Q3 2025 Nokia Corp Earnings Call
Speaker #2: Good morning , ladies and gentlemen . Welcome to Nokia . S third quarter 2025 results . Call . I'm David , head of Nokia Investor Relations .
Speaker #2: And today with me is Justin Hotard , our president and CEO , along with Marco Wiren , our CFO . Before we get started , a quick disclaimer .
Speaker #2: During this call , we will be making forward looking statements regarding our future business and financial performance . And these are predictions that involve risks and uncertainties .
Speaker #2: 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.
Speaker #2: We have identified such risks in the risk factor section of our annual Report on form 20 F , which is available on our Investor Relations website .
Speaker #2: Within today's presentation , references to growth rates will mostly be on a constant currency and portfolio basis , and other financial items will be based on our comparable reporting .
Speaker #2: Please note that our Q3 report and a presentation that accompanies this call are published on our website . The report includes both reported and comparable financial results and a reconciliation between the two .
Speaker #2: In terms of the agenda for today . We will go . Justin will go through our key messages from the quarter , and then Marco will go through our financial performance .
Speaker #2: We'll then move to Q&A. With that, let me hand over to Justin.
Speaker #3: Thank you . David . Overall , we delivered a solid performance in the third quarter in line with our expectations . We grew net sales by 9% with all business groups growing .
Speaker #3: Order intake was again strong, particularly in optical networks and IP networks driven by AI and cloud customers. Our profitability in the quarter was as expected.
Speaker #3: Network infrastructure , gross margin improved sequentially , though it was impacted slightly by product mix , cloud and network services had a strong gross margin in the quarter .
Speaker #3: Product mix impacted the gross margin of mobile networks , with a lower mix of software revenue . Our operating margin declined year on year due to a one time benefit seen in the prior year from a loss provision reversal , without which our operating margin would have been flat .
Speaker #3: The broader demand environment remains healthy as we move into the fourth quarter . We have seen some improvements in CSP expectations , along with the strong order intake I mentioned in AI and cloud .
Speaker #3: In fact , entering the fourth quarter , our backlog coverage is stronger than in recent years . We're also pleased with our progress on the Infinera acquisition .
Speaker #3: We are ahead of schedule with the integration timeline and with synergy expectations . The acquired business contributed strongly to both our net sales growth and order intake growth in Q3 .
Speaker #3: So after a solid Q3 and continued strong order intake , we are well on track to achieve our full year outlook . We have expect a fourth quarter with net sales growing sequentially and slightly above our historical seasonality of 22% .
Speaker #3: We are currently tracking towards the midpoint of our operating profit outlook range . Let me now share a few highlights across the business from the third quarter .
Speaker #3: For our network infrastructure business, the key highlight has been our progress in the AI and cloud customer segment in Q3. This segment accounted for 6% of our group net sales. Breaking it down:
Speaker #3: It was 14% of our network infrastructure business and more specifically , 29% of optical networks in optical . As mentioned , our 800 gig XR plus coherent Plugable became available in the quarter and shipped to our first hyperscale customer .
Speaker #3: Our pipeline in this space is growing as customer investments accelerate and data center architectures evolve. Q3 also saw us announce strategic partnerships with both N-scale and Supermicro.
Speaker #3: With N-scale, we are now a preferred partner for advanced networking technologies across our knee portfolio. Supermicro is adopting our SR Linux network operating system for their 800 Gig Ethernet switches, providing an expanded footprint for our network operating system.
Speaker #3: Finally , we secured two new design wins for our switching platform in the quarter with hyperscalers . The market is growing rapidly , and while I am pleased with these initial signs of progress in IP networks , clearly we still have a lot of work ahead of us in our fixed network business .
Speaker #3: We launched our new 50 gig Pon offering with our unique solution built on our quillion chipset . Operators can easily evolve from Gpon to Xgs , 25 gig and 50 gig pon on the same fibre ready with encryption for the post-quantum era .
Speaker #3: Nokia's solution also provides enterprises with the bandwidth , security and reliability they require . Customers like frontier Communications in the United States are already using our unique Pon technology to seamlessly introduce 25 gig Pon .
Speaker #3: Now I want to turn to our mobile businesses , starting with cloud and network services . The team has delivered strong network . Net sales growth and operating profit growth as it continues to focus on autonomous cloud native architectures in core , we became the market share leader in the first half of 2025 .
Speaker #3: As reported by Del Oro . Approximately 70% of 5G standalone core network deployments outside China use a portion of Nokia's 5G core stack and network penetration is still less than 30% for 5G standalone core in mobile networks , we continue to see the market stabilize .
Speaker #3: We recently announced a deal with Vodafone Three that will see us enter their new combined network in the UK as a major brand, with approximately 7,000 sites.
Speaker #3: We are focused on improving the returns in the business over time , delivering for our customers and differentiating through innovation in Nokia technologies .
Speaker #3: We secured several new agreements in the quarter . The team continues to be disciplined on productivity and operating leverage . While we are now entering the heightened investment phase for six G standardization , we continue to see stability in our annual operating profit in Q3 , we completed a strategic review of our venture fund investments .
Speaker #3: We have decided to scale down our passive venture fund investments over time. We will substantially reduce the capital deployed in these areas.
Speaker #3: As a result, our venture fund investments are now reported within financial income and expenses. Going forward, we will consider targeted direct minority investments in companies that help us to accelerate our strategy.
Speaker #3: An example is the investment we made in N-scale alongside the strategic partnership that I referred to earlier . Because of this change , we are making a technical change to our operating profit guidance , increasing it by €0.1 billion , which is related to the negative impact the venture funds had on our operating profit in the first half .
