Nokia Oyj

OMXH:NOKIA

Earnings Call Analysis

Nokia's Earnings Call Highlights Strong Margins amid Revenue Declines

In Q3, Nokia experienced a 7% decline in net sales, primarily in Mobile Networks, yet achieved a notable 490 basis point increase in gross margins, now at 10.5%. Specific sectors showed growth: Fixed Networks increased by 9% and IP Networks by 6%. The outlook for Mobile Networks has shifted, projecting a sales decline of 19% to 23%, with an operating margin range revised to 5% to 7%. Free cash flow remains robust at over EUR 600 million. Nokia Technologies excelled with a 36% sales growth, bolstered by licensing agreements, driving annual net sales to about EUR 1.3 billion.

Market Landscape and Growth Trends

In the third quarter of 2024, Nokia has observed a slow yet steady market recovery, particularly within Fixed and IP Networks, which grew by 9% and 6% respectively. This improvement comes after a long period of declining sales, particularly in Mobile Networks, which experienced a significant 17% decrease. The company emphasizes that demand is reviving post-inventory adjustments, particularly in North America, where they witnessed double-digit growth across all business units, signifying renewed operator deployment plans.

Performance Highlights

Nokia reported strong financial results with a gross margin improvement of 490 basis points year-on-year. The company noted that all business units contributed positively to this margin increase, with enhanced cost control measures driving efficiencies. Furthermore, Nokia generated over EUR 600 million in free cash flow during Q3, contributing to a net cash position of EUR 5.5 billion, indicating robust capital management and operational effectiveness.

Guidance for 2024

Looking ahead, Nokia’s outlook for 2024 remains cautious yet hopeful. The company expects Mobile Networks sales to decline by 19% to 23%, while operating margins are projected to range between 5% and 7%. In contrast, Network Infrastructure is expected to see a modest decrease in sales of 3% to 6%, with operating margins anticipated to hold steady between 10% and 12%. The continued focus on profitability is underlined by a targeted cost-saving goal of EUR 1 billion, with EUR 500 million already achieved in run-rate savings.

Strategic Initiatives and Acquisitions

Nokia is actively pursuing strategic growth avenues outside traditional service provider markets. The ongoing acquisition of Infinera is anticipated to enhance scale in North America and cater to webscale customers, expected to close in H1 2025. Furthermore, Nokia is investing in data centers, defense sectors, and private wireless technologies, aiming to expand its footprint in high-growth non-CSP markets.

Risks and Resilience

While there are signs of potential recovery, challenges persist. The Mobile Networks sector remains under pressure, heavily influenced by losses from major contracts, notably with AT&T. However, Nokia is strategically pivoting towards non-CSP customers, which is yielding positive deal momentum in international markets such as Brazil and India. Analysts predict that weak mobile market conditions will gradually improve, paving the way for enhanced revenues in the near future.

Final Thoughts

In summary, while Nokia faces challenges, particularly within Mobile Networks, the overall growth trajectory appears to be stabilizing. Their robust free cash flow, strategic acquisitions, and focus on diversification towards more lucrative sectors such as data centers present a positive long-term outlook. Investors should remain vigilant regarding the evolving market dynamics, while also exploring the potential benefits from Nokia's proactive initiatives aimed at capturing new growth opportunities.

Earnings Call Transcript 2024-Q3

[David Mulholland, executive]

Good morning, ladies and gentlemen. Welcome to Nokia's Third Quarter 2024 Results Call. I'm David Mulholland, Head of Nokia Investor Relations. And today with me 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, proposed transactions 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.

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 we will refer to margins that 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 2.

In terms of the agenda for today's call, Pekka will go through our key messages for the quarter. Marco will then go into more detail on our financial performance and then Pekka will make a few comments on particular highlights from Q3. We'll then move to Q&A. With that, let me hand over to Pekka.

[Pekka Lundmark, executive]

Thank you, David, and thank you for all joining us today. Overall, the big picture is that the market is turning, but it's turning slowly. We see encouraging signs of market recovery in Fixed Networks and IP Networks, but even if it is a bit slower than we expected earlier this year, and Optical Networks and Mobile Networks remain weaker. Fixed Networks grew 9% in the quarter, while IP Networks grew 6%. Regionally, both saw strong growth in North America as the inventory digestion is now largely behind us and operator deployment plans have solidified.

Demand trends in NI continued to improve with solid order intake growth and a book-to-bill above 1. We also saw a significant improvement in our gross margin with all business groups contributing. We continue to take quick action on our cost savings program and have now achieved EUR 500 million in run-rate gross cost savings.

The quarter also saw good deal momentum. We signed a number of important deals across all business groups, and I'll touch on some of these later in the presentation. We are making progress expanding to non-CSP customers and are increasing investments to accelerate growth opportunities in areas like the fast-growing data center space in defense and in private wireless.

We continue to have a year of strong free cash flow, generating over EUR 600 million in Q3 and EUR 2 billion year-to-date. Our financial outlook for 2024 is unchanged, and we are currently tracking in the bottom half of the range for comparable operating profit and at the high end of the range for free cash flow conversion.

