諾基亞 (NOK) 2017 Q1 法說會逐字稿

Hello, and welcome to the Nokia Q1 2017 Earnings Results Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations.

Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's First Quarter 2017 Conference Call.

I'm Matt Shimao, Head of Nokia Investor Relations.

Rajeev Suri, President and CEO of Nokia; and Kristian Pullola, CFO of Nokia, are here in Espoo with me today.

During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry.

These statements are predictions that involve risks and uncertainties.

Actual results may therefore differ materially from the results we currently expect.

Factors that could cause such differences can be both external, such as general economic and industry conditions as well as internal operating factors.

We have identified such risks in more detail on Pages 67 through 85 of our 2016 Annual Report on Form 20-F, our interim report for Q1 2017 issued today as well as our other filings with the U.S. Securities and Exchange Commission.

Please note that our results release, the complete interim report with tables and the presentation on our website include non-IFRS results information in addition to the reported results information.

Our complete results report with tables available on our website includes detailed explanation of the content of the non-IFRS information and a reconciliation between the non-IFRS and the reported information.

With that, Rajeev, over to you.

Thank you, Matt, and thanks to all of you for joining our Q1 results call.

Nokia's first quarter results showed our improving business momentum and that we are effectively moving beyond the integration effort for 2016 to making 2017 a year of execution and performance.

In the quarter, we slowed the rate of our top line decline, delivered a strong gross margin and improved group-level profitability.

We also saw encouraging signs of stabilization in Mobile Networks, significant, even if early, signs of improvement in Applications & Analytics and year-on-year expansion in both sales and profits in Nokia Technologies.

We were able to deliver these solid results even though Q1 tends to be our seasonally weakest quarter and even though we had challenges in our IP/Optical Networks and Fixed Networks business groups.

This truly shows the power of our end-to-end portfolio.

So in short, I am pleased, even if not fully satisfied, both with where we landed in Q1 and with our operational momentum as we head into the rest of the year.

As you will recall, in recent quarters, you've heard me talk about 3 key priorities for Nokia in 2017: stabilizing our top line, delivering our cost savings and executing our strategy.

In each of these 3 areas, we made progress in the first quarter.

Starting with the top line.

And as you have seen, we substantially slowed the rate of our sales decline.

Group-level non-IFRS net sales in the quarter were EUR 5.4 billion, down 4% year-on-year.

Our Networks sales of EUR 4.9 billion were down 6% year-on-year.

The comparable numbers for Q4 2016 were a 13% decline at the group level and 14% for Networks.

Underlying this improved performance was a number of large deals that leverage our end-to-end portfolio, a continued improvement in our win rate, more cross-selling opportunities and further expansion of our sales to a diversified customer base.

So step-by-step, our top line is heading in the right direction.

As you have seen, we reconfirmed our full year guidance, expecting our primary market of communication service providers, or CSPs, to see a low single-digit percentage decline and accordingly, for our top line to be in line with that.

That said, we will not be content until we return to healthy growth, and that remains very much a top priority for me and my team.

Turning to the cost side.

Operating expenses in Networks were down EUR 35 million compared to the same quarter last year, and we drove significant savings in cost of goods sold as well.

With these efforts, I remain confident that we are well on track to deliver EUR 100 million in OpEx savings this year, along with the EUR 1.2 billion in total cost savings in full year 2018.

We believe this strikes the right balance between reductions and the investment needed to maintain our strong competitive position.

You can see the results of our cost discipline and Networks strong gross margin in the quarter.

Despite the challenges in our IP/Optical Networks and Fixed Networks businesses, which I will come back to, our Networks gross margin was remarkably resilient.

In fact, at 39.5%, it was among the best we have ever delivered in any first quarter.

Then, strategy.

Let me spend a few minutes on the progress we have made here.

As you will recall, the strategy that we shared 5 months ago has 4 main pillars: leading in high-performance end-to-end networks with communication service providers; expanding network sales to select vertical markets needing high-performing secure networks; building a strong stand-alone software business at scale; and creating new business and licensing opportunities in the consumer ecosystem.

