諾基亞 (NOK) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Nokia's Third Quarter 2021 Results Call.

I'm David Mulholland, Head of Nokia's Investor Relations.

And today in Aspo with me is Pekka Lundmark, our President and CEO; along with Marco Wiren, our CFO.

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.

Factors that could cause such differences can be both external as well as internal operating factors.

We have identified such risks in more detail in the section titled Operating and Financial Review and Prospects, risk factors of our 2020 annual report on Form 20-F as well as other filings with the U.S. Securities and Exchange Commission.

Within the presentation today, unless otherwise stated, references to growth rates will be mostly on a constant currency basis, and margins will be on a comparable reporting basis.

Please note that our results release, the complete report with tables and the presentation on our website include comparable results information in addition to the reported results, including a detailed explanation and reconciliation between the 2.

So with that, in terms of what we'll go through today, I'll shortly hand over to Pekka, who will go through a brief overview of our financial performance before giving an update on the project progress that we're making in terms of the strategic objectives we've given each business.

We'll then run through a quick word on enterprise, along with how we see the supply chain constraints and then hand over to Marco, who will go through the financial performance in more detail before we get to Q&A.

So with that, over to Pekka.

Thank you very much, David, and thank you, everybody, for joining today.

We had another great quarter, third quarter 2021, strong execution.

Also some headwinds that I want to highlight, especially when it comes to top line because of component availability.

I'll come back to that soon because in the big picture, when we look at our numbers in the quarter, we had a 2% top line growth.

It's 6% year-to-date.

But what is interesting is that actually we could have grown faster without supply chain constraints.

So the main point here is that we are currently not constrained by market demand or our own production capacity.

But what is constraining our growth at the moment is availability of components.

2% growth.

A couple of highlights.

First of all, our most important and largest market, North America, we had excellent 9% growth despite some of these earlier communicated headwinds that we had in mobile networks.

The other businesses in North America very well compensated for the decline that we had in mobile networks, which was very much expected.

Then a couple of other highlights.

Cloud and Network Services had really good 12% growth, and Nokia Technology is also double digit, 11% growth.

And network infrastructure overall against a pretty strong Q3 last year had 6% growth.

And within the network infrastructure group, the Fixed Networks division was really the standout of this quarter with fantastic 29% growth.

So overall, pretty good quarter from a top line point of view.

Then if we move to profitability.

Gross margin, first, this is really a testimony to our improving product competitiveness.

We had comparable gross margin expanding by 340 basis points.

And this is pretty much across the board at the moment.

And particularly pleasing was to see that mobile networks had 220 basis points expansion in gross margin.

Our group margin, 40.8%.

As I said, 340 basis points improvement.

Mobile networks, 220 basis points.

We also had very strong year-over-year gross margin expansion in Cloud and Network Services.

Even if we were to exclude some of the project-related provisions that we made in Q3 last year, this is very important to note because CNS these 2 quarters, Q3 this year and last year, they are not entirely apples to apples.

So very good development in gross margin.

And that's, of course, then reflected in the operating margin, where we had 250 basis points expansion to a pretty decent level of 11.7%.

And here, it's again worth noting that this is, of course, after the investment -- increasing investment that we have put into research and development to strengthen our technology leadership.

So a pretty good operating margin development.

And then the last point about the kind of financial highlights is really cash conversion.

We not only did have good operating margin, but also a good cash conversion, slightly over EUR 700 million free cash flow, and the result of that is that we now, at the end of the third quarter, we have EUR 4.3 billion net cash on our balance sheet.

Then I move to some other highlights on businesses, and I'll be talking quite a bit of technology because it is really the fundamental thing that is driving our competitiveness.

And I want to start with perhaps the most important technology highlight of this quarter, which was the launch of the next-generation FP5 routing silicon.

In our IP routing business, we have actually gained market share with every generation of product that we have brought to the market.

And we believe that this will continue.

What we have now launched this industry's most advanced network process in silicon with 4.8 terabytes per second capacity.

This gives operators performance without compromise for service provider IP networks.

And this capacity that this platform gives is approximately 3x more compared to the previous generation.

At the same time, with that, when we are increasing capacity 3x, we are actually reducing power consumption per bit by 75%.

So there is more capacity.

There is less power consumption per bit.

And one very important detail about the product is that -- or the platform is that it is the first in the world to provide 800 gigabit Ethernet interfaces.

It's not only power efficient and has a lot of capacity, but it's also extremely flexible in terms of programming capabilities to support the constantly evolving network needs, network evolution, network structural evolution.

