Q2 2019 Earnings Call
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Hi, guys call, which conference is your next June .
Nokia earnings call.
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Actually attractive enterprise Adjacencies I'm pleased to say our progress with very good in the second quarter.
Even if you adjust for some project timing that benefited Q2.
Nokia software had a solid quarter growing year on year sales by 8% in constant currency and posting a double digit percentage point increase in its operating margin.
As you will recall, we have two different parts of Nokia software applications and core.
Apps is delivering solid progress based on the improvements we have made to develop our products on a cloud native common software foundation and our investments in creating a strong standalone software sales organization.
As core is now fully integrated into Nokia software. It is in the midst of a portfolio modernization and sales transformation similar to that of the apps business.
Our approach to cloud native is fundamentally different from and well ahead of what others in our sector are doing.
The demands of Fiveg and digital services are such that you cannot just evolved old applications, rather we have rewritten from scratch, our integrated software suite for Fiveg to be cloud native multi network and multi vendor. In addition, it is optimized for the leading cloud platforms, including Amazon, Microsoft and Google.
Based on the quality firework, our software portfolio of getting considerable external recognition, putting us in a strong position to gain share in the future.
Turning to enterprise, we are continuing to target double digit growth for full year 2019, despite the 6% year on year constant currency growth rate in Q2, which was driven by expected project timing challenges.
We also expanded sales through new enterprise customers with 32 additions in the second quarter, one area, where we see opportunity continuing to grow is private wireless where we have one more than 80 deals.
Private wireless is increasingly seen as a foundational industry for auto capability with demand growing from many different kinds of customers.
Companies in verticals like utilities transportation and logistics as well as the public sector need large scale field networks railways need future communication systems to replace aging GSM, our technology factories mines airports and other enterprises need high performance wireless campus networks.
Overall, the need is large and diverse and it cannot be met with a box cell approach with these enterprises. After all are not like our service provider customers networking is not their core business and they are looking for a partner who can deliver a full end to end turnkey solution.
Nokia is an ideal such partner with the right solutions that span our full portfolio.
You can see that in work that we are already doing for example energy company electro in Brazil is using our full suite of customer premises equipment radio packet core and management products, along with services to help them rollout private LTE for automating and managing their electrical grid.
Other examples include Sempra renewables, which is using our technology to connect wind farms and target a 90% cost reduction and our work with Telefonica, Peru to deliver a private wireless network from Minera Las Bambas, one of the world's largest copper mines.
The third point I want to make is about cash.
Yes, our cash performance was challenging in the quarter no denial about that but there is some context that must be understood.
In particular, we expected the majority of what occurred given roughly 900 billion euros use for our 2018 annual employee incentives quarterly dividend payment and restructuring. We also had some expected inventory builds in order to deliver on customer demand for Fiveg network deployments.
Then we did have unexpected issues, including some normal business that came very late in the quarter and that we could not immediately convert to cash we expect that conversion to happen in second half.
Collection of a large receivable from a state owned operator was also delayed although we expect payments will start to flow later this year.
Despite that context, however, I remain unhappy with our overall working capital performance, we have a clear view of what needs to be done to get back on track and have put in place a more structured program to improve results.
The last point I want to make is about our expectations for 2018 as you will have seen today, we have maintained our guidance for a full year non IFRS operating margin of 9% to 12% non IFRS diluted earnings per share of 25 to 29 Euro cents.
And for slightly positive free cash.
In Q2, we made progress in delivering on our dad projects, but at the same time risks remain.
Those risks include the execution demand with a very large second half of the year with particular intensity in the fourth quarter trade related uncertainty.
Challenges in China related to a clear preference for local vendors and pressure on profitability that could cause us to limit our participation in that market.
And the potential of an overall increase in competitive pressure.
At this point, we expect that the pattern for the full year will reflect slower first and third quarters and more robust second and fourth quarters.
