Earnings Call Transcript - NOK Q1 2026

David Mulholland, Head of Investor Relations

Good morning, ladies and gentlemen. Welcome to Nokia's First Quarter 2026 Results Call. I'm David Mulholland, Head of Nokia Investor Relations. Today with me is Justin Hotard, our President and CEO; along with Marco Wiren, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Within today's presentation, references to growth rates will mostly be on a constant currency and portfolio basis and other financial items will be relating to our comparable reporting. Please note that our Q1 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 our key messages for the quarter. Marco will then go through the financial performance, and we'll then move to Q&A. With that, let me hand over to Justin.

Justin Hotard, President and CEO

Thank you, David, and good morning, everyone. Our first quarter gave us a solid start to 2026. Net sales grew 4% to EUR 4.5 billion with an operating margin of 6.2%, and we delivered a free cash flow of EUR 629 million in the quarter. Gross profit was EUR 2 billion and gross margin expanded 320 basis points, supported in part by the absence of a one-time charge in mobile infrastructure in the prior year. It also benefited from strong performance in Optical Networks as we began to see the synergy benefits from the Infinera acquisition. Operating profit was EUR 281 million, with operating margin expanding 200 basis points. We saw strong momentum with AI and cloud customers. Net sales grew 49%, and we received EUR 1 billion in new orders, particularly driven by Optical Networks. At the group level, book-to-bill was above 1. And in Network Infrastructure, it was well above 1. I'm proud of Team Nokia's execution in Q1. The focus now is on delivering through the year and maximizing the growth opportunity in front of us. At our Capital Markets Day last November, we outlined our view of the AI super cycle and the market opportunity for Nokia. Since then, demand has accelerated. At the time, expectations were for the largest hyperscalers to spend around $540 billion in CapEx in 2026. Now, those expectations have increased to over $700 billion. This reflects the pace at which our customers are scaling infrastructure for AI. Today, AI-driven traffic is estimated at around 20% of total network traffic, which is roughly 80 exabytes per month and is still primarily human to machine. As we move deeper into agentic AI adoption and ultimately physical AI adoption, machine-to-machine traffic will become the primary driver of traffic, and that will lead to a step change in network traffic. We already see this demand in AI factories, both in data center interconnect and inside the data center in routing and switching. Increasingly, this is also driving demand in transport networks across metro and long haul, and we believe this is a structural shift in the market, which will sustain for multiple years. We now expect our AI and cloud addressable market to grow at a 27% CAGR between 2025 and 2028, up from the 16% we shared in November. This implies the addressable market for network infrastructure growing at a 14% CAGR compared to 9% that we shared in November. This is already benefiting Nokia in orders and in revenue. In March, we introduced several new products at OFC. These launches reflect our focus on accelerating innovation following the Infinera acquisition. The industry is scaling from hundreds to thousands of fibers between data centers. To address this demand, we introduced our next-generation hyperscale multi-rail solution, which will begin shipping later this year. It scales fiber capacity without expanding physical infrastructure, delivers an 8x increase in density and is 25% more dense than competing products announced recently. In addition, we also shared that we're evolving how we bring optical solutions to market. Our roadmap moves to a building block architecture with four optical engines that are embedded in multiple form factors compared to the two engines per generation previously. The architecture allows us to bring 13 application-optimized solutions to market. For customers, this means simplified deployment and a reduced total cost of ownership of up to 70%. These products will begin sampling in the first half of 2027 and will ship in volume in the second half. In Q1, we also saw strong growth in our IP networks pipeline as we build deeper engagements with our AI and cloud customers on switching and routing. We were awarded new design wins and continue to build a strong pipeline of further opportunities. We expect this to translate into new orders over the coming quarters. We've also increased our investment in optical networks and our new indium phosphide manufacturing facility in San Jose, California is on track to begin ramping production later this year. As a result, we are increasing our growth assumptions for network infrastructure in 2026. We now expect growth between 12% to 14%, up from the 6% to 8% we communicated in January. For Optical and IP networks combined, we expect growth of 18% to 20%, up from 10% to 12%. Turning now to Mobile Infrastructure. This new segment began operating in January, and the team is focused on aligning our roadmap to customer needs, streamlining the integrated business to improve productivity and delivering on the KPIs we outlined at our Capital Markets Day. Core software had another strong quarter, growing 5% and gaining market share. In the quarter, we delivered six competitive swaps. Our customers are modernizing their platforms with cloud-native solutions, adopting new security features and driving end-to-end automation with a focus on reducing operating expenses. Radio networks also delivered on our expectations. We signed several deals in the quarter, including with Virgin Media O2. At Mobile World Congress, we introduced a new generation of radios that are AI RAN ready. Our Doksuri remote radio heads deliver a 30% improvement in power efficiency and up to a 25% reduction in weight. In addition, we continue to make good progress on AI RAN in partnership with NVIDIA, and we are on track to begin field trials by the end of the year. Technology Standards continue to perform well across its markets. The business continues to deliver stability, and we expect largely flat net sales for the full year with improved profit generation year-over-year. With that, I'll hand over to Marco.

