Moday file

So here is an update on Nokia from its presentation with Citigroup this morning. Pekka Lundmark is NOK's CEO and explained that NOK reports in euros not dollars. 

Pekka Lundmark

Our view on 2021 in terms of mobile networks, volumes has not changed dramatically. We have been talking about the so-called headwinds in the North American market, both in terms of market share and also marginal – actually pricing development. They are still there. The good thing is that we have been able to mitigate some of those through our progress in other parts of the world, but those headwinds specific to North America, they are still there. And that then feeds into the overall expectation for 2021.

Amit Harchandani

Noted. And we'll certainly dig into some of the regional dynamics later in the session. Another topic, staying with mobile networks, where there I say, the market's been positively surprised has been in terms of your competitiveness and your product roadmap, help us understand what's coming down the pipes over the next 12 months. How do you perceive your competitiveness, not just in terms of functionality, but also in terms of cost structure?

Pekka Lundmark

We have made a lot of progress over the past 12 months on the product competitiveness in mobile networks. We had a major product launch as you may recall in June this year where we published or released our next-generation AirScale platform, which includes massive MIMO, antennas and remote radio heads. That's now a portfolio that has 32 TRx massive MIMO antenna, 64 TRx massive MIMO antennas, eight D8R remote radio heads, which have really, really competitive bandwidth management. We are talking about the platform that has 400 megahertz instantaneous bandwidth and 200 megahertz of occupied bandwidth. This all comes in a pretty compact package that weighs only 17 kilograms, which is the lightest on the market.

This gives excellent features for the whole platform for frequency management, especially in the very popular 3GPP frequency band N78, which is 3.4 to 3.8 gigahertz. And all this comes with 240 watts of RF output power, excellent feedback from customers. And here, we are now seeing the results of what we've been talking about for quite some time that we have been, mobile networks in [indiscernible] business, we have increased our R&D capacity. On top of that, we have increased our R&D productivity.

Now we are seeing results, but this launch was not only about radios. It was also about baseband. And we have now launched the world's most integrated 5G and singular and baseband which compared to the earlier generation that we had has eight times more capacity and it can reduce power consumption by up to 75%, which has then a direct connection to the sustainability agenda, also that we were talking about earlier. This is all powered by the Nokia ReefShark SoC technology that we've been talking a lot about. And this again, shows that the SoC program is delivering.

Another highlight of this launch is that this platform that we are now starting to deliver is O-RAN ready. So to the extent our customers bought O-RAN, we are ready to deliver that. And this really means that we believe that we are going to keep the promise that we made already about a year ago. By the end of this year, we will have for the launch parts kind of closed the gap to the main competitors on the market. So I'm really, really optimistic about this chase in mobile networks at the moment.

Amit Harchandani

Thank you, Pekka. Several interesting points in your response, and I've already had a couple of questions coming in from the audience listening in on this. Firstly, maybe for some of those who were less tech-savvy in the audience could you simplistically explain based on some of the portfolio characteristics that you've talked about, does it allow you to target a wider say opportunity or a wider customer base? Does it allow you to target more swap out opportunities? Are there more greenfield opportunities? Help us understand what in simplistic terms does this portfolio allow you to do in terms of what you can address?

Pekka Lundmark

All of those examples that you mentioned are relevant. So I was talking about IBW and OBW. So very quickly, what do those things mean in practice? So instantaneous bandwidth sets the frequency boundaries within which the radio is able to operate. In our case, as I said, it's 400 megahertz, which is exactly this 3 to 4 – 3.4 to 3.8 gigahertz bandwidth that this radio can take care of. Then the other part, which is the OBW, occupied bandwidth, that's the sum of the active bandwidths that one radio can serve at the same time. Both of these are extremely competitive team.  What this means in practice from operators or customers point of view is that they get more with the bandwidth investment that they have made. They are able to provide a faster troop with more capacity on the same bandwidth and extremely important, especially (in) markets where operators have invested a lot of money on frequency bands like in North America.

Then the baseband part, it is now the first time when we deliver a common baseband for 5G and 4G and actually for the whole Single RAN, which means that operators who are building 5G, they can install the same baseband for their old radios, 4G radios, even 3G radios and 5G radios, which of course is extremely important for cost efficiency point of view. And this is also, as I said, an extremely kind of tightly packaged solution. It is very small and efficient in power consumption, which is extremely important for operators because power consumption is for most operators one of the largest cost items that they are having in their P&L.

Amit Harchandani

Noted, Pekka. And the other quick question, which has comment is – you commented about your portfolio being Open RAN ready. Could you elaborate on that please? And is that a differentiator versus competition?