Speaker #3: However , operationally , our guidance is unchanged after a solid Q3 and with recent order trends , we are well on track to achieve our full year outlook for operating profit .
Speaker #3: As I mentioned before, we expect fourth-quarter net sales to grow sequentially at slightly above our historical seasonality of 22%, and we are tracking towards the midpoint of our operating profit range of €1.7 billion to €2.2 billion at our Capital Markets Day in New York on November 19th.
Speaker #3: We will share our strategy to unlock the full potential of our portfolio and the steps we are taking to focus the company to deliver ongoing growth and operating leverage .
Speaker #3: The AI supercycle is accelerating demand for providers of advanced and trusted connectivity . Nokia is uniquely positioned to be a leader in this market .
Speaker #3: With that , let me hand it over to Marco to discuss our financial performance . Thanks , Justin .
Speaker #2: , and hello .
Speaker #4: From my side as well . In quarter three , we saw net sales increase by 9% and we are pleased to see growth across all of our business groups .
Speaker #4: First margin for the group declined 150 basis points year on year . And this was largely as we have expected . And this is because of the product mix within both network infrastructure and mobile networks .
Speaker #4: Operating margin was 9% , 220 basis points below the prior year . Although this was mainly due to a one time impact from the reversal of a loss allowance for trade receivables in the prior year .
Speaker #4: Without this , the operating profit . Operating margin would have been flat year on year , and we generated $429 million of free cash flow and ended the quarter with 3 billion of net cash .
Speaker #4: I would like to update you on our cost savings program , which we introduced in 2023 . We expect to get about 450 million savings in 2025 , and going forward , we will focus on delivering operational leverage through continuous productivity improvement .
Speaker #4: It simplification , digital instruments , instrumentation and organizational efficiency rather than using large restructuring programs . Ultimately , this means a cultural shift towards consistent cost , discipline and efficiency to help us deliver our strategic goals .
Speaker #4: Turning to our business groups now, starting with network infrastructure, which had another strong quarter with 11% growth. Optical networks was the standout performer, with 19% sales growth and continued to see strong order trends, with a book-to-bill ratio well above one. IP networks also saw strong growth in orders during the quarter.
Speaker #4: As we start to see an increased traction with AI and cloud . As Justin mentioned , IP network sales grew 4% and fixed networks grew 8% in the quarter .
Speaker #4: First margin was impacted by product mix and declined 190 basis points. Although it did increase from the level we had in Q2.
Speaker #4: Operating margin declined because of lower cross margin , along with the increased investments in R&D and the acquisition of Infinera in the quarter .
Speaker #4: We see did see a small positive contribution to operating profit from Infinera as we start to see some initial benefit from synergies , along with the growth in the business .
Speaker #4: Cloud and network services sales grew by 13% in the quarter, as we continue to see strong demand for our cloud-based core platforms.
Speaker #4: Gross margin increased 380 basis points as we improved cost of delivery , along with the operating leverage benefit of higher sales , operating margin also increased by 250 basis points , with some of the cross margin strength partially offset by higher R&D expenses .
Speaker #4: And mobile networks net sales increased by 4% year on year , driven by growth in Vietnam and Middle East and Africa . In quarter two , we said we expect Q3 gross margin to be lower than normal , reflecting a lower software contribution .
Speaker #4: And this was indeed the case during the year. We saw a 370 basis points decline with respect to operating margin. Although operating expenses declined, the reversal of a loss allowance in the prior year meant that operating margin declined.
Speaker #4: Without this, the operating margin would have only slightly declined, despite this being a quarter with a low software contribution in the mix.
Speaker #4: Turning now to Nokia Technologies, net sales grew by 14% in the quarter, and we signed several new deals in Q3.
Speaker #4: Our annual net sales run rate remains at approximately $1.4 billion. Operating expenses in Quarter Three saw some timing benefits and therefore will increase slightly in Quarter Four.
Speaker #4: We continue to expect a 1.1 billion operating profit for the full year in Nokia technologies . Now let's look at the net sales by region in North America , we saw strong growth in network infrastructure and cloud and network services .
Speaker #4: Whilst mobile networks declined slightly in APAC India sales grew in network infrastructure , driven by strong demand for fixed wireless , while mobile network sales returned to some modest growth outside of the benefit , we saw from Nokia Technologies Europe was stable in quarter three .
Speaker #4: Now turning to our cash performance, we ended the quarter with a net cash position of €3 billion. Free cash flow was a positive €429 million.
Speaker #4: Consistent with our profit generation as and well managed working capital . We continue to target a 50 to 80% free cash flow conversion from comparable operating profit for the full year .
Speaker #2: Thank you Justin and Marco . Before we turn to the Q&A session , you should already have received an invitation to register for our Capital Markets Day , which is Justin mentioned , will be held in New York on the 19th of November .
Speaker #2: We hope as many of you as possible will be able to join us at the event . As usual for the Q&A session .
Speaker #2: As a courtesy to others in the queue , could you please limit yourself to one question and a brief follow up ? Kelly , could you please give the instructions ?
Speaker #5: We will now begin the question and answer session . If you are also viewing the webcast , please remember to mute the audio on your computer before asking your question , as there is a 32nd delay to ask a question .
Speaker #5: Please press star one on your telephone and wait for your name to be announced. If you are using a speakerphone, please pick up the handset before pressing your keys.
Speaker #5: to withdraw your question .
Speaker #2: Please .
Speaker #5: Yes , let's go . I'll now hand back to David Mulholland .
Speaker #2: We will take our first question today from Artem Beletsky from CIB. Artem, please go ahead.
Speaker #6: Yes. Hi, and thank you for the presentation. So, my question would be relating to IP networks and the switching business on that front.