Marco Wiren, CFO

Thank you, Justin, and hello from my side as well. As Justin mentioned, we had a solid start to the year with EUR 4.5 billion in sales, growing 4% with growth in both operating segments. Gross profit was just over EUR 2 billion with a gross margin of 45.5%, a 320 basis points improvement year-on-year. Operating profit was EUR 281 million, with an operating margin of 6.2%, and this is up 200 basis points compared to the previous year. Free cash flow was EUR 629 million, and the quarter ended with a net cash of EUR 3.8 billion. Network Infrastructure sales grew 6% in quarter 1. Optical Networks had another strong quarter with 20% net sales growth, and this is mainly driven by AI and cloud customers. We also grew in telecom as operators invest to meet increasing demands on transport networks. IP Network sales grew 3% with growth in AI and cloud, offset by softness in other customer segments during the quarter. We expect growth in IP Networks to start to accelerate in quarter 2 as we ramp shipments tied to new design wins with AI and cloud customers. Fixed Networks declined by 13%, reflecting our portfolio strategy to focus on higher-margin products. Sales of our optical line terminal products were largely stable in the quarter. And looking ahead, we expect the sales trend to improve as the year progresses. We see a supportive demand environment, especially in the U.S. with fiber deployments remaining a key investment focus for Tier 1 operators. Gross margin in Network Infrastructure was 43.4%, increasing 150 basis points. The increase was driven by a higher gross margin in Optical Networks, benefiting mainly from Infinera integration synergies and scale. We continue to expect some gross margin headwinds through the year as a result of product mix. Operating margin was 6.7%, 30 basis points below the previous year as we had a full quarter of Infinera expenses compared to one month last year. For the full year, we do expect to slightly increase the Network Infrastructure operating margin. However, our focus this year is on investing to capture the long-term growth opportunity in the market. In Mobile Infrastructure, net sales grew by 3%. Core software sales grew 5%, while Radio Networks sales were flat. Technology Standards sales grew by 10% as a result of signing several deals in consumer electronics and multimedia, which contributed catch-up sales in the quarter. Gross margin increased by 430 basis points to 48.5%, in line with our long-term target for mobile infrastructure gross margins. The increase was mainly related to a EUR 120 million contract settlement, which negatively impacted the previous year. We expect Mobile Infrastructure gross margins in the second and third quarters to be somewhat weaker and then much stronger in quarter 4. And this is consistent with the typical seasonality in the business. Operating margin was 8.9% in the quarter, an increase of 380 basis points, reflecting the settlement impact and lower operating expenses supported by the ongoing cost-saving program. If we then turn to look at our sales growth by customer segment, AI and Cloud grew 49%, mainly driven by Optical Networks. Mission-critical Enterprise and Defense grew 19% and Technology licensing grew 10%. These growing markets offset a 2% decline in telecom to deliver 4% growth for the group. The decline among telecom customers was partly related to some of the portfolio decisions we are taking in Fixed Networks. Overall, we continue to see the telecom market as relatively flat. The quarter 1 was a strong quarter for free cash flow generation, which amounted to EUR 629 million. We saw the typical working capital unwind in the first quarter related to the receivables buildup at the end of '25 from a strong quarter 4 sales seasonality. For your models, remember that quarter 2 is typically a seasonally low period for cash as we pay employee cash incentives in that quarter. Finally, to our 2026 guidance assumptions. Our group level financial outlook remains unchanged, and we are currently tracking somewhat above the midpoint of the range for comparable operating profit, which is between EUR 2 billion and EUR 2.5 billion. Justin has already mentioned the two key assumptions for the full year that have changed. We now target to grow faster in Network Infrastructure this year with 12% to 14% growth, up from the previous assumption of 6% to 8%. And specifically in Optical and IP Networks, we now target 18% to 20% growth, up from the previous 10% to 12% growth. Then regarding quarter 2, we currently assume a 5% to 9% sequential increase in net sales. For operating profit, we expect quarter 2 to account for between 12% and 16% of the full year based on the comment I already made that we are tracking somewhat above the midpoint of the full year range. This would equate to H1 being between 24% and 28% of the full year operating profit, consistent with 2025. And this is mainly due to the growth-related investments we are making to support the long-term opportunities in the business. And with that, let me hand back to David for Q&A.

