Good morning, ladies and gentlemen. Welcome to Nokia's second quarter 2026 results call. I'm David Mulholland, head of Nokia Invest Relations, and today with me is Justin Hotard, our president and CEO, along with Marco Varan, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results could 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've identified such risks in the risk factor section of our annual report on Form 20F, which is available on our Invest Relations website. Within today's presentation, references to growth rates will be on a constant currency basis, and other financial items will be based on our comparable reporting. Please note that our Q2 report and a presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and reconciliation between the two. In terms of the agenda for today, Justin will go through the strategic highlights of the quarter, and then Mark will go through our financial performance. We'll then move to Q&A. With that, let me hand over to Justin.
Thanks, David, and hello, everyone. Our second quarter showed continued progress against the strategy we set out in our capital markets today. Our team is focused on maximizing our opportunity in the AI super cycle, and that focus is translating into early results. I'm pleased with the progress that Team Monokia has made in the first half of 2026. In Q2, net sales grew 9%. We expanded our gross margin by 70 basis points to 46% and our operating margin by 70 basis points to 9%. Network infrastructure delivered strong growth, led by optical and IP networks, with sales from AI and cloud customers more than doubling year-on-year. Mobile infrastructure sales also grew, and the business delivered stable profitability, largely driven by product mix. Marco will take you through the details of our financial performance in his update in a moment. I want to take a step back and look at how our first-half performance demonstrates progress against the strategy we set out in last November. As a reminder, these are the five priorities we shared at our Capital Markets Day, and I'm pleased by the progress we've already made across each of these areas. Let me touch on a few highlights from Q2. AI and cloud was the strongest growth driver in the quarter. Net sales more than doubled year-on-year to 446 million euros, and order intake grew to 2.8 billion euros. While we're very pleased with the order growth, it's important to put that number into a bit of context. Q2 benefited from several significant long-term orders as our customers looked to secure supply in a constrained environment. To provide some reference, approximately half the order volume received in Q2 is expected to convert to revenue in the next 12 months. As I've said before, order patterns in this market can be lumpy, and we should not expect this level of intake every quarter. As importantly, the strength was broad-based across optical networks and IP networks, and included some of the design wins we mentioned last quarter. This was driven by growing demand for data center interconnect and scale across fabrics from our customer base. The demand primarily shows up in our AI and cloud segment, but we're also seeing emerging signs of growth in telecom customers as they invest to support the increased data traffic driven by the AI supercycle. During this quarter, we also secured our first multi-rail ILA design win with a major customer. This is one of the new optical networking products we launched at OFC this past March. Last week, we launched the industry's first commercial AI RAM platform, marking a fundamental shift from a hardware-defined radio network to software-defined platforms. This fundamentally changes the economics of radio networks. Our AI RAM platform gives our telco customers a path to improve network performance through software and AI innovation, rather than relying on hardware upgrades as they have traditionally. The platform would deliver more than 100% spectral efficiency gains by 2028, doubling the capacity operators can get from their existing spectrum. The performance benefits are tangible in 5G networks, and our AI RAM platform provides a software upgrade path to 6G to ensure continuity without additional hardware investment. The platform is also open, programmable, and ORAM compliant. This gives operators greater flexibility as they evolve their networks. They can choose the hardware path that works best for them, adding AI acceleration into their existing Nokia AirScale infrastructure, deploying new AI RAN hardware, or moving to cloud-native AI RAN. Ultimately, this is about delivering more performance, better returns, and faster delivery of new service for our customers. We're on track to enter pilot deployments at the end of this year and expect to be commercially available in 2027, as we've said previously. Co-innovation is a powerful differentiator for Nokia. When we combine our technology leadership with the expertise and scale of our customers and partners, we accelerate innovation, bring solutions to market faster, and solve increasingly complex challenges together. We're already demonstrating early results from this approach, and I will highlight four examples from Q2. First, we expanded our partnership with Google Cloud, bringing Gemini-powered AI agents into our autonomous networks portfolio. Second, with Vodafone Albania, we demonstrated AI-powered network slicing using agents to dynamically optimize network resources. Third, we expanded our relationship with Indesat or New Hutchinson in Indonesia, supporting network modernization and the rollout of 5G while providing a seamless upgrade path to AI RAM. And fourth, we entered trials with a U.S. hyperscaler for a new out-of-band management solution that goes inside the data center, leveraging the passive optical technology that we deliver in our fixed networks business. We're also making progress to focus Nokia where we can differentiate and create long-term value. This means we are investing where we see long-term demand and we believe Nokia can be a unique winner and at the same time reducing exposure to areas where we are less differentiated. In November, we shared that our fixed wireless access customer premise equipment portfolio is not core to the future of our strategy. The sale we announced this past quarter to NCIGO is an example of our disciplined approach to capital allocation and allows us to concentrate resources on higher priority opportunities. The sale is on track to close by the end of the year. Talking about higher priority opportunities, one area of focused investment is scaling the capacity needed to support our optical growth ambitions, particularly around Indian phosphide semiconductor manufacturing. In San Jose, our new Indian Phosphate Fab is now processing test waivers as we move closer to product qualification. It remains on track for volume production by the end of the year. In June, we announced a new commitment we are making to scale our Pennsylvania facility, increasing our advanced test and packaging capacity for optical systems in that facility by 10 times. In addition, today we announced the acquisition of a manufacturing site from NXP in Arizona, where we plan to increase our Indian phosphide grab capacity. This gives us additional capacity to support our own demand and greater optionality, recognizing the supply constraints in the market today. Altogether, these investments continue to strengthen and secure U.S.