諾基亞 (NOK) 2019 Q2 法說會逐字稿

Hello and welcome to the Nokia Second Quarter 2019 Earnings 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 Second Quarter 2019 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 at 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 risk 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 risk in more detail on Pages 60 through 75 of our 2018 Annual Report on Form 20-F, our financial report for Q2 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 financial report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and the reconciliation between the non-IFRS and the reported information.

With that, Rajeev, over to you.

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

Nokia's second quarter results showed a sharp rebound from our weak Q1 with robust growth and improving profitability.

When we announced our first quarter results, we said we expected meaningful progress over the course of the year.

And I can say that we delivered that progress in Q2 with good operational execution and momentum in the implementation of our strategy.

Nokia's year-on-year revenue grew a strong 5% in the quarter in constant currency, well ahead of a primary addressable market that we expect will grow slightly on a full year basis.

As we adapt the opportunities to grow, we maintained our disciplined and enhanced profitability.

Pleasingly, our 7.9% non-IFRS operating margin was up 160 basis points year-on-year and 910 basis points sequentially.

The main area of disappointment in the quarter was our cash position, although our performance was not totally unexpected given large outflows for shareholder dividends, incentive payments and restructuring.

Kristian and I will both talk about this subject in greater detail.

Our fixed networks business is undergoing a transition and that caused some challenges as well.

I will also come back to this near the close of my remarks.

In addition to these issues, I would like to cover 4 other topics today.

5G, both from a Nokia and a market perspective; how the virtuous circle of investment that I've mentioned before is benefiting Nokia; progress in the execution of our strategy; and an update on our 2019 expectations.

Let me start with 5G, where we continue to win new deals and improve our product competitiveness.

We now have 45 commercial 5G deals and are operational in 9 live 5G networks.

We also started to recognize 5G revenue in the second quarter, including in North America and expect that recognition to continue to build in the second half of the year.

As we sell 5G Radio to customers, we are taking the opportunity to sell other things as well.

Pleasingly, around half of our 5G Radio wins contain additional Nokia products, demonstrating the power of our end-to-end portfolio.

As you know, in earlier calls, I commented on our 5G Radio roadmaps and while our progress is both fast and meaningful, we still have work to do.

Customers in lead markets like the United States, Korea and Japan are moving fast, and we are working night and day to be there for them.

While we continue to reduce R&D in legacy areas, our commitment to 5G is clear.

Our end-to-end R&D capacity is larger than our European competitor, giving us the resources to catch up where we are behind and further distance ourselves where we are already ahead.

4G field performance is one of those areas where we are ahead.

This matters because for 5G non-standalone, the variant that is being rolled out today, you need a strong 4G layer to deliver high performance.

Nokia has that performance.

For the first half of 2019, RootMetrics, an independent network testing company, once again gave us the highest scores for 4G network performance across the 125 U.S. markets it tracks.

This is not just a theoretical benefit.

It is something that is helping us win in 5G.

To date, all of the current Nokia 4G/LTE customers who have decided on their 5G NR supplier have selected Nokia.

In addition to this excellent conversion rate, we expect to gain share with some of these customers, improving our 5G footprint compared to 4G.

This progress is just the start, as we have over 340 customers to help transition to 5G over the 10- to 20-year investment cycle.

From a broader market perspective, it is clear that 5G is moving well beyond just capacity focused hotspots and campus networks for enterprises.

Yes, those will be important for both our operator and enterprise customers, but nationwide coverage will also come.

And you will see 5G deployments that use low, mid- and high-band spectrum.

In Korea, for example, 5G that blankets the entire country will be a reality very soon.

In the United States, to provide another example, it will take a bit longer to get to full coverage as the mid-band spectrum that will complement the low and high bands already allocated has not yet been made available, but there is no doubt that it will come.

While there's a lot of 5G talk today and no shortage of activity, some of you may recall the 5G maturity index that we commissioned from Analysys Mason and that I shared at Mobile World Congress earlier this year.

That study made 2 things very clear.

First, that many countries will move fast to deploy 5G.

We are seeing that process underway today.

Second, that wider adoption would take longer.

Most operators expect it to take about 4 or 5 years after that initial rollout to get 5G deployed to 75% of their customers.

We're also seeing this play out today, which is a good thing.

It gives vendors time to be ready to deploy at massive volumes and ensures that a stable overall ecosystem will be fully in place.

So to recap here, Nokia has a solid position in the early stages of 5G with our win rate and deployments, our 4G performance and deep customer base give us confidence about the opportunities to come and given the expected timing of large scale deployments as 5G moves beyond the lead countries, Nokia will be ready to support our customers at scale.