Finally, we have made good progress on the Infinera acquisition receiving antitrust and CFIUS approval in the U.S. along with Infinera shareholders approving the deal a couple of weeks ago. We continue to target to close the deal in H1 2025. And then over to you, Marco.

[Marco Wiren, executive]

Okay. Thank you, Pekka, and hello from my side as well from the sunny Helsinki. I will start by discussing our overall group performance. And the net sales decline of 7% in quarter 3 was mainly driven by Mobile Networks. Importantly, however, we delivered significant improvement in gross margin expanding by 490 basis points year-on-year. This was driven by a combination of improved product regional mix and actions to reduce product costs.

Our operating margin was solid at 10.5%. This was supported by strong gross margins, continued cost control and benefit from the reversal of allowances with certain trade receivables that was recognized in other operating income. We were pleased to report strong free cash flow of over EUR 600 million, which means we ended the quarter with a net cash balance of EUR 5.5 billion.

Now as I turn to discuss each business performance, it is worth noting that we have lowered the net sales assumption for each of the networks. Considering slower pace market recovery that Pekka mentioned, we have also slightly adjusted operating margin range. Network Infrastructure sales showed modest year-on-year growth in the quarter after 5 quarters of decline.

We were pleased to see growth in both Fixed Networks 9%; and IP Networks at 6%. Optical Networks declined by 15%, optical was the last unit to start seeing the market slowdown and will likely be the last recovery. We were encouraged to see double-digit growth in all 3 businesses in North America. Gross margins improved mainly driven by favorable mix between businesses and also improvement within IP Networks. Operating margin was 11.8% and this is 100 basis point improvement driven by the higher gross margin and a reduction in operating expenses.

And based on our current view of market and the slower pace of recovery, we now expect Network Infrastructure net sales to be down 3% to 6% this year and operating margin be between 10% and 12%. Mobile Networks sales declined by 17%. This was mainly driven by a decrease in India as 5G deployment remained elevated in the year ago quarter.

North America also declined, which reflects impact of lower market share of one customer. Pleasingly, gross margin increased by 500 basis points as a result of improved product costs, favorable product and regional. Operating margin was 5.3%, an increase of 70 basis points, driven mainly by the improvement in gross margin, while operating expenses were largely stable.

The revised outlook assumption for Mobile Networks net sales is now a decline of 19% to 23% with an operating margin of 5% to 7%. Cloud and Network Services sales declined by 4% in the quarter, and this was mainly related to the divestment we did earlier this year. And adjusting for this, net sales would have been stable. Operating margin improved driven by higher gross margin and lower operating and our updated assumption for Cloud and Network Services is now a decline of 4% to 7%, with an operating margin between 6% to 8%.

Moving next to Nokia Technologies. Net sales grew 36% in quarter 3, mainly as a result of the smartphone licensing agreements signed previously this year. Nokia Technologies also saw higher sales from Automotive and IoT, including [indiscernible] with point-of-sale payment device.

We were also pleased to be able to announce that we have now signed with 2 video streaming companies for use of our technology. This is an important step for us in this new growth area. And Nokia Technologies' annual net sales run rate has been gradually increased in the recent quarter, but continues to be around to approximately EUR 1.3 billion in the third quarter.

Let's look at the net sales by region. You see here that India drove the majority of net sales decline in quarter 3 as the region still saw the heavy 5G deployment in the year ago quarter, hence, a 43% decline. Also worth noting was North America, where strong growth in Network Infrastructure was offset by Mobile Networks. Indeed, overall Americas for Network Infrastructure grew 21% in the quarter. Other regions showed declines with the exception of Europe, which showed 1% growth. However, this was entirely due to Nokia Technologies, which is fully reported in this region. And excluding Nokia Technologies net sales in Europe would have declined by approximately 7%. And looking at our cash in quarter 3, we saw another quarter of strong free cash flow at over EUR 600 million.

This was driven by solid operating profit and changes in working capital, which benefited from lower receivables. During the quarter, we also returned EUR 360 million to shareholders through dividends and share buybacks. And we ended the quarter with a net cash position of EUR 5.5 billion. With that, let me hand it back over to Pekka.

[Pekka Lundmark, executive]

Thank you, Marco. The first topic I want to cover in this section is the market outlook. As we started this year, we knew parts of the market would remain challenging, such as Mobile Networks given the tough comparison in India after significant 5G rollouts.

We were, however, optimistic that areas like IP and Fixed Networks would start to recover in the second half of the year as inventory dynamics would normalize and lower interest rates could help stimulate investments.

Looking at the market today, I'm encouraged that we are now seeing an improving dynamic in Fixed Networks and IP Networks with the inventory issues now largely behind us. However, as you can see in the slide, the overall market dynamic has clearly been weaker than anyone expected at the start of the year and this continues to impact our net sales assumptions.

Our focus during this period has been on managing our cost base and executing against our strategic pillars. This means ensuring that we win deals that can expand our footprint, maintaining our pricing discipline and investing to diversify our business and drive expansion in high-growth non-CSP markets.

Mobile Networks is a good example of this. We have been seeing really good deal momentum in recent months, evidenced by wins with Vodafone Idea, NTT DOCOMO Japan, and then also in Brazil, New Zealand and Vietnam, where we have either gained or maintained market share.

