Q2 2026 Nokia Oyj Earnings Call

Speaker #1: Good morning, ladies and gentlemen. Welcome to Nokia's second quarter 2026 results call. I'm Devon Mulholland, head of Nokia Invest Relations, and today with me is Justin Hotak, our president and CEO, along with Marco Varan, our CFO.

Speaker #1: 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.

Speaker #1: Actual results could 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 #1: We've identified such risks in the risk factor section of our annual report on Form 20F, which is available on our investor relations website. Within today's presentation, references to growth rates will be on a constant currency basis, and other financial items will be based on our comparable reporting.

Speaker #1: Please note that our Q2 report and a presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and reconciliation between the two.

Speaker #1: In terms of the agenda for today, Justin will go through the strategic highlights of the quarter, and then Marco will go through our financial performance.

Speaker #1: We'll then move to Q&A. With that, let me hand over to Justin.

Speaker #2: Thanks, David, and hello everyone. Our second quarter showed continued progress against the strategy we set at our capital markets day. Our team is focused on maximizing our opportunity in the AI supercycle, and that focus is translating into early results.

Speaker #2: I'm pleased with the progress that Team Monokia has made in the first half of 2026. In Q2, net sales grew 9%. We expanded our gross margin by 70 basis points to 46%, and our operating margin by 70 basis points to 9%.

Speaker #2: Network infrastructure delivered strong growth, led by optical and IP networks, with sales from AI and cloud customers more than doubling year on year. Mobile infrastructure sales also grew, and the business delivered stable profitability largely driven by product mix.

Speaker #2: Marco will take you through the details of our financial performance in his update in a moment. I want to take a step back and look at how our first half performance demonstrates progress against the strategy we set out in last November.

Speaker #2: As a reminder, there are these are the five priorities we shared at our capital markets day, and I'm pleased by the progress we've already made across each of these areas.

Speaker #2: Let me touch on a few highlights from Q2. AI and cloud was the strongest growth driver in the quarter. Net sales more than doubled year on year to 446 million euros, and order intake grew to 2.8 billion euros.

Speaker #2: While we're very pleased with the order the order growth, it's important to put that number into a bit of context. Q2 benefited from several significant long-term orders, as our customers looked to secure supply in a constrained environment.

Speaker #2: To provide some reference, approximately half the order volume received in Q2 is expected to convert to revenue in the next 12 months. As I've said before, order patterns in this market can be lumpy, and we should not expect this level of intake every quarter.

Speaker #2: As importantly, the strength was broad-based across optical networks and IP networks, and included some of the design wins we mentioned last quarter. This was driven by growing demand for data center interconnect and scale across fabrics from our customer base.

Speaker #2: The demand primarily shows up in our AI and cloud segment, but we're also seeing emerging signs of growth in telecom customers as they invest to support the increased data traffic driven by the AI supercycle.

Speaker #1: Apology, leadership, with the expertise and scale of our customers and partners, we accelerate innovation, bring solutions to market faster, and solve increasingly complex challenges together.

Speaker #2: reference. Approximately half of our volume received in Q2 is expected to convert to revenue in the next 12 months. As I said, order patterns in the market can be lumpy, and we should not expect this level of intake every quarter. As importantly, the strength was broad-based across optical networks and IP networks, and includes some of the design wins we mentioned last quarter. for data center interconnect and scale across fabrics, from our customer base.

Speaker #2: During this quarter, we also secured our first multi-rail ILA design win with a major customer. This was one of the new optical networking products we launched at OFC this past March.

Speaker #1: We're already demonstrating early results from this approach, and I will highlight 4 examples from Q2. First, we expanded our partnership with Google Cloud. Bringing Gemini-powered AI agents into our autonomous networks portfolio.

Speaker #2: quarter. AI supercycle. quarter. This was driven by growing demand During this quarter, we also secured our first multi-rail ILA design win with a major customer.

Speaker #2: Last week, we launched the industry's first commercial AI RAN platform. Marking a fundamental shift from a hardware-defined radio network to software-defined platforms. This fundamentally changes the economics of radio networks.

Speaker #1: Second, we vote a phone Albania, we demonstrated AI-powered network slicing using agents to dynamically optimize network resources. Third, we expanded our relationship with Indesat or a new Hutchinson in Indonesia, supporting network modernization and the rollout of 5G, while providing a seamless upgrade path to AI RAN.

Speaker #2: Our AI RAN platform gives our telco customers a path to improved network performance through software and AI innovation, rather than relying on hardware upgrades as they have traditionally.

Speaker #2: The platform would deliver more than 100% spectral efficiency gains by 2028, doubling the capacity operators can get from their existing spectrum. The performance benefits are tangible in 5G networks, and our AI RAN platform provides a software upgrade path to 6G, to ensure continuity without additional hardware investment.

Speaker #1: And fourth, we entered trials with a U.S. hyperscaler for a new out-of-band management solution that goes inside the data center, leveraging the passive optical technology that we deliver in our fixed networks business.

Speaker #2: This was one of the new optical...

Speaker #1: We're also making progress to focus Nokia, where we can differentiate and create long-term value. This means we are investing where we see long-term demand, and we believe Nokia can be a unique winner, while at the same time reducing exposure to areas where we are less differentiated.

Speaker #2: The platform is also open, programmable, and ORAN compliant, this gives operators greater flexibility as they evolve their networks. They can choose the hardware path that works best for them.

Speaker #2: Adding AI acceleration into their existing Nokia AirScale infrastructure deploying new AI RAN hardware or moving to cloud-native AI RAN. Ultimately, this is about delivering more performance, better returns, and faster delivery of new service for our customers.

Speaker #1: In November, we shared that our fixed wireless access customer premise equipment portfolio is not core to the future of our strategy. The sale we announced this past quarter to Insigo is an example of our disciplined approach to capital allocation and allows us to concentrate resources on higher-priority opportunities.

Speaker #2: We're on track to enter pilot deployments at the end of this year, and expect to be commercially available in 2027, as we've said previously.

Speaker #1: The sale is on track to close by the end of the year. Talking about higher-priority opportunities, one area of focused investment is scaling the capacity needed to support our optical growth ambitions, particularly around indium phosphide semiconductor manufacturing.

Speaker #2: Co-innovation is a powerful differentiator for Nokia. When we combine our technology leadership with the expertise and scale of our customers and partners, we accelerate innovation, bring solutions to market faster, and solve increasingly complex challenges together.

Speaker #1: In San Jose, our new Indian phosphide fab is now processing test wafers as we move closer to product qualification. It remains on track for volume production by the end of the year.

Speaker #2: We're already demonstrating early results from this approach and I will highlight four examples from Q2. First, we expanded our partnership with Google Cloud. Bringing Gemini-powered AI agents into our autonomous networks portfolio.

Speaker #1: In June, we announced a new commitment we are making to scale our Pennsylvania facility: increasing our advanced test and packaging capacity for optical systems in that facility by ten times.

Speaker #2: Second, with Vodafone Albania, we demonstrated AI-powered network slicing using agents to dynamically optimize network resources. Third, we expanded our relationship with Indesat or a new Hutchinson in Indonesia, supporting network modernization and the rollout of 5G, while providing a seamless upgrade path to AI RAN.

Speaker #1: In addition, today we announced the acquisition of a manufacturing site from NXP in Arizona, where we plan to increase our Indian phosphide fab capacity.

Speaker #1: This gives us additional capacity to support our own demand and greater optionality, recognizing the supply constraints in the market today. Altogether, these investments continue to strengthen and secure U.S.-based optical manufacturing capacity for the long term.

Speaker #2: And fourth, we entered trials with a US hyperscaler for a new out-of-band management solution that goes inside the data center leveraging the passive optical technology that we deliver in our fixed networks business.

Speaker #1: While Marco will update you on our restructuring progress, I wanted to touch on one key area where we are making progress and driving incremental productivity.

Speaker #2: We're also making progress to focus Nokia where we can differentiate and create long-term value. This means we are investing where we see long-term demand and we believe Nokia can be a unique winner and at the same time reducing exposure to areas where we are less differentiated.

Speaker #1: We believe that, to be a relevant technology provider in the AI supercycle, we need to be a leading adopter of AI internally. Last year, we established a team to deploy AI testbeds across multiple functions within Nokia.

Speaker #1: One area where we're seeing early traction is software development, where we now have nearly 100% adoption across our developer base. This is already yielding significant productivity returns, supporting our efficiency targets and accelerating roadmap deliverables.

Speaker #2: In November, we shared that our fixed wireless access customer premise equipment portfolio is not core to the future of our strategy. The sale we announced this past quarter to Insigo is an example of our disciplined approach to capital allocation and allows us to concentrate resources on higher priority opportunities.

Speaker #1: We will continue to scale this initiative across every function of the organization as our testbeds yield tangible results. We see this as essential not only to unlock sustainable returns, but also to be a better partner in support of our customers as we help them unlock the full potential of the AI supercycle.

Speaker #2: The sale is on track to close by the end of the year. Talking about higher priority opportunities, one area of focused investment is scaling the capacity needed to support our optical growth ambitions, particularly around Indian phosphide semiconductor manufacturing.

Speaker #2: In San Jose, our new Indian phosphide fab is now processing test waivers as we move closer to product qualification it remains on track for volume production by the end of the year.

Speaker #2: In June, we announced a new commitment we are making to scale our Pennsylvania facility increasing our advanced test and packaging capacity for optical systems in that facility by 10 times.

Speaker #2: In addition, today we announced the acquisition of a manufacturing site from NXP in Arizona, where we plan to increase our Indian phosphide fab capacity.

Speaker #2: This gives us additional capacity to support our own demand and greater optionality recognizing the supply constraints in the market today. Altogether, these investments continue to strengthen and secure US-based optical manufacturing capacity for the long term.

Speaker #2: While Marco will update you on our restructuring progress, I wanted to touch on one key area where we are making progress and driving incremental productivity.

Speaker #2: We believe that to be a relevant technology provider in the AI supercycle, we need to be a leading adopter of AI internally. Last year, we established a team to deploy AI testbeds across multiple functions within Nokia.

Speaker #2: One area where we're seeing early traction is software development, where we now have nearly 100% adoption across our developer base. This is already yielding significant productivity returns supporting our efficiency targets and accelerating roadmap deliverables.

Speaker #2: We will continue to scale this initiative across every function of the organization as our testbeds yield tangible results. We see this as essential not only to unlock sustainable returns, but also to be a better partner in support of our customers as we help them unlock the full potential of the AI supercycle.

Speaker #2: So in closing, I want to recognize and thank Team Nokia for a strong first half of the year. We are focused on our key priorities and have begun to fundamentally change how we work.

Speaker #2: I'm pleased to see our efforts are already reflected in our results. We're entering the second half with good momentum and remain on track to deliver somewhat above the midpoint of our operating profit guidance.

Speaker #2: And now I will turn the call over to Marco to dive into our financial performance.

Speaker #1: Thank you, Justin, and hello from my side as well. Before looking at the quarterly performance, let me start with reporting changes we announced this morning.

