Nokia Oyj (NOK) Q3 2020 Earnings Report, Transcript and Summary

Hello, and welcome to Nokia’s Third Quarter Teleconference and Video Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Shimao, Investor Relations. Sir, you may begin.

Ladies and gentlemen, welcome to Nokia’s third quarter teleconference and video call. I’m Matt Shimao, Head of Nokia Investor Relations. Pekka Lundmark, President and CEO of Nokia; and Marco Wirén, CFO of Nokia are here with me via teleconference and video 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 risks 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 30th 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. Please also note that we have a lot of content today and to ensure we have a good amount of time for Q&A, we may decide to let this call run five minutes over. With that Pekka, over to you.

Thank you very much, Matt. And it's a pleasure to talk to all of you on my first quarterly call at Nokia. We actually do have a lot to cover today, so let's get right to it starting with our third quarter results first. Overall, the quarter was solid and we did see progress in many parts of the business. We also saw some developments that while not impacting the quarter will provide some potential headwinds in the future. When we look at market conditions, we believe that our primary addressable market excluding China will decline this year on a constant currency basis. We expect that we will slightly underperform the market, driven by -- mostly by global services. And then from a topline perspective, it's clear that Q3 year-on-year decline -- sales decline was disappointing. Global Services and to a lesser extent, Nokia Software, were the primary drivers of that decrease. We cannot be happy with a 3% decline in topline on constant currency basis and 7% decline on a reported basis. Several Nokia level profitability metrics were, however, up year-on-year, including operating margin and operating profit. As you have seen, we had 80 basis points improvement in non-IFRS operating margin and 200 basis points improvement in IFRS reported operating margin. In the sign of the progress that we are making, I would also note that our network's gross margin was up strongly 370 basis points to be accurate from the same quarter last year. Overall, we saw solid operational and commercial discipline and a low non-IFRS operating expenses largely resulting from less travel due to the ongoing pandemic. And then in terms of net cash, we ended the quarter with €1.9 billion, up €139 million from Q4, 2019 to mark the fifth consecutive quarter of solid free cash flow. So this is a quick group summary, and then to our businesses. And I would like to start with mobile access. I'm of course well aware that many of you have expressed concern about our case in mobile access and with our mobile radio products in particular, I understand that concern. And as we noted, when we announced our Q4 2019 results, we have lost share in the segment in recent years. We also have important milestones we need to hit in the coming months and there is still some risk that remains, but the underlying progress is real. We saw healthy single digit sales growth in mobile networks, driven by 5G deployments and have now -- and we have no more -- one more than a 100 5G deals. I think the exact number is 101 at the moment. Our 5G powered reefshark shipments, our shipments are tracking well. And we continue to expect stable 4G plus 5G market share in 2020 of 27% excluding China. We did see a decline in our conversant rate in Q3, driven by changes at Verizon, where we expect our mobile radio share to trend down over the coming years. Despite this Verizon remains a top three customer and our relationship is strong and strategic. We are seeing some offsetting gains with operators who are reconsidering their vendors as a result of geopolitical issues. We estimate that we have one approximately 43% of the value of such deals available today. In short, we are making progress, but there is no overnights route to success and we will invest. We will invest whatever it takes to be a leader in 5G, just as we have been a leader in 4G. In fact, let me reiterate this point. We will do whatever it takes to win in mobile networks and more specifically in 5G. If that means we need to sacrifice some short-term profitability to do so, that's what we will do. Our customers are counting on us and we will be -- and we will be there for them. Then the other parts of mobile access global services, which had a difficult quarter with year on year sales down significantly. Margins were negatively impacted by a large provision for a poor project that was contracted several years ago, without that the impact actually the profitability of global services would have been quite strong in the quarter. Reflecting significant operational improvements from a top-line perspective, the decline was driven by three regions where the issues are clearly understood. In North America, our deploy services were down substantially. We are heavily dependent on one large customer where activities have been on hold, as they're focused on future planning. Our Latin America and Asia Pacific regions are both being hit heavily by the coronavirus. India, which we report as part of Asia Pacific had also faced difficult regulatory. Let me know Nokia Enterprise, which had another excellent quarter and once again, posted double digits year on year constant currency sales growth. Demand for mission critical networking solutions and industries, including utilities and the public sector remains robust and Nokia remains well-positioned to serve this market. In the quarter, we added 83 new enterprise customers with most of those in private wireless. And then to Nokia Software, which had unfortunately a weak quarter. Constant currency sales were down year-on-year as was operating margin. We saw a number of project delays slower than expected CapEx decisions with some customers. Orders, however, remained strong, including the win of one of the telco software industry's largest ever deals with the key North American customer. Pleasingly, [indiscernible] again ranked Nokia as the number one telco software player by revenue for the third year in a row. IP routing had one of its best ever third quarters for sales, and for operating profit. Our market leading FP4 technology continues to provide us with strong differentiation, and we have now secured over 250 FP4 based projects. Almost half of these are new customers where we previously did not have a routing footprint. We have a strong pipeline of new product set for 2021 and believe we remain well-positioned to maintain our momentum in this business. Orders in the quarter were somewhat soft which may be related to slowing spend as a result of uncertainties associated with the