Switching to the second point I want to make today.

In earlier calls, I've talked about what we are calling the virtuous circle of investment as operators and enterprises move to upgrade their network to take full advantage of 5G.

That circle is very much underway today.

We see customer spending now to be ready for 5G, but also to avoid investments in both radio and transport peaking at the same time.

This benefits both our IP routing and optical networks businesses.

To give a bit more detail on both, our IP routing sales were up a stellar 18% year-on-year in constant currency.

Much of this was driven by our highly competitive routing portfolio and the fact that our FP4-based products are now shipping in volume.

We now have more than 100 FP4 projects and more than 70 of those represent new footprint for us.

In almost 30 cases, we have displaced a competitor at some of the world's largest operators, data center providers and enterprises, pretty impressive.

On the optical side, constant currency sales were up again, rising 9% year-over-year.

With our new PSE-3 based products starting to ship in Q3, we will also, once again, leapfrog the competition.

Turning to our strategic efforts to build a strong scalable software business and expand into structurally attractive enterprise adjacencies, I'm pleased to say our progress was very good in the second quarter.

Even if you adjust for some project timing that benefited Q2, Nokia Software had a solid quarter, growing year-on-year sales by 8% in constant currency and posting a double-digit percentage point increase in its operating margin.

As you will recall, we have 2 different parts of Nokia Software, Applications and Core.

Apps is delivering solid progress based on the improvements we have made to develop our products on a cloud-native common software foundation and our investments in creating a strong standalone software sales organization.

As Core is now fully integrated into Nokia Software, it is in the midst of a portfolio modernization and sales transformation similar to that of the Apps business.

Our approach to cloud native is fundamentally different from and well ahead of what others in our sector are doing.

The demands of 5G and digital services are such that you cannot just evolve all applications.

Rather, we have rewritten from scratch our integrated software suite for 5G to be cloud native, multi-network and multi-vendor.

In addition, it is optimized for the leading cloud platforms, including Amazon, Microsoft and Google.

Based on the quality of our work, our software portfolio is getting considerable external recognition, putting us in a strong position to gain share in the future.

Turning to enterprise.

We are continuing to target double-digit growth for full year 2019, despite the 6% year-on-year constant currency growth rate in Q2, which was driven by expected project timing challenges.

We also expanded sales to new enterprise customers with 32 additions in the second quarter.

One area where we see opportunity continuing to grow is private wireless, where we have won more than 80 deals.

Private wireless is increasingly seen as a foundational industry 4.0 capability with demand growing from many different kinds of customers.

Companies in verticals like utilities, transportation and logistics as well as the public sector need large-scale field networks.

Railways need future communication systems to replace aging GSM-R technology, factories, mines, airports and other enterprises need high-performance wireless campus networks.

Overall, the need is large and diverse, and it cannot be met with a box sell approach.

These enterprises, after all, are not like our service provider customers.

Networking is not their core business, and they are looking for a partner who can deliver a full end-to-end turnkey solution.

Nokia is an ideal such partner with the right solutions that span our full portfolio.

You can see that in work that we're already doing.

For example, energy company, Elektro, in Brazil is using our full suite of customer premises equipment, radio, packet core and management products, along with services to help them roll out private LTE for automating and managing their electrical grid.

Other examples include Sempra Renewables, which is using our technology to connect wind farms and target a 90% cost reduction.

And our work with Telefónica Peru to deliver a private wireless network for Minera Las Bambas, one of the world's largest copper mines.

The third point I want to make is about cash.

Yes, our cash performance was challenging in the quarter.

No denial about that, but there is some context that must be understood.

In particular, we expected the majority of what occurred, given roughly EUR 900 million used for our 2018 annual employee incentives, quarterly dividend payment and restructuring.

We also had some expected inventory builds in order to deliver on customer demand for 5G network deployments.

Then we did have unexpected issues, including some normal business that came very late in the quarter and that we could not immediately convert to cash.

We expect that conversion to happen in second half.

Collection of a large receivable from a state-owned operator was also delayed, although we expect payments to start to flow later this year.

Despite that context, however, I remain unhappy with our overall working capital performance.

We have a clear view of what needs to be done to get back on track and have put in place a more structured program to improve results.

The last point I want to make is about our expectations for 2019.

As you will have seen today, we have maintained our guidance for a full year non-IFRS operating margin of 9% to 12%, non-IFRS diluted earnings per share of EUR 0.25 to EUR 0.29 and for slightly positive free cash flow.

In Q2, we made progress in delivering on our targets, but at the same time, risks remain.