While I cannot go through everything we are doing in each of these areas, let me just share some highlights, starting with leading with communication service providers.

The renewed momentum in Mobile Networks in the quarter was certainly a positive signal in this area.

Part of that was driven by strong market interest in our path to 5G road map, going from 4.5G the 4.5G Pro to 4.9G and then onto 5G.

We already have 145 4.5G customers and significant interest in the upgrades that come next as operators look to meet quality and capacity demands before the arrival of 5G.

When 5G does come, we will be ready.

Many of you have seen the 5G FIRST solution that we announced at Mobile World Congress, which spans across radio, cloud core transport and services to offer early 5G adopters with a full end-to-end capability.

Our strong competitive position in the mobile market can be seen in our very strong Q1 conversion rate of pipeline opportunities to contracted wins.

In addition, we successfully landed some new flagship deals such as the mobile broadband network project in Mexico known as Red Compartida, our largest ever in Latin America, and another with Three UK, in which Nokia will deploy the world's first fully integrated cloud-native core network.

So when it comes to leading with CSPs, I would say not a bad quarter for Nokia.

In fact, quite a good one.

My primary concern in this area remains consistent with what I noted last quarter, that our mobile radio R&D teams continue to work through a consolidation of radio platforms and implementing new features.

And as I've also said, we expect to have this work largely behind us by the end of this year.

Now onto the second pillar of our strategy: expanding network sales to select vertical markets needing high-performing secure networks.

As you know, we're aiming to broaden our footprint in a handful of verticals: energy; transportation; public sector; and technological extra-large enterprises, which include Webscale.

All of which increasingly need the high-performing network capabilities that only few companies can fully provide.

We're in the midst of building segment-specific teams to address these vertical markets and accelerating a prudent ramp-up of customer-facing personnel.

While these are early days, all indications are that we are proceeding well.

Our focus is on building a stronger order pipeline.

And in Q1, we saw good year-on-year growth in that pipeline in every one of our target verticals.

Now onto the third pillar of our strategy: building a strong stand-alone software business and doing so at scale.

As you saw in our results, the performance of our Applications & Analytics business is heading in the right direction.

Sales were roughly flat year-on-year in the first quarter, and the pipeline of future opportunities is robust.

We continue to make important structural improvements in the quarter, including strengthening our software-focused sales capability, renewing personnel and customer-facing roles, rearchitecting our software on a common foundation and putting the right incentive plans in place to drive a sharper focus on software across all of our customer teams.

As you have seen, we acquired Comptel, which will strengthen our software portfolio with critical solutions in a number of key areas.

To be very clear, our work in stand-alone software is far from done, but I'm confident that we are moving in the right direction and methodically, to fill gaps in our software portfolio and to bring new innovations to the market.

Now to the fourth pillar of Nokia strategy of creating new business and licensing opportunities in the consumer ecosystem, where we have had a number of developments in recent months.

On the licensing front, we continue to pursue an outcome with Apple that delivers fair value for our intellectual property.

As the legal process move forward, there is nothing that I can add on this topic at this stage, but you can be sure that we will continue to vigorously protect our interests.

Also, an important step forward and following encouraging signs in China, we are seeing deeper engagement on licensing topics and are now in discussions with many of the leading mobile manufacturers in that country.

During the quarter, we also announced our plans to transition the Withings brand to Nokia and saw excellent sales of the Withings Steel HR activity tracker and heart rate monitor.

And of course, I think it would have been hard to miss the excitement around the launch of Nokia-branded phones by our partner, HMD Global.

Not only do we get the benefit of low-risk brand licensing revenue from HMD Global, but we also expect their marketing spend to have a positive impact on the Nokia brand.

So that is a brief update on how we are executing against our strategy, and now let's turn to the business groups.

Given that I've already talked some about Mobile Networks, Applications & Analytics and Nokia Technologies, let me focus on the remaining two, starting with IP/Optical Networks, or ION.

It was a tough quarter for ION, there's no doubt about it, with year-on-year sales down 14%, roughly the same across both IP routing and Optical Networks.