coronavirus. This is not yet at the level of being a significant concern and intense sales efforts are underway to expand our pipeline. Optical Networks had a strong sales quarter, in part due to an easing of temporary supply chain constraints related to coronavirus. Profitability for this business remains roughly at the breakeven level on an annual basis. Next year we will start to benefit and I'm still talking now about the Optical business -- we will start to benefit from product cost reductions driven by our acquisition of Elenion. But the competitive landscape prevents -- remains challenging. Fixed access had year-on-year sales growth of 2%, and healthy operating margins in Q3. We also saw good progress with our portfolio with the launch of our industry leading 25 gigabit passive optical network products. The transition from corporate to fiber and fixed wireless access remains underway. That's a sign of this change Q3 was the first quarter ever, in which our fiber sales were higher than copper. Many customers including AT&T have stated that fiber is the top priority, particularly, given the coronavirus. There is also an important regional shift in fiber deployments and away from China to other parts of the world. And finally, Nokia Technologies whose sales declined in the quarter, largely driven by lower brand licensing royalties, or brand partner HMD global had been hit hard by the coronavirus, while HMD has recently completed the fundraising round and taken steps to stabilize its business, we expect the full recovery to take some time. Importantly, we successfully renewed one major patent license agreement in the quarter, and did so in a way that demonstrates the strength of our portfolio. And the fact that we now have 5G patents to offer. With all of that as background, let me now turn to our full year 2020 guidance. Without current assessment of the balance of opportunities and risks including some footprint and pricing challenges in North America, we have decided to adjust the midpoint of our guidance to narrow our guidance ranges. We now expect our non-IFRS EPS to be €0.23 plus or minus €0.03 cents. And our non-IFRS operating margin to be 9%, plus or minus 1 percentage point. We are also providing more transparent guidance for 2020 recurring free cash flow and Marco will say more on this shortly. With that, let me now turn to our strategies, a new operating model. We plan to share our strategy with you in three phases. Today I'll talk about some of the conclusions, fairly high level conclusions we have reached to-date, and related changes we are making to our operating model. We will then hold a call with you on December 16, when we will share more information about our strategy of market dynamics and additional details about our new business groups. And that will then be followed by a Capital Markets Day on March 18, when we will go deep into each of our business groups, focusing on strategy targets and the operational plans. Before talking about some of the principles that will define our strategic direction, let me give a perspective on some broader trends that set the context for us, our thinking. First, telco operators will continue to need to support massive capacity demands without commensurate cost increases. As a result, we expect CapEx to remain constrained as operators we look to drive a step change in cost effectiveness, within their total spend however, we believe there will be shifts that will benefit us over time. Second, the broad trend towards open architectures with increasing virtualization will accelerate. This will be driven by cost pressures as well as the need to increase speed and agility. Adoption will vary widely and the full transition is more than a decade away, but the shift to more open interfaces, virtualization and cloudification, network function disaggregation, AI driven automation and optimization is well underway. Third, enterprise demand for high performance networks will increase as overall digitization and automation accelerate. The early benefits of enterprise digitization have been important, but are so far limited, but going forward, physical industries of all kinds will accelerate their digital transformation built on networks that meet their strangest performance needs. And fourth, as a fourth, as a service offerings, as a service offerings will keep expanding in mission critical networks for enterprises and telco operators. This will continue to be driven by industrial automation, the shift from static ownership to instant access the move of webscale companies into the edge cloud and Nokia's own move into Cloud Native functionality that can be deployed on cloud infrastructure from any major cloud provider. Fifth, trust and security will grow even further in importance. Telco operators and enterprises alike will insist, not just that all products and services are designed to be secure from the start, but that vendors are trusted. Governments will continue to drive this change and enterprises will seek to ensure that their intellectual property secure as they move to a more digital world. And finally, we see value migrating from integrated systems to cloud native software systems on one hand, and to enable in silicon and photonics on the other hand, in a way value splitting migrating into these two parts of the system, both of them of course offering interesting opportunities. I have already mentioned that cloudification of networks. Equally important is the technology necessary to meet future demands for massive capacity and efficiency as digital transformation happens in every sector. Investments in the underlying silicon devices and optical components are essential to achieve the highest performance at the desired cost and will remain a critical component to cloud native capabilities going forward. With that brief overview of the changes we see underway, let me now make four key points that will be critical to our future strategy. First, we are a technology company and that means technology leadership. In those areas where we choose to compete, we will play to win. All our businesses will need to have a path of being one of the market leaders in both revenue and profitability. If there is not the path to reach these goals, we will reassess our options. Achieving this will mean prioritization and ensuring that our capital allocation is clearly aligned to our strategy and where we have a credible path to value creation. As part of this approach, we will be careful not to overextend ourselves. It makes no sense to do things halfway. We either need to be all in to win or not waste our time and shareholders money. Second, our customer base with telco operators and adjacent enterprises offers a solid platform for value creation. Telco operators will continue to be at the heart of our business, the