Those risks include the execution demands of a very large second half of the year with particular intensity in the fourth quarter, trade-related uncertainty, challenges in China related to a clear preference for local vendors and pressure on profitability that could cause us to limit our participation in that market and the potential of an overall increase in competitive pressure.

At this point, we expect that the pattern for the full year will reflect slower first and third quarters and more robust second and fourth quarters.

Then just a brief comment on our EUR 700 million cost-savings program, which is well on track.

In addition to taking the committed costs out, our focus is on becoming a better, more productive company for the long term.

Before handing the call to Kristian, just a comment on fixed networks, which you will have seen had an 11% year-on-year constant currency revenue decline in the quarter.

Fixed has long been a disciplined organization that delivered consistently good results.

Today, however, it is being impacted by the shift in spending away from traditional access product areas as well as some tough competition.

We see future opportunities in fixed, given our leadership in next-generation technologies, such as fixed wireless access, where we are getting excellent traction in the market and have won deals with customers like Optus, Telia and RAN.

In addition, we continue to be well positioned in both copper and fiber.

We have more than 20 deployments of next-generation passive optical networking and the largest deployment of the future-focused corporate technology known as G.fast.

These trends give us confidence in the future, but the reality is that a turnaround will take some time in that business.

With that, let me turn the call over to Kristian.

Kristian?

Thank you, Rajeev.

Today, I will take you through a number of topics including financial performance of Nokia Technologies and Group common and other as well as group level results.

I would then like to focus on our cash flow in Q2.

And finally, I will brief -- touch upon our guidance.

Starting with Nokia Technologies.

Net sales in Q2 totaled EUR 383 million, an increase of 6% year-on-year and 4% on a constant currency basis.

This solid result primarily reflected higher onetime and recurring licensing net sales, partly offset by the sale of our Digital Health business in May 2018.

In Q2 2019, we had EUR 30 million of onetime net sales compared to EUR 10 million in Q2 2018.

Adjusting for this, recurring net sales increased 2% year-on-year.

Recurring licensing net sales were up in Q2 as we signed an agreement with a new licensee as expected.

Our annualized licensing run rate in Q2 was approximately EUR 1.4 billion.

From a profitability perspective, operating margin in Nokia Technologies continued to show solid improvement.

Operating margin in Q2 was 85% compared to 81% in the year-ago quarter.

This improvement was primarily due to the absence of costs related to digital health, which we divested, as I said earlier last year.

Moving to group common and other in Q2.

Net sales decreased 6% year-on-year on a constant currency basis, primarily driven by radiofrequency systems, which had a tough comparison as the year-ago quarter benefited from a large customer rollout.

This was partly offset by growth in ASN as new projects started to ramp in the quarter.

Group common and other operating loss worsened year-on-year, driven primarily by lower gross profit as well as higher costs related to longer-term [IP] investments needed to drive digitalization in the future.

These costs negatively impacted both R&D and SG&A, consistent with what I communicated last quarter.

Profitability was also impacted by a net negative fluctuation in other income and expenses due to lower gains from Nokia's venture fund investments.

We continue to expect group common and other operating expenses to be approximately EUR 20 million per quarter higher in 2018 due to the investments we are making in digitalization.

Please take this into account in your modeling.

Moving on to Nokia level results.

Group level non-IFRS operating margin was 7.9% in Q2 and largely reflected higher net sales as well as higher gross profit across networks, Nokia Software and Nokia Technologies.

Looking at non-IFRS financial income and expenses in Q2, our year-on-year results were essentially flat.

Within this, interest expenses increased, driven by higher costs related to sales of receivables.

This was offset by an improvement in our FX result.

We have now increased our financial income and expense outlook assumption to be an expense of approximately EUR 350 million for 2019 and over the longer term.

This expectation is primarily due to higher costs related to sale of receivables and, to a lesser extent, higher interest expense bookings relating to uncertain and disputed tax positions.

Our non-IFRS tax rate came in at 28% in Q2 2019, and we continue to expect our full year non-IFRS tax rate to be approximately 28% for 2019.

At a Nokia level, our non-IFRS diluted EPS was EUR 0.05 in Q2, up from EUR 0.03 in the year-ago quarter.

Overall, this performance was primarily driven by gross profit improvements across networks, Nokia Software and Nokia Technologies.

Turning next to our cash performance in Q2, which as Rajeev mentioned, is a major area of focus for us.

On a sequential basis, Nokia's net cash decreased by approximately EUR 1.5 billion to a quarter-end balance of approximately EUR 500 million.

Approximately EUR 900 million of the sequential decline was primarily driven by 3 cash outflows that were in line with our expectations.