Pekka Lundmark

Well, competition, of course, needs to speak for themselves and there has been a lot of discussions as you know about Open RAN. It’s very important to remember that what Open RAN is and what it is not. Open RAN, O-RAN is an interface between the baseband and radio parts of the base station. Operators are running it, driving it, because they expect that to increase competition. It’ll be interesting to see that when and how that will happen, because it does not actually reduce anyone’s development cost. It is still the same baseband and the same radio that you need to develop. And this is pretty expensive development.

So it remains to be seen what will happen to the competitive dynamics. We have decided to support it, because for principle reasons, we want to support open interfaces. And our conclusion is that if Open RAN is to come, it’ll come with or without us. So we had decided that it’s much better that we are actively supporting it. We want to be on that train when it leaves the station. But then we do not actually believe that Open RAN will be a big needle over on the market in the short to medium-term, because there’s also a lot of complexity in it.

3GPP has defined thousands of features that somebody needs to take care of that trends and works in different supplier combinations across this interface. And this will take some time before it matures. And again, as we have seen so far Open RAN has not taken any major market share. It has been mostly trials. And when you look at different market analytics firms Delora, for example, they expect that the O-RAN growth as percentage of the total market will actually be quite slow. But nevertheless, we are ready if our customers want O-RAN, we are ready to support them.

Amit Harchandani

Thank you, Pekka. I guess moving on to network infrastructure now and your fixed networks business, that’s enjoyed robust growth in the first half. Is this a case of demand being pulled forward? How are customers thinking about fixed over the next 12 months?

Pekka Lundmark

Yes, we had excellent growth in network infrastructure in the first half of the year. Actually, I would say that we would have even been able to grow faster if there would be more components available on the market. There are some customers who because of the component shortages are now placing orders for the whole of 2022. Some customer even want to discuss outlook for 2023, but this is not, of course driving the sales, the top line that we are reporting. So we had excellent top line on top of that customers are actually currently willing to increase the longer-term visibility.

The overall market demand for network infrastructure is robust. And that applies actually to all four segments inside network infrastructure, IP Routing, Optical Networks, Fixed Networks and Submarine Networks. All of these are benefiting from the investments into new broadband access being fixed or mobile. The network infrastructure business also benefits from the 5G investments, because backhauling of base stations of course is a big investment into the fixed point of the network as well. So overall outlook for network infrastructure is pretty solid from demand point of view and once again, if there were more components available on the market, we would probably have been able to grow faster than we did in H1.

Amit Harchandani

Thank you, Pekka. And actually I wanted to maybe follow up with a couple of questions on the network infrastructure business. So you talked about the overall demand and you touched upon submarine, clearly submarines grown even faster than fixed. And there have been historically some question marks on submarine, but does this demand for submarine. Do you see that continuing into next year or is that just an uplift for this year?

Pekka Lundmark

The demand seems to be continuing. It is fairly cyclical business. This is to be noted. It has always been cyclical and now we are enjoying a strong cycle. But the new thing here, which is driving this business is really investments by webscalers, who are building their own submarine cables to connect the different continents. And this is of course on this scale, something that we have not seen before. So pretty strong situation there, but again it is a cyclical business.

Amit Harchandani

Thank you. And maybe the last bit within Network Infra, but talking of another part, which is seen as a combination of cyclical and secular, which is the optical networks business. How do you break down the demand there? And I guess in particular, how do things change once a PSE-V starts coming through?

Pekka Lundmark

PSE-V is of course, one very important step in the technology development that we have already started our first deliveries there. So we believe that we are in a good position. The cyclicality of this business is a bit difficult to assess at this time. Yes, right now the demand is strong. I believe that this will be connected to the potential. I guess word supercycle would be perhaps a bit too ambitious, but we’ve been talking quite a lot about this that when you think about things like 5G, that it seems currently to us that market will behave a little bit differently than 4G that we will reach the peak of the market from CapEx point of view, maybe in a couple of years time.

And we believe that peak will continue for several years, because there is this whole new wave of industrial – industry driven investment, when serious industries of this world will start to invest in their own network capacity either directly or through slices that they purchase from operators. And this will then have significant secondary effects on things like edge cloud, edge cloud infrastructure, and then all the connectivity that those data centers will need and all the connectivity that the more and more dense networks of base stations will need.

So this could continue for several years. And of course, technology investment is extremely important here for competitiveness, as we are seeing in all our segments. And now with the first deliveries in PSE-V, we are clearly making progress also in this segment.

Amit Harchandani

Absolutely. And we’ll circle up maybe later come back to optical medium term later in the session. But just quickly to round off the near-term discussion, you talked about availability of components Pekka, and if you had more, you could ship more. Could you comment on how do you see that situation coming back to normality? If I could use that word, does it come by the end of this year, middle of next year? And by that token, we talk about shortage of components. There’s also a shortage of talent out there. A lot of companies are talking about the war for talent in a very tight market. So maybe you could address those two elements as a part of maybe a near-term discussion before we go into the longer-term topics.