And on top of everything, it has very advanced security and encryption capabilities to -- which are actually in-built directly on the chipset level to protect the network against various types of attacks.

Feedback to this launch has been great from customers.

What is, of course, important to keep in mind that this is a silicon platform now.

And on top of this, we will then be rolling out a whole new generation of products.

And these rollouts will begin gradually during the first half of 2022.

Then I would like to move to another business, and that is fixed networks because I already said that fixed networks within the Network Infrastructure division was actually the standout of this whole quarter in terms of growth, 29% year-on-year growth despite actually quite tough comparables in the third quarter last year.

Going forward, comparables will continue to get more challenging, but we actually believe quite a lot in opportunities in this business.

They remain substantial.

And let me explain why.

And of course, the main key underlying reason is the lasting effect on importance of fast home connectivity because of COVID.

That means that broadband is not only about mobile, operators are actually currently prioritizing fiber investment.

And here, you can see this is Nokia's product sales, excluding services.

The gray color here represents copper, which, of course, is a declining business.

The green one, green color is fiber.

And you can see the fast expansion in our fiber access volumes over the past couple of years.

And then very importantly, there is a new segment here, which is fixed wireless access, which is still very small today, but expected to grow a lot going forward.

Then, of course, comes to the question on the sustainability of this growth, and I just want to make one highlight here.

This graph shows in various countries, Germany, U.K., Italy, Poland and France, so forth.

First of all, with the yellow orange color homes with fiber accessibility, homes that could be connected.

They are not all connected yet, but they could technically be connected because there is a fiber that is passing the home.

And then the light blue color represents homes, which have not been passed so today, which means that they cannot even be connected today.

So all of this here, the blue color represents in a way, the remaining opportunity.

So it is substantial across many, many parts of the world.

So the market opportunity is clearly there.

Then the next question is that how are we able to address that opportunity product-wise?

And here, I would like to start with exactly in the same way as I was talking about in the second quarter, and we've been talking about the system on chip platforms importance for mobile networks business through ReefShark.

Now in the second quarter, we launched FP5 for routing networks, IP networks.

Here also, the important source of competitiveness is our chipset QuilionASIC, which enables high-density, low-power solutions, which has led us to actually lead the GPON and now lately XGS-PON market.

We are currently #1 in GPON fixed access, and we are very clear leader in XGS-PON.

XGS-PON is the 10 gigabit symmetrical passive optical network, which is establishing itself as the leading technology of choice, and it's predicted to overtake GPON next year.

We actually have 40% market share outside of China in XGS-PON optical line terminals.

Interesting thing about the Quilion chipset is that it is also used as a platform for the next generation after XGS-PON, which will be 25 gig PON.

In this segment, we believe that we are 18 months ahead of competition.

We have 1 live.

This is very new, of course, all of this, but we have 1 live network with Proximus in Belgium and over 20 trials.

And the best part of this is that this is really available today.

If customers want this technology 25-gig today, we are able to deliver.

And one more point about this 25 gig is directly upgradable from 10 gig.

So operators have a secure investment when they want to do future upgrades to 25 gig per second.

And then one more fixed access segment that I want to highlight, which I already mentioned, is fixed wireless access, where we are #1 also in the world at the moment with more than 25 deployments.

What you see here is our home access box for fixed wireless.

We also continue to innovate with the new approach to make millimeter wave radio viable in fixed wireless access.

We have a new clever antenna design and algorithms, where we provide extremely high gain, 360-degree field of view and continued optimization of the various propagation paths for the signal.

This means that we can establish a good connection even with weak or reflected signals and still allow for consumer indoor self-install, which is, of course, critical to make the business case work.

Then moving on to, of course, one of our absolute main businesses, in addition to network infrastructure, which I've now covered is, of course, mobile networks where we also have pretty good progress.

We have -- now since we launched our new AirScale portfolio in the second quarter, we have received extremely good customer feedback and a lot of additional traction with customers.

And the latest number is 189 commercial 5G deals and 72 live GSP 5G -- CSP 5G networks.

One, it's more than curiosity actually that we have now placed the world's first 5G carrier aggregation call in a stand-alone architecture with Taiwan Mobile.

We have increased quite a lot our technology and R&D investment in 5G, as we have been discussing several times earlier.

And the encouraging thing is that this investment is delivering result.

Here, you can see a 12-month trailing gross margin development in our mobile networks business.

And operating margin development, as you will have seen, has also been good.

And that is, of course, after this pretty strong increase that we have put in, in the R&D investment.

Our gross margin in the quarter was 37.8%, and as said, up 220 basis points, driven by improvements in cost competitiveness.

