Matt Shimao - Nokia Oyj Rajeev Suri - Nokia Oyj Kristian Pullola - Nokia Oyj.

David Mulholland - UBS Ltd. Sandeep Deshpande - JPMorgan Securities Plc Aleksander Peterc - Société Générale SA (UK) Sébastien Sztabowicz - Kepler Cheuvreux SA Andrew M. Gardiner - Barclays Capital Securities Ltd. Robert Sanders - Deutsche Bank AG (UK) Richard Kramer - Arete Research Services LLP Stefan Slowinski - Exane Ltd.

Alexander Duval - Goldman Sachs International Simon M. Leopold - Raymond James & Associates, Inc. Timothy Patrick Long - BMO Capital Markets (United States) Pierre C. Ferragu - New Street Research LLP (US).

Hello and welcome to the Nokia Second Quarter 2018 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instruction] Please note this event is being recorded. I will now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin..

Ladies and gentlemen, welcome to Nokia's second quarter 2018 conference call. I'm Matt Shimao, Head of Nokia Investor Relations. Rajeev Suri, President and CEO of Nokia and Kristian Pullola, CFO of Nokia are here in Espoo with me today.

During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. These statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect.

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

We have identified such risks in more detail on pages 71 through 89 of our 2017 Annual Report on Form 20-F, our financial report for Q2 and half-year 2018 issued today, as well as our other filings with the U.S. Securities and Exchange Commission.

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

Our complete financial report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and a reconciliation between the non-IFRS and the reported information. With that, Rajeev, over to you..

the first is our product and regional mix, as I noted last quarter; the second is related to the acceleration of 5G and near-term actions in a small number of large customers to fund their 5G entry within their existing budget plans.

When it comes to mix, some of the challenges that we saw in Q1 abated in Q2, given the strengthening of sales in North America, but some of it did not. To give just one example here, look at our IP/Optical Networks business group.

We have seen good momentum with our industry-leading FP4-based products and sales of our own IP routing products, i.e, excluding increasingly small resale activities were approximately flat in the quarter on a constant currency basis in what we believe is a currently declining market.

Our performance in IP routing would have been meaningfully better if we had not faced some component supply issues in the quarter, although we still expect to capture those sales in coming quarters as those supply issues are mitigated.

Along with the good progress in IP routing, we saw very strong sales growth in the Optical Networks part of this business group. We continue to progress well in Optical, but it remains a challenge from a profitability perspective. As a result, it provided a significant drag on the margins of the full IP/Optical Networks business group.

Just a quick comment on component shortages overall. There is tight supply for some standard components, such as various capacitors, diodes, and transistors that are used in our sector and many others, as well.

The root cause of this situation is the fast growth of digital technologies in areas such as automotive as well as supplier consolidation delaying capacity investments.

While our procurement team is doing a good job of managing the situation, there is a risk that ongoing shortages could limit our ability to capture upside from unforecasted demand and to benefit from normal cost erosion. Coming back to the margin discussion.

Global Services also remains a challenge with ongoing Network implementation under pressure by pre-5G rollouts. We are very focused on improving the performance of Global Services and I will return to this subject later on. Then competitive intensity, and it is a legitimate question to ask if we are seeing an increase, and I would say no.

Competitive intensity has been constant. We do see some aggressive cases in the quest for 5G footprint, but nothing particularly unusual. What we are seeing instead is a small number of customers with considerable purchasing power looking to fund their earlier than expected entry into 5G and asking us for price reductions is one way to do that.

We certainly do not give in easily to such requests and remain focused on finding the best balance between long-term footprint and profitability. The leverage of our end-to-end portfolio shows its power here, as well, as we are able to ask for offsets for any concessions that we make.

We have already seen that play out in reality and have one footprint in some new areas as a result. While we are generally able to offset price reductions with cost erosion over time, it will take some time to catch up, given the speed of these changes, but it is clear that in this environment cost control remains more important than ever.