Speaker #1: As we have agreed to sell our fixed wireless access business to Insigo, we now consider the sale of enterprise campus edge highly probable. As a result, both businesses are classified as discontinued operations.

Speaker #1: So, in closing, I want to recognize and thank Team Nokia for a strong first half of the year. We are focused on our key priorities, and have begun to fundamentally change how we work.

Speaker #1: I'm pleased to see our efforts are already reflected in our results. We're entering the second half with good momentum and remain on track to deliver somewhat above the midpoint of our operating profit guidance.

Speaker #1: We have published recast historical numbers for 2025 and quarter one 2026 to support comparability. In quarter two 2026, this reporting change reduced comparable net sales by 66 million and increased the comparable operating profit by 13 million.

Speaker #1: And now, I will turn the call over to Marco to dive into our financial performance.

Speaker #2: Thank you, Justin, and hello from my side as well.

Speaker #1: Before looking at the quarterly performance, let me start with reporting changes we announced this morning. As we have agreed to sell our fixed wireless access business to Insigo, we now consider the sale of Enterprise Campus Edge highly probable.

Speaker #1: It also led to minor adjustments in cost allocations between network infrastructure and mobile infrastructure. With an impact of approximately 1 to 2 million per quarter.

Speaker #1: Turning to performance, net sales grew 9% in the quarter, supported mainly by network infrastructure. Gross profit was 2.2 billion and gross margin increased 70 basis points to 46%.

Speaker #1: As a result, both businesses are classified as discontinued operations. We have published recast historical numbers for 2025 and Q1 2026 to support comparability.

Speaker #1: The margin expansion was driven by network infrastructure and particularly optical networks, where we continue to benefit from both strong demand and the integration of Infinera.

Speaker #1: In quarter two 2026, this reporting change reduced comparable net sales by 66 million, and increased the comparable operating profit by 13 million. It also led to minor adjustments in cost allocations between network infrastructure and mobile infrastructure.

Speaker #1: Operating profit was 434 million and operating margin increased 70 basis points to 9%. The quarter benefited from some software revenue recognition coming in in quarter two instead of quarter three.

Speaker #1: With an impact of approximately 1 to 2 million per quarter. Turning to performance, net sales grew 9% in the quarter, supported mainly by network infrastructure.

Speaker #1: We'll also incurred higher stock-based compensation expense which represented 150 basis points head win to our operating margin in quarter two year on year. And this was driven by Nokia's share price increase, an increase in the program and the issuance happening earlier in this year.

Speaker #1: Gross profit was 2.2 billion, and gross margin increased 70 basis points to 46%. The margin expansion was driven by network infrastructure, and particularly optical networks, where we continue to benefit from both strong demand and the integration of Infinera.

Speaker #1: Financial income and expenses benefited from a positive venture fund revaluation during the quarter. Which supported both net profit and EPS earnings per share. Free cash flow was negative 732 million and as you know, quarter two is typically the weakest quarter for cash generation as employee cash incentives are paid in quarter two.

Speaker #1: Operating profit was 434 million, and operating margin increased 70 basis points to 9%. The quarter benefited from some software revenue recognition coming in in quarter two instead of quarter three.

Speaker #1: We also incurred higher stock-based compensation expense, which represented a 150 basis point headwind to our operating margin in Q2 year-on-year. This was driven by Nokia's share price increase, an increase in the program, and the issuance happening earlier in this year.

Speaker #1: We also saw some increase in working capital during the quarter. We ended quarter two with a net cash position of 2.8 billion maintaining a strong balance sheet and significant financial flexibility.

Speaker #1: Let me now turn to network infrastructure. Net sales grew 12% in the quarter reflecting continued strength across the business. Optical networks grew 20% and growth was supported by continued demand from AI and and cloud customers.

Speaker #1: Financial income and expenses benefited from a positive venture fund revaluation, during the quarter. Which supported both net profit and EPS earnings per share. Free cash flow was negative 732 million, and as you know, quarter two is typically the weakest quarter for cash generation, as employee cash incentives are paid in quarter two.

Speaker #1: But we also saw healthy demand from telecom customers investing in transport infrastructure. IP networks grew 16%. The stronger order momentum that began in the second half of 2025 is now translating into revenue growth.

Speaker #1: We also saw some increase in working capital during the quarter. We ended quarter two with a net cash position of 2.8 billion, maintaining a strong balance sheet and significant financial flexibility.

Speaker #1: Fixed networks declined 2%. The areas where we are prioritizing investment performed well. Optical and line terminal sales grew 18% while ONT sales declined 16% as we continued to focus on higher value parts of the portfolio.

Speaker #1: Let me now turn to Network Infrastructure. Net sales grew 12% in the quarter, reflecting continued strength across the business. Optical Networks grew 20%, and growth was supported by continued demand from AI and cloud customers. We also saw healthy demand from telecom customers investing in transport infrastructure.

Speaker #1: Gross margin increased 240 basis points to 42.7%. This improvement was driven by three factors. First, we benefited from a higher scale as revenue increased.

Speaker #1: IP Networks grew 16%. The stronger order momentum that began in the second half of 2025 is now translating into revenue growth. Fixed Networks declined 2%. The areas where we are prioritizing investment performed well: optical and line terminal sales grew 18%, while ONT sales declined 16% as we continue to focus on high-value parts of the portfolio.

Speaker #1: Second, we continued to realize synergies from the Infiner acquisition. And third, we saw more favorable mix within fixed networks. The gross margin improvement was partially offset by growth investments we are making across optical networks and IP networks as we position ourselves to capture the long-term opportunity in AI infrastructure.

Speaker #1: And finally, operating margin increased 170 basis points to 8.1%. And turning to mobile infrastructure, net sales grew 7% in the quarter for software grew 1%, radio networks 7%, and technology standards increased 15%.

Speaker #1: Gross margin increased 240 basis points to 42.7%. This improvement was driven by three factors. First, we benefited from higher scale as revenue increased. Second, we continued to realize synergies from the Infinera acquisition.

Speaker #1: And technology standards benefited from signing the few new agreements during the quarter. And included some catch up revenue recognition. Looking at the full year, we continue to expect technology standards to deliver a similar level of sales and profitability as in 2025.

Speaker #1: And third, we saw more favorable mix within fixed networks. The gross margin improvement was partially offset by growth investments we are making across optical networks and IP networks, as we position ourselves to capture the long-term opportunity in AI infrastructure.

Speaker #1: Gross margin was better than we expected entering the quarter and the main driver was a higher contribution from software sales as some revenue were expected in quarter three ended up benefiting quarter two gross margin.

Speaker #1: And finally, operating margin increased 170 basis points to 8.1%. Turning to Mobile Infrastructure, net sales grew 7% in the quarter. Core software grew 1%, radio networks 7%, and technology standards increased 15%.

Speaker #1: Looking ahead, because of the earlier software revenue phasing, we currently expect mobile infrastructure gross margin in quarter three to be closer to 44 to 46% reflecting a lower software contribution.

Speaker #1: And technology standards benefited from signing a few new agreements during the quarter, and included some catch-up revenue recognition. Looking at the full year, we continue to expect technology standards to deliver a similar level of sales and profitability as in 2025.

Speaker #1: Before improving again in quarter four, in line with normal seasonality. And operating profit was stable year on year. Looking at sales by customer segment, AI and cloud was again the fastest growing segment.

Speaker #1: Gross margin was 49.3%, which was somewhat better than we expected entering the quarter, and the main driver was a higher contribution from software sales as some revenue we expected in quarter three ended up benefiting quarter two gross margin.

Speaker #1: With net sales increasing 105% year on year. Growth was broad based across both optical and IP networks. Telecom sales increased 4% while technology licensing grew 15%.

Speaker #1: Looking ahead, because of the earlier software revenue phasing, we currently expect mobile infrastructure gross margin in quarter three to be closer to 44 to 46%, reflecting a lower software contribution.

Speaker #1: And we remain optimistic about the long-term AI and cloud opportunity and continue to see strong customer demand. At the same time, our expectations for the telecom market remain largely unchanged.

Speaker #1: Before improving again in quarter four, in line with normal seasonality. And operating profit was stable year on year. Looking at sales by customer segment, AI and cloud was again the fastest growing segment.

Speaker #1: Turning to restructuring and integrating integration costs. First, we are on track to complete our 2023 to 2026 restructuring program this year. And achieve 1.2 billion euros in gross cost savings.

Speaker #1: Net sales increased 105% year on year. Growth was broad-based across both optical and IP networks. Telecom sales increased 4%, while technology licensing grew 15%.

Speaker #1: The second area is the integration of our Chinese operations into Nokia's global operating model after taking full ownership at the end of 2025. As we discussed previously, we continue to adjust our operating structure to reflect market conditions and improve competitiveness.

Speaker #1: And we remain optimistic about the long-term AI and cloud opportunity and continue to see strong customer demand. At the same time, our expectations for the telecom market remain largely unchanged.

Speaker #1: As a reminder, this program was expected to achieve 200 million in cost synergies with one time charges of between 350 and 400 million euros over two to three year period.

Speaker #1: Turning to restructuring and integration costs. First, we are on track to complete our 2023 to 2026 restructuring program this year and achieve €1.2 billion in gross cost savings.

Speaker #1: We now expect to recognize approximately 350 million of the planned one time charges by the end of 2026 as we accelerate the integration to complete it within two years.

Speaker #1: The second area is the integration of our Chinese operations into Nokia's global operating model, after taking full ownership at the end of 2025. As we discussed previously, we continue to adjust our operating structure to reflect market conditions and improve competitiveness.

Speaker #1: And the third area is a set of new efficiency progress, mainly impacting Europe. These programs are expected to lead to a restructuring charges of 200 million euros in 2026.

Speaker #1: As a reminder, this program was expected to achieve €200 million in cost synergies, with one-time charges of between €350 million and €400 million, over a two- to three-year period.

Speaker #1: This actions are focused on simplifying the organization improving productivity and ensuring resources are aligned with our strategic priorities. Overall, we expect restructuring charges of approximately 800 million in 2026.

Speaker #1: We now expect to recognize approximately 350 million of the planned one-time charges by the end of 2026, as we accelerate the integration to complete it within two years.

Speaker #1: Then let's go to cash with respect to cash flow. The quarter followed the normal seasonality. We typically see in quarter two. The largest impact was the payment of annual employee incentives related to 2025 performance.

Speaker #1: And the third area is a set of new efficiency progress, mainly impacting Europe. These programs are expected to lead to a restructuring charges of 200 million euros in 2026.

Speaker #1: We also saw some working capital buildup during the quarter. Reflecting the continued growth of the business. Despite these seasonal factors, our overall cash generation profile remains unchanged.

Speaker #1: This actions are focused on simplifying the organization, improving productivity, and ensuring resources are aligned with our strategic priorities. Overall, we expect restructuring charges of approximately 800 million in 2026.

Speaker #1: Considering some of the increased restructuring costs, and as we make some investments in working capital, to prepare for growth, we now expect to track towards the low end of our free cash flow conversion assumption of 55 to 75%.