Then just a brief comment on our 700 million Euro cost savings program, which is well on track.
In addition to taking the committed costs out our focus is on becoming a better more productive company for the long term.
Before handing the call to Christian just to comment on fixed networks, which you will have seen had an 11% year on year constant currency revenue declined in the quarter fixtures long been a disciplined organization that delivered consistently good results. Today. However, it is being impacted by the shift in spending away from traditional access product areas as well as some tough competition, we see future opportunities and fixed given our leadership in next generation technologies, such as fixed wireless access where we are getting excellent traction in the market and have won deals with customers like Optus Telia and rain.
In addition, we continue to be well positioned in both copper and fiber we have more than 20 deployments of next generation passive optical networking and the largest deployment of the future focused corporate technology known as GTAT fast these trends give us confidence in the future, but the reality is that a turnaround will take some time in that business with that let me turn the call over to Christian.
Christian.
Thank you Rajiv today I will take you through a number of topics, including financial performance of Nokia technologies and group common and other as well as group level results I would then like to focus on our cash flow in Q2, and finally I will briefly touch upon our guidance starting with Nokia technologies net sales in Q2 totaled 383 million euros, and an increase of 6% year on year and 4% on a constant currency basis. This solid risk results primarily.
Reflected higher onetime and recurring licensing net sales, partly offset by the sale of our digital health business in May 2018.
In Q2, 2019, we had 30 million euro or one time net sales compared to 10 million Euro in Q2 2018 adjusting for this recurring net sales increased 2% year on year.
Recurring licensing net sales were up in Q2, as we signed an agreement with a new licensee as expected our annualized licensing run rate in Q2 was approximately 1.4 billion euros.
From a profitability perspective operating margin in Nokia technologies continued to show solid improvement operating margin in Q2 was 85% compared to 81% in the year ago quarter. This improvement was primarily due to the absence of costs related to digital helps health, which we divest divested as I said earlier last year.
Moving to group common and other in Q2 net sales decreased 6% year on year on a constant currency basis.
Primarily driven by radio frequency systems, which had a tough comparison as the year ago quarter benefited from a large customer rollout. This was partly offset by growth in ASEAN as new projects starting started to ramp in the quarter.
Group common and other operating loss worsened the year on year, driven primarily by lower gross profit as well as higher costs related to longer term I'd investments needed to drive digitalization in the future. These costs negatively impacted both R&D and SGN eight costs consistent with what I communicated last quarter.
Profitability was also impacted by a net negative.
Fluctuation in other income and expenses due to lower gains from Nokia's venture fund investments.
We continue to expect group common and other operating expenses to be approximately 20 million euros per quarter higher in 2018 due to the investments we're making in digitalization. Please take this into account in your modeling.
Moving on to Nokia level results group level No no first operating margin was 7.9% in Q2 and largely reflected higher net sales as well as higher gross profit across networks Nokia's software and Nokia technologies looking at no nine for us financial income and expenses in Q2, our year on year results were essentially flat within this interest expenses increased driven by higher costs related to sales of receivables. This was offset by an improvement in our FX result, we have now increased our financial income and expense outlook assumption.
To be an expense of approximately 350 million euro for 2019 and over the longer term. This expectation is primarily due to higher costs related to sale of receivables and to a lesser extent higher interest interest expense bookings relating to uncertain and disputed tax positions.
I will now for us tax rate came in at 28% in Q2, 2019, and we continue to expect our full year non IFRS tax rate to be approximately 28% for 2019 at a Nokia level, our non non our first diluted EPS was five euro cents in Q2 up from three euros sense in the year ago quarter. Overall. This performance was primarily driven by gross profit improvements across networks, Nokia's software and Nokia technologies.
Turning next to our cash performance in Q2, which as Rajiv mentioned is a major area of focus for us on a sequential basis Nokia's net cash decreased by approximately 1.5 billion Euro two a quarter end balance of approximately 500 million euro.