David Mulholland, Head of Investor Relations

Thank you, Justin and Marco. 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. Sherry, could you please give the instructions?

Operator, Operator

Yes, sir. Thank you. We will now begin the question and answer session. Operator Instructions. I will now hand it back to you, Mr. David Mulholland.

David Mulholland, Head of Investor Relations

Thanks, Sherry. We'll take our first question today from Fredrik Lithell from Handelsbanken.

Fredrik Lithell, Analyst (Handelsbanken)

Congrats, a great report. I would like to step into the world of Optical Networks and ask you: your raised assumption for the year — is that based on that you see more positively on getting better traction on production capacity throughout the year, so earlier than you anticipated before? Or is there something else in there that gives you the opportunity to raise that guidance?

Justin Hotard, President and CEO

Yes. Thanks, Fredrik. So I think two things I would touch on. I think one is a little bit more confidence on supply. And obviously, the fab is one component. There are also other components of the optical subsystems, the DSPs, obviously, that's in pluggables. As you think about our larger systems, there are multiple different elements to that. So it's a bit more supply confidence on optical from — obviously, as we said, demand is strong — demand continues to be strong on optical. And then it's also related to some of the traction we're starting to see in IP networking. And as we've talked about in the past, the IP networking business has been a little bit lumpy as we drive the growth, but we're starting to see more visibility for the year, and that's a part of what's driving the growth.

David Mulholland, Head of Investor Relations

Did you have a follow-up, Fredrik?

Fredrik Lithell, Analyst (Handelsbanken)

I'm fine with that.

David Mulholland, Head of Investor Relations

Thanks Fredrik. We'll take our next question from Janardan Menon from Jefferies. Janardan, please go ahead.

Janardan Menon, Analyst (Jefferies)

Just wanted to dive into the design wins and the EUR 1 billion that you've reported saying most of that or the bigger portion of that is from Optical. Are these still on the 800 gig side? You had put out a very impressive portfolio of products at the 1.6T, 2.4T, 3.2T at OFC, which you said would be starting to come through by late 2027. So are you already seeing some order intake on those? Or is it too early for those kind of more leading-edge or next-generation products to be — are we seeing orders right now? And I have a small follow-up.

Justin Hotard, President and CEO

Yes. First of all, thanks, Janardan. If you look at the demand that we're fulfilling for this year, I really see that momentum on the back of our 800-gig pluggable and then the associated line systems and the platforms that we have available and shipping today. A key thing that I maybe didn't touch on in my comments, I'll just emphasize, is that the roadmap we launched at OFC, I touched on the fact that it's largely oriented towards 2027. But a key note there is that roadmap was designed with a real focus on AI and cloud customers and designed in collaboration with some of those customers. So we talk a lot about that customer collaboration. I talked about it at CMD a little bit. We talk about it quite a bit internally, and that's a good example. As I would give you macro broad brush orders, I think what we see in orders generally is some elongation in orders in terms of a desire for a longer-term commitment on orders. And that's, of course, something we're seeing in terms of our demand back into the supply chain, providing longer-term commitments. And I think that's very normal with the kind of demand expansion we're seeing and the lead times. I think if you look at other players in our ecosystem in this space, they're all saying similar things. So I would say that, that's very consistent for us as well.