Speaker #6: So how do you see the progress on that front in general . And you have also said target three quarters ago . What comes to year 2028 or so ?
Speaker #6: You are well tracking on it.
Speaker #2: But one second. Could you start your question again, please? We are experiencing a slight technical issue on our side.
Speaker #6: Yes. Don't worry, no worries. Can you hear me now?
Speaker #2: Yes , we can hear you .
Speaker #6: Okay , great . So . So I would like to ask a question relating to IP networks and you initiatives . What comes to data center and switching business ?
Speaker #6: So . So you mentioned that you have some new design wins during the quarter . So how you are tracking against your target for 2028 and also should we anticipate some contribution to revenues looking at upcoming quarters .
Speaker #6: Thank you .
Speaker #3: Yeah . So so Artem , I think as I've said I've said in a couple of forums , but maybe just to share here , I think when we talk about a €100 million incremental investment , you know , the reality for me is that's a small portion of our overall capital .
Speaker #3: And so I don't think you'll see us focus on that metric going forward. What I will say about the business is I was pleased with the wins.
Speaker #3: I'm pleased on the book to Bill in in IP networks . Overall , the reality is we all know is that , you know , we're we're still a fairly small player in this space well behind some of the market leaders .
Speaker #3: So so we're at the start of a journey . But but the announcements we've made I think are positive . The metrics are positive .
Speaker #3: You know, there's much more work to be done in the longer term.
Speaker #2: Did you have a quick follow-up, Artem?
Speaker #6: Yes , absolutely . So maybe more general questions . So so looking at your growth opportunities , what comes to AI and cloud .
Speaker #6: So it was 6% of sales in the quarter . So increase compared to Q2 . But in general looking at the next couple of years where do you see the biggest growth opportunities .
Speaker #6: Looking at different customer segments . So so whether it's like hyperscalers , enterprise or sovereign side , where you see the biggest opportunity for you ?
Speaker #3: Yeah , I think first of all , the biggest opportunity is clearly , you know , it's clearly in a is in the hype is in the hyperscalers and the cloud .
Speaker #3: So it's driving most of the demand . Obviously the partnership with Anyscale is a good example of our focus in this area . We've made other announcements in the past and and we also believe that , you know , that sovereign clouds will present a significant opportunity for us over time .
Speaker #3: As we've talked about before, we're optimistic about the work that's being done in the EU as well as in other regions.
Speaker #3: So we think that these are all important growth segments for us . But clearly , you know , the demand today is largely coming from from the hyperscalers and some of the larger neo clouds .
Speaker #2: Thanks , Artem . We'll take our next question from Simon Leopold from Raymond James . Simon , please go ahead .
Speaker #7: Appreciate it . Thank you for taking the question . So nice to hear about the progress in the hyperscalers . I want to dig a little bit more deeply here in that more recently we've heard about an application referred to as scale across for optics , which I think of as basically data center interconnect on steroids .
Speaker #7: Could you talk a little bit about what this means for Nokia in particular , and how you see that as a as an opportunity ?
Speaker #3: Yeah , sure . Simon and I , I think it's something that's been around , you know , obviously scale up or what's being talked about as scale across has been in networks for , in data centers for a long time in certain certain parts of the market .
Speaker #3: So , so this isn't a new technology , but what is happening is as we push bandwidth demands , which obviously the AI data centers are driving , it's creating new demand for innovation in that space .
Speaker #3: And I think this is where , you know , the assets we have , I think are well positioned . It's not a place where I can tell you , we can point to it and say , we've got material revenue today .
Speaker #3: It's still early days , but but I do think if you look at our assets here , particularly what we're doing in India and phosphide with the fab , the ability to build optical components down on on the Indian phosphide silicon and innovate in packaging in these areas .
Speaker #3: We think we've got technology that can be relevant here . But , but but obviously as as bandwidth demands continue in networks , you know , both scale across and and scale out , which is what we typically call , you know , we typically see in top of rack networking and IP switching .
Speaker #3: Both of those create tremendous opportunity for us . And the way I would dimensionalize the opportunity in optical is , you know , we'll share more of this at CMD .
Speaker #3: Is that every time you get to the next unit , if you go from , you know , the long haul networks to the metro networks to the data center .
Speaker #3: Now inside the data center , then inside the rack , each one of those is , you know , has incremental opportunity to , at a volume level .
Speaker #3: Of course , there's a there's a performance and cost delta . You have to hit as well because what we build for long haul networks is obviously going to be significantly more expensive than what you'd have to build to fit inside of a server , inside of a rack .
Speaker #3: So there's a there's a part of this that will , you know , will require us to continue to innovate in this space , and you'll hear more about it .
Speaker #3: And in our discussions at CMD.
Speaker #2: Did you have a follow-up, Simon?
Speaker #7: Sure . Thank you . Yeah , I presume we'll talk about the long term strategy . Of course , at the capital Markets Day .
Speaker #7: But I'm wondering if you could provide us a few thoughts on how Nokia is plan is regarding six G mobility investments . Have you started investing ?
Speaker #7: Is that in the R&D today? Is it something that starts in '26, or is it something further out in time? I'm just really focused on modeling for the moment because I expect we'll hear some more at the Capital Markets Day next month.
Speaker #7: Thank you .
Speaker #3: Yep . Yeah . So on technology standardization , which is obviously very important , relevant for tech . That work has already started .
Speaker #3: And the investment is ongoing . And as I touched on in , you know , in my comments where , you know , we're going to go through a bit of an investment , you go through a bit of an investment cycle in that space .
Speaker #3: So , so that that ramp is happening and we obviously reiterated confidence in the , you know , on the ongoing profit outlook for for Nokia technologies as a part of that .