As I look at the business, we had a strong Q1 2016, and thus, a tough year-on-year compare.

The communication service provider market is quite soft, and we currently have a very limited present in -- presence in faster-growing segments with web-scale companies and vertical markets.

We still have some headwinds related to ending sales of third-party routing products.

We face an upcoming product transition and IP routing to next-generation technology.

And in Optical Networks, we have leading technology, but are lacking the operating leverage that would come from additional scale.

So what are we doing?

First, we are moving fast to expand beyond our traditional communication service provider market.

The good news is that we have initial traction with many of the web-scale players, particularly in Optical Networks, and that gives us the opportunity to expand sales to include other parts of our portfolio.

As an example, we now have optical contracts with some of the top Internet companies in China and have a goal to build on that presence in the future to include sales of additional products and services.

In the quarter, we also launched a wireless router targeted at utilities and other vertical markets and established a partnership with Tata Power Delhi Distribution to modernize electrical grids with advanced communications network solutions in India.

Second, we are preparing a significant IP product announcement to come midyear, in fact, not too long from now.

We think this will put us in a strong competitive position, not just in the telco world but with web-scale companies as well.

With that strong differentiation, we can move fast to capitalize on our growing presence with this broader customer set.

We expect to see orders for this next generation of products to start in the fourth quarter, with meaningful revenue starting in early 2018.

Given this, we anticipate the rest of this year to remain challenging for ION, but we do expect a rebound in the medium term.

Third, we are keeping a clear focus on the cost side and bringing some of the Nokia cost methodologies to parts of the IP/Optical Networks business.

That said, and I want to be very clear about this, in showing that we have the right competitive products is absolutely our top priority in the space, and we will not jeopardize that.

Fourth, we're expanding sales of ION products to regions and customers where Nokia has traditionally been strong, leveraging our deep presence and relationships.

An example here were the deals we have won in India for our IP mobile backhaul and back-end call solutions.

Finally, we continue to execute on our 3-year plan for Optical Networks.

We currently have a very strong product line based on the chipset that we announced in March 2016, which we believe continues to be the world's most advanced.

We have a lean cost structure in Optical Networks and now simply need additional scale, and that is very much our focus.

Going forward, we will continue to monitor progress in optical against our long-term plans, and as we do with all of our businesses, to ensure that we're on track to meet our long-term goals.

So to sum up, while the current situation is somewhat difficult for ION, I'm confident we have the right team and right actions to get back on track.

Then Fixed Networks, where sales were down 19% in the quarter compared to Q1 2016 when Fixed Networks reported unseasonably strong results.

In addition to a strong year-on-year compare, Fixed Networks' weak Q1 sales were also a result of the end or delay of a handful of large deployments that were started in 2016.

Such fluctuations are not unusual for a project-driven business, and I do not see any dramatic structural change in the fixed market beyond what we have said before.

We are very well positioned with strong products, increasingly selling to new customers where Nokia has traditionally had a strong presence and deep relationships.

And I see medium-term opportunities to grow significantly with cable customers.

In short, I do not expect 2017 to be an easy year for Fixed Networks, but with the very lean cost structure of this business, we can deliver solid profitability even in quarters where sales are low, like we saw in Q1.

Finally, onto Networks regions, where I will limit my comments to North America and China, given the high interest in those areas.

In North America, we delivered year-on-year sales growth of 7%, which was helped somewhat by currency fluctuations.

On balance and relative to other geographies, we remain optimistic about North America as we believe that slower spending in some customers will be offset by higher spending in others.

The FirstNet wireless network for first responders, where we won an important role, is also a key opportunity even if we expect to only ramp up slowly over the course of the year.

In China, sales fell 3% year-on-year.

It is no secret that operators are lowering CapEx spending in the market, and that continues to impact us and other vendors.

That said, we also see some interesting developments as operators move aggressively into the Internet of Things and as China's megacities look to use smart city techniques to improve livability and sustainability.

With that as an overview of the quarter, I would like -- now like to hand the call over to Kristian for more on our financials.

Kristian?

Thank you, Rajeev.

