is something else it could be a utility or it could be a safety authority.
But then there is.
From wide area networks are very different the case and this is one of our most important strategic growth opportunities and that is the millions and millions of industrial campus is that there are in this world who are all seeking ways to improve their productivity through digitalization, and that's where our accomplished wireless.
<unk> said that you're including edge computing platform for accomplished wireless <unk> wireless access through our index solution etcetera etcetera.
And so I just wanted to because enterprise. So it's a very wide concept I want to highlight that these are the four in a way opportunities that we are focusing on in this business.
It is fair to say that our top line did not meet expectations in Q1, 7% drop in Q1 was affected by.
Supply chain challenges and some order conversion delays.
The positive side of this is that as we already said at the end of last year. After Q4, we had a great order intake and a great order backlog and the good thing is that the strong order intake continued in Q1, we continued to grow double digit in order. So what we're actually doing now is we are growing in order backlog and then the <unk>.
<unk> challenge and the goal obviously that we then have for the remaining quarters for this year is to make sure that we start converting that order backlog at a faster pace and that is definitely our goal.
We continue to grow our customer base and build what we believe will be a sustainably growing business and to meet them and if you recall the previous slide under accomplished wireless opportunity I was talking about here is not only accomplished but also private wireless in general including wide area. Also we continued our good pace of growth.
In those segments, we increased with 30, new customers from 420 to 450 during the quarter. So we continue to focus in the enterprise segment. Our goal continues to be that in the coming years, the relative share of enterprise of our oil sales will grow.
Meaning that it will grow faster than the service provider side of the business.
Yeah.
So ladies and gentlemen, with that I would like to hand over to Mark.
Yeah.
Thank you Pekka.
And Hello from my side as well.
I'll give a little bit more flavor on the financials.
And starting with the topline development as Pekka mentioned, we had 1% growth on constant currency basis, and if you look at the different geographies what has happened starting with Asia Pacific you can see the 15% growth there and this was growth in all business groups.
While North America that was driven by network infrastructure.
And if you looked at Europe growth, 2%, we actually had a very good growth in mobile networks.
But also in Europe , we actually record the revenues from technologies unless you saw Pekka showed a small that we have a decline of 17% and this is actually offsetting the good growth.
Growth that we had in mobile networks, but also optical and IP had some decline in Europe .
Then if we look at the Red ones, starting with Latin America, and actually in Latin America, all business groups, but also the business division within network infrastructure optical IP and F N fixed networks. They all grew in Latin America.
The only one that didn't was submarine submarine business study has more protein based business and they do have certain projects going from region to region and that's why we saw the decline in Latin America.
And then lastly, I just want to highlight India, FCC minus 24% and the reason he is more timing issue.
As you all know.
The Rollouts of five Qi will happen later this year.
And then going over to operating margin development on and I would say that we had a good development in Q1 and very pleased to see the mobile networks operating margin expansion of 410 basis points, we had a very strong gross margin development.
While we also invested in R&D at the same time.
The next area network infrastructure with a small operating profit growth.
While operating margin.
A decline of 90 basis points, just like Pekka mentioned.
And this is where we invest in R&D as well, but also the absence of the one off in operating other operating income last year.
CNS 570 basis points expansion in the operating margin is a great achievement and.
It's good to see that that also here, we had a very good year on year improvement and this was expansion on gross margins.
Then we have two areas, where we saw the offset of these good developments and technologies is one of those in and of course these more delays in the revenues and because of those litigations and negotiations that we had.
With two customers.
And the other one is the group common last year, we had in our venture funds 90 million income and this year in quarter. One we have 40 million. So these are the big impact here.
And then if you look our cash performance, we had a good performance in quarter, one we generated 326 million free cash flow.
And this is mainly coming from a strong adjusted profits, but also you can see a positive impact from our networking capital and here of course in quarter four when we have a higher sales part of that is collected in Q1. So that's why the trade receivables declined in Q1.
And gave a positive impact of $350 million.
Offsetting that wants that we actually increased our inventories about $200 million.
And this is just like we mentioned earlier, we want to build some buffers considering the supply chain constraints situation, where we are.