Janardan Menon, Analyst (Jefferies)

Understood. And I know you don't want to talk about growth in Networks and Optical separately, but it's been quite a big increase in your guidance from 10%–12% to 18%–20%. Is most of that from Optical? Or are you going to see a meaningful acceleration in your IP side from Q2 onwards, which could, say, take you towards double-digit growth rates there by the end of the year?

Justin Hotard, President and CEO

I would say that the optimism we have on the 18% to 20% is across both sides of the business right now.

David Mulholland, Head of Investor Relations

We'll take our next question from Artem Beletski from SEB. Artem, please go ahead.

Artem Beletski, Analyst (SEB)

I would like to ask on AI and cloud-related orders. So I think book-to-bill was around 3 in the quarter. And when do you actually expect some catch-up to be seen in terms of deliveries? And could you maybe talk still about some potential delivery constraints that you have in this area?

Justin Hotard, President and CEO

I think, Artem, first of all, I would say right now I'm focused on maximizing the opportunity that we see. I don't see the book-to-bill as something we need to catch up to. Our focus right now is on just maximizing the demand. As I said as well, we are starting to see some elongation of the order cycle, which is normal in these environments. In terms of constraints, generally, there's a fair amount of constraint in the semiconductor ecosystem in general. We don't talk about it in detail, but if you think about the kinds of lead times you hear across semiconductor manufacturers, the leading players, that gives you a pretty good indication of what lead times are. In other areas, at the scale that we're building indium phosphide as an industry, that's driving demand back into the supply chain and we need to build capacity for that. We're working on that as well. As you think about investment in optical, think about it in a few ways: investing and scaling capability and capacity. We're obviously bringing on the second fab, but it's scaling production capability into the supply chain. And then, of course, continuing to invest in the product portfolio to make sure we're maximizing the coverage of the portfolio against the market demand that we see.

David Mulholland, Head of Investor Relations

Thanks Artem. Did you have a quick follow-up?

Artem Beletski, Analyst (SEB)

Yes, I had actually. So just relating to fixed networks. You do highlight some headwind coming from consumer premise fiber business that is not seen as strategic. Is it something that should be prevailing throughout this year or how we should think about it?

Justin Hotard, President and CEO

I think it's something that we're going to continue to be disciplined on throughout the year. There are probably two things to consider here. One is the macro market on fiber, particularly what's happening in the U.S. We talked about some of this last year with the CapEx builds of the Tier 1 and Tier 2 operators, which gave us some tailwind. We feel good about the underlying business, but we want to make sure that we're focused on the right type of business for us long term. So we expect we'll continue to have some headwind on the CPE side as we become more disciplined in that space and focus on the areas where it's valued. We also think this is a business that has good long-term prospects in data center. At OFC, we launched an out-of-band management solution oriented towards data center. So we really like this business and we recognize it was a bit of a tough quarter. It's a situation where we're going through an intentional transition to make sure the business has a long-term sustainable growth profile, not just in top line, but more importantly in gross margin and operating profit.

David Mulholland, Head of Investor Relations

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

Simon Leopold, Analyst (Raymond James)

Thank you, David. The first thing I wanted to touch on was, in the past, you've floated this idea of growing the switching business by on the order of EUR 1 billion into hyperscale opportunities. I'm wondering with the commentary today and the wins you've had, could you update us on the current opportunities in the sales funnel and longer-term prospects for this business unit?