I will start today by spending a few minutes on our reporting structure and then continue with the financial performance of Nokia Technologies and Group Common and Other before commenting on our cash performance in Q1 and highlighting key cash items for Q2.

Finally, I will take you through FIE and taxes as well as progress around our cost-savings target and the guidance for the full year 2017.

But first, let me say a few words on our acquisition of Comptel, which we announced on February 9. The cash offer that we made, valuing Comptel at approximately EUR 350 million, was well received and accepted by the clear majority of their shareholders.

This allows us to now proceed with the squeeze-out of the remaining Comptel shares.

As we gain control of the company in late Q1, we already consolidated Comptel's balance sheet into our Q1 financials.

And the first full year -- full quarter of financials will be reported as part of Applications & Analytics in Q2.

Moving on to a brief discussion on the recasted 2016 quarterly financials.

We have reviewed the allocation of certain expenses by function and segment and moved to a more activity-based allocations, resulting in changes how expenses are presented.

In addition, as discussed last quarter, as part of the Alcatel-Lucent integration, we have harmonized our FX hedging practices and simplified the related financial reporting.

Overall, the recasts are small and have no impact on our business narratives.

You can find the details on Pages 46 through 48 in our press release issued today.

Looking further towards Q2 earnings, there will be additional changes as we align our reporting structure with our new organizational structure effective April 1. Starting from Q2, Ultra Broadband Networks will compose of the Mobile Networks, Global Services and Fixed Networks business groups, and we will provide additional financial data on Global Services.

The new Global Services business group is comprised of the Global Services organization of the Mobile Networks business group as well as company-wide managed services.

To be clear, Global Services does not include the services activities of IP/Optical Networks, Fixed Networks or Application & Analytics, which continue to be managed and reported as part of those business groups.

As a result, for our Networks business, we will continue to report net sales for total services.

To provide you a bit of context, in Q1, Global Services within Mobile Networks represented approximately 70% of total services net sales.

The 3 other Networks business groups accounted for the remaining 30%.

Continuing then with Nokia Technologies, which grew net sales by 25% year-on-year, primarily due to higher patent and brand licensing revenue, along with the acquisition of Withings in Q2 2016.

Approximately 1/3 of the year-on-year increase was due to nonrecurring net sales related to a new license agreement.

Regarding our litigation with Apple.

Our agreement with them expired at the end of last year, and hence, our results do not currently include any licensing revenue from Apple.

While the legal proceedings continue to move forward, we encourage the sell side to remove Apple from their numbers until we have reached a clear outcome.

This includes removing Apple from 2018 models.

Looking at technologies profitability on a year-on-year basis.

The gross margin was affected by a change in business mix following the acquisition of Withings.

Together with higher OpEx, this resulted in lower operating margin as we continued to ramp up our Digital Health and Digital Media businesses and had higher litigation costs related to Apple.

Having said this, as we have highlighted also earlier, we remain focused on the spend in Nokia Technologies to ensure investments at appropriate levels.

As discussed last quarter, the litigation costs related to Apple could be approximately EUR 100 million per year.

We have ramped spending on licensing-related litigation, and the Apple-related costs are already at a run rate of approximately EUR 50 million in Q1.

In our quarterly earnings release, you can now find net sales disclosed separately for tax licensing and product businesses.

To further help modeling tax profitability, as a rule of thumb, one can assume close to 100% gross margin for our licensing income and approximately 40% gross margin currently for text product businesses.

Turning next to performance of Group Common and Other in Q1.

The overall revenue that we report in this area increased by approximately 8% year-on-year.

The growth was primarily driven by Radio Frequency Systems, which continued -- continues its encouraging performance from Q4.

Alcatel Submarine Networks, on the other hand, saw its net sales decline year-on-year, primarily due to the timing of projects.

As we have said in the past, the strategic reviews of both businesses are ongoing, and we will naturally update you on those once we have reached a conclusion.

Moving then to our cash performance in the quarter.

On a sequential basis, Nokia's net cash and other liquid assets decreased by approximately EUR 890 million sequentially, with a quarter-end balance of approximately EUR 4.4 billion.