challenges they face will however drive a fundamental shift to new open architectures with increasing virtualization and the focus on top line growth through value added use cases including industrial applications. It is our goal, not just to support this transition, but to lead it. With Enterprise as the demand is clear, given the double-digit revenue growth we have delivered in recent quarters. We are well positioned to maintain strong momentum in this business, as digitization and automation in industrial segments drive increased investments in technologies, such as private wireless and cloud solutions. Third, we see a longer-term opportunity to lead the network as a service business models for operators, enterprises and webscale customers. This change offers a broad opportunity for Nokia to provide a trusted software LED and cloud based network capability that can be rapidly integrated, deployed and self managed as a complete service. On top of this, we can move up the value chain and provide additional network plus value adding services. We would expect enterprises to be the first adopters of such network plus, as a service capabilities. Our view is that they should be provided in partnership with telco operators or directly by Nokia in areas that operators choose not to address. This is not something that will happen overnight. It will take years to develop, but the train is leaving the station today, and coronavirus will most likely serve as an accelerant. We plan to be at the front of that train as we are uniquely positioned given our deep experience in delivering carrier grade network performance and our extensive work with webscale companies and Enterprises. And finally, and this is really important. We will shift from end-to-end as a core strategic idea to a more focused approach with our new business groups, each having clear and distinct roles that are aligned to how customers buy - aligned to how our customers buy. We will still provide integrated solutions to customers who want such an offering, but each business will have its own P&L and operational accountability. And they have to demonstrate the path to delivering shareholder value each of them. Return on capital employed will be a key metric and justifying subpar performance by being part of an end-to-end offer will no longer be acceptable. This last point takes me through our operating model, and their immediate moves we will make to improve and align with our expected future direction. These changes, which will be effective January 1, 2021, have five key goals. First, better align to our customers by our new business groups will be focused on the offer they bring to customers, they are structured to shrink the distance between sales and R&D, so we can respond to customer needs faster and more effectively. There is also limited deal overlap between the groups, less than 20% of cases. And this will further reduce complexity. Second, improve accountability, in our new model, P&L responsibility will sit with our business groups. Those organizations will be led by members of the company's group leadership team who will own all the relevant product, service, sales, supply chain and all the core activities necessary to execute and develop their respective business. Third, increased simplicity and cost efficiency. The fragmented accountability we have today has resulted in heavy corporate overlay processes. With our new model, we can strip much of this back and become more cost efficient and better empower business groups to move fast and effectively. Fourth, ensure a consistent strategic logic, in the four new business groups there is a clear link to our future strategic goals and plans, how we will manage each business where we will target growth, and so on. And fifth, very important, improve transparency. We want to ensure that we provide investors and analysts with the clarity needed to understand our business. To do that, we will align our future external reporting with our new internal structure. So with that, let me turn to our new business groups. The first is mobile networks. This business group will include our mobile network product, network deployment and technical support services and related network management, the net sales in the last four quarters for this business group were approximately €10 billion. We will continue to drive this business with a turnaround mindset, and it will have the full portfolio for addressing customer needs in mobile access networks. It will target leadership in key future technologies such as oRAN, and vRAN, and as I said earlier, we will increase our investment to ensure we lead in 5G, just as we did in 4G. I also believe that this new model will put us in a position to better address some of the challenges we face as we look at the root causes of those past challenges. They have largely come from three main areas. The first was the worldwide acceleration of three GPP compliant 5G, while we were still migrating the Alcatel Lucent 4G portfolio to the market leading Nokia airscale platform this delayed the ramp up of our 5G investments. The second was growth by acquisitions, which helped drive our market share growth, but meant that we had to support multiple platforms for many years. This situation has largely been resolved and what is left will be addressed in 2021 as additional new system or chip-based products become available. The third challenge, and one that this new organizational model will help resolve is that we have had an insufficient link between product development and requirements for installation and service ability, by better aligning the product teams with those who sell, install and service, we believe we can make significant improvements. As we announced in the press release this morning, Tommi Uitto has been appointed President of this business effective January 1. The second business group is IP and fixed networks, which will include IP routing, optical networks and fixed access net -- and fixed networks groups, as well as Alcatel Submarine Networks business currently reported under Group Common. The net sales in the last four quarters for this group were approximately €7 billion, and it also had has a very strong portfolio. We see ever increasing demand for higher capacity, greater reliability, faster speeds and cost efficiencies in the areas covered by this unit, and we will continue to focus on providing our customers with exactly those things. These are relatively stable businesses with potential for growth in load single-digits and solid cash generation, their products and services are typically purchased separately from mobile networks. So the complexity related to deal overlap is limited. To give a quick snapshot of each business and what I see it today, IP routing first is all about delivering double-digit