In addition to the deals we have been winning, the team has also done an excellent job in managing their cost base. At our progress update in December of last year, Tommy provided details on Mobile Networks revamped strategy and how MN would rebaseline its operations, improve its go-to-market and drive productivity and efficiencies through the business.

You can see here on the slide that through many of these actions, Mobile Networks has been able to reduce product costs, which, in turn, has been driving improvements in gross margin in recent quarters. MN has also been taking quick action on operating expenses, which were down approximately 6% year-on-year in Q3 when excluding the impact of variable pay accruals.

We said last December that by 2026, we would lower the approximate net sales required to deliver double-digit operating margin in Mobile Networks from EUR 11.5 billion to EUR 10 billion. We have now further lowered this required net sales level for a double-digit operating margin to EUR 9.5 billion over the same time frame.

Moving on to Network Infrastructure and the current market dynamics. I know Federico and his team gave you a detailed explanation recently with our progress update event in September, but I will revisit some of the key opportunities we see.

In Fixed Networks, there remains a significant opportunity as more homes are connected with fiber. Currently, around 70% of homes excluding China do not have fiber. Operators around the globe continue to show a strong appetite to drive fiber connectivity higher.

There are also significant government programs starting to take effect. We continue to expect some of our first revenue under the U.S. BEAD program in Q4 this year. The program has taken time to build momentum, but this is now starting to move fast with all states having Volume 1 approved and good progress in Volume 2.

We continue to see good progress in mature markets moving to upgrades with and XGN and -- XGS and 25G-PON. In addition, we see good market expansion opportunities with fixed wireless which is ramping again in some markets, including India and the new opportunity we call Optical LAN.

This is where enterprise customers would use passive optical equipment for in-building networks such as in offices. You can create a future-proof network supporting all the way up to 100 gigabits per second, which is also highly power efficient and over time to take share from the campus Ethernet switching market.

For Optical Networks, we continuously talked a lot. We obviously talked a lot about this already back in June when we announced the Infinera acquisition. The market is clearly weak today and may take some time to recover.

We feel confident about the future opportunity, however, PSE-6s has put us in a technology leadership position that continues to resonate with customers. We also look forward to the pending Infinera acquisition that will significantly increase our scale in North America and exposure to web scale customers. I believe the future combined company will be extremely well positioned for future growth and importantly, towards new AI-driven data center opportunities.

Finally, in IP Networks, our market position in service provider edge routing remains strong with our market-leading FP5 and FPcx-based products. We have seen a growing opportunity in the enterprise and webscale markets having signed some important deals recently.

We are increasing investments in this space as we see a significant opportunity to diversify our IP Networks business with mission-critical networks and also into the data center. We are investing to expand our product portfolio to accelerate these opportunities. Various estimates put the TAM in these areas at about EUR 20 billion. So it's a great opportunity for us to grow into.

And just as a reminder, to put that EUR 20 billion in perspective, we estimate that our service provider TAM is around EUR 84 billion at the moment. So this will be a significant addition to our TAM when we move forward.

In terms of some more tangible elements of our progress on the diversification of IP into enterprise and webscale, we can see on this slide some of the progress we have made in this strategic pillar. CoreWeave is an AI hyperscaler and we will deploy our IP routing and optical transport portfolios globally as part of an expensive backbone build-out -- extensive backbone build-out with immediate rollout across CoreWeave's data centers in the U.S. and Europe.

This is an important win for us, and we are excited to start on this journey with them. We also recently announced a new product with the launch of our Event-Driven Automation platform or EDA. With EDA, you can automate the entire data center network life cycle from design through deployment and into operation. This abstracts a lot of the complexity of managing multi-vendor networks and really complements our SR Linux network operating system.

In Cloud and Network Services, the markets remain challenging, but we have seen excellent momentum in 5G core. We continue to drive our leadership position in the 5G core market, and today, Nokia leads the world in 5G live core networks. Our key differentiator -- one key differentiator for us is in how we are driving the cloud native transformation, giving operators flexibility in how they want to deploy their networks.

This transition to cloud native is a critical enabler of the desire to create more programmable and automated networks in the future. We have supported this wireless with the launch of the first telco network using 5G stand-alone core on AWS and have since also deployed 5G core networks on public clouds with O2 Telefónica Deutschland, Comcast and Telenet, to name a few.

We marked the 1-year anniversary of the launch of our network as core platform in September, ending the quarter with more than 20 network API partners globally, including many of the world's leading CSPs for example, British Telecom, Orange, Telefónica and Deutsche Telekom Germany as well as ecosystem partners such as Infobip and Google.

Regarding our comparable operating profit outlook, this remains unchanged. While we have lowered the net sales outlook assumptions for our business groups, this is being compensated for by high gross margins and the progress we are making on cost savings. We are currently tracking within bottom half of comparable operating range and at the high end of our free cash flow range.

So in conclusion, as we have outlined, the overall market weakness that has characterized this year showed some signs of improvement with growth in both Fixed Networks and IP and stabilization in Cloud and Network Services. We are pleased to see strong gross margin across all business groups, reflecting positive regional and product mix as well as the impact of the cost savings measures we announced earlier.

