Earnings Call Transcript - NOK Q3 2025

David Mulholland, Head of Nokia Investor Relations

Good morning, everyone. Welcome to Nokia's Third Quarter 2025 Results Call. I'm David Mulholland, Head of Nokia Investor Relations. Joining me today are Justin Hotard, our President and CEO, and Marco Wiren, our CFO. Before we begin, I want to share a brief disclaimer. We will be making forward-looking statements about our future business and financial performance, which involve risks and uncertainties. As a result, actual outcomes may differ significantly from our current expectations. Various external and internal factors could contribute to these differences. We have outlined such risks in the Risk Factors section of our annual report on Form 20-F, available on our Investor Relations website. During today's presentation, growth rates will generally be discussed on a constant currency and portfolio basis, while other financial figures will be based on our comparable reporting. Please note that our Q3 report and the related presentation are accessible on our website and include both reported and comparable financial results along with a reconciliation. The agenda for today includes Justin discussing our key messages for the quarter, followed by Marco covering our financial performance. After that, we will open the floor to questions. Now, I will turn it over to Justin.

Justin Hotard, President and CEO

Thank you, David. Overall, we delivered a solid performance in the third quarter, in line with our expectations. We grew net sales by 9% with all business groups growing. Order intake was again strong, particularly in optical networks and IP networks driven by AI and cloud customers. Our profitability in the quarter was as expected. Network Infrastructure gross margin improved sequentially, that was impacted slightly by product mix. Cloud and Network Services had a strong gross margin in the quarter. Product mix impacted the gross margin of mobile networks with a lower mix of software revenue. Our operating margin declined year-on-year due to a one-time benefit seen in the prior year from a loss provision reversal. Without which our operating margin would have been flat. The broader demand environment remains healthy as we move into the fourth quarter. We have seen some improvements in CSP expectations along with the strong order intake I mentioned in AI and cloud. In fact, entering the fourth quarter, our backlog coverage is stronger than in recent years. We're also pleased with our progress on the Infinera acquisition. We are ahead of schedule with the integration timeline and with synergy expectations. The acquired business contributed strongly through both our net sales growth and order intake growth in Q3. So after a solid Q3 and continued strong order intake, we are well on track to achieve our full year outlook. We expect the fourth quarter with net sales growing sequentially and slightly above our historical seasonality of 22%. We are currently tracking towards the midpoint of our operating profit outlook range. Let me now share a few highlights across the business from the third quarter. For our network infrastructure business, the key highlight has been our progress in the AI and cloud customer segment. In Q3, this segment accounted for 6% of our group net sales. Breaking it down, it was 14% of our network infrastructure business and more specifically, 29% of optical networks. In Optical, as mentioned, our 800-gig ZR, ZR+ coherent pluggables became available in the quarter and shipped to our first hyperscale customer. Our pipeline in this space is growing as customer investments accelerate and data center architectures evolve. Q3 also saw us announce strategic partnerships with both Endscale and Super Micro. With Endscale, we are now a preferred partner for advanced networking technologies across our NI portfolio. Super Micro is adopting our SR Linux network operating system for their 800 gig Ethernet switches, providing expanded footprint for our network operating system. Finally, we secured two new design wins for our switching platform in the quarter with hyperscalers. The market is growing rapidly. And while I'm pleased with these initial signs of progress in IP networks, clearly, we still have a lot of work ahead of us. In our fixed network business, we launched our new 50 gig PON offering. With our unique solution built on our Chilean chipset, operators can easily evolve from GPON to XGS, 25 gig and 50 gig PON on the same fiber. Ready with encryption for the post-quantum era, Nokia solution also provides enterprises with the bandwidth, security and reliability they require. Customers like Frontier Communications in the United States are already using our unique PON technology to seamlessly introduce 25 gig PON. Now I want to turn to our mobile businesses, starting with Cloud and Network Services. The team has delivered strong network net sales growth and operating profit growth as it continues to focus on autonomous cloud-native architectures. In voice core, we became the market share leader in the first half of 2025 as reported by Dell'Oro. Approximately 70% of 5G stand-alone core network deployments outside China use a portion of Nokia's 5G core stack. And network penetration is still less than 30% for 5G stand-alone core. In Mobile Networks, we continue to see the market stabilize. We recently announced a deal with Vodafone 3 that will see us enter their new combined network in the U.K. as a major RAN supplier with approximately 7,000 sites. We are focused on improving the returns in the business over time, delivering for our customers and differentiating through innovation. In Nokia Technologies, we secured several new agreements in the quarter. The team continues to be disciplined on productivity and operating leverage. While we are now entering the heightened investment phase for 6G standardization, we continue to see stability in our annual operating profit. In Q3, we completed a strategic review of our venture fund investments. We have decided to scale down our passive venture fund investments. Over time, we will substantially reduce the capital deployed in these areas. As a result, our venture fund investments are now reported within financial income and expenses. Going forward, we will consider targeted direct minority investments in companies that help us to accelerate our strategy. An example is the investment we made in Endscale alongside the strategic partnership that I referred to earlier. Because of this change, we are making a technical change to our operating profit guidance, increasing it by EUR 0.1 billion, which is related to the negative impact the venture funds had on our operating profit in the first half. However, operationally, our guidance is unchanged. After a solid Q3 and with recent order trends, we are well on track to achieve our full year outlook for operating profit. As I mentioned before, we expect fourth quarter net sales to grow sequentially at slightly above our historical seasonality of 22%. And we are tracking towards the midpoint of our operating profit range of EUR 1.7 billion to EUR 2.2 billion. At our Capital Markets Day in New York on November 19, we will share our strategy to unlock the full potential of our portfolio and the steps we are taking to focus the company to deliver ongoing growth and operating leverage. The AI super cycle is accelerating demand for providers of advanced and trusted connectivity. Nokia is uniquely positioned to be a leader in this market. With that, let me hand it over to Marco to discuss our financial performance.

