Hello, and welcome to the Nokia First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. At this time I would now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin.

Thank you. Ladies and gentlemen, welcome to Nokia’s first quarter conference call. I’m Matt Shimao, Head of Nokia Investor Relations. Rajeev Suri, President and CEO of Nokia and Kristian Pullola, CFO of Nokia are here me via conference call today. During this call, we’ll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. These statements are predictions that involve risk and uncertainties. Actual results may, therefore, differ materially from the results we currently expect. Factors that could cause such differences can be both external, such as general, economic, and industry conditions, as well as internal operating factors. We have identified such risk in more detail in the section titled operating and financial review and prospects. Risk Factors of our 2019 annual report on Form 20-F, our financial report for Q1 published today on Form 6 K, where we have added the COVID-19 Risk Factor as well as our other filings with the U.S. Securities and Exchange Commission. Please note that our results release, the complete interim report with tables and the presentation on our website include non-IFRS results information in addition to the reported results information. Our complete financial report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and a reconciliation between the non-IFRS and the reported information. With that, Rajeev, over to you.

Thanks, Matt, and thanks to all of you for joining. I hope that you're all keeping well and safe in these unprecedented times. As we all know, events related to the COVID-19 pandemic are moving quickly and the global economic outlook remains uncertain. I want to start by briefly making 4 high level points about Nokia's first quarter. First, we made stealth progress in our mobile access business as our transformation and product cost reduction efforts started to take hold. Second, our Q1 showed broad year-on-year profitability improvements, thanks to strong performance across our portfolio, including enterprise and software, supported by continued discipline on costs. Third, we remain highly focused on generating cash and took a number of actions in Q1 to improve our total cash position in what is a seasonally slow quarter. And fourth, we are adjusting the midpoint within our previously disclosed outlook ranges for full-year 2020 to reflect the increased risks and uncertainty presented by the ongoing COVID-19 situation. We expect the majority of this COVID-19 impact will be in Q2 and believe that our industry is fairly resilient to the crisis, although non-immune. With that as an introduction, I will focus the rest of my remarks on two main areas: one, our Q1 highlights and the progress we are making in mobile access and other parts of our business; and two, the unusual situation with regard to COVID 19. Now to the quarter. When I spoke to you when we announced our Q4 results, I said I expected to see progressive performance improvement over the course of 2020, and Q1 was largely consistent with this expectation. Non-IFRS Nokia level operating margin was up significantly from Q1 2019, rising 3.6 percentage points, while non-IFRS operating profit landed at €116 million. An important driver behind that was…

Thank you, Rajeev. Today, I would like to start by walking you through our current liquidity position and our cash performance in Q1. I will then continue with a brief summary of our financial results for both Nokia Technologies and Group Common and Other. Then take you through group level results for the first quarter. And finally, I will quickly provide an update on our cost savings program and close with some remarks on our guidance. Okay. Let's start with our liquidity position and cash performance. We closed Q1 with a solid total cash position of €6.3 billion, a sequential increase of approximately €310 million. The primary driver for the increase was related to a drawdown of €500 million loan from the European Investment Bank in February, which will mature in 2025. The facility was signed in August 2018 and had a drawdown period of 18 [ph] months. In addition to our solid cash position, we also have a €1.5 billion revolving credit facility available to us that remains undrawn. Looking at our debt, we have approximately €5 billion outstanding, all of which is financial covenant free with an average maturity of six years and a smooth repayment schedule. We do not have long-term debt repayments due in 2020 and the next maturity, which totals €500 million is due in March 2021. Additionally, we continue to explore prudent opportunities to further strengthen our liquidity position in a proactive manner. I'm confident that the conservative management of our balance sheet has positioned us well from a liquidity standpoint to run the business and to continue to fund the R&D investments needed to position us as a leader in 5G and beyond. While our total cash increased in the quarter, Nokia's net cash decreased by approximately €410 million to a quarter-end balance…

Thank you, Kristian. One quick thing, which is the operating margin guidance. We now expect our non-IFRS operating margin to be 9%, plus or minus 1.5 percentage points. For the Q&A session, please limit yourself to one question only as a courtesy to everyone else in the queue. Jamie, please go ahead.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from David Mulholland from UBS. Please go ahead with your question.