-based optical manufacturing capacity for the long term. While Marco will update you on our restructuring progress, I wanted to touch on one key area where we are making progress in driving incremental productivity. We believe that to be a relevant technology provider in the AI super cycle, we need to be a leading adopter of AI internally. Last year, we established a team to deploy AI testbeds across multiple functions within Nokia. One area where we're seeing early traction is software development, where we now have nearly 100% adoption across our developer base. This is already yielding significant productivity returns, supporting our efficiency targets, and accelerating roadmap deliverables. We will continue to scale this initiative across every function of the organization as our test beds yield tangible results. We see this as essential not only to unlock sustainable returns, but also to be a better partner in support of our customers as we help them unlock the full potential of the AI super cycle. So in closing, I want to recognize and thank Team Nokia for a strong first half of the year. We are focused on our key priorities and have begun to fundamentally change how we work. I'm pleased to see our efforts are already reflected in our results. We're entering the second half with good momentum and remain on track to deliver somewhat above the midpoint of our operating profit guidance. And now I will turn the call over to Marco to dive into our financial performance.
Thank you Justin and hello from my side as well. Before looking at the quarterly performance, let me start with reporting changes we announced this morning. As we have agreed to sell our fixed wireless access business to INSEEGO, we now consider the sale of enterprise campus edge highly probable as a result both businesses are classified as discontinued operations we have published recast historical numbers for 2025 and quarter one 2026 to support comparability in quarter two 2026 this reporting change we reduced comparable net sales by 66 million and increased the comparable operating profit by 13 million it also led to minor adjustments in cost allocations between network infrastructure and mobile infrastructure with an impact of approximately one to two million per quarter turning to performance net sales through nine percent in the quarter supported mainly by network infrastructure cross profit was 2.2 billion and cross margin increased 70 basis points to 46 percent the margin expansion was driven by network infrastructure and particularly optical networks where we continue to benefit from both strong demand and the integration of infinite error operating profit was 434 million and operating margin increased 70 basis points to nine percent the quarter benefited from some software revenue recognition coming in in quarter two instead of quarter three we also incurred higher stock based compensation expense which represented 150 basis points head win to operate a margin in quarter two year-on-year and this was driven by Nokia's share price increase an increase in the program and the issues happening earlier in this year. Financial income and expenses benefited from a positive venture fund revelation during the quarter which supported both net profit and EPS, earnings per share. Pre-cash flow was negative $732 million, and as you know, quarter two is typically the weakest quarter for cash generation as employee cash incentives are paid in quarter two. We also saw some increase in rookie capital during quarter. We ended quarter two with a net cash position of $2.8 billion, maintaining a strong balance sheet and significant financial flexibility let me now turn to network infrastructure net sales grew 12% in the quarter reflecting continued strength across the business optical networks for 20% and growth was supported by continued demand from and cloud customers but we also saw healthy demand from telecom customers investing in transport infrastructure. IP networks grew 16%. The strong order momentum that began in the second half of 2025 is now translating into revenue growth. Fixed networks declined 2%. The areas where we are prioritizing investment performed well. optical line terminal sales grew 18% while ONT sales declined 16% as we continue to focus on higher value parts of the portfolio. Cross margin increased 240 basis points to 42.7%. This improvement was driven by three factors. First, we benefited from a higher scale as revenue increased. Second, we continued to realize synergies from the inferior acquisition. And third, we saw more favorable mix within fixed networks. The cross-modern improvement was partially offset by growth investments we are making across optical networks and IP networks as we position ourselves to capture the long-term opportunity in AI infrastructure. And finally, operating margin increased 170 basis points to 8.1%. And turning to mobile infrastructure, net sales grew 7% in the quarter, core software grew 1%, radio networks 7%, and technology standards increased 15%. and technology standards benefited from signing a few new agreements during the quarter and included some catch-up revenue recognition. Looking at the full year, we continue to expect technology standards to deliver a similar level of sales and profitability as in 2025. First model was 49.3%, which was somewhat better than we expected entering the quarter, and the main driver was a higher contribution from software sales as some revenue were expected in quarter three ended up benefiting quarter two cross margin. Looking ahead, because of the earlier software revenue facing, we currently expect mobile infrastructure cross margin in quarter three to be closer to 44 to 46 percent, reflecting lower software contribution. before improving again in quarter four in