Marco Wiren, CFO

Thank you, Justin, and hello from my side as well. In the third quarter, we experienced a 9% increase in net sales, and we are happy to report growth across all our business groups. The gross margin for the group decreased by 150 basis points year-on-year, which was largely expected due to the product mix within network infrastructure and mobile networks. The operating margin was 9%, falling 220 basis points from the previous year, mainly due to a one-time effect from the reversal of loss allowance for trade receivables last year. Without this factor, the operating margin would have remained flat compared to the previous year. We generated EUR 429 million in free cash flow and finished the quarter with $3 billion in net cash. I want to update you on our cost savings program initiated this year, which we anticipate will yield around EUR 450 million in savings by 2025. Looking ahead, we will concentrate on achieving operational leverage through ongoing improvements in productivity, IT simplification, digital tools, and organizational efficiency, rather than relying on large restructuring initiatives. This approach signifies a cultural shift towards consistent cost discipline and efficiency to support our strategic objectives. Moving on to the business groups, starting with net infrastructure, which had another strong quarter with 11% growth. Optical Networks stood out with 19% sales growth and continues to see strong order trends with the book-to-bill ratio significantly above 1. IP Networks also experienced strong growth in orders this quarter, reflecting increased interest in AI and cloud, as Justin mentioned. IP Networks sales grew by 4%, and fixed networks increased by 8% during the quarter. The gross margin was affected by product mix, decreasing by 190 basis points, although it did improve from the level seen in the second quarter. The operating margin declined due to the lower gross margin alongside increased investments in R&D and the acquisition of Infinera. We saw a minor positive contribution to operating profit from Infinera this quarter, benefiting from initial synergies and business growth. Cloud and Network Services sales rose by 13% this quarter as demand for our cloud-based core platforms remains strong. The gross margin improved by 380 basis points thanks to better delivery costs and operational leverage from higher sales. The operating margin also went up by 250 basis points, though some of the gross margin strength was partially offset by higher R&D expenses. Mobile networks saw a 4% increase in net sales year-on-year, driven by growth from Vietnam and the Middle East and Africa. In the second quarter, we had indicated that we expected the third quarter gross margin to be lower than usual due to a reduced software contribution, and this was indeed the case, with a 370 basis point decline during the year. Despite a decrease in operating expenses, the reversal of a loss allowance from the previous year led to a drop in the operating margin. Without this, the decrease in operating margin would have been minimal, despite it being a quarter with a lower software contribution. Now turning to Nokia Technologies, net sales grew by 14% this quarter, with several new deals signed. Our annual net sales run rate remains around EUR 1.4 billion. Operating expenses in this quarter benefited from some timing adjustments and are expected to increase slightly in the fourth quarter. We still anticipate an operating profit of EUR 1.1 billion for the full year in Nokia Technologies. Now let’s examine net sales by region. In North America, we saw significant growth in network infrastructure and cloud and network services, while mobile networks experienced a slight decline. In APAC, sales in India increased in network infrastructure due to strong demand for fixed wireless, while mobile network sales saw some modest growth. Excluding Nokia Technologies, Europe remained stable in the third quarter. Now regarding our cash performance, we ended the quarter with a net cash position of EUR 3 billion. Free cash flow was a positive EUR 49 million, consistent with our profit generation and well-managed working capital. We continue to target a free cash flow conversion of 50% to 80% from comparable operating profit for the full year.