We remain on track to achieve our targeted €1.2 billion of recurring annual cost savings in full-year 2018. As I've noted before, we see further reduction opportunities.

In particular, we believe we can take out more costs in IT, real estate, and central support functions as well as shift several additional products into a managed-for-cash mature operating model.

With our centralized transformation organization and disciplined execution model, we have shown that we know how to drive out costs and we are well-positioned to continue to do that. With those comments, let me turn to the progress we are making in the execution of our strategy.

Starting with our first pillar, leading in high-performance end-to-end networks with communication service providers. The good news here is that we see no change to the overall dynamics driving the acceleration of 5G.

Nokia and its competitors are all hard at work, as there's been a radical shift in the time from the release of standards to the expectation of trial systems from around 12 months for 3G and 4G to just a few months for 5G.

With that intensity, if any company tells you they have everything done and dusted for 5G, well, I would approach that claim with more than a little skepticism. We all face some risks as we push to get 5G products to market. Time is tight and development teams are stretched.

But despite the high pressure, the Mobile Networks team is making solid progress on its roadmaps. You can see this in the deals that we have won and announced, and we have others in the pipeline that are still to come. Let me take a moment here to talk about market share in Mobile Networks.

As you know, we think it makes no sense to look at share developments on a quarterly basis but given that there seem to be some misperceptions out there, let me provide some perspective. First, on a global level, we believe that we gained share in 4G in 2017 and are likely to do the same again in 2018.

When I look at how we do when we compete head-to-head in Mobile against our European competitor, we almost always manage to extend our contracts with existing accounts at unchanged market share. And if I look at the cases where market share did change, we win roughly two-thirds of the time.

In other words, there are many more cases where customers have decided to move business to us from that competitor rather than the other way around.

You can see our momentum in the announcements we have made this year with customers ranging from NTT DOCOMO to Sprint, dtac in Thailand, Telenor in Pakistan, Orange in Egypt and Senegal, Telia in Norway, Estonia and Lithuania, building on earlier wins in Finland, Sweden, and Denmark, China Unicom, and plenty more that are not public.

All of these were hard fought against competitors that you know well.

Also, on a global level, our Customer Perceived Value Index, which is basically our more sophisticated way of looking at customer satisfaction, showed that we closed the gap to the one competitor ahead of us and increased the gap from a major competitor who is already below us, another good sign of strength.

Second, we are not losing any footprint in North America. I know it has been reported that Nokia lost a small number of markets in Verizon to a competitor. That is true, and it is unfortunate.

Verizon is a longstanding customer and we deeply value our relationship with them, but we still have a very strong position with Verizon and are working closely with them on 5G. In two other large North American operators we are gaining meaningful share in mobile radio. In a fourth, we are holding steady.

In the coming few days you should expect to hear more as we have a large signed deal with one of the large North American customers that we are preparing to announce. I'm also sure that you've seen a number of press releases from us since the start of the year about our very close work with T-Mobile and Sprint.

So, in short, I see no overall footprint loss in North America and any suggestion that Nokia is losing share as a result of some fundamental issue of product competitiveness is simply incorrect. It might make for interesting competitor-fueled speculation, but it does not reflect reality.

When I look at our performance in the first half of the year and our backlog in the second half, I see no reason for concern about our market-share position beyond normal execution challenges. I would also point out that with the scope of our portfolio, we are able to win deals with North American customers that some of our competitors cannot.

As just one example, we announced in the quarter that we would be providing XGS-PON fiber technology to Frontier Communications and Greenlight Networks and we also had meaningful non-public wins in IP routing, optical and software. Turning to Global Services. As you're aware, we recently appointed Sanjay Goel as President of that organization.

Sanjay is charged with improving the overall execution within his organization where we have seen cost overruns in a few projects recently that have hit our margin. In addition, since his appointment, Sanjay has conducted a full review of his business. From that, he has developed a plan with two key pillars.