The first one was the payment of 2018 performance-related incentives to employees.

The second was the payment of the first quarterly dividend installment, and the third was restructuring and associated cash outflows.

In addition, approximately EUR 350 million of the decline in net cash was temporary in nature and is expected to reverse in the second half of 2019.

The temporary increase was mainly related to accounts receivable.

Our free cash flow was negative EUR 1 billion in Q2, primarily driven by our net working capital performance.

Excluding restructuring cash outflows, which totaled EUR 110 million, net working capital generated a decrease in net cash of EUR 1.2 billion.

Within this, liabilities decreased EUR 830 million, a change that was primarily related to the incentive payments, which we flagged last quarter and that I mentioned earlier, as well as decrease in accounts payable that related to lower spend in the quarter.

Receivables increased by EUR 260 million, primarily related to the earlier mentioned temporary increases of approximately EUR 350 million.

Inventories increased EUR 150 million sequentially, as we continue to ensure sufficient flexibility to deliver higher levels of equipment sales, particularly related to 5G as well as an increase in work-in-progress inventories related to certain large 5G deployments.

Additionally, cash taxes were higher than expected in Q2, totaling EUR 160 million.

This was due to an increase in taxes withheld at source by certain customers.

That said, we have maintained our outlook assumption for cash taxes and as we expect this impact to normalize in the future.

Looking forward, we expect approximately EUR 350 million of temporary cash headwinds related to the receivables in Q2 to reverse in the second half, mainly in Q3.

As we said last quarter, we also expect inventory levels to significantly improve in the second half of 2019 as large 5G deployments and acceptances accelerate meaningfully.

We also announced today that the Board of Directors resolved to distribute the second installment of the 2018 dividend, which will be EUR 0.05 per share with a record date of July 30.

The payment of the second installment of the dividend in addition to withholding taxes related to the first installment are expected to total approximately EUR 300 million and will be paid out in Q3.

While the first half has been challenging from a cash perspective, we are confident that we are well positioned to drive a stronger improvement in the second half of the year.

Finally, turning to our guidance.

We have today reiterated our full year Nokia-level guidance.

After an anticipated weaker first half of the year, we continue to expect to see a more robust second half, although risks still remain, as Rajeev said.

We now expect that 2019 will have seasonally -- will be seasonally characterized by a particularly weak first quarter, a strong second quarter, an expected soft third quarter and an expected particularly strong fourth quarter.

This view continues to be based on our expectations for accelerating 5G deployments and improving cost efficiency.

We have also updated our view on the primary addressable market, following our first half 2019.

On a constant currency basis, we now expect our primary addressable market to grow slightly in 2019 and for the growth to continue in 2020.

This is in comparison with our prior expectation for '19 to be flattish and for 2020 to grow.

We continue to expect to outperform our primary addressable market in both '19 and '20.

Lastly, as I mentioned earlier, while I'm not pleased with our free cash flow performance in the first half, I am confident that we will be able to turn this around, and we continue to target slightly positive free cash flow for the full year.

With that, I will hand over to Matt for Q&A.

Thank you, Kristian.

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

Nicole, please go ahead.

(Operator Instructions) Our first question comes from David Mulholland of UBS.

So just firstly on gross margins, obviously, good progress in Q2 compared to what we saw in Q1.

I think at the time of Q1, you called out 4 different issues that had impacted the margin in the quarter.

Can you possibly talk about how much of that has now normalized?

What still remains as a headwind?

And in that context, how you see things in this softness, is that both a top line and a margin comment into Q3?

I think we did see strong performance in Q2 when it comes to operational execution.

We also saw higher level of software sales in the quarter when we started to recognize also 5G.

In addition to that, clearly, strong growth in routing and in the strategically important areas of software and enterprise.

Yes, software, to some extent, benefited from some timing benefits.

And that might then have an impact to Q3.

But other than that, I think it's more revenue-based than margin-based when we talk about the seasonal pattern for the year.

Our next question comes from Achal Sultania of Credit Suisse.

Just when we talked about the EUR 200 million of revenues that you couldn't execute in Q1, can you help us, give some color around that how much of that we've already seen in Q2?

How much we expect to see in the second half?

And relating to that, like most of those issues around customer acceptances, are they now behind us, given that you've started to see 5G deliveries taking place, and you talk about 5G acceptance probably accelerating in the second half?

Yes.

I think we started to recognize 5G revenue in the quarter.

I think we can say that approximately half of that 200 is done and the rest is to come, which means that customer acceptances has started to come in.

And also the 5G software is now in general availability, which means that customer teams can deploy and sell that in the normal course.

So I think this is a good starting place from where to move into the second half.