Positively, we saw some good deal momentum, particularly in Mobile Networks, where we have been winning new business in Brazil, India, Japan, Vietnam and New Zealand. Our strong cash performance means that we have EUR 5.5 billion net cash at the end of the quarter. And if you recall, we have also accelerated the share buyback program.

Finally, as we just shared, we are tracking within the ranges we set for the full year. With that, let me hand over to David for Q&A.

[David Mulholland, executive]

Thank you, Pekka, and Marco. Before we move to the Q&A session, just a quick comment on some of our plans in terms of investor events. We are planning to hold a Capital Markets Day in 2025 after the Infinera deal has closed. Obviously, there's still a bit of uncertainty around the timing on exactly when that will be. So we don't have an exact date yet, but we'll communicate such as soon as we're able to.

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

[Operator]

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

[David Mulholland, executive]

Thanks, Alice. We'll take our first question from Joachim Gunell DNB.

[Joachim Gunell, analyst]

So can you just help us understand here how much of this considerable gross margin improvement stemmed from structural actions, supply chain utilization, self-help as opposed to geographic mix? And then just comment a bit whether this one-off AR benefit actually impacted the gross margin? Or is it more on the OpEx side?

[Marco Wiren, executive]

Thank you, Joachim. And I start with reversal of the allowance of trade receivables. And just to be very clear, that did not impact the gross margin, we always book those in other operating income and expenses. And when it comes to gross margin performance in the quarter, I would say that it's quite equal when it comes to product mix and regional mix and also the product cost reductions that we have.

[David Mulholland, executive]

Did you have a follow-up, Joachim?

[Joachim Gunell, analyst]

Yes, very briefly. So on the order intake momentum across your different NI units and call it, the sequential lower net sales assumptions. Can you just discuss the trajectory here on, call it, unit basis where you see incremental strength and weakness?

[Pekka Lundmark, executive]

First of all, as I already said, the overall trajectory is turning. But of course, we recognize that we continue to have a top line challenge. The good thing is that since now Q4 last year, we have had positive momentum in orders and book-to-bill more than 1. So the order -- that means that the order backlog is building.

It is building now especially in Fixed and IP, more so than in Optical. And then from a geographical point of view, an extremely encouraging sign is that the momentum is picking up strongest in North America because that was also the first market that started to weaken when the cycle turned about 1.5 years, 2 years ago. And now it seems to be driving growth also.

We actually had double-digit growth in North America in all units of NI. So that's where the growth is coming. And additional comment there, another positive thing is that now the momentum in NI is picking up with Tier 1 operators also in North America.

[David Mulholland, executive]

We'll take our next question from Simon Leopold from Raymond James.

[Simon Leopold, analyst]

I wanted to follow up on this announcement you had in the quarter regarding CoreWeave win, as I think a good reference for gaining some exposure to AI. I'm wondering if you could elaborate how you see opportunities like this evolving in your business? And then more broadly, how to think about the longer-term strategy of evolving the customers away from the telco base into more enterprise-like opportunities?

[Pekka Lundmark, executive]

Yes. Thanks, Simon. This is obviously in the very core of our strategy, this whole question. As I said earlier, our telco TAM is EUR 84 billion. Data center TAM is currently at EUR 20 billion, albeit we are not yet able to address all of it, but we are gradually getting towards that goal.

That EUR 84 billion, even though the telco TAM is expected to recover somewhat next year, but we have to be realistic. I mean, telco TAM will never be a significant growth market. So the only way to grow there will be through taking market share, which we are, of course, targeting, but it's not the growth market.

Data centers will be our #1 growth target for the coming years. There will be others as well, but that will be the #1. And we already have references like Apple and Microsoft in this space, but the reason why CoreWeave is so important is that they are now the leading GPU as a service company. And they have now taken pretty much our entire portfolio both on the IP side and Optical side.

And as we know, AI is driving new business models. And one of the business models is clearly GPU as a service. If you look at what's -- even some of the operators like T-Mobile in their Capital Markets Day, they are talking about an opportunity to look into GPU as a service as an add-on to their business. And then, of course, there is the significant hyperscaler opportunities and smaller data center opportunities.

So this is something that this particular application is going to be driving significant growth opportunities for us. Vach and Mike talked about this in our recent NI event in September. And what we plan to do then going forward is that once we get the Infinera deal closed, we will arrange a Capital Market Day, where we will then do a deep dive into our growth segments outside of telcos.

And obviously, it goes without saying that this will be the #1 target for that opportunity because we are already today quite well exposed to data centers on the IP side, but then the Infinera deal will significantly increase our exposure also on the Optical side. And it will help us to get more and more inside the data center fabric because the role of Optics will increase also not only in connections between data centers, but gradually also inside data centers when we are connecting servers to each other.

And once we get there, that market will be of extremely high volumes. But again, I know that we will need to get more tangible on this and talk about concrete targets and revenue targets and so on. That's what we will be doing when we get Infinera closed and then arrange a Capital Market Day for this purpose.