line with normal seasonality. And operating profit was stable year-on-year. Looking at sales by customer segment, AI and cloud was again the fastest-growing segment with net sales increasing 105% year-on-year. Growth was broad-based for both optical and IP networks. Telecom sales increased 4%, while technology's licensing grew 15%. And we remain optimistic about the long-term AI and cloud opportunity and continue to see strong customer demand. At the same time, our expectations for the telecom market remain mostly unchanged. Turning to restructuring and integration costs. First, we are on track to complete our 2023-2026 restructuring program this year and achieve 1.2 billion euros in cross cost savings. The second area is the integration of our Chinese operations into Nokia's global operating model after taking full ownership at the end of 2025. As we discussed previously, we continue to adjust our operating structure to reflect market conditions and improve competitiveness. As a reminder, this program was expected to achieve 200 million in cost to entries with one-time charges of between 350 and 400 million euros over a two- to three-year period. We now expect to recognize approximately 350 million of the planned one-time charges by the end of 2016, as we accelerate the integration to complete it within two years. And the third area is a set of new efficiency progress mainly impacting Europe. These programs are expected to lead to restructuring charges of 200 million euros in 2026 these actions are focused on simplifying the organization improving productivity and ensuring resources are aligned without strategic priorities overall we expect restructuring charges of approximately 800 million in 2026 then let's go to cash with respect to cash flow the quarter followed the normal seasonality we typically see in quarter two the largest impact was the payment of annual employee incentives related to 2025 performance we also saw some working capital build-up during the quarter reflecting the continued growth of the business despite these seasonal factors, our overall cash generation profile remains unchanged. Considering some of the increased restructuring costs and as we make some investments in working capital to prepare for growth, we now expect to track towards the low end of our free cash flow conversion assumption of 55 to 75%. And finally, turning to our outlook, there is no operational change to our comparable operating profit guidance. The only adjustment is the technical change resulting from the move of fixed-wise access and enterprise campus edge into discounted operations. And we continue to track somewhere above the midpoint of our operating profit range looking at quarter 3 specifically we currently assume the sequential increase in net sales of between 3 and 7% for operating profit we currently expect a result broadly similar to quarter 2 due to the phasing of software sales in mobile infrastructure could be in quarter two and quarter three followed by meaningful improvement in quarter four and this is a combination of the normal seasonality we see in our telgo business and the contribution from year-on-year growth in ai and cloud sales aside from the discontinued operations adjustment, our outlook assumptions remain largely unchanged. The demand environment remains supportive and we allocate capital where we see the strongest opportunities for long-term growth while maintaining discipline on profitability and cash generation.
Thank You Justin and Marco.
Operator
As usual for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up operator could you please give the instructions ladies and gentlemen we will now begin the q a session if you have a question and are using the zoom app we ask that you please use the raised hand function at the bottom of your zoom screen or by clicking on the three dots on the black bar at the bottom of your zoom screen alternatively if you have joined by a zoom browser please click the reactions button at the bottom of your zoom page and then select raised hand if you have dialed in by phone today and wish to ask a question please use star 9 on your keypad to raise your hand and then star 6 to unmute once your name has been announced you may ask your question if you want to withdraw your question please lower your hand by using the raised hand function or star 9 if you have dialed in I will now hand the call back to David Mulholland head of investor relations for the Q&A thank you Thanks, Danny.
We'll take our first question today from Terrence Tsui from Morgan Stanley. Terrence, please go ahead.
Yes, thank you very much. I hope you can hear me okay. I had a question around capacity and particularly around the four new DSPs planned by the end of 2027. So this is actually a big ramp up compared to the previous run rate. Can you give us some milestones to look out for and reassurance that this could be achieved? Thank you.
Sure, Terrence. I mean, I think, first of all, we talked about, you know, these going into customer trial in 27 and then becoming commercially available towards the end of 27. I think the thing I would just emphasize and remind you of on this is that Nokia and Infinera previously were each building two DSPs individually, so collectively a total of four DSPs. One of the decisions we made, and I've talked about this a bit, as we saw the growth opportunity emerging in Optical, was to maintain the DSP team as is versus reducing them. And the reason we did that was we felt quite strongly in spending time with our customers that we could actually deliver more differentiated products to them with four unique DSPs versus the traditional two that we had been delivering in each company independently. And that laid out and supported the roadmap that we launched at OFC in March. And I touched on that a bit in last quarter's call. So the view here is that we think this gives us better market coverage aligned to where the market is evolving, specifically given the amount of investment we're seeing across the different layers of optical fabric, from the scale across fabric to what we see in data center interconnect to metro network to long-haul transport. So, across all of that, you know, we've got, we think we have a much better portfolio in 2027 to address each of the unique evolving solutions than we would have had if we'd only kept two versions. Do you have a follow-up, Terrence?
A real quick follow-up on the comments around the order book potentially being lumpy. Do you still expect like an output to jet victory over the long term from these levels, will be able to some bumps along the way.