profitability, strong cash flow and gaining market share. This is a business with momentum, a strong presence with webscale companies, new growth potential in data center switching, strong technology leadership, and a robust product pipeline for 2021. In optical networks, we have a turnaround ongoing a strong market position, and the target to deliver mid single-digit operating margins in two to three years. In fixed networks, we are managing through a market transition with accelerating growth in fiber and the regional shift away from China. Our focus is delivering fiber to the most economic point and leveraging fixed wireless access. Our goal is to deliver near term single-digit margins and better than that in the longer-term. And then the fourth part of this business will be Alcatel Submarine Networks which is number one in its segment has a very strong order book, and is on a path to profitability. It has been reported as part of Group Common and we will change that in our new model. Federico Guillén has been appointed President of this business effective January 1. And then the third is cloud network services, which will contain our existing Nokia software business, excluding mobile networks, network management and our enterprise solutions. It will also include voice and packet core and managed an advanced services from our current Global Services Unit. This unit will also act as a delivery channel of certain products from other business groups to enterprise customers. We want this business group to deliver a growth by leveraging the transition in our industry to cloud-based delivery, network-as-a-service business models and software led value creation. The net sales in the last four quarters for this group were approximately €3 billion. The potential of the areas covered by this business is significant. And we have created this structure with an eye to the future. Most of the revenue from this group comes today from telco operators. But we see an opportunity to leverage the transition with both operators and enterprises to a world where software is the key value driver -- where the software is the key value driver, where cloud delivery is the norm, whereas the service models prevail, where industrial digitize digitization is a must, where private wireless is a key enabling technology. And where use cases we have not even thought of today, come to the fore. Raghav Sahgal has been appointed as President of this business effective, January 1st. And fourth is our highly profitable licensing business in Nokia Technologies. The net sales in the last four quarters for this group were approximately €1.4 billion. We expect this unit to remain largely unchanged, as its strategic direction is clear, both to generate royalties from mobile devices, particularly as we add 5G patterns and renew deals. And second, to continue to work to expand into new segments, such as consumer electronics, automotive and IoT. The unit is also responsible for licensing, the Nokia brand. Jenni Lukander will continue as President of this business. Equally important to the business groups will be our new customer experience organization. Customer experience will provide a common interface to customers. Act as a company wide voice of our customers. And support the building of strong relationships and new business opportunities. We already have world class customer teams, who have ensured that we have strong trusted customer relationships. We intend to keep this as a nation so strength, going forward. Customer Experience will also include our region and country management as well as marketing. This group will be led by Ricky Coker. And then, of course, in addition to the four business groups and the customer experience organization. We will have four corporate functions, finance legal and compliance people, and then, strategy and technology a very important function, which will include, long-term research our strategic planning and very importantly, Nokia Bell Labs. You can see more about these functions and their leaders, in today's press release. With these changes, we will significant significantly improve accountability, increase simplicity and provide new cost efficiency opportunities. We are actually moving from a fairly complicated group wide matrix organization, matrixes in all kinds of dimensions, into a fairly straightforward and simple P&L driven line organization. Though so that businesses will not operate in a silo vis-à-vis customers. There will be one common interface, through which the businesses P&L responsible businesses will operate. I believe this will be a step change in, how we work and allow us to move faster to respond to customers and to new market opportunities. With that, that's perspective about where we are going. Let me come back to the topic of our guidance for 2021. We expect next year to be a challenging, the year of transition with meaningful, meaningful headwinds, from North America, as I have already mentioned. And further investment requirements in 5G. Coronavirus and its related economic impact are also a concern. Given based our current view of 2021 is that we will deliver or Nokia level operating margin, Non-IFRS operating margin of seven to 10%. We intend to provide an update on our long-term outlook, at the latest on Capital Markets Day. Our goal now is to ensure that our strategic framework is supported by concrete operational plans from the businesses, factors that support our ability to generate stronger margins include an expected successful turnaround in mobile access, plan to target new value creation from software led digital services with both CSPs and enterprises, a clear path to maintain technology leadership in IP routing and related ongoing market share gains, more discipline portfolio management with each business required to show a clear path to value creation and not rely on end-to-end strategy justification, and better accountability, productivity and cost structure through our simplified operating model. I recognize that this is a lot to digest, which is why we will have more time to discuss these topics in December and March. I want to be very clear that I believe the potential of Nokia is substantial, but delivering on that promise will not happen overnight. We expect to stabilize our financial performance in 2021 and deliver progressive improvement towards our long-term goals after that. I'm sure that you have plenty of questions, but before that we turn - but before we turn to that, let me hand over to Marco for comments Marco? Marco Wirén: Thank you so much, Pekka, and welcome from my side as well, very nice to meet you virtually. Unfortunately we couldn't meet face to face yet because of the COVID. And just building over what Pekka said, and I want to start my comments by emphasizing that we will manage Nokia