[Simon Leopold, analyst]

We're looking forward to that. And as a quick follow-up, could you talk about your outlook beyond the fourth quarter for the Indian market, particularly considering the Vodafone Idea award you also announced recently?

[Pekka Lundmark, executive]

Of course, happy to do that. Just as a quick reminder, in 2022, our Indian top line was about EUR 1.3 billion. And then last year, we had significant growth to EUR 2.8 billion because of the 5G rollout. We said already then that last year was an exception, but we are building in a way, a new normalized run rate that will be above what we had in 2022.

And that's exactly what is happening. We have been talking about this EUR 1.5 billion to EUR 2 billion. We are currently tracking closer towards the lower end of that scale. But nevertheless, we will be clearly above the '22 levels.

And the good news is that we are expecting meaningful growth next year. Vodafone Idea, obviously, is a new deal for us and also the investments of the 2 other leading operators in India this year have been significantly lower than last year. And there are reasons to believe that they would also start recovering. So clearly, India will be one of our growth drivers next year.

[David Mulholland, executive]

We'll take our next question from Sami Sarkamies from Danske Bank.

[Sami Sarkamies, analyst]

I would like to continue on Mobile Networks. Your sales this year will be below EUR 8 billion, including about EUR 0.5 billion from AT&T. I guess you need to find about EUR 2 billion of additional sales in order to reach your goals. Can you elaborate on how much of this is covered by the number of deals that you have announced during the third quarter? And when will these new deals start to be visible in your financials?

[Pekka Lundmark, executive]

Well, Sami, of course, as is typical to Mobile Networks deals, you sign a deal and then those revenues will start coming in gradually during the future quarters and years. So that is not something that when you sign a deal that then all of a sudden in the next quarter, you have large revenue. I mean they are taking us to the right direction, but obviously, we need more deals than this. This is not yet enough. And there is now, as you know, a general expectation including by the market analysts that the Mobile Networks market that declined significantly this year will start to recover next year.

Let's see how quickly that comes, but expectations are there. We have after the AT&T decision, which, of course, was a big negative to us. After that, we have been winning much more than what we have lost. So in relative terms in the new deals, we have kept increasing our market share ex AT&T.

So that is a promising sign. But again, the deals that we have signed in Q3 are not yet going to be enough, more will be needed. And then, of course, very important is that in Mobile Networks, we continue to work on the non-CSP segments. Private wireless where we are a market leader, we have almost 800 customers in that segment at the moment, fast growth.

And then a little bit longer -- more longer term, mid- to long term, kind of second half of the 2020 story, increasingly important will be the defense industry where we have promising traction. We'll talk more about this at the upcoming Capital Markets Day. We are integrating the offering of Phoenix with Nokia's 5G platform.

And of course, the reason why we are doing is that despite the fact that in the defense market sales cycles are long, but once you are in, you are in, and you are in for a long term and of course, margin potential there is promising. So that's why we feel that strategically, it is extremely important to get additional coverage for the EUR 2 billion annual R&D investment that we are putting in, in Mobile Networks. And part of the volume targets there obviously will increasingly be non-CSP segments even though we do expect also the CSP market to somewhat recover next year.

[David Mulholland, executive]

Do you have a follow-up, Sami?

[Sami Sarkamies, analyst]

Maybe one on the cost savings program, you're still talking about EUR 1 billion savings target, even though the recovery is happening much slower than anticipated. Why haven't you stepped up to EUR 1.2 billion already?

[Marco Wiren, executive]

Thank you, Sami. I must say that we are quite happy how fast we've been able to get actually traction and results on the cost saving programs. So as we said also, run rate and cost savings is now EUR 500 million so far this year. And we definitely see that the pace of the program has been extremely satisfactory.

And if you look also a number of employees at the end of quarter 3, we had 78,000 employees and this is down from 86,000 that we had when we announced the program. So very rapid development here. And as you remember, about 60% of the total cost saving program of EUR 800 million to EUR 1.2 billion is from Mobile Networks and then 30% in CNS and the remaining part from NI and corporate functions.

And the target range that we have when it comes to the number of employees is 72,000 to 77,000 but of course, when after we have divested ASN, they have about 2,000 employees. So we will adjust the targets after we have closed the deal as well, accordingly.

But the main reason why we have an interval range in the cost savings between EUR 800 million to EUR 1.2 billion is that we can change and adjust based on what we see in the market. And as I said, we have started extremely fast this program now.

[Pekka Lundmark, executive]

And maybe to add just one small but important thing to what Marco said, obviously, we are not quite even yet within the range -- targeted range. We are getting very close to the upper end of that range, but we have always said that it will then ultimately -- remember, this is an end '26 target, and we have executed extremely fast now and where we will ultimately end will depend very much on the pace of the market recovery.

But so far, we have been executing extremely fast. And just as an additional proof point, we have today announced to the employee representatives an intention to reduce another 350 jobs in Europe. That is just one additional proof point as to that we are not yet done with this program.

[David Mulholland, executive]

We'll take our next question from Artem Beletski from SEB.