Yeah look I think two things about this quarter this quarter's order book I mean obviously if you do the book to bill on this it's a significant jump up so I think you know I think for me that's a that's a data point around you know a little bit of lumpiness but the other is the elongation of the orders which we've been taught we've been talking about expecting and we're seeing here so I think we have to look at it in both those dimensions and the way I think about orders is I think about orders in a period of time, right, because it's easy to give you a headline number and then say, well, you know, the next question is, is that over a quarter period, a four-quarter period, an eight-quarter, 12-quarter, et cetera. And so for me, that's really where we're focused is not, you know, is not necessarily on are we getting, you know, big order pops consistently, but rather are we seeing the order momentum grow as we look at it over a time period. And right now, you know, what we're seeing is continued growth and continued demand in the market. And as I said in my comments, it's still largely driven by AI and cloud, particularly around scale across and data center interconnect. And then we're starting to see some emerging growth. We saw some of it in sales this year in our telco customer base, and we believe that's also tied to AI demand.
Thanks, Terrence. We'll take our next question from Simon Leopold from Raymond James. Simon, please go ahead. Simon, have you unmuted yourself?
There we go. Can you hear me now, David?
Okay, great, great. I didn't expect that button to pop up. I wanted to see if you could rank order and characterize supply chain risk. And I'm thinking about issues like memory printed circuit boards and even in the phosphide wafers, maybe a particular focus on that latter one, The wafers, given the factory expansion, whether or not you can get the materials. And then I've got a quick follow-up after.
Sure. Look, I think the most, you know, if I think about the supply chain risks or the time that we're spending in this, first of all, as you rightly point out, it's broad-based, right? So I think we talk a lot about memory. And memory is significant just given the amount of demand that is in the market. I think this has been talked about quite a bit across, you know, multiple companies and multiple parts of this ecosystem. So, there's clearly, you know, there's clearly constraints there. And then, obviously, the pricing, you know, the significant change in pricing driven by that shortage, which, again, has been talked about very broadly across the tech ecosystem. So, that's probably the one that we see as most significant. Now, you know, we talked about this last quarter. I think I don't need to repeat what I said last quarter, but maybe briefly. You know, our focus is on securing supply, you know, simplifying our designs, looking at where we can, you know, we can reduce scope wherever possible in our design. And, of course, then passing that, you know, passing that on to customers. And I think if you look at what we said last quarter, you know, there were some companies with us last quarter. It seems like more companies have joined us in some of the more recent earnings calls now, making that same comment. The key thing for me here is also really talking to our customers, Not the AI and cloud customers, they understand this well, but really making sure our telco, our mission-critical customers understand that we have elongated lead times, which means better visibility, better planning, and something that we need to team with them on. So particularly important in that regard. And then as you touch on, there's a broad base across the board. On the Indian Phosphite question you asked, Simon, the comment I'll make is, you know, This new fab is really looking at, you know, is looking at coming online probably earliest than 29. And if you think about our capacity, we've got, you know, a significant jump up with San Jose coming, you know, call it 27 as it ramps volume manufacturing later this year or volume manufacturing later this year. So 27 it ramps, and we kind of line up for a 29 ramp and an incremental capacity. As you know, that's kind of the timelines that you you have to take with these You know with these investments And I think as we're looking at it, we're looking out at you know at different solutions to get Indian phosphide capacity at that time That's obviously an industry issue though. It's something that all of us in the industry need to enable and it's It's something that you know, I think collectively we need to solve, you know, even even across You're even across the ecosystem Thanks, Sam.
Yeah, I wanted to see if maybe you could offer us your view on the scale across market and your ambitions, Nokia's ambitions, for this particular application, considering optical and IP routing.
Yeah, absolutely. I mean, I think, first of all, Simon, I think there's a lot of – I'm going to be a little technical, but scale across is, you know, technically was talking about data centers within a given campus area that were strung together as an AI factory. And one of the things I talked about on the last call was the demand we're seeing in data center interconnect. So my point in saying that is some of what we're seeing is just increased data center interconnect. Now, you can call it scale across or, you know, some folks may want to label it one way or another. To me, they're very different. They're complementary and very important applications because one is back-end connectivity, which is, you know, which is providing connectivity to expand the back-end for scale out, which is the scale across fabric. The other is data center interconnect, providing higher bandwidth between data centers over a long haul on the front end. Both of those, you know, have a routing element. And obviously, the data center interconnect has a very significant demand growth in routing. And if you look at our opportunity and why we're talking about growth in both IP and optical, it's because we're seeing growth in both of those elements. So they are complementary. They are reinforcing. And the other thing I'll say is it's not limited to that. We are seeing some traction in some of the back-end switching. It's on a limited basis. obviously without getting into all the market dynamics there but all of this is you know all of this is encouraging in terms of our focus in this area and the traction we're starting to make thanks sam we will take our next question from sammy sakhamis from danska bank sammy please go ahead hi my question would be on your supply capability in optical networks are you fully constrained, or have you been able to build any inventory during the first half of the year? Yeah, I would say, Sammy, it's a good question. There are always pockets, you know, think of legacy products and those areas where we probably have some supply. But in general, I would think of us as being constrained, right? We talk about lead times elongating. It's because we're seeing constraints, and particularly on the leading edge products. And by the way, I don't think we're unique in that. I think that's, you know, if you look at our ecosystem, again, I think you see, you know, you see the constraints and you see that across, you know, the component suppliers, some of our peers, et cetera. So, obviously, we're working aggressively on that and maximizing the, you know, the supply. But as I've said as well, if you look at our forecast, you know, what we've included in our forecast is the demand that we have line of sight to shipping. And we recognize even that has some risk because that, you know, that assumes continuity of supply, no disruptions, you know, everything goes perfectly. So when we're thinking about this, we're thinking about it from a constraint perspective, aligned to what we have line of sight to in supply. But absolutely, if there was more supply, I think we'd probably generate more revenue.