The first is to improve the overall profitability of our established base services business of care, network implementation, and managed services.

The second pillar is to focus on our new higher-margin services such as those for the enterprise, artificial intelligence-based cognitive services built on our AVA platform, and our ready-to-go WING solution which provides global IoT connectivity as a service based on a recurring revenue model.

As an aside, you may have seen in the quarter that we won a commercial WING deal with AT&T to provide seamless IoT connectivity to their enterprise customers. As part of that, we are working together to develop, test, and launch next generation IoT services.

Finally, just a brief comment on Fixed Networks, a business that is run with excellent discipline. Fixed has continued to deliver healthy profitability, despite ongoing top-line challenges. Those top-line issues are driven by several large customers lowering their fixed investments in recent quarters.

While we believe those customers will have to ramp up spending again at some point, we focused on growth in two areas. The first is expansion of our portfolio. As you know, we are working to tap new growth opportunities in the cable market, whole-home Wi-Fi, and fixed-wireless access, including 60-gigahertz millimeter wave-based products.

These efforts will take time to mature, extending well into 2019, but so far things are looking good. The second is regional expansion. We continue to have success in bringing fixed products to customers where Nokia has traditionally been strong, including in Japan, India and South Korea.

This work will also take some time to turn into meaningful revenue for Fixed Networks and we see that developing over the course of 2019. In the next pillar of our strategy, expanding in select vertical markets, our momentum continued in Q2 and we are well-positioned here for the second half of the year.

As many of you know, our expansion targets some very specific enterprise segments, transportation, energy in the public sector as well as web scale companies and extra-large companies that use technology for competitive advantage.

Progress is good, and our combined enterprise business grew at a year-on-year rate of approximately 30% in constant currency when you exclude the former Alcatel-Lucent third-party integration business that we're exiting.

Our order book looks solid going into the second half of the year and I'm also very pleased that our enterprise work in general is on track to deliver the profitability we expect. I mentioned earlier that we expanded our footprint to 37 new customers in the second quarter after adding 33 new ones in Q1.

One of our wins in Q2 was a State Grid Corporation of China, which chose Nokia to upgrade its optical transport network in Beijing and Tianjin. Another with one of China's leading Internet service providers is to provide optical networking connectivity in China and in a number of other countries.

And the third pillar of our strategy, building a strong standalone software business at scale, Nokia Software returned to growth with sales up 2% year-on-year in constant currency, driven by good results in our business support systems. With this performance, I am increasingly confident that the poor Q1 results of Software were an aberration.

Feedback on the quality of our products is excellent and we continue to generate orders at a fast rate. Profitability in Nokia Software was not yet where we wanted to be, but the team is doing good work to focus investments on the areas of high impact.

Furthermore, the modernization of our portfolio onto a common software foundation continues to proceed well. We expect that this foundation will improve our efficiency and agility and give us a structural margin advantage over time.

In the fourth pillar, which is now focused exclusively on licensing, we had another terrific quarter with strong performance in both recurring licensing revenues and profitability. When you look at our patent licensing business, there are two important things to keep in mind.

The first is that we expect our current portfolio strength both to continue for many years to come and to give us considerable monetization opportunities. The second is that we're not sitting still.

We've always had clear and ambitious targets for new patent creation and we are constantly adding new patents to our portfolio while still maintaining a high-quality threshold. Many of those patents are also relevant to mobile devices, something we're able to do, given the strength of our research teams in Nokia Bell Labs and our business groups.

One last note related to this pillar is that we closed the sale of our Digital Health business during the quarter. This has a positive impact on costs and ensures that Nokia Technologies is now a highly-focused engine of licensing for the company.

Turning to a regional perspective, I'll keep my comments short and focused on North America, China, and Asia-Pacific to ensure we have enough time for your questions. First, North America. As I said before, we grew in constant currency in the region in Q2 and we see no reason why that momentum should change this year.