Then a couple of comments on cloud and network services.

And of course, as we've been discussing quite a lot earlier, this is, in a way, a research year for CNS, where we are in the middle of a pretty big product portfolio rebalancing.

And against this backdrop, it was really encouraging to see how this quarter went.

We had a 12% growth in constant currency.

This was driven by very much by the core network business, which is 5G core, is one of the key focus areas of CSN.

We are making good progress overall in the product portfolio rebalancing.

And while we are doing that, we have now decided to focus on 6 segments within CSN.

I already mentioned 5G core, which of course, enables new use cases, drives capacity and cost efficiency.

Then we are focusing on analytics and AI to optimize network efficiency, quality of experience.

Then very importantly, private wireless to accelerate digitalization and automation of enterprises, all the millions and millions of industrial campuses of this world.

Digital operations, a very important segment, automated provision of services, managing the complexity of the service delivery enabling slicing of the network, just to give a couple of examples.

Monetization/billing over 5G -- new 5G use cases, service models in a way, monetize everything that the customer is investing in.

And then last but definitely not least, the big focus area is managed security for the network, protect new attack surfaces, handle device proliferation and so on.

And in a way, a big directional ambition in this business is to continuously develop towards new business models like network as a service to build recurring business models where you actually offer network functionality implemented with software on the cloud as a service.

Then a couple of comments on the enterprise business, which is not, of course, reported as a separate business group because the product comes from different business groups.

But we have a -- we have one system solution approach and one go-to-market approach in this business.

We cannot, of course, be happy with a 4% decline in enterprise sales this year.

It was 3% year-to-date.

There was some bulkiness in this, especially with large web scalers.

What I do want to emphasize is that we are currently building a strong backlog for this business for 2022.

One of the key segments in our enterprise strategies, of course, private wireless, as I said, and that part of the business is clearly growing double digit at the moment.

We have already over 380 wireless -- private wireless customers.

This whole market is still in the very early stages.

I just earlier mentioned the millions and millions of industrial campuses that will be our targets going forward.

And it is so important that we have actually decided to double down our investment.

We are ramping our investment in this space to further extend our market leadership.

We have recently launched a product platform called MX Industrial Edge, which actually takes the industrial edge opportunity beyond pure connectivity.

We are now launching an application platform with open interfaces for application developers to create a full ecosystem for industrial digitalization.

And then my last comment before I hand over to Marco is about the supply chain because as I already said initially, this is bit of a challenging situation.

And of course, the background to all of this is that the global semiconductor demand is greatly exceeding supply at the moment.

Here, you can see that the demand only between 2020 and 2022 in the world is expected to grow by almost 40%.

And this is then combined with the unprecedented component cost inflation for our industry.

For a long time, our industry has been used to where prices are continuously roading.

Now at least temporarily, that trend seems to have seems to have turned.

We are working relentlessly, of course, with both our suppliers and with our customers.

It's very hands on every day we work with 2 goals in mind, 2 goals in mind: To ensure component availability, to make sure that our customers get what they need; and then number two, to deal with the cost inflation.

And of course, our goal is to minimize the impact on our margins.

But we do expect that this will have an effect on Q4, and it also could limit our margin expansion potential in 2022.

At least, it is fair to say that limit -- that visibility to Q4 and 2022 is not what it typically has been at this time of the year.

So this does cause uncertainty.

We have been dealing with this challenging situation fairly well in the future.

This is not a Nokia specific issue.

This is an industry issue, but it would be naive to say that it would not affect us as well.

It will.

And it is possible that the situation will get more challenging before it then starts getting better.

Okay.

Thank you very much.

And now I would like to hand over to Marco.

Thank you, Pekka, and good morning from my side as well.

I will dig deeper into the financial performance of Nokia during the quarter 3. And I will start with the market estimates.

The overall market is pretty much stable compared to our previous view as well.

But there's a couple of items that I would like to highlight.

And the first one is the mobile networks.

And as you see, we actually estimate that the addressable market will grow about 5% instead of 6%, as we had in our previous estimate.

And the main driver here is that we believe that the supply chain situation that Pekka just mentioned, will impact this market.

And also, when it comes to the network infrastructure, we believe that this market is also affected by the supply chain constraints.

But considering the year-to-date growth, we believe that this market is actually growing 5% instead of 4%.

And we especially see in the fixed networks and IP network side with the CSP customers where the market is very strong.

And then if we look at the 2% growth that we had in quarter 3, we can see that there's a lot of changes in between different geographies.

And it will start with the North America, you can see that we had a 9% growth.