David Mulholland, Head of Nokia Investor Relations

Thank you, Justin and Marco. Before we turn to the Q&A session, you should have received an invitation to register for our Capital Markets Day, which as Justin mentioned, will be held in New York on the 19th of November. We hope as many of you as possible will be able to join us at the event. As usual, for the Q&A session, as a courtesy to those in the queue, can you please limit yourself to one question and a brief follow-up. Kelly, could you please give the instructions?

Operator, Operator

Yes. Let's go. I'll now hand back to David Mulholland.

David Mulholland, Head of Nokia Investor Relations

We will take our first question today from Artem Beletski from SEB.

Artem Beletski, Analyst

So my question would be relating to IP Networks and switching business on that front. So how do you see the progress on that front in general? And you have also said to target three quarters ago, when it comes to year 2028. So are you well tracking on it?

David Mulholland, Head of Nokia Investor Relations

One second, could you start your question again, please? We just got a tech difficulty on our side.

Artem Beletski, Analyst

Yes, no worries. Can you hear me now?

David Mulholland, Head of Nokia Investor Relations

Yes, we can hear you.

Artem Beletski, Analyst

Okay. Great. So I would like to ask a question relating to IP Networks and your initiatives regarding data center and switching business. So you mentioned that you have some new design wins during the quarter. So how you're tracking against your target for 2028? And also, should we anticipate some contribution to revenues looking at upcoming quarters?

Justin Hotard, President and CEO

Yes. So Artem, I think as I've said in a couple of forums, but maybe just to share here, I think when we talk about EUR 100 million incremental investment, the reality for me is that's a small portion of our overall capital. And so I don't think you'll see us focus on that metric going forward. What I will say about the business is, I was pleased with the wins. I'm pleased with the book-to-bill in IP networks overall. The reality, as we all know, is that we're still a fairly small player in this space, well behind some of the market leaders. So we're at the start of a journey. But the announcements we've made, I think are positive. The metrics are positive. It's much more work to be done longer term.

David Mulholland, Head of Nokia Investor Relations

Did you have a quick follow-up, Artem?

Artem Beletski, Analyst

Yes, absolutely. So maybe more general questions. So looking at your growth opportunities when it comes to AI and cloud. So it was sales in the quarter, increased compared to Q2. But in general, looking at the next couple of years, where do you see the biggest growth opportunities looking at different customer segments? So is it like hyperscalers, enterprise or super insight where you see the biggest opportunity for you?

Justin Hotard, President and CEO

Yes. I think, first of all, the biggest opportunity is clearly in the hyperscalers and the neo cloud. So that's driving most of the demand. Obviously, the partnership with Endscale is a good example of our focus in this area. We've made other announcements in the past. We also believe that sovereign clouds will present a significant opportunity for us over time. As we've talked about before, we're optimistic about the work that's being done in the EU as well as in other regions. So we think that these are all important growth segments for us. But clearly, the demand today is largely coming from the hyperscalers on some of the larger neo clouds.

David Mulholland, Head of Nokia Investor Relations

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

Simon Leopold, Analyst

Appreciate it. So nice to hear about the progress in the hyperscalers. I want to dig a little bit more deeply here in that more recently, we've heard about an application referred to as scale across for optics, which I think of as basically data center interconnect on steroids. Could you talk a little bit about what this means for Nokia in particular and how you see that as an opportunity?

Justin Hotard, President and CEO

Certainly, Simon. This concept has been around for some time, particularly in certain market segments regarding data center networks. It's not a novel technology. However, the surge in bandwidth demands, largely driven by AI data centers, is generating a fresh need for innovation in this area. Our assets are well-positioned to address this demand. While I cannot point to significant revenue from this just yet, it's still in the early stages. When considering our capabilities, especially in indium phosphide and our fabrication processes, we believe we have relevant technology. As bandwidth needs grow in networks, both in scale across and scale out, especially in top-of-rack networking and IP switching, we see substantial opportunities. I will elaborate on this during our upcoming CMD, but to illustrate the potential in optics, advancing through different units—like from long-haul networks to metro networks to data centers and then within the racks—presents incremental volume opportunities. Of course, we need to address performance and cost ratios, as the technology for long-haul networks is significantly pricier than what is required for a server housed in a rack. Thus, we must continue our innovation efforts in this domain, and we'll share more insights during our discussions.