Speaker #3: So , so I think that gives you some indication from a modeling standpoint for men . You we are we've talked about this publicly .
Speaker #3: We're doing work on early on six G pre . I'd say pre six G radio technology . There's more there's more work here .
Speaker #3: I think the thing for me in this space is you know and Simon and I've talked about this a little bit in comments as well is I think there's a lot of focus on for obvious reasons , on the , on the G transition .
Speaker #3: You know , the 3G , 4G , 5G , six G . I actually think what's more important for us is the is what we've done in in cloud and network services , which is the pivot to to a cloud native core .
Speaker #3: And then you look at the results and the performance on on share capture and revenue growth . I think that's a good indicator for how we see we're going to start to think about the opportunity and ran , which is as we go into AI and , you know , in men , yes , there's going to be a new generation of radios in terms of frequency .
Speaker #3: Hopefully frequencies with spectrum approvals . And of course , six G , six G capabilities in terms of spectral efficiency . But there's a lot more to do in terms of radio capabilities and features .
Speaker #3: And we've got , you know , this is why we announce things like the AI ran Alliance , you know , previously . It's where we see opportunity with with our work in cloud ran , for example .
Speaker #3: And and I think that's that's where we'll continue to invest . We'll unpack for you is , is that these are things that we need to we need to focus on and invest and innovate .
Speaker #3: And of course , continue to work closely with customers . So we'll unpack that for you at at CMD , as well as how we're approaching that .
Speaker #3: But I wouldn't I wouldn't assume that we haven't . You know , it's a binary thing where we haven't started . It's a part of ongoing investment .
Speaker #2: Thanks , Simon . We'll take our next question from Alex de Waal from Goldman Sachs . Alex , please go ahead .
Speaker #8: Yes . Thank you so much for the question . Firstly , just dovetailing off the last question . Very much . Looking forward to hearing more about the long term tech strategy on on wireless .
Speaker #8: Just in the short term , you talked about a measure of stabilization . There . Wondered if you could give a bit more color as to the extent to which that's driven by the Rand market in your most important geographies versus progress you've made on your product .
Speaker #8: And then secondly , it was interesting to hear in your prepared remarks about how you will focus on cost control by ongoing steps like digitalization rather than large restructuring programs .
Speaker #8: Wondered if at this point you could talk a bit more about what motivates that shift and the benefits this brings . Many thanks .
Speaker #3: Maybe. Maybe we go with the second part. Marco, you want to talk about that?
Speaker #4: Yeah , absolutely . And what the cost savings , just like I mentioned in my , my introduction as well . So thinking is that that operational leverage is extremely important for us .
Speaker #4: And , and continuous improvement is something that , that we want to get in our genes that every entity basically continuously find ways .
Speaker #4: How can we continuously improve and do things more efficiently . And of course , here comes quite naturally in the new technologies . You know , utilizing AI and , and and other digitalization opportunities that you can find .
Speaker #4: That's why simplification is extremely important in this. And securing that we can actually get the benefits out of those different installations of AI that we have.
Speaker #4: And , and continuously work on the process simplification and , and find ways how we can make the processes more efficient continuously . And it's not a one off action .
Speaker #4: It's something that you have to do continuously.
Speaker #3: Yeah . And then in terms of the market outlook , first of all , I think pretty clear from what we've been saying that if you think about the the AI and cloud market growing rapidly , the the CSP market broadly is has been quite stable .
Speaker #3: So as we think about that , you know what I when I look at our results , I think stabilizing in men in terms of our performance , you know , being predictable , there's always there's always puts and takes .
Speaker #3: There's going to be ups and downs in the quarter, and variance based on a given customer's volume in one quarter. So we'll see a little bit of that.
Speaker #3: But when you look at the longer term trends , I think , you know , we're we're feeling better about about a stabilizing environment .
Speaker #3: And then on cloud and network services , as I touched on , you know , we believe that , you know , we believe we're growing above above market rates at this point .
Speaker #2: Thanks , Alex . We'll take our next question from Sami sarcomas from Danske Bank . Sami , please go ahead . Hi . Thanks .
Speaker #9: Could you please elaborate on the factors that drove the positive surprise in the third quarter? As you had anticipated, did you see similar sales and margins as in Q2?
Speaker #9: And when we think about Q4, you also mentioned a strong order book. But do you still have uncertainties related to the timing of deliveries, as you chose not to narrow the guidance range down?
Speaker #4: Yeah . Thank you . Sami . And what comes to the if you look ? The . Cross margin development . And in different businesses you can see that we had a very good development in cloud and network services and and here as you understand this business has been quite frequently saw that you get big part of of the profits in quarter four .
Speaker #4: Now, this year we have been working actively to try to actually balance that distribution of profits more equally between the different quarters.
Speaker #4: But at the same time , you see also the that we have increased our gross margins and there's a few reasons for this .
Speaker #4: One is , of course , that that we've seen a good traction on , on 5G standalone core implementations where we have been very successful , gaining market share and and then of course , we've been working quite a long time in the CNS as well to clean up the portfolio .
Speaker #4: And and this , of course , giving a result as well . And the third point I would say as well , is that that also in , in our , our core business , CNS has been working heavily to , to take cost out and make things more efficiently .
Speaker #4: And by that, improving the margin levels.
Speaker #2: Did you have a follow-up, Sami?
Speaker #9: Maybe a detailed question on the 6% exposure to AI and cloud in the third quarter ? I think you mentioned 5% Hyperscaler exposure after Q2 .
Speaker #9: These are different metrics , right ?
Speaker #3: These are these are comparable . Sami . So think of the 5% to 6% is Q3 as Q3 .
