Nokia Oyj

OMXH:NOKIA

Earnings Call Analysis

Nokia Focuses on Cost Reduction Amid Sales Decline

Nokia is restructuring to boost agility and cost efficiency, planning to slash costs by EUR 800 million to EUR 1.2 billion by 2026, leading to a 10%-15% workforce reduction. Despite macroeconomic pressures decreasing Q3 net sales by 15% and Mobile Networks sales by 40% in North America, gross margin remained stable at 39.2%, and operating margin was resilient at 8.5%. Nokia expects Q4 seasonal improvements but foresees a TAM contraction, particularly in Mobile Networks. Aiming for the lower end of its EUR 23.2-24.6 billion 2023 net sales forecast and the midpoint of the 11.5%-13% operating margin, Nokia remains optimistic about the sector's long-term outlook.

Eyes on Efficiency: Nokia Targets Significant Cost Reductions

In light of current economic pressures, Nokia aims to substantially lower its costs by EUR 800 million to EUR 1.2 billion by the end of 2026. This initiative includes a reduction in personnel expenses, aiming to reduce headcount, leading to a 10% to 15% cost saving in this area.

Resilience Amidst Macroeconomic Headwinds

The company faced a challenging quarter with a 15% year-on-year decline in net sales due to macroeconomic challenges pressuring operator spending. Despite this, Nokia maintained a gross margin of 39.2% and achieved an operating margin of 8.5% for the quarter, reflecting resilience given the circumstances.

Mixed Performance Across Business Segments

Notably, the Network Infrastructure segment experienced a 14% sales decline, mostly across the board except for Optical Networks, which grew by 4%. IP Networks witnessed a 24% decrease, majorly impacted by North America. On the other hand, Cloud and Network Services showed stability with marginal declines and a 290 basis point increase in operating margin.

Mobile Networks and Regional Variability

The Mobile Networks sector continues to see regional variances, with significant growth in India but declines in North America and other areas. Despite a decline in gross margin year-on-year, sequential improvement has been observed and is expected to enhance further in Q4. Moreover, over the last 18 months, Nokia has bolstered its market share in the overall RAN market, excluding China, by over 3 points.

Patent Licensing and Growth in Private Wireless

Although Nokia Technologies experienced a 14% decline, which is consistent with previous quarters in 2023, the management remains optimistic about returning to a run rate of EUR 1.4 billion to EUR 1.5 billion. Meanwhile, the enterprise segment is outperforming with private wireless growing at a double-digit rate, underscoring the company's strength in this niche with approximately 675 customers.

Cash Flow and Shareholder Returns

The quarter's free cash flow was negative at EUR 400 million, primarily due to net working capital outflows. Nevertheless, the company managed to return EUR 260 million to shareholders through dividends and share buybacks and is hopeful that cash performance will improve in Q4.

Outlook Amid Market Deterioration

Nokia anticipates a 9% decline in the addressable market for Mobile Networks due to ongoing macro uncertainty, but it foresees long-term market potential. For 2023, Nokia is steering towards the lower end of the net sales guidance range (EUR 23.2 billion to EUR 24.6 billion) and the midpoint of the operating margin range (11.5% to 13%).

Earnings Call Transcript 2023-Q3

[David Mulholland, executive]

Good morning, ladies and gentlemen. Welcome to Nokia's Third Quarter 2023 Results Call. I'm David Mulholland, Head of Nokia Investor Relations. And today, with me here in Espoo, is Pekka Lundmark, our President and CEO, along with Marco Wiren, our CFO.

Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Results that could cause -- factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website.

Within today's presentation, references to growth rates will mostly be on a constant currency basis. And where we refer to margins, it will be based on our comparable reporting. Please note that our Q3 report and the presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and a reconciliation between the two.

In terms of the agenda for today's call, Pekka will give a quick overview of some of the announcements we've made this morning along with our financial progress in the quarter. Marco will then go into a bit more detail on some of the key factors influencing our financial performance before Pekka gives a brief conclusion, and we move to Q&A.

With that, let me hand over to Pekka.

[Pekka Lundmark, executive]

Thank you, David, and thank you all for joining us today. Before we talk about our financial performance, I wanted to actually start and explain some other announcements we have made today because we are taking decisive action on three levels: strategic, operational and costs.

We will accelerate our strategy execution by providing our four business groups with increased operational autonomy and agility. This will enable them to better address opportunities in their distinctive markets. They will be empowered to faster diversify beyond service providers, build new ecosystem partnerships, implement new business models and invest for technology leadership.

We are also streamlining our operating model. We had, in 2021, created four P&L responsible business groups, structured around unique customer offerings, but supported by a shared sales organization. We will now embed the sales teams into the business group, so the new model is the one that you will see here on the right-hand side on the slide. These dedicated sales teams with a strong product and customer connection will enable business groups to better seize growth opportunities and diversify into enterprise web-scale and government sectors. This change will bring highly empowered teams in front of customers that are able to make quicker decisions based on their needs.

The company will also move to a leaner corporate center with strategic oversight and guidelines, for instance, for financial performance, portfolio development and compliance. We will continue our strong commitment to long-term research through Nokia Bell Labs.