Approximately 900 million euro of the sequential decline was primarily driven by three cash outflows that were in line with our expectations. The first one was the payment of 2018 performance related incentives to employees. The second was.
The second was the payment of the first quarterly dividend.
Installment and the third was restructuring and associated cash outflows.
In addition, approximately 350 million euro or the decline in net cash was temporary in nature and is expected to reverse in the second half of 2019. The temporary increase was mainly related to accounts receivable.
Our free cash flow was negative 1 billion Euro in Q2, primarily driven by our networking capital performance, excluding restructuring cash outflows, which totaled 110 million Euro net working capital generated a decrease in net cash of 1.2 billion Euro within this liability is decreased 830 million Euro a change that was primarily related to the incentive payments, which we flagged last four quarter and that I mentioned earlier as well as decrease in accounts payable that related to lower spend in the quarter.
Receivables increased by 260 million Euro primarily related to the earlier mentioned temporary increases of approximately 350 million euros inventories increased 150 million euros sequentially. As we continued to ensure sufficient flexibility to deliver higher levels of equipment sales, particularly related to fiveg as well as an increase in work in progress inventory is related to certain large fiveg deployments.
Additionally, cash taxes were higher than expected in Q2 totaling 160 million Euro. This was due to an increase in taxes withheld at source by certain customers that said, we have maintained our outlook assumption for cash taxes and as we expect this impact to normalize in the future.
Looking forward, we expect approximately 350 million euro the temporary cash headwind headwinds related to the receivables in Q2 to reverse in the second half mainly in Q3.
As we said last quarter, we also expect inventory levels to significantly improve in the second half of 2019 as large five.
Gee deployments and acceptances accelerate accelerate meaningfully.
We also announced today that the board of directors resolved to distribute the second installment of the 2018 dividend, which will be five euro cents per share.
With a record date of July .
Thirtyth the payment of the second installment of the dividend.
In addition to withholding taxes related to the first installment are expected to total approximately 300 million euro and will be paid out in Q3.
While the first half has been challenging from a cash perspective, we are confident that we are well positioned to drive a stronger improvement in the second half of the year.
Finally, turning to our guidance, we have today reiterated our full year Nokia level guidance.
After an up and after an anticipated weaker first half of the year. We continue to expect to see a more robust second half although risks still remain as Rajiv said, we now expect 2009, we now expect that 2019, we will have.
Seasonality will be seasonally characterized by a particularly weak first quarter, a strong second quarter and expected soft third quarter, and an expected, particularly strong fourth quarter.
This view continues to be based on our expectations for accelerating fiveg deployments and improving cost efficiency.
We have also updated updated our view on the primary addressable market. Following our first half 2019 on a constant currency basis, we now expect our primary addressable market to grow slightly in 2019.
And for the growth to continue in 2020.
This is in comparison with our prior expectation for 19 to be flattish and for 2022 grow we continue to expect to out perform our primary addressable market in both 19 and 20.
Lastly, as I mentioned earlier, while I'm not pleased with our free cash flow performance in the first half I am confident that we will be able to turn this around and we continue to target slightly positive free cash flow for the full year with that I will hand over to Matt for QNX.
Thank you Christian for the Q and a session. Please limit yourself to one question only as a courtesy to everyone else in the queue.
Nicole Please go ahead.
Thank you.
We will now begin the question and answer session.
You ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
To answer your question. Please press Star then two.
So one question.
Our first question comes from David Mulholland.
Please go ahead.
Hi, Thanks for taking the questions just firstly on gross margins obviously, good progress in Q2 compared to what we saw in Q1 I think at the time of Q1 you called.
For different issues that had impacted the margin in the quarter can you, possibly talk about how much of that has nine normalized still remains as a headwind and in that context, how you see things in this softness is both a topline and margin comment into Q3.
I think we did see strong performance in that in Q2 when it comes to.
Operational execution, we also saw.
Higher level of software sales.