David Mulholland, Head of Nokia Investor Relations

Did you have a follow-up, Simon?

Simon Leopold, Analyst

Sure. Yes, I presume we'll talk about the long-term strategy, of course, at the Capital Markets Day. But I'm wondering if you could provide us a few thoughts on how Nokia's plan is regarding 6G mobility investments. Have you started investing? Is that in the R&D today? Is it something that starts in 2026 or is it something further out in time? I'm just really focused on modeling for the moment because I expect we'll hear some more at the Capital Markets Day next month.

Justin Hotard, President and CEO

Yes, the work on technology standardization has already begun, and investment in this area is ongoing. As I mentioned, we are entering a period of investment in this space. We remain confident in the profit outlook for Nokia Technologies as part of this process, which should provide some guidance for modeling. Regarding Mobile Networks, we have publicly discussed our efforts on early 6G technology. While there's significant focus on the transition through the generations—3G, 4G, 5G, and now 6G—I believe what's more crucial is our advancements in cloud and network services, particularly our shift to a cloud-native core. The performance metrics, such as market share and revenue growth, reflect this strategy. As we look ahead, we will start to explore opportunities in Radio Access Networks (RAN), especially with the integration of AI. We anticipate the emergence of new radio generations with improved frequencies and spectral efficiency, but there is much work still to be done in enhancing radio capabilities and features. That’s why we announced the AI RAN Alliance, highlighting our commitment to innovation in Cloud RAN. These areas will demand our focus and investment as we work closely with customers. We will provide more details at the Capital Markets Day on our approach moving forward, but please know that we have initiated these efforts as part of our ongoing investment strategy.

David Mulholland, Head of Nokia Investor Relations

We'll take our next question from Alex Duval from Goldman Sachs.

Alexander Duval, Analyst

Yes. Thank you so much for the question. Firstly, just dovetailing off the last question, I'm very much looking forward to hearing more about the long-term tech strategy on wireless. Just in the short term, you talked about a measure of stabilization there. I wondered if you could give a bit more color as to the extent to which that's driven by the RAN market in your most important geographies versus progress you've made on your product? And then secondly, it was interesting to hear in your prepared remarks about how you will focus on cost control by ongoing steps like digitalization rather than large restructuring programs, wondered if at this point you could talk a bit more about what motivates that shift and the benefits this brings?

Justin Hotard, President and CEO

Let me start with the second part, Marco, do you want to talk about that?

Marco Wiren, CFO

Yes, absolutely. And what comes to cost savings just like I mentioned in my introduction as well. So thinking is that operational leverage is extremely important for us and continuous improvement is something that we want to get in our genes that every entity basically continuously in ways, how can we continuously improve and do things more efficiently. Of course, here comes quite naturally in the new technologies, utilizing AI and other digitalization opportunities that you can find, and that's why IT simplification is extremely important in this and securing that we can actually get the benefit out of those different installations of AI that we have and continuously work on the process simplification and find ways how we can make the processes more efficient continuously. And it's not a one-off action. It's something that you have to do continuously.

Justin Hotard, President and CEO

Yes. And then in terms of the market outlook, first of all, I think you're pretty clear from what we've been saying that if you think about the AI and cloud market growing rapidly, the CSP market broadly has been quite stable. So as we think about that, when I look at our results, I think stabilizing in MN in terms of our performance being predictable. There's always puts and takes. There's going to be ups and downs in the quarter and vary based on a given customer's volume in one quarter. So we'll see a little bit of that. But when you look at the longer-term trends, I think we're feeling better about a stabilizing environment. And then on Cloud and Network Services, as I touched on, we believe that we believe we're growing above market rates at this point.

David Mulholland, Head of Nokia Investor Relations

Thanks, Alex. We'll take our next question from Sami Sarkamies from Danske Bank.

Sami Sarkamies, Analyst

Could you please elaborate on the factors that drove the positive surprise in the third quarter as you had anticipated similar sales and margins as in Q2? And when we think about Q4, you also mentioned a strong order book, but do you have still uncertainties related to timing of deliveries as you chose not to narrow the guidance range down?