In the face of a more challenging market environment, we will reduce our cost base to secure our profitability. We are moving quickly to lower our cost base on a gross basis by EUR 800 million to EUR 1.2 billion by the end of 2026, assuming on target variable pay in both periods. Nokia expects to act quickly on the program with at least EUR 400 million of in-year savings in 2024 and a further EUR 300 million in '25. The program is expected to result in a 72,000 to 77,000 employee organization instead of the approximately 86,000 employees Nokia has today. Overall, this represents a 10% to 15% reduction in personnel expenses. The exact scale of the program will depend on the evolution of the market demand in the coming years. We do expect net savings, but the magnitude will depend on how inflation develops.

If we now turn to our financial performance in Q3. We saw an increased impact on our business from the macroeconomic challenges, which are pressuring operator spending, and that resulted in a 15% year-on-year decline in net sales. Gross margin at 39.2% declined only slightly versus the previous year, and I'm happy to see a sequential improvement in gross margin in Mobile Networks. However, it is during such challenging times that the business proves its resilience, and that is exactly what we see when we look at the operating margin, which was 8.5% for the quarter.

Network Infrastructure sales declined by 14%, with most business lines declining with the exception of Optical Networks. IP Networks sales declined by 24%, reflecting weakness in North America as customers continue to evaluate their spending as well as small declines in other regions. The 19% decline in Fixed Networks was broad-based, exacerbated by tough comparisons to the quarter year -- corresponding quarter a year ago. Fixed Networks was also impacted by customer spending in America as well as some inventory digestion. There was a small decline of 5% in Submarine Networks, which related to project timing. The growth in Optical Networks of 4% was primarily driven by India and showed the continuing momentum in customer engagement with our PSE-V solutions. Recently, gross margin in Network Infrastructure improved year-over-year, while operating margin was somewhat resilient at 9.5%, a decline of 80 basis points.

In Mobile Networks, we saw the regional trends of the first half continuing in Q3. North America sales were impacted by the challenging macro environment and as customers continued to digest inventories. India grew significantly year-over-year, but the pace of deployment has slowed significantly compared to H1. There were declines in most other regions with the exception of Middle East and Africa, which had modest growth.

Gross margin declined year-on-year, reflecting the regional mix, but we did see a sequential improvement and expect further improvement into Q4.

Operating margin also declined to a lesser extent as it benefited from positive impacts of other operating income. As you can see in the bottom left of the slide, over the last 18 months, we have gained over 3 points of market share in the overall RAN market, excluding China, a real testament to the improved competitiveness of our products.

Cloud and Network Services delivered a more stable performance in Q3 with a small top line decline. We are happy to see that the growth in Enterprise Solutions continued, but was offset by small declines elsewhere. Operating margin in Cloud and Network Services expanded by 290 basis points, somewhat also benefiting from other operating income.

We take a moment to understand the evolution of the digital ecosystem today, we have visualized on the slide -- as we have visualized on the slide that you can see on the screen. This slide brings together the ecosystem of CSPs, hyperscalers, enterprises and developers working together to bring new capabilities to market to enable Industry 4.0, the Metaverse and many other new types of value.

Our Network Monetization Platform, which delivers network as code to the ecosystem launched in September, brings the ecosystem together through APIs to enable seamless connectivity, whereby enabling new use cases to help CSPs and enterprises take advantage of the opportunities created. We have created this platform which, once again, we call Network as Code organically, bringing deep knowledge and understanding of networks, enterprises and the developer community, which puts us firmly at the forefront to help operators monetize their advanced 4G and 5G assets using network APIs. We want to empower a new wave of enterprise and industrial applications that can utilize the network in a much more programmable way. We have seen significant interest from operators globally and have already signed for strategic agreements.

Raghav will go into more detail on the work we are doing in this space at our investor event in December.

Nokia Technologies declined 14% as a result of the same two items that have impacted prior quarters in 2023. Our Q3 run rate remained at EUR 1 billion, stable compared to prior quarters. We remain confident in our ability to return to the EUR 1.4 billion to EUR 1.5 billion run rate that we have had been in the past as we complete the smartphone licensing renewal cycle and further expanding into new growth areas. It is worth noting that renewal negotiations also continue with certain other smartphone companies. We also passed a key milestone recently. We now have over 6,000 patents declared essential to 5G.

And then turning briefly to our Enterprise performance in Q3. Net sales grew by 5% in the quarter and have now reached approximately 10% of the group net sales on a 4-quarter rolling basis. This is well aligned with our ambitions and have no intention to slow down expanding into this area. Private wireless grew at a double-digit rate once again, and we now have approximately 675 customers. Overall, Enterprise remains a key part of our strategy, and we are pleased with the progress here despite the macro uncertainty we have been seeing elsewhere in the business.

So with that, let me turn it over to Marco to comment on our financial performance in a little bit more detail. Over to you, Marco.

[Marco Wiren, executive]

Yes. Thanks, Pekka. And let me start by commenting the regional performance of our business. And we saw continued year-on-year growth in India, where the net sales grew 121% in the quarter, and this was driven by both Mobile Networks and Network Infrastructure. And as we indicated last quarter as well, we have seen some normalization in the region in quarter 3, and we expect the pace of deployment to continue to slow. We saw declines in most regions and notably in North America, where we saw the largest impact from the macroeconomic as well as from inventory digestion effect I referred to as well. And this led to a decline of 40% year-on-year.