Justin Hotard, President and CEO

I'm not sure there's much more we'll say than what we described, but maybe to break it down a little bit: good design wins in Q1. Those don't show up meaningfully in orders; they're in pipeline but not in orders in Q1. So we expect to see some of that start to flow in Q2. These businesses are more design-win driven, meaning it's not a procurement event where you win a single procurement and move to the next. It's more about getting designed into a specific use case and application. That means the sales cycle is a little bit longer, but I'm encouraged by the progress we're making here, and we'll continue to update you as we see the longer-term forecast. I'm pleased with the work the team is doing and the progress we're making.

Simon Leopold, Analyst (Raymond James)

As a quick follow-up: it does seem the press release cadence in the mobility business has stepped up a bit. You didn't talk much about it today, but I want to get a better feeling. You mentioned the field trial for the AI RAN. Is there any movement or change in your view on how this particular business unit in mobility RAN might be trending, particularly relative to how you talked about it last quarter?

Justin Hotard, President and CEO

A couple of things. Overall, the telecom market is flat. Strategically, this is a market where we need to find new sources of value, and those can come either from enabling new services for telcos to monetize or businesses that are less CapEx intensive. We fundamentally believe the future is more of an evolution and is software-driven. What I'm very pleased about is that the AI RAN trials and the engagement around a model that will be fundamentally different for the baseband are progressing. We'll start to detach software innovation—meaning not just features, but actual performance enhancements from the underlying hardware—just like model performance improves in AI with GPUs over time. We see the same trend coming in this part of the business. I'm really pleased we're seeing strong interest from the industry. As I said at CMD, our focus is not on making the business necessarily a growth business because the underlying market is not growing, but to make it much more profitable and deliver an attractive return on invested capital. I'm very pleased with the start the team has made in MI. There's more work to do and a big milestone later this year with NVIDIA.

David Mulholland, Head of Investor Relations

Thanks, Simon. We'll take our next question from Rob Sanders at Deutsche Bank. Rob, please go ahead.

Robert Sanders, Analyst (Deutsche Bank)

Maybe just a question around profitability in optical. I think originally with the Infinera deal, you were looking at double-digit operating margin. But clearly, you're stepping up your investment. So I was just wondering if you're still on track to hit that target maybe by next year? The second question would just be around hiring and OpEx. Given the opportunity is clearly growing, what is your view around OpEx growth this year?

Justin Hotard, President and CEO

Do you want to take those?

Marco Wiren, CFO

When it comes to Optical, when we announced the Infinera deal we said we aim for double-digit operating margins, and this is something we still believe in. We've seen very good synergy work that the teams have been doing, and we are on track or actually ahead of our targets when it comes to synergy capture. We're very pleased with that. If you look at the combination of these two companies, how well they actually complement each other has been extremely successful among our customers as well. We have had very good design wins and were fast to decide on the roadmap. This is one reason we've seen these good wins on the Optical side. Regarding OpEx, we've said we will invest in capturing these opportunities on the Optical side. As Justin mentioned earlier, supply is constrained. So we are investing in securing that we get the supply that is needed. We focus on that. Otherwise, we don't guide any specific OpEx numbers.

David Mulholland, Head of Investor Relations

Thanks Rob. We'll take our next question from Ulrich Rathe from Bernstein. Ulrich, please go ahead.

Ulrich Rathe, Analyst (Bernstein)

I have two questions. First, you're maintaining the group EBIT outlook with this higher growth in Optical and IP and you're explaining that you want to secure growth with higher investments. Could you talk a little bit more about the mix of these costs? Is this more R&D? Is it more sales and marketing? Is it more into production? More color on that cost increase would be helpful. That would be my first one.

Justin Hotard, President and CEO

First, let me remind you we provide a range and give direction on the range, and we're not changing our guidance range. We're tracking somewhat above the midpoint. As we look at the business, we're making investments across R&D, sales and marketing, and production. There's CapEx with the fab work, but there's also investment in OpEx for scaling capability and manufacturing. In Optical, we're going through a massive step function in volume as an industry, which means we need to mature the supply chain and production capability. We're investing to ensure we can capture the fullness of the opportunity around us.