differently going forward. Fundamentally, both Pekka and I believe that being successful in a technology space is about investing in R&D, and try product leadership. And we will together try a rigorous focus on capital allocation and ensure that we are investing properly in the right areas. And just like Pekka mentioned, return on capital employed is something that we are focusing a lot, and seeing that those businesses that we have will have the right return, and supporting this each of our four new units will be responsible for actively reviewing their portfolio on ongoing basis. And our internal business reviews will be focused on early identification of issues, and will be action oriented as well. And with that, I would like to start my commentary with the walkthrough of Q3 cash flow and our overall liquidity position. Since Pekka already walk through the business performance of Q3, I will briefly touch upon our financial results for Group Common and Others. And finally, I will take you through a few Nokia level items, including an update on our operating expenses. So starting off with our cash flow and liquidity position. And both of these, I can say, I'm very pleased to see how Q3 ended, while Q3 2020 marks the fifth straight quarter of solid free cash flow, it is important to note that large majority of that reason performance has been related to lower net sales, which has benefited net working capital. We have also made progress in terms of our underlying working capital execution. And this is followed by the program we started already in Q1 2019. But of course, when it comes to this year's cash flow generation, as I said, majority of that came from lower top-line. These are two cash related items worth commenting briefly as well, CapEx and taxes. Both of which were affected by timing in Q3. As a result, we have reduced our 2020 outlook assumptions by €50 million for CapEx as well as cash taxes. In addition to improve transparency, we provided two additional disclosures regarding our cash flow in Q3 outlook section. First, we now guiding for 2020 recurring free cash flow, using qualitative range with a midpoint of €600 million. And the second point. We now provide for both 2020 and 2021, and expected difference between Nokia Technologies free cash flow and operating profit. So that you have easier the way to model, what will be the cash flow going forward the next year as well. And our solid Q3 cash flow strengthens our strong total cash position, which is now actually €7.6 billion. In addition to this cash position, we continue to have an undrawn €1.5 billion revolving credit facility. And looking at our depth, we have €5.8 billion outstanding, and all of which is financial covenant free. And also if you look at the maturity profile, it is very undemanding and the average maturity is six years. So, I feel very confident that our current liquidity position will provide the flexibility we need to invest in key areas, in order to be the leader where we choose to compete. In terms of dividend which isn’t turning. I know that many of you want to know all plans already now, but this is a proposal that our Board of Directors, typically makes after Q4. As you know, our board wants to see sustainable cash flow generation before receiving to the dividend. And it is a priority to ensure that we make the right R&D investments, especially in 5G -- to this leadership in technology that Pekka mentioned as well. So, moving to Group Common and Other. Overall net sales increased by 16% year-on-year on a constant currency basis. And this growth was primarily driven by Alcatel Submarine Networks or ASN, which benefited from a strong demand and reopened of our factories. As you remember, the factories were closed because of COVID. Now that we have our factories up and running, we are positioned to benefit also the great market that ASN is seeing. And this is the reason why we have a very strong order book and actually a market leader in this area. Just like Pekka mentioned, it is the web scalars that are, you know, the bet biggest customer group here. And while both cross profit and gross margin improved year-over-year, driven by higher net sales in ASN, overall operating profit of Group Common and Other declined. And the primary reason for this was related to a €45 million net negative fluctuation in the value of our venture fund investments. And these was basically due to the effects changes because the fund is in -- currency, and this is reported on other income and expenses. Then turning to Nokia group level results, in addition to the points that [indiscernible] made. I just want to add some commentary on operating expenses, where there has been a notable development in Q3. If you look operating expenses in Q3 came in quite low. And of course these reflected continuous progress on our cost saving program, but also the temporary OPEX savings related to COVID. And just to give you a couple of examples here, I would travel and personal expenses were significantly lower compared to a year ago. And of course we understand that this is not sustainable. And these will part of this at least eventually we'll get back when we get more normal conditions post COVID, and therefore when modeling operating expenses for Q4 at the full year 2020. Please consider the following; first, with regards to cost saving program, we are on track to achieve that isle €500 million target by the end of 2020. And in addition to these savings, we now expect COVID and lower annual employee incentives to temporary drive down our cost as well in 2020. So as a result, we now expect all full year, 2020 non-IFRS operating expenses to total, approximately to €6.3 billion. Last, but definitely not least. I would like to say a few words on ESG, Nokia and people within Nokia, we want to be proud of our company and our environmental footprint and handsfree and to do the greater good for the society at large. So we clearly believe that our ESG efforts are important for the future of Nokia and that connectivity and technology will play a key role here helping to solve the future challenges. We intend to be at the forefront in our actions, as well in how we integrate our sustainability reporting going forward. So ESG is a priority that we will continue to focus on. And in closing a lot will be changed going forward, especially as we are shifting to our new operational model. I believe that there's a lot of opportunities to create value by improving our execution and our operational and governance, as well. As we do these, we are deeply committed to a transparent finance of reporting and communication. So you will see that, of course we have to change the reporting structure due to the new organization and we will report those P&L entities as well. With that. I will hand over to Matt for Q&A. Thank you.