And then if we look at the operating profit in the quarter, you can see here that the maturity of the decline was driven by Mobile Networks. And this reflected the regional mix that has been impacting the business through the year, mainly due to increased levels of sales in India and then, of course, the lower sales in North America.

And also Network Infrastructure, we -- you can see here that it was rather resilient despite the overall top line decline. Cloud and Network Services showed some progress in the quarter, while Nokia Technologies declined and the group common change was minimal as venture fund performance was flat year-on-year.

And turning to our cash performance. Our free cash flow was negative EUR 400 million in quarter and was mainly driven by continued outflows in net working capital. And this largely reflected an increase in receivables and increase in liabilities, while inventories declined slightly.

In the quarter, we returned EUR 260 million to shareholders through dividends and share buybacks and we ended the quarter with EUR 3 billion of net cash. And while our cash performance has been quite weak year-to-date, we do expect net working capital headwinds to ease in quarter 4 and for cash performance to improve.

And next, looking at our total addressable markets. We saw further deterioration in the quarter, namely in Mobile Networks and, to a lesser extent, Network Infrastructure. Mobile Networks addressable market is now expected to decline 9% as the macro uncertainty continued to adversely impact our year. Clearly, our market has seen a challenging environment this year, but we do still believe in the mid- to long-term attractiveness of this space.

And then finally, turning to our outlook. While our third quarter net sales were impacted by the ongoing uncertainty, we expect to see a more normal seasonal improvement in our network business in the fourth quarter. And based on this and assuming also that we resolved the outstanding renewals impacting Nokia Technologies, we are tracking towards the lower end of our EUR 23.2 billion to EUR 24.6 billion net sales range for 2023. And we continue to track towards the midpoint of our comparable operating margin range of 11.5% to 13%.

And with that, back to you, Pekka, for some final remarks.

[Pekka Lundmark, executive]

Thank you, Marco. To summarize, our third quarter performance demonstrated resilience in our operating margin despite the impact of the weaker environment on our net sales. In the last 3 years, we have invested heavily to strengthen our technology leadership across the business, giving us a firm foundation to weather this period of market weakness.

We continue to believe in the mid- to long-term attractiveness of our markets. Data traffic is expected to continue to grow 20% to 30% per year. And actually, the big picture is pretty simple. I mean the whole world is talking about cloud computing and AR evolutions, and there are huge expectations on both. But neither of the two, cloud computing or AR evolutions will materialize without significant investments in networks that have vastly improved capabilities. So that's why we believe that this is a question of timing. But however, since that timing of market recovery is uncertain, we are now taking decisive action on three levels: strategic, operational and costs, as I described. So I believe that these actions will make a significant contribution to creating value for our shareholders.

So with that, over to David for Q&A.

[David Mulholland, executive]

Thank you, Pekka and Marco, for the remarks. Before we start the Q&A, I just wanted to highlight that, as Pekka mentioned, we do plan to hold an analyst and investor progress update event on the 12th of December at our headquarters in Espoo, Finland. We hope many of you will be able to join us in person, and registration details will be coming out next week. At the event, we will have presentations from Pekka and Marco on the evolution of our operating model, along with an update from Tommi Uitto on what we're doing in Mobile Networks, along with Raghav Sahgal on Cloud and Network Services.

With that, let's start the Q&A. [Operator Instructions] Alex, could you please give the instructions?

[Operator]

[Operator Instructions] I will now hand the call back to Mr. David Mulholland.

[David Mulholland, executive]

Thank you, Alex. We'll take our first question from Alex Peterc from Societe General.

[Alexander Peterc, analyst]

My first question would be really on what we should read into your substantial -- in your cost-cutting plan. Is that mainly what you think is required to get you to 14% margins by 2024? Or should we also read as it is that you plan for potentially a longer and more protracted deeper downturn in your end markets without guiding on 2024? Could you give us some sense of direction there? And I have a quick follow-up.

[Marco Wiren, executive]

Thank you. And when it comes to long-term target, we have said that we aim to reach that by 2026. We haven't given any more specific on that when it comes to '24, so we cannot give you any guidance on that yet. We will get back to that in our quarter 4 report. Otherwise, the cost-cutting program, we are taking actions now to be prepared for the market conditions that we see right now. And as we said also that depending how the market evolves over the next coming years, how much we will basically do the cost cuttings and what levels would we get. And that's why we're giving you this interval as well.

[Pekka Lundmark, executive]

Clearly, if I add one thing, the key thing here really is to be prepared for various scenarios. We are not saying necessarily that this would be a long downturn. But the thing is that it is impossible to say exactly how long it will last. We just want to be prepared for different possibilities.

[David Mulholland, executive]

And you have a follow up.

[Alexander Peterc, analyst]

Just a very quick follow-up. You do note the ongoing inventory reduction at your customers that affect your top line, and that was very visible in the quarter. Could you help us understand where you think we are in this destocking cycle at your Mobile and Fixed Network operator clients in major geographies?

[Pekka Lundmark, executive]

Yes, Alex. This -- I mean, the inventory digestion obviously varies by customer, but things do continue to trend in the right direction. Some customers are more advanced than others in terms of reaching their desired levels, and it continues to impact Q4 given the pace of rollout of several networks that's slowed, but the big picture still is that we expect this to be much less of a topic in 2024.

