Nokia Oyj (NYSE:NOK) Q3 2023 Earnings Call Transcript

Nokia Oyj (NYSE:NOK) Q3 2023 Earnings Call Transcript October 19, 2023

Nokia Oyj misses on earnings expectations. Reported EPS is $0.05 EPS, expectations were $0.09.

David Mulholland: Good morning, ladies and gentlemen. Welcome to Nokia’s Third Quarter 2023 Results Call. I’m David Mulholland, Head of Nokia Investor Relations. And today, with me here in Espoo is Pekka Lundmark, our President and CEO; along with Marco Wiren, our CFO. 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. Actual results may therefore differ materially from the results we currently expect. Results that could cause – factors that could cause such differences can be both external as well as internal operating factors. 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.

Within today’s presentation, references to growth rates will mostly be on a constant currency basis and where we refer to margins, it will be based on our comparable reporting. Please note that our Q3 report and the presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and a reconciliation between the two. In terms of the agenda for today’s call, Pekka will give a quick overview of some of the announcements we’ve made this morning along with our financial progress in the quarter. Marco will then go into a bit more detail on some of the key factors influencing our financial performance before Pekka gives a brief conclusion and we move to Q&A. With that, let me hand over to Pekka.

Pekka Lundmark: Thank you, David and thank you all for joining us today. Before we talk about our financial performance, I wanted to actually start and explain some other announcements we have made today because we are taking decisive action on three levels, strategic, operational and costs. We will accelerate our strategy execution by providing our four business groups with increased operational autonomy and agility. This will enable them to better address opportunities in their distinctive markets. They will be empowered to faster diversify beyond service providers, build new ecosystem partnerships, implement new business models and invest for technology leadership. We are also streamlining our operating model. We had in 2021 created four P&L responsible business groups, structured around unique customer offerings, but supported by a shared sales organization.

We will now embed the sales teams into the business group. So the new model is the one that you will see here on the right hand side on the slide. These dedicated sales teams with a strong product and customer connection will enable business groups to better seize growth opportunities and diversify into enterprise web scale and government sectors. This change will bring highly empowered teams in front of customers that are able to make quicker decisions based on their needs. The company will also move to a leaner corporate center with strategic oversight and guidelines, for instance, for financial performance, portfolio development and compliance. We will continue our strong commitment to long-term research through Nokia Bell Labs. In the face of a more challenging market environment, we will reduce our cost base to secure our profitability.

We are moving quickly to lower our cost base on a gross basis by €800 million to €1.2 billion by the end of 2026 assuming on target variable pay in both periods. Nokia expects to act quickly on the program with at least €400 million of in-year savings in 2024 and a further €300 million in ’25. The program is expected to result in a 72,000 to 77,000 employee organization instead of the approximately 86,000 employees Nokia has today. Overall, this represents a 10% to 15% reduction in personnel expenses. The exact scale of the program will depend on the evolution of the market demand in the coming years. We do expect net savings, but the magnitude will depend on how inflation develops. If we now turn to our financial performance in Q3.

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Q&A Session

We saw an increased impact on our business from the macroeconomic challenges, which are pressuring operator spending, and that’s resulted in a 15% year-on-year decline in net sales. Gross margin at 39.2% declined only slightly versus the previous year, and I’m happy to see a sequential improvement in gross margin in Mobile Networks. However, it is during such challenging times that the business proves its resilience, and that is exactly what we see when we look at the operating margin, which was 8.5% for the quarter. Network Infrastructure sales declined by 14% with most business lines declining with the exception of Optical Networks. IP Network sales declined by 24%, reflecting weakness in North America as customers continue to evaluate the spending as well as small declines in other regions.

The 19% decline in Fixed Networks was broad-based, exacerbated by tough comparisons to the quarter year – corresponding quarter a year ago. Fixed Networks was also impacted by customer spending in America as well as some inventory digestion. There was a small decline of 5% in Submarine Networks, which related to credit timing. The growth in Optical Networks of 4% was primarily driven by India and showed the continuing momentum and customer engagement with our PSE-V solutions. Pleasingly, gross margin in Network Infrastructure improved year-over-year while operating margin was somewhat resilient at 9.5% [ph] a decline of 80 basis points. In Mobile Networks, we saw the regional trends of the first half continuing in Q3. North America sales were impacted by the challenging macro environment and as customers continued to digest inventories.

India grew significantly year-over-year, but the pace of deployment has slowed significantly compared to H1. There were declines in most other regions with the exception of Middle East and Africa, which had modest growth. Gross margin declined year-on-year, reflecting the regional mix, but we did see sequential improvement and expect further improvement into Q4. Operating margin also declined to a lesser extent as it benefited from positive impacts of other operating income. As you can see in the bottom left of the slide, over the last 18 months, we have gained over 3 points of market share in the overall RAN market, excluding China, a real testament to the improved competitiveness of our products. Cloud and Network Services delivered a more stable performance in Q3 with a small top line decline.

We are happy to see that the growth in Enterprise Solutions continued but was offset by small declines elsewhere. Operating margin in Cloud and Network Services expanded by 290 basis points, somewhat also benefiting from other operating income. If we take a moment to understand the evolution of the digital ecosystem today, we have visualized on the slide – as we have visualized on the slide that you can see on the screen. This slide brings together the ecosystem of CSPs hyperscalers, enterprises and developers working together to bring new capabilities to market to enable Industry 4.0, the Metaverse and many other new types of value. Our network monetization platform, which delivers network as code to the ecosystem launched in September, brings the ecosystem together through API – to APIs to enable seamless connectivity, whereby enabling new use cases to help CSPs and enterprises take advantage of the opportunities created.

We have created this platform, which once again, we call Network as Code organically, bringing deep knowledge and understanding of networks, enterprises and the developer community, which puts us firmly at the forefront to help operators monetize their advanced 4G and 5G assets using network APIs. We want to empower a new wave of enterprise and industrial applications that can utilize the network in a much more programmable way. We have seen significant interest from operators globally and have already signed four strategic agreements. Raghav will go into more detail on the work we are doing in this space at our investor event in December. Nokia Technologies declined 14% as a result of the same two items that have impacted prior quarters in 2023.