The sequential decrease was mostly attributable to negative cash flow from operations.

In Q1, Nokia had approximately EUR 150 million of restructuring and associated cash outflows, excluding this, the net working capital resulted in a decrease in net cash of approximately EUR 390 million.

This was primarily due to an increase in inventories and a decrease in short-term liabilities, partly offset by a decrease in receivables.

While all of these changes are directionally consistent with seasonality, we believe we have opportunities to improve our receivables and inventory turnover metrics as we proceed through 2017.

Looking into Q2.

As a reminder, bonuses paid under employee incentive programs will have a negative impact on Nokia's cash flow in Q2.

In addition, Nokia's board has proposed a dividend of EUR 0.17 per share, which would impact our cash balance by approximately EUR 1 billion when paid out to shareholders after our AGM later this quarter.

Furthermore, the settlement of the Comptel acquisition is expected to have an approximately EUR 340 million negative impact on our cash balance in Q2.

We still expect free cash flow to be slightly positive for the full year 2017.

In Q1, we continued the rationalization of our debt by issuing EUR 1.25 billion of new bonds and repurchasing, through tenders offers, approximately EUR 730 million of the shortest-dated euro notes and U.S. dollar notes that had been issued by Lucent Technologies back in the 90s.

The purpose of these transactions was to optimize our maturity profile, lower future average interest expenses and eliminate subsidiary-level external debt.

Given the current favorable corporate bond market, we feel the timing of the near bond issue was good.

This was also reflected in the strong demand for the new bonds, enabling us to achieve highly attractive coupons.

While the bond tender offers resulted in a nonrecurring cash outflows of approximately EUR 65 million in Q1, these transactions enabled us to lower Nokia's future running interest expenses by approximately EUR 25 million per annum.

Primarily, due to the bond tenders and new bond issuing in Q1 and lower-than-estimated costs on defined pension and other post-employment benefit plans as well as expected performance of certain venture fund investments, we now expect Nokia's non-IFRS financial income and expenses to be approximately EUR 250 million for the full year 2017, down EUR 50 million from our earlier estimate.

The share repurchases under our capital structure optimization program are well on track.

In Q1, we continued to execute our buyback program, bringing the total buybacks so far to approximately EUR 450 million out of the planned EUR 1 billion.

Our intention is to continue the share repurchases after Q1 earnings and complete the program by the end of 2017.

Continuing with an update on taxes.

Nokia's geographic profit mix in the first quarter resulted in an unusually low non-IFRS tax rate of 19%.

For the full year, we continue to expect our non-IFRS tax rate to be around the midpoint of the 30% to 35% guidance range.

As discussed last quarter, to create a foundation for our long-term tax structure, we started concrete actions in Q4 to integrate the former Alcatel-Lucent and Nokia operating models.

We were able to launch and complete these actions in Q1, consistent with our expectations, triggering nonrecurring reported tax expenses of approximately EUR 250 million.

For the full year, we continue to expect Nokia's cash taxes to be approximately EUR 600 million, again in line with what we indicated last quarter.

Turning finally to our EUR 1.2 billion cost-savings target and recap of key guidance items.

We have, today, reiterated our guidance for EUR 1.2 billion of annual cost savings in full year '18.

We continue to track well with our plan, and I'm confident that we will achieve the planned EUR 250 million of cost savings for this year.

Regarding the overall planned network equipment swaps, we also reiterated our guidance for the swap-outs and expect this to total EUR 900 million, of which EUR 450 million would be recorded this year.

The majority of these swap-outs are still ahead of us, and we are now focused on execution here.

Finally, we, today, reiterated guidance for our Networks business for full year 2017: top line, in line with our primary market; and 8% to 10% operating margin.

Again, if the market and our execution are both strong, we could land at the higher end of this range.

Finally, I would like to remind you that we will be hosting our upcoming Annual General Meeting in Helsinki on May 23.

And as Rajeev already mentioned, Basil and his team are also planning to host an IP routing event for industry analysts in mid-June in San Francisco, the main parts of which will be webcast-ed.

With that, over to Matt for Q&A.

