Edited Transcript of NOKIA.HE earnings conference call or presentation 25-Jul-19 12:00pm GMT

Our fixed networks affair is undergoing a transition and that caused some challenges because well. I will also carry experience ought this end the end of my remarks. can appendix ought these issues, I used to alike ought cover 4 other topics today. 5G, both from a Nokia and a impartial perspective; how the virtuous revolve of investment that I've mentioned ago is benefiting Nokia; encounter can on the execution of our strategy; and an update above our 2019 expectations.

Let me begin with 5G, where we abstract ought acquire new deals and improve our manufacture competitiveness. We now gorge 45 commercial 5G deals and are operational can 9 alive 5G networks. We also started ought identify 5G revenue can the second quarter, including can North America and expect that recognition ought abstract ought build can the second half of the year. because we sell 5G Radio ought customers, we are taking the opportunity ought sell other things because well. Pleasingly, almost half of our 5G Radio wins involve additional Nokia products, demonstrating the might of our end-to-end portfolio. because you know, can earlier calls, I commented above our 5G Radio roadmaps and still our encounter can is both hasty and meaningful, we however gorge career ought do. Customers can guide markets alike the United States, Korea and Japan are moving fast, and we are working evening and engagement ought exist there because them. still we abstract ought lessen R&D can legacy areas, our commitment ought 5G is clear. Our end-to-end R&D capacity is larger than our European competitor, giving us the goods ought arrest up where we are after and farther distance ourselves where we are already ahead. 4G sphere action is one of those areas where we are ahead. This matters because during 5G non standalone, the variant that is being rolled out today, you want a vigorous 4G layer ought deliver tall performance. Nokia has that performance. because the first half of 2019, RootMetrics, an independent network testing company, once again gave us the highest scores because 4G network action along the 125 U.S. markets it tracks. This is no impartial a theoretical benefit. It is something that is helping us acquire can 5G. ought date, vulgar of the recent Nokia 4G/LTE customers who gorge decided above their 5G NR supplier gorge selected Nokia. can appendix ought this excellent conversion rate, we expect ought acquire part with some of these customers, improving our 5G footprint compared ought 4G. This encounter can is impartial the start, because we gorge above 340 customers ought assistance transition ought 5G above the 10- ought 20-year investment cycle. From a broader impartial perspective, it is sweep that 5G is moving strong beyond impartial capacity focused hotspots and campus networks because enterprises. Yes, those will exist significant because both our operator and enterprise customers, besides nationwide coverage will also come. And you will yell on 5G deployments that use low, mid- and high-band spectrum. can Korea, because example, 5G that blankets the complete people will exist a reality identical soon. can the United States, ought furnish another example, it will accept a bit longer ought acquire ought complete coverage because the mid-band spectrum that will complement the cheap and tall bands already allocated has no still been made available, besides there is no doubt that it will come. still there's a lot of 5G tongue today and no lack of activity, some of you can memorize the 5G maturity index that we commissioned from Analysys Mason and that I shared can Mobile dirt assembly earlier this year. That learn made 2 things identical clear. First, that many countries will encounter hasty ought deploy 5G. We are seeing that process underway today. Second, that wider adoption used to accept longer. Most operators expect it ought accept around 4 or 5 years after that initial rollout ought acquire 5G deployed ought 75% of their customers. We're also seeing this play out today, which is a good thing. It gives vendors time ought exist ready ought deploy can vast volumes and ensures that a firm overall ecosystem will exist fully can place. hence ought recap here, Nokia has a hard site can the early stages of 5G with our acquire appraise and deployments, our 4G action and deep guest foundation unity us belief around the opportunities ought carry and given the expected timing of big scale deployments because 5G moves beyond the guide countries, Nokia will exist ready ought hind our customers can scale.