Speaker #2: Thanks, Sami. We'll take our next question from Richard Kramer from Richard. Please go ahead.
Speaker #3: Thanks , Justin .
Speaker #10: When we look at your competitors and to the various knee divisions , many of them are point solutions in one or another of the fields of routing optics or fixed in the current hyperscaler and are these areas being kept separate , or do you think that the end to end promise .
Speaker #10: We heard about so much from both of the prior CEOs at Nokia that is finally being realized, at least within any.
Speaker #3: Well , I think a couple of things on this , Richard . So first of all , for me , you know , clearly fixed access is its own business .
Speaker #3: And the , you know , the technology and innovation there is coming out of a few markets . I mean , the largest , the largest one for us , obviously is in in the US , but there's other markets where we're seeing technology and innovation opportunities and , and so I think that's a that's almost a its own trend .
Speaker #3: And I shared obviously I shared the discussion around the 50 gig pond . But this capability that we have to allow you to add new technologies in line , in-line in , in your , in your terminals , we think is a is a true differentiator .
Speaker #3: We hear that from customers . The customers using it believe it gives them value because they can . You know , they don't have to invest in a complete infrastructure upgrade to overhaul .
Speaker #3: The key message there is we're competing on the technology's merits itself . And I think if you look at , you know , IP switching and certainly in optical networking , I would say the same .
Speaker #3: We've got a win on the technical merits themselves . I mean , we've got you know , we've got very capable customers across our portfolio , AI and cloud as well as CSPs that that want to buy best of breed technologies and enable their solutions and execute on their strategies and deliver value to their customers and our focus has to be on doing the things that add value to them .
Speaker #3: And where I think there's leverage and synergy for us is being able to to see what's happening across these markets and , and bring , you know , bring greater , greater scale and innovation to them .
Speaker #3: But but I think that for me , the term isn't end to end . It's you've always got to have best of breed products , best of breed technology .
Speaker #3: And and then you've got to be able to to leverage the , you leverage the ecosystem so that you're , you know , obviously you're better together , but it's not it's not something that we do that can assume we could have a deficiency in one area .
Speaker #3: That's certainly not how we think about it .
Speaker #2: And just building .
Speaker #4: On just that , of course , the compatibility is very important . So that's a benefit that we can get compared to competition , which only go with one product that when we come with several products and they are best of breed and customers buy those that those actually work well together .
Speaker #2: Did you have a follow-up? Richard: Yeah.
Speaker #10: Quick one quickly for Marko. We saw a reduction in your forecast restructuring cash outflows from $450 million to $350 million and an increase of $50 million in gross cost savings.
Speaker #10: Is this Nokia finally transitioning from what's been a decade-long restructuring to maybe being able to focus more beyond 2026 on just growth?
Speaker #4: Yeah , I would say that the important thing is that that we want to avoid these large scale restructuring programs going forward . And a more get this into our DNA as continuous improvement and cost focus and secure that we continuously find ways how we can take out cost in our , you know , fixed cost basis .
Speaker #4: And our operations and utilize all the , you know , digitalization opportunities that that that could bring instead of doing these large scale .
Speaker #4: Cost cutting programs . So that's our focus going forward .
Speaker #2: Thanks , Richard . We'll take our next question from Felix Henriksen from Nordea . Felix , please go ahead .
Speaker #11: Hi . Thanks for taking my question . Good to see Infinera turning positive on operating profit contribution . And I wanted to ask about that .
Speaker #11: That in light of the progress that you made on integration , do you see the 200 million in run rate operating profit synergies for 2027 as , as conservative ?
Speaker #11: And are these savings something that you will have to reinvest in the growth of the optical business, kind of like what you're doing on the IP side of things?
Speaker #11: Thanks .
Speaker #3: Yeah . Multiple questions in there . So let me let me sort answer , first of all . Yeah . We'll provide a full update at CMD on our view .
Speaker #3: But I would say , you know certainly well on track on our commitments as we've talked about on the on the cost synergies , clearly with the growth that we're seeing ahead of our ahead of our expectations on on top line synergies .
Speaker #3: And then I think in terms of investment , what I would say is we'll talk more about that , talk more about that in CMD .
Speaker #3: But you know, we're going to be very disciplined in capital allocation. Obviously, you saw one dimension of that with our decision on venture funds.
Speaker #3: This this quarter . But this is a place where , you know , where if we see the opportunity to accelerate , accelerate or enhance returns , we'll make continued investments .
Speaker #3: But right now , you know , I think again , please , you know , pleased to be on track on the on the cost synergies and and thrilled to be running ahead of expectations on revenue .
Speaker #2: Thanks , Felix . We'll take our next question from Rob Saunders from Deutsche Bank . Rob , please go ahead .
Speaker #8: Yeah. Hi, I just had a question on mobile networks. There's some speculation that the EU will apply pressure on some member countries to accelerate their swap out of Chinese vendors.
Speaker #8: So I'm just interested in that . And how you think about that , given your recent public statements . And and then , of course , I just want to talk a bit about opex .
Speaker #8: You know, how do you think about OPEX into next year, given you clearly wanted to invest more in these growth areas?
Speaker #8: Thanks .
Speaker #3: Yeah . So , so , Rob , thanks for that . First of all , I mean , obviously we're you know , we would love to see , you know , regulations in the EU that that create the market opportunity .
Speaker #3: You're talking about . And I think it's important from a , you know from a high risk vendor standpoint . It's also important from a , you know , just from a sovereignty perspective in terms of having , you know , the two largest providers of networks , you know , in the West , being European , I think that's important .
Speaker #3: You know , we're optimistic that we would be able to , you know , to , to to obviously grow in that , you know , capture some portion of that market if it was available .