Did you have a follow-up, sorry?
Yeah, regarding radio network, just curious, is do you think you are currently gaining share? You had a 5% organic growth in the first half of the year. I think that's a bit more than your main European rival is having, or is it just like timing?
Yeah, my view on this, Sammy, is it's timing. We talked about – actually, Marco talked about the timing around the software revenue recognition we had in Q2, which is tied to our radio software platforms. So I would call this timing. I also think looking at market share on a quarterly basis in this industry is super challenging to get any kind of good signal. I think you have to look at it certainly on an annual basis.
Thanks, Tommy. Let's take our next question from Alex DeValle from Goldman Sachs. Alex, please go ahead.
Yes, thank you very much. You talked about further progress in AI RAN. I wondered if you could talk a bit about the timeline of this benefiting Nokia in terms of revenue and competitive position and what your discussions with telco are suggesting in that area and secondly back to the AI side I wondered if you could give an update on switching and the progress you make there can you help us understand the latest thoughts on switching design ends and when we should expect orders and revenue momentum given the progress you're delivering I mean, this is the second one first.
In terms of the switching design wins, we talked about this a little bit last quarter. We said, you know, we expected orders this year. We saw a lot of those orders come in in Q2. Obviously, as you know, in the design win process, you start small, you get traction, and then you build on top of that as you validate and execute for performance. So, you know, we're continuing to drive that across a number of customers. um obviously we're pleased with the progress we had in q2 and then can you just repeat your your first question yeah absolutely justin it was just um you had mentioned uh further progress on ai ran i'm just curious um how you think about um the customer feedback and the timelines for that impacting uh your revenues yeah i i mean look i i uh i think basically alex everything is consistent with what we said pilots at the end of 26 commercially available in 27 obviously we'd anticipate more significant volume going into 28 and that continues to be our expectation in terms of AI RIM.
Thanks Alex. We'll take our next question from Ulrich Ratha from Bernstein. Ulrich please go ahead.
Speaker 6
I think we've lost Ulrich. Thank you. Are you there Ulrich? Sorry, let's take some time here. Take some time for the button to appear here. Apologies. So I wanted to come back to the very strong AI cloud order intake, put it into perspective already with regards to the longer, the elongation of the order book, as you call it. I was wondering, in supply-constrained markets, we often do see double ordering, which does create a false signal for suppliers such as Nokia. How do you see this risk? Are there any specific reasons why this would be an unlikely factor for Nokia?
Yeah, look, I think, first of all, if you think about the customers, the level of sophistication in the customers that are placing these orders, you get to step back and ask what the incentive is for, you know, for double ordering. I've absolutely seen this much like you in supply-constrained markets that I've worked in in the past, And it's particularly prevalent in markets where you're focused on enterprise customers or you've got channels because customers tend to diversify and look for allocation. But in this environment, the thing that I would flag is, you know, for one of these customers to come in and say, I'm going to double order with you, when ultimately that goes back to supply of leading-edge silicon manufacturing capacity on optical components that they can actively inspect and we transparently share the progress. The question for them would be what does it do in terms of incentives. The other thing I would say is we're obviously, as we're making commitments on a longer-term basis, we're expecting those commitments from customers as well.
Speaker 6
If I may follow up with one clarification, what would you call a normal length of an order book? Is it essentially 100% of the orders within the next 12 months? Because you highlighted sort of the difference, you know, with half of the revenues. Is 12 months for 100% the quote-unquote normal here or not?
Yeah, Ulrich, that's a good question. So I think typically we have seen orders within 12 months in our customer base. Now, you know, again, there's two factors to this. Obviously, one is the growing demand, you know, is the fact that AI and cloud is a new segment for us, right? So I would say we've had less exposure to this, obviously, significantly less exposure to this in the past. And then the second thing is obviously the supply constraints. So I think both of those are factors. But if you think about our traditional business in, you know, with Telco customers, heavily concentrated with Telco customers, and then obviously some in mission critical, those orders, you know, we may get a, win a contract award, but we would not, we would see orders typically within 12 months, and that's really a shift. And that's why when I talk about our telco customer base, one of the conversations we're having with those customers is getting more visibility going forward because they're also used to giving us fairly short-term, within 12 months visibility, and we need to be planning even further. And so this is something that we're, you know, with all of our sales teams having this conversation to make sure that we're getting better visibility, not because it implies a commitment, but because, you know, the risks given the supply constraints in the industry are, you know, we don't want to miss any, you know, any of their deliveries while we continue to support them, given, you know, given their importance to us as well as customers.