[David Mulholland, executive]

Thank you, Alex. We'll take our next question from Simon Leopold from Raymond James.

[Simon Leopold, analyst]

I want to see if you could maybe unpack a bit about what's informing your confidence in the seasonal improvement for 4Q and just remind us what are your views on what is normal seasonal, just so we've got a reference on that. And what I'm looking for is whether it's around products or around geographies, just what's kind of the bill to that confidence?

[Marco Wiren, executive]

Yes, absolutely. Thank you. Normally, if you look historically, we've seen the normal seasonality if you compare between quarter 3 and quarter 4, that there is about 20%, 25% uptick between those two quarters. And this is how our customers usually buy from us, and also the delivery schedules are based on this.

When it comes to this year, this is what we see right now that we have some regional differences as well. We have said that India is slowing down, just like we've said already in quarter 2 that we see that during the second half, we see more normalization in India. But then, of course, we see other customers and other regions as well that there is normal seasonality trend, and this is why we expect the quarter 4 to be an uptick. And of course, here as well, I just want to remind you that we have assumed that we will sign the agreements in the tech side, which are in the litigation right now.

[David Mulholland, executive]

Do you have a follow-up, Simon?

[Simon Leopold, analyst]

Yes. Just maybe a quick follow-up and more just philosophically, does the increased BU autonomy imply in any way that the company is more open to the idea of either some divestitures or separation of any kind? Can people read that into this structure?

[Pekka Lundmark, executive]

Well, as I said, the purpose or the reason why we are doing that, i.e., increased autonomy to the businesses is really to accelerate our strategy execution, and we are removing any kind of remaining complexity in the organization, in the interface between the sales teams and the business units. So that is really the driver to create smaller autonomous units so that they would be able to, in a way, control their own destiny when it comes to the market expansion to non-CSP businesses entering into technology and other partnerships of their own without having to negotiate or coordinate always this with other businesses.

So this is really the driver in all this. But having said all this, I mean, we have said, if you remember our strategy pillar presentation from -- already from the Mobile World Congress Active portfolio management is one of our pillars, and it continues to be. So you have seen some moves earlier this year on RFS and then on the Cloud Infrastructure deal we made with Red Hat. And absolutely, these type of things will continue to be on the agenda also going forward.

[David Mulholland, executive]

And we'll take our next question from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

My first question is a little bit on this -- if you can give us any preliminary restructuring charges needed to reach a new sales model and lowered employee base, both perhaps to the EUR 400 million that you expect for 2024, this EUR 295 million, I believe, non-restructuring charges or restructuring charges in Q3 and also if -- for the full -- close to EUR 1 billion mid-range of the total cost out that we should expect until 2026.

[Marco Wiren, executive]

Thank you, Daniel. I just want to start with saying that when it comes to cost program -- cost out program and the organizational involvement that we are doing, those are two separate issues and not connected itself. So the reason for the reorganization when it comes to sales resources, this is not cost cutting. It is more to secure that we have the best customer interconnection and can serve customers in the best possible way.

When it comes to the cost-cutting program, just like we said, we estimate to have already EUR 400 million in in-year savings next year and EUR 300 million in '25. When it comes to the restructuring onetime charges and cash out, they will be close to the annual savings that we achieved. So those usually go hand in hand, and this is something we see as quite typical as well.

[David Mulholland, executive]

Did you have a follow up, Daniel?

[Daniel Djurberg, analyst]

I guess, some on the -- obviously, a sensitive matter, but still important given your outlook or -- on the guidance, the visibility into the IPR renewal outlook today versus a quarter ago given the outcome we've seen in various quarters rulings recently.

[Marco Wiren, executive]

Yes. Just like you said, we've seen a very good development on different court outcomes that we've been on a winning side, and that's why we are very confident on the quality of our patents. And that's why we believe also that we should have a positive outcome in these dedications and negotiations that we have. And as we said that in our guidance for this year as well, we assume that we will finalize these negotiations with these two outstanding customers in the tech side. So this is pretty much what we can say right now. As you understand, the timing is always difficult to estimate. And we always said also that we prioritize defending the value of our portfolio over specific time lines.

[David Mulholland, executive]

Thank you, Daniel. We'll take our next question from Felix Henriksson from Nordea.

[Felix Henriksson, analyst]

Regarding the cost savings and the headcount reductions that you've announced, I want to hear your thoughts on what are you sacrificing while taking these actions. Is there any implications for R&D, sales, et cetera? And sort of will you have to sort of accelerate recruitment again once the market sort of picks up and becomes more favorable?

[Pekka Lundmark, executive]

Yes. Thank you, Felix. First of all, we are really making structural changes in the operating model and in the group structure in general with exactly the game that what we are now cutting would not automatically have to be recruited back when the market picks up, so we expect [indiscernible] structural improvement of our cost base.

What is important to keep in mind here is that when we are doing the reductions, we will always protect R&D output. There is, obviously, very interesting opportunities to improve R&D productivity through new technologies. We have already seen that in the right hands. For example, AI copilots are significantly improving the productivity of software development, for example. So there are opportunities in terms of R&D productivity, but we are clearly going to always defend our ability to deliver R&D output.

And when it comes to sales resources, obviously, the sales reorganization and simplification of the organization that we are now doing is providing some potential. But there, ultimately, the sales resources will be scaled in accordance with what we see in terms of opportunities on the market. And then when it comes to SG&A, that is clearly an additional source of savings that we are seeing, and it is a meaningful part of the overall potential in the program.

