Nokia Oyj

OMXH:NOKIA

Earnings Call Transcript 2022-Q2

[David Mulholland, executive]

Hi, everyone, and welcome to the short introduction to Nokia's Second Quarter 2022 Financial Results. My name is David Mulholland, Head of Investor Relations. And with me today is Pekka Lundmark, our President and CEO.

[Pekka Lundmark, executive]

Hi, everyone.

[David Mulholland, executive]

In today's discussion, we'll be focusing our financial discussion primarily on constant currency growth rates and when we talk about margins on a comparable basis. If you look at our financial report that's published on the Investor Relations website, you can find a full reconciliation to our IFRS financial results.

[David Mulholland, executive]

And with that, Pekka, can you give us a few words on how you find Nokia's financial performance in the second quarter?

[Pekka Lundmark, executive]

Thanks, David. I'm pleased to say we continue to execute well in the second quarter. We improved net sales growth to 3% despite the ongoing impact of supply chain constraints. We saw growth in Network Infrastructure, Mobile Networks. And from a regional perspective, North America was a real standout with a 19% increase in net sales.

Q2 was also another quarter of robust profitability with a 12.2% operating margin. This was slightly down year-on-year due to the timing effects of contract renewals in Nokia Technologies as well as a one-off software benefit in Mobile Networks that we communicated last year. But excluding these factors, we continue to see strong improvement in the underlying profitability of the business. Overall, it was a solid quarter and first half for 2022. And I'd like to thank the whole Nokia team for that.

[David Mulholland, executive]

And I wonder if you could share a few more words just on how each of the business groups performed in the quarter.

[Pekka Lundmark, executive]

First of all, Network Infrastructure had another great quarter with 12% growth in net sales. This was driven both by strong market demand and our increased market share. All 4 of its businesses grew with Fixed Networks and Submarine Networks as the main engines, both delivering double-digit growth. I was also pleased to see Mobile Networks delivering solid profitability and a 1% growth in net sales.

Our continuing investments in technology leadership and competitiveness are showing results. We are confident we will deliver growth on a full year basis this year, and that will remain on a path to start growing faster than the market in the midterm.

Cloud and Network Services growth was flat compared to last year, while Nokia Technologies continued to be impacted by the ongoing renewal process of 2 licensing contracts. But we remain confident in the strength of our patent portfolio and expect to return to the previously communicated annual run rate of EUR 1.4 billion to EUR 1.5 billion, with the assumption that the 2 ongoing contract renewals are concluded.

[David Mulholland, executive]

One of the concerns that we've had from many of our investors recently is around the outlook for the global economy. I wonder if you could share a few words on how you see that potentially impacting Nokia's business.

[Pekka Lundmark, executive]

Well, we are obviously seeing the same headlines our investors are seeing. None of us has a crystal ball to predict what exactly is going to happen in the world economy in the next 12 months. Our focus is on preparing for all possible scenarios. However, I would like to make a couple of quick comments.

First, even though our business is not immune to macro trends, we continue to see strong investment trends in connectivity, particularly into 5G and fiber deployments. And those investments are very important for many of our customers to cope with increasing data consumption and the need to increase productivity, which networks enable.

So far, we haven't seen any major changes in our demand outlook. Customer demand and order intake remain strong, and we continue to be more supply than demand limited. But the macro trends could impact the pace at which our customers are investing. There can, for instance, be some challenges in emerging markets where currency movements could impact the affordability of our products that are effectively priced in U.S. dollars or euros.

And finally, the most important thing for us as a company is to make sure we do not become complacent. We will maintain our focus on further increasing our technology leadership and having a constant focus on cost efficiency. If we maintain that focus, I'm confident we can continue to deliver on our strategic goals.

[David Mulholland, executive]

The other area that we've been getting a lot of questions, and I have been discussing at length with our investors, is around our supply chain. It's obviously been a constraint on the business, but how do you see that performing in the second quarter and into the second half of the year?

[Pekka Lundmark, executive]

As you all know, this has been a really challenging situation that we have been dealing with in a number of ways since the pandemic hit. Towards the end of last year, we were facing constraints across a lot of suppliers in the business. We said earlier this year that the situation was changing a bit towards more supplier-specific challenges that were constraining our business. Today, that largely remains the case, but we are seeing signs of the remaining challenges starting to ease through the second half of 2022 and the first half of 2023.

[David Mulholland, executive]

And as a global business, you mentioned Nokia has some currency exposures. Now obviously, we've seen year-to-date that there's been a 10% strengthening of the U.S. dollar. Can you maybe give us a quick overview of Nokia's exposure to currencies and how it can impact the business as well?

[Pekka Lundmark, executive]

The good thing is that when we are talking about currencies, we are relatively well naturally hedged from a currency exposure and have broadly similar sales compared to costs in most currencies. We do, however, have slightly more revenue than we have costs in U.S. dollar, with roughly 55% of sales and 50% of costs currently.

As a rough rule of thumb to our currency exposure in the longer term, in relation to the U.S. dollar, if the dollar strengthens by 10% against the euro, it would provide a roughly 5% tailwind to our sales and a neutral to slightly positive impact to our operating margin before hedging. In the short term, however, our hedging program, which dampens the impact of currency movements, means that our operating profit for the financial year 2022 is largely unaffected. So considering the tailwind it provides to sales, a stronger U.S. dollar is a slight headwind to our operating margin.

[David Mulholland, executive]

Thank you, Pekka. And for the first half of the year is obviously now behind us, how do you see the financial outlook for the second half and for the full year 2022?

[Pekka Lundmark, executive]

Overall, we had a strong first half. And with our renewed competitiveness, we are well placed to deliver our full year 2022 guidance. There remain risks around the timing of technologies, contract renewals, potential COVID-19 lockdowns and the supply chain situation. We are currently tracking towards the higher end of our net sales guidance and towards the midpoint of our operating margin guidance as we manage ongoing inflation and currency headwinds.

[David Mulholland, executive]

Thanks, Pekka. Any final words before we finish up?

[Pekka Lundmark, executive]

Well, to sum up, we are in a good place. I'm pleased with the progress across the business in the first half of the year. It has led to improved revenue and good profitability. I think there are great opportunities for us ahead with the demand for digitalization and connectivity continuing to increase. Our work to refocus R&D investments and improve cost efficiency has put us in a stronger position to capitalize on these opportunities. So all in all, I'm pleased with the first half of the year. And I look forward to further progress in the second half.

[David Mulholland, executive]

Thank you, Pekka, for these comments. And thank you all for joining us today.

During this video, we have made forward-looking statements, and these statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. We have identified such risks in more detail in the Risk Factors section of our 2021 Annual Report on Form 20-F.