Speaker #3: Number two , in terms of opex question was , was really , you know , really just around operating leverage , I think our , you know , my push is really specific on this is I want I want to see us drive operating leverage something Marco touched on in his comments .
Speaker #3: But the reason for that is because I want to be able to to maximize returns in terms of capturing value from the business , we have , and then and then deploy capital in in areas where we think we can , we can win things like incremental R&D .
Speaker #3: If there's demand in the market , things like , you know , increasing factory capacity and and optics to the extent that we see opportunities there and , you know , it's important we talk a lot about the fabrication facilities .
Speaker #3: You know , these are far smaller than you can . You think of a fabrication facility in silicon . And and actually the investment sizes are much smaller .
Speaker #3: And again, we'll unpack more of that for you at CMD. But those are the kinds of things I want to be able to deploy capital into.
Speaker #3: Obviously incremental sales coverage , where we're seeing growth in AI . But , but but I would think of all of this as , as driving enhanced returns , not , you know , not something that's going to , you know , not going to dilute our performance .
Speaker #3: And that's that's key .
Speaker #2: Thanks , Rob . We'll take our next question from Andre Gardner from city . Andre , please go ahead .
Speaker #8: Thank you . David . Morning , all .
Speaker #12: I just had one on gross profitability . Please . Both . I suppose on the positive side , in what you've seen in CNS and then perhaps on the more negative side with mobile networks , we're seeing quite a lot of volatility quarter to quarter .
Speaker #12: CNS clearly driven nicely in three Q by the the mix towards 5G core is that mix sustainable . And so are , you know , a high 40s gross margin for CNS is what we should be anticipating .
Speaker #12: Yes . Perhaps with some quarterly fluctuation . But perhaps not . Not to the extent that we've been seeing . Can you sustain gross margins around that level and then similarly , on the other side with mobile , 41% in the prior quarter , down to 35% in the current quarter ?
Speaker #12: Yes , I understand again , software mix has changed , but , you quite dramatic moves . What what do you think is sort of a more normalized level given the revenue run rate that you're at in mobile ?
Speaker #12: What's more, what is the normalized level of gross margins for men at this point? Thank you.
Speaker #4: Yeah . Thank you . If I start with the mobile network side , there is variability . And that's why we usually see that that mobile networks would be better to look on an annual basis or four quarters , because you have always some product mix fluctuations .
Speaker #4: The level of software has a big impact on gross margin, and you see this also between Quarter Two and Quarter Three. Why do we see this fluctuation between those quarters, where you have more software in Quarter Two and less in Quarter Three?
Speaker #4: And I would say that if you if you look on a longer term or annual basis , then you can see the levels of mobile networks across margins and get understanding of where it is and how we are tracking compared to previous year .
Speaker #4: And then what comes to CNS . I mentioned earlier . Already a few points there that that what about reasons for for the improved gross margins .
Speaker #4: And we definitely believe that it is sustainable, and this has been a multi-year journey to get the improvements here, clean them up.
Speaker #4: The portfolio , focus on on on cost out on on the different products that we have . But also we see the market support here .
Speaker #4: It took for a while before the 5G standalone core started to get traction . Actually , from our customer side on CSP side , and now we've seen in the past 18 months that that it actually have been quite positive .
Speaker #4: And we have momentum there . And thanks to our cloud based solution that we have , we have actually gained market share and been able to improve our market position .
Speaker #2: Thanks , Andrew . We'll take our next question from sorry . Daniel Djurberg from Handelsbanken . Daniel , please go ahead .
Speaker #13: Yeah . Thank you . And congrats to strong numbers . Actually would like to to continue on that question . I had the same more or less on the mobile networks .
Speaker #13: The software upgrades on standalone seems not to be in tandem , at least with the CNS on the 5G core . So should we expect to have a little bit of a upgrade in the baseband software ?
Speaker #13: Radio unit software, or ahead of us on the back of the 5G standalone core? Now being lived on? Thanks.
Speaker #4: Usually I can start and Justin , if you have anything you can add as well . But what usually happens is in in in the new generation is that you first install the hardware basement and radios .
Speaker #4: And when you see that the demand increase is on , on , on , the customer side , then you actually implement the core as well .
Speaker #4: When , when you see that actually you need those features that that the new generation can offer . And this is exactly the same example here in 5G .
Speaker #4: In the beginning, the 4G core was still functioning quite well. And in the early 5G installations, and now when there are more opportunities to slice and dice the network, you actually need a 5G standalone core to be able to capture those opportunities and offer those services to your customer base.
Speaker #3: Yeah , I would just add a couple of things . I think we're we want to make sure we're clear on the Q2 to Q3 margin impact in MN is timing because of how we release software in this portfolio , which is we release up an upgrade .
Speaker #3: We then recognize the revenue of those upgrades as they get deployed into customers . And largely customers take the release . And so that's , that's that's the timing dimension between Q2 and Q3 .
Speaker #3: But also realize that the PN baseband software , which is the majority of the software revenue we have in mobile networks today , is still largely , you know , in a legacy , what I would call more legacy appliance model , cloud and network services are our core networks have moved to a cloud cloud model .
Speaker #3: And that means you have much , you know , we have more subscription based pricing . We have more readable deployment . That means customers will will be paying on a recurring revenue basis for an ongoing support , ongoing support and service .
Speaker #3: So whether it's subscription based , you know , models there , it's a very different it's a different business model in that dynamic .
Speaker #3: You know , obviously we we think that's the long term direction of travel and mobile . But that's not where the where the market is today .
Speaker #3: Today , you know , our cloud ran business is is fairly small .
Speaker #2: Did you have a quick follow-up, Daniel?
