Hello and welcome to Nokia’s Second 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. I would now like to turn the conference over to – Mr. Shimao, you may begin.

Hello? Okay. Wonderful. Ladies and gentlemen, welcome to Nokia’s second 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 with 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 on April 30 on Form 6 K, 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 today. I hope you are continuing to stay well and safe amid the COVID-19 pandemic. I’m pleased to say that our second quarter is now the proof-point that we continue to make strong and meaningful improvements in our business performance. We have been consistent in saying that we are taking the right steps to deliver progressive improvement over the course of this year. And in my view, we remain on the right path to deliver on that promise. In fact, we went into the second quarter with some concern given the ongoing pandemic. But we ended being quite pleased with where we landed. Consider the following highlights. First, year-on-year profitability was up. Non-IFRS diluted earnings per share was €0.06, up €0.01. Nokia level non-IFRS operating margin was up 40 basis points. Nokia level gross margin was back to around 40%. Networks’ gross margin was up 450 basis points, following a 350 basis point gain in Q1. And Mobile Access gross margin was up significantly. Second, we saw significant improvement in cash generation. We ended Q2 with €1.6 billion in net cash, up from €1.3 billion in the previous quarter and total cash was €7.5 billion. Free cash flow in the quarter was positive €265 million versus negative €1 billion in Q2 2019. Given our strong first-half improvement, we now expect free cash flow for full year 2020 to be clearly positive compared to our earlier guidance of positive. Third, even if revenue was down by 11%, the majority of that decline was the result of the impact on our business from COVID-19, as well as a significant drop in sales in China, given the prudent approach we have taken in that market. We also saw a reduction driven by our…

Thank you, Rajeev. Today I would like to kick things off by walking you through our current liquidity position and our cash performance in Q2. I will then briefly touch upon our financial results for both Nokia Technologies and Group Common and Other, and then take you through a few group level highlights, including an update on our cost savings program and finally, close with some remarks on our guidance. Let’s start with our liquidity position and cash performance, both of which exemplify the strong progress we have made over the last year. We closed the quarter with a strong total cash position of €7.5 billion, a sequential increase of approximately €1.2 billion. There were 2 primary drivers for this increase: first, the proceeds from a debt issuance that we successfully completed in early May; and second, strong cash performance in the quarter. In addition to our cash position, we continue to have a €1.5 billion revolving credit facility available to us. This facility remains undrawn and, in June, we exercised our option to extend the maturity date by 1 year into 2025. Looking at our debt, we now have approximately €6 billion outstanding, all of which is financial covenant free, with an average maturity of 6 years, and a smooth repayment schedule. This includes the €1 billion debt raised in Q2, on a net basis. I am confident that we have taken the right actions to conservatively manage our balance sheet. This positions us well from a liquidity standpoint during these uncertain economic times. Sequentially, Nokia’s net cash increased by approximately €230 million to a quarter-end balance of approximately €1.6 billion. This increase was attributable to positive free cash flow in the quarter, which was largely driven by our solid adjusted net profit. In Q2, net working capital, excluding…

Thank you, Kristian. For the Q&A session, please limit yourself to one question only as a courtesy to everyone else in the queue. Cole, please go ahead.

And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Sandeep Deshpande with JP Morgan. Please go ahead.

Yeah, hi. Thanks for letting me on, and all the best to you, Rajeev and Kristian, in your future endeavors. My question – you’ve had a very good second quarter in terms of your margin. If one looks at your gross margin in Networks, there is almost 500 bps or more than 500 bps improvement from the first quarter. Clearly, I mean, your product itself is improving. We’ve seen data points from the supply chain of your suppliers beginning to supply to you on the [E6] [ph]. So I’m trying to understand here that if one project, this grows margin into the second half of the year, your guidance should be much higher than what you have guided the market to at this point. So why are you saying at this point that your gross margin is going to decline into the second half of the year, given this significant improvement you’ve seen in the current quarter? Or is it that there was a huge mix shift in the current quarter, which is not going to be sustained into the second half of the year? Thank you.