And also in Q1, we initiated the share buyback program and so far in Q1, we actually purchased about $10 5 million shares and that's about $50 million impacting Q1.
Just looking for what would come through Q2 keep in mind that in Q2 cash flow will be impacted by the outflows related to employee variable pay and that's why.
Quarter, two cash flow will be.
And different.
Then if we go to market outlook and how the market has been changed we've done two main changes here and this is affecting us that the market is now growing about 4% instead of three and the two adjustments that we've made.
Here is actually the first we see a.
Better market in North America, especially in more Barnett Brooks' area.
And this is slightly offset for us.
Other adjusted we made and that's the situation in Russia, Ukraine.
And the outcome of a phase two adjustment is that mobile networks mortgage is now expected to increase by 4% instead of three one.
While the CNS.
Market is expected to grow 4% instead of five and here you can see in the CNS area that the Russia, Ukraine is impacting slightly.
But our ambition remains to grow faster than the market.
And then just looking at the outlook and our guidance a little bit more detail first of all I want to emphasis that demand environment continues to be very strong.
While the supply chain and inflation challenges remain as wall and we are confident that we can deliver all witches and Tony outlawed.
So like Pekka also referred to a COVID-19 situation in China that could pose some short term challenges considering the lockdowns we've seen there.
But we do not expect that to impact our full year.
Overall, our outlook is unchanged and the only change that we've done is adjusting the topline guidance.
Because of the FX movements during the quarter. So it's a 300 million adjustment. So now the topline is expected to be between $22 9 billion to $24 1 billion, while the operating margin and cash flow are the same.
And then just to give you.
A reminder of our guidance and how we have built it up if we start from choosing 'twenty, one operating margin, which ended up at 12, 5%.
And we had about 150 basis points one offs in that.
So the comparable starting point is actually 11%, but we expect that the sales growth and the operational improvements that we are working on will actually offset.
Operator.
So the inflation and supply chain challenges that we see and also our investments in R&D.
So with that I. Thank you for my part.
Turning to you back to David.
Thank you Marco and thank you Pekka as well for the presentations before we move to the Q&A session. I just wanted to give you all another date for your diaries I'm pleased to announce that on.
On the 16th of June we'll be holding our next progress update presentation. This time, focusing on our cloud and network services business details of that will be sent out shortly.
With that let's move to the Q&A as a courtesy to others in the queue. Please limit yourself to one question and a brief follow up without Rachel could you. Please give the instructions for the Q&A.
Thank you we will now begin the question and answer session. Thank.
Thank you in the video webcast. Please remember to mute the audio.
On your completion before asking your question.
Secondly, yes.
The question you May Press Star then.
One on your telephone keypad.
Using a speakerphone please pick up your handset before pressing the case here with.
Your question please.
I will now hand, the call back to Mr. David Mulholland.
Thank you Rachel.
We will take our first question from Alex Duval from Goldman Sachs. Alex. Please go ahead.
Yes, many thanks for the question.
Congratulations on the strong results.
Firstly just on gross margins in mobile are you saw very robust profitability that on the gross margin level.
Allowing you to deliver strong profits. Despite some of the supply of seats you referenced I Wonder if you could talk a little bit more about the key drivers of the strength.
To what degree are we thinking about things like product quality advances or cost structure and can you contextualize a bit.
How important the reef shark story is in mobile.
Part of that many times.
Well.
Absolutely as we have said said many times the reef shark started story is absolutely essential and this now the share was 82%.
In Q1, and we are on track towards 100% by the end of this year, but I would like to highlight that actually did in the presentation as well in addition to that the other.
Side of the story is the structural development, we have inside the services part of the mobile networks.
And that's where we are transitioning.
Transitioning.
From lower margin deploy services towards higher margin.
Care and maintenance services using.
Maximally new technologies.
Artificial intelligence automatic fault.
Detection.
Automated.
Network optimization and so on and this is the other part of the also I would call a technology story in addition to rate shock.
Thank you Alex did you have a brief follow up.
Yes, just very briefly.