Thank you Marco. For the two day session, please limit yourself to one question only as a courtesy to everyone else in the queue. Cole, please go ahead.

[Operator Instructions] And our first question today will come from Alexander Duval with Goldman Sachs. Please go ahead.

Yes. Hello. Hi, there. Many thanks for question. Today you’re talking about increased investment, and that's clearly mapped into your guidance and you referenced R&D in particular. And can you please talk about what you've learned so far in terms of what kind of R&D is needed? How you're going to direct the spending and what are the kind of benefits. You'll get from that spend, if we think about things like product quality on the wireless side, your market position, and also financial factors like gross margin?

Okay. Thank you, thank you that's of course an extremely critical, critical question. I would like to my start my answer, going few years back, which I already commented earlier that, for the reasons that I explained. We were clearly behind in 5G development and that has cost us some market share. And since then we have been constantly increasing the spending at the same time when we've been pretty heavily rationalizing the R&D structure and reducing the number of locations where we do R&D. And the good thing is that our customers have recognized the progress and we have lately received pretty encouraging feedback from many customers, and some of them. I can say it, because they said it in public BT with whom we’ve made - signed a large deal. Recently, they said that in public that they have seen great progress on our 5G. So I believe we are catching up. We still need to complete the system on chip roadmap, and it will go into next year until we have - have a high enough share of those. But then very importantly, it is then also being able to on the software side, complete the development of all the different features when we look at the current situation. I mean, different customers are in different situations in some customer - with some customers. We already have cases where we have seen that we are actually slightly ahead of competition in some features. But still if we are totally honest to ourselves and an average. We are still slightly behind. And that's why, since we have very important customer opportunities and we want to take care of these customers and make the commitments to them. When it comes to next year's deliveries and the year after - after that we have decided to increase the investment on R&D. We have to remember that for the time being and this will continue into 2021, we are still going to invest both in. So, SOCs, and then FPGAs, and this will continue in 2021, but then after that, when this ramp up has completed in 2021, then hopefully gradually after that we would be able to start reducing this double spending. So - so that's why I mean there is a possibility that one way or another next year will be the peak, peak here and in the name of transparency. I'm also, since we have factored this in into the guidance next year, what we are talking about in terms of increased R&D spend next year in 5G, it's low triple digits in millions i.e. a low hundreds of millions in additional spend next year and this is one of the things that is factored in the guidance for next year. Sorry, this was a long answer to your question and of course we could go more into detail also. Also, when we have time, but this is how we see this.

Please go ahead with the next question please.

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

Yeah Hi, good morning, good afternoon. My first question is just relating to -- your reflections on Nokia’s as mistakes in the past. I have noticed that in the past, bad news has traveled slowly and good users traveled fast. And, you know, look it has missed its margin targets historically, but are you doing differently internally to make sure that there's no excessive optimism, whether on competitiveness, on pricing? And related to that, when you think about your new sort of organizational structure and when can you take a view, do you think on, on which businesses are non core. You said you mentioned for example that optics could do mid single digit margin, but that doesn't for example, probably cover its cost of capital, so I'd love to sort of hear when you think as a sort of drop dead for some of these decisions about disposals? Thanks.