Demand is high as is the pressure to deliver, but we are well-prepared. As is typical with the kind of large network rollouts we are seeing in North America, you can expect initially a high share of network implementation, but with that then declining over time. Second, China.

While there is certainly opportunity in China, we are approaching it with prudence. We value our customer relationships there and remain impressed by the speed and scale of their shift to new technologies. At the same time, we see risk that sales in the country could be dilutive to margins.

Should that be the case, you can expect to see us continue to play to win in China, but with a focused, very deliberate way. Third, Asia-Pacific, which includes India. For now, the India market remains on fire for Nokia.

In Q2, we had our seventh consecutive quarter of year-on-year sales growth and the highest quarterly sales ever in the history of our networks business there. While we expect this torrid pace to slow somewhat in coming quarters, we also see new opportunities starting to accelerate on the fixed networking side.

Other parts of Asia-Pacific were a bit challenging in Q2, but we see improvement in the coming quarters. With that, I'd like to turn the call over to Kristian for more on our financials.

Kristian?.

Thank you, Rajeev. I will start today by spending a few minutes on the financial performance of Nokia Technologies and Group Common and Other, then a few words on taxes and financial income and expense. Next, I'll take you through our cash performance in Q2, and finally, I'll walk you through some key topics related to our guidance.

First, Nokia Technologies, which delivered another quarter of solid results in Q2. While overall net sales declined 2% year-on-year, that was due to non-recurring items in the year-ago quarter. Adjusting for this, our recurring licensing revenues grew 23% year-on-year, reflecting the various licensing deals we signed throughout 2017.

Based on our Q2 performance, we continue to be at an annual recurring net sales level of approximately €1.4 billion. Operating margin in Technologies reached 81% in the second quarter, driven by higher gross margins and lower operating expenses.

The year-on-year improvement in OpEx primarily reflected lower expenses related to our digital media and digital health businesses, as well as the absence of Apple litigation costs, which negatively impacted the year-ago quarter. As a reminder, in May 2018 we completed the sale of our Digital Health business back to the co-founder of Withings.

We believe that the Q2 operating expenses are at a healthy level and that investing at approximately these levels will enable us to achieve our guidance to grow at a three-year CAGR of 10% and deliver 85% operating margin in 2020. Continuing next with Group Common and Other performance in Q2.

Overall net sales decreased by approximately 9% year-on-year on a reported basis and decreased approximately 4% on a constant currency. The decline was primarily driven by Alcatel Submarine Networks where the comparison to the year-ago quarter was challenging due to the completion of two large projects then.

This was partly offset by growth in Radio Frequency Systems which was driven by a large customer rollout. Group Common and Other operating loss improved substantially year-on-year in Q2, primarily related to realized gains from Nokia's venture fund investments. Moving on to taxes and financial income and expense.

Our Q2 non-IFRS tax rate came in unusually high at 43%. The higher tax rate was primarily related to the regional profit mix in the quarter, in addition to the combination of both low or absolute level of profit and prior year tax charges.

Despite the unusually high tax rate in Q2, we are still confident that our non-IFRS tax rate will be approximately 30% in the full year 2018. Looking at non-IFRS financial income and expense.

On a year-on-year basis, our second quarter 2018 results primarily reflect the absence of venture fund distributions from financial income and expense following the adoption of IFRS 9.

In addition, financial income and expense was impacted by the adoption of IFRS 15, which resulted in higher costs related to the sale of receivables and financing elements from customer and other contracts. These negative impacts were partly offset by lower overall interest expenses.

We have revised our guidance on non-IFRS financial income and expense to be an expense of approximately €350 million in the full year 2018, up from our prior guidance of €300 million. This is due to the negative impact from foreign exchange fluctuations as well as higher hedging costs.