Thanks, Sandeep. And thanks also for the good wishes. So first of all, Sandeep, I think we put in place this strong centralized commercial management deal discipline last year. And that is helping us with these underlying structural improvements. And so, if you think about where that margin strength came from, the first is 4G LTE, because 4G LTE is now pretty much on a worldwide basis entering this capacity phase. The second, of course, because of our 5G system-on-chip, it helps us in 4G LTE when we are bidding for these combined deals which have 4G and 5G. Having said that, we haven’t yet felt the impact in any meaningful way from the 5G SoC which will come in due course, because remember, there’s a 6 month lag between shipments and actually banking some of the benefits. The other areas where we benefited with IP routing, fixed, and IP routing because of technology leadership we have there, still that window remains open for us. But there is also this product and regional mix issue that we benefited from in the quarter, which will be slightly less pronounced as you move forward. So those are kind of the puts and takes, 4G, routing, fixed, and then this product regional mix that will be less pronounced in [as well] [ph].

Thank you, Sandeep. Cole, next question, please.

And our next question will come from Robert Sanders with Deutsche Bank. Please go ahead.

Yeah. Hi, good afternoon, and my best wishes to you guys as well. My question is just about Huawei, Huawei dominant footprint. What are you actually hearing from operators in terms of you getting a second look? And how are you going about engaging with these operators that maybe you haven’t engaged with for a while? And within that, are you seeing any particular region where those operators that were previously dependent on Huawei are now coming to you? Is it Europe, Middle East or is it even Asia and LatAm as well? Thank you.

Thanks, Rob. Yeah, yes, we’re seeing several countries consider their 5G technology event with options. I think Europe is, clearly, one of them, where there’s probably most of that momentum. Now, whatever the government’s decisions are, we are ready to help our customers wherever they are in the world. So we have the capacity. We have the scalability. We’ve got the products. And, to me, it isn’t just about radio. It is also about core, that being sensitive. But it’s also about transport, so routing in particular. I mean, that’s also considered IP core, and then, to a lesser degree, also fixed. So I think it’s going beyond the evaluation or reevaluation of endless lectures resulting in concrete medium-term opportunities, the emphasis on medium-term, and that’s where things are. So we’ve seen already before in Canada that we were able to expand our share. We saw that in Japan with SoftBank, with KDDI. We’ve seen Vodafone Hutchison Australia where we entered, where we were not a supplier at all. Now, we are a sole supplier in [accountable] [ph] radio and transport. Thanks for the wishes.

Thank you, Rob. Cole, we’ll take our next question, please.

And our next question will come from David Mulholland with UBS. Please go ahead.

Hi. Thanks for taking the question. And good luck from me as well. Just on the commentary around win-rate and market share, obviously, still remaining above 100% ex-China. As you look at that into the second half of the year and into Q3 and Q4, given current visibility and deals you think are up for grabs, do you think that’s something you can still sustain from here? Obviously, there’s some opportunities from Huawei, but are there other any other areas you are feeling some pressure?

Thanks, David. So at this point, based on the visibility, we have – we believe that that 4G plus 5G market share of 27%. And the win rate of above 100% excluding China is what we’re looking at. That’s what we’ve seen. And then there are puts and takes as always in this business. There are some win-backs, there are some stresses. But so far that’s the number we’ve seen.

Thank you, David. Cole, next question, please.

And then, the next question will come from Achal Sultania with Credit Suisse. Please go ahead.

Hi, good afternoon. All the best, Rajeev and Kristian, from my side as well. Maybe I think Rajeev, which you touched upon this topic in the U.S., highlighting that one of the key customer were still seeing slow ramp in Q2. And obviously, you are talking about the acceleration in second half of the year. Can you help us understand, is it going to be across the board or is it going to be with one specific customer when we think about second half? And then, what exactly like kind of products is this customer looking to deploy in the U.S.? Is it mainly focused on mid-band? Or is it a combination of macro mid-band and small cells, and then software upgrades as well? Thank you.