[David Mulholland, executive]

Thank you, Felix. Did you have a follow-up?

[Felix Henriksson, analyst]

Yes. Yes, just a quick one regarding the market demand. So I just wanted to hear your thoughts on whether or not you actually think that the market can turn for the better without sort of these killer apps that can actually improve 5G monetization for your telecom customers or because it sounds like that the current sort of headwinds that you're facing are perhaps also going beyond the inventory corrections and the macro slowdown that we see.

[Pekka Lundmark, executive]

Yes. I mean this is obviously one of the most important interesting questions for the whole industry going forward because a key reason why operators have been hesitant with their investments has been that their 5G monetization has been slower than expected. And the reason for that has been that it has been difficult for them to introduce new applications that would take advantage of the capabilities of 5G.

And what we really need is, first of all, in the Network Infrastructure, we need a stand-alone core with capabilities like slicing. We need more capacity in the radio interface, which is to be achieved through 5G mid-band. But then very importantly, we need to make the network more programmable so that it's easier and faster and less costly for application developers to bring new use cases to the market. And this is where the Network as Code platform that we introduced to the market during Q3 comes in. It is a platform that includes a set of APIs with the goal to make the network programmable.

And what I do want to emphasize is that we have developed this organically within that R&D budget that we have. We have excellent feedback from customers. We have significant traction from the market. We have four -- as I mentioned, we have four deals already, and there is clearly more in the pipeline. And this is one of the key focus areas that we will be delivering more information in Raghav presentation in the December investor event.

[David Mulholland, executive]

Thank you, Felix. We'll take our next question from Richard Kramer from Arete.

[Richard Kramer, analyst]

Pekka, the first question is you have this infrastructure progress update this summer, which highlighted that you were coming into new product cycles and IP routing and optics as well as looking forward to big U.S. government funding projects and fixed. Are you now seeing that infrastructure is no longer driven by product cycles as it was before? And can you give us an update on where the hyperscaler wins that we've long hoped Nokia would be able to deliver where you are on realizing those?

[Pekka Lundmark, executive]

Well, we are working on several hyperscale opportunities right now. But as of today, there are no new news. Hopefully, there would be soon. So that remains to be an attractive opportunity.

In general, when we talk about Network Infrastructure, and I guess, especially the network architectures and the product cycles in routing and optical, and then I comment fixed access as well. But there is obviously now with the new technology cycles, including what we are delivering in routing through FP5 and the 800 gigabit services and then the optical platform, PSE-V, the combination of these two is enabling completely new network architectures in the metro and regional networks where the key driver is really a new generation of 400 and 800 gigabit services. We are, of course, trialing already 1.2 terabits per second. We are able to deliver it. We are able to deliver 800 gigabit services over 2,000 kilometers, which is a real technology leadership position in the whole world.

These are the drivers that are pushing network architectures to new boundaries, and we see no slowdown in this type of -- kind of product-driven or architectural development evolution of the networks. You saw that the Optical Network business in terms of volumes has been more resilient than the other businesses. So this is all good. But at the same time, obviously, these are taking a very critical look on their investments also in this area because of the macroeconomic situation. But our relative position here is pretty strong.

Then in terms of fixed access, obviously, the comparables are pretty tough now because we had substantial growth in that business, both in '21 and '22. When we get into '24, we do expect to start getting support from government-funded programs, especially the BEAD program in the U.S., the EUR 42 billion high-speed Internet grant program, where we estimate that our accessible market is about 10% of that. We have -- since the announcement in July where we announced that we would be starting manufacturing that would be in compliance with the Buy America requirements. We have had significant traction from several service providers, including Tier 2 and Tier 3 service providers that will be making investments and getting funding from the BEAD initiative. So this will start coming gradually during 2024.

In general, when we talk about the demand for Network Infrastructure, there is, here and there, interesting evidence that hopefully we would now be through the low point in terms of demand in Q3 in terms of new orders. And we would expect that, gradually, the market will start recovering. But again, it is too early to call it a broad-based recovery, but we are seeing signs here and there. So that's why we definitely continue to believe in the potential of Network Infrastructure.

[Richard Kramer, analyst]

And maybe a quick one for Marco. A quick follow-up for Marco. Just so we can understand it, does the rise of reaching 10% of Enterprise sales within the mix, does that have a near-term dilutive or positive impact on margins given you obviously are expanding your product portfolio there and you need to do your sort of go-to-market model, but at the same time, Enterprise historically has had very healthy margins?

[Marco Wiren, executive]

Yes. Thank you for the question. We haven't specified the margin in Enterprise side. But as we said that we believe in this sector very heavily and our ambitions is to grow in this sector, and this is one of our strategic pillars as well at the group level that we believe that this will create new opportunities, just like Pekka mentioned already in Network Infrastructure side.

In IP side, we have increasingly introducing new offerings to our customers in the webscale side, where we are still quite small. And this gives -- beyond the more normal market development, this gives the new opportunities for growth in NI as well.

[David Mulholland, executive]

Thank you, Richard. We'll take our next question from Andrew Gardiner from Citi.