Speaker #1: Then let's go to cash with respect to cash flow. The quarter followed the normal seasonality we typically see in Q2. The largest impact was the payment of annual employee incentives, related to 2025 performance.

Speaker #1: And finally, turning to our outlook, there is no operational change to our comparable operating profit guidance. The only adjustment is the technical change resulting from the move of fixed wires access and enterprise campus edge into this kind of operations.

Speaker #1: We also saw some working capital buildup during the quarter for the business. Despite these seasonal factors, our overall cash generation profile remains unchanged. Considering some of the increased restructuring costs, and as we make some investments in working capital to prepare for growth, we now expect to track towards the low end of our free cash flow conversion assumption of 55% to 75%.

Speaker #1: And we continue to track somewhat above the midpoint of our operating profit range. Looking at quarter three specifically, we currently assume the sequential increase in net sales of between 3 and 7% for operating profit broadly similar to quarter two.

Speaker #1: And finally, turning to our outlook, there is no operational change to our comparable operating profit guidance. The only adjustment is the technical change resulting from the move of fixed wires access and enterprise campus edge into this continued operations.

Speaker #1: Due to the phasing of software sales in mobile infrastructure between quarter two and quarter three, followed by meaningful improvement in quarter four. And this is a combination of the normal seasonality we see in our telco business and the contribution from year on year growth in AI and cloud sales.

Speaker #1: And we continue to track somewhat above the midpoint of our operating profit range. Looking at quarter three specifically, we currently assume the sequential increase in net sales of between 3 and 7% for operating profit, we currently expect to result broadly similar to quarter two, due to the phasing of software sales in mobile infrastructure between quarter two and quarter three followed by a meaningful improvement in quarter four.

Speaker #1: Aside from the discontinued operations adjustment, our outlook assumptions remain largely unchanged. The demand environment remains supportive and we allocate capital where we see the strongest opportunities for long-term growth while maintaining discipline on profitability and cash generation.

Speaker #2: Thank you, Justin and Marco. As usual for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up.

Speaker #2: Operator, could you please give the instructions?

Speaker #1: This is a combination of the normal seasonality we see in our telco business and the contribution from year-on-year growth in AI and cloud sales.

Speaker #3: Ladies and gentlemen, we will now begin the Q&A session. If you have a question and are using the Zoom app, we ask that you please use the raised hand function at the bottom of your Zoom screen or by clicking on the three dots on the black bar at the bottom of your Zoom screen.

Speaker #1: Aside from the discontinued operations adjustment, our outlook assumptions remain largely unchanged. The demand environment remains supportive, and we allocate capital where we see the strongest opportunities for long-term growth, while maintaining discipline on profitability and cash generation.

Speaker #3: Alternatively, if you have joined via Zoom browser, please click the reactions button at the bottom of your Zoom page and then select raised hand.

Speaker #3: If you have dialed in by phone today and wish to ask a question, please use star nine on your keypad to raise your hand and then star six to unmute.

Speaker #3: Once your name has been announced, you may ask your question. If you want to withdraw your question, please lower your hand by using the raised hand function or star nine if you have dialed in.

Speaker #1: Thank you, Justin and Marco. As usual for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up?

Speaker #3: I will now hand the call back to David Mulholland, head of investor relations for the Q&A. Thank you.

Speaker #1: Operator, could you please give the instructions?

Speaker #3: Ladies and gentlemen, we will now begin the Q&A session. If you have a question and are using the Zoom app, we ask that you please use the raised hand function at the bottom of your Zoom screen, or click on the three dots on the black bar at the bottom of your Zoom screen.

Speaker #2: Thanks, Danny. We'll take our first question today from Terence Tsui from Morgan Stanley. Terence, please go ahead.

Speaker #4: Yep. Thank you very much. I hope you can hear me okay. I had a question around capacity and particularly around the four new DSPs planned by the end of 2027.

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Speaker #4: So this is actually a big ramp up compared to the previous run rate. Can you give us some milestones to look out for and reassurance that this could be achieved?

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Speaker #4: Thank you.

Speaker #2: Sure, Terence. I mean, I think first of all, we talked about, you know, these going into customer trial in 27 and then become commercially available towards the end of 27.

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Speaker #2: I think the thing I would just emphasize and remind you of on this is that Nokia and Infinera, previously were each building two DSPs, the individually.

Speaker #3: I will now hand the call back to David Mulholland, Head of Investor Relations, for the Q&A. Thank you.

Speaker #1: Thanks, Dani. We'll take our first question today from Terence Tsui from Morgan Stanley. Terence, please go ahead.

Speaker #2: So collectively a total of four DSPs. One of the decisions we made and I've talked about this a bit as we saw the growth opportunity emerging in optical was to maintain the DSP team as is versus reducing them.

Speaker #4: Yep, thank you very much. I hope you can hear me okay. I had a question around capacity and particularly around the four new DSPs planned by the end of 2027.

Speaker #2: And the reason we did that was we felt quite strongly and spending time with our customers that we could actually deliver more differentiated products to them with four unique DSPs versus the traditional two that we had been delivering in each company independently.

Speaker #4: So this is actually a big ramp-up compared to the previous run rate. Can you give us some milestones to look out for, and provide reassurance that this could be achieved?

Speaker #4: Thank you.

Speaker #1: Sure, Terence. I mean, I think first of all, we talked about these going into customer trial in 2027 and then becoming commercially available towards the end of 2027.

Speaker #2: And that laid out and supported the roadmap that we launched at OFC in March. And I touched on that a bit in last quarter's call.

Speaker #1: I think the thing I would just emphasize and remind you of on this is that Nokia and Infinera previously were each building two DSPs individually.

Speaker #2: So the view here is that we think this gives us better market coverage aligned to where the market is evolving specifically given the amount of the amount of investment we're seeing across the different layers of optical fabric from the scale, the scale across fabric to what we see in data center interconnect to haul transport.

Speaker #1: So collectively, a total of four DSPs. One of the decisions we made—and I've talked about this a bit—is we saw the growth opportunity emerging in Optical was to maintain the DSP team as is, versus reducing them.

Speaker #2: So across all of that, you know, we've got we think we have a much better portfolio in 2027 to address each of the unique evolving solutions than we would have had if we'd only kept two versions.

Speaker #1: And the reason we did that was we felt quite strongly, in spending time with our customers, that we could actually deliver more differentiated products to them with four unique DSPs, versus the traditional two that we had been delivering in each company independently.

Speaker #1: Did you have a follow-up, Terence?

Speaker #4: A real quick follow-up on the comments around the order book potentially being lumpy. Do you still expect like an upward trajectory over the long term from these levels?

Speaker #1: And that laid out and supported the roadmap that we launched at OFC in March. And I touched on that a bit in last quarter's call.

Speaker #1: So the view here is that we think this gives us better market coverage aligned to where the market is evolving, specifically the amount of investment we're seeing across the different layers of optical fabric—from the scale across fabric to what we see in data center interconnect, to metro network, to long-haul transport.

Speaker #4: Or be it with some, you know, bumps along the way?

Speaker #2: Yeah, look, I think two things about this quarter. This quarter's order book. I mean, obviously if you do the book to bill on this, it's a significant jump up.

Speaker #2: So I think, you know, I think for me that's a that's a data point around, you know, a little bit of lumpiness. But the other is the elongation of the orders, which we've been taught we've been talking about expecting and we're seeing here.

Speaker #1: So across all of that, we've got we think we have a much better portfolio in 2027 to address each of the unique evolving solutions than we would have had if we had only kept two versions.

Speaker #2: So I think we have to look at it in both those dimensions. And the way I think about orders is I think about orders in a period of time, right?

Speaker #2: Because it's easy to it's easy to give you a headline number and then say, well, you know, the next question is, is that over a, you know, a quarter period, a four quarter period, an eight quarter, 12 quarter, et cetera?

Speaker #2: Did you have a follow-up, Terence?

Speaker #4: A real quick follow-up on the comments around the order book potentially being lumpy. Do you still expect an upward trajectory over the long term from these levels?

Speaker #2: And so for me that's really what we're focused is not, you know, is not necessarily on are we getting, you know, big order big order pops consistently, but rather are we seeing the order momentum grow as we as we look at it over a time period?

Speaker #4: Or will it be with some bumps along the way?

Speaker #1: Yeah, look, two things about this quarter. This quarter's order book. I mean, obviously, if you do the book to bill on this, it's a significant jump up.

Speaker #2: And right now, you know, what we're seeing is continued growth. And continued demand in the market. And as I said in my comments, it's still largely driven by AI and cloud.

Speaker #1: So I think for me, that's a data point around a little bit of lumpiness. But the other is the elongation of the orders, which we've been talking about expecting.

Speaker #2: Particularly around scale across and data center interconnect. And then we're starting to see some, you know, some emerging growth. We saw some of it in sales this year in our telco customer base.

Speaker #1: And we're seeing here so I think we have to look at it in both those dimensions. And the way I think about orders is I think about orders in a period of time, right?

Speaker #2: And we believe that's also tied to to AI demand.

Speaker #1: Because it's easy to give you a headline number and then say, well, the next question is, is that over a quarter period, a four-quarter period, an eight-quarter, 12-quarter, et cetera?

Speaker #1: Thanks, Terence.

Speaker #4: Thank you.

Speaker #2: We'll take our next question from Simon Leopold from Raymond James. Simon, please go ahead. Simon, have you unmuted yourself?

Speaker #1: And so, for me, that's really where we're focused—is not necessarily on whether we are getting big order pops consistently, but rather, are we seeing the order momentum grow as we look at it over a time period?

Speaker #5: There we go. Can you hear me now, David?

Speaker #2: Yes, go ahead, Simon.

Speaker #1: And right now, what we're seeing is continued growth and continued demand in the market. And as I said in my comments, it's still largely driven by AI and cloud.

Speaker #5: Okay, great, great. I didn't expect that button to pop up. Sorry. I wanted to see if you could could rank order and characterize supply chain risk.

Speaker #1: Particularly around scale, across and data center interconnect. And then we're starting to see some emerging growth. We saw some of it in sales this year in our telco customer base.

Speaker #5: And I'm thinking about issues like memory, printed circuit boards, and even in the emphasized wafers, maybe a particular focus on that that latter one, the wafers, given the factory expansion, whether or not you can get the materials and then I've got a quick follow-up after.

Speaker #1: And we believe that's also tied to AI demand. Thank you.

Speaker #2: We'll take our next question from Simon Leopold from Raymond James. Simon, please go ahead. Simon, have you unmuted yourself?

Speaker #5: Thank you.

Speaker #2: Sure. Look, I think the most, you know, if I think about the supply chain risks or the time that we're spending in this, first of all, as you rightly point out, it's broad based, right?

Speaker #2: So I think we talk a lot about memory and memory is significant, just given the the amount of demand that is in the market.

Speaker #5: There we go. Can you hear me now, David?

Speaker #1: Yes, go ahead, Simon.

Speaker #5: Okay, great, great. I didn't expect that button to pop up—sorry. I wanted to see if you could rank order and characterize supply chain risk.