Yeah. Thanks, Achal. So what we’ve seen so far in the U.S. is that there’s been reforming preparation for Dynamic Spectrum Sharing, so that means low-band 5G, right, 850, 900 and so on. What we saw last year with millimeter wave, but also, low-band in the case of T-Mobile, 600. And now I think, with this mergers coming together and clarity in terms of second half. We see that the ramp up will increase in both low-band with that particular operator, but also the mid-band, right, that’s a spectrum that they’ve now got. And so there’s – in Q2 with the big soft, especially in services. And now as the sites come online, and if they get clarity off of their own roadmap, then that’ll accelerate in the second half. When you talk about C-band, which is the broader options base that will happen at the end of this year, results should happen at some point in Q1 next year, and that spectrum will be cleared for you by the operatives that are the winners in that space only by the end of next year. And then, of course, on a different related note, the CBRS band opens up opportunities for enterprise players, particularly utilities, that will look to drive field area networks and, of course, from our enterprise business we’re super keen on that opportunity as well.

Thank you, Achal. Cole, next question, please.

And the next question will come from Simon Leopold with Raymond James. Please go ahead.

Well, thank you for taking the question, Rajeev, good luck on your next venture. Just wanted to maybe get to a key point here, given the 2020 outlook you’ve provided, can we consider this evidence that your relationship with Verizon, likely one of your biggest customers remains solid, and that your plans with that customer on 5G are on track per your prior plans? Thank you.

Thanks, Simon. We do not comment on our customer’s vendor strategy. Nokia is proud to serve Verizon and we are committed to continuing to help them build the best reliable and highest performing network. We work with them across multiple technologies so far end to end portfolio, if not all. And we have a longstanding strategic partnership in key technologies, and we play a critical role in Verizon’s 4G networks and continue to work with them to accelerate innovation around 5G technology.

Thank you, Simon. Cole, we’ll take our next question, please.

And the next question will come from Alex Duval with Goldman Sachs. Please go ahead.

Yes. Hi, there. Many thanks for the question, and thanks for the help with these – on some questions of [VAs] [ph]. Just one if I may, you’ve talked about continuing to track towards the 35% on ReefShark shipments by the end of this year. I wondered if you could talk more broadly about how you assess the later stage of your product in terms of competitiveness on wireless? And how many more quarters roughly it would take if you need to be on a par with others in the market? I wonder if you could talk about some of the other dimensions to bear in mind.

Thanks, Alex. So by the end of the second quarter, the new ReefShark SoC based massive MIMO radio unit. This product family was shipping in about 13 variants across the global market in different frequency ranges, and this number continues to rise. That’s the one thing. Remember, we said, we will first start with the RF part of the SoC. And then we also have the ReefShark SoC is available for the next generation of Nokia multi radio baseband. So this is the next thing that we said we will start shipping and we’re on track to start shipping the baseband board by the end of 2020. And then if we look at next year, we expect that our ReefShark SoC based baseband and radio units will take the lion share of our delivery, so reaching at least around 70% by year end. So that’s how we see it in terms of the product competitiveness, we are shipping products now with the lower part consumption, higher performance and lower product costs. And then when it comes to features, I think the catch up has accelerated in the last few quarters. And yes, in some features were a little bit behind in the order of – a few months and then in some other places like small cells, et cetera, where we’re also ahead. And then when it comes to the next generation, we get this feedback from all of our customers that that went ahead in vRAN, Cloud-RAN, and Open RAN. And we are going to continue to accelerate in these next generation areas.

Thank you, Alex. Cole, next question, please.

And the next question will come from Alexander Peterc with Societe Generale CIB. Please go ahead.

Hi, and thank you for taking my question. Best wishes to both of you as well on my side and your future endeavors. Can you just provide a little bit of color on the margin recovery – the gross margin recovery in the network business, particularly in mobile. If you could tell us, if it’s more on the hardware side or in service delivery, what’s the contribution of both of these to improvement? Thanks.