And we had headwinds in mobile networks, just like we have been mentioning those earlier, but these were offset by the double-digit growth that we saw in network infrastructure and cloud and network services.

And just to mention also that all the 3 businesses in network infrastructure had double-digit growth numbers in North America.

And now I exclude ASN because ASN is a different type of business, and it's between the geographies quite a lot.

Then the second area I would like to highlight is Asia Pacific.

As you can see, we had 18% growth in Asia Pacific.

And the main driver here was very strong 5G investments in Japan.

And the third item I would like to highlight is India.

As you see, we had a negative development there, about 7%.

But here, I would say that it's more a timing issue.

If you look at the year-to-date growth in India, it's 26%.

So it's quite remarkable development there.

And the last geography that I would like to highlight is Europe.

We see a 5% decline, and this is more related to network infrastructure business, while Mobile Networks business was more stable and year-to-date figure for Europe is plus 2%.

And if we look what has happened in our operating margin development, and as Pekka mentioned already that the new operational model has definitely strengthened our focus and our capability within the BGs.

And that's why it's very nice to see that we had this 250 basis point expansion in our operating margin in Q3.

And if we look at the different factors that have affected this, we had a negative impact from product mix.

And I would say that basically, 2 factors here is ASN and CNS growth that has an impact on our overall group operating margin, and that's why we saw this negative impact in group level.

The next one is regional mix, where we had a positive impact.

And this is basically coming from North America and Asia Pacific.

And then if you look at the cost side, we have definitely done a lot of improvements in our cost competitiveness in mobile networks.

But these have been offset by increased R&D investments, but also some higher incentive accruals that we've done this year compared to last year.

Then there's 2 items that I would like to highlight that has had an impact on our development here as well.

And the first one is the venture fund investments that we have.

We actually had a plus EUR 40 million impact in the third quarter.

And if you compare with the last year same quarter, we had a minus EUR 20 million impact.

And then loss provisions.

Just like Pekka mentioned already, we had in our CNS business last year project-related loss provisions.

And of course, that had a positive impact now because we don't have those this year.

And if we dig deeper into each of the businesses and look their performance during the quarter and starting with the mobile networks.

Pekka already mentioned that the very good 220 basis points expansion on gross margin in mobile networks.

And of course, we can see here that the cost competitiveness that we've been focusing on is giving results.

But also, we had a good regional mix that gave benefits here.

And of course, when it comes to operating margin, you see those investments in R&D that is affecting our operating margin and also some incentive accruals here.

Then going into network infrastructure, you can see that we had a 6% growth.

And the major drivers here were, just like Pekka mentioned, that fixed networks, 29% growth in the quarter.

It's remarkable.

But also, ASN had a 20% growth in this quarter, while IP Networks was about flat, and optical had a 12% decline.

But here, we have to remember that last year, optical was benefited by the pent-up demand, followed by the COVID.

And we had actually all-time high quarter 3 sales in last year.

And that's why we saw this decline.

And then of course, if we look at the operating margin, that was declining compared to last year.

And the main reasons here are basically the mix.

That has a negative impact, but also that we have ramped up our R&D investments during this period.

And remember that year-to-date figure is pretty good and expansion from last year, year-to-date operating margin is 470 basis points.

So I would say pretty good development here.

And then if we look, Cloud and Network Services, we had a 12% growth.

And this growth is basically coming from those 2 key focus areas that we have, which is 5 core -- 5G core and enterprise solutions.

And of course, when you look the year-on-year development on the operating margin, you can see that there's a huge increase.

But remember that just about above half of that expansion is due to these project-related loss provisions.

But also excluding that, we see that the improvement is 10 percentage points.

So it is definitely good work here as well, and we've been getting results out of those operational improvements and top line growth that we've been seeing here.

Then Nokia Technologies had a 11% growth.

And of course, these are benefiting from the contracts that we've been signing since last year, end of last year until now.

And we believe that the annualized run rate sales is about EUR 1.4 billion to EUR 1.5 billion.

And if we look at our cash performance, we can say that now we have sixth quarter in a row with a positive free cash flow.

And also the fact that we converted almost all adjusted profit into cash, and that's why the quarter end net cash balance was EUR 4.3 billion.

When it comes to working capital, I can say that the inventories increased only EUR 70 million in the quarter.

And of course, in the situation where we are today, we perhaps would have like to see a little bit more increase to get more visibility and security on the supplies side, when it comes to semiconductors.

And if we take a step back and look a little bit longer trend when it comes to cash generation, it used to be a little bit more volatile.

Now we actually see more consistent track record of free cash flow generation.