We do, however, continue to expect financial income and expense to be approximately €300 million over the longer term. Next, moving to our cash performance in Q2 and some key items for Q3. On a sequential basis, Nokia's net cash decreased by approximately €2 billion with a quarter-end balance at approximately €2.1 billion.

A clear majority of the sequential decrease in net cash was attributable to two expected items. First, the payment of our dividend, which totaled approximately €940 million. Second, incentive payments related to our business performance in 2017, which was the primary driver of the €600 million decrease in liabilities within working capital.

Note that related to the dividend paid in Q2, we paid approximately €130 million in withholding taxes in Q3. Diving a bit more into details on our cash performance. Foreign exchange impact on net cash was approximately negative €170 million in the second quarter, approximately half of the negative impact related to our U.S.

dollar denominated bonds, and was offset by the higher fair valuation of the financial instruments which are used to hedge these bonds. The other half was related to balance sheet items in various foreign currencies and was offset by related positive impact in liabilities within net working capital from certain hedging activities.

Net cash used in operating activities was approximately €830 million. Within this, Nokia had approximately €130 million of restructuring and associated cash outflows. Excluding restructuring, we experienced decrease in net cash related to net working capital of approximately €860 million.

Looking at the individual components of net working capital, of the €860 million change, approximately €600 million was related to a decrease in liabilities, primarily driven by the bonuses paid under our annual employee incentive plans, and to a lesser extent, a decrease in deferred revenue.

These were partly offset by an increase in accounts payable related to higher inventories as well as longer payment terms and positive impacts in liabilities within net working capital from certain hedging activities, as I mentioned earlier.

Additionally, inventories increased approximately €140 million as we continued to plan for a higher level of equipment sales in the second half of 2018. Receivables increased approximately €130 million, primarily related to the seasonal uptick in revenues in the quarter.

More broadly, regarding net working capital, we are not satisfied with our current performance and we continue to focus on improving our efficiency. Cash taxes totaled approximately €100 million in the quarter, down from Q1, which was abnormally high due to the settlement of the tax dispute in India.

Based on our latest view for full year 2018, we updated our guidance on cash taxes, which we now expect to be €400 million in 2018, down from our previous guidance of €450 million. Over the longer term, however, we continue to expect annual cash taxes to be approximately €450 million until Nokia's U.S.

and Finland deferred tax assets are fully utilized. Lastly, CapEx also returned to a more normalized level in Q2 following elevated levels in Q1 and amounted to approximately €100 million. As such, we have reiterated our CapEx guidance to be €700 million for the full year 2018. Finally, turning to our guidance, let me touch upon a few key topics.

At Group level, we have today reiterated our full year 2018 guidance for non-IFRS operating margin to be in the 9% to 11% range and non-IFRS EPS to be in the € 0.23 to € 0.27 range.

Our cost savings program remains on track as we are confident that we will deliver €1.2 billion of recurring annual cost savings in the full year 2018, of which €800 million is expected to come from operating expenses. We also remain well on track regarding our network equipment swaps from a timing and cash out perspective.

Additionally, we continue to expect slightly positive recurring free cash flow in 2018. Looking specifically at Networks, we reiterated our view that our primary addressable market will decline approximately 1% to 3% in 2018 on a constant currency basis.

From a net sales perspective, we continue to expect to outperform our primary addressable market this year. This continues to be driven by customer demand for 5G and our strategy to expand into select vertical markets.

We expect improving market conditions in the second half with particular acceleration in the fourth quarter in North America following the weakness we saw in the first half. Also, as Rajeev mentioned earlier, we also reiterated our guidance for Networks operating margin for the full-year 2018 to be in the 6% to 9% range.

Our results in 2018 and over the longer term are expected to be influenced by a number of factors that we detailed in our outlook. I would like to focus on a few of these factors briefly.

First, given the industry-wide shortages that we are seeing for specific standard components, our ability to scale up our supply chain operations to meet the increasing demand we expect will be critical and we are taking appropriate action here.