[Artem Beletski, analyst]

So I would like to ask you about API strategy and progress on that front. Could you maybe talk about this topic? It has been more in focus recently given announced JV between Ericsson and some 12 global CSPs. And what do you think about this type of development?

[Pekka Lundmark, executive]

Yes. Thank you, Artem. This is obviously another extremely important question. And first of all, I have to say that I'm happy to see that joint venture announcement because what it will do to the market is that in addition to the actions that we are taking, it will accelerate the API economy because ultimately, why is this important?

It will boost operators' ability to monetize their investment. And the faster that ecosystem develops the better we are able to open up network capabilities and the network resources, the application developers, the better for operators and ultimately that will support operator investments into the network.

Now we have, of course, taken a slightly different approach than our competitor. We have developed all of this organically. We came to a conclusion that we do not need to acquire a [ CFIUS ] -- legacy [ CFIUS ] player to enter this market. We have developed this organically and with pretty good progress. We've announced this initiative a year ago, and we are currently having more than 20 partners across the ecosystem including 16 CSPs, including names like British Telecom, Telefonica, Orange, Deutsche Telekom and others. So we are able to offer extremely attractive base of networks to the developers who want to use our APIs. So overall, this is a good thing to the industry.

Then another thing that is important to keep in mind, I mean, it will take quite a long time before revenues through APIs will be a meaningful business. We are talking multiple years. But what is in relative terms, even more important right now from a business perspective is what's happening in the core network itself. And that is something where I'm extremely pleased with the position that we have. We have taken the lead in the cloudification of the core network, i.e., moving the core network software to CNFs, Cloud-Native Functions.

We want to make the entire core network cloud native. And why is this important? Because cloud nativeness will ultimately enable efficient automation of the network functions without going fully cloud native, you will not be able to do that in an efficient way.

So this is where we are leading at the moment. We are working with multiple customers with extremely good feedback, and once we are making the core network cloud native, as I said, that enables automation, that enables operators to push down their operational costs that will make it easier for them to launch new services.

And ultimately, full automation will be needed in order to be able to reap all the benefits from the API ecosystem as well. So that's why this is not only about introducing APIs. This is very much a comprehensive strategy as to what to do to the entire core network to make the resources available to the ecosystem.

[David Mulholland, executive]

Thanks, Artem. Do you have a quick follow-up?

[Artem Beletski, analyst]

Yes. A quick one on India's profitability. So how we should think about it? Has the picture changed or not when it comes to gross margin and the EBIT margin impacts given the fact that it should be showing quite nice growth next year?

[Marco Wiren, executive]

Yes. Thank you, Artem. As we've said earlier as well, that different countries buy different things. And based on what they buy, the margins could vary and also how much they drive R&D -- additional R&D.

When it comes to India, we are quite pleased with the margins we have in India. And we haven't specified exactly what levels they are, but they have been developing well and in comparison to other markets, they are in a decent level as well.

[David Mulholland, executive]

We'll take our next question from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

I would like to ask a little bit on enterprise. The revenue represented 12%, up from 10% of total revenues in Q3 and was up 9% year-over-year. Still down 5% the last 9 months. Can you talk a little bit on the -- what you see in terms of book-to-bill for enterprise? And if you should expect this renewed momentum to stay on for a while and also if you can comment a little bit on the profitability level seen in enterprise?

[Pekka Lundmark, executive]

I mean on a full year level this year, obviously, because of the weak first half of the year, it's clear that our enterprise top line ambitions will -- our results will not meet our ambition. The good thing is that the momentum is turning here as well. We have good progress in both orders and the fact that we had 11% growth in the non-CSP segments in this quarter, which is much better than what we had in the beginning of the year is encouraging. Pipeline is promising.

And again, I was talking about data centers earlier then we will have the upcoming closing of the Infinera acquisition, which will give us a significant boost to the non-CSP businesses as well. So overall, in relative terms, this year, enterprise or non-CSP businesses will be performing much better top line wise than the service provider business. But in absolute terms, what we will be achieving this year, we are not happy with. And we, of course, expect an acceleration next year also in enterprise. And the pipeline that we have is clearly supporting that.

[Marco Wiren, executive]

I'm just building on what Pekka said. Remember also that this is a little bit lumpy business also based on when we sign larger deals with web scalers. And that's why was up and down a little bit. That's why the trend is extremely important to follow here.

[Daniel Djurberg, analyst]

Perfect. May I have a follow-up and that would be a little bit on, if you can give a lesson learned on your new organization that you implemented and disclosed for some 10 to 12 months ago, a bit more siloed and so on. And also if you see any pros and cons if you should do, for example, [indiscernible] with Mobile Networks and give it to the shareholders because then you can run Nokia with a net debt while Mobile Network with net cash.

[Pekka Lundmark, executive]

Well, that second question is not something that I will start commenting That's, of course, a massive strategic question for the whole company. We have said multiple times that we are fully committed to Mobile Networks, and we see a lot of opportunities there.

The operational model is clearly taking us to the right direction. In any model, there are pros and cons. In our model, we are giving the businesses more freedom than before to do independent maneuvers, including in the customer interface, and that is increasing the speed and agility and that is increasing their ability to go after new customer segments, such as defense and data centers, et cetera.