And of course, this is reflecting all the actions that we have taken in the past quarters to secure very good focus on net working capital.

And at the same time, we have doing restructurings and significantly reducing the sale of receivables, and this has led to a very strong liquidity position.

Then I would like to just highlight that when it comes to dividend, just like we said in our Capital Markets Day already, that our ambition is to get back to a dividend-paying position.

But remember, this is a Board of Directors decision.

And after the quarter 4, Board will assess the possibility of proposing a dividend to the AGM based on our dividend policy.

And we want to also say that we are reiterating our full year outlook, and we expect that we -- on the operating margin side, that we will be in the upper end of this range.

And seasonality, we have been mentioning as well that we believe it's different in this year.

And those headwinds that we have communicated will impact that.

But also the fact that the uncertainty of the global semiconductor markets will limit our visibility not only in Q4, but also when it comes to 2022.

And that's why the semiconductor situation and the one-offs that we have had this year may limit our margin expansion potential in 2022.

Because year-to-date one-off so far, we have had there about 100 basis points in our operating margin.

But at the same time, we believe we are well positioned to capitalize the strong demand that we see in our end markets through those technology investments and technology leadership that we have and also the improved competitiveness that we have.

So this is all from my side.

I thank you, and back to you, David.

Thank you, Marco.

We will now start the Q&A session.

For the Q&A session, please could you limit yourself to one question and as a courtesy to everyone else in the queue.

Operator, could you please go ahead and give the instructions.

We will now begin the question-and-answer session.

(Operator Instructions) Your first question comes from Dominik Olszewski from Morgan Stanley.

Yes.

You mentioned the 100 basis points of one-offs this year as a positive to operating margin as you flagged at the first half as well.

But obviously, equally, the supply chain has gone against you this year.

So could you maybe discuss how much and quantify how much of a revenue impact or profit impact has that been this year or maybe into Q4?

And then secondly, you showed a slide on fiber penetration.

Can you just touch on how much operating leverage do you have into that theme because it's obviously impressive growth, so how much additional investment does it need?

Thank you, Dominik.

And when it comes to the impacts of semiconductor situation this year, we believe we definitely have seen some impact and just like we highlighted already in Q2, that we could have had higher sales in Q2, but also now in Q3, and that will affect us in Q4 as well.

We haven't quantified exact numbers.

But just like we said that we would have been able to grow faster than we are because the end markets are supporting higher growth.

If I take the fiber question.

The fiber access business is volume sensitive.

You need high volumes to get the good margins, and that's exactly where we are getting now.

And you are seeing actually the result coming through now when we have this type of growth.

We have been increasing and will most likely continue to slightly increase the R&D investment there, but not in such a way that it would, in a way, it weigh all the good things that we would get through the volume.

Thank you, Dominic.

Just a reminder, if you could keep yourself to 1 question, please.

Rachel, next question.

The next question is from Francois Bouvignies from UBS.

So the question I had is on your performance by regions and mainly Europe and China down this quarter.

I just want to have your thought of what should we expect for the next quarters, one, because, of Europe, you've seen that you have a lot of product launches and with the challenges that Huawei is facing, should we expect some market share maybe gained in the next few quarters in Europe and maybe coming back to a healthy growth there?

And in China, in light of the recent contract announcement there, although small, should we expect the benefit of that in the next quarter or so?

Yes.

When it comes to the different regions, we definitely believe that in mobile network side, that if you look at the European area, that we have had a very good opportunities when suppliers have changed the supply base.

And we've been winning about half of those opportunities.

And how exactly this will play out in quarter 4, that's -- let's see about that.

It depends -- it's timing issue a little bit as well.

When it comes to China, those contracts or shipments will start coming from quarter 4 and forward based on those wins that we did in China, the latest purchase in Brown.

That is right.

And if I just quickly a couple of kind of macro comments on both regions.

In general, in 5G investment and also in many segments of broadband, fixed broadband, Europe has actually been lagging behind some other parts of the world.

There is always some lumpiness in deliveries, which is now mainly explaining the minus 5% in Q3.

But structurally, we continue to believe in the European market potential.

There is a lot to be gained there.

And then when it comes to China structurally, it continues to be, of course, a large and important market.

There, we have to be realistic that it is a fact that market share that is available to non-Chinese vendors there is currently small and it's prudent to expect that, that would not change anytime soon.

Thank you, Francois.

Rachel, next question, please.

The next question is from Sami Sarkamies from Nordea Markets.

I would actually continue on the component shortages.

Can you still elaborate on the extent that this limited your sales in the second and third quarter.