Obviously had a strong beat on EBIT in the quarter, but if I look at the sort of fully rod lift in terms of what you're implying.
On a fiscal year basis.
You're implicitly hasnt sort of raise the other quarters I just wondered if he could give.
Given the sort of context around that obviously realize you're early in the year.
Any thoughts that would be helpful.
We don't really have any new thoughts on that of course, we we never guided for any individual quarter. So we're looking at full year guidance, which we are keeping unchanged. This was a good start.
The year, but.
As I said.
The supply chain tightness.
Tightness continues.
So and so we have to also be.
A careful and understand that the work needs to continue we have not changed our full year outlook.
Thank you Alex we will take our next question from Francois <unk> from UBS Francois. Please go ahead.
Okay.
Hi, Thank you very much.
So two quick ones. The first one maybe just to zoom on the mobile network. So when you look at the performance in Q1, the revenue was down 4% at constant currency and you actually increased.
Your Tam market to two 4% for for the full year, if I'm not mistaken. So my question is it would imply a significant acceleration.
Going forward from delivery of Q1, so can you help us understand the visibility that you have on this acceleration and maybe as Q1 was particularly impacted by supply.
How confident are you you will get the supply to to catch up.
With the growth.
For the full year is that makes sense and then I would have a quick follow up.
Thank you and if I start what comes to the mobile networks.
Growth for this year.
We are quite confident that we will have growth this year for.
The mobile networks of course, there's always the timing issues and phasing issues.
In different customers and geographies is wall, but.
We see a very robust and good market that is supporting us and also.
We believe that.
The competitiveness that we have been working on.
Quite heavily in the past 18 months is supporting us in this and scenes Susan <unk> negotiations, we actually haven't lost any more footprint. We actually have gained and just like I showed that in Europe . We had a very good growth and this is thanks to those gains that we have had in Europe also win some.
Players have been changing their vendor base.
Thank you Francois did you have a brief follow up on the competition.
Got it.
Yes, I mean, just a quick question you said I mean you have.
Good visibility on your capacity for because theres been a constrained so is it improved too.
To support the growth going forward.
Yeah, I would say that that we have.
Yeah.
Pasadena and factory capacity, if you mean that our sub suppliers.
They are not constrained in the capacity itself. So there we have much more flexibility.
Then compared to for example, semiconductor supply situation.
Thank you Francois and we'll take our next question from Simon Leopold from Raymond James Simon. Please go ahead.
Thank you very much last quarter, you identified some hurdles limiting your ability to raise prices I would like to see if we could revisit this.
Topic again, maybe a better understanding of where you might see pockets of opportunities maybe digging into some of the particular segments like routing as an example.
And if youre not able to raise prices, but you are maintaining this operating margin outlook I'd like to better understand what you're doing to offset the inflation for input cost if it's not about price increases.
Well, obviously in that.
Full year outlook, we have taken into account everything we know and understand and assume on both the input cost development and then the actual technology competitiveness in product cost development and it's always a kind of a product of this to the <unk>.
Product technology development continues.
And every new technology generation that we bring to the market structurally lowers the cost of the network. So that is one thing, but then of course as we all know there is very strong inflationary pressure in the world at the moment and we are seeing increases in input costs and of course in new deals that we are pricing.
In every single new deal, we embed all the information that we have on the technology competitiveness input cost and then in that particular customer situation, our relative competitiveness vis vis competition and it's a it's all these needs to be factored in into into pricing.
<unk> in our business because this is.
In most segments, especially in mobile networks, a business, which does not have a very well established in a way global market price. Every single deal is usually separately price negotiated and I can assure you that in all new deals that we are making we are putting in all the input cost increases that we.
Uh huh.
That scene and of course this goes so I believe that the whole industry that.
Everybody has an interest and an intention to pass on as much of the input cost increases onto customer prices.
As possible and again in the 11 to 13, 5% comparable margin forecast that we have for this year, we have taken into account everything we know about this.
Did you have a follow ups on them.
Yes.
Thank you for that.
Markets like routing, where you are the dominant player.
Essentially my impression is youre matching.