Thanks for taking the question. I just wanted to come back on the point you've made around the supply chain. Obviously, you had some constraints impact in Q1, and you flagged there's still some risk going on into Q2. But where are we with the supply chain? I think from what Ericsson was saying the other week, it seems like from their side, they've managed it quite well that they're still able to mostly supply customers. So how much of an issue should we still expect going forward from that in terms of supply chain issues?

Thanks, David. We saw those issues limited to a very few number of customers. Supply chain issues were from, like I said, China and parts of Asia, especially when it comes to Tier II, Tier III component vendors. Going into Q2, we see some supply risk. But we also see risk related to really the physical site access part in countries that are locked down so that engineers can't grow and access those sites to do the installation and commissioning. Even if we are an essential service as a sector, logistically, it is more challenged on the ground due to lock down. So those are the two risks we see, perhaps the inflation one is greater than the supply.

Thank you, David. Operator, we will take our next question please.

Our next question comes from Sandeep Deshpande from JP Morgan. Please go ahead with your question.

Yeah, hi. In terms of the disruptions you're seeing in the supply chain. Do you have an understanding of how much you're going to see in the second quarter because you say that in your release -- in your press release this morning that it is going to be worse, or you say that the worst impact will be seen in the second quarter? So, does that mean that we're going to see more than €200 million of impact in the second quarter? And then is these -- the supply chain disruptions, which are causing these issues in the first and the second quarter, will we see those made up in the second half as the lockdowns end? Thank you.

So, maybe I'll start here. So, we do see overall for the year that there will be a net impact from COVID. We have reflected that both in our guidance for the overall market, where we shifted the guidance from being flat to now being down. And we also adjusted for that by bringing down our -- the midpoint for both our operating margin as well as for EPS slightly. We do think that the majority of this impact compared to what we expected earlier, will come through in the second quarter. And then some of that but still with the net impact that I talked about, will be offset in the second half.

Thank you, Sandeep. Jamie, we'll take our next question please.

Our next question comes from Robert Sanders from Deutsche Bank. Please go ahead with your question.

Yes, hi. Good afternoon. My question is just about Dynamic Spectrum Sharing. Given you've now launched that offering. I was just wondering, can you try and contrast the approach you're making to DSS versus that of companies like Ericsson? And what is the feedback you're getting on from key customers on the relative strengths and weaknesses of your approach?

Thanks, Rob. So, first of all, DSS is an important feature. We will be on time in line with commercial devices. So, around July, will be volume deliveries. That's the 4G, 5G DSS that many customers need, such as in North America and elsewhere. We also have this all the way from 2G, 3G, 4G DSS including 5G, but also 2G, 3G, 4G DDS. And that is required in many emerging markets, where it's required in Latin America. It's required in Middle East and Africa. It will be required in a lot of parts of Asia-Pacific. To do the same thing you see in 4G, 5G, so to get the spectral efficiency in 2G or 4G DSS. And here, we feel we are unique, and we are getting a lot of interest from customers. So, the 5G developed countries, advanced markets, but 2G to 4G will be leased in a lot of other places in the run-up to 5G.

Thank you, Rob. Jamie next question please.

Our next question comes from Achal Sultania from Credit Suisse. Please go ahead with your question.

Hi, good afternoon. Rajiv, I think you mentioned a strong data traffic growth starting because of COVID and operators feeling the need to upgrade networks, it seems like you've had some benefit of that on gross margins along with the product cost decline. Now, you also mentioned that data traffic is kind of plateauing in a lot of markets. So, how should we think about the business mix going into Q2 and Q3? Do we actually see the benefit of what we saw in Q1 continue into the next couple of quarters, or is it really going to be your focus on product cost decline, which gives you the benefit on gross margins?