Speaker #2: I think this has been talked about quite you know, multiple companies and multiple parts of this ecosystem. So there's clearly, you know, there's clearly constraints there.

Speaker #5: And I'm thinking about issues like memory, printed circuit boards, and even indium phosphide wafers, maybe a particular focus on that latter one, the wafers, given the factory expansion, whether or not you can get the materials and then I've got a quick follow-up after.

Speaker #2: And then obviously the the pricing, you know, the significant change in pricing driven by that shortage which again has been talked about very broadly across the tech ecosystem.

Speaker #2: So that's probably the one that we see as most significant. Now, you know, we talked about this last quarter. I think I don't need to repeat what I said last quarter, but maybe briefly.

Speaker #5: Thank you.

Speaker #1: Sure. Look, I think that if I think about the supply chain risks or the time that we're spending on this, first of all, as you rightly point out, it's broad-based, right?

Speaker #2: You know, our focus is on securing supply. You know, simplifying our designs, looking at where we can, you know, we can reduce scope, wherever possible in our designs.

Speaker #2: And of course then passing that, you know, passing that on to customers. And I think, you know, if you look at what we said last quarter, you know, there were some companies with us last quarter, it seems like more companies have joined us in some of the more recent earnings calls now making that that same, you know, that same comment.

Speaker #1: So I think we talk a lot about memory and memory is significant, just given the amount of demand that is in the market. I think this has been talked about quite a bit across multiple companies and multiple parts of this ecosystem.

Speaker #2: The key thing for me here is is also really talking to our customers, not the AI and cloud customers, they understand this well, but really making sure our telco, our mission critical customers understand that we have elongated lead times, which means better visibility, better planning, and something that we need to team with them on.

Speaker #1: So, there's clearly constraints there. And then, obviously, the pricing—the significant change in pricing—driven by that shortage which, again, has been talked about very broadly across the tech ecosystem.

Speaker #1: So that's probably the one that we see as most significant. Now, we talked about this last quarter. I think I don't need to repeat what I said last quarter, but maybe briefly, our focus is on securing supply, simplifying our designs, and looking at where we can reduce scope, wherever possible, in our designs.

Speaker #2: So particularly important in that regard. And then as you as you touch on, there's a broad base across the board. On the Indian phosphide question you ask, Simon, the comment I'll make is, you know, this.

Speaker #2: This new fab is really looking at, you know, is looking at coming online probably earliest in '29. And if you think about our our capacity, we've got you know, significant jump up with San Jose coming, you know, call it '27 as it ramps volume, right?

Speaker #1: And of course, then passing that on to customers. And I think if you look at what we said last quarter, there were some companies with us last quarter, it seems like more companies have joined us in some of the more recent earnings calls now making that same comment.

Speaker #2: Manufacturing later. Or volume manufacturing later this year. So '27 it ramps then we we kind of line up for a '29 ramp and an incremental capacity.

Speaker #1: The key thing for me here is also really talking to our customers—not the AI and cloud customers, they understand this well—but really making sure our telco, our mission-critical customers understand that we have elongated lead times, which means better visibility, better planning, and something that we need to team with them on.

Speaker #2: As you know, that's kind of the the timelines that you you have to take with these you know, with with these investments. And I think as we're looking at it, we're looking out at, you know, at different solutions to get Indian phosphide capacity at that time.

Speaker #1: So, particularly important in that regard. And then, as you touched on, there's a broad base across the board. On the indium phosphide question you asked, Simon, the comment I'll make is this new fab is really looking at coming online probably earliest in '29.

Speaker #2: That's obviously an industry issue though. It's something that all of us in the industry need to enable. And it's it's something that, you know, I think collectively we need to solve.

Speaker #2: You know, even even across you know, even across the ecosystem.

Speaker #1: Thanks, Simon. Did you have a follow-up?

Speaker #1: And if you think about our capacity, we've got a significant jump up with San Jose coming, call it '27, as it ramps volume, right? Manufacturing later this year or volume manufacturing later this year.

Speaker #5: Yeah, I wanted to see if maybe you could offer us your view on on the scale across market and your ambitions. You know, Kia's 's ambitions for this particular application considering optical and IP routing.

Speaker #1: So, '27 it ramps, then we kind of line up for a '29 ramp and incremental capacity. As you know, that's kind of the timeline that you have to take with these investments.

Speaker #5: Thank you.

Speaker #2: Yep. Yeah, absolutely. I mean, I think first of all, Simon, I think there's a lot of I'm going to be a little technical, but scale across is, you know, technically was was talking about data centers within a given campus area that we're strung together as a AI factory.

Speaker #1: And I think as we're looking at it, we're looking out at different solutions to get indium phosphide capacity at that time. That's obviously an industry issue, though.

Speaker #1: It's something that all of us in the industry need to enable, and it's something that I think collectively we need to solve, even across the ecosystem.

Speaker #2: And one of the things I talked about last on the last call was the demand we're seeing in in data center interconnect. So my point in saying that is some of what we're seeing is just increased data center interconnect.

Speaker #2: Thanks, Simon. Did you have a follow-up?

Speaker #2: Now, you can call it scale across or, you know, some folks may want to to label it one way or another. To me, they're very different.

Speaker #5: Yes, I wanted to see if you could offer us your view on the scale across the market and your ambitions—Nokia's ambitions—for this particular application, considering optical and IP routing.

Speaker #2: They're complementary. And very important applications because one is backend connectivity, which is, you know, which is connect is providing connectivity to expand the backend for scale out, which is the scale across fabric.

Speaker #5: Thank you.

Speaker #1: Yep. Yeah, absolutely. I mean, I think, first of all, Simon, I think there's a lot of—I'm going to be a little technical—but 'scale across' technically was talking about data centers within a given campus area that were strung together as an AI factory.

Speaker #2: The other is data center interconnect providing higher bandwidth between data centers. Over a long haul on the front end. Both of those have, you know, have a routing element.

Speaker #2: Obviously, the data center interconnect has a has a very significant demand growth in in routing. And and if you look at our opportunity and why we're talking about growth and, you know, in in both IP and optical, it's because we're seeing growth in in both of those both of those elements.

Speaker #1: And one of the things I talked about last on the last call was the demand we're seeing in data center interconnect. So my point in saying that is some of what we're seeing is just increased data center interconnect.

Speaker #2: So they are complementary. They are reinforcing. Now, the other thing I'll say is it's not limited to that. You know, we are seeing some, you know, we are seeing some some some traction in in back in some of the backend switching.

Speaker #1: Now, you can call it 'scale across,' or some folks may want to label it one way or another. To me, they're very different. They're complementary and very important applications because one is back-end connectivity, which is providing connectivity to expand the back-end for scale-out, which is the scale-out cost fabric.

Speaker #2: It's on a limited basis, obviously without getting into all the the market dynamics there. But all of this is, you know, all of this is encouraging in terms of our focus in this area and the traction we're starting to make.

Speaker #1: The other is data center interconnect, providing higher bandwidth between data centers over a long haul. On the front end, both of those have a routing element.

Speaker #1: Thanks, Simon. We'll take our next question from Sami Sarkamesh from Danske Bank. Sami, please go ahead.

Speaker #1: Obviously, the data center interconnect has a very significant demand growth in routing. And if you look at our opportunity and why we're talking about growth and in both IP and optical, it's because we're seeing growth in both of those elements.

Speaker #5: Hi, my question would be on your supply capability in optical networks. Are you fully constrained or have you been able to build any inventory during the first half of the year?

Speaker #2: Yeah, I would say, Sami, it's a good pockets you know, think of think of legacy, you know, legacy products and those areas where we probably we have some supply.

Speaker #1: So they are complementary. They are reinforcing. Now, the other thing I'll say is it's not limited to that. We are seeing some we are seeing some traction in some of the backend switching.

Speaker #2: But in general, I would think of us as being constrained, right? We talk about lead times elongating. It's because we're seeing constraints and particularly on the leading edge products.

Speaker #1: It's on a limited basis, obviously, without getting into all the market dynamics there. But all of this is encouraging in terms of our focus in this area and the traction we're starting to make.

Speaker #2: And I and by the way, I don't think we're unique in that. I think that's you know, if you if you look at our ecosystem again, I think you see you know, you see the constraints and and you see that across you know, the component suppliers and some of our peers, etc.

Speaker #2: Thanks, Simon. We'll take our next question from Sami Sarkamesh from Danske Bank. Sami, please go ahead.

Speaker #2: So obviously we're working aggressively on that and maximizing the you know, the supply. But as I've said as well, if you look at our forecast, you know, what what we've included in our forecast is the demand that we have line of sight to shipping.

Speaker #5: Hi, my question would be on your supply capability in optical networks. Are you fully constrained, or have you been able to build any inventory during the first half of the year?

Speaker #1: Yeah, I would say, Sami, it's a good question. There are always pockets—think of legacy products and those areas where we probably have some supply.

Speaker #2: And and we recognize even that has some risk because that you know, that's that assumes continuity of supply. No disruptions, no you know, everything goes perfectly.

Speaker #1: But in general, I would think of us as being constrained, right? We talk about lead times elongating. It's because we're seeing constraints. And particularly on the leading edge products.

Speaker #2: So so when we're when we're thinking about this, we're thinking about it from a constraint perspective, aligned to what we have line of sight to in supply.

Speaker #1: And by the way, I don't think we're unique in that. If you look at our ecosystem, again, I think you see the constraints, and you see that across the component suppliers and some of our peers, et cetera.

Speaker #2: But I absolutely if there was more supply, I think we'd probably generate more revenue.

Speaker #1: Did you have a follow-up, Sami?

Speaker #5: Yeah, regarding radio networks, just curious do you think you are currently gaining share you had 5% organic growth in the first half year? I think that's a bit more than your your main European rival is having.

Speaker #1: So, obviously, we're working aggressively on that and maximizing the supply. But, as I've said as well, if you look at our forecast, what we've included in our forecast is the demand that we have line of sight to shipping.

Speaker #5: Or is it just like timing?

Speaker #2: Yeah, my my view on this, Sami, is it's you know, it's timing. We talked about a you know, actually Marco talked about the timing around the the software revenue recognition we had in Q2, which is tied to our our our our radio software platforms.

Speaker #1: And we recognize even that has some risk because that assumes continuity of supply, no disruptions. Everything goes perfectly. So when we're thinking about this, we're thinking about it from a constraint perspective, aligned to what we have line of sight to in supply.

Speaker #2: So I would call this timing. I also think looking at market share on a quarterly basis in this industry, is is super challenging to get any kind of good signal.

Speaker #1: But absolutely, if there was more supply, I think we'd probably generate more revenue.

Speaker #2: I think you have to look look at it certainly on an annual basis.

Speaker #2: Did you have a follow-up, Sami?

Speaker #5: Yeah, regarding radio networks, just curious—do you think you are currently gaining share? You had 5% organic growth in the first half of the year.

Speaker #1: Thanks, Sami. We'll take our next question from Alex Duvall from Goldman Sachs. Alex, please go ahead.

Speaker #4: Yes, thank you very much. You talked about further progress in AI RAN. I wondered if you could talk a bit about the timelines this benefiting Nokia in terms of revenue and competitive position and what your discussions with telco are suggesting in that area.