We talked about 1 to 2 percentage points or something more meaningful.

And do you anticipate potential larger headwind in Q4 and in the first half next year?

I'm thinking how to answer that question without giving you a number because we have decided not to quantify.

This is also partially commercially sensitive.

But it is meaningful.

And it is actually increasing.

It's -- as I said, it's quite possible that this situation will get worse before it gets better.

Of course, structurally, it will get better one day.

Semiconductor industry is currently investing heavily, but there is quite a long time lag before some of that capacity starts coming online.

So we can be fairly confident that when we get to '23 and then '24, this situation could completely reverse itself and there could be excess capacity, which would then be reflected in prices.

But '22 will be the big in a way, inflection point where everybody currently is still wondering that what will really happen.

And that's why we are saying that there are uncertainties.

We've been doing fairly well in this war about semiconductors so far, but it is getting more challenging.

Thank you, Sami.

Rachel, next question, please?

The next question is from Alex Duval from Goldman Sachs.

There's been some debate in the market as to whether we're approaching mid or late cycle as pertains to 5G.

Clearly, you've been talking about some opportunities in various regions.

Some of those seem to relate to market share.

So as we think about demand into 2022 and potentially 2023, can you talk about which regions you see growth?

And how you think about the drivers there?

Obviously, cognizant of these component issues you've talked about, but how are you thinking about the cycle and demand?

We believe that we are still maybe 2 to 3 years away from the peak of the 5G market.

And then when we look at the kind of the development of the market from there, the 4G market peaked and then it started to decline quite quickly after that.

We believe that there are good reasons to believe that this peak could actually last for a longer period of time.

And then it would gradually start declining towards 2030 when then 6G will start hitting the market.

And the reason is clearly that there are -- there will be so many new use cases compared to the previous generations.

Of course, the consumer side is one thing on that one since you asked about regions.

Clearly, Europe has been lagging behind in investment compared to the United States to North America in general and Korea and Japan and China.

So Europe is now clearly picking up on this investment.

But then there is this big thing about the industrial digitalization.

And as I have said so many times, it seems now that with 5G, this long-standing promise of of moving the operational technology of enterprises on to networks, on to cloud and start realizing the long-standing promise of Fourth Industrial Revolution and significant industrial productivity improvement that, that will be possible with the combination of 5G and cloud and artificial intelligence.

And when we are talking to our customers and observing what serious big, heavy industrial actors are planning at the moment is actually quite encouraging.

Almost all of them are one way or another going to invest in next-generation connectivity, especially in 5G.

There are 15 million industrial campuses in this world.

That's an amazing number.

And when you start to think about what kind of services, network infrastructure and then different types of edge cloud platforms they will invest in, I believe that that will create a significant opportunity for several years to come.

Thank you, Alex.

Rachel, next question, please.

The next question is from Peter Nielsen from ABG.

I'd like to turn to North America piece where you obviously had a strong quarter overall.

Looking at mobile, Pekka, I interpret your comments on that, that we've seen the full brunt of the impact of the headwinds you have sort of talked about before in North America that we've seen those in Q3.

And perhaps if I interpret correctly, it's not getting worse in Q4.

Could you give us any indication on how you're doing on mobile in North America?

And Marco kindly gave us a number for Europe.

But how you're doing in North America on mobile, that will be very helpful.

And if you have any outlook you want to share for next year?

Okay.

What we have said earlier is, of course, that we have had certain issues with market shares and price erosion.

Those referred to decisions that some of our customers made over than a year ago, around mid-2020.

And that is now, of course, reflected in the numbers, and that creates a tough Q3 this year comparison compared to Q3 last year.

We are not disclosing regional numbers by business.

But when you look at the mobile networks top line development, for example, you get an idea because the main reason for that is actually in the North American situation.

Sequentially, I don't think it's going to get in a way any worse.

We've been doing well in North America in terms of new decisions and our product competitiveness and our market position after actually all the way after those negative decisions were made some time mid last year.

So from that point of view, I believe that we have, in a way, now been able to stabilize the situation.

And then, of course, our goal is to then turn to a more positive development after this Q4 this year compared to Q4 last year, of course, still will continue to be a challenge.

And this is one of the reasons why we expect that we will not see the typical seasonality or at least the seasonality will be less pronounced this year than it has typically been in our results.

Thank you, Peter.

Rachel, next question, please.

The next question comes from Simon Leopold from Raymond James.

I wanted to see how you're considering the opportunities from government stimulus projects.

If we can hear specific views regarding the RDOF program that is in the U.S., the Rural Development Opportunity Fund as well as global thoughts.