In the in the quarter when we started the WRECO not recognize also also fiveg.
In addition to that clearly strong growth in.
In routing and and in the in the strategically important areas of of software and enterprise, Yes software to some extent benefited from from some timing benefits.
And then and that might then have an impact due to Q2 Q3.
But other than that I think it's it's more.
Revenue base than than margin based when we talk about that.
The seasonal pattern for for the for the year.
Thank you David I call next question. Please.
Our next question comes from Tanya.
Credit Suisse. Please go ahead.
Hi, Thanks, just when you talked about the 200 million of revenues that you couldn't execute in Q1 can you help us give some color around that how much of that we've already seen in Q2, how much.
We expect to see in the second half and relating to that like.
Most of those issues around customer acceptances are there now behind us given that you've started to see.
My fight you deliveries, taking place and you talk about Fiveg acceptance, probably accelerating in the second half. Thank you.
Yeah, I think we started to recognize fiveg revenue in the in the quarter I think we can say that approximately half of that that through 200 years, Don and the rest is due to come which means that customer acceptances has.
Started to come in and then also the Fiveg software is now in general availability, which means that customer teams can deploy and sell that.
In the in the normal course so.
I think this is a good good starting place from that from where to move into the second half.
Thank you Charles Nicole we'll take our next question. Please.
Our next question comes from Robert Sanders Deutsche Bank. Please go ahead.
Yes, hi, good afternoon.
Average maybe a question just on what Youre seeing around.
From European operators in particular around continuity of supply concerns from one of your major competitors.
Your your Swedish competitor seems rather skeptical of dealing with these companies. These operators given they want some commitments and they think that lease operators are looking for free options. How do you see do you do you want to engage with these these operators.
Would you like to see how it how youre going again, how are you going to go forward.
With dealing with these companies.
And would you commit resource behind it without any upfront kind of spend from those guys.
Thanks, Robert So.
If an operator in Europe or elsewhere, because whatever concerned wants to.
Go to another vendor for Fiveg and of course. This is this is all non standalone like all non Standalone fiveg bills are taking place, which means the new therefore de layer and if that means it's a wholesale swap.
We would not like to do that so we have other technology alternatives.
The favorite one I have is.
We will introduce it 10 layer of Nokia Fourg, LTE and use that as the base connection layer to go to.
To go to Fiveg.
There are other opportunities.
If your spectrum is delayed but you might as well look at Standalone architecture, which is coming next year as a way to go to Fiveg.
Because swaps are not helpful for for anyone.
In the very corner cases sort of exceptional circumstances, where there is a case where full swap needs to take place of course, we would need proper form commitments.
Eric will have to make sense over the mid to long term otherwise our pricing discipline and the culture. We have does not allow us to go down that track.
Thank you Rob Nichol next question please.
Our next question comes from Paul Silverstein of Cowen. Please go ahead.
Thank you appreciate you taking the question with respect to the exceptional royalty stream.
You saw in the quarter, you mentioned share gain you also mentioned, which would put you rollout.
What.
Given the secular nature routing, where you're not talking about a growth market.
What is your outlook for the sustainability of strong growth there.
Thanks, Paul in routing we are benefiting for a couple maybe three things number one we have technology leadership right. We are the only ones shipping 16 nanometer product.
This next generation FP for like I said, we have a 100 new projects of which some 70 are our new footprint for us.
40 of them, we are taking new share, where we didn't sort of habit, we expanded our share and 30 of them is completely displacing a competitor. So it's doing well in the marketplace, primarily due to technology leadership.
Ben This end to end Fiveg. The thing I mentioned that you if you're an operator in fact in enterprise. If you want to first upgrade your transport layer and then go and spend the money on radio you don't want to have to Capex speaks the same track that's been if benefiting us in routing and of course, we're also getting a benefit from the enterprise business.
I think we have a we have an opportunity to continue this technology leadership.