Our next question comes from Robert Sanders of Deutsche Bank.

Yes.

Rajeev, maybe a question just on what you're seeing around some European operators, in particular, around continuity of supply concerns from one of your major competitors.

Your Swedish competitor seems rather skeptical of dealing with these companies, these operators, given they want firm commitments, and they think that these operators are looking for free options.

How do you see it?

Do you want to engage with these operators?

Would you like to -- how are you going to go forward with dealing with these companies?

And would you commit resource behind it without any upfront kind of spend from those guys?

Thanks, Robert, so if an operator in Europe or elsewhere because whatever concern wants to go to another vendor for 5G, and of course, this is all non-standalone, right, so all non-standalone 5G builds are taking place, which means you need a 4G layer, and if that means it's a wholesale swap, we would not like to do that.

But we have other technology alternatives.

The favorite one I have is introduce a thin layer of Nokia 4G LTE and use that as the base connection layer to go to 5G.

There are other opportunities.

If your spectrum is delayed, well, you might as well look at standalone architecture, which is coming next year as a way to go to 5G, because swaps are not helpful for anyone.

In the very corner cases sort of exceptional circumstances, where there is a case where a full swap needs to take place, of course, we would need proper firm commitments, and it will have to make sense over the mid- to long term.

Otherwise, our pricing discipline and the culture we have does not allow us to go down that track.

Our next question comes from Paul Silverstein of Cowen.

With respect to the exceptional routing strength you saw in the quarter, you mentioned share gain.

You also mentioned it was related to 5G rollout.

What is the -- given the secular nature of routing, where you're not talking about a growth market, what is your outlook for the sustainability of strong growth there?

Thanks, Paul.

In routing, we're benefiting from a couple -- maybe 3 things.

Number one, we have technology leadership, right?

We are the only ones shipping 16-nanometer product, this next-generation FB4.

Like I said, we have 100 new projects, of which some 70 are new footprint for us.

40 of them, we're taking new share where we didn't sort of have it.

We expanded our share.

And 30 of them is completely displacing a competitor.

So it's doing well in the marketplace primarily due to technology leadership.

Then this end-to-end 5G.

This thing I mentioned that you -- if you're an operator or, in fact, an enterprise, you want to first upgrade your transport layer and then go and spend the money on radio.

You don't want to have 2 CapEx peaks at the same time.

So that's benefiting us in routing.

And of course, we're also getting a benefit from the enterprise business.

I think we have an opportunity to continue this technology leadership for a while.

You have to remember, though, that at some point, we're going to have a tough compare because we've had growth now for a number of quarters and Q4 last year was very strong.

Our next question comes from Richard Kramer of Arete Research.

Rajeev, I'd like to focus on your comment on China, where you mentioned a clear preference for local vendors, and obviously, you have JV there.

Given the trade tension, should we expect that the Chinese government would exercise its option to exit that JV with Nokia?

And how do you think about the China market going forward since the volumes there are so critical to the overall industry, but obviously, profitability is much lower than you would find in some other markets?

Thanks, Richard.

So to the first question, at this point, we don't see an indication that a JV exit would -- or a potential of such thing happen would be related in any way to the trade tensions.

On the second point, how do we see the China market.

Given the low profit share of the market, we don't think just having that volume is necessarily advantageous from a scale perspective.

So we're not going to -- if you take a less [position] at market, it doesn't impact our ability to make gross margins globally.

So we'll be prudent in that market.

We will adjust in areas where we have strength, where we can play a larger role in China, so think about transport, optical, routing for web scale players, for enterprise players, private wireless, for railways and energy companies, et cetera and then perhaps also in the core business, where our joint venture actually helps us get an advantage.

And in radio, where price erosion tends to be the highest, we will limit our participation in terms of what we think is prudent.

Our next question comes from Sandeep Deshpande of JPMorgan.

Just a quick question.

When we look at your revenue growth in the quarter, I mean, you're very -- you've got good revenue growth in wireless and extremely strong revenue growth in optical and in routing.

At the same time, your gross margin is down year-on-year, which seems to indicate that the gross margin in wireless may have declined year-on-year.

Can we understand what is exactly happening there?

Given the kind of strength you're seeing in these routing and optical businesses, do you need to do more restructuring in terms of the gross margin in your core wireless business or there is something else, which is impacting the mix in the gross margin?

Thanks, Sandeep.

So there were 2 reasons.

First, services mix.

As is typical in early stages of a cycle, we see a greater proportion of network deployment services, which carry lower gross margin.

Second, the 4G to 5G transition.