Speaker #13: Yes , please . Yeah . Just a question on a little bit on your work already in Q2 . You commented to unify corporate functions , simplify work , etc.
Speaker #13: , and , and more change culture a bit to unlock the operating leverage . And then you've seen quite a large changes , especially when the CTO office and the question is on on the Nokia Bell Labs organization , should we expect this to be more focusing on AI data center than on the mobile networks ?
Speaker #13: And radio access networks ahead , given the departure of .
Speaker #3: Yeah , look , I think for me , a couple of things . First of all , I talked about functional excellence , which was the purpose around the corporate functions .
Speaker #3: And I think having having a leader that is the chief technology and AI officer , that's focused on technology and AI , key areas of our platforms , you know , AI , security , cloud , you know , all of those elements that we're we're touching on or talking around in this call today is very important .
Speaker #3: And and having someone who's excellent in that , but also understands fixed , you know , our fixed network infrastructure business and mobile infrastructure .
Speaker #3: And if you look at if you look at Pallavi's background , she has she has a career where she's done both , you know , across juniper , HPE and then also at Intel and then , you know , the other thing was focus around corporate development .
Speaker #3: And that was not just out of , you know , the strategy organization , but but also bringing together some of the corporate development folks we had within the business groups and and also within the the finance organization .
Speaker #3: So for me , this is all about , you know , around functional excellence and aligning accountability and having cleaner , cleaner and simple functions .
Speaker #3: And then obviously we also moved the digital office to the IT organization into finance , which really ties back to to the focus that Marco touched on in his comments around , you know , driving ongoing improvement , ongoing productivity and enabling that through digitization , through AI , through through simplification around processes and obviously , you know , it is an important part of how you both , you know , both simplify and standardize and and realize those benefits .
Speaker #3: And so we felt like that was a natural alignment. So, I think that's the way I would think about it.
Speaker #3: I think it's I think it's important , you know , we have two compelling assets in both our network infrastructure business and our mobile portfolios .
Speaker #3: And we need a CTO that , can look across all of that and also make sure that we're we're thinking about the right long term investments in , in Nokia Bell Labs , whether it's from a research or from a , you know , a near-term , near-term innovation standpoint .
Speaker #2: Thanks , Daniel . We'll take our next question from Emil Immonen from DAB . Carnegie . Emil , please go ahead .
Speaker #14: Hi. Can you hear me?
Speaker #2: Yep . Yes , we can hear you now .
Speaker #14: Yep . Thanks . Thanks for taking my question . So I wanted to maybe ask a little bit on the demand in Europe in general .
Speaker #14: So on the revenue decline on some parts in anni and also in mobile networks in Europe . Do you see that this is more , let's say , structural , or would you say that this is temporary in the way that Europe is just not investing right now ?
Speaker #14: How do you see this developing going forward?
Speaker #3: Yeah , I think in terms of . I think that I would say telcos , it stabilizing demand and , you know , we think that's a good thing .
Speaker #3: Obviously we talked about the potential of upside in Europe over time . If if there's regulation that , you know that addresses high risk vendor status .
Speaker #3: But I think , you know overall that feels that feels pretty good . And then look , you know , we're excited about the potential of of AI and data center business in Europe .
Speaker #3: We're certainly excited about the opportunity we the partnership we have with N-scale and the opportunity , you know , for other other companies to invest in Europe .
Speaker #3: And so we like the trends of what we're seeing. But the reality is the majority of the investment today is happening in the U.S.
Speaker #3: And so as you look at our revenues and you look at our profile , you know , the demand is coming from the US .
Speaker #3: And I think that's that's important . So , so that's that's how I would net it out .
Speaker #2: Did you have a quick follow up on though ?
Speaker #14: Yeah . Maybe weekly touching on on the private wireless side . The customer numbers grow nicely . But you haven't really discussed it at all in terms of revenue or anything .
Speaker #14: Could you, could you say how is that part of the business going?
Speaker #4: Yeah , I can just , just like you said , we've seen a nice increase in a number of customers . But remember , we're still in very early phase of of this journey and , and even if growth rates are pretty good , but it will take some time before this will be a meaningful business .
Speaker #4: So it's worth , you know , focusing more about that .
Speaker #3: Yeah . And I would just add , I think our , you know , if you look at where we are today , I think Marco summarized it well , I would tell you that where I see our biggest opportunity is in focused vertical markets , vertical market use cases .
Speaker #3: And so there's some examples in railways for example , and utilities as the other . Right . So if you look at those , those are the places where we've got we've got opportunity .
Speaker #3: But again, this goes back to that message of focus.
Speaker #2: Thanks Emil . Our next question from Sebastian from Kepler cheuvreux Sebastian , please go ahead .
Speaker #15: Yeah . Hi everyone . Thanks for taking my question . Coming back to mobile networks , your business is going back to moderate organic growth in the third quarter .
Speaker #15: But you remain close to breakeven. Breakeven results those days. How do you plan to return to more decent margins in the coming years?
Speaker #15: Maybe not double digit , but maybe high a little bit . If it's more cost cutting , if it's more to support your revenue with more growth opportunity .
Speaker #15: And the second question is also linked to mobile. We have heard some comments that the chain government could be looking to push the network vendors in Europe outside the Chinese market.
Speaker #15: Is this something that you already see in your order intake in China, or is it not something that you see already in your business?
Speaker #15: Thank you .
Speaker #3: Yeah , absolutely . I mean , I addressed this a little bit in my comments . I mean , I think on on , on mobile networks , we're absolutely , you know , one of my priorities right now is on improving the returns .
Speaker #3: And I think we do that in a couple of ways , you know , continued tight focus and tight engagement with with customers .