[Andrew Gardiner, analyst]

I just wanted to come back to the seasonality you're calling out in the fourth quarter. I mean, Marco, you described the normal seasonality, I think, in particular, with reference to Mobile Networks and Network Infrastructure, low to mid-20% sequential. But at the same time, you're also telling us that India is off the peak and volumes are coming down, so that is a headwind or a loss in equal. And I think Pekka, you mentioned as well that there's still some impact from the inventory cycle in the fourth quarter. So what would be offsetting those two headwinds to get you to a more normal level of seasonality in the fourth quarter?

[Marco Wiren, executive]

Yes. As I said, we see different areas in different customers that their plans are that we see potential increase in quarter 4, and this is how we have based our forecast as well. And we've seen that when we gave the quarter 2 report as well that the second half would be more skewed towards the quarter 4, and quarter 3 would be a lower one. And this is exactly how we've seen the development so far. So this is where we have based our assumptions in our forecast for quarter 4 as well.

[Andrew Gardiner, analyst]

Is it possible to help us a little bit in terms of in the region or two that might be a little bit better than normal as a result of that? And just obviously, we've had your competitor, Ericsson, earlier this week, and I fully take your point that the phasing through the year for the different operators and different vendors is going to be a little bit different depending on exactly what you're doing for them and where in the country. But just it would be helpful to understand where you might be seeing a better trend in the fourth quarter.

[Marco Wiren, executive]

We haven't given any specific guidance on this. But if you look at different businesses as well and how they performed in quarter 3, and Pekka alluded to this as well that we believe, for example, that in NI side and Network Infrastructure side, that we perhaps have seen the low point now. And there seems to be some signs of improvement on the market as well.

[Pekka Lundmark, executive]

And then, of course, to be added maybe. It's obvious but, of course, in Cloud and Network Services business, we are again expecting a seasonally big quarter in Q4. And then in the forecast, there is, of course, for the Technologies business, the assumption that we close the ongoing negotiations with OPPO and Vivo.

On India, maybe one comment. Our India business last year was EUR 1.3 billion. And now we have, year-to-date, EUR 2.5 billion. There was a big sequential drop in Q3 compared to Q2. So now we are getting to levels which would be closer to what we said earlier that, in a way, the new normal run rate when we then look into '24 and '25 would be somewhere between the EUR 1.3 billion in 2022 and wherever we will end this year. So this is something that is important to keep in mind in terms of India. So there was already a big sequential drop between Q2 and Q3.

[David Mulholland, executive]

Thank you, Andrew. We'll take our next question from Sandeep Deshpande from JPMorgan.

[Sandeep Deshpande, analyst]

I'm trying to understand actually now going into 2024, clearly, you are adjusting your cost base as well. But on the top line, I mean, if the U.S. doesn't show signs of significant recovery and India, as Pekka just mentioned, is going to be between '22 and '23, so it's going to be down from '23, then unless something else is going to kick in on a full year basis, Nokia could see quite a big drop in revenues as such really. So I mean maybe you can help us understand how you are thinking of that. Clearly, you're not giving any guidance for how you're thinking of '24 at this point, as such really. And I have a quick follow-up on the costs.

[Pekka Lundmark, executive]

As you understand, it is too early to provide a full view on '24. However, the macroeconomic environment clearly remains the key factor as we head into next year. We do not know where the market will take us in '24. I mentioned some early positive signs, especially in the Network Infrastructure business that could start providing support in 2024, but the reality is that there are so many macro uncertainties out there that we simply should not assume that we get a lot of support from the market next year, and that is why we are now taking decisive actions on cost. So we believe that this is a win-win. If then there is a fast recovery on the market and we have taken cost action, then it's even better. But we want to be in a position to get to that 14% comparable operating margin by 2026, also in a scenario where there would not be a fast significant market recovery. That is the point here.

[Sandeep Deshpande, analyst]

I mean on your costs, just my quick follow-up is on your cost position. In terms of what you've announced in terms of cost reductions and what we've seen in the most recent quarter, I mean your sales fell very substantially short in the third quarter, but your gross margin wasn't that bad. It was quite good. I mean, maybe in that respect, where are the costs could be taken out? Is it mainly in the OpEx that you're taking out cost because the problems don't seem to be on your gross margin line. There seems to be -- I mean, so maybe you're removing costs into the future because you think that your overall cost -- operating cost base is too high.

[Marco Wiren, executive]

Yes. Thank you. Yes, we actually -- in the plans that we have now for the cost-cutting program, we aim to cut about 70% from -- is coming from the OpEx side and 30% is coming from above gross profit side, so cost of goods sold. So this is the split that we are aiming to do. Saying that, I want to emphasis once again that our aim is to protect the R&D capacity so that we will continue to aim for technology leadership position in the future as well. That's why it's so important the R&D capacity projection.

[Pekka Lundmark, executive]

And that obviously has a connection -- direct connections to the product technology competitiveness. And your observation of the gross margin is excellent because our technology position, product competitiveness, as I said, improved a lot in the last couple of years. And that is now, of course, extremely important when we aim to defend our gross margin also in weaker times.

[David Mulholland, executive]

Thank you, Sandeep. We'll take our next question from Francois Bouvignies from UBS.