Speaker #5: I think that's a bit more than your main European rival is having. Or is it just like timing?

Speaker #1: Yeah, my view on this, Sami, is it's timing. We talked about—actually, Marco talked about—the timing around Q2, which is tied to our radio software platforms.

Speaker #4: And secondly, back to the AI side, I wondered if you could give an update on switching and the progress you make there. Could you help us understand the latest thoughts on switching design ins and when we should expect orders and revenue momentum given the progress you're delivering?

Speaker #1: So I would call this timing. I also think looking at market share on a quarterly basis in this industry is super challenging to get any kind of good signal.

Speaker #1: I think you have to look at it, certainly, on an annual basis.

Speaker #2: I mean, it's a second one first. In terms of the you know, the switching design wins, we talked about this a little bit last quarter.

Speaker #2: Thanks, Sami. We'll take our next question from Alex Duvall from Goldman Sachs. Alex, please go ahead.

Speaker #2: We said, you know, we'd expect we expected orders this year. We saw a lot of those orders come in in Q2. Obviously, as as you know, in the design win process, you you start small, you get traction, and then you build on top of that as as you as you validate and execute for performance.

Speaker #3: Yes, thank you very much. You talked about further progress in AI RAN. I wondered if you could talk a bit about the timeline for this benefiting Nokia in terms of revenue and competitive position, and what your discussions with telcos are suggesting in that area.

Speaker #2: So you know, we're continuing to drive that across a number of customers. Obviously, we're pleased with the progress we had in Q2. And then can you just repeat your your first question?

Speaker #3: And secondly, back to the AI side, I wondered if you could give an update on switching and the progress you're making there. Could you help us understand the latest thoughts on switching design-ins, and when we should expect orders and revenue momentum, given the progress you're delivering?

Speaker #4: Yeah, absolutely, Justin. It was just you had mentioned further progress on AI RAN. Just curious how you think about the customer feedback and the timelines for that impacting your revenues.

Speaker #1: I mean, it's the second one first. In terms of the switching design wins, we talked about this a little bit last quarter. We said we'd expected orders this year.

Speaker #2: Yeah, I I mean, look, I I I think basically, Alex, everything is consistent with what we've said. Pilots at the end of '26, commercially available in '27.

Speaker #1: We saw a lot of those orders come in in Q2. Obviously, as you know in the design win process, you start small, you get traction, and then you build on top of that.

Speaker #2: Obviously, we'd anticipate more significant volume going into '28. And and that continues to be to be our expectation. In in terms of AI RAN.

Speaker #1: As you validate and execute for performance. So we're continuing to drive that across a number of customers. Obviously, we're pleased with the progress we had in Q2.

Speaker #1: Thanks, Alex. We'll take our next question from Ulrich Rother from Bernstein. Ulrich, please go ahead. I think we've lost Ulrich.

Speaker #1: And then, can you just repeat your first question?

Speaker #3: Yeah, absolutely, Justin. It was just you had mentioned further progress on AI RAN. I'm just curious how you think about the customer feedback and the timelines for that impacting your revenues.

Speaker #5: Thank you. Sorry, it takes some time. Yeah, it takes some time for the button to appear here. Apologies. So I wanted to come back to the very strong AI cloud order intake.

Speaker #5: You put it into perspective already with regards to the longer the elongation of the order book as you call it. I was wondering, in in supply constrained markets, we often do see double ordering.

Speaker #1: Yeah, I mean, look, I think basically, Alex, everything is consistent with what we've said. Pilots at the end of '26, commercially available in '27.

Speaker #1: Obviously, we'd anticipate more significant volume going into 2028, and that continues to be our expectation in terms of AI RAN.

Speaker #5: Which does create a false signal for suppliers such as Nokia. How do you see this risk? Are there any specific reasons why this would be an unlikely factor for Nokia?

Speaker #2: Thanks, Alex. We'll take our next question from Ulrich Rosset from Bernstein. Ulrich, please go ahead. I think we've lost Ulrich.

Speaker #2: Yeah, look, I think first of all, if you if you think about the customers the level of sophistication and the customers that to step back and ask what the incentive is for you know, for double ordering.

Speaker #3: Thank you.

Speaker #2: Are you there, Ulrich?

Speaker #3: Sorry. It takes some time. Yeah, it takes some time for the button to appear here. Apologies. So I wanted to come back to the very strong AI cloud order intake.

Speaker #2: I I've absolutely seen this much like you in supply constrained markets that I've worked in in the past. And it's particularly prevalent in markets where you're focused on enterprise customers or you've got channels because customers tend to diversify and look for allocation.

Speaker #3: You put it into perspective already with regards to the longer elongation of the order book, as you call it. I was wondering, in supply-constrained markets, we often do see double ordering.

Speaker #2: But in in this environment, the thing that I would flag is you know, for you know, for one of these customers to come in and say, I'm going to double order with you when ultimately that goes back to supply of leading edge silicon, manufacturing capacity on optical components that they're they can actively inspect and we transparently share the progress.

Speaker #3: Which does create a false signal for suppliers such as Nokia. How do you see this risk? Are there any specific reasons why this would be an unlikely factor for Nokia?

Speaker #1: Yeah, look, I think, first of all, if you think about the customers—the level of sophistication and the customers that are placing these orders—they get to step back and ask what the incentive is for double ordering.

Speaker #2: You know, the question for them would be what does it you know, what does it do in terms of incentives? The other thing I would say is, you know, we're we're obviously as we're making commitments on a longer-term basis, we're you know, we're expecting those commitments from customers as well.

Speaker #1: I absolutely seen this much like you in supply constrained markets that I've worked in in the past. And it's particularly prevalent in markets where you're focused on enterprise customers or you have got channels because customers tend to diversify and look for allocation.

Speaker #5: That's helpful. If I may follow up with one clarification. What would you call a normal length of an order book? Is it is it essentially 100% of the orders within the next 12 months?

Speaker #1: But in this environment, the thing that I would flag is for one of these customers to come in and say, I'm going to double order with you when ultimately that goes back to supply of leading edge silicon, manufacturing capacity on optical components that they can actively inspect and we transparently share the progress.

Speaker #5: Because you you highlighted sort of the difference, you know, with half of the revenues. Is is 12 months for 100% the quote unquote normal here or not?

Speaker #2: Yeah, Ulrich, that's a good question. So I think typically we have seen orders within 12 months in our customer base. Now, you know, again, I there's two two factors to this.

Speaker #2: Obviously, one is the growing demand. You know, is the fact that AI and cloud is a new segment for us, right? So I would say we've had less exposure to this, obviously, since usually less exposure to this in the past.

Speaker #1: The question for them would be: what does it do in terms of incentives? The other thing I would say is, obviously, as we're making commitments on a longer-term basis, we're expecting those commitments from customers as well.

Speaker #2: And then the second thing is obviously the supply constraint. So I think both of those are factors. But if you think about our traditional business in you know, with telco customer heavily concentrated with telco customers and and then obviously some in mission critical, those orders, you know, we we we may get a a win a a contract award, but we would not we would see orders typically within 12 months.

Speaker #3: That's helpful. If I may follow up with one clarification. What would you call a normal length of an order book? Is it essentially 100% of the orders within the next 12 months?

Speaker #3: Because you highlighted sort of the difference with half of the revenues. Is 12 months for 100% the quote unquote normal here or not?

Speaker #2: And that's really the shift. And that's why when I talk about the you know, our telco customer base, one of the conversations we're having with those customers is getting more visibility going forward because they're also used to giving us you know, fairly short-term you know, within within 12 months visibility.

Speaker #1: Yeah, Ulrich, that's a good question. So, I think typically we have seen orders within 12 months in our customer base. Now, again, there are two factors to this.

Speaker #2: And we need to be planning even further. And so this is a this is something that we're you know, with all of our sales teams having this conversation to make sure that we're getting better visibility, not because it implies a commitment, but because the you know, the the risks given the supply constraints in the industry are you know, we don't we don't want to miss any you know, any of their deliveries while we continue to support them, given.

Speaker #1: Obviously, one is the growing demand. Is the fact that AI and cloud is a new segment for us, right? So I would say we've had less exposure to this, obviously, substantially less exposure to this in the past.

Speaker #1: And then the second thing is obviously the supply constraint. So I think both of those are factors. But if you think about our traditional business in with telco customers, heavily concentrated with telco customers and then obviously some in mission critical, those orders, we may get a win a contract award, but we would not we would see orders typically within 12 months.

Speaker #2: You know, given their importance to us as well as customers.

Speaker #1: Thanks, Ulrich. We'll take our next question. From Jacob Bluestein from BNP Paribas. Jacob, please go ahead.

Speaker #1: And that's really the shift. And that's why when I talk about the our telco customer base, one of the conversations we're having with those customers is getting more visibility going forward because they're also used to giving us fairly short-term within 12 months visibility.

Speaker #4: Great. Thanks for taking the question. You obviously ramping up in terms of AI and cloud revenues. I guess we're not yet seeing it in terms of margins.

Speaker #4: And I guess my question is just when and and I appreciate that's obviously as you know, as these businesses scale, margins will go up.

Speaker #1: And we need to be planning even further. And so this is something that we're with all of our sales teams having this conversation to make sure that we're getting better visibility, not because it implies a commitment, but because the risks given the supply constraints in the industry are we don't want to miss any of their deliveries while we continue to support them, given their importance to us as well as customers.

Speaker #4: And particularly on the IP side, you're just sort of starting to scale now. But it's interested how long do you think an action takes before these revenues become materially accretive?

Speaker #2: Yeah, I think I think two things, Jacob. So one is gross margin and then the other is is operating leverage, right? And and as as we talked about in in capital markets today, we you know, we're we're doing a lot of work at the at the front end of the three-year period to really set the company up to become more efficient, more nimble, more scalable, and and and get the operating leverage as we drive growth in the business.

Speaker #2: Thanks, Ulrich. We'll take our next question from Jacob Bluestein from BNP Paribas. Jacob, please go ahead.

Speaker #3: Great, thanks for taking the question. You're obviously ramping up in terms of AI and cloud revenues. I guess we're not yet seeing it in terms of margins.

Speaker #2: So that's a key focus. And we talked about that by nature that would be a little you know, a little bit backend loaded. Now, I'm I like I said, I'm very pleased with the progress we're making and and and obviously with the demand accelerating higher than what we said at capital markets today, we've got optimism optimism on progress there that you know, we'll continue to we'll continue to improve.

Speaker #3: I guess my question is just when, and I appreciate that obviously as these businesses scale, margins will go up. And particularly on the IP side, you're just sort of starting to scale now.

Speaker #3: But it's interesting—how long do you think an action takes before these revenues become materially accretive?

Speaker #2: On the on the other side, on the gross margin side, you know, this is an area where you know, I think I think we're dealing with a you know, with with just a lot of complexity in the mix.