When they do not need to negotiate about sales resources, they can make basically their own decisions on sales resources and sales incentives and sales priorities. And that is showing good results.

Again, I mean, our issue this year has not been that we would not have momentum in pipeline creation or in order intake, the real issue -- in relation with the market, the real issue and the top line challenge that we have, that is general market weakness that hopefully is now finally starting to turn.

The -- any model has also than downsides that you need to mitigate. And obviously, the risk to be siloed in the customer interface is something that you have to mitigate. We are doing that well. We have -- for each key customer, we have account executive team, which is responsible for the overall relationship management with the customer and those teams are also then coordinating all cross-business matters to the extent they exist in the customers.

So we are taking care of both relationship management, multi-business deals with the customers. And then very importantly, we have several solutions on the market where there are components from multiple businesses. And a very important part of the model is that every time when there is a multi-business solution, there is always a lead business that owns the solutions engineering and also takes the lead in sales. So I'm pleased with the progress with the new model. And again, every model has its pros and cons, but I believe that the pros of this model clearly outweighed its cons.

[Marco Wiren, executive]

And remember, we started the new operational model already 2021. And we have seen very clearly that speed, agility and accountability are definitely giving the results that we expected.

[David Mulholland, executive]

We'll take our next question from Jakob Bluestone from BNP Paribas.

[Jakob Bluestone, analyst]

So just getting back to network infrastructure. If you can maybe just expand a little bit on where is the area that sort of continues to disappoint? I think if I read between the lines, it sounds like it's optical, which continues to undershoot. And then maybe also linked to that, if you can just expand a little bit on the North American strength? Is that just coming from BEAD? Or would you say it's kind of more broad-based in terms of the recovery there?

[Pekka Lundmark, executive]

Sure. I mean the good news is that the strength we now see in NI North America is there, even though there is very little or almost nothing from BEAD yet in those numbers. So BEAD will be an upside opportunity to what we are already seeing. BEAD is coming -- everybody knows that it's coming more slowly than people were hoping a year or two years ago, the U.S. administration is acknowledging it.

They have been slow in the allocation of the funds. But now the good news is that it is happening. I think the number of states that have opened a grant window is now 6. All states have this so-called Volume 1 approved. Most states have also Volume 2 approved. And then the next step is that they open the grant windows. And as I said, 6 windows have done it.

And it currently seems in case you are interested in details is that Louisiana will be the state that will be first moving to really releasing the funds. And once the funds get released, that's when then there is an opportunity for us to convert that into order intake.

And we believe that we start seeing some of that in Q4, and most likely some initial small deliveries already in Q4. But then very much, this will be a story of '25 and '26, and it will start providing upside on top of what we are seeing.

But I mean your observation was absolutely correct. Inside NI optical is weaker. One reason is that we are weaker in optical in North America. And this is exactly where then the Infinera acquisition will come in because they are strong in Optical North America, and that's when we then finally expect also us to be able to reap all the benefits of the North American recovery, which we are currently seeing more on the IP and Fixed side.

[David Mulholland, executive]

Do you have a follow-up, Jacob?

[Jakob Bluestone, analyst]

Yes, if I can just follow up on an earlier point. I mean, you've talked a bit about the growth in non-CSP enterprise. You talked about the CoreWeave contract and sort of the shift more into data centers. I would just be interested in understanding how does the profitability looks in the non-CSP segment versus your more sort of traditional business? So is this accretive or dilutive to your margins that you're kind of making this tilt?

[Pekka Lundmark, executive]

A lot will, of course, ultimately depend on the volumes achieved. But absolutely, as an additional business opportunity, it will be driving our operating profit and also our operating margin. That's absolutely our goal. Then it's too early to comment now in case there are large single deals that how the gross margin of each deal would look like.

But when you look at the data center market in general, maybe one thing to look at is the current leading vendors to that market and what type of profitability they have. And you will see that, in general, in NI segments, the non-service provider, non-telco segments are offering to vendors much better profit opportunities than the telco market.

[David Mulholland, executive]

We'll take our next question from Sébastien Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, analyst]

On the AT&T 5G contract, you had already a negative impact in Q3. And if I remember well, you were more forecasting more downside moving into 2025. Could you help us understand a little bit the dynamic of the AT&T 5G contract [ down ] in the coming quarters? Should we expect a bigger step back -- step down in 2025?

[Marco Wiren, executive]

Yes, thank you. Yes, you're correct. Just like you mentioned, we've seen impact of AT&T. And if you look how we see the AT&T contract development going forward, we've said that this year, thanks to the accelerated revenue recognition that we did in quarter 2, we will be about the same level that we were last year.

And this EUR 150 million acceleration came from basically next year. And that's why we're also saying that next year's volumes will be about half of this year's volumes towards the AT&T.

[David Mulholland, executive]

Do you have a follow-up.

[Sébastien Sztabowicz, analyst]

Yes, a follow-up on CNS and 5G core. You mentioned excellent momentum on the 5G core, I would say traction and so on. But the CNS division is still flattish like-for-like in Q3. Could you explain a little bit the dynamic behind CNS today? What is driving the business not to grow despite solid traction on 5G core.