I mean, I'm of course focusing on the future and not on the past and I do not want to go too deep into anything that has happened before. I talked about the R&D situation in 5G, which I believe I've explained in a way that that is satisfactory. But what is really going to be important for us in the future is to communicate as transparently as possible. We want to develop internally first of all, a culture of openness in all aspects both good news and bad news so that management will get accurate information also on things that are not going well in addition to things that are going well. But then, I mean, my commitment and Marcus and my commitment to you dear investors is, is to be as honest and as transparent as possible and in the name of that honesty and transparency, we have now given you our current best view on next year which will be tough. I realize that many of you feel that it's a disappointment, but when we factor in these four things, loss of market share in one big important American customer, strong price pressure in North American mobile networks, the increased R&D investment to achieve technology leadership in 5G and then COVID uncertainties. This is the most honest and best picture that we can currently give of next year and that's how we want to continue also in the future. Then your second question about what could be potential non core businesses in the future? That's of course not something that I want to speculate on this time as we explained all businesses will need to be able to demonstrate a path to at least deliver their cost of capital, if they are not there today, path to value creation. And as I said earlier, optical networking business it is in turnaround mode. At the moment with close to breakeven profitability, so it's currently nowhere near delivering its cost of capital. Having said that, it has pretty exciting momentum going on. There's good topline growth. Q3 profitability year-over-year was promising. And then there is the product cost reduction opportunity through the acquisition of Elenion which will start to play into the numbers next year. So from that point of view, I'm not ready to make that decision or conclusion today that that they would not be able to cover their cost of capital going forward. So this is the assessment that we are going to go into look through for all businesses and then of course, we will be openly communicating any decisions that we may make in the future.

Thank you, Rob. As a reminder, please limit yourself to one question only as a courtesy to everyone else in the queue. So Cole, we'll take our next question please.

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

Hi. Thank you for taking my question. Can I just ask, when you look at your footprint in mobile, so the loss of footprint with China 5G Verizon, it’s quite substantial. Can you maybe tell us whether you'll be able to claw back maybe half of the loss of the loss footprint in areas where your main competitor is losing share now due to security concerns. How much do you think you can actually claw back? Thank you.

Of course, our goal is to recover, as much of it as possible, but I do not have a number for you yet, but we do see opportunities and some of this recent deals that we have announced clearly are part of this recovery. And yes, we do have exciting stuff in the pipeline as well, but I will not give you a number today. What I would like to point out though, is that when we talk about Verizon, they continue to be our top three customer. We continue to work with them in many parts of the network in routing, in optics, in fixed, in software, cloud, you name it. And of course, we are in the 4G network strongly, and we are, by no means, going to give up on 5G radio either going forward. So we want to find a way to fight back in the future. So that's a general statement about Verizon. The relationship is good and strategic and we have an ongoing dialogue with them all the time. And how much of this others will be able to compensate that and then the low market share in China, which we of course, want to work on in the future. It's too early to say.

Thank you for your question Alex. Cole we’ll take the next question please.

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

Hi. Thanks for taking the question. Just kind of following on a similar term, you've commented that in Q3 you still achieved over a 90% conversion outside of China and obviously this clearly a big impact in the U.S. and have you embedded within kind of the full quantum of headwind of Verizon. And if that's the case, is there anything else you can call out beyond BT that have been helpful in terms of gains elsewhere to offset some of the headwind, because I would have assumed that it would have been a lot less than 90% with Verizon alone.

I mean we have factored in into that number everything we have, and of course, Verizon has a negative, a clear negative impact because of the strong volumes that there are. But as you correctly point out there are also some positive news BT. There is Orange and Proximus in Belgium. There is Elisa. There is Telia in Finland, and several others as well.

Thank you, David. Cole, next question please.

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

Hi, thanks. Can you talk about your ambitions related to top line growth? For example, do you think you will be able to show growth next year despite loss of Verizon footprint? And longer term, are you targeting about market growth even possibilities to gain a share from some of your Chinese rivals?

Of course, any business needs to have an ambition to target top line growth and grow faster than the market, but next year will be challenging, because of the reasons we have already discussed and it remains to be seen that how these two things play out when it comes to top line next year, the loss of market share in North America, but then some of the opportunities in other segments that we are seeing. We are not giving a top line guidance yet for next year. And we see then -- we will then need to see that when we get into December and then Capital Market Day that's what is the right way of providing you with additional information so that you can model the top line part as well. But the best we can now say about next year is that the combination of our expected top line gross margin and OpEx and everything basically SG&A and everything that we will be looking at 5% to 10% non-IFRS operating profit. Marco Wirén: 7 to 10. And…

7 to 10, yes.