Thanks Achal. So, it's evidenced by the data graphic growth and let's call it, preparedness for the future. Even if it's plateauing, people have learnt a lesson and they want to prepare for the future. So we're seeing that in our order intake in fixed access, fixed networks. I talked about a significant increase in order intake there. We're seeing a good order book in IP and optical, both in Q1 and going into this quarter. And then overall traffic is also going up in mobile, even if the centers are changing rather than business centers, it's more to the home. Yes, mobility is reducing and handover is reducing, but the traffic is going up. So there's also that potential opportunity in capacity demand in 4G. And then, of course, there are some markets where fixed access isn't strong enough. And then you've got to see that connected through wireless. On the longer term, though, I see clear opportunities and fixed moving faster to fiber and more robust IP and transport. There's no point of all this traffic explosion, if your IP and optical network is not up to scratch. So it's sort of – this is where our end-to-end portfolio really helps from a long-term perspective.

Thank you, Achal. Jamie, we'll take our next question please.

Our next question comes from Tal Liani from Bank of America. Please go ahead with your question.

Hi, guys. I have two questions. The first one is, would you consider changing the company structure, meaning selling assets given the continued decline in routing or what we're seeing with optical, what's the value of keeping the company still as a combined company of multiple assets? And the second question, if you can relate to china. We are seeing Ericsson reporting better numbers in China. And I want to understand the sustainability of the trends in China for you? How do you think it's going to play out over time? Thanks.

Thank you. Actually, routing and optical, routing is just a compare issue compared to last year. But otherwise, the fundamentals are very, very strong in routing in particular, we've got some supply headwinds as well that affected us in Q1, but very, very, very strong leadership there in terms of technology, strong order book, as I said, same in optical, and both these benefits -- both these businesses will benefit from increased traffic. So there is a comparable issue, but I don't see a change in fundamentals for this business. This is routing in particular as an anchor business and helps us a lot in terms of robust future. And, of course, it's the way to penetrate enterprise, as well as web scale companies where we have been successful. So when it comes to the broader question, will we sell assets and so on? No, our end-to-end strategies intact at this point in time, and there's no change to that, our Chairman also confirmed that on 2nd of March, when we were together in a press conference. Obviously, it's possible the new CEO needs to come in and review strategy and that's very normal. I think then your second question was around China. And from this year's point of view, we have baked in the impact from what we're seeing in our guidance. And also, not just 2020, but also the long-term, and with the recent decisions in China, we will have some top line impact, but much more limited impact on operating profit. And then I just want to quickly put the situation in China in perspective. We have consistently said that we take a prudent approach to share in China given the profitability and cash challenges in the country. Ultimately, strategy is about hard choices. We are making…

Thank you, Tal. Jamie, we'll take our next question please.

Our next question comes from Aleksander Peterc from Société Générale. Please go ahead with your question.

Good afternoon. Thanks for the question. Can we come back a little bit on 5G powered by ReefShark? I'd just like to know in your increase from 10% to 17% of 5G PPR products. If you could give us an insight on which part of the family of ReefShark chipsets have been contributing to this increase over the quarter and which element for part of the ReefShark family you're working on that will come through in the remainder of the year to increase this share? Thank you.

Thanks Aleks. So, with 10% at the end of Q4. We have started shipping some of the radio SoCs, especially in massive MIMO. And now we've expanded that to the range of 5G. The baseband SoC will come later in the year, putting us in a significantly stronger position in 2021. And it doesn't have to be linear necessarily. It can be non-linear from 1Q to the other, but we are confident we can get to that 35% -- greater than 35% by the end of the year. So, yes, good progress there.

Thank you, Aleks. Jamie, next question please.

