Nokia(US:NOK)2024-07-18 13:45Financial Data and Key Metrics - Q2 2024 sales declined by 18% YoY, primarily driven by a significant drop in India, which accounted for three-quarters of the decline [25][31][135] - Gross margin increased by 450 basis points, largely due to improvements in Mobile Networks, including €150 million in accelerated revenue recognition from the AT&T contract resolution [31] - Operating margin stood at 9.5%, down 190 basis points YoY, impacted by the decline in top-line revenue despite the AT&T benefit [32] - Free cash flow was strong at approximately €400 million in Q2, contributing to a net cash balance of €5.5 billion [20][44] - The company is tracking towards the midpoint or slightly below the midpoint of its comparable operating profit guidance of €2.3 billion to €2.9 billion for 2024 [28] Business Line Performance - Network Infrastructure: Sales declined by 11% YoY, with sequential improvement from Q1. Order intake trends are improving, supporting expectations of significant net sales growth in H2 2024 [33][26] - Mobile Networks: Sales decline was mainly driven by India, reflecting the peak of 5G deployments in Q2 2023. However, sequential growth was seen across all regions, and the AT&T contract resolution provided a €150 million revenue boost [35][36] - Cloud and Network Services: Sales declined by 16% YoY, impacted by the challenging environment and the disposal of the device management and service management platform business, which had a 3 percentage point negative impact [40][41] - Nokia Technologies: Solid quarter with a run rate of €1.3 billion, supported by smartphone renewals and a new agreement with a video streaming platform [42] Market Performance - India: Significant decline in sales, with Q2 2023 marking the peak of 5G deployments. Full-year revenue in India is expected to be between €1.5 billion to €2 billion, including contributions from fixed wireless contracts [35][139] - North America: Return to growth, supported by the AT&T benefit and improvements in Network Infrastructure [43] - Other Regions: Softness across most markets, with no significant growth drivers noted [43] Strategy and Industry Competition - The company is focusing on cost savings, having already achieved €400 million in run-rate savings out of a targeted €800 million to €1.2 billion by 2026 [27][65] - The acquisition of Infinera is expected to enhance the Network Infrastructure business, particularly in optical networks, with €200 million in synergies targeted by 2027 [49][50] - The divestment of the Submarine Networks business to the French State is part of the strategy to streamline operations and focus on core areas [24][51] - The company is making progress in Open RAN and Cloud RAN projects, with recent wins including Vodafone in Italy and stc in Saudi Arabia [58][59] Management Commentary on Operating Environment and Future Outlook - The industry is stabilizing, with expectations of significant net sales growth acceleration in H2 2024, though the recovery is slower than previously anticipated [4][26] - The company remains on track to achieve its 2024 outlook, supported by cost-saving measures and improving order intake trends [4][68] - Management expects a strong Q4, driven by sales volume and order backlog, though continued momentum in Q3 is required [7][8] Other Important Information - The company has signed 16 ecosystem agreements, including with Orange, Telefonica, and Turkcell, as well as partnerships with Infobip and Google, which are expected to drive demand for network APIs [3] - The board has accelerated the share buyback program, aiming to complete €600 million in buybacks by the end of 2024, a year ahead of schedule [69][110] Q&A Session Summary Question: Network Infrastructure EBIT Margins - The company expects Q3 margins to balance weaker Mobile Networks performance with improvements in Network Infrastructure. Q4 margins are expected to be strong, supported by order backlog and delivery schedules [74][75] Question: Strong H2 Recovery - The strong recovery in H2 is supported by existing order backlog, market recovery trends, and expected delivery times. The company anticipates continued order momentum in Q3 [77][78][79] Question: Cost Savings Impact - €400 million in cost savings have been implemented, with one-third impacting cost of sales and two-thirds impacting OpEx. The company is confident in achieving its cost-saving targets [81][82] Question: Cloud and Network Services Growth - CNS seasonality is expected to be similar to previous years, with a strong Q4. Core network traction in Europe and the decline of 3G core networks are key drivers [85][86][89] Question: AT&T Contract Impact - The €150 million from AT&T is an acceleration of revenue recognition, not a fee. Revenue from AT&T is expected to remain stable in 2024 but drop by half in 2025 [90][91][92] Question: German Government Actions on Chinese Vendors - The company is monitoring the situation in Germany regarding restrictions on Chinese vendors but lacks clarity on the impact on RAN opportunities [99][100] Question: Enterprise and Webscale Diversification - The company is making progress in diversifying into enterprise and webscale markets, with non-CSP business now accounting for 11.6% of group net sales [96][103] Question: Portfolio Management and Acquisitions - The company remains prudent on acquisitions, focusing on strong industrial logic and synergies. The divestment of ASN was driven by strategic considerations and favorable pricing [124][126] Question: Cash Flow and Working Capital - Strong cash flow in H1 was driven by normalization of working capital and India payments. The €150 million AT&T impact will lead to working capital inflows in subsequent quarters [128][129][132] Question: Revenue Decline and Right-Sizing - The revenue decline is primarily market-driven, with three-quarters of the decline coming from India. The right-sizing of the organization has not negatively impacted revenue [135][137] Question: Operating Model and Margins - The company is focusing on shifting more value to software and cloud-based models to improve margins. Large-scale CSP projects remain a margin drag, but enterprise and defense sectors offer better margin potential [150][151][155] Question: IPR and Tech Revenue - The company signed a video streaming deal in Q2 and is exploring new growth areas, with a run rate of €150 million in new growth areas as of December [158]