Second, to address increased price pressure that we are seeing from our customers, we are implementing bold recovery actions such as further cost reductions and managing certain businesses for cash.

And third, regarding the large-scale 5G deployments that we expect, it is difficult to predict the exact timing of project completions and acceptances by customers.

To be clear, we expect our second half 2018 results to benefit from the start of the 5G cycle and the 5G momentum to continue in 2019 and 2020, it is the timing related to the specific projects that is more difficult to predict.

On the licensing business, we reiterated our guidance for recurring net sales to grow at a 10% CAGR over the three-year period ending 2020 and continue to expect to reach an operating margin of 85% for the full-year 2020.

We have a strong track record in our licensing business and we are working hard on new licenses while continuing to strengthen our industry-leading intellectual property portfolio. We believe we are making good solid progress towards our 2020 guidance. With that, I hand over to Matt for Q&A..

Thank you, Kristian. For the Q&A session, please limit yourself to one question only. Nicole, please go ahead..

Thank you. Our first question comes from David Mulholland of UBS. Please go ahead..

Hi. Thanks for taking the question. Just wanted to come back on the point that you made around just kind of pricing pressure but not seeing any change in competitive intensity.

Can you just explain to us why, if you're not seeing a change in competitive intensity, I can understand suppliers asking for price reductions, given what they're doing, but why you are accepting it? Given the change in the industry structure we've seen over the last couple of years kind of intrigued us to why you're accepting that.

And then maybe if you could just add on to that what actions you're planning to do in the second half and what confidence you have that you can start to recover gross margins into H2..

Thanks, David. We've seen this in a small number of large customers that have significant purchasing power, and it's not due to any widespread competitive intensity.

This is more than saying, look, I mean, we're now going to have to bring forward 5G earlier than expected and we need to fund it within the current budget, so it's better to do it with that now. Now why are we accepting it? We don't accept it lightly because we have end-to-end portfolio.

We ask for other business so that we can be made whole, we have offsetting mechanisms, we have pricing discipline, we have cost levers. But at the end of the day, in some cases we do have to accept it because there's also 5G footprint to be had. So, you've got to watch long-term footprint and balance it with short-term needs of the customers.

I think then your second question was with regard to what are the action – what are the second half. So, in second half we expect the cycle of 5G, the super cycle of 5G to start in Q3, and so, we expect improvement in gross margin overall in second half, incrementally in Q3, but more significantly in Q4.

And that is because we will see the regional mix play in our favor with North America and these big rollouts begin to really happen. We will also see a reversal of some of the adverse business mix portfolios, so, for instance, IP routing versus optical and so on. So, I'd say second half more robust from a gross margin standpoint.

We also have other recovery actions both on – basically on fixed costs that we have levers that we can pull in the short-term and we're already working through those actions..

Thank you..

Maybe just to add, so clearly, as Rajeev said, so scale will give us gross margin benefit in the second half. And then it's restless kind of execution on projects and getting them done without any cost overruns and so on, which we also expect to yield improvement going into the second half here..

Thank you, David. Nicole, next question, please..

Our next question comes from Sandeep Deshpande of JPMorgan. Please go ahead..

Thank you for letting me on.

You talked about the scale helping in terms of the margins in the second half, can you comment on the mix? Because you've announced over the past year and a half couple of major new products associated with the ReefShark based base stations as well as the FP4-based IP routers, I mean, can you talk about the mix of those new products in terms of your revenue and whether that will help improve the gross margin, not only in the second half but into 2019?.

Thanks, Sandeep. Yes, I'm glad you asked the question.

So, yeah, we do expect with AirScale ramping up in our mobile portfolio, including with ReefShark and the family of chips coming with ReefShark, FP4 in IP routing, PSE-3 in optical, these are all enhancements to product cost, and so we see product cost erosion, and therefore, we will see also a benefit from that.