Marco Wiren, CFO

This is pretty much the same across the industry in Optical. The whole supply chain is doing the same to secure demand opportunities. But still, there's more demand than supply. That's why it's important we invest in capturing these opportunities.

David Mulholland, Head of Investor Relations

Did you have a follow-up, Ulrich?

Ulrich Rathe, Analyst (Bernstein)

On this guidance upgrade and the Optical growth, there still seems to be a relative dearth of customer announcements with hyperscalers. Could you talk about the reasons? You talked in the past about preferring to focus on the business, not announcements, but is there possibly a hesitation on the side of the hyperscalers to talk about Nokia given Nokia is not a U.S. company? Or are there other specific reasons why you wouldn't have more meaningful announcements that tell us what you're doing with which hyperscaler?

Justin Hotard, President and CEO

You'd have to ask customers about their disclosure practices. From my perspective, that's not my priority. My priority is making sure we're partnering with them effectively, delivering what they need, and helping them execute on their strategies. That's where I spend my time. We also don't have the same concentration dynamic as some U.S. players because our business is more diversified, which might be another factor. There's no indication I see of a geopolitical dynamic affecting announcements.

David Mulholland, Head of Investor Relations

Thanks Ulrich. We'll take our next question from Richard Kramer from Arete.

Richard Kramer, Analyst (Arete)

Justin, you mentioned the elongation of the order book. Can you tell us how much of that EUR 1 billion of new contract orders is firm, i.e., that you have purchase orders against it versus long-term frame contracts, just to understand the timing of realizing that additional incremental EUR 1 billion of orders?

Justin Hotard, President and CEO

This is a great question. Across the business, including with our telco customers, we have multiyear frame agreements. Sometimes we announce some of those. But the only thing you see in orders is firm purchase orders with delivery dates. We haven't provided dimensionalization above a certain lead time, but we are seeing some elongation. I see that as a net positive because it's tied to underlying demand for the products and it helps with predictability and capacity planning.

David Mulholland, Head of Investor Relations

Did you have a quick follow-up, Richard?

Richard Kramer, Analyst (Arete)

For Marco: given the working capital buildup, the employee incentives, the EUR 750 million to EUR 850 million of pending CapEx to your EUR 900 million to EUR 1 billion expectation, restructuring and so on, will year-end cash be materially lower than what we see now? It feels like you have a lot of cash drains on the business in the next two to three quarters.

Marco Wiren, CFO

Yes. We had very good cash generation in quarter 1 and quarter 2 is lower, but we generate cash continuously year-by-year and we have a very good cash position to have the freedom to make decisions. Our capital allocation principles prioritize R&D first, then other investments including inorganic that support growth, then dividend. If we deem to have excess capital, we can consider share buybacks. We are confident about our cash position.

David Mulholland, Head of Investor Relations

Thanks Richard. We'll take our next question from Felix Henriksson from Nordea.

Felix Henriksson, Analyst (Nordea)

Congrats on a strong order quarter. Given the unprecedented demand in AI and cloud, and also the supply-constrained market environment across the sector, is pricing something that's contributing to your guidance upgrade in Optical and IP? Are you starting to see support from raising prices for that?

Justin Hotard, President and CEO

Maybe I'll comment and Marco can add. In general, in Optical you have a cost curve coming down enabling scaling, so the growth is much more unit volume driven than price driven. We acknowledge some cases where pricing is going up—memory has been talked about as a structural pivot and that's a place where we have some exposure. We're working with customers on that; sometimes we pass on costs, in other cases we redesign products. But overall, the growth is mainly volume-driven, not price-driven.

Marco Wiren, CFO

Building on that, our new launches introduced at OFC focus on improving the power of the bid for our customers, which is one of their main KPIs, helping them to improve their cost base.

David Mulholland, Head of Investor Relations

Did you have a quick follow-up, Felix?

Felix Henriksson, Analyst (Nordea)

Just a quick one. Can you comment on how long the lead times between getting the order to actual revenues in Optical are at the moment? Trying to get a sense of whether the EUR 1 billion incremental AI and cloud orders for Q1 will already support 2026 or more so 2027?