The price offers or the price increases that others are in.
In a sector like fixed access where you are a dominant player in many markets essentially what you have said I want to confirm that if you set price on new deals based on the higher input cost, but youre not retroactively raising price on existing contracts. That's the key point I just want to confirm.
Typically it's and I guess this is easy to understand that it's much easier to raise prices in new contracts than in existing contracts of course, we have an interest in all of our customer discussions step to make sure that.
That we defend our margins and it's actually quite straightforward the stronger your technology competitiveness is the stronger pricing power you have and we have seen.
<unk> strong technology competitiveness in routing obviously, it's now further strengthened through <unk> five and also in fixed access, especially on the optical line terminal.
Syed.
First in Bonn, then G PON and now quickly transitioning to 10 gigabit symmetrical xjs born uneven gradually to <unk> point that is a segment, where we have pretty strong.
Competitive technology competitiveness market position and hence also our pricing power.
Thank you Simon and we will take our next question from Aleksander <unk> from Societe Generale, Alex. Please go ahead.
Good morning, and thank you for the question.
Could you, perhaps give us a bit of a quantification of the headwinds that you experienced in Q1, what was the amount of sales you missed as a result of constraints and you expect to catch up in future periods for the sales already simply lost.
And also they chose to use effect mobile networks as well as network Division.
Structure divisions.
Proportions.
We are not quantifying that impact we did highlight that it was meaningful and we can confirm that the 1% topline growth would have been higher.
Without this kind of strange, but again on full year basis, we are.
I'm confident that we are able to deliver including the semiconductor situations, which continuous tight at the moment, but there are signs that at least give us reason to hope that the situation would improve in the second half of the year, but then again as mark highlighted.
Right now or actually since the end of March there have been lockdowns in the Shanghai region. We do have contract manufacturing there now they are receiving gradually.
<unk> centers to start opening up.
I mean these are some of the short term risk factors, but again, we do not expect this to.
Affect our full year full year performance.
Did you have a quick follow up Alex.
Yes, just a quick follow up on interesting on the mobile network services our way.
The shift to more high value add.
Great.
<unk> technology support and.
With less network rollout is this a structural shifts.
And we should expect this positive development going forward was it just a Q1 bit.
It's not the Q1 <unk>.
One Lady say structural.
Shifts that we are actually actively driving.
Thank you Alex and we will take our next question from Andrew Gardiner from Citi. Andrew. Please go ahead.
Alright, Thank you David.
Good morning, guys, just a quick if I could start with a follow up actually to the point you were just speaking with Alex.
On the services side.
At a time when the industry is deploying <unk> G. How are you able to move away from those deployments.
It actually negatively impacting your networks business.
Put another way is it a case of just layering on additional higher margin services on top of the existing deployment business and therefore, the mix is changing in that way.
I would say that we are it's actually it's actually both but we when we are driving this shift.
Obviously it is then seen in how we tactically approach of deals and how we price the different parts of the contracts and and of course, we have an interest there.
Optimize the margin structure of our contracts and we're just simply seeing that.
In some cases, having less appetite in the deal, making a four deploy services, especially if the margins are extremely low Esa good decision, but again every customer situation is different and there are differences in as to how connected in the deal the deploy services.
Future care services, and then the physical network itself, how tightly connected to those different elements of the DLR and that of course affects the pricing tactics of each deal.
Did you have a follow up Andrew.
Yes.
Question on the technology side I'm just interested in so what's changed in the last two and a half months or so since you gave us the initial guidance, where you didnt really reference the license expiry so negotiation.
I presume that I presume that that.
At that stage of the year.
Obviously, you already knew about what was happening and why.
Why the change in language around.
At this point.
Oftentimes when we get these negotiations I think you and the cost and the other companies have decided to just exclude IP off that.
That piece of IP off from your guidance.
Are you not compromising your negotiating position.
So we're having an inherent assumption.
Yeah, Thank you Anna and.
I believe that we mentioned also in in the fall.
We had litigation with Apple and we have publicly talked about that.
So that's been in the current all the time.