[Pekka Lundmark, executive]

Yes. Thank you. The reason is actually very simple. There are legacy segments inside CNS where the market is declining significantly. For example, 3G core where we were a big player that has been a significant component in CNS, and that is rapidly declining. Then there is a number of other legacy applications that are declining as well.

But the strategic growth segments in CNS, including 5G core and including campus wireless and edge compute solutions, they are all growing heavily and with a very healthy rate. So that is the kind of challenging CNS that when we then create the overall CNS result, it's a combination of these legacy segments and strategy segments -- strategic segments, and we will be looking in the future to opening this up a little bit more so that you can see that's where the growth is actually coming from. But clearly, 5G grow is -- 5G core is growing at the moment.

[David Mulholland, executive]

We'll take our next question from Rob Sanders from Deutsche Bank.

[Robert Sanders, analyst]

I just had a question on the Mobile Networks business. Ericsson seems to be delivering with AT&T quite significant cost and CapEx savings that they are now using as a reference design to other operators, including outside the U.S. And that's obviously with a single vendor approach. I was just wondering, like, are you working on similar types of reference designs. And do you have reference designs that you can go and demonstrate similar kind of TCO savings like they are doing right now?

[Pekka Lundmark, executive]

Absolutely, we have such reference designs and actually a significant -- not the only, but an important part of that is what I was earlier talking about the qualification of the core network, which is a significant part of improving operators' TCO and overall efficiency.

And of course, we are trying then the whole mobile ecosystem into that thinking. What I should say though is that even though we also have some customers where we are the only vendor at the moment, we are currently not seeing that going with a single vendor would, in any way, be becoming a new trend with it. On the contrary, most of the recent deals, if not all of the recent deals that we have seen in the future have confirmed that operators want to stick with -- typically with 2 vendors.

We have a couple of cases where we have been able to defend our 100% market share successfully. But again, these cases where there is only 1 vendor seem to be more of an exception than a rule. And I believe that everything we are seeing currently is pointing to the direction that, that's how it will remain.

[Robert Sanders, analyst]

Yes, just a quick follow-up, just on Network Infrastructure. You had positive book-to-bill, I think, for 3 or 4 quarters now. And yet your Q4 sales guide has come down. Is the turns business an issue? Is that because of distributor stock? Is there any particular reason why your backlog duration seems to be -- keep on going up, but your turns business seems to keep on disappointing? And when does that sort of become less of an issue?

[Marco Wiren, executive]

Thank you. As we said that the recovery is slower than we expected, and it takes a longer time now for our customers to convert those orders into sales. So they don't issue the purchase orders in as fast pace as perhaps we and they thought in the beginning.

And just like you mentioned as well, we have had a book-to-bill above 1 for 4 quarters in a row now, and order intake has been increasing 4 quarters in a row as well in NI. So we definitely see that the market is strengthening, but still due to macroeconomic uncertainties, our customers are very careful and they just are very slow on issuing those purchase orders, but this gives a good platform going forward as well in -- for the next year.

[Pekka Lundmark, executive]

And also, I mean, just to be clear, even though we are not going to start publishing our order intake or order backlog numbers, but the NI order backlog at the moment is clearly on a higher level than it was a year ago.

[David Mulholland, executive]

We'll take our last question from Alex Duval from Goldman Sachs.

[Alexander Duval, analyst]

Yes. Just a question on the one-offs. I think you said to an earlier caller that this didn't benefit gross margin. It looks like this might be sitting in other income and expenses. Could you just quantify how much the EBIT benefit is from that? And then secondly, you talk about rightsizing the cost base so as to be able to hit double-digit operating margins on a lower revenue level of EUR 9.5 billion. I just wondered to what extent that's a function of a worse outlook for next year for your addressable markets? Clearly, last time, there was a big cost change that was then followed by a downtick in the market. So just curious how you're thinking about the outlook for next year, given we're in November. Really appreciate any color?

[Pekka Lundmark, executive]

If I take that second part, and Marco takes the first part. So you should not connect that to next year's outlook. I mean that's our own preparedness, that how we are resetting the cost base. And we just wanted to say that we have made even more progress than we originally targeted on the cost base reset and we are now targeting to create a cost base for Mobile Networks that would be able to deliver double-digit profitability at EUR 9.5 billion top line instead of the earlier targeted EUR 10 billion. This has nothing to do with next year's outlook. And as I said, there is a general expectation that after this really, really weak market in Mobile Networks in 2024, we would see market recovery next year.

[Marco Wiren, executive]

Yes. And that also if we look at the third-party analyst firms, they -- in their figures, they show growth for next year in Mobile Networks markets. And when it comes to the reversal of the freight receivables, as we said earlier as well, very clearly that it's not impacting gross profit or gross margins. This is booked in other operating income and expenses. And you can see also -- we haven't specified the level. Of course, we have other items in the other operating income and expenses as well. But you can see both at group level, but also in the Mobile Networks level that there's a positive other operating income in quarter 3. And this is, of course, the same thing when we book a customer -- expected customer loss, we booked that in other operating income expense as well.

[David Mulholland, executive]

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

[Operator]

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