Justin Hotard, President and CEO

We haven't given a specific number, but dimensioning for the broader demand in Optical is around 12 to 18 months. There are exceptions where some things might be sooner depending on the specific product, but that's a good way to think about the broader lead times we're seeing today.

David Mulholland, Head of Investor Relations

Thanks, Felix. We'll take our next question from Sandeep Deshpande from JPMorgan. Sandeep, please go ahead. Sandeep, we can't hear you.

Operator, Operator

I just find this; perhaps your line is on mute.

Sandeep Deshpande, Analyst (JPMorgan)

My first question is regarding the switching business of Nokia. On the Optical side, you probably have all the hyperscalers as customers at this point. You announced in the past few quarters wins on switches at multiple hyperscalers. Would you suggest at this point that you have a fairly broad exposure in terms of future design win activity or future shipments at all the hyperscalers? Or is it still very limited to one or two hyperscalers in terms of your switching business?

Justin Hotard, President and CEO

I won't provide that level of dimensioning, but as you look at the AI and cloud customer base, different customers pursue different strategies. We get traction where our portfolio fits their strategy, which is the best way to answer your question.

David Mulholland, Head of Investor Relations

Did you have a quick follow-up, Sandeep?

Sandeep Deshpande, Analyst (JPMorgan)

Is it broader today than it was, say, a year ago, in terms of the customer base?

Justin Hotard, President and CEO

Yes, I think it's broader based on what we see today than it was a year ago. I look more at the design wins in the footprint rather than a simple count of customers.

Sandeep Deshpande, Analyst (JPMorgan)

A quick follow-up on the financials. Historically, Nokia had challenges with integration after M&A. Clearly, the Infinera integration is helping top-line growth. Has the company got a structured process in place such that the Infinera integration will not have issues in the mid- to long-term? And secondly, given the new fab ramping up later this year, are there any risks associated with that ramp given typical semiconductor fab ramp-up issues?

Marco Wiren, CFO

If you look at the integration, we're tracking extremely well compared to our own targets and what we guided. We're actually doing it better than we expected. The team is focused on securing the integration and speed is important. This is definitely going well and we're extremely happy with the progress.

Justin Hotard, President and CEO

Two quick additions: one, even if you took the growth out, I think you'd see solid execution on the integration; the team has done very well. Cultural integration is a key driver of outcome, and at OFC it was clear the team had become one—Team Nokia. That's hugely important. Second, one acquisition does not make a trend. We have more work to do to show consistent success. Under our Chief Corporate Development Officer, we're focused on finding the right businesses for our portfolio, being smart with capital allocation, and executing integrations well. Infinera has been a good one, but we need to capture learnings and not forget past lessons.

Marco Wiren, CFO

On manufacturing, indium phosphide is quite different compared to silicon manufacturing. It requires much lower CapEx and it's faster. Our team is working well and applying learnings from Fab 1 to Fab 2. We're transferring those learnings into Fab 2 and making good progress.

David Mulholland, Head of Investor Relations

Thanks Sandeep. We'll take our next question from Jakob Bluestone from BNP Paribas. Jakob, please go ahead.

Jakob Bluestone, Analyst (BNP Paribas)

I had a question on the margin progression as your IP revenues scale. You've increased revenue guidance for components of Network Infrastructure, but it's a more modest change at the group level. For IP in particular, as that business starts to accelerate, is it similar to what we've seen in Optical where initially it's perhaps not as accretive to margins, and then as the business gains scale it becomes more margin accretive? Just help us understand the drivers there.

Justin Hotard, President and CEO

I think like any business there's a scaling effect. The big focus right now is on capturing the opportunity and making sure it's accretive to profit for the company. That's the priority.

Marco Wiren, CFO

When you're starting with new products, it takes time to get profitability up, and that's why we mentioned some impact in Network Infrastructure for the first half of this year. But these are definitely accretive to operating profit and we see good opportunities.

David Mulholland, Head of Investor Relations

Thanks Jakob. Go ahead Jakob with your follow-up.