Switching ought the second point I expect ought create today. can earlier calls, I've talked around what we are calling the virtuous revolve of investment because operators and enterprises encounter ought upgrade their network ought accept complete amuse of 5G. That revolve is identical much underway today. We yell on guest spending now ought exist ready because 5G, besides also ought escape investments can both radio and expend peaking can the too time. This benefits both our IP routing and optical networks businesses. ought unity a bit more detail above both, our IP routing sales were up a stellar 18% year-on-year can successive currency. Much of this was driven by our highly competitive routing portfolio and the fact that our FP4-based products are now shipping can volume. We now gorge more than 100 FP4 projects and more than 70 of those denote new footprint because us. can about 30 cases, we gorge displaced a opponent can some of the world's largest operators, news heart providers and enterprises, beautiful impressive. above the optical side, successive money sales were up again, rising 9% year-over-year. With our new PSE-3 based products starting ought steamer can Q3, we will also, once again, leapfrog the competition.

Turning ought our strategic efforts ought build a vigorous scalable software affair and amplify into structurally attractive enterprise adjacencies, I'm pleased ought speak our encounter can was identical good can the second quarter. even if you adapt because some design timing that benefited Q2, Nokia Software had a hard quarter, growing year-on-year sales by 8% can successive money and posting a double-digit percent point amplify can its operating margin. because you will recall, we gorge 2 various parts of Nokia Software, Applications and Core. Apps is delivering hard encounter can based above the improvements we gorge made ought ripen our products above a cloud inhabitant usual software foundation and our investments can creating a vigorous standalone software sales organization. because heart is now fully integrated into Nokia Software, it is can the heart of a portfolio modernization and sales transformation alike ought that of the Apps business. Our manner ought cloud inhabitant is fundamentally various from and strong ahead of what others can our sector are doing. The demands of 5G and digital services are such that you cannot impartial evolve vulgar applications. Rather, we gorge rewritten from scratch our integrated software apartment because 5G ought exist cloud native, multi-network and multi-vendor. can addition, it is optimized because the chief cloud platforms, including Amazon, Microsoft and Google. Based above the feature of our work, our software portfolio is getting considerable outside recognition, putting us can a vigorous site ought acquire part can the future.

Turning ought enterprise. We are continuing ought purpose double-digit growth because complete year 2019, in spite of the 6% year-on-year successive money growth appraise can Q2, which was driven by expected design timing challenges. We also expanded sales ought new enterprise customers with 32 additions can the second quarter. One region where we yell on opportunity continuing ought carry is personal wireless, where we gorge won more than 80 deals. personal wireless is increasingly seen because a foundational industry 4.0 endow with lack growing from many various kinds of customers. Companies can verticals alike utilities, traffic and logistics also because the public sector want large-scale sphere networks. Railways want future traffic systems ought replace aging GSM-R technology, factories, mines, airports and other enterprises want high-performance wireless campus networks. Overall, the want is big and diverse, and it cannot exist met with a box sell approach. These enterprises, after all, are no alike our service provider customers. Networking is no their heart business, and they are looking because a companion who can deliver a complete end-to-end turnkey solution. Nokia is an perfect such companion with the accurate solutions that span our complete portfolio. You can yell on that can career that we're already doing. because example, people company, Elektro, can Brazil is using our complete apartment of guest premises equipment, radio, pack heart and management products, along with services ought assistance them catalog out personal LTE because automating and managing their electric grid. Other examples involve Sempra Renewables, which is using our technique ought unite wind farms and purpose a 90% charge reduction. And our career with Telefónica Peru ought deliver a personal wireless network because Minera Las Bambas, one of the world's largest copper mines.

The third point I expect ought create is around cash. Yes, our money action was challenging can the quarter. no denial around that, besides there is some context that have ought exist understood. can particular, we expected the majority of what occurred, given around EUR 900 million used because our 2018 annual employee incentives, quarterly dividend payment and restructuring. We also had some expected inventory builds can order ought deliver above guest lack because 5G network deployments. Then we did gorge unexpected issues, including some natural affair that came identical late can the district and that we could no directly vary ought cash. We expect that conversion ought happen can second half. Collection of a big receivable from a state-owned operator was also delayed, though we expect payments ought begin ought flow afterward this year. in spite of that context, however, I linger miserable with our overall working leading performance. We gorge a sweep meaning of what needs ought exist done ought acquire experience above chase and gorge lay can lay a more structured program ought improve results.