You highlighted fixed access I think that's probably the most affected, but if we could get your perspective.

It's very clear that this stimulus programs, they create actually a lot of opportunities for us.

all the decisions have not been made and there are still final decisions to be made, especially in the U.S. regarding the Chips Act and various funds, for example, for ORAN development and so on.

But on balance, this is very positive development for us.

And we believe that not only our mobile business, but also fixed broadband access business will benefit from these decisions.

The same is true to Europe, the recovery and resilience facility of the European Union, which is now gradually being rolled out to implementation in different member states is definitely a net positive for us.

Thank you, Simon.

Rachel, next question, please.

The next question is from Robert Sanders from Deutsche Bank.

I guess, I know you don't want to give a specific outlook for 2022 sales, but can you at least rank your segments in terms of growth potential?

And which segments within the sort of 3 cloud network and mobile will be most affected by the supply issues you're facing?

An easy way to answer that would be that CNS will not be affected because it's software.

And this is actually a relevant point because we are -- overall, we see growth opportunities in all 3 businesses next year.

But we are not going to be limited by demand side.

Next year, this whole game will be more supply game compared to what it has typically been.

CNS is, of course, different because there are no limitations as to delivery capacity.

So in terms of market and in terms of our product competitiveness, we believe that the direction of travel and the underlying development is positive.

The uncertainty is caused by the supply side.

And there, I do not see big differences between mobile networks and network infrastructure because these fundamental challenges are not even things that would be there with individual chip makers.

They go all the way to wafer production and availability of substrates for the components and so on.

So it will affect everybody.

Thank you, Rachel next question, please.

The next question is from Frank Maao from DNB.

So I was wondering if you could talk a little bit about how the cost inflation challenges pan out on a more practical level.

I mean -- and also, in terms of the supply chain bottlenecks, how that, if you can unpack what kind of -- what makes you are most worried about?

Is it semis, what kind of semis?

You mentioned substrates, but also could there be issues around -- have you seen typically around site equipment not being from third parties there in place at the time, cables and brackets or batteries or whatever.

If you could talk a little bit and give some color around what kind of gear basically is more challenged, if it's just the semi part and also all the stuff.

And related to that, what kind of is the length of the contract with the suppliers to manage the builder materials impact of the cost inflation, which is coming from these disturbances?

Do you have -- typically have long contracts that would allow you to kind of smooth out, say, a 10% or 20% increase in spot prices, for example, for semiconductors?

That's one question.

Typically, these contracts would be annual contracts.

And this is one of the reason why the uncertainty, for example, regarding 2022 is there because a lot of these negotiations are actually ongoing for 2022 at the moment.

For commercially sensitive reasons, I will not go into details as to which suppliers it would be and which segments.

As I already said earlier, it is fairly broad-based affecting all semiconductors.

And to some extent, it could behave a little bit different for memories.

But still, the whole industry of semiconductors is being affected.

And again, it's commercially sensitive.

That's why I will not discuss that what type of price increases we are seeing.

And of course, it is continuous discussion with both suppliers and then, of course, our customers.

And our goal is to find the right balance between being able to deliver and then also optimize our margins.

Thank you, Frank.

Rachel, next question, please.

The next question is from Sandeep Deshpande from JPMorgan.

Just coming back to the issues on semiconductors, et cetera, if I may ask.

I mean if you look at the RAN market today, I mean, particularly in the West, there isn't that much competition between -- in the market given the geopolitical issues that are ongoing.

And customers typically can't change suppliers just because you can't supply this quarter and you may be able to supply next quarter.

So does this not just mean that your demand is delayed into next year?

And once you can get the supply of semiconductors, that your sales will be much higher because you will probably not lose business because of the semiconductor situation?

I think, Sandeep, that is the right assessment.

Of course, there can be individual cases where the reality would be different.

But in majority of the cases, I believe that's exactly what would happen that it would be more of a delay of delivery than losing the sale completely.

Thank you, Sandeep.

Rachel, next question, please?

The next question is from Paul Silverstein from Cowen.

Where is the opportunity or opportunities for greatest upside with respect to your margin structure, putting supply chain challenges aside, which presumably are transitory?

Yes.

We are working quite heavily on 2 fronts of this side, I would say.

One is, of course, securing that we have the technological leadership because what we believe is that when you have the technological leadership, then you have much better ability to have higher margins as well.

And the other one is securing that we have the best, most optimal cost base.

And you've seen also that we are increasing the R&D.

But at the same time, we've actually been able to reduce our cost base in other areas to mitigate that increase that we have in R&D.