For a while you have to remember, though that at some point, we're going to have a tough compare because we've had growth now for another quarter than Q4 last year was very strong.
Thank you Paul MACOM next question please.
Our next question comes from Richard Kramer.
Research. Please go ahead.
Thank you very much Rajiv I'd like to focus on your comment on China, where you mentioned a clear preference for local vendors and obviously you haven't JV there given the trade tensions should we expect that the Chinese government when exercised its option to exit that JV with Nokia and how do you think about the China market going forward since the volumes. There are so critical to the overall industry. Obviously profitability is much lower than you would find in some other markets. Thanks.
Thanks, Richard So back to the first question.
At this point, we don't see an indication that.
JV exit win or the potential of such things happened would be related in any way to the trade tensions.
On the second point, how do we see the China market.
Given the low profit share of the market. We don't think just having that volume is necessarily.
Advantageous from a scale perspective, so we're not going to.
If we take a less bullish market doesn't impact our ability to make.
Gross margins globally, so we'll be prudent in that market.
We will adjust in areas, where we have strength, where you know where we can play a larger role in China. So think about transport optical routing for web scale players for enterprise players private wireless for railways and energy companies et cetera, and then perhaps also in the core business, where our joint venture actually helps us.
Getting the advantage and in radio where price erosion tends to be the highest we will limit our participation in terms of what we think is prudent.
Thank you Richard Nicole we are ready for our next question. Please.
Our next question comes from Sandy.
JP Morgan. Please go ahead.
Yes.
Hi, we're letting me on.
Just a quick question when we look at your revenue growth in the quarter I mean your base you've got good revenue growth in wireless and extremely strong revenue growth in optical and in routing.
At the same time your gross margin is down year on year, which seems to indicate that the gross margin in wireless may have declined year on year.
Can we understand what is exactly happening there given the kind of strength, you're seeing in the routing and optical businesses.
Do you need to do more restructuring in terms of the gross margin in your core wireless business or there is something else, which is impacting the mix in the gross margin.
Thanks Sandeep.
So there were two reasons first services mix as its typical in early stages.
Of a cycle, we see a greater proportion of network deployment services, which carry lower gross margin second the fourg to Fiveg transition. So as also was the case in the early cycle of Fourg. It will be natural for Fiveg gross margin to be lower at the beginning but to expand over time with scale due to improved product costs and of course as well as scale.
Overall, yes, we are cutting costs. If you remember our 700 million cost savings program part of that is cost of sales.
Areas, such as global services, which will help us.
Overtime.
Thank you Sandy Nicole next question please.
Our next question comes from Andrew Gardiner.
Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking the question one again on the margin front. So two parts first on the gross margin just to clarify on one of the earlier responses.
Earlier in the year, you had spoken quite clearly have sequential improvement from the low point in first quarter.
In the second quarter again, and then again in the fourth quarter I just want to make sure that that that's still what you're effectively saying that we will we'll see a further uptick in gross margin in the third and then again in the fourth quarter and then on the Opex front with the cost saving plan.
It looks like you did a particularly good job in the second quarter a lot of cost did come out if I sort of sustain that kind of opex through the back half of the year. It looks like you might even be slightly ahead of the planned for.
The 2019 goal of about $150 million of cost saving is that is that correct and so should we see a steady trend of opex through the back half of the year. Thank you.
Yeah, I think on on your on your first first point. It is fair to say that there is a reason why we.
While we think that the the second half will be stronger than the first half as we discussed 90 days ago.
It is fair to say that now with the strong performance in the in the.
The transition from from two to three is maybe different than than what we what we anticipated earlier.
You know some of that is topline maybe some of that this is also also margin and thus.
It goes back to your question I think when it comes to the cost side, we are tracking well.
On the on the plan.
We'll continue to have a head down and execute on that and then we'll see where we come out at the at the end of the year and of course.
One should not expect that Q3 is going to be anything like you won.