Marco Wiren, CFO

Yes. Thank you, Sami. And what comes to them, if you look at gross margin development in different businesses, you can see that we had a very good development in Cloud and Network Services. And here, as you understand, this business has been frequently so that you get a big part of the profits in quarter 4. Now this year, we have been working actively to try to actually balance that distribution of profits more equal between the different quarters. But at the same time, you see also that we have increased our gross margins, and there's a few reasons for this. One is, of course, that we've seen good traction on 5G stand-alone core implementations where we have been very successful in gaining market share. And then, of course, we've been working quite a long time in the CNS as well to clean up the portfolio. And this, of course, giving result as well. And the third point I would say as well is that also in our core business, CNS has been working heavily to take cost out and make things more efficiently by that, improving the margin levels.

David Mulholland, Head of Nokia Investor Relations

Do you have a follow-up, Sami?

Sami Sarkamies, Analyst

Maybe a detail question on the 6% exposure to AI and Cloud in the third quarter. I think you mentioned 5% hyperscaler exposure after Q2. These are different metrics, right?

Justin Hotard, President and CEO

These are comparable, Sami. So think of the 5% and 6% as Q3.

David Mulholland, Head of Nokia Investor Relations

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

Richard Kramer, Analyst

Justin, when we look at your competitors in the various NI divisions, many of them are point solutions in one or another of the fields of routing optics or fixed. In the current hyperscaler ecosystem, are these areas being kept separate? Or do you think that the end-to-end promise we heard about so much from both of the prior CEOs at Nokia is finally being realized at least within NI?

Justin Hotard, President and CEO

I believe there are a few important points to address, Richard. Firstly, fixed access operates as its own business, with technology and innovation emerging from several markets. The U.S. is our largest market, but there are other regions where we see opportunities for technological advancement, making this a distinct trend. I’ve mentioned the capabilities of the 50 gig PON, and our ability to incorporate new technologies into terminals is a significant differentiator, as customers appreciate the value it brings without requiring a full infrastructure overhaul. The essential message is that we are competing based on the quality of our technologies. In areas like IP switching and optical networking, our strengths lie in the technical merits of our offerings. We have competent customers across our portfolio, which includes AI and cloud solutions, along with those looking for top-tier technologies to support their strategies and provide value to their clients. Our focus must remain on activities that enhance their value. We see potential for synergy by understanding trends across these markets and introducing greater scale and innovation. Ultimately, our approach is to offer best-in-class products and technologies while leveraging the ecosystem to create stronger solutions together, without relying on any weaknesses in any one area.

Marco Wiren, CFO

And just in that sense that, of course, the compatibility is very important. So that's a benefit that we can get compared to competition, which only go with one product. And when we come with several products and they are best of breed and customers want to buy those, that those actually work well together.

David Mulholland, Head of Nokia Investor Relations

Did you have a follow-up, Richard?

Richard Kramer, Analyst

Yes. Quick one, quickly for Marco. We saw a reduction in your forecast restructuring cash outflows from EUR 450 million to EUR 350 million and an increase of EUR 50 million in gross cost savings. Is this Nokia finally transitioning from what's been a decade-long restructuring to maybe being able to focus more beyond '26 on just growth?

Marco Wiren, CFO

Yes. I would say that the important thing is that we want to avoid these large-scale restructuring programs going forward and more get this into our DNA as continuous improvement and customer focus and secure that we continuously find ways how we can take out cost in our fixed cost basis and our operations and utilize all the digitalization opportunities that could bring instead of doing these large-scale cost-cutting programs. So that's our focus going forward.

David Mulholland, Head of Nokia Investor Relations

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

Felix Henriksson, Analyst

Good to see Infinera turning positive on operating profit contribution. And I wanted to ask about that, in light of the progress that you made on integration, do you see the EUR 200 million in run rate operating profit synergies for 2027 as conservative? And are these savings something that you will have to reinvest in the growth in the optical business, kind of what you're doing in the IP side of things?

Justin Hotard, President and CEO

Yes, multiple questions in there. So let me sort of answer. First of all, we'll provide a full update at CMD on our view. But I would say, surely well on track on our commitments as we've talked about on the cost synergies, clearly, with the growth that we're seeing ahead of our expectations on top line synergies. And then I think in terms of investment, what I would say is we'll talk more about that in CMD, but we're going to be very disciplined in capital allocation. Obviously, you saw one dimension of that with our decision on venture funds this quarter. But this is a place where if we see the opportunity to accelerate or enhance returns, we'll make continued investments. But right now, I think, again, pleased to be on track on the cost synergies and thrilled to be running ahead of expectations on revenue.