Thank you, Kristian.

(Operator Instructions) Carrie, please go ahead.

(Operator Instructions) The first question comes from Achal Sultania of Credit Suisse.

My question is on IPR.

Obviously, you have now removed the guidance of EUR 800 million of IPR revenues, excluding Apple.

I'm just trying to understand what has changed in the last few months in the process that you have to -- that has become slightly more uncertain in terms of whether the size of the renegotiation or the timing of these renegotiations that you have to move away from the guidance, especially given the fact that you're not talking about like deepening some of these agreements in China.

So that probably should be -- we should be reading it as a positive.

So I'm surprised why that guidance is still not valid.

Maybe I'll clarify here.

So the -- it wasn't really guidance for the future.

It was a point-in-time statement that we made each and every quarter when it comes to what is the run rate of our IPR business.

What we decided to do now for this quarter was actually to give a more granular breakout of the technologies business revenue per licensing and product business.

And in a similar way as before, then clearly call out how much of that licensing revenue would be nonrecurring in nature, so that you get the same information as before about the IPR business.

So there is no kind of pullback on any guidance here as you indicated in your question, just more granular, actual reporting.

Thank you, Achal, for your question.

And by the way, you can find that disclosure on Page 26 of the press release.

The next question comes from Sandeep Deshpande of JPMorgan.

My question, Rajeev, is regarding the businesses that you are trying to get into, the close verticals to your core business.

How much do you think are you targeting revenue to be there this year?

Or is this really a 2018 revenue opportunity for you in terms of reporting it to the market?

Thanks, Sandeep.

Yes, we think that likely orders in Q4, if things go as planned; and 2018, meaningful revenues, particularly from the new product launch that we will do in IP routing.

We're already getting traction in optical.

That paves the way for this to happen.

The next question comes from Andrew Gardiner of Barclays.

I was just interested in a bit more insight into the gross margin performance in the quarter.

Rajeev, I mean, you highlighted just how strong it was, particularly for what is normally a seasonally weak quarter.

Can you give us any insight as to how you're seeing mix evolve through 2Q and 3Q?

Can this level of gross margin be sustained for the next couple of quarters, given how you see product mix evolving, particularly given what you've described for sort of IP networks trends coming through the next couple of quarters?

Thank you, Andrew.

So for Q1, we benefited from a good regional mix and also a good product mix within that.

We continue to benefit from the end-to-end portfolio.

That's becoming more strategic for customers and also providing us opportunities for cross-sell.

And then finally, of course, the disciplined operating model we have, which allows us to continue to have improvements in COGS, in fixed production overheads.

And we've also seen the reduction in COGS help us to continually strengthen our margins.

So those are the things.

And overall, for 2017, obviously, is that we have reaffirmed the guidance.

The next question comes from Robert Sanders of Deutsche Bank.

Maybe if you could just talk a bit about the routing business, given that it was at one of the areas of disappointment.

How quickly do you think that business can start to reaccelerate?

Is there any product cycle that's coming or something that could drive that business back up?

That would be great.

Thanks, Robert.

So what's happening is that the higher spend is taking place in core routing and in the cloud players, so in that space.

And that's where we're not present to the same degree.

And so the new product refresh that's coming, that's looking very good.

We think it will allow us to increase our competitiveness and actually leapfrog.

And that will come, at some point, mid of this year.

And once that's launched and we start discussions with our customers, we think this will give us meaningful strength in Q4 in terms of order intake and then turning into revenues for 2018.

So the rebound is more medium term and 2018 onwards.

The next question comes from Richard Kramer of Arete Research.

Rajeev, you talked about healthy orders, and you also talked about a high conversion of the pipeline, even with the, obviously, the weaker performance in routing.

Given that the target of having stable or even growing revenues, have you now reached sort of greater than 1x book-to-bill?

And with respect to these orders and the conversion of the pipeline, do you think you're taking meaningful market share?

Or is it sort of too early to say, given that the industry is still sort of recovering in terms of willingness to spend money?

Thanks, Richard.

So yes, we look at order intake, order backlog, all those metrics.

Q4 was promising.