Okay. Thank you Andrew and Nicole next question. Please.
Yes, however on an excel Goldman Sachs.
I Wonder if you could talk a bit about your latest thoughts on the strength of your product offering in wireless relative to your peers.
First of all it looks like you've now navigated. This software is that needed to be resolved wondered if you could just clarify on that and secondly.
In parallel how confident are you on chipset development being on track.
From a roadmap perspective to Fiveg.
Thanks, Alex.
So we were a few weeks delayed and Thats why we can get that revenue recognition in Q1 now.
GAAP general availability, we're getting customer acceptances and important indicator, we have nine lives commercial networks, our conversion rate is a fantastic fourg to fiveg.
With the 45 teams we have.
And then.
Because these networks are non Standalone architecture, it really does matter how good your fourg areas that gives us the ability to use that installed base to sort of convert all the customers to fiveg and so this Rootmetrics example, I gave in my prepared remarks, it's really important it's the second time, we won.
The best network performance across all of these 125 markets.
And so there is still some work to do.
But it's you know.
It's not in the area of stability over the network our network performance generally perhaps in some features which have to come.
Later in the year, but we will be there for the most important features of the customers need such as dynamic spectrum sharing et cetera that will be on time, we already have it in parts of the network between Fourg and Fiveg that will be on time and the customers needed on the chipset development on on Fiveg again, it's it's on track for both radio and and base band you remember that Weve shock is a family of products and they're starting to come out during 19, and 20 and they will also give us product cost advantages Wendy scaling get volume.
Thank you Alex Nicole next question please.
Our next question comes from Alexander of attack of Society.
Please go ahead.
Yes, good afternoon, and thank you for taking my question Im just wondering if you could comment.
A little bit on gross margin development.
From Q1 into Q2 and networks on products and on services separately, if my impression that services improved more than than product and with that in mind could you also comment on any pricing pressure you see in your product categories in networks. Thanks.
Maybe I'll start and maybe Rajiv you want to talk about the pricing. So we did see an improvement in in the execution of the of services.
On the other hand, as we discussed there was also more services content, which then how to how to kind of negative business mix.
Impact.
The fact that we we started to recognize revenue for for Fiveg also meant that there was a.
A more normal software.
Content in now.
In in in the networks margin.
Then clearly the strong growth of optical.
Benefitted from a from a business.
Business mix mix point of view, so so in that in that sense you had some some puts and takes and an overall kind of strong performance both on the product as well as on the services side and on pricing Alexander we are.
Lower change in competitive intensity, so it's neutral.
A bit concerned that there was talk of.
You know those wanting to take some strategic contracts and that could drive some competitive pressure.
Haven't seen it yet but that is a profitable we're on the alert and fourth we have to reinforce our pricing discipline at a time like that can be.
Very clear that that will hold China, we will see it being aggressive as I said earlier, but.
You know nothing meaningful exchange yet on pricing.
Thank you Alex Nicole next question please.
Our next question comes from Stephan Slowinski contain BNP Paribas. Please go ahead.
I guess sorry, thanks for taking my question just to come back on the the cash position and cash flow.
Youve typically had a healthy net cash position and we've seen that fall too.
About 0.5 billion euros I understand you expect improvements in the second half of the year, but how important is it for you as a company to remain a net cash position or would you be okay. If you went into a net debt position. Thank you.
I think that a strong balance sheet. This this is important for the for the company that's why.
The.
Cash is and cash and cash flow is a focus area during the second half.
As I said in my prepared remarks, we do see the the LIBOR do.
To pull to get to the the slightly.
You know positive free cash flow for the for the full year. It is about reversing the temporary headwinds that we had.
Mainly in receivables it is about getting the reduction of inventory related to fiveg to start happening during the second half and then continue to work that as we go into into 2020 and that.
By doing that will that will come out.
At the at the end of the year at a at a better net cash position than the 500 million that we hold at the moment.
Thank you Stefan Nicole next question please.