And it's always difficult to know exactly what is the timing of these negotiations and when we come to a conclusion and signing of the deal.
And.
But all of these has been in our guidance buildup as wallet and of course, we believe that we can sign those agreements.
During this year, but I have to be very clear here that we are not at all.
In any way risking.
Our quality of the deals by getting some.
Busy specific timeline here, but we.
We believe that our portfolio is very robust and our technologies are very good. So we have a high belief in those and actually nothing else has changed here. It just that the timing it takes longer time and and this is quite normal business for technologies.
This is what they are doing actually continuously we have.
Different deals coming to end and we always renew those and negotiations take different timeframes.
And again, maybe just to just to come.
What we said earlier since you used the word word guidance. So we have not changed our full year outlook in terms of the.
The group profitability. So it remains the same.
Despite the situation in tech having had a weaker Q1.
And it's better to defend the value of the portfolio that we have instead of trying to.
Signatures as possible.
Thank you Andrew we'll take the next question from Ben Hartford from New Street Research. Please go ahead.
Yeah.
Thanks for taking my question is just on the enterprise market and what you called out today is private wireless. So we just wanted to know how competitive dynamics is shaping up in the market going forward, you've obviously got a strong strong position today.
I've always see companies like Cisco and Dell.
So hard to scale is there anything in the market. So how do you see that evolving and how do you think you can compete with our go to market strategy there.
Yes. Thank you that's that's a highly relevant and topical question because there has been a lot of announcements on the private wireless side at the moment.
We believe we are we're the market leader.
And this has been confirmed by the.
Third Party research.
Houses are as well so that is the starting position we are increasing our investment both on the R&D side and on the go to market side and unlike in mobile networks or in wide area private networks for utilities. For example, this is a segment where.
There are some channels and various types of partnerships are really the name of the game and in addition to our selling directly to end users. We often partner, sometimes we partner with service providers, we can partner with them at their distribution company or weaker Dave and partner.
Through selling technology platforms.
Some of the other players in the industry and we are really deploying.
Deploying multiple different business models in different channels to this and.
I do not want to want to mention any or highlight specifically any of the names that you that you mentioned, but we should assume that in some of these announcements that have been out there of companies that are typically not mobile network players when they announce say wireless cause.
<unk> wireless a private wireless they often assume that they will have technology partnerships in their final delivery.
Did you have a quick follow up on.
No that's great. Thank you. Thank you David Thanks, Ben we'll take the next question from Sami Sarcomere from Danske Bank Sammy. Please go ahead.
You mentioned that there is another IPR licensing agreement. In addition to all that expired at the end of last year are you expecting a return to the earlier 151.
Four to $1 5 billion run rate.
Able to renew those agreements at previous rates or does that require improved royalty rates or new licensing customers.
Yeah. Thank you for the question and.
We believe that we are returning back to 1415.
Run rate in this as you know our guidance is wall.
Remember that we also had one customer that exited.
The Ah.
Device side.
But we've been quite successful in automotive.
Yeah.
If you look at consumer electronics side and also we are working on it.
<unk> side to get new customers to see what opportunities we have going forward.
And we.
We have guided on the technology side that that would be stable.
On a year on year.
And we believe that that's that's going to be the case this year as well.
Did you have a brief follow up sorry.
Any color on how those discussions are progressing I guess there is litigation was helpful. But.
What about the other park.
Yeah. Unfortunately.
I don't want to go into the ongoing negotiations and exactly how they are proceeding.
And we are negotiating with them these bodies and.
When ever we have any information, we will give that to you and keep you updated on these issues as well.
Thank you Tony and we will take our next question from Sandeep Deshpande from JP Morgan Sandeep. Please go ahead.
Sandeep either.
Yes, hi.
Sorry.
Can you hear me, Yes go ahead Sanjay.
Yes.
Im sorry.
My question is.
Two quick questions firstly on the enterprise market.
You just mentioned in the earlier question that you have got you are market leader, you're announcing a lot of deals, but your enterprise revenues are still down year on year, maybe we can have.
Lending into that enterprise revenues and the second question is on the gross margin.