So as also was the case in the early cycle of 4G, it will be natural for 5G gross margin to be lower at the beginning, but to expand over time with scale due to improved product cost and, of course, as well as scale overall.

Yes, we are cutting costs.

If you remember, our EUR 700 million cost-savings program, part of that is cost of sales in areas such as Global Services, which will help us over time.

Our next question comes from Andrew Gardiner of Barclays.

One, again, on the margin front, so 2 parts.

First, on the gross margin, just to clarify on one of the earlier responses.

Earlier in the year, you had spoken quite clearly of sequential improvement from the low point in first quarter in the second quarter again and -- but then again in the fourth quarter.

I just want to make sure that that's still what you're effectively saying, that we will see a further uptick in gross margin in the third and then again in the fourth quarter.

And then on the OpEx front with the cost-saving plan, looks like you did a particularly good job in the second quarter.

A lot of cost did come out.

If I sort of sustain that kind of OpEx through the back half of the year, it looks like you might even be slightly ahead of the plan for the 2019 goal of about EUR 150 million of cost savings.

Is that correct?

And so should we see a steadier trend of OpEx through the back half of the year?

I think on your first point, it is fair to say that there is a reason why we think that the second half will be stronger than the first half, as we discussed 90 days ago.

It is fair to say that now with the strong performance in the second quarter, we are no longer in a position to say that we will have sequential improvements throughout the year.

Yes, Q4 will be particularly strong as earlier, but the transition from 2 to 3 is maybe different than what we anticipated earlier.

Some of that is top line, maybe some of that is also margin and, thus, goes back to your question.

I think when it comes to the cost side, we are tracking well on the plan.

We'll continue to have head down and execute on that.

Then we'll see where we come out at the end of the year.

And of course, one should not expect that Q3 is going to be anything like Q1 though.

Our next question comes from Alexander Duval of Goldman Sachs.

Yes.

Alex Duval, Goldman Sachs.

Wondered if you could talk a bit about your latest thoughts on the strength of your product offering in wireless relative to your peers.

First of all, it looks like you've now navigated the software issues that needed to be resolved.

Wondered if you could just clarify on that?

And secondly, in parallel, how confident are you on chipset development being on track from a roadmap perspective for 5G?

Thanks, Alex.

So we were a few weeks delayed, and that's why we couldn't get that revenue recognition in Q1.

Now we've got general availability.

We're getting customer acceptances.

An important indicator is we have 9 live commercial networks.

Our conversion rate is fantastic, 4G to 5G, with the 45 deals we have.

And then because these networks are non-standalone architecture, it really does matter how good your 4G layer is.

That gives us the ability to use that installed base to sort of convert all the customers to 5G.

And so this RootMetrics example I gave in my prepared remarks, it's really important.

It's the second time we won the best network performance across all of these 125 markets.

And so there is still some work to do, but it's not in the area of stability of the network or network performance generally, perhaps in some features which have to come later in the year.

But we will be there for the most important features that the customers need, such as dynamic spectrum sharing, et cetera.

That'll be on time.

We already have it in parts of the network.

Between 4G and 5G, that'll be on time when the customers need it.

On the chipset development on 5G, again, it's on track for both radio and baseband.

You remember that ReefShark is there, family of products, and they're starting to come out during '19 and '20.

And they will also give us product cost advantages when they scale and get rolled up.

Our next question comes from Aleksander Peterc of Societe Generale.

Yes.

I was just wondering if you could comment a little bit on gross margin development from Q1 into Q2 in networks, on products and on services separately.

It's my impression that services improved more than product.

And with that in mind, could you also comment on any pricing pressure you've seen in your product categories and networks?

Maybe I'll start, and then Rajeev, you want to talk about the pricing.

So we did see an improvement in the execution of services.

On the other hand, as we discussed, there was also more services content, which then had a kind of negative business mix impact.

And the fact that we started to recognize revenue for 5G also meant that there was a more normal software content in the networks margin.

Then clearly, the strong growth of optical benefited from a business mix point of view.

So in that sense, you had some puts and takes and overall kind of strong performance, both on the product as well as on the services side.

And on pricing, Aleksander, we are -- no change in competitive intensity.

So it's neutral.

We're a bit concerned that there is talk of those wanting to take some strategic contracts, and that could drive some competitive pressure.

Haven't seen it yet, but that is possible.

We're on the alert, and of course, we have to reinforce our pricing discipline at a time like that and be very clear that, that will hold.

China, we will see it being aggressive, as I said earlier, but nothing meaningful to change yet on prices.

Our next question comes from Stefan Slowinski of Exane BNP Paribas.

Yes.

Just to come back on the cash position and cash flow.