Thanks, Howard. We'll take our next question from Jacob Blustein from BNP Baribas. Jacob, please go ahead.
Thanks for taking the question. You're obviously ramping up in terms of AI and cloud revenues. I guess we're not yet seeing it in terms of margins. I guess my question is just when, and I appreciate that, obviously as these businesses scale, margins will go up. And particularly on the IT side, you're just sort of starting to scale now. But it's been said, how long do you think it actually takes before these revenues become materially accretive?
Yeah, I think two things, Jacob. So one is gross margin, and then the other is operating leverage, right? And as we talked about in Capital Markets Day, we're doing a lot of work at the front end of the three-year period to really set the company up to become more efficient, more nimble, more scalable, and get the operating leverage as we drive growth in the business. So that's a key focus. And we talked about that. By nature, that would be a little bit back-end loaded. Now, like I said, I'm very pleased with the progress we're making. And obviously, with the demand accelerating higher than what we said at Capital Markets Day, We've got optimism on progress there that, you know, we'll continue to improve. On the other side, on the gross margin side, you know, this is an area where, you know, I think we're dealing with, you know, with just a lot of complexity in the mix. You know, and this is a little bit of supply chain. This is also us, you know, we talked about the focus we're making in FN on exiting, you know, low margin business. So some of those things are just playing through in the business, and you're not quite seeing a drop to the bottom line yet. But obviously, we're very clear on what we're anticipating, and based on the assumptions we shared at Capital Markets Day and the progress that we're making ahead of those in terms of revenue growth.
Great, Sarah. And if I could just ask a quick follow-up. You mentioned you've got several customers coming in on the IP side, I think you said. And I'd just be interested in understanding just sort of the level of concentration of that customer mix. I mean, would you say you're well represented across the different hyperscaler customers, or would you say it's still a relatively narrow segment?
Yeah, I think we've talked about this a little bit before. It's fairly concentrated today, but that's the way that, you know, that's the way you build the business, right? And so I think we've got, you know, we've got very good partnerships and relationships across, you know, many of the AI and cloud players, the hyperscalers. The focus right now is, you know, is obviously on making sure where we do have demand that we're, you know, we're delivering it and we're continuing to innovate for those customers. And then, you know, over time, obviously, expanding that footprint.
We'll take our next question from Oliver Wong from Bank of America. Oliver, please go ahead.
Hey guys, thanks for taking my question. My first question is in terms of the 2.8 billion AI orders in the quarter, I understand that a significant portion pertains to some of your significant design wins and data center switches from last quarter. So I think it would be helpful is if you could maybe try to quantify or guide us a little bit on kind of, you know, how much of the order of the total AI orders this quarter that kind of comprise, just so that we can, you know, have a better sense of, you know, underlying optical-related demand order.
Yeah, I mean, I think I would say it was driven by optical and IP weighted towards optical, and that's probably not a surprise given the momentum we're seeing right now in that market.
Got it. And a quick follow-up. In terms of, you know, within optical, you know, you meant to discuss briefly about sort of scale across versus regular DCI. I was just wondering, you know, what the composition of demand is right now between the two.
Yeah, I don't think we're breaking that out right now. I just would highlight that I think there's a significant amount of demand in DCI as well as scale across. And I think that's – I think the two kind of get either pushed together or maybe the DCI piece gets underappreciated. But that's – you know, that's certainly where, for us, we're – you know, we're seeing – we're seeing traction on both.
Thanks, Oliver. Our next question from Richard Kramer from Arece. Richard, please go ahead.
Thanks. Hey, Justin. My first question for you is, on the AI RAM transition, your customer installed base runs on Nokia proprietary silicon. Do you see the industry long-term shifting away from that proprietary silicon-based set of solutions? And what are the implications for, you know, what is a 3 billion euro run rate of mobile R&D and mobile network's margins for that transition?
Hey, Richard. So a couple of things on this. First of all, I've talked about this pretty openly. I think we're in a point where the industry has to transition. I think we look at what we see on AI RAN and the spectral efficiency. By the way, we'll have spectral efficiency on our existing hardware. We'll have some improvements in software. But there'll be an order of magnitude below what we're talking about on AI RAN. But the second thing here is that when you look at leading-edge silicon, you do the math on the cost of leading-edge silicon. And then, by the way, the supply constraints on leading-edge silicon, in my mind, this is a very clear industry shift that has to happen on the baseband. And that is a shift to general-purpose silicon. And, of course, you know, we were partnered with NVIDIA in launching the AI RAN solution. You know, there are other players out there with general-purpose, you know, based solutions that are delivering virtualized RAN stacks. So I don't think we're alone in this move. Fundamentally, as we think about the R&D in this space, this is the other thing I've touched on. You know, when you look at this industry, there's two fundamental challenges, and certainly from 4G and 5G, one of them is that, you know, the cost of capital, the return on investment capital at an operator level in aggregate hasn't delivered, right, in terms of the investment, certainly looking at 5G, but also 4G. If you look at it from a supplier perspective, you know, a technology provider like us, it also hasn't been acceptable on our side. And so I think we also have to look at how we, you know, and generate a better return on invested capital. Getting out of purpose-built silicon on the baseband is a step in that direction, and that's why we said that's the long-term direction. I think it's incredibly compelling when you can also say to a customer, by the way, look at the better efficiency you can get on your hardware, which means you're going to get a better return on that hardware investment. And then the last thing we're saying is, by the way, when we deliver the hardware, that's not the best performance you're going to get. We'll continue to provide performance enhancements. As an industry, we've always added features, but the fact that we're now adding performance capabilities in our software stack we think is a huge advantage. And the final point I'll make is, as we've talked about in the software stack, this is a single software stack. So we've got capabilities to optimize it for different hardware, including our legacy stack, and, of course, the NVIDIA GPUs that are now coming into our portfolio on the AI RAM platform. But it's a single software stack. So we're getting a tremendous amount of leverage out of that stack. So this is right on that path.