Speaker #3: It ties a little bit to the second question you asked , which I'll address in a minute . But tight , focused engagement with customers , particularly those customers that want to co-innovate and collaborate with us because I think differentiation for us longer term comes through innovation and technology leadership that was historically where the market was , I will , you know , I would say that obviously if you go back five years , the business , the company's business was in dire straits because we weren't in that case , we've now stabilized the portfolio .
Speaker #3: But as an industry and I think certainly as a player in this industry , we need to continue to innovate . So that's as much of a preview as I'll give you to to CFD .
Speaker #3: But I'd encourage you to attend . But but I think absolutely that's that's the line of where we're headed . And then in terms of China , you know , this is one of the places where we've largely , you know , we're largely not exposed the revenue in China has come down massively over the last few years .
Speaker #3: So I , you know , the reality is it's a fraction of our revenue today and our market share is fractional in mobile networks in China .
Speaker #3: It's it's not a core market for us . So the the communications from the government obviously we follow those closely . You know we respect and support their their decisions .
Speaker #3: And you know , the reality for us is we're going to focus on markets where we believe there's significant opportunity and customers where we believe we can collaborate and innovate .
Speaker #3: And I think there's more opportunity ahead for us .
Speaker #2: Thanks , Sebastian . We'll take our last question from Didier , from Bank of America . Didier , please go ahead .
Speaker #11: Yeah . Good morning .
Speaker #16: Thanks , David . And thanks for taking my question . There's a question for Justin . Really . You know , you've been in the job now for a few months .
Speaker #16: I just wondered if you could share your thoughts about , you know , the direction of the business . Strategically , especially when it comes to the mobile networks .
Speaker #16: You know , the core activities and also IPR , which are vastly different , I guess , from , you know , your day to day activities , which presumably are focused on getting those AI and cloud contracts .
Speaker #16: So that was my first question, and I've got a quick follow-up. Thank you.
Speaker #3: Sure . So look , I think probably nothing I haven't shared in my comments . I think we have two businesses network infrastructure and and mobile businesses in the portfolio .
Speaker #3: I mean , obviously if you look at the comps , there's there's four major providers of mobile infrastructure . They all have three things .
Speaker #3: They have they have core networks , they have radio networks , they have the radio networks , which was what we call HN , and they have IP licensing , which is what we call tech .
Speaker #3: So I think we've got a pretty clear it's pretty clear you need the full portfolio . If you look at the players that have not had the full portfolio , they've all struggled to to innovate or sustain a foothold .
Speaker #3: And so so I think that's that's , you know , for me , number one , in terms of the difference , look , as I've said before , I think connectivity is going to be an area where , you know , performant , reliable and trusted providers are going to be very valuable .
Speaker #3: And the reality is we have a portfolio that plays across all of those core elements of connectivity . What we're seeing today with with AI , and I think the thing that candidly , we were we weren't capturing as historical or historical Nokia prior to the Infinera acquisition , as much as we could have was the fact that in our in our optical and IP businesses , the market , the technology investment or the technology leadership had shifted to , to , to cloud .
Speaker #3: And now AI and cloud. So now we're starting to capture some of that. Like I said, I'm pleased with the progress there.
Speaker #3: And and I think that same I think you're going to see those same trends happen . And roll into to mobile over time .
Speaker #3: Because ultimately , if you think about the some of the compelling uses of AI autonomous vehicles , robotics , you know , smart glasses , virtual reality , augmented reality , they all need mobile connectivity .
Speaker #3: And and I think that will be favorable . But I don't know if the answer I think I don't think the answer is going to be doing the same thing .
Speaker #3: We've always done . I think we have to continue to innovate . And that's why I like what we've done in , in , in cloud and network services with setting up a , you know , a autonomous cloud native core stack .
Speaker #3: And , and I think there's more opportunity for us ahead in mobile networks . Again , it's going to require that the things I talked about Focuse collaboration and co-innovation with customers and and , you know , an emphasis on , on best of breed technology and , and and strong partnerships .
Speaker #2: You had a quick follow-up, did you?
Speaker #7: Yeah .
Speaker #16: Completely unrelated on the Nokia technology side. So, I mean, Nokia sold their phone business to Microsoft ten years ago or so.
Speaker #16: So I just wondered how is the innovation pipeline in the IPR business for , you know , the non-standard patents ? Is there is there a risk of a cliff at some point , as you're not in the phone business , or are you , you know , confident that you can continue to monetize the ACP and non at least at the at the current level ?
Speaker #3: Yeah , absolutely . I mean , I think this is a good question . So just back to the comment I just made again every , every player of scale in mobile infrastructure has has a strong IP , has a strong IP business , what we call tech .
Speaker #3: With the changes I didn't touch on this in my earlier comments , but with the changes we made in the CTO office , we've also now really tightly aligned the standards team into into tech .
Speaker #3: But we see , you know , one , we see very good , good stable revenue in the business . We are you know , we've we've said already we're starting to invest in six G monetization .
Speaker #3: That's important for us. And we see other, you know, we also see other emerging revenue streams in other segments. So I think the business is very healthy.
Speaker #3: The team's doing an excellent job . They're there . They're also doing I think , probably the best job of any of the businesses right now .
Speaker #3: And in in pushing on operating leverage so that they can they can continue to deliver deliver the performance they need to . And , you know , you'll you'll hear a little more about that in CMD .
Speaker #3: So that's the last plug I'll make for cmd . But we'll talk about some of that as well . There .
Speaker #2: Thanks , Diane . Thanks , Justin for the comments . 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 .
Speaker #2: 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.
Speaker #2: 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.
Speaker #2: Thank you for joining us .