David Mulholland, Head of Nokia Investor Relations

We'll take our next question from Rob Sanders from Deutsche Bank.

Robert Sanders, Analyst

I just had a question on mobile networks. There is some speculation that the EU will apply pressure on some member countries to accelerate their swap out of Chinese vendors. So I'm just interested in that and how you think about that given your recent public statements. And then, of course, I just want to talk a bit about OpEx, how you're thinking about OpEx into next year, given you clearly wanted to invest more in these growth areas.

Justin Hotard, President and CEO

Thank you, Rob. Firstly, we are certainly looking forward to potential regulations that could create the market opportunities you've mentioned. It's crucial from both a high-risk vendor perspective and a sovereignty viewpoint, especially in ensuring that major network providers in the West are European. We are hopeful that we can grow and capture a share of that market if it becomes accessible. Regarding operating expenses, my focus is primarily on operating leverage. I want us to drive efficiency as Marco noted, as this will help maximize our returns and allow us to invest in areas where we believe we can excel, such as additional R&D if market demand exists, and expanding factory capacity and optics when opportunities arise. It's worth mentioning that our fabrication facilities are much smaller than traditional silicon fabs, and the investment required is considerably lower. We will provide more details at our upcoming meeting. Overall, I want to channel our capital into areas that enhance returns, rather than dilute our performance, which is fundamental.

David Mulholland, Head of Nokia Investor Relations

We'll take our next question from Andrew Gardiner from Citi.

Andrew Gardiner, Analyst

Thank you, David. I just had 1 on gross profitability, please, both, I suppose, on the positive side and what you've seen in CNS, and then perhaps on the more negative side with mobile networks. We're seeing quite a lot of volatility quarter-to-quarter. CNS clearly driven nicely in 3Q by the mix towards 5G core. Is that mix sustainable? And so high 40s gross margin for CNS is what we should be anticipating? Yes, perhaps with some quarterly fluctuation, but perhaps not to the extent that we've been seeing, right? Can you sustain gross margins around that level? And then similarly, on the other side with mobile, 41% in the prior quarter, down to 35% in the current quarter. Yes, I understand again, software mix has changed, but quite dramatic moves. What do you think is sort of a more normalized level, given the revenue run rate that you're at in mobile? What's a more normalized level of gross margin for MN at this point?

Marco Wiren, CFO

Yes. Thank you. If I start with the mobile network side, there is variability, and that's why we usually see that mobile networks would be better to look on an annual basis of 4 quarters because you have always some product mix fluctuations. The level of software has a big impact on gross margin, and that you see also between quarter 2 and quarter 3, while we see this fluctuation between those quarters where you had more software in quarter 2 and less in quarter 3. And I would say that if you look on a longer-term or annual basis, then you can see the levels of mobile networks gross margins and get an understanding of where it is and how we are tracking compared to the previous year. And then when it comes to, I mentioned already a few points there that are what about the reasons for the improved gross margins. And we definitely believe that it is sustainable. This has been a multiyear journey to get the improvements here in up the portfolio, focus on cost out on the different products that we have. But also we see the market support here. It took for a while before the 5G stand-alone core started to get traction actually from our customer side on CSP side. Now we've seen in the past 18 months that it has been quite positive, and we have momentum there. Thanks to our cloud-based solution that we have, we have actually gained market share and been able to improve our market position.

David Mulholland, Head of Nokia Investor Relations

We'll take our next question from Daniel Djurberg from Handelsbanken.

Daniel Djurberg, Analyst

Congrats to strong numbers. I actually would like to continue on that question, I heard the same, more or less. On the mobile networks, the software upgrades on stand-alone seems not to be in tandem, at least with the CNS on the 5G core. So should we expect to have a little bit of an upgrade in the baseband software radio unit software or ahead of us on back stand-alone core now being led down?

Marco Wiren, CFO

I can begin, and Justin, feel free to add anything. Typically, in the new generation, you start by installing the hardware and radios. When you notice increased demand from customers, you then implement the core features that the new generation provides. This is similar in the case of 5G. Initially, the 4G core performed adequately for early 5G installations. However, as opportunities arise to slice the network, a 5G stand-alone core becomes necessary to capture those opportunities and deliver services to our customers.