But, of course, also the mix regionally, North America being more as a percentage of total revenue, optical being a little bit more balanced, as we've seen in the first half it's been more aggressive growth in optical, but IP routing will pick up because FP4 is starting to ship across the family of our platforms in a meaningful way from the second half onwards, as well, and benefiting 2019, as you said.

..

Thank you, Sandeep. Nicole, we'll take our next question, please..

Our next question comes from Aleksander Peterc of Société Générale. Please go ahead..

Yes. Hi and thanks for taking my question. I'd just like to understand a little bit of your message on the H2 recovery thanks to the 5G acceleration.

That became more of a Q4 affair in today's release, is that how we should read it? And does this mean that there's been a bit of a pushout of recovery into year-end, so everything happening slightly later than anticipated, or is it just my perception of this? And then secondly, just very briefly regarding the gross margin evolution, you seem to be indicating that there will be already some improvement in the third quarter and generally for H2 should be better, but already in Q3 we should see some improvement from the depressed levels in Q2? Thanks..

Yeah, so, it will – thanks, Aleksander. So, the rollouts that we've won, the deals from North America, 5G including 4G, they will start in Q3, but they'll be stronger in Q4, given the rollout plans of the customers.

There will be incremental improvement in gross margin in Q3 but there will be significant improvement in Q4, as we said, so particularly in Q4, given both the seasonality plus also the rollout schedule..

Thank you, Aleks. Nicole, we'll take our next question..

Our next question comes from Sébastien Sztabowicz of Kepler Cheuvreux. Please go ahead..

Yeah, one question on the competitive landscape in Optical Networks going forward following the announcement of the deal between Infinera and Coriant.

Do you see any market share gain opportunity there in the near term that they will be doing the integration process even though it seemed very rather interdeveloped between the two companies? Thank you..

Thank you, Sébastien. First of all, we see that as a good thing, that that industry consolidation is beginning to happen because there are many players. We've been on a tear in optical, we have been taking share, we're now according to Dell'Oro, number one in Europe, Middle East, and Africa for a couple of quarters in a row.

We've been very successful with web-scale, we are being successful with enterprise vertical customers, and also with the service provider customers. And given the innovation that we see coming on top of this with the PSE-3 chipset and so on, we expect to be able to continue this.

So, we're doing well, and we think if the industry consolidates it is better for the long-term industry structure for optical..

Thank you, Sébastien. Nicole, we'll take our next question, please..

Our next question comes from Andrew Gardiner of Barclays. Please go ahead..

Good afternoon, thank you. Just a follow-up on that optical question, Rajeev. I mean, you mentioned the success that you're having in optical with web-scale customers.

Can you – and you've talked sort of loosely earlier about the end-to-end success, I'm just interested in a bit more detail as to whether the sort of toehold that you had with optical into web-scale, are you – is there evidence now that you can sort of – that can follow with routing with Nokia software? Are you seeing that – sort of that pipeline build within the extra-large enterprise or web-scale space? Thank you..

Yeah, thanks, Andrew. So, with regard to optical, we've been doing well with web-scales in China as well as web-scales in the U.S. Now, is that a good Trojan horse for us to get more with FP4? We've seen success with Apple and Xiaomi where we will be shipping FP4.

We're working with the other web-scales, as well, so our opportunities are FP4, but also in Nuage and in Deepfield, which is basically the analytics platform that we have, both separately can be sold as well as embedded with FP4.

So, yes, progress, but I think it's a journey, so it will take us a little bit longer to get to where we want to be with the target web-scale customers..

Thank you, Andrew. Nicole, we'll take our next question, please..

Our next question comes from Robert Sanders of Deutsche Bank. Please go ahead..

Yeah. Hi, good afternoon. I was just interested in asking a bit more about these North American contracts. What is the typical deal length on these RFQs that you're seeing with the big-four operators? Or to put it another way, what percent of the total 5G ramp would these deals represent that you're signing currently? Thanks..