Thank you, Alex. Yeah. So – yeah, it was 3 things for Mobile Access: one, a reduction in low margin services, right. So exiting some unprofitable managed services, contracts and reduction of deployment devices, we’re actively out of choice; second, 4G LTE being in the capacity phase, so we saw an uplift in margins in 4G LTE, and we will not see it to the same extent in future quarters, it will be – to a slightly lower extent, but the fact that 4G LTE is in this capacity phase worldwide, it’s just going to remain as a reality now for the medium- to long-term. And then the third was, of course, in 5G SoC, when you have more of these SoCs shipping System-on-Chip products with lower product cost that makes you competitive in [page] [ph]. And that means that you are more competitive and retain more margins in 4G as well, so you get that indirect benefit. We haven’t yet seen 5G System-on-Chip material benefits, yes, because – yet, because, we only had 10% run rate at the end of Q4. And remember, there’s a 6 month lag and that is yet to come. So I think what I’m saying is that with both the commercial management and deal discipline, as well as some of these product benefits now we’re seeing, for the most part structural improvements on an underlying basis, with the exception of Q2 where we saw a little bit better regional mix and product mix that that might not record to the same extent.

Thank you, Alex. Cole, next question, please.

And the next question will come from Dominik Olszewski with Morgan Stanley. Please go ahead.

Hi, everyone. Thanks for taking my question. Then I’ll add my best wishes too. My question is around the recent news reports on exports from China, maybe could you discuss Nokia’s ability to service the rest of your global customers? Should you see export controls be put in place, for example, in China but elsewhere? And how independent and modularized is your internal supply chain more broadly?

Thanks, Dominik. Look, as a global company operating in a multitude of regions, if we have – more than 31 – network of 31 factories without EMS suppliers. We have a number of fulfillment hubs for logistics. So we are mindful of the geopolitical environment and the risks and opportunities that it creates for us. We have a global supply chain footprint and it is designed for optimize global supply, and it’s designed to mitigate against risks such as local disruptive events or transportation capacity. And actually it’s become even more agile, because we’ve had to do this in the pandemic before than ever, because we were seeing effective lockdown some countries you have to move, factory capacity to other countries and so on. So literally on a week by week basis, you have to have this agility. So we are continuously reviewing our supply chain strategy and given both COVID-19 and the geopolitical situation that this is receiving a greater than usual attention with multiple scenarios and so on that you’re working on and the key word is agility.

Thank you, Dominik. Cole, next question, please.

And the next question will come from Richard Kramer with Arete Research. Please go ahead.

Thank you very much. It feels like an end of an era, guys. Right now the industry discussion seems to be dominated by Open RAN. And indeed Tommi’s blog post talking about it is creating the future rather than protecting the past. But one of the big questions for investors who’ve seen the impact of white box vendors in areas like networking and server is the implications for Nokia’s profit pools in network equipment given your chipset investment, and specifically also for the future of your services business, where you still have a lot of headcount. So can you talk through how you might have transitioned Open RAN, and protect your profit pool when we’ve seen similar moves, guesstimate the profit pools and other sectors? Thanks.

Thanks, Richard. I think the first thing I’ll start with is that we obtain the same thing happen in core networks, right. We saw that when it started to shift to virtualized and now cloud-native, so we have some experience with navigating that space. And what I would say is, I’ll give you some puts and takes. First of all, we started this already, right. We have a long history of involvement in open initiatives in 3GPP, the Linux Foundation’s ONAP initiative, multi access edge computing, working with Rakuten, right, we took a step in that direction already in 4G, ahead of Open RAN in 5G. We joined the Open RAN policy coalition, because it gives us the opportunity to promote open standards or the strategic and policy level, as well as from a technology standpoint. So if we do this well, the opportunity is that services could grow. There could be more software. And my favorite one is that we’ll stop swapping each other, because mix and match is not a bad thing, right. So we swap each other fairly modern equipment sometimes, because there’s an entry barrier if you’re not in the game in that network. And then I’ll remind us all that, the amount of features that we have in our operative need by the way of feature parity, it isn’t what the some of the smaller vendors are offering, I mean, they have 50, 60, 70 features maybe more suited for enterprise, but when it comes to the service providers with thousands of features that they want to carry over from 4G to 5G, and next generation 5G. And then System-on-Chip will be a key determinant there as well. It may not be as much for vRAN, but absolutely will be for Open RAN, because a lot of the network performance, lower power consumption, the better product cost efficiency, all comes from SoC. So those are some of the advantages. Of course, there’s also a threat in the installed base. If you have a strong installed base isn’t actually a threat. But I think that hopefully is a good perspective of pros and cons. And do we you want to leave and not protect, because with or without us open MAN is coming. It will come over a period in time. Some of the forward-leaning operators will start first. But the reality is – and greenfields are already doing it. Reality is it’s happening over time, and we want to lead rather than protect.