Our next question comes from Dominik Olszewski from Morgan Stanley. Please go ahead with your question.

Yes. Hi, thank you very much for taking the question. Just one on my end, which is on the software business. Could you dig a little bit deeper on detail in terms of what's been performing so well to drive the margins so high in this quarter at least? Thank you.

Well, particularly good execution in the quarter, operational efficiency. But I think if you step back and see what's happening in software because we are consistently putting in a good performance in this area of diversification. It is when we decided to rewrite our software on a cloud-native portfolio to rewrite on a common software foundation and make it cloud native, that just allowed us ability to become more agile in that R&D piece, get better time to market, but also expand gross margins.. And so that's the lever, the other one they've been driving is services. Just – we have a solid portfolio. We're ahead of the curve compared to others cloud native common software foundation and just good execution in the quarter.

Thank you, Dom. Jamie, we'll take our next question please.

Next Question is from Richard Kramer from Arete Research. Please go ahead with your question.

Thanks very much guys. I'd like to ask you both about the topic of capital allocation. Rajeev, it feels like you crossed a Rubicon in China where you chose not to allocate capital there to radio. And that, kind of, begs the question for yourself and Kristian, whether shareholders should be concerned with the €640 million Level 3 liabilities for the put option around NSB? And on the flip side, given that Nokia now has two sort of overlapping growth businesses between enterprise and software, what ways can you – can we look forward to that you could allocate more capital to those areas since they're seeing rising margins and rising sales in the current climate? Thanks.

Yeah, Richard, I think as Rajeev described, we continue to see China as a key market, our business mix in China will change. We'll continue to work on the market together with the existing partner that we have in the country.

And then on -- Richard, your question on Nokia Software and enterprise, thanks for that. So it's not overlapping. These are two different diversification areas. But we are doing that. We are absolutely doing that. That's why you see the performance. In Q4 last year, enterprise grew 33%. Overall, strong double-digit growth last year, 18% for full year, 19% in Q1, Nokia Software now 13%. It might vary between quarters for Nokia Software given the nature of that business. But, hey, we are putting all of the attention there. We're absolutely focused on diversification. The money is available to them, and we will allocate capital to them, I’m a big believer in software and enterprise.

Thank you, Richard. Jamie, we're ready for our next question.

Our next question comes from Stefan Slowinski from Exane BNP Paribas. Please go ahead with your question.

Yeah, thank you. And thanks for taking my question. Just for Kritsian. After the Q4, you gave a pretty specific OpEx outlook talking about OpEx in 2020 being a €50 million greater than 2019. I didn't see if you had reiterated that today or with the currency moves you mentioned, if you can give us an update on what that number is? And then I guess on the top-line, you've talked about the addressable market being lower this year. Can you help quantify that so we can think about how much lower we should be modeling on the top line? Thank you.

Yeah, I think on the OpEx question, nothing has really changed. We feel confident that we will be able to hit the €500 million overall reductions, which will bring €300 million of savings this year. Some of those savings will be offset then by hopefully, higher incentive accrual this year, and thus, the same OpEx year-on-year logic holds as after Q4. When it comes to market and top-line change, the way to think about that is that while we haven't quantified how much we believe that the market will decline this year, you should really look at the changes that we made to the midpoint of our operating margin and EPS to be a good proxy of how much the topline would be down because that's actually the main driver why we are adjusting our outlook for margin and EPS.

Okay, thank you, Stephan. Jamie, next question please.

Our next question comes from Sami Sarkamies from Nordea Markets. Please go ahead with your question.

Thanks. I have a question on your IPR license business where royalties were flattish in Q1 even though the smart home market was severely impacted by COVID-19. Last night, Qualcomm guided for about 30% lower license revenues in the June quarter, but you are not flagging any headwinds. Can you please explain why your business model seems more stable given the situation?