Justin Hotard, President and CEO

I want to clarify a few points regarding the margin impact from Q2 to Q3 and the timing involved due to our software release process. We release an upgrade and then recognize the revenue from those upgrades as they are deployed by customers, which influences the timing between these two quarters. It's also important to note that the majority of our software revenue in mobile networks comes from legacy baseband software, while our Cloud and Network Services have transitioned to a cloud model. This shift involves more subscription-based pricing and recurring revenue for ongoing support and services, which differs significantly from the traditional model. We believe this subscription-based approach is the future direction for mobile networks, but currently, our CloudRamp business remains relatively small.

David Mulholland, Head of Nokia Investor Relations

Did you have a quick follow-up, Daniel?

Daniel Djurberg, Analyst

Yes, I have a question regarding your work in the second quarter. You mentioned efforts to unify corporate functions, simplify processes, and foster a culture of change to enhance operating leverage. There have been significant changes, particularly within your CTO office. My question is about the Nokia Bell Labs organization. Should we anticipate a greater focus on AI data centers rather than mobile networks and radio access networks in the future following the departure of an unnamed individual?

Justin Hotard, President and CEO

Yes. I believe a few key points are important here. Firstly, I previously mentioned the need for functional excellence, particularly regarding our corporate functions. It is essential to have a Chief Technology and AI officer who concentrates on critical technology aspects of our platforms, such as AI, security, and cloud. These are crucial topics we've addressed in today's call. This leader should not only be skilled in these areas but also have a solid understanding of our fixed network and mobile infrastructure businesses. If you examine Palabi's background, she has a history of working across companies like Juniper, HPE, and Intel, blending experience across both sectors. Additionally, we focused on corporate development, pulling together team members from the strategy organization and our business groups along with the finance department. To me, this highlights functional excellence by enhancing accountability and streamlining our functions. We also integrated the digital office or IT organization into finance, which aligns with Marco's remarks on enhancing performance, productivity, and leveraging digitization and AI to simplify our processes. IT plays a crucial role in achieving these efficiencies. Therefore, it felt like a logical alignment. Overall, we have two strong segments in our network infrastructure and mobile portfolios. Our CTO can oversee both and ensure we prioritize the right long-term investments in Nokia Bell Labs, whether in research or immediate innovations.

David Mulholland, Head of Nokia Investor Relations

We'll take our next question from Emil Immonen from DNB Carnegie.

Emil Immonen, Analyst

Hi, can you hear me?

David Mulholland, Head of Nokia Investor Relations

Yes, we can hear you now.

Emil Immonen, Analyst

So I wanted to maybe ask a little bit on the demand in Europe in general. So on the revenue decline on some parts in NI and also mobile networks in Europe. Do you see that this is more, let's say, structural or would you say that this is temporary in the way that Europe is just not investing right now? How do you see this developing going forward?

Justin Hotard, President and CEO

In terms of communication service providers, particularly telcos, we are observing a stabilization in demand, which is a positive development. We have mentioned the potential for growth in Europe over time, especially if regulations are put in place to address high-risk vendor status. Overall, the situation seems encouraging. We are also enthusiastic about the opportunities in the AI and data center sectors in Europe, including our partnership with Endscale and the potential for further investments in the region. We appreciate the trends we are witnessing, but it's important to note that the majority of current investments are taking place in the U.S. Consequently, when analyzing our revenues and overall profile, it is evident that demand is primarily originating from the U.S., and I think that is significant. That sums up our perspective.

David Mulholland, Head of Nokia Investor Relations

Did you have a quick follow-up, Emil?

Emil Immonen, Analyst

Yes. Maybe quickly touching on the private wireless side. The customer numbers grow nicely, but you haven't really discussed it at all in terms of revenue or anything. Could you say how is that part of the business going?

Marco Wiren, CFO

Yes. Just like you said, we've seen a nice increase in the number of customers. But remember, we are still in a very early phase of this journey. Even if growth rates are pretty good, it will take some time before this will be a meaningful business. So it's worth focusing more on that.

Justin Hotard, President and CEO

Yes. And I would just add, I think if you look at where we are today, I think Marco has summarized it well. I would tell you that where I see our biggest opportunity is in focused vertical markets use cases. And so there's some examples in railways, for example, and utilities is the other, right? So if you look at those, those are the places where we've got opportunity. But again, this goes back to that message of focus.

David Mulholland, Head of Nokia Investor Relations

Our next question from Sébastien Sztabowicz from Kepler Cheuvreux.