Yeah. Thank you, Sami. And Cole, we'll go to our next question please.

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

Thank you for taking the question. I wanted to see if you could maybe talk about the process, you would undertake to determine if you have sufficient scale to compete in 5G given all the moving parts of higher R&D, lower volumes, I have to imagine you've got an equation here, and bring scale competitiveness into question. Could you just help us understand the thought process and the calculus behind the plan to move forward? Thank you.

Of course. That's something that we have following up every day and it will actually now when we consolidate all that into a P&L responsible business. It will also be much easier for us internally to make those decisions because we will be able to better than before connect the deal making, the customer decisions and the expected volumes and margins and potentially the expected additional customer specific R&D requirements, all together in this decision making. For competitive reasons, I'm currently not going. Today we are not going to open up this more, but it is exactly as you said, it is a product of volume, sales margin, gross margin and then very much and this is very important in that business is the R&D investment, because we are talking about a lot of money and as we have noted it will increase next year. Our goal once again is then, since we are today operating in this communication and a fairly high level that we would be able to then provide you the next level of information on the market positions and general ambition of these businesses in December, and then do a real deep dive in March, in the Capital Market Day when then hopefully we would be able to give you a much more detailed information.

Thank you, Simon. Cole, next question please.

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

Thanks very much Pekka. I think investors have become rather tired of the -- the entire equipment sector at Nokia or Alcatel or Ericsson and others with sort of never ending rounds of restructuring where the cash costs seem to linger on, but the cost savings become very hard to spot. Will your move to a new operating model at Nokia involve yet another sort of Nokia restructuring, I think this would be 3.0 or 4.0 since the Alcatel merger, but yet another major restructuring plan that investors would have to wait to see the end of to prove the cost savings.

If I take this through the lenses of what we -- what we want with or what we target with the simplification of the operational model and this is really going to be quite a big simplification. One of one of those things is really to target better cost efficiency i.e. lower -- lower cost, because there is an opportunity through this simplification to look at how we do things and potentially rationalize some overlapping functions. What we do need to focus on, though in everything that we do is basically ultimately at the end of the day only two things matter. Is that you have R&D teams that create great products and then you need to have customer teams that are able to take these to customers and get them installed delivered and taking care of your customer and everybody else in the company. Mark and me included, we are here to make these two teams successful. So if we -- when we talk about rationalization. We want to do it in such a way that we keep focused on these two teams. I do see potential for better cost efficiency, but this is something that we will come back to, then later when our plans have proceeded and then of course I mean, the reality is in some cases, if you want to reduce costs, there may be then restructuring costs associated. But this is all speculation at this time there are no decisions. And this is something that we will we will come back to later, if needed.

Thank you for your question Richard. Cole, we will now take our final question for today.

And your final question for today will come from Stefan Slowinski with Exane BNP Paribas. Please go ahead.

Yes. Good afternoon and thanks for the increased detail and transparency today. Had a question on cash flow and the dividend outlook, would you say is now a three to five year outlook so just wondering what you mean by three to five years? And in the past I think you've stated you would reinstate the dividend when you had 2 billion of net cash. You should be there by the end of this year, so are you suggesting that the net cash will trend lower next year, if you don't pay a dividend this year, or is that €2 billion level no longer the policy? Thank you.

Thank you so much for the question. Just to be clear here. The three to five year long-term dividend target has been there quite a long time and that's our dividend policy 40 to 70% of non-IFRS EPS is paid as a dividend. When it comes to the Board of Directors assessment that I touched upon us well in my introduction. The board will make the decision, usually after the Q4 for closing. And, of course, then they're going to assess, not only the net cash today, but also what are the investment needs that we have going forward. And what is the expected net cash position going forward and all of these different aspects are weighted together and that's the board will make a decision.

Okay. Thank you very much for your questions today everyone, I'd like to talk -- turn the call back to Pekka for closing remarks.

Thank you very much. Matt and thanks again to all of you for joining us today. As you can see we still have plenty of work to do on our go forward strategy and I know we will have a lot to discuss with all of you in the coming months. I will simply say three things in closing. First, we will have a relentless focus on returning Nokia to shareholder value creation. Second, we will be transparent about where we stand and the challenges we face. And third, there is much good - there's much good that we are doing every day, and you can see that in our solid Q3, our progress in mobile access and the strong positions we have elsewhere in our business. So I really look forward to talking with all of you again in December, if not earlier in one-to-one meetings. So with that, again, back to you, and Matt - thank you very much and back you, Matt.

Thank you, Pekka. Ladies and gentlemen, this concludes today's call. I would like to remind you that during the 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.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. And at this time, you may now disconnect your lines.