Mobile networks clearly incredibly strong.
Already at 82% reached Chuck.
Is there upside in that gross margin given how far you've gone in terms of changing the product we didn't.
Changing the chips we didn't.
Within the base station, so I'm trying to understand the flex on the gross margin.
Okay. Thank you Sandeep enterprise first time, and I know I'm repeating myself, but of course.
Minus 7% topline in the quarter does not.
Even close to meet our targets.
Targets, but again this is more a and order backlog conversion issue. We do have the orders we have a very strong.
Order book.
And also in Q1 orders continued to grow double digit of course private wireless is only one part that I explained then we have the deep.
And I verticals.
Including governments and then we have web scales as well and there is always some lumpiness in some of these deals but they overall.
Development in terms of orders and market position continues to look promising so we are not.
Giving up a bit on our target that we would make the enterprise segment grow faster than.
And then the service provider segment than the mobile network gross margin, obviously three of shock.
One key driver there there is still work to do there but of course now once we I mean this reef shark percentage will very soon lose its relevance and.
Once it loses its relevance we will also of course stop reporting. It then the development will continue there will be a new generations of silicon that are in the pipeline continuously new generations of software and of course. Our goal is to is to continue to dip.
Develop our technology position so as to maximize the gross margin. This is one of the drivers of the gross margin of course then.
Then the other one.
Is which we already discussed this the the service part of the business, where we are driving the business towards higher share of higher margin <unk>.
Services and then of course, one thing which is also important to gross margin is.
It's volume because of the leverage that you are getting on your fixed production overheads. So the more volume we are able to able to get that also then supports gross margin going forward.
Thank you we'll take our next question from Paul Silverstein from Cowen <unk> Co. Please go ahead.
So sort of pursue one ask about network infrastructure.
It sounds like there is any reason for concern.
There are a lot of investors.
To be conservative macro deterioration trailblazing into software.
<unk>.
Which in turn translates into lower come through sort of Capex are you seeing any signs of softening whatsoever.
I missed the first part of the question, but did I understand correctly that it was it was about the general the development of the general economy, and how that would work.
Potentially affect our our markets was that the question.
That is because whether you are seeing.
No we I mean, what we are seeing today.
<unk> continues to be strong.
Strong orders also in Q1.
Strong funnel of new opportunities.
There are of course two sites into this there is the general technology cycle.
And there are reasons to believe that that that continues to be a strong cycle in terms of digitalization mobile broadband fixed broadband et cetera right.
Cetera, but then of course, the other side is the general economy and the macroeconomic development then okay.
You don't have a crystal ball, we don't have a crystal ball.
Medical medical has won but I, certainly certainly don't and we all know that should there be.
Any significant hit to the overall economy that could affect our service provider investment plants and that could have a negative effect on us, but its impossible to speculate on something that you do not know.
All we are seeing today continues to be strong anything you would like to.
No I think you covered it well.
Did you have a quick follow up Paul.
Yes.
First Youre limited in what you can say about the Microsoft announcement from us it would be great any additional color.
Specific to Microsoft you've made clear that web scale is a big push cloud in general.
You show the logos Apple Google Microsoft any color you can give in terms of where you are penetrating that opportunity more broadly and deeply.
Obviously, the web scalar.
Our very large.
Market.
The Microsoft deal is one important a deal we are also working with our with the other web scalar.
These are often deals that.
Take long time to conclude.
And you often need to engage in very detailed technical R&D level discussions that are do take time. So we do not want to get ahead of ourselves on this but this deal with Microsoft is a strong testimony to the competitiveness of our portfolio but.
Again.
Deals at the moment, they are lumpy and they do take time, but this is definitely a segment that are that we want to build more traction on going forward.
Thank you Paul we'll take our next question from Sebastian <unk> from Kepler Sugar Sebastian. Please go ahead.
Yes, Hello, everyone and thanks for taking the question on the <unk>, we all know almost four years into this strategy.
You see the investment building yet.
2023, do you see some of them to seek further expansion into investment next year.
Reaching close to the peak of the feature.
And a follow up would be on <unk> business could you provide a little bit more color on the street.