The persist point I expect ought create is around our expectations because 2019. because you will gorge seen today, we gorge maintained our guidance because a complete year non-IFRS operating margin of 9% ought 12%, non-IFRS diluted earnings per part of EUR 0.25 ought EUR 0.29 and because slightly certain free money flow. can Q2, we made encounter can on delivering above our targets, besides can the too time, risks remain. Those risks involve the execution demands of a identical big second half of the year with special intensity can the fourth quarter, trade-related uncertainty, challenges can China related ought a sweep alternative because local vendors and stress above profitability that could effect us ought bounds our participation can that impartial and the latent of an overall amplify can competitive pressure. can this point, we expect that the table because the complete year will muse slower first and third apartment and more noise second and fourth quarters. Then impartial a concise comment above our EUR 700 million charge savings program, which is strong above track. can appendix ought taking the committed costs out, our concentrate is above becoming a better, more productive company because the expectation term.

Before handing the yell ought Kristian, impartial a comment above fixed networks, which you will gorge seen had an 11% year-on-year successive money revenue refuse can the quarter. Fixed has expectation been a disciplined organization that delivered consistently good results. Today, however, it is being impacted by the shift can spending away from traditional access manufacture areas also because some well competition. We yell on future opportunities can fixed, given our leadership can next-generation technologies, such because fixed wireless access, where we are getting excellent traction can the impartial and gorge won deals with customers alike Optus, Telia and RAN. can addition, we abstract ought exist strong positioned can both copper and fiber. We gorge more than 20 deployments of next-generation passive optical networking and the largest deployment of the future-focused corporate technique known because G.fast. These trends unity us belief can the future, besides the reality is that a turnaround will accept some time can that business.

With that, holiday me reform the yell above ought Kristian. Kristian?

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Kristian Pullola, Nokia company - CFO [4]

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Thank you, Rajeev. Today, I will accept you over a quantity of topics including economical action of Nokia Technologies and people usual and other also because people even results. I used to then alike ought concentrate above our money flow can Q2. And finally, I will concise -- affect upon our guidance.

Starting with Nokia Technologies. Net sales can Q2 totaled EUR 383 million, an amplify of 6% year-on-year and 4% above a successive money basis. This hard arise largely reflected higher onetime and recurring licensing net sales, partly offset by the sale of our Digital Health affair can in 2018. can Q2 2019, we had EUR 30 million of onetime net sales compared ought EUR 10 million can Q2 2018. Adjusting because this, recurring net sales increased 2% year-on-year. Recurring licensing net sales were up can Q2 because we signed an assembly with a new licensee because expected. Our annualized licensing brook appraise can Q2 was about EUR 1.4 billion. From a profitability perspective, operating margin can Nokia Technologies continued ought appear hard improvement. Operating margin can Q2 was 85% compared ought 81% can the year-ago quarter. This improvement was largely due ought the want of costs related ought digital health, which we divested, because I said earlier persist year.

Moving ought people usual and other can Q2. Net sales decreased 6% year-on-year above a successive money basis, largely driven by radio frequency systems, which had a well comparison because the year-ago district benefited from a big guest rollout. This was partly offset by growth can ASN because new projects started ought ramp can the quarter. people usual and other operating loss worsened year-on-year, driven largely by lower complete use also because higher costs related ought longer-term [IP] investments needed ought motivate digitalization can the future. These costs negatively impacted both R&D and SG&A, compatible with what I communicated persist quarter. Profitability was also impacted by a net negative fluctuation can other allowance and expenses due ought lower gains from Nokia's hazard fund investments. We abstract ought expect people usual and other operating expenses ought exist about EUR 20 million per district higher can 2018 due ought the investments we are making can digitalization. amuse accept this into interpret can your modeling.

Moving above ought Nokia even results. people even non-IFRS operating margin was 7.9% can Q2 and mainly reflected higher net sales also because higher complete use along networks, Nokia Software and Nokia Technologies. Looking can non-IFRS economical allowance and expenses can Q2, our year-on-year results were essentially flat. Within this, advantage expenses increased, driven by higher costs related ought sales of receivables. This was offset by an improvement can our FX result. We gorge now increased our economical allowance and fare expectation hypothesis ought exist an fare of about EUR 350 million because 2019 and above the longer term. This expectation is largely due ought higher costs related ought sale of receivables and, ought a lesser extent, higher advantage fare bookings relating ought ambigous and disputed tax positions. Our non-IFRS tax appraise came can on 28% can Q2 2019, and we abstract ought expect our complete year non-IFRS tax appraise ought exist about 28% because 2019. can a Nokia level, our non-IFRS diluted EPS was EUR 0.05 can Q2, up from EUR 0.03 can the year-ago quarter. Overall, this action was largely driven by complete use improvements along networks, Nokia Software and Nokia Technologies.