Our next question comes from Sebastian Tab.
Kepler. Please go ahead.
Yes, Thanks for taking my question and one of your U.S. competitor in HP, I decided to embark into a kind of vertical integration with the accretion or for I guess here is this something that could make sense for Nokia tweeting would definitely.
From a user will do things could be good.
Vintage in the long term in IP and optics.
Thanks.
Sebastian So just any color at a high level, we believe in custom silicon as a way to go because we think we can.
I have a better cost of the product or we could put an acceleration and innovate. So that is true for mobile networks with reef shark family of chipsets, which grew four f. before.
In terms of routing it's true for PSV three in the optical business.
Then when it comes to your specific question on vertical integration, we also see IP and optical come closer together right, we see the need for photonics.
In that optical layer.
And and we have competencies, there and we see that.
Also important over the long term.
The benefit we have is that we have bought IP and optical right. So that can be an end to end play that will become increasingly important. So I'm pleased that that's getting recognized in the sector.
Thank you Sebastian Nicole next question please.
Our next question comes from Simon Leopold of Raymond James. Please go ahead.
Thanks for taking the question I wanted to see if you could maybe update us on how your views have evolved on the timing of Fiveg rollouts globally, and specifically I'm I'm seeking are the prospects of China, possibly slipping in time and 18 T. Commenting just yesterday that they would have national coverage complete by the first half of 20, which seems fast and even Japan and Korea updates as well it sounds like Rias moved nicely.
Appreciate how things have moved thank you.
Thanks, Simon So I'll try to give you a quick around the 12 round the world trip on this the first let's start with North America. So.
We'll see.
The opposite of launched we'll do more the experience of good they want to expand.
For more coverage.
Whether operators that have done millimeter wave hotspot deployment, they will expand doors as well.
We see the demand for low band build that's the only way to get National coverage Socgen point, you make about 18 to you or others. So they will be low band build.
And you know.
Hi Bank build which is this millimeter wave there is no good bad except for sprint, but that mid band will become available in the next.
A couple of years and so that will be if you like the third wave.
And so thats a U.S. and then you look at Korea, we experienced a very good there are some 1.5 million subscribers that are being put on the opposite of the trying to price fiveg at a premium they are in fact, our pricing five European relative fourg.
Then you have the middle Eastern markets, Saudi Arabia, UAE, Qatar and they're also going to be early lead markets. We see that momentum building up from end of 19 going into 2020, then the nordics.
It's one that can be accretive for going to fiveg will expand their revenues potentially so they will do that and then we see the next.
The last of Nordics.
When we're looking at UK, and Italy, where the auctions that taken place Germany will come next so next year going to you will move from lead markets expanding to do more coverage and capacity and the new markets coming on.
Thank you Simon of those top on the call next question. Please.
Our next question comes from.
Carson Donny.
Citigroup. Please go ahead.
Good afternoon on on the touch and learning from Citi and thanks for taking my question.
I just wanted to go back to the revised market outlook in the press release today.
Could you maybe just.
To better understand the drivers of this improved outlook across the various segments is it's the only mobile and also to do with the other segments that you operate in and on that note. When you talk about growth continuing into 2020 do see good accelerating into 2020 . Thank you.
It is clear that we've we've seen kind of strength in the market.
In the in the first half, which gives us confidence that the full year will be stronger than the earlier flattish.
Expectations that we we expectation that we had.
You know some of that is on the back of the.
Positive flight Fiveg response in markets such as.
Cory and and end use and then you know as Rajiv said.
In the end of course.
How much the growth.
Potentially accelerates or not depends a bit on how strong 19 in top end up ends up being because again I think the fiveg cycle doesn't.
Look at the calendar years now there is there is momentum and some of that will be deployed at.
Thank you Nicole next question please.
Our next question.
Follow up from David Holland.
Please go ahead.