Pekka Lundmark

So the component situation, first, I think I’ve said in connection of the Q2 report that it’s a real fight out there. We have done pretty well in that fight, but that is something that you have to focus on every single day on all levels of the organization. How long will it continue? I mean, there are very different opinions depending on who you talked. And I believe that there will also be differences between different suppliers. There’s a lot of capacity investment going on all the way into new foundry capacity and substrate capacity and so on. It takes time before those investments will hit the market, because even the lead times for machines needed are long at the moment.

In some segments we could actually be facing a turning point already during Q3, Q4. In some segments, this could continue well into 2022 or even into early 2023. By 20 – later 2023 and then 2024 it’s quite likely that there will be significantly more capacity available out there. The important thing here is that that you have to take a pretty – in the short-term pretty operational approach to this because most of the suppliers are in allocation mode at the moment. And then it’s very important that you make it clear to them that that the relation is important. You are important to them. They are important to you, it’s mutual dependency that both need each other not only in the short-term, but also in the long-term when – then the capacity situation has again, turned to the better. And again, we’ve been putting a lot of time and resources into this myself included. We’ve been doing fairly well in a difficult situation.

Amit Harchandani

Thank you, Pekka. As we’ve gone past the halfway mark in this fireside chat, let’s maybe move on to talking about now some of the longer-term topics as Pekka, you and your team continue to pivot the wider group. So again, I go back to mobile networks now and take a more longer-term view. And you touched upon North America earlier, and some of the near-term demand dynamics. Help us understand how are you thinking about your medium to longer-term demand prospects across different geographies and key customers. There’s obviously North America where it’s clearly off to the races. You got Europe, which is starting to come through, interestingly in China, where you’ve made a comeback. Please help us understand how you think about your opportunities in each of the key geographies, and maybe comment on some of the key customers, if you may wish to do so.

Pekka Lundmark

Well, I won’t repeat what I already went through earlier about the product competitiveness, because that’s of course, fundamental to the market share. And again, we expect to have 25% to 26% market share in mobile networks excluding China. This year as we all know, the investments have progressed furthest in North America,  Korea, Japan as well, now with the new frequency bands, the mid-band especially in North America, as you have seen the operators have actually increased their investment plans. So that market looks pretty robust at the moment. But then the interesting thing is that Europe, which has been behind in 5G investments, including 5G coverage, as percentage of the total population is now speeding up, which is a very good thing.

And gradually then also now when we get to the end of this year and then 2022, those parts of the world who have actually had very limited 5G investments so far (Latin America, Africa, India, of course), being one big target going forward. They will gradually start making investment decisions. And we are so glad that now in this – in a way next wave of 5G, decisions will come, we will have fundamentally stronger product competitiveness than we had when some of the first decisions were made.

On top of this come then, the big new opportunity, which is difficult to quantify, which is the industrial 5G, the 5G networks that will support automated manufacturing, robot control, logistics control, transportation, mining, you name it. There is so much productivity improvement that can be gained with next generation technology, connectivity investment in this industries, that we do believe that this will be driving some of these investments for many years to come. You mentioned China that deal is something that we are proud of because of the fact that of course, the technical requirements that Chinese customers have on 5G are extremely tough. And we are proud to have been selected as a vendor as in that particular case as the largest foreign supplier.

Amit Harchandani

Noted. And in terms of, you talked about your competitive – sort of competitiveness, your product portfolio, specific to Europe, how do you see that sort of, I guess to some degree, Huawei replacement, but how do you see sort of the demand dynamic playing out in Europe between the real demand and say, call it the swap out demand, if I could put it that way?

Pekka Lundmark

It is clearly both. We have estimated that we have one about 50% of these opportunities, where operators have decided to do swaps because of various reasons. So we have clearly taken our share of that. But of course, it's not only that, as I said earlier, if you take the 5G coverage as percentage of population in Europe and compare that to the U.S., or even more so to Korea, we are still quite far behind. So there is a lot of catch up to be done. And that that's of course, kind of completely new investmnt. It has nothing to do with any swaps.

Amit Harchandani

Understood, understood. Moving on to another topic, which I get – guess gets a lot of attention is the mobile network's margins. Now I appreciate the first half post flattered by one-offs and you've given the 2023 guidance well six months ago. There’s a lot of uncertainty out there, but let me give it a shot. Is it fair to say that there’s more upside and downside industry or 2023 targets as things stand today?