Turning next ought our money action can Q2, which because Rajeev mentioned, is a chief region of concentrate because us. above a sequential basis, Nokia's net money decreased by about EUR 1.5 billion ought a quarter-end remains of about EUR 500 million. about EUR 900 million of the sequential refuse was largely driven by 3 money outflows that were can queue with our expectations. The first one was the payment of 2018 performance-related incentives ought employees. The second was the payment of the first quarterly dividend installment, and the third was restructuring and associated money outflows. can addition, about EUR 350 million of the refuse can net money was momentary can character and is expected ought contrary can the second half of 2019. The momentary amplify was largely related ought accounts receivable. Our free money flow was negative EUR 1 billion can Q2, largely driven by our net working leading performance. Excluding restructuring money outflows, which totaled EUR 110 million, net working leading generated a lessen can net money of EUR 1.2 billion. Within this, liabilities decreased EUR 830 million, a vary that was largely related ought the incentive payments, which we flagged persist district and that I mentioned earlier, also because lessen can accounts payable that related ought lower expend can the quarter. Receivables increased by EUR 260 million, largely related ought the earlier mentioned momentary increases of about EUR 350 million. Inventories increased EUR 150 million sequentially, because we abstract ought guarantee sufficient flexibility ought deliver higher levels of equipment sales, especially related ought 5G also because an amplify can work-in-progress inventories related ought certain big 5G deployments. Additionally, money taxes were higher than expected can Q2, totaling EUR 160 million. This was due ought an amplify can taxes withheld can source by certain customers. That said, we gorge maintained our expectation hypothesis because money taxes and because we expect this shock ought normalize can the future. Looking forward, we expect about EUR 350 million of momentary money headwinds related ought the receivables can Q2 ought contrary can the second half, largely can Q3. because we said persist quarter, we also expect inventory levels ought significantly improve can the second half of 2019 because big 5G deployments and acceptances hasten meaningfully. We also announced today that the Board of Directors resolved ought segregate the second installment of the 2018 dividend, which will exist EUR 0.05 per part with a record engagement of July 30. The payment of the second installment of the dividend can appendix ought withholding taxes related ought the first installment are expected ought complete about EUR 300 million and will exist paid out can Q3. still the first half has been challenging from a money perspective, we are confident that we are strong positioned ought motivate a stronger improvement can the second half of the year.

Finally, turning ought our guidance. We gorge today reiterated our complete year Nokia-level guidance. after an anticipated weaker first half of the year, we abstract ought expect ought yell on a more noise second half, though risks however remain, because Rajeev said. We now expect that 2019 will gorge seasonally -- will exist seasonally characterized by a especially weak first quarter, a vigorous second quarter, an expected gentle third district and an expected especially vigorous fourth quarter. This meaning continues ought exist based above our expectations because accelerating 5G deployments and improving charge efficiency. We gorge also updated our meaning above the leading addressable market, following our first half 2019. above a successive money basis, we now expect our leading addressable impartial ought carry slightly can 2019 and because the growth ought abstract can 2020. This is can comparison with our previous expectation because '19 ought exist flattish and because 2020 ought grow. We abstract ought expect ought outperform our leading addressable impartial can both '19 and '20.

Lastly, because I mentioned earlier, still I'm no pleased with our free money flow action can the first half, I am confident that we will exist capable ought reform this around, and we abstract ought purpose slightly certain free money flow because the complete year.

With that, I will hand above ought Matt because Q&A.

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Matt Shimao, Nokia company - head of IR [5]

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Thank you, Kristian. because the Q&A session, amuse bounds yourself ought one question only, because a courtesy ought everyone else can the queue. Nicole, amuse encounter can ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Mulholland of UBS.

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David Terence Mulholland, UBS Investment Bank, investigation division - Director and Equity investigation Analys