Okay, thanks. And then a quick follow-up for Marco, if I may. You know, your comments about being above the midpoint of your full-year profit guidance, I don't know, but having flattish profits in third quarter suggests you're going to more than double profits in Q4. Can you talk through the drivers of that, be it software revenue recognition, licensing, product deliveries, cost reductions, especially given the cash outflows for restructuring CapEx, working capital, et cetera, that we're seeing now and can expect in the second half?
Yeah, thank you. I would say that if you look at the normal seasonality that the industry has, specifically on the telecom customer-based side, is usually very Q4 delivery heavy, And that's why we've seen in the past years as well that that part of the industry usually generates the biggest profits and sales as well in quarter four. And now in addition to that, we see also increase in AI and cloud customer base that is also impacting the seasonality of our operations and also profit generation. When it comes to restructuring, the program that we announced in 2023, end of 2023, that we will end in the end of this year, and we expect that we will get those $1.2 billion accumulated gross cost savings, just like we said as well. And in addition to that, we expect to actually accelerate the synergy program that I mentioned earlier when it comes to the China company that we took over 100%. And then also we had some additional voluntary-based cost-saving restructuring also in Europe, and those we will take this year as well. But altogether, if you look at our cash position, we have a very strong position. Now we had $2.8 billion net cash end of quarter two. We have some inventory and working capital increase in quarter two to secure also deliveries going forward. And then, of course, accounts receipts will follow normal sales pattern as well. But we believe also by the end of the year, we have very clear financial position and cash position. So I don't see any issues there.
Thanks, Richard. We'll take our next question from Sandeep Peshpanda from JPMorgan. Sandeep, go ahead.
Hi, thanks, Nidimion. I want to understand how you are in the court.
We can barely, we're really struggling to hear you, Sandeep. Can you hear me?
Can you hear me better now?
Yeah, so you have a nice strong entity in the quarter. How much, I mean, in the last quarter you had said that the 1 billion euros of orders were an ongoing audit intake, even though you will have lumpiness in your orders. How much of this 2.8 billion euros is an ongoing audit intake, would you characterize? And then secondly, regarding AI and cloud, how should we be looking at a run rate on revenue in this business between optical and high yield output.
So on the first one, I think we've broken it out for you that, you know, what we saw in the next 12 months and forward, and I'm not going to break it out any further in terms of or try to estimate that for you, but that should give you a good view on what's in the coming four quarters and what's beyond that. And then in terms of the mix, I think I touched on this. I mean, you know, Optical is growing a little bit faster this quarter than IP, but, of course, it's starting from a healthier, just a stronger position. IP, we're just, you know, as we said, we're just starting to ramp in design wins and deliver those. We talked about that last quarter. So I'm pleased with the momentum, and I think, you know, if you look at it from the other side, which is 100% year-over-year growth, I think we're set up for a very, you know, very good, you know, continued growth forecast from the AI and cloud segment.
Thank you, Simon. Do you have a follow-up? No, I'm fine. Thank you. Thanks, David. We'll take our next question from Sebastian Stabovitz from Kepler-Shivra. Sebastian, please go ahead.
Yeah, hello everyone. Thanks for taking my question. On ARN coming back, have you seen a specific commercial traction over the past few months? Have you been added any new customers trailing your solution and you are targeting twice more spectral efficiency by 2028 what about the total cost of ownership of this solution and next to the baseband do you plan to partner with nvidia on gpu for radios or it will be mostly focused on the baseband thank you okay so uh so three questions let me let me hit them uh first of all i'll start actually with the last one So the announcement that we made last week was around AI-RAN for Baseband and the NVIDIA GPU solution going into our AirScale platform, a future standalone platform,
and also having a Cloud-RAN common off-the-shelf server solution. So that's the current announcement. In terms of the spectral efficiency in TCO, as you probably know, that TCO ends up being a very customer-specific discussion, but at the macro level, you know, a hardware deployment with, you know, with 100% spectral efficiency improvement, I think the math there speaks for itself in terms of the value creation potential for the operator. And the other key thing is that the software, this is a software model, so the benefit for the operator is not just TCO, but it's also a CapEx to OpEx transition in terms of ongoing benefit without having to have hardware upgrades. So I think there's a tremendous amount of value when you look at it from a lifecycle standpoint. And then in terms of the pilot deployments, you know, we've announced 10 public customers on track for later this year. There's many conversations going on about this. We expect to start the pilots later this year. Obviously, we expect that we'll continue into 27. and obviously as we make progress and we should continue to share the progress publicly as we you know as we can on the progress we're making the capabilities we're delivering but it's more than just spectral efficiency it's also a platform that's extensible and we talked about this a little bit it's a bit technical but you can add you can actually put your own applications and services in at the radio layer and this allows some new capabilities which we think are going to be pretty attractive to a number of operators, things like sensing and other applications.