Thank you, Richard. Cole, we will take our next question. And the next question will come from Stefan Slowinski with Exane BNP Paribas. Please go ahead.

Great. And thank you for taking my question. Just with the setback from China, the U.S. is obviously becoming an even more important market for you. And I just had a question on the Mobile Access side there. You confirmed sort of the outlook for 2020. If we look to 2021, the market is still expected to be quite healthy. How do you see your share in the U.S., on the Mobile Access side evolving into 2021? Is there opportunity for you to increase share in that growing market or is there a risk that you could see some share loss? Thank you.

Yeah, again, as I said, we’re supplying to all of the operators there. And we are – we’ve got our C-Band product. We have supplied 55 customers out of our 83 5G networks on mid-band, basically. C-Band is mid-band. So we’re ready for that game. The spectrum auctions will take time. And, of course, T-Mobile is happening as we speak. So hard to say how share will evolve some of the C-Band tendering activity will – some of it is in motion, some of it will begin to happen. But all we can say is that we have a strong position today. It’s a focus area, and outside of the service provider space there also other opportunities that we’re focused on. So, so far it’s fine. We just need to keep up the good work in terms of our roadmap competitiveness.

Thank you, Stefan. Cole, looking at the time, I think we have time for 1 more question for today’s call.

And that question will come from Sami Sarkamies with Nordea Markets. Please go ahead.

Hi, thanks for taking my question. You’re not expecting to underperform slightly your addressable market excluding China. Can you elaborate on the assumptions that have changed during the second quarter? I’m especially interested in whether this is in any way related to U.S. market developments.

Thanks, Sami. That’s a – as we said also in our press release, that’s related to a reduction of low margin services, deployment services in particular, but also managed services is one meaningful example.

Okay, thank you all for your great questions today. I’m sorry, we weren’t able to get completely through the queue. But with this, I’d now like to turn the call back to Rajeev.

Thanks all for the good wishes, very much appreciated. It’s been great working with you all. I mentioned in my remarks that we were pleased with where we landed overall this quarter, given the impact of the COVID-19 pandemic and that underlines the trend we are seeing in making meaningful improvements to our business performance. Of course, the pandemic is far from over. And many parts of the world are currently in a very tough situation. The health and safety of our employees remains at the top of our priority list. While I’m satisfied with the work we have done so far to keep our people safe, we will remain extremely vigilant as the situation develops. And finally, this is my last working day as CEO. My last quarterly announcement and I want to close with a note of thanks. A lot of warm wishes to all of you. I leave knowing that you will be in good hands with Pekka Lundmark, with whom the transition is proceeding in an orderly manner. And we will talk to you next quarter. It has been a great privilege and an honor to lead this incredible company in the past 6 years, and Nokia Siemens Networks before that for 5 years, and to be a part of the Nokia family over the past 25 years. Thanks to our shareholders. Thanks to our customers. Thanks to our many other stakeholders. And particularly, thanks to the great employees of Nokia. You have constantly made me proud and I expect that you will continue to do so in the many years to come. Thank you all. It has been a pleasure and an honor. 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 on April 30 on Form 6-K, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.