Pekka Lundmark

First of all, as you noted just for full transparency, we had €80 million one-off positive in Q2, which of course, helped a lot when it comes to the overall profitability of Mobile Networks. Hey, look, our target is 5% to 8% comparable operating profit in 2023. And if you listen carefully, the Tommi Uitto’s Capital Market Day presentation, he did say very clearly that of course, 5% to 8% is not the ultimate target for Mobile Networks.  We want to go double-digit. The 5% to 8% target for 2023 was set only as you said a few months ago. So, we are not ready to revisit that at this time, we continue to work on the component situation. We want to continue to deal with the North American headwinds that we’ve been talking about (while) other parts of the world are progressing well. We are making progress in North America as well. So many things are going to the right direction. So, certainly I will continue to target with Tommi that one time in the future, we will be delivering double-digit profitability and Mobile Networks.

The catch up that we’ve been playing, and that will be to a large extent completed by the end of this year, as I said, is one step. But of course, then the next step will be – target will be to take the lead on the product side. And we have some exciting stuff coming out in the pipeline for the 2022 to 2023, 2024, as well as I also know our competitors. So the fight will continue. The technology race will never end, but our relative position is increasing. And of course that will end your time be reflected in margins as well.

Amit Harchandani

All right. Thank you for that, Pekka. We’ll watch out for that. But moving on maybe beyond Mobile Networks, we talked about optical earlier, and of course, we also briefly touched upon IP. In a medium term context, when I look at those two spots within the infrastructure business, how are you thinking about competition for both IP and optical against the likes of Cisco? For example, you’ve also had losses for Huawei. We talk about Huawei in the Mobile Networks context, but there’s also opportunity for example, on the optical side. So help us understand medium term, how are you thinking about your competitive positioning in IP and optical?

Pekka Lundmark

Those are slightly two segments at the moment. And our relative position in IP has been a little bit stronger than in optical, even though we are now making progress in optical as well. Then, of course, there’s a lot of theories about IP optical convergence that will start happening through optical plugables that are installed directly into routers. And this is of course, one reason why it makes a lot of sense to – sense to be a player in both of these games. The IP networking business is clearly one of our best businesses in Nokia profitability that this well in double digits. And as we have hinted before there is some exciting stuff coming out later this year.

We had, as you know, a major product launch in Mobile Networks earlier this year, but there is something to come on our network infrastructure side later this year that will then further increase our competitiveness. The routing silicon that we have had on the market, the FP4 has already been market leading, the routing silicon, routing software, and then network automation and analytics capabilities have created a very strong, strong package, but there is more to come. So I have every reason to be optimistic about the future of that business.

Amit Harchandani

Got it. And any particular comment on, say the opportunity in optical with Huawei’s sort of ceding share in Europe?

Pekka Lundmark

There are opportunities, and of course the difference if you will, between the optical and IP market, is that the optical market is still much more fragmented. There's a lot of small players and in all these segments, of course, Huawei has enjoyed the large market share. So anything that that would one way or another kind of affect that market share would of course be an opportunity for the rest of the players, including our ourselves. Some of the recent analyst – market analyst reports, it has been noted that we actually were took a market leadership, number one position in optical networks in Europe earlier this year.

Amit Harchandani

Indeed. Indeed. I guess moving on to your, another of your business is a bit more of a turnaround story, which is your Cloud and Network Services business. How are you talking about the recovery there in the context of say quality of portfolio rebalancing? And maybe I could also take this as an opportunity to ask you, how do you anticipate the enterprise side of the Nokia story to play out over the medium term?

Pekka Lundmark

The turnaround if you want to, and I guess it's fair to call it turnaround in Cloud and Network Services. It's really an important one for us and Raghav Sahgal and his team, they are in the middle of a major portfolio assessment at the moment. There's a lot of products there who are ending or getting close to the end of their lifetime. There's a lot of products that will need to be faced out in the coming years and then replaced with something new.

And Raghav was actually talking about this quite a lot at the Capital Market Day. And we are now kind of focusing this business around five to six key areas where of course 5G core is an extremely important focus area going of course, very well together with the Mobile Networks business, then analytics and AI-based services, for example network quality analytics, automatic fault detection, performance optimization with the help of artificial intelligence is another focus area.

Then private wireless and industrial automation, which I already earlier said is a major product area, not only for the radio network, but also for the core network or the data center part. Then digital operations and closed loop automation, automated deployment of services, zero-touch management of services, service quality assurance being one focus area and then managed security increasing an importance all the time.

And last but not least, monetization and billing systems. So this would be in a way, the high level focus of cloud network services, and perhaps to zoom a little bit more into the enterprise side of it. Since you've asked enterprise customers represented 7% of Nokia's overall sales in the latest report and structurally of course, there can be comparables and bumps-up and down any individual quarter.

Note that Lundmark is very careful about the risk from high tech demands from China which may result in renewed support for the local contender.

 

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