So the more R&D we can focus on and get the right output because it's not only money put into R&D, but also the efficiency of R&D.

And we have been extremely good on actually increasing the output, and mobile networks is a very good example how we've been measuring how much output we can get based on the same amount of money that we put in.

And we continue to do that in all areas.

Thank you, Paul.

Rachel, next question, please.

The next question is from Aleksander Peterc from Societe Generale CIB.

I'd just like to focus a little bit on Cloud Network Services, the CNS.

Could you tell us how advanced you are with addressing the poorly performing projects there that's maybe still well on margins.

So should we expect any benefit once that all of those issues are fully resolved?

And how sustainable is the sharp gross margin improvement that we saw here?

You mentioned the 10 percentage point improvement outside of the -- of last year's losses.

So basically, how much of this we should continue to model going forward?

Basically, we are doing 2 things in CNS at the moment.

We are -- first of all, we are addressing certain old nonperforming contracts, which is one part of this.

And then in addition to that, which is perhaps even more important strategically, is then the complete reassessment and reshuffling of the portfolio.

And as I explained in my presentation, we have now defined the 6 focus areas to invest in, which will then be driving CNS growth going forward.

The gross margin improvement in Q3, I would be a bit careful when you look at the year-on-year because of those big one-off project provisions that we had last year, which we did not have this year.

Of course, our goal is that -- and I believe we will get there, that once we clean up the old portfolio of bad projects and then focus the business on the right growth segments, the goal is that, that would be structurally driving up margins.

But again, one quarter is too short and now we have this exceptional suggestion with the big provisions last year.

So I would be a little bit careful as to not to draw too quick conclusions on Q3.

Thank you, Alex.

The next question is from Artem Beletski from SEB.

I would like to ask you about sort of OpEx trends going forward.

And basically, when it comes to R&D, so we have seen increase there, as you have been highlighting previously.

So is now basically full impact visible on this side and maybe in terms of SG&A trends and potential of, say, incentive accrual impacts and other factors.

Could you provide some color on the development going forward also there?

Yes.

Thank you for the question.

And yes, definitely, we have said that this year, we will definitely double down on R&D, especially in mobile networks.

But we also have increased R&D in network infrastructure.

As you saw, the new FP5 chip that we launched.

So these have created more cost in the R&D side.

What comes to the future investments in R&D that we balanced always based on what we believe is needed to secure that we have the technological leadership position.

When it comes to SG&A cost, there, we continuously see what opportunities do we have to be most optimal and get out of the -- that kind of service that we need in the company as a whole and secure that we are competitive compared to our peers as well.

So I will not go into estimations of next coming years R&D levels that we will get back to you when we guide next year's figures as well.

Thanks, Artem.

And Rachel, can we now take our last question, please.

The final question is from Richard Kramer from Arete Research.

Just want to dig in on the enterprise area for a little while because if we look at the run rate of sales and the 380 million customers, and I know you may still be ramping with many of them, it averages out to a very small amount for customers, so less than EUR 4 million.

And obviously, you mentioned some large hyperscalers in there.

Can you lay out how you're planning to go to market in this space because what we've seen with many of your peers in the past is that they haven't got that go-to-market right.

And also, since you seem to be sticking fairly strictly to budget and spend levels in areas like sales and marketing this year.

So how do you plan to realize that enterprise opportunity next year without building a lot of sales force and channel organization?

There are a couple of different segments which have to be dealt with differently.

The large Web scalers, it's actually fairly R&D-intensive discussion that you need to have with them.

So it's very straightforward.

And of course, the number of these customers is fairly limited.

So that's, in a way, a case of its own.

Then when we talk about private wireless, there are 2 different types of private wireless.

There are the wide area networks for utilities and railways and public services.

Those deals are actually conceptually fairly close to what we are doing in mobile network.

So similar type of approach to those customers works fairly well.

But then a completely different case is this millions of industrial campuses.

And there, we are currently developing the distribution model.

You cannot have your own sales force that would visit 50 million industrial compasses.

You need to have a distribution network or layers of distribution so that you don't need to invest in fixed cost for that sales force yourself.

So that's what we are currently building.

Thanks, Richard.

Ladies and gentlemen, this concludes today's call.

I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties.

Actual results may, therefore, differ materially from the results currently expected.

Factors that could cause such differences can be both external as well as internal operating factors.

We have identified these in more detail in the section titled Operating and Financial Review and Prospects Risk Factors of our 2020 annual report on Form 20-F as well as other filings with the U.S. Securities and Exchange Commission.

Thank you for joining us.