You've typically had a healthy net cash position, and we've seen that fall to about EUR 0.5 billion.

I understand you expect improvements in the second half of the year.

But how important is it for you as a company to remain in the net cash position?

Or would you be okay if you went into a net debt position?

I think that a strong balance sheet is important for the company.

That's why the cash is -- and cash and cash flow is a focus area during the second half.

As I said in my prepared remarks, we do see the levers to pull to get to the slightly positive free cash flow for the full year.

It is about reversing the temporary headwinds that we had, mainly in receivables.

It is about getting the reduction of inventory related to 5G to start happening during the second half and then continue to work that as we go into 2020.

And by doing that, we'll come out at the end of the year at a better net cash position than the EUR 500 million that we hold at the moment.

Our next question comes from Sébastien Sztabowicz of Kepler.

Yes.

One of your U.S. competitor in IP have decided to embark into a kind of vertical integration with the acquisition of Acacia.

Is this something that could make sense for Nokia to integrate vertically from suppliers?

Or do you think it could be a [good] advantage in the long term in IP and optics?

Thanks, Sébastien.

So [if I just take] that [color] at a higher level, we believe, in custom silicon as a way to go because we think we can have a better cost of the product, we could put an acceleration and innovate.

So that is true for mobile networks with ReefShark family of chipsets.

It's true for FB4 in terms of routing.

It's true for PSE-3 in the optical business.

Then when it comes to your specific question on vertical integration, we also see IP and optical come closer together, right?

We see the need for photonics in that optical layer.

And we have competencies there, and we see that also important over the long term.

The benefit we have is that we have both IP and optical, right?

So that can be an end-to-end play that will become increasingly important.

So I'm pleased that that's getting recognized in the sector.

Our next question comes from Simon Leopold of Raymond James.

I wanted to see if you could maybe update us on how your views have evolved on the timing of 5G rollouts globally, and specifics I'm seeking are the prospects of China possibly slipping in time.

And AT&T commenting just yesterday that they would have national coverage complete by the first half of '20, which seems fast, and even Japan and Korea updates as well.

It sounds like Korea has moved nicely.

Appreciate how things have moved.

Thanks, Simon.

So I'll try give you a quick around the 12 -- around-the-world trip on this.

So first, let's start with North America.

So we'll see -- the operators that have launched will do more.

The experience is good.

They want to expand for more coverage.

Where there are operators that have done millimeter wave hotspot deployment, they will expand those as well.

We see the demand for low-band build.

That's the only way to get national coverage.

So at this point, you make about AT&T or others.

So there will be low-band build and high-band build, which is this millimeter wave.

There is no mid band except for Sprint, but that mid band will become available in the next couple of years.

And so that will be, if you like, the third wave.

And so that's U.S.

And then you look at Korea, the experience is very good.

There are some 1.5 million subscribers that have been put on.

The operators are trying to price 5G at a premium.

They, in fact, are pricing 5G as a premium relative to 4G, good network performance, good experience, and they are going to just expand to nationwide coverage.

So Korea is going to do that as we speak.

They're going to start building and expanding.

Then you have Japan.

The deadline is first quarter 2020.

We've seen developments in the market.

Awards are taking place.

So that work will start to begin in the second half in earnest.

China, I don't think will get delayed.

It'll happen around Q3.

Some of the trial, large-scale trials are already happening.

And then this next phase of tendering will begin.

So Q3, Q4 onwards, that will accelerate.

Then you have the Middle Eastern market, Saudi Arabia, UAE, Qatar, and they are also going to be early lead markets.

We see that momentum building up from end of '19 going into 2020.

Then the Nordics.

And the Nordics, especially Finland, where the consumption of data use is the highest in the world.

It's very high.

And the need for 5G is there.

And given the pricing that operators have for 5G or even in 4G, it's one that can be accretive.

So going to 5G will expand their revenues potentially.

So they will do that, and then we'll see the next -- the rest of Nordics.

Then we're looking at U.K. and Italy were the auctions that are taking place.

Germany will come next.

So next year is going to be -- we'll move from lead markets, expanding to do more coverage and capacity and the new markets coming on.

Our next question comes from Amit Harchandani of Citigroup.

Amit Harchandani from Citi.

I just wanted to go back to the revised market outlook in the press release today.

Could you maybe just help us better understand the drivers of this improved outlook across the various segments?

Is it purely mobile?

Is it also to do with the other segments that you operate in?

And on that note, when you talk about growth continuing into 2020, do you see growth accelerating into 2020?

I think it is clear that we've seen kind of strength in the market in the first half, which gives us confidence that the full year will be stronger than the earlier flattish expectations that we -- expectation that we had.