Jakob Bluestone, Analyst (BNP Paribas)

Just on the San Jose fab, can you help us understand whether that will cover your internal needs from the outset or not?

Justin Hotard, President and CEO

San Jose gives us support and certainly supports the growth we see and expansion capacity for us beyond the current portfolio and volumes. That doesn't mean we won't look at ways to further accelerate capacity because long-term we think this is a structural market and we're uniquely positioned with indium phosphide manufacturing capability at scale. San Jose gives us runway for the near term.

David Mulholland, Head of Investor Relations

Thanks, Jakob. We'll take our next question from Sébastien Sztabowicz from Kepler. Sébastien, please go ahead.

Sébastien Sztabowicz, Analyst (Kepler)

The main opportunity for Nokia remains getting across with optical line systems and your pluggable optics. I'm curious, have you seen any specific opportunity building around co-packaged optics or near-package optics because the market seems bullish and demand is building these days?

Justin Hotard, President and CEO

On that side, we've not made any announcements. We demonstrated some technology development at OFC, but no announcements at this time.

Sébastien Sztabowicz, Analyst (Kepler)

A follow-up on Infinera synergies. Previously you talked about generating EUR 200 million synergies in 2026 instead of 2027. Are you still on track with that? And given the accelerated investment, is it fair to assume still a nice improvement of margin in Optical Networks this year?

Marco Wiren, CFO

Yes, the synergy work is tracking very well and a little ahead of schedule. We originally said it would take three years from closing and are tracking somewhat better. We see the impact of synergies already in our quarterly reports; in Q1 we mentioned Infinera acquisition synergies are benefiting Optical, and we will see those throughout the year as well.

David Mulholland, Head of Investor Relations

Thanks Sébastien. We'll take our next question from Oliver Wong from Bank of America. Oliver, please go ahead.

Oliver Wong, Analyst (Bank of America)

I had a question on the Q1 AI orders and your backlog. You mentioned lead times in Optical are 12 to 18 months currently, but you also significantly increased growth assumptions for this year for Optical and IP. Are these orders, even though lead times are up to 18 months, much more near-term loaded? And regarding IP growth expected this year, I presume most of that is from the switch business, but you mentioned big design wins translating into orders starting next quarter. Are a lot of these design wins expected to translate into revenues this year?

Justin Hotard, President and CEO

Some of the design wins will start ramping this year. Optical is generally 12 to 18 months lead time. You've heard others talk about being sold out over multiple years; that's a pretty good indication of Optical. IP is a little shorter, but parts of that supply chain have constraints. We work closely with customers on forecasting and planning, and the only thing we register as orders are actual purchase orders.

David Mulholland, Head of Investor Relations

Thanks, Oliver. We'll take our last question this morning from Emil Immonen from DNB Carnegie. Emil, please go ahead.

Emil Immonen, Analyst (DNB Carnegie)

Can you hear me now?

David Mulholland, Head of Investor Relations

Yes, that's a bit better.

Emil Immonen, Analyst (DNB Carnegie)

So the growth you're saying — the 27% market growth that you're now seeing instead of 16% — could you comment on whether that is volume-driven or price-driven?

Justin Hotard, President and CEO

It's volume driven.

Emil Immonen, Analyst (DNB Carnegie)

In that case, given Fab 2 coming online at the end of this year, does that mean that you're building a third fab maybe? Previously you said your current capacity was planned to the earlier growth you were seeing in demand.

Justin Hotard, President and CEO

To clarify: when we shared Fab 2 in November, we said Fab 2 would be sufficient to meet the demands of the guidance we provided, and there was additional capacity on top. We're not making announcements about additional manufacturing capacity at this time. Think of it this way: in prior guidance there was excess capacity and ability to build. We're investing in ramping Fab 2 at scale. It's not just the fab; it's all components of the supply chain because that fab produces a critical optical component, but there's also a DSP and other components in pluggables and subsystems. All of that factors into this.

David Mulholland, Head of Investor Relations

And thank you, ladies and gentlemen, for joining us today. This concludes today's call. I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may, therefore, differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Thank you all.

Operator, Operator

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