Speaker #1: Yeah, I think two things, Jacob. So, one is gross margin, and then the other is operating leverage, right? And as we talked about in Capital Markets Day, we're doing a lot of work at the front end of the three-year period to really set the company up to become more efficient, more nimble, more scalable, and get the operating leverage as we drive growth in the business.

Speaker #2: You know, and this is a little bit of supply chain. This is also us you know, we we talked about the focus we're making in FN on on on exiting you know, low margin business.

Speaker #2: So some of those things are just playing through in the business and you're not quite seeing a drop to the bottom line yet. But but obviously we're we're very clear on on what we're anticipating and you know, and based on the assumptions we shared at capital markets today.

Speaker #1: So that's a key focus. And we talked about that by nature, that would be a little bit back-end loaded. Now, like I said, I'm very pleased with the progress we're making, and obviously with the demand accelerating higher than what we said at Capital Markets Day, we've got optimism on progress there that we'll continue to improve.

Speaker #2: And the progress that we're making ahead of those in terms of revenue growth.

Speaker #4: Very clear. And if I just ask a quick follow-up, just I mean, you mentioned you've got several customers coming in on the IP side.

Speaker #4: I think you said and I'd just be interested in understanding just sort of the the level of concentration of that customer mix. I mean, would you say you're well represented across the different hyperscaler customers or would you stay stay still a relatively narrow segment?

Speaker #1: On the other side, on the gross margin side, this is an area where I think we're dealing with just a lot of complexity in the mix.

Speaker #1: And this is a little bit of supply chain. This is also us we talked about the focus we're making in FN on exiting low margin business.

Speaker #2: Yeah, I I think we've talked about this a little bit before. It's it's fairly concentrated today. But that's the way that you know, that's the way you build you build the the business, right?

Speaker #1: So, some of those things are just playing through in the business and you're not quite seeing a drop to the bottom line yet. But, obviously, we're very clear on what we're anticipating and based on the assumptions we shared at Capital Markets today.

Speaker #2: It's and and so I think we've got you know, we've got very good partnerships and relationships across you know, many of the AI and cloud players, the hyperscalers, the focus right now is you know, is is obviously on making sure where we do have demand that we're you know, we're delivering it and we're continuing to innovate for those customers.

Speaker #1: And the progress that we're making ahead of those, in terms of revenue growth.

Speaker #3: Very clear. And if I just ask a quick follow-up, just I mean, you mentioned you've got several customers coming in on the IP side.

Speaker #2: And then you know, over time, obviously expanding that footprint.

Speaker #3: I think you said, and I'd just be interested in understanding just sort of the level of concentration of that customer mix. I mean, would you say you're well represented across the different hyperscaler customers, or would you say it's still a relatively narrow segment?

Speaker #3: No, I think it's very helpful.

Speaker #4: Thank you.

Speaker #1: We'll take our next question from Oliver Wong from Bank of America. Oliver, please go ahead.

Speaker #3: Yeah, I think it was also related.

Speaker #4: Hey guys, thanks for taking my question. My first question is in terms of the 2.8 billion AI orders in the quarter, understand that a significant portion pertains to some of your significant design wins in data center switches from last quarter.

Speaker #1: Yeah, I think we've talked about this a little bit before. It's fairly concentrated today, but that's the way you build the business, right?

Speaker #4: So I think we'll be helpful is if you could maybe try to quantify or guide us a little bit on kind of you know, how much of the of the order of the total AI orders this quarter that kind of comprise just so that we can you know, have a better sense of you know, underlying optical related demand in the quarter.

Speaker #1: And so I think we've got very good partnerships and relationships across many of the AI and cloud players, the hyperscalers, the focus right now is obviously on making sure where we do have demand that we're delivering it and we're continuing to innovate for those customers.

Speaker #1: And then over time, obviously expanding that footprint.

Speaker #4: Thanks.

Speaker #4: No, I mean,

Speaker #2: Yeah, I mean, I think I would say it was it was it was driven by optical and IP weighted weighted towards optical. And that's probably not a surprise given you know, given the momentum we're seeing right now in that market.

Speaker #3: Thank you.

Speaker #2: We'll take our next question from Oliver Wong at Bank of America. Oliver, please go ahead.

Speaker #4: I think it was also related.

Speaker #3: Hey guys, thanks for taking my question. My first question is, in terms of the $2.8 billion AI orders in the quarter, I understand that a significant portion pertains to some of your significant design wins in data center switches from last quarter.

Speaker #4: Got it. And a quick follow-up in terms of you know, within optical, you know, you mentioned you discussed briefly about sort of scale cross versus regular DCI.

Speaker #3: So I think we'll be helpful if you could maybe try to quantify or guide us a little bit on kind of how much of the order of the total AI orders this quarter that kind of comprise just so that we can have a better sense of underlying optical related demand in the quarter.

Speaker #4: I was just wondering you know, what the composition of of demand is right now between the two.

Speaker #2: Yeah, I don't think we're breaking that out right now. I just would highlight that I I I think there's a there's a significant amount of demand in in DCI as well as scale across.

Speaker #2: And I think that gets I think the two kind of get either pushed together or maybe the DCI piece gets underappreciated. But that's you know, that's certainly where for us we're you know, we're seeing we're seeing traction on both.

Speaker #3: Thanks.

Speaker #1: Yeah, I mean, I think I would say it was driven by optical and IP weighted towards optical. And that's probably not a surprise given the momentum we're seeing right now in that market.

Speaker #1: Thanks, Oliver. We'll take our next question from Richard Kramer from Arezze. Richard, please go ahead.

Speaker #5: Thanks. Hey Justin, my first question for you is on the AI RAN transition, your customer install base runs on Nokia. Proprietary silicon. Do you see the industry long-term shifting away from that proprietary silicon base set of solutions?

Speaker #3: Got it. And a quick follow-up, in terms of within optical, you mentioned you discussed briefly about sort of scale cross versus regular DCI. I was just wondering what the composition of demand is right now between the two.

Speaker #5: And what are the implications for you know, what is a 3 billion euro run rate of mobile R&D and mobile networks margins for that transition?

Speaker #1: Yeah, I don't think we're breaking that out right now. I would just highlight that I think there's a significant amount of demand in DCI, as well as scale across.

Speaker #5: Thanks.

Speaker #2: Yeah, hey Richard. So I I a couple things on this. First of all, I I've talked about this pretty pretty openly. I I think we're in a we're at a point where the industry has to transition.

Speaker #1: And I think that gets—I think the two kind of get either pushed together, or maybe the DCI piece gets underappreciated. But that's certainly where, for us, we're seeing traction on both.

Speaker #2: You know, I I think you know, when we look at what we see on AI RAN. The spectral efficiency. By the way. We'll have spectral efficiency on our existing hardware.

Speaker #2: Thanks, Oliver. We'll take our next question from Richard Kramer from Arete. Richard, please go ahead.

Speaker #2: We'll have some improvements in software, but there'll be you know, order an order of magnitude below what we're talking about on AI RAN. But the second thing here is that when you look at leading edge silicon, you do the math on the cost of leading edge silicon.

Speaker #3: Thanks. Hey Justin, my first question for you is on the AI RAN transition. Your customer installed base runs on Nokia proprietary silicon. Do you see the industry, long term, shifting away from that proprietary silicon-based set of solutions?

Speaker #2: And then by the way, the supply constraints on leading edge silicon in my mind, this is a very clear you know, this is a very clear industry shift that has to happen on the baseband.

Speaker #3: And what are the implications for what is a 3 billion euro run rate of mobile R&D and mobile networks margins for that transition? Thanks.

Speaker #2: And and that is a shift to to general purpose silicon. And of course, you know, we you know, we we're partnered with NVIDIA in launching the the AI RAN solution.

Speaker #1: Yeah, hey Richard. So a couple of things on this. First of all, I've talked about this pretty openly. I think we're in a point where the industry has to transition.

Speaker #2: You know, there are other players out there with general purpose you know, base solutions that that are delivering virtualized RANs virtualized RAN stacks. So I don't think we're alone in this move.

Speaker #1: I think when we look at what we see on AI RAN and the spectral efficiency, by the way, we'll have spectral efficiency on our existing hardware.

Speaker #2: Fundamentally, as we think about the R&D in this space, this is the other thing I've touched on. You know, when you look at this industry, there's two there's two fundamental challenges in and certainly from 4G and 5G.

Speaker #1: We'll have some improvements in software, but there'll be an order of magnitude below what we're talking about on AI RAN. But the second thing here is that when you look at leading edge silicon, you do the math on the cost of leading edge silicon, and then by the way, the supply constraints on leading edge silicon in my mind, this is a very clear this is a very clear industry shift that has to happen on the baseband.

Speaker #2: One of them is that you know, the the cost of capital the return on invested capital in in you know, at an operator level and aggregate hasn't you know, hasn't delivered right in terms of the investment and certainly looking at 5G but also 4G.

Speaker #2: If you look at you look at it from a supplier perspective, you know, a technology provider like us, it also hasn't been acceptable on our side.

Speaker #1: And that is a shift to general purpose silicon. And of course, we're partnered with Nvidia in launching the AI RAN solution. There are other players out there with general purpose-based solutions that are delivering virtualized RANs, virtualized RAN stacks.

Speaker #2: And so I think we also have to look at how we you know, how we shift investment and generate a better. On invested capital.

Speaker #2: Getting out of purpose built silicon on the baseband is a step in that direction. And that's why we said that's the long-term direction. I I think it's incredibly compelling when you can also say to a customer, by the way, look at the the better efficiency you can get on your on your hardware, which means you're going to get a better return on that hardware investment.

Speaker #1: So I don't think we're alone in this move. Fundamentally, as we think about the R&D in this space, this is the other thing I've touched on.

Speaker #1: When you look at this industry, there's two fundamental challenges and certainly from 4G and 5G. One of them is that the cost of capital to return on invested capital in at an operator level and aggregate hasn't delivered, right, in terms of the investment and certainly looking at 5G, but also 4G.

Speaker #2: And then the last thing we're saying is, by the way, when we deliver the hardware, that's not the best performance you're going to get.

Speaker #2: We'll continue to provide performance enhancements. As an industry, we've always added features. But the fact that we're now adding performance capabilities in our software stack, we think is a huge advantage.

Speaker #2: And the final point I make I'll make is as we've talked about in the software stack, this is a single software stack. So we we've got capabilities to optimize it for different hardware, including our legacy stack and of course the NVIDIA GPUs.

Speaker #1: If you look at you look at it from a supplier perspective, a technology provider like us, it also hasn't been acceptable on our side.

Speaker #1: And so I think we also have to look at how we shift investment and generate a better return on invested capital. Getting out of purpose-built silicon on the baseband is a step in that direction.

Speaker #2: That are now you know, making they're now coming into our portfolio on the AI RAN platform. But it's a single software stack. So we're getting a tremendous amount of leverage out of that stack.

Speaker #1: And that's why we said that's the long-term direction. I think it's incredibly compelling when you can also say to a customer, by the way, look at the better efficiency you can get on your hardware, which means you're going to get a better return on that hardware investment.

Speaker #2: So this is right on right on path.