Some of that is on the back of a positive 5G response in markets such as Korea and U.S. And then as Rajeev said, the whole 5G cycle is accelerating going into to 2020.

And that -- and with that, there will be growth.

In the end, of course, how much the growth potentially accelerate, so no, it depends a bit on how strong '19 ends up -- end up -- ends up being.

Because again, I think the 5G cycle doesn't look at calendar years now.

There is momentum, and some of that will be deployed at -- on this side of the year-end and then some of that will continue going into 2020.

Our next question is a follow-up from David Mulholland of UBS.

I just wanted to follow up on the kind of Q1 to Q2 progress.

I think in Q1 on gross margins, you called out service costs and contracts were costs that overrun.

Is -- has that fully resolved itself now?

Or is that still a bit of a drag in Q2 on the underlying margins?

I think we had improved service execution in the second quarter.

However, as I said, at the same time, deployment services was a bigger portion of the overall mix and that then had a negative margin impact.

But when it comes to services execution, the team has responded really well.

And we do see -- we did see improvement in Q2.

And as Rajeev said in one of his answers, services is also one of the areas where cost reductions related to cost of sales are expected to come from.

That's great.

And can I just clarify as well just on the Q3 gross margin trend, because there's been a couple of mixed comments.

I think you've -- it's been clear that top line you expect growth will slow a bit.

But in gross margins, will we stay at a similar level?

Is there room for some improvement?

Or could it soften a little bit from where we are in Q2?

Or just overall, is it not a big movement in the context of what we've seen so far?

So we are no longer in the business of giving quarterly gross margin guidance.

But the only thing I'll say is that the earlier comment that we made 90 days ago about seeing sequential improvements throughout the year is something we can no longer repeat as a result of the strong performance in the second quarter.

Our next question comes from Richard Kramer of Arete Research.

Just to -- given the extent of restructuring, Rajeev and Kristian, that you guys have gone through, could you give us a sense of the road map going forward for ASN and RFS and whether they are now fully part of the family and will stay there?

And Rajeev, if you want to give us a better sense what the road map forward for the Fixed business is.

It's obviously very strategic for a lot of operators, and you have a lot of customer commitments.

I know you were trying to break into the cable market with that business with LightSpeed.

Can you give us a sense of if whether we should expect further restructuring or structural changes in the group or we can sort of rest easy, that this is the structure we can look forward to in 2020 and beyond?

Yes.

Thanks, Richard.

So for now, I think that we said that we will be holding on to ASN.

So I think we should assume that, by and large, the structure is going to remain for the foreseeable future.

On fixed access, as we move from copper to fiber -- this is what we're seeing right now.

We're seeing the operators spend on 5G, and so they're not yet spending fully on the fiber builds, e.g., in Europe.

But I see a possible acceleration of 5G as a -- sorry, of fiber as a next growth driver, meaning fiber to the x, fiber to the most economical point.

So we see that possibly happening.

If the operator find the right business case, then -- and I think there is a potential for that to happen.

Most importantly, I think the single growth driver, I would say, Nokia has in the fixed access business is fixed wireless [access], right?

So by that, I mean the customer premises equipment, the antenna business that we have there.

We've got 3 meaningful deals now that are public, Telia, rain, Optus, and we're seeing some fairly significant interest and traction in the market.

So I think it's going through copper to fiber to fixed wireless access.

Should that move to fiber and fixed wireless access not take place, then they'll have to put more copper, i.e., more vectoring and 25 gig and XGS-PON and et cetera, et cetera.

And the ASN, RFS.

And ASN, RFS, like I said, I think we've got to keep that in that structure.

Thank you, Richard, and thank you for -- thank you, everyone, for your questions today.

I'd now like to turn the call back to Rajeev.

Thank you, everyone, for the questions.

Thank you, Matt and Kristian.

To briefly summarize, I'm largely pleased with where Nokia landed in Q2.

It was a strong quarter from both a sales and profitability perspective.

Many of our businesses performed very well, gaining share and improving the competitiveness of their products and services.

Yes, our cash performance was a challenge in the quarter.

But as Kristian and I shared earlier, we have measures in place to sharpen our execution, and we expect meaningful improvement in the second half.

While we face some risks, have plenty of hard work to do and need to execute superbly in the second half, we're making considerable progress and continue to see a path to meet the commitments we made for the year.

With that, Matt, back over to you, Matt.

Thank -- 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 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, such as general economic and industry conditions, as well as internal operating factors.

We have identified these in more detail on Pages 60 through 75 of our 2018 Annual Report on Form 20-F, our financial report for Q2 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.