Yes, I think the big reason for that is that a big portion of our agreements are actually fixed price and fixed cost over time. And as a result of that, we haven't seen a lot of growth when the market was growing. Now, we don't see any decline when the market is declining.

Thank you, Sami. Jamie, next question please.

Our next question comes from Simon Leopold from Raymond James. Please go ahead with your question.

Great. Appreciate. Thanks for taking the question. I wanted to see if maybe you could drill down on the fixed access business. It was weaker than I would have imagined in this quarter. And I think we've all expected it would be a declining business in 2020 all along, but it does look a little bit worse. And I just want to see if we can think about some of the cross currents like usage for 5G backhaul as well as maybe some of the deficiencies that have been evident in consumer broadband in Europe. How you think about those opportunities and how we should think about the full year for fixed access? Thank you.

Yes. Thanks, Simon. The business has benefited recently from strong order intake growth. But overall, this industry is going through a transition from copper to fiber and that's just taking time because some of the operators don't yet see the full business case for fiber. So, I think the growth drivers here are going to be that transition potentially accelerating, especially with what everybody's learned through the pandemic evidenced a little bit in our order intake at this point. But then fixed wireless access for those operators that do not have fixed that is a good revenue opportunity. And there, we are seeing some momentum. So, for us, the growth drivers are going to come down fixed other access and the acceleration of fiber.

Thank you, Simon. Jamie, I think we have -- I think we'll take our last question today for today.

The last question comes from Pierre Ferragu from New Street Research. Please go ahead with your question.

Hey thank you for your question. Rajeev, I'd like to get an update from you on how Nokia stands in the open RAN and VRAN debate. I see you guys have been active with Rakuten in Japan. I saw an announcement with third-party, where you will be one of the main 5G suppliers and along with Altiostar supplying like an open VRAN solution as well. And at the same time, in the debate in the U.S. with the administration, you seem to be pushing back on the legislation that is trying to impose open RAN to operators. So it looks like you're fairly positively minded on the topic. But at the same time, you're not comfortable with open vRAN going too fast, maybe?

Thanks, Pierre. We have always been of the view that the industry eventually will be open, and we need to play rather than hide. And so we played the Rakuten 1 much to our success. We were able to launch with them on time, but also we were able to upsell a broad part of our end-to-end portfolio. And I'm a believer that vRAN, ORAN will happen. I think it will start with vRAN, gives us an edge over some of the smaller players, because ultimately, vRAN, ORAN also need that silicon capability. And feature parity with the old, not just with the new. So we will have vRAN compliance and availability on time when the largest operators need it and their business case is justified. And on the ORAN, I think it is going to take still a number of years, before it becomes meaningful for anybody. But I'm positive on that, but it will take time.

Thank you, Pierre, and thank you all for your questions today. I'd now like to turn the call back over to Rajeev.

Thank you all for your questions, and I'll close with a couple of comments. First, despite the COVID-19 impacts I discussed, I remain confident that inside Nokia, we are taking the right steps to deliver progressive improvement in the four key areas of Mobile Access. While I'm pleased with our solid improvement in Q1, I want all of you to know, we appreciate that you are rightly measuring Mobile Access' progress over a multi-quarter perspective. This is how it should be, and that is what our employees are working to. Second, the technology strength we have will enable Nokia to better serve our customers in the current environment, whether it is our FP4-based routing or PSE-3 optical networking products our common software foundation and cloud computing capabilities or the private wireless networks we are building in our enterprise business. The strength of our position in these businesses continue to serve Nokia well. Thank you all, and please stay safe and well. With that, I will hand the call back over to Matt.

Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may, therefore, differ materially from the results currently expected. Factors that could cause such differences can be both external, such as general economic and industry conditions as well as internal operating factors. We have identified these in more detail in the section titled, operating and financial review and prospects, risk factors. Of our 2019 Annual Report on Form 20-F, our financial report for Q1 published today on Form 6-K, where we have added COVID-19 risk factor, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you.

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect your lines.