Hi, Thanks for taking just wanted to follow up on the kind of Q1 to Q2 progress I think in Q1 on gross margins you call that service cost and contracts for cost overrun.
Has that fully resolved itself my or is that still a bit of a dry dock in Q2 on the underlying margins.
I think we had a you know improved turbotax execution in the.
In the second quarter.
However, as I said.
At the same time.
A deployment services was a bigger.
A portion of the overall mix and that then had a negative margin.
The impact, but when it comes to services execution you know the team has responded really well.
And we do see we did see improvement in that in Q Q2, and as Rajiv said in one of these.
I'm, sorry can I, just clarify as well just from the Q3 gross margin trend because there's been a couple of mixed comments I think it's been clear that topline you expect growth will slow a bit but in gross margins, where we stay at a similar level is there room for some improvement or could it soften a little bit from where we are in Q2.
Or just overall is not a big movement in the context of what we've seen so far.
So we are we are no longer in the business of getting a quarterly.
It's something we we can no longer repeat that's a result of the strong performance in the in the second quarter.
Nicole My understanding is that we have a one final follow up question in the queue is that right.
Next question comes from Richard Kramer.
Yes, thanks, very much just just in given the extensive restructuring Rajiv and Christian that you guys have gone through could you give us a sense of the road map going forward for.
Yes, Dan and RFS.
And whether they are now fully fully part of the family and will stay there and Rajiv if you want to give us better sense of what the roadmap forward for the fixed businesses. It's obviously very strategic for a lot of operators and you have a lot of customer commitment.
I know you were trying to break into the cable market with that business might be can you give us a sense of whether we should expect further restructuring or structural changes in the group or weekend sort of rest easy. Then this is the structure. We can look forward to in 2020 and beyond.
Okay.
Thanks, Richard so.
But now I think that we have said that.
We will be holding onto HSN. So I think we should assume that by lot. This structure is.
Is going to remain for the foreseeable future on fixed access.
As we move from copper to fiber. This is what we're seeing right now we think the operators expand on Fiveg and so.
They're not yet spending 40 on on the fiber builds the EG in Europe .
But I see a possible acceleration of Fiveg as the next sorry of fiber as the next growth driver, meaning fiber to the X micro to the most economical point.
Most importantly, I think the single growth driver I would say Nokia has and the fixed access business is fixed wireless.
Right. So by that I mean, the customer premises equipment. The antenna business that we have there. We've got three meaningful deals now that are public daily rain up to us and we are seeing some.
Fairly significant interest and traction in the market. So I think it's going through copper to fiber to do with wireless access should that move to fiber fixed wireless access not take place then they'll have to put more copper by email vectoring and 25 gig in ECS, TSS upon and et cetera et cetera.
And the SMS fast and he has an RFS like I said I think we are going to keep that and thats the structure.
Thank you Richard and thank you for thank you everyone for your questions today I'd now like to turn the call back to reduce thank you everyone for the questions. Thank you, Matt and Christian to briefly summarize I'm largely pleased with where Nokia landed in Q2.
It was a strong quarter from both a sales and profitability perspective, many of our businesses performed very well.
Gaining share in improving the competitiveness of the products and services.
Yes, our cash performance was a challenge in the quarter, but as Christian and I shared earlier, we have measures in place to sharpen our execution and we expect meaningful improvement in the second half.
While we face some risks have plenty of hard work to do and need to execute superbly in the second half we are making considerable progress and continue to see a path to meet the commitments. We made for the year would that Matt back over to you.
Thank you ladies and gentlemen, this concludes our conference call I would like to remind you that during the conference call. Today, we have made a number of forward looking statements that involve risks and uncertainties actual results may differ differ materially from the results currently expected factors that could cause such differences can be both external such as general economic and industry conditions as well as internal operating factors represented by these in more detail on pages 16 through 75 by 2018 annual report on form 20-F, our financial report for Q2 issued today as well as our other filings with the U.S.
Exchange Commission. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.