[Francois-Xavier Bouvignies, analyst]

I wanted to come back, I'm afraid, on the cost side. So I understand that the industry is going to a slowdown that maybe takes more time than you expected and maybe a bit deeper. But the magnitude strikes me a little bit because you can do cost savings, but it's not because of you have 1-year delay that you are just 10% to 15% of your workforce. I would imagine it's a very important strategic decisions also on top of your realignment or reorganization, I should say. So you talked about the fundamentals unchanged, you still believe in it and the data growth is one that you mentioned as an example, but yet your top line is not and you said that the operators are struggling to monetize this data growth anyway. So I'm just wondering is, given the magnitude of this cost savings, what literally changed beyond the timing element? Because it seems that it's much deeper than just a timing issue, if you see what I mean.

And the second question I had is a bit more on the technology side of things. Can you maybe tell us 6G should we expect 6G at some point? If yes, when? And the impact of open line and an update on open line, if it's impacting your business at all right now.

[Pekka Lundmark, executive]

Okay. All right. Well, what I would, first of all, like to note is that the -- there is a reason why we gave a range and not a definitive number in terms of the cost reduction. So 10% to 15%, that is a wide range, and that will depend exactly on the timing and the shape of the market recovery because we know that it will come. It is a question of timing. It may sound a lot, but we believe it's doable without sacrificing the R&D output as said. You have to remember that our most important market from a profitability point of view is the North American market, and now we have two quarters behind us where we have 40% drop in top line. And when we look at the operator plans there, we know that there will be a recovery. But again, we do not know when it will come. And I'm not sure if the operators themselves either understand yet or know yet when they will start increasing their investments again.

So this is all only -- I mean the question is simply being prepared. If then there is a fast recovery, then it's super good. We have lower cost and then we get the benefits of a recovery. But we feel that it's better now in this situation where there is so much uncertainty to, in a way, go all in. And then it's always easier to take then a step back if, for some reason, you have cut too much somewhere. But we believe that this, at least 10%, is fully doable without sacrificing some of the most important things, which are -- which definitely is R&D output.

Then your second question, the timing of 6G. I mean there's obviously a lot of discussions now within the operator community that how that game should be played because they are all now thinking that how do I monetize 5G. They have been disappointed on their own ability to monetize 5G, and then there is the weak economy and high interest rates and so on. I mean the base case continues to be that 5G would start -- sorry, 6G would start delivering around '29 and then maybe volumes in 2030. So there would be roughly 10-year difference between 5G and 6G. This is still uncertain. There could be changes, but this is the base case we are working against.

I don't actually think that the number of 5 or 6 is the most important thing. The most important thing is that what will the applications be and what will they demand. If we expect that the data traffic will continue to grow 20% to 30% per year and then, little by little, we will start seeing completely new types of use cases, for example, driven by augmented reality, various types of immersive use cases for consumers, for video conferencing, for industrial applications and so on and so on. There's a lot like this in the pipeline.

And you have seen the Apple announcement on the AR device. We believe that there will be a race where there will be a lot of new devices driving bandwidth usage in the coming years. If that happens, we are looking at somewhere around '26, 27, '28 when most of the 5G frequencies will have been exhausted, which means that new frequencies for new capacities will be needed. They must be allocated. And once that is done, very important thing for everybody, including operators and consumers, will be the cost of that bandwidth, how do we make sure that we deliver the services as cost efficiently and with as little power consumption as possible. And that will require new generations of silicon. It will require new innovations in terms of massive MIMO in the radio interface.

If you want to call that 6G, fine. But I don't think that matters. The driver is really what the new applications will need. And there, our expectation again is that when we get to '27, '28, the capabilities of 5G will gradually start to be exhausted and something new will be needed.

[David Mulholland, executive]

Thank you, Francois. We'll take our next question, Sébastien Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, analyst]

On fixed broadband access, some new analysts are now targeting roughly stable market development for the next five years. And you have been historically quite conservative or positive on the growth prospect for fiber going forward. Have you seen any major change in market dynamics on fixed broadband access. That would be my first question.

The second one is on the mix for next year. How do you see the mix evolving moving into 2024? And what could be the different moving parts to your gross margin moving into 2024?

[Pekka Lundmark, executive]

Was this question -- I had a little bit difficult to hear all the points. So was this about Fixed Networks and the phone market?

[Sébastien Sztabowicz, analyst]

Yes, Fixed Network and the outlook for Fixed Network for the coming years.

[Pekka Lundmark, executive]

Yes, yes. I mean, we continue to believe in a highly favorable outlook for Fixed Networks because if you look at, for example, the stats that we gave in the Q2 report as to how many percent of the world's homes have been fast or connected, we are still looking at pretty low numbers. And then we have to remember that already those homes, which are connected today, they will be subject to capacity upgrades. And all of this will be further supported by the various government programs like the U.S. program that we discussed where the goal of the government is to have a gigabit service in every home.

So we believe that this will be a highly attractive market going forward despite the short-term slowness. We are #1 in GPON globally with more than 40% market share in GPON OLTs. We have 46% market share in XGS-PON, which is the latest generation of 10 gigabit symmetrical GPON, which is used in about 95% of the next generation on deployments. And we have clear technology leader in this segment. So this is a perfect example of a market now where there is a lot of long-term potential combined and also mid-term potential combined with a strong technology leadership position. So we continue to be pretty bullish on -- in terms of the potential of the fixed markets.

[David Mulholland, executive]

Thank you, Sébastien. We'll take our next question from Sami Sarkamies from Danske Bank.