Q1 has been good.

We need to watch Q2 now to give us enough granularity and visibility that the remainder of the year will track well according to our plans.

But I will say that it's partially the end-to-end portfolio.

It's the competitiveness of the product lineup that's giving us this high conversion rates.

So I'm very pleased, in particular, with Mobile Networks conversion rate that we've seen increase.

In terms of your market share question, the end-to-end portfolio is really helping with operators as we always said it would, but now it's starting to get real traction.

But I think the right way to look at market share is, we're very pleased with the encouraging start of year, but you've got to look at it at least on a three-quarter basis to start to declare victory that we're actually getting market share gains.

Great start of the year, but not yet willing to call whether we're getting market share gains.

The next question comes from Gareth Jenkins of UBS.

Just a quick question on swap-outs.

I wondered whether you could firm up some of the timing for the expenses of swap-outs, and maybe whether you're able to parse some of those back by selling new product into those operators where you'd normally swap out.

So thanks, Gareth.

I really don't have anything else to add to what we have in the release on the timing, EUR 450 million expected for the year and then the remainder in '18.

When it comes to, does this give us an opportunity to upsell?

Clearly, that's what we need to aim for.

We are putting in kind of newer gear where -- then there are upsell opportunities.

And clearly, as part of the execution of the swaps, the teams are also focused on identifying additional opportunities for upsell.

Correct.

And I just add, Gareth, that China is more advanced in terms of swap-outs and now the category levels are starting to pick up.

The next question comes from Alex Duval of Goldman Sachs.

I just wanted to get a bit more granularity on the wireless revenues.

Clearly, very solid versus expectations.

And I wondered if you could give a little bit more in terms of what drove that.

Trying to understand, was it more to do with share shift?

Was it about sort of the stabilization in the market?

Or potentially, and maybe in combination with this last factor, was there some catch-up from the previously delayed Alcatel base station sales?

Because obviously, there were some delays you were aligning customer road maps.

Thanks, Alex.

So I don't think a big change in the market.

In fact, maybe the market is slightly worse because China Unicom announced a big CapEx reduction, but sort of roughly the same as we had talked about in the Capital Markets Day.

And no catch-up discussion, in particular.

We benefited from the regional mix.

You saw North America.

Some of the customers that were not spending are now spending.

That's a positive.

Small Cells intensification is starting to happen.

And as we always said that the bright spot for this year will be North America.

Although there are puts and takes, and we need to be watching this space.

India is the other.

And it appears parts of Asia Pacific are seeing a rebound, particularly Japan and Korea, which are coming up from the bottom that used to be in that market.

The next question comes from Stuart Jeffrey of Natixis.

I had a question on cross-selling opportunities.

You talked about these coming through.

I would have expected them to show up more in the routing and optics side, given that your footprint in mobile is so much bigger.

And yet, that doesn't seem to have happened.

So could you just explain why we're not seeing that impacting routing and whether cross-selling is actually starting to come through?

Thanks, Stuart.

So I think it's a 2-way street because we're actually also seeing it in mobile, given that there are customers that were IP/Optics customers and they're selling their mobile equipment, for instance, in U.S. There are a number of smaller carriers like this.

We saw some strength in optical, for instance, in Reliance in India.

We could call that out, and that was some where we went and won a deal in optical where Nokia's channel was strong.

We saw the same in fixed in India.

We're now seeing traction in Japan for fixed, somewhat for IP as well.

But I think when we start to look cross-sell, we measure our solution practices that are end-to-end.

We have a number of those.

We measure our multi-business group associated deal pipeline.

And again, that is increasing.

And that pipeline that is increasing is of course, also cross-sell to others at some place.

We're seeing strength in cloud, which is, again, a cross-sell because it involves many of our business groups.

So all put together, this product refresh issue in IP, once that's done, we'll see potentially more cross-sell in IP routing as well.

The next question comes from Sébastien Sztabowicz of Kepler Cheuvreux.

Sébastien Sztabowicz.

One question on the Red Compartida project in Mexico.

Can you just comment a little bit on the bidding tender and the pricing condition of this very big deal?