Sébastien Sztabowicz, Analyst

Coming back to mobile networks. Your business is going back to moderate organic growth in the third quarter, but to remain close to breakeven rather than those days. How do you plan to return to more decent margins in the coming years, maybe not double-digit, but maybe high single-digit? Is it more cost-cutting? Is it more to support your revenue with more growth opportunities? And the second question is also linked to mobile. We have heard some comments that the Chinese government could be looking to push the network vendors in Europe outside the Chinese market? Is this something that you already see in your order intake in China? Or is this not something that you see already in your business?

Justin Hotard, President and CEO

Yes, absolutely. I addressed this a bit in my comments. On mobile networks, one of my current priorities is to improve our returns. We can achieve this in a couple of ways, including maintaining a strong focus and engagement with our customers. This is related to your second question, which I will address shortly, but engaging closely with customers who want to co-innovate and collaborate with us is essential. I believe our long-term differentiation relies on innovation and technological leadership. Historically, that’s where the market stood. Five years ago, our company's business was struggling because we weren’t in that position. We have now stabilized our portfolio, but as an industry player, we must continue to innovate. That serves as a preview for our upcoming event, and I encourage you to attend. In terms of China, we were largely unaffected. Revenue there has significantly decreased over the past few years, making it just a small part of our overall revenue today, and our market share in mobile networks in China is also minimal. It’s not a core market for us. We monitor communications from the government closely and respect their decisions. Our focus will be on markets where we see substantial opportunities and with customers where we can collaborate and innovate. I believe there’s more opportunity ahead for us.

David Mulholland, Head of Nokia Investor Relations

We'll take our last question from Didier Scemama from Bank of America.

Didier Scemama, Analyst

Thanks, David, a question for Justin really. You've been in the job now for a few months. I just wondered if you could share your thoughts about the direction of the business strategically, especially when it comes to the mobile networks, the core activities and also IPR, which are vastly different, I guess, from your day-to-day activities, which presumably are focused on getting those AI and cloud contracts. So that was my first question, and I've got a quick follow-up.

Justin Hotard, President and CEO

Sure. Didier, I think I’ve shared most of my insights already. We essentially have two segments: network infrastructure and mobile. There are four major players in mobile infrastructure, and each of them has core networks, radio networks, which we refer to as MN, and IP licensing, which we call tech. It’s evident that having a complete portfolio is essential. Those who lack a full offering have encountered difficulties in both innovation and maintaining their market position. This is my primary point. In terms of differences, as I’ve mentioned previously, connectivity will be an area where dependable and reputable providers will be crucial. Our portfolio encompasses all fundamental aspects of connectivity. Currently, with AI developments, we are finally capturing what we missed at historical Nokia before the Infinera acquisition, especially in our optical and IP segments, where technological investments have shifted towards cloud and now AI. We’re beginning to seize those opportunities, and I’m pleased with our progress. I anticipate similar trends in mobile over time since many exciting AI applications, like autonomous vehicles, robotics, smart glasses, and virtual/augmented reality, require mobile connectivity. I believe this will be advantageous. However, I don’t think we can just stick to our old ways. Continuous innovation is vital. That’s why I’m excited about our initiatives in cloud and network services, particularly with the development of an autonomous cloud-native core stack. I see a lot of potential ahead for us in mobile networks, but achieving this requires focus, collaboration, co-innovation with customers, and a strong commitment to top-tier technology and partnerships.

Didier Scemama, Analyst

Yes, completely unrelated on the Nokia Technology side. So I mean, Nokia sold their phone business to Microsoft, what 10 years ago or so. So I just wondered how is the innovation pipeline in the IPR business for the nonstandard essential patents? Is there a risk of a cliff at some point as you're not in the phone business? Or are you confident that you can continue to monetize the SCP and non-SEPs at least at the current level?

Justin Hotard, President and CEO

Yes, absolutely. I think this is a good question. Going back to my earlier comment, every player of scale in mobile infrastructure has a strong IP business, what we call tech with the changes. I didn't mention this before, but with the adjustments we've made in the CTO office, we have now closely aligned the Standards team with tech. We see very good, stable revenue in the business. As we've indicated, we're beginning to invest in 6G monetization, which is important to us. We also see other emerging revenue streams in different segments. Overall, the business is very healthy, and the team is doing an excellent job. They are currently excelling at pushing for operating leverage to maintain their performance. You will hear more about this in the upcoming CMD, which I want to highlight. We will discuss some of these topics there as well.

David Mulholland, Head of Nokia Investor Relations

Thanks, Justin, Marco, for the comments. Ladies and gentlemen, this concludes today's call. I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified 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 for joining us.

Operator, Operator

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