Speaker #5: Okay, thanks. And then a quick follow-up from Marco, if I may. You know, your concept about being above the midpoint of your full year profit guidance.

Speaker #1: And then the last thing we're saying is, by the way, when we deliver the hardware, that's not the best performance you're going to get.

Speaker #5: But having flattish profits in third quarter suggests you're going to more than double profits in Q4. Can you talk through the drivers of that, be it software revenue recognition, licensing, product deliveries, cost reductions?

Speaker #1: We'll continue to provide performance enhancements. As an industry, we've always added features. But the fact that we're now adding performance capabilities in our software stack, we think is a huge advantage.

Speaker #5: Especially given the the cash outflows for restructuring capex, working capital et cetera that we're seeing now and can expect in second half. Thanks.

Speaker #1: And the final point I'll make is as we've talked about in the software stack, this is a single software stack. So we've got capabilities to optimize it for different hardware, including our legacy stack and of course the Nvidia GPUs that are now making that are now coming into our portfolio on the AI RAN platform.

Speaker #2: Yeah, thank you. Yeah, I would say that if you look the normal seasonality that the industry has, specifically on a telecom customer base side, is usually very Q4 delivery heavy.

Speaker #1: But it's a single software stack, so we're getting a tremendous amount of leverage out of that stack. So this is right on that path.

Speaker #2: And that's why we've seen in the past years as well that that part of the industry usually generates the biggest profits and and and sales as well in quarter four.

Speaker #3: Okay, thanks. And then a quick follow-up from Marco, if I may. Your comments about being above the midpoint of your full-year profit guidance, but having flattish profits in third quarter suggests you're going to more than double profits in Q4.

Speaker #2: And now in addition to that, we see also increase in AI and cloud customer base that is also impacting the seasonality of of our operations and and also profit generation.

Speaker #3: Can you talk through the drivers of that—be it software revenue recognition, licensing, product deliveries, or cost reductions? Especially given the cash outflows for restructuring, CapEx, working capital, et cetera, that we're seeing now and can expect in the second half.

Speaker #2: What counts to restructuring that we we the program that we announced in '23 end of '23 that we will end in end of this year.

Speaker #3: Thanks.

Speaker #2: Yeah, thank you. Yeah, I would say that if you look the normal seasonality that the industry has, specifically on a telecom customer base side, is usually very Q4 delivery heavy.

Speaker #2: And we expect that we'll get those 1.2 billion accumulated accumulated gross cost savings just like we we said as well. And and and in addition to that, we we expect to to actually accelerate the synergy program that we we I mentioned earlier what comes to the the China company that we took over 100%.

Speaker #2: And that's why we've seen in the past years as well that that part of the industry usually generates the biggest profits and sales as well in Q4.

Speaker #2: And now, in addition to that, we also see an increase in AI and cloud customer base. That is also impacting the seasonality of our operations and profit generation.

Speaker #2: And and then also we had some additional voluntary based cost saving restructuring also in Europe. And those we will take this year as well.

Speaker #2: What comes to restructuring that we the program that we announced in '23, end of '23, that we will end in end of this year.

Speaker #2: But altogether, if you look at our cash position, we have very strong position. Now we had 2.8 billion net cash end of quarter two.

Speaker #2: And we expect that we'll get those 1.2 billion accumulated gross cost savings, just like we said as well. And in addition to that, we expect to actually accelerate the synergy program that we I mentioned earlier, what comes to the China company that we took over 100%.

Speaker #2: We had some inventory and working capital increase in in quarter two. To secure also deliveries going forward. And then of course accounts receivables follow normal sales pattern as well.

Speaker #2: But we believe also that by the end of. We have very good financial position and cash positions so I don't see any any issues there.

Speaker #2: And then, also, we had some additional voluntary-based cost-saving restructuring in Europe. We will take those this year as well. But altogether, if you look at our cash position, we have a very strong position.

Speaker #5: Thanks, Richard. We'll take our next question from Sandeep Deshpande from JP Morgan. Sandeep, go ahead.

Speaker #3: Hi, thanks for letting me on. I want to understand from your order intake in AI and cloud in the quarter.

Speaker #5: Sandeep, we can we can barely hear we're really struggling to hear you, Sandeep.

Speaker #3: Can you hear me? Can you hear me better now?

Speaker #2: Now we had 2.8 billion net cash end of quarter two. We had some inventory and working capital increase in quarter two. To secure also deliveries going forward.

Speaker #5: Just a little better.

Speaker #3: Yeah. So you have a very strong intake in AI and cloud in the quarter. How much I mean, last quarter you had said that the 1 billion euros of orders were an ongoing order intake even though you will have lumpiness in your orders.

Speaker #2: And then of course, accounts receivables follow normal sales pattern as well. But we believe also that by the end of the year, we have very good financial position and cash positions so I don't see any issues there.

Speaker #3: How much of this. 2.8 billion euros is an ongoing order intake would you characterize? And then secondly, regarding AI and cloud, how should we be looking at run rate on revenue in this business between optical and and IP routing?

Speaker #3: Thanks, Richard. We'll take our next question from Sandeep Deshpande from JP Morgan. Sandeep, go ahead.

Speaker #2: Sure. So on the first one, I think we've broken it out for you that, you know, what we saw in next 12 months and and and forward.

Speaker #4: Hi, thanks for letting me on. I want to understand your input on AI and cloud in the quarter.

Speaker #3: Sandeep, we can we can barely we're really struggling to hear you, Sandeep.

Speaker #2: And I'm and I'm not going to, you know, break it out any further in terms of or or try to try to estimate that for you.

Speaker #4: Can you hear me? Can you hear me better now?

Speaker #3: Just a little better.

Speaker #2: But it gives that should give you a good view on what's in, you know, what's in the coming four quarters and what's beyond that.

Speaker #4: Yeah. So very strong input in AI and cloud in the quarter. How much I mean, last quarter you had said that the 1 billion euros of orders were an ongoing order intake even though you will have lumpiness in your orders.

Speaker #2: And then in terms of the mix, I think I touched on this. I mean, you know, optical is growing a little bit faster this quarter than IP.

Speaker #2: But of course it's starting from a, you know, a healthier just a stronger position. IP were just, you know, as we said, we're we're just starting to ramp in design wins and deliver those.

Speaker #4: How much of this 2.8 billion euros is an ongoing order intake would you characterize? And then secondly, regarding AI and cloud, how should we be looking at a run rate on revenue in this business between optical and IP routing?

Speaker #2: We talked about that last quarter. So I'm I'm pleased with the the momentum and I think, you know, if you look at it from the other side, which is 100% year over year growth, I think we're set up for a very, you know, very good, you know, continued growth forecast from the AI and cloud segment.

Speaker #1: Sure. So on the first one, I think we've broken it out for you—that is, what we saw in the next 12 months and forward. And I'm not going to break it out any further in terms of, or try to estimate that for you.

Speaker #5: Thank you, Sandeep. Did you have a follow-up?

Speaker #3: No, I'm fine. Thank you.

Speaker #5: Thanks, Sandeep. We'll take our next question from Sebastian Stubowitz from Kepler Chevron. Sebastian, please go ahead.

Speaker #1: But it gives that should give you a good view on what's in what's in the coming four quarters and what's beyond that. And then in terms of the mix, I think I touched on this.

Speaker #4: Yeah, hello everyone. Thanks for taking my question. On AI RAN coming back, have you seen a specific commercial traction over the past few months?

Speaker #1: I mean, optical is growing a little bit faster this quarter than IP. But of course, it's starting from a healthier just a stronger position.

Speaker #4: I view being added any new customers trialing your solution. And you are targeting twice more spectral efficiency by 2028. What about the total cost of ownership of this solution?

Speaker #1: IP were just as we said, we're just starting to ramp in design wins and deliver those. We talked about that last quarter. So I'm pleased with the momentum.

Speaker #4: And next to the basement, do you plan to partner with NVIDIA on GPU for radios? How it will be mostly focused on the basement?

Speaker #1: And I think if you look at it from the other side, which is 100% year over year growth, I think we're set up for a very good continued growth forecast from the AI and cloud segment.

Speaker #4: Thank you.

Speaker #2: Okay. So so three questions. Let me let me hit them. First of all, I'll start actually with the the last one. So the announcement that we made last week was around AI RAN for baseband and the NVIDIA GPU solution going into our air scale platform.

Speaker #3: Thank you, Sandeep. Did you have a follow-up?

Speaker #4: No, I'm fine. Thank you.

Speaker #3: Thanks, Sandeep. We'll take our next question from Sebastian Stabovitz from Kepler Cheuvreux. Sebastian, please go ahead.

Speaker #2: Our future standalone platform and also having a cloud RAN, you know, common off-the-shelf server solution. So that's the that's the the current announcement. In terms of the spectral efficiency and TCO, as you as you probably know, that's a that that TCO ends up being a very customer specific discussion.

Speaker #5: Yeah, hello everyone. Thanks for taking my question. On AI RAN coming back, have you seen specific commercial traction over the past few months?

Speaker #5: I see you are adding new customers trialing your solution, and you are targeting twice the spectral efficiency by 2028. What about the total cost of ownership of this solution?

Speaker #2: But at the macro level, you know, hardware deployment with, you know, without with 100% spectral efficiency improvement, I think the math I think the math there speaks for itself in terms of the, you know, the value the value creation potential for the operator.

Speaker #5: And next to the basement, do you plan to partner with Nvidia on GPU for radios, or it will be mostly focused on the basement?

Speaker #5: Thank you.

Speaker #2: And the other key thing is that the software this is a software model. So the benefit for the operator is not just TCO, but it's also it's also a CAPEX to OPEX transition in terms of ongoing benefit without having to have hardware upgrades.

Speaker #1: Okay. So three questions. Let me hit them. First of all, I'll start actually with the last one. So the announcement that we made last week was around AI RAN for baseband and the Nvidia GPU solution going into our Airscale platform.

Speaker #2: So I think there's a tremendous amount of value when you look at it from from a life cycle standpoint. And then in terms of the the pilot deployments, you know, we've got we've announced 10 public customers on track for for later this year.

Speaker #1: Our future standalone platform. And also having a cloud RAN common off-the-shelf server solution. So that's the current announcement. In terms of the spectral efficiency and TCO, as you probably know, that's a TCO ends up being a very customer-specific discussion.

Speaker #2: There's there's there's many conversations going on about about this. We expect to start the deployment the pilots, you know, later this year, obviously expect that will continue into 27.

Speaker #1: But at the macro level, hardware deployment with 100% spectral efficiency improvement, I think the math I think the math there speaks for itself in terms of the value creation potential for the operator.

Speaker #2: And and and obviously as we make progress and we you know, we'll continue to share the progress publicly as we, you know, as we can on the progress we're making, the capabilities we're delivering.

Speaker #2: But it's more than just spectral efficiency. It's also a platform that's it's extensible. And we talked about this a little bit to bit technical, but you can add you can actually put your own applications and services in at the radio layer.

Speaker #1: And the other key thing is that this is a software model. So the benefit for the operator is not just TCO, but it's also a capex to opex transition in terms of ongoing benefit, without having to have hardware upgrades.