It will be a profitable project over the last time of the deal.

And also, do you see any specific indication of risk on this last year project?

Thank you, Sébastien.

So this is a project that we really wanted to get.

It's a big flagship deal.

It's our largest ever in Latin America, and it's a unique business model on the right kind of spectrum with 700-meg spectrum, so potentially large rollout.

We want a good slice of that.

It's actually a good end-to-end deal because we've got about 40% of the radio, but very large part of the core and other transport and OSS and so on.

So it's really a multi-business group end-to-end deal for us.

It makes sense long term, otherwise, we wouldn't have done it, so to your profitability question.

And we should hopefully see help from this at the latter part of the year in turning Latin America little bit more favorably because that market has macro issues and operator issues and so on, and potentially, even more help in 2018.

But I guess, it's fair to say that it's a large project.

It has all of the opportunities and risks that come with a large project, but we are in the business of doing large projects.

So in that sense, it's business as usual.

The next question comes from Tim Long of BMO Capital Markets.

Just wanted to ask about the European region.

It a looks like it's been under a little pressure the last few quarters here.

Just mostly macro and maybe just a little bit of color on what your segments might be holding up better or worse in the European market.

Thanks, Tim.

Yes, it is macro.

It's Eastern Europe continues to be slow.

Russia, it's also -- little bit concerned about the election climate and how that will unfold.

It's much more about evolution of 4G on the mobile side, a little bit slow on the IP side and fixed.

There is potential for a lot of fiber deals to start coming through in the longer term with fiber 2DX type of projects.

So it's sort of macro and sort of the investment climate in Europe, given that there are so many operators and consolidation yet to happen.

So all of these things put together, Europe will continue to be weak overall as a market this year.

Our last question comes from Aleksander Peterc of Societe Generale CIB.

I'd just like to understand, because you mentioned it on the previous quarterly call that you have several potential markets that could do better versus your guidance.

And you mentioned the U.S. having momentum potentially; Japan, Korea, rebounding; Mexico wholesale deal; and Indian LTE.

So I'd see a lot of these and actually materializing.

So if you could explain what holds you back from a little bit more positive outlook?

Thanks, Alex.

But then on the flip side, there are also weaker markets like Middle East and Africa.

You've got the Eastern Europe comment that I made, but Europe, all in all.

China is probably even incrementally a little bit worse because China Unicom announced a big CapEx reduction as you might have seen, even though there's possible partial offset from China Mobile potentially available.

Yes, India, tracking well.

North America, well, but there's also some sort of merger and acquisition headwind on the operator side that we need to watch.

Japan and Korea, starting to rebound, but not yet in full rebound, I would suggest.

Southeast Asia, potential rebound, but not fully there.

So as always, I don't think the market has changed.

There are puts and takes.

Broadly, the market is the same.

And so the primary market, low single-digit decline, as we talked about in Capital Markets Day.

So thank you for your questions today.

And now, back to you, Rajeev, for closing remarks.

Thanks, Matt and Kristian, and thanks again to all of you for joining.

I'd like to close with just a few thoughts.

We are pleased with the Q1 performance we delivered and with the progress we are making to put our strategy into action.

Whether it's deepening and widening our footprint with communication service providers, launching new innovations, adding customers and new vertical markets, enhancing our software offerings, stabilizing our top line or progressing with our cost savings.

But of course, we are not complacent.

We know we have some challenges in select business groups, and we are very focused on addressing those issues.

And with the actions we have underway, I am confident that we can get those businesses back on track.

With the integration of Alcatel-Lucent behind us, we are committed to building on that platform and to making 2017 a year of execution and performance.

With that, thank you very much for your time and attention.

Matt, back to you.

Ladies and gentlemen, this concludes our conference call.

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

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

Factors that could cause such differences can be both external, such as general economic and industry conditions as well as internal operating factors.

We have identified these in more detail on Pages 67 through 85 of our 2016 Annual Report on Form 20-F, our interim report for Q1 2017 issued today as well as our other filings with the U.S. Securities and Exchange Commission.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your line.

Have a great day.