These days between the four big blocks that you mentioned.
You bet he calls.
It will as it competes with us and so on and where do you see this <unk> opportunity within the spirit of full blocks for the coming years. Thank you.
I mean, we've been talking a lot about campus wireless so strategically that is an extremely important.
Segment and.
In a way I guess it is a good thing about that segment is that it will consist of a large number of.
Smaller deals so they it will be easier to forecast.
And planned for from both from a financial forecasting and supply chain point of view.
This is quite different from the Lumpiness of large web scale deals where the Microsoft dailies is one example currently.
Still accomplished wireless is quite small.
Our business, but it is growing extremely fast a wide area networks is an established business. There is continues to be growth opportunities, but the ni vertical so that we called it that is a meaningful part of the overall.
7% of the group last year enterprise.
So that continues to generate opportunities as well, but if you want to me personally to highlight.
In relative terms, where the strongest growth opportunities I would.
Still mentioned accomplished wireless than the five year cycle.
Question, well you asked about 'twenty three we continue to be of the opinion that.
In the absence of something in the macro environment that would take everyone with a big surprise.
We continue to have a strong view on the market.
We have seen with most service providers have said about their 2023, Capex plans and they do look pretty strong in different parts of the world of course, the U S operators are a little bit more head in that cycle compared to some other markets, Japan Korea and U S started first and now Europe .
Southeast Asia now India is starting and then Latin America. Following so we continue.
To have an optimistic view on the five year cycle and then of course on top of everything comes to the enterprise and accomplished wireless opportunity, which is small today, but expect it to grow fast.
Thank you Sebastian we'll take our next question from <unk> from Bank of America. Please go ahead.
Yes. Thanks for taking my question most of my questions have been asked I just want to maybe have this like.
So I can go into the Microsoft question earlier can.
Can you just give us a sense because I mean switching is not your strength historically has more routing optical et cetera.
So switching at Hyperscale is all the more impressive but I wanted to understand are you selling.
Chassis with the chips that are on board.
Operating system.
Can you just give us a sense of the win.
Sure just trying to understand how significant that is yeah, yeah. So.
If I start from the operating system its based on on the open source Sonic initiative, that's been where we've been working on with together with Microsoft <unk> chassis based.
It is supporting the move towards high density 400, gigabit Ethernet application and see Microsoft steer too.
Network.
Switch product, it's not the F B five base, it's based on merchant.
Silicon and it is going to deliver multiple applications. In addition to the 400 gigabit interconnectivity that tier two network architecture. It will deliver some fixed form factor applications for data centers top of rack leaf spine and super spine applications, and so and I saw that.
Evolve over.
Overtime, so we see this as a strategic.
Breakthrough, but as I already said earlier, we also need to be careful that we don't get ahead of ourselves because switching with web scale or if it's a new segment for us and we all know who we are up against there and it is a highly competitive market.
Thank you David we'll take our last question from Peter Kurt Nielsen from APG. Peter. Please go ahead.
Thanks, very much David and thank you for the opportunity just returning to move on it was placed in North America.
Sales declining in North America, this quarter, which I guess, it's been weaker than anticipated three months ago could you elaborate a little bit. Please on what is driving.
The lower sales in North America, while we haven't had the full reset by the end of last year and how you view the no.
So how we should view the north American market for the remainder for you in the coming quarters. Please given that the market is growing quite strongly and then can I just David my follow up please.
Am I to understand.
You correctly that you still expect to grow in line with the mobile networks addressable market for this year. Despite the sort of flattish Q1. Thank you.
What comes to North America market in general we.
Definitely see that the market is supporting there might be some phasing issues.
Depending on which customer is investing in wood with time and and that affects a little bit our sales development there as well.
We.
We believe that.
As I said earlier.
North of our market. He is very supportive so theres, a big Capex plans and with our competitive position as well we believe that we see.
With opportunities in North America.
Thank you Peter Thank you, both monochrome Pekka and 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 such risks in the risk factors section of our annual report on form 20-F, which is available on our Investor Relations website.
With that thank you all for joining us.