Speaker #2: And this allows some some new capabilities, which we think are going to be pretty attractive to a number of operators, things like sensing and and other applications.

Speaker #1: So I think there's a tremendous amount of value when you look at it from a lifecycle standpoint. And then in terms of the pilot deployments, we've got we've announced 10 public customers on track for later this year.

Speaker #5: Thanks, Sebastian. We'll take our next question from Rob Sanders from Deutsche Bank. Rob, please go ahead.

Speaker #1: There's many conversations going on about this. We expect to start the deployment the pilots later this year, obviously expect that will continue into 27.

Speaker #3: Yeah, hi. Thanks for taking my question. First question would just be about the Indian Fossified Fab RAN. Do you have line of sight to hitting best-in-class 6-inch yields next year?

Speaker #1: And obviously, as we make progress and we will continue to share the progress publicly as we can on the progress we're making, the capabilities we're delivering.

Speaker #3: Clearly coherent is already doing pretty well. Lamentum seems a bit behind. So where do you stand on that? And the second question would just be around AI RAN.

Speaker #3: If you look at the top three US operators, how many do you think internally have already gone past the go/no-go decision on whether to deploy AI RAN?

Speaker #1: But it's more than just spectral efficiency. It's also a platform that's extensible. And we talked about this a little bit—it's a bit technical—but you can actually put your own applications and services in at the radio layer.

Speaker #3: Thank you.

Speaker #2: Okay, got it, Rob. Thanks. So I I think obviously we have one operator today in the US. I'm going to start with the AI RAN one.

Speaker #1: And this allows some new capabilities, which we think are going to be pretty attractive to a number of operators, things like sensing and other applications.

Speaker #2: I'll come back to Indian Fossified. So on AI RAN, we have one operator in the US that's got our our our RAN deployed at scale.

Speaker #3: Thanks, Sebastian. We'll take our next question from Rob Saunders from Deutsche Bank. Rob, please go ahead.

Speaker #2: That's T-Mobile. They announced that they're, you know, they're going to be our lead our lead partner on on the pilot. So obviously we're working closely with them.

Speaker #4: Yeah, hi. Thanks for taking my question. My first question would just be about the Indian fossil-fab ramp. Do you have line of sight to hitting best-in-class 6-inch yields next year?

Speaker #2: I would assume that that would lead us to conclude that they're probably not past the go/no-go deployment path. On the others, I I think it's a it's a discussion, you know, that, you know, that obviously you know, we'll leave for them to assess.

Speaker #4: Clearly coherent is already doing pretty well. Lamentum seems a bit behind. So where do you stand on that? And the second question would just be around AI RAN.

Speaker #2: But you know, my my view here is that the GPU performance is compelling and it's particularly compelling in a business case where, you know, spectral efficiency matters, which is going to be more dense operations.

Speaker #4: If you look at the top three US operators, how many do you think internally have already gone past the go/no-go decision on whether to deploy AI RAN?

Speaker #4: Thank you.

Speaker #2: But you know, that that's obviously you know, they've got roadmaps and strategies probably better to ask them than than ask me. And then on the on the Indian Fossified RAN, what I would say is we've got yield targets that we've we've focused on, but you know, both yield and and volume targets we focused on through 2027 on the the fab.

Speaker #1: Okay, got it, Rob. Thanks. So I think obviously we have one operator today in the US. I'm going to start with the AI RAN one.

Speaker #1: I'll come back to Indian fossified. So on AI RAN, we have one operator in the US that's got our RAN deployed at scale. That's T-Mobile.

Speaker #1: They announced that they're they're going to be our lead partner on the pilot. So obviously we're working closely with them. I would assume that that would lead us to conclude that they're probably not past the go/no-deployment path.

Speaker #2: You know, my my view is while we're, you know, and you you rightly said, while the ecosystem is maturing and it's not just the two you mentioned, but also the Chinese manufacturers in this space, I I also believe this is a place where we're going to go through a significant amount of maturity and learning as we scale and scale yield.

Speaker #1: On the others, I think it's a discussion that obviously will leave for them to assess. But my view here is that the GPU performance is compelling and it's particularly compelling in a business case where spectral efficiency matters, which is going to be more dense operations.

Speaker #2: And and that's what I'm focused on with the team versus a specific target or or competitor reach. I think there's actually I think this is more about us learning and scaling and and making sure we can we can deliver on our our volume plans.

Speaker #2: And obviously our cost point.

Speaker #1: But that's obviously they've got roadmaps and strategies probably better to ask them than ask me. And then on the Indian fossified ramp, what I would say is we've got yield targets that we've focused on both yield and volume targets.

Speaker #5: Thanks, Rob. We'll take our next question from Artem Veletsky from SEB. Artem, please go ahead.

Speaker #4: Yes, good afternoon. And thank you for taking my question. Relating to ANI, could you maybe comment what type of order intake development you actually see outside of AI and cloud?

Speaker #1: We've focused on through 2027 on the fab. My view is while we're and you rightly said while the ecosystem is maturing and it's not just the two you mentioned, but also the Chinese manufacturers in this space, I also believe this is a place where we're going to go through a significant amount of maturity and learning as we scale and scale yield.

Speaker #4: So namely telcos and mission critical. So how we should think about revenue growth trajectory on this front, looking at this year and also next year.

Speaker #2: Yeah, thank you, Artem. Just like we we mentioned earlier as well, that we had a good good order intake development and and sales development in in also non-AI and cloud customer base.

Speaker #1: And that's what I'm focused on with the team versus a specific target or a competitor reach. I think there's actually I think this is more about us learning and scaling and making sure we can deliver on our volume plans.

Speaker #2: So telcos were investing more and this is also driving because of of their need need to invest in their networks to secure that they can deliver the demand that is coming from from AI and cloud and AI in general development.

Speaker #1: And obviously our cost point.

Speaker #3: Thanks, Rob. We'll take our next question from Artem Veletsky from SEB. Artem, please go ahead.

Speaker #5: Yes, good afternoon. And thank you for taking my question. Relating to ANI, could you maybe comment what type of order intake development you actually see outside of AI and clouds?

Speaker #5: So namely telcos and mission-critical. So how we should think about revenue growth trajectory on this front, looking at this year and also next year.

Speaker #2: And most likely this will happen broadly more broadly going forward as well because we believe that AI demand will continue the underlying demand will continue for longer longer period of time.

Speaker #1: Yeah, thank you, Artem. Just like we mentioned earlier as well, that we had a good order intake development and sales development in also non-AI cloud customer base.

Speaker #2: And and without a very good secure networks, it is very difficult to provide those improvements that that AI is actually providing. I don't know if you have something you want to add.

Speaker #1: So telcos were investing more and this is also driving because of their need to invest in their networks to secure that they can deliver the demand that is coming from AI and cloud and AI in general development.

Speaker #5: Yeah, no, I would say the only thing the only thing I would say, Artem, is if you looked at ANI specifically, the only headwind which we talked about last quarter is obviously on the on the customer premise equipment side of fixed networks where we're getting much more disciplined on margin.

Speaker #5: That creates a bit of a headwind when you look at ANI as a whole. Underneath that is is the momentum that Marco talked about.

Speaker #1: And most likely, this will happen more broadly going forward as well because we believe that AI demand will continue—the underlying demand will continue—for a longer period of time.

Speaker #5: And and IP and optical and also you know, healthy obviously a healthy growth in in in optical line terminals as well. Which is the network side of the of the fixed networks business.

Speaker #5: Thanks, Artem. We'll squeeze one last question in from Felix Hendrickson from Nordea. Felix, please go ahead.

Speaker #1: And without very good secure networks, it is very difficult to provide those improvements that AI is actually providing. I don't know if you have something you want to add.

Speaker #4: Hi.

Speaker #5: Go ahead, Felix.

Speaker #2: Yeah, no, I would say the only thing I would say, Artem, is if you looked at ANI specifically, the only headwind, which we talked about last quarter, is obviously on the customer premise equipment side of fixed networks where we're getting much more disciplined on margin.

Speaker #4: Can you hear me now?

Speaker #5: Yes, go ahead.

Speaker #4: Okay, perfect. Yeah, thanks for excusing me in. So in the report, you say that the IP networks product mix had an adverse impact on the ANI gross margin.

Speaker #4: Was there something specific to the quarter or does this sort of imply that the margin profile in data center switching products at this scale is sort of diluted to your ANI gross margins?

Speaker #2: That creates a bit of a headwind when you look at ANI as a whole. Underneath that is the momentum that Marco talked about in IP and optical, and also, obviously, healthy growth in optical line terminals as well.

Speaker #4: Thank you.

Speaker #2: Yeah, I think this is largely tied to what we said at the CMD, you know, we'd see some gross margin headwinds as we ramp products in this space.

Speaker #2: Which is the network side of the fixed networks business?

Speaker #3: Thanks, Artem. We'll squeeze one last question in from Felix Hendrickson from Nordea. Felix, please go ahead.

Speaker #2: And this is this is what we're seeing you know, what I'm what I'm focused on is it's you know, the the the business is fundamentally a creative to gross profit.

Speaker #5: Hi.

Speaker #2: And and ultimately to our operating margins. And then as we talked about earlier in one of the answering one of the questions, making sure we're we're streamlining the you know, the company and driving efficiency so that we unlock operating leverage.

Speaker #3: Go ahead, Felix. Yes, go ahead.

Speaker #5: Okay, perfect. Yeah, thanks for excusing me. So in the report, you say that the IP networks product mix had an adverse impact on the ANI gross margin.

Speaker #2: And that's that's our focus. I mean, obviously we've got to show that, but but when I think about what you know, where Marco and I are focused, we're we're very focused on that side right now.

Speaker #5: Was this something specific to the quarter, or does this sort of imply that the margin profile in data center switching products at this scale is somewhat dilutive to your ANI gross margins?

Speaker #2: And and I think you'll you'll see the margin you'll see the margin as we mature in this space continue to improve.

Speaker #5: Thanks, Felix. Ladies and gentlemen, that 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.

Speaker #5: Thank you.

Speaker #1: Yeah, I think this is largely tied to what we said at the CMD. We'd see some gross margin headwinds as we ramp products in this space.

Speaker #5: Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks and the risk factor section of our annual report on Form 20F.

Speaker #1: And this is what we're seeing what I'm focused on is it's the business is fundamentally a creative to gross profit. And ultimately to our operating margins.

Speaker #5: Which is available on our investor relations website. Thank you for joining us today.

Speaker #1: And then as we talked about earlier in one of the answering one of the questions, making sure we're streamlining the company and driving efficiency so that we unlock operating leverage.

Speaker #1: And that's our focus. I mean, obviously we've got to show that. But when I think about where Marco and I are focused, we're very focused on that side right now.

Speaker #1: And I think you'll see the margin you'll see the margin as we mature in this space continue to improve.

Speaker #3: Thanks, Felix. Ladies and gentlemen, that concludes today's call. I would like to remind you that during the call today, we made a number of forward-looking statements that involve risks and uncertainties.

Speaker #3: 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 #3: 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 #3: Thank you for joining us today.