Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Nokia Oyj (NOK, Financial) announced the planned acquisition of Infinera, which is expected to significantly increase the scale and profitability of its optical networks business.
- The company saw an improvement in order intake trends in Q2, with orders growing year on year, particularly in network infrastructure.
- Nokia Oyj (NOK) achieved a strong quarter of free cash flow with approximately EUR400 million in Q2.
- The company has actioned EUR400 million of run rate savings under its cost savings program, targeting EUR800 million to EUR1.2 billion in gross savings by 2026.
- Nokia Oyj (NOK) maintained its full-year outlook, tracking towards the midpoint or slightly below the midpoint of its comparable operating profit guidance of EUR2.3 billion to EUR2.9 billion.
Negative Points
- Nokia Oyj (NOK) experienced an 18% decline in its top line year-on-year, with three-quarters of the decline driven by India.
- The operating margin at 9.5% was 190 basis points below the prior year, negatively impacted by the decrease in top line.
- Sales in network infrastructure declined by 11%, with declines across all three business lines.
- The company revised its net sales planning assumption down from prior plus 2% to 8% growth to now minus 2% to plus 3%.
- Cloud and network services business declined 16% year on year, impacted by the challenging environment and the disposal of certain platform businesses.
Q & A Highlights
Q: Can you explain the expected steep recovery in Network Infrastructure (NI) EBIT margins in Q4?
A: Pekka Lundmark, President and CEO: We expect a very strong Q4, primarily driven by leverage from the sales volume we anticipate in the quarter. The Q3 margin will balance a weaker mobile networks margin without the benefit of the accelerated revenue recognition from the AT&T deal resolution.
Q: What is driving the better-than-normal seasonal behavior in the second half?
A: Pekka Lundmark, President and CEO: The comparables get significantly easier because last year was an exception with a strong beginning and weak end. This year, we expect the reverse. We have had three quarters of strong order intake, building order backlog, and we expect this momentum to continue in Q3.
Q: What is driving the expected 50% growth in Cloud and Network Services (CNS) from Q2 to Q4?
A: Pekka Lundmark, President and CEO: The seasonality in CNS this year will be similar to previous years, with the full-year result made during Q4. This is supported by deal momentum, particularly in core networks in Europe, and the consolidation of the core network market.
Q: Can you provide more details on the AT&T contract resolution and its impact?
A: Marco Wiren, CFO: The EUR150 million was an acceleration of revenue recognition due to the contract resolution. We will continue to deliver services and software upgrades until the end of 2025. This year will be approximately at the same level as last year, with a significant drop next year and another drop in 2026, but not to zero.
Q: How do you see the opportunity from the German government's action against Chinese vendors?
A: Pekka Lundmark, President and CEO: The mobile core part is clear, but the RAN part has some ambiguity. We need more information to make a definitive assessment. The market share of Chinese players in mobile core has been limited, so the impact is not huge.
Q: What is the progress on diversifying into enterprise and hyperscale markets?
A: Pekka Lundmark, President and CEO: Enterprise net sales were 11.6% of group net sales in Q2. The Infinera acquisition is targeted to accelerate our webscale business, especially the data center market, which is an attractive growth market.
Q: What is the impact of the cost-saving program on revenue decline?
A: Pekka Lundmark, President and CEO: The revenue decline is not related to the operational model change or downsizing. It is primarily due to market conditions, particularly the normalization of 5G deployments in India.
Q: How do you plan to manage the cost-saving program given the slower market recovery?
A: Pekka Lundmark, President and CEO: We have accelerated the program and reduced headcount faster than expected. We are targeting 72,000 to 77,000 employees by the end of 2026. We are prepared to adjust based on market recovery and our market share development.
Q: What is your strategy for improving gross margins and operating margins?
A: Pekka Lundmark, President and CEO: We need to move more value to software, cloud, and software-as-a-service models. Stronger silicon capabilities and reducing dependency on large CSP projects will also help improve margins.
Q: What is the progress on non-smartphone IPR deals and their impact on revenue?
A: Marco Wiren, CFO: We signed the first video streaming deal in Q2, which is a promising area. The run rate for new growth areas was EUR150 million in December, and we aim to continue gaining traction in these areas.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