Thanks. We'll take our next question from Rob Sanders from Deutsche Bank. Rob, please go ahead.
Yeah, thanks for taking my question. First question would just be about the Indian phosphide fab ramp. Do you have line of sight to hitting best-in-class six-inch yields next year? Clearly, Coherent is already doing pretty well. Lamentum seems a bit behind. So where do you stand on that. And the second question would just be around AI RAN. If you look at the top three U.S. operators, how many do you think internally have already gone past the go-no-go decision on whether to deploy AI RAN? Thank you.
Okay, got it, Rob. Thanks. So, I think obviously we have one operator today in the U.S., and I'm going to start with the AI RAN, and I'll come back to you in the bus flight. So, on AI RAN, we have one operator in the U.S. that's got our RAN deployed at scale, that's T-Mobile. They announced that they're, you know, they're going to be our lead partner on the pilots. So, obviously, we're working closely with them. I would assume that that would lead us to conclude that they're probably not past the GO-TO deployment path. On the others, I think it's a discussion, you know, that, you know, that obviously, you know, we'll leave for them to assess but you know my view here is that the GPU performance is compelling and it's particularly compelling in a business case where you know spectral efficiency matters which is going to be more dense operations but you know that that's obviously you know they've got roadmaps and strategies probably better to ask them than ask me and then on the on the Indian phosphide ramp what I would say is we've got yield targets that we've we focused on but you know both yield and volume targets we focused on through 2027 on the fab um you know my view is while we're you know you rightly said while the ecosystem is maturing and it's not just the team you mentioned but also the Chinese manufacturers in this space um I also believe this is a place where we're going to go through a significant amount of maturity and learning as we scale uh and scale yield and that's what I'm focused on with the team versus a specific target or or competitor reach I think there's actually I think this is more about us learning and scaling and making sure we can deliver on our volume plans and obviously our cost point.
Thanks Rob. We'll take our next question from Arten Valetsky from SEV. Arten, please go ahead.
Yes, good afternoon and thank you for taking my question.
Relating to ANI, could you maybe comment what type of foreign tech development you actually see outside of AI and cloud so namely telcos and the mission critical so how we should think about the revenue growth trajectory on this front looking at this year and also next year yeah thank you Artem just like we mentioned earlier as well that we had a good good ordering take development and development in in also known in and cloud customer base or telcos were investing more and this is also driving because of their need need to invest in their network to secure that they can deliver the demand that is coming from the cloud and AI in general development and most likely this will happen broadly, more broadly going forward as well because we believe that AI demand will continue, the underlying demand will continue for a longer period of time and without very good secure networks it is very difficult to provide those improvements that AI is actually providing. I don't know if you have something you want to add.
Yeah, I would say the only thing I would say, Artem, is if you looked at NI specifically, the only headwind which we talked about last quarter is obviously on the customer premise equipment side of fixed networks where we're getting much more disciplined on margin. That creates a bit of a headwind when you look at NI as a whole. Underneath that is the momentum that Mark had talked about in IP and optical, And also, you know, healthy, obviously a healthy growth in optical line terminals as well, which is the network side of the Dix Networks business.
Thanks, Arthur. We'll squeeze one last question in from Felix Hendrickson from Nordea. Felix, please go ahead. Go ahead, Felix.
Okay, perfect. Yeah, thanks for excusing me. So, in the report, you say that the IP network's product mix had an adverse impact on the NI gross margin. Was there something specific to the quarter, or does this sort of imply that the margin profile in data sharing switching products at this scale is sort of dilutive to your NI gross margins?
Yeah, I think this is largely tied to what we said at the CMD. you know, we'd see some gross margin headwinds as we ramp products in this space, and this is what we're seeing. You know, what I'm focused on is it's, you know, the business is fundamentally accretive to gross profit and ultimately to our operating margins, and then as we talked about earlier in answering one of the questions, making sure we're streamlining the company and driving efficiency so that we unlock operating leverage, and that's our focus. I mean, obviously we've got to share that, but But when I think about where Marco and I are focused, we're very focused on that side right now. And I think you'll see the margin as we mature in this space continue to improve.
Thanks, Felix. Ladies and gentlemen, that concludes today's call. I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the risk factor section of our annual report on Form 20F, which is available on our Investor Relations website. Thank you for joining us today.
Operator
This concludes today's call. Thank you, everyone, for joining. You may now disconnect.