[Sami Sarkamies, analyst]

I wanted to follow up the earlier question by Sandeep regarding puts and takes going into next year. I think you already covered the top line. That is obviously the big unknown. But if we focus on things that you can control, what should we think about OpEx next year? I guess given the new cost program that has been announced, it shouldn't at least be higher than this year.

And then if we think about gross margins, I guess, those should also be higher next year as you'll probably benefit from normalization of geographic mix. And then there will be also cost measures impacting COGS.

[Marco Wiren, executive]

Yes. Thank you, Sami. What comes to '24, of course, because of the uncertainty, we don't guide '24 yet. But if we look at the different elements of your question regarding cost saving programs, so like we said, we -- ambition is that we get already in-year savings of EUR 400 million in '24. And also, we said that about 70% of the total savings in the program will come from OpEx, and this is our planning right now when it comes to '24.

Then when it comes to exactly development on gross margin levels, partly it depends on the mix as well, both product mix, but also regional mix and then also how the market recovery is happening and what is the speed and when we will see in different parts as the market recovery most likely will not be perhaps exactly the same for all our segments that we have. Then we have to also remember that in 2023, we have received savings also from the variable pay that we have in the company.

[David Mulholland, executive]

Sami, did you have a follow-up?

[Sami Sarkamies, analyst]

Yes. Regarding the cost savings program, just curious how material contribution could we see from divestments in you reaching the lower cost base.

[Pekka Lundmark, executive]

Well, of course, what we are communicating in terms of cost would be not including any effects from divestments that we would potentially do in the future. So this is on a like -- on a comparable basis.

[David Mulholland, executive]

Thank you, Sami. We'll take our last question from Didier Scemama from Bank of America.

[Didier Scemama, analyst]

I guess most of my questions have been asked. What I wondered, clearly, you're taking very decisive actions on the cost base, I think, realizing that the RAN market is probably going to be in a downturn for the next several years and especially as 6G is quite far away. What I wondered is, are there any other sort of strategic alternatives you are considering for the business? I think Simon asked the question earlier, whether you're considering a breakup of the business to give more autonomies to your divisions, et cetera, because it feels like it's not going to be fun to just cut costs for the next several years.

[Pekka Lundmark, executive]

No, you are absolutely right. You cannot run a business if your only strategy is to cut costs. But I want to repeat what I said earlier that when we are cutting costs, what is really important for us is that we do not sacrifice our R&D output because, otherwise, it would be just downsizing and downsizing and downsizing.

When it comes to the question of structural moves like what as you said, splitting that company, I already answered that what we are going to continue with is optimization of our portfolio, and that is one of our strategic pillars. You have seen some moves already, and we are not excluding that there would be additional moves going forward. It is part of our strategy, as we announced already in Barcelona.

But then I would like to slightly disagree with you that when you kind of concluded that the RAN market will be a declining market all the way until 6G, we do not agree. 25% of base stations outside of China are currently 5G mid-band upgraded, which means that 75% of that potential is still there. If and when the data traffic will continue to grow, operators will have to start investing again.

In a couple of years' time, 5G advanced will hit the market providing some significant additional new capabilities for new use cases, such as digital wins, drones, immersive applications, AR and so on. Roughly at the same time comes the time when the first 5G installations that we made in 2019, 2020 will hit the mid-generation upgrade cycle as we have seen in the previous cycles as well. And the technology has improved so much from 2019, 2020, especially in terms of power consumption. But given the high power prices and ESG that most operators now have, we believe that there will be significant upgrade opportunities in mid-generation as well. So -- and then on top of this comes all the potential from private 5G and then the price and all the use cases. So respectfully, I would disagree with you that this will be a declining market all the way until 6G.

[Didier Scemama, analyst]

I mean, respectfully also, I mean, if you look at -- when you look at the transition from 4G to 5G, we had, I think, 3 years of downturn and I think it was all about cost cutting during that period. It was pretty painful. Also looking at the history of Nokia and Alcatel-Lucent has been consistent cost cutting over the course of the last 15 years or so. It's been quite difficult. And the promises of things like LTE Advanced or 4.5G have not materialized. And as you said yourself, the problem fundamentally is that although 5G was great from a cost per bit standpoint for the operators, they have not been able to monetize their investments with higher ARPU, higher EBITDA. So ultimately, it's got a knock-on effect on the ability to invest in CapEx. So that's why I would rather not be too bearish, but at the same time, I don't see too much difference between 4G and 5G cycle, if you know what I mean.

[Pekka Lundmark, executive]

I believe that this will be different. But you are absolutely correct when you talk about 5G monetization. I mean that is what we need to help operators do. We need to get to API's programmable networks, make it easier for them to build new use cases. But again, I mean, I do believe that once we start seeing these new devices on the market, AR/VR immersive experiences, we will start to see a completely new range of applications emerging that will be driving capacity needs.

But what I would suggest is that since this will be one of the key themes in our December update, where Tommi will be talking about in more detail in terms of what those use cases will be, we will continue this discussion there. And of course, this whole theme of new use cases and immersive applications is not only an MN theme. It's very much also going to be a driver for Fixed Networks and home broadband.

[David Mulholland, executive]

Thank you, Didier. Ladies and gentlemen, that 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 as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Thank you all for joining us today.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.