Thanks, Robert. It kind of varies from customer to customer. There's not a universal answer. In some cases where the rollout is very clear where the operator knows exactly which cities they want to cover, which towns they want to cover, how much of nationwide coverage they'll have in 5G, then you get a three-year contract.

In other places you might get a one-year contract. So, it really depends on the spectrum, what band it is, and what sort of rollout plans they have.

Having said that, of course, it's a sticky business because a lot of these initial 5G rollouts would be done on what we call non-standalone 5G, so it sits on the 4G install base, so your install base does matter. In the second way there will be the standalone 5G networks and that's more for industrial applications with a separate core network.

So, I'd say one year to three year, depends case by case, but it's a sticky business, so you keep making these deals every year..

And I guess it's fair to say that the recurring nature of 5G rollouts in North America still holds. We do see a first phase now. Then when optimal spectrum will be made available to our customers we'll see a next phase, and most likely, there will be a third phase, then with even more kind of focus on the industrial use cases.

So, I think that's also what you need to keep in mind when you think about what the contractual nature of the business that we are doing with our customers there is..

That's a great point because you have 600 happening right now rollout, you have 2.5, you have some millimeter wave, but remember that the sweet-spot spectrum will still be around the U.S, which is about 3.7 to 4.2, this mid-band, so there will be a second wave of North America 5G rollout. And a third wave because of industrial, as Kristian said..

So, thank you, Rob. And, Nicole, we'll now take our next question..

Our next question comes from Richard Kramer of Arete Research. Please go ahead..

Thanks very much. Rajeev, if I can look past the sort of second half questions and look at the areas you laid out as having momentum into 2019 and beyond, notably IP routing, software, and maybe infrastructure as a service for enterprise verticals, most of these should carry materially higher gross margins than your current levels.

And when you bridge this sort of long-term margin guidance, do you see this as a function of mix, i.e, these higher margin areas are going to outgrow a flat-ish network business? Or is the margin upside going to come more across the board from – given that Networks has been where you've seen the focus of a lot of the restructuring? And then quickly for Kristian, do you have any major IPR renewals that could materially affect 2019 and beyond? It seems one of your largest licensees is likely to come up for renewal either now or sort of shortly.

Thanks..

Thanks, Richard. Your mix point is spot on because our strategy is to grow software. So, if we grow Nokia software, that's naturally structurally higher margin. Then our strategy is to grow enterprise, and what we're seeing right now is it's hitting the target margins we want, so it's structurally better, both margin as well as growth.

Third, webscale and what we call technological extra-large enterprises. Again, same story holding there as well, particularly because they tend to buy more IP routing, these segments, both webscale and enterprise, a big part of our broader enterprise business is actually IP routing.

And then you have areas like WING, areas like cognitive services, areas like enterprise services. So, in our Global Services business they're also targeting higher margin over time because by the very nature of it they're not RFQ-driven, they're driven out of cycles, they have proactive sales. So, yes, mix will improve.

And then again, whenever you have 5G deals, the end-to-end scope of that will allow us to get more into routing and so on. And I think now IP routing is starting to – we've been gaining share for a while. As FP4 ships, we'll start to continue that trend and momentum..

And I think on the IPR, it is clear that for us to achieve the 10% CAGR over the three-year period ending 2020, we need to both get new licensing agreements in place with the smartphone vendors that are yet not licensed.

As well as they'll break into automotive as well as consumer electronics and also renegotiate and renew some of the expiring patent licensing agreements, as we have said. So, it is a combination of those things and we are making progress on all those areas..

So, thank you, Richard. And Nicole, we'll take our next question..

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

Yes. Hi, thanks for taking my question. Just wanted to maybe drill in on China a little bit.

Obviously, one of your competitors has been in a pause for the last couple of months, and just wondering if that's had any impact on your business, either positively or negatively? Has that been delaying any decision-making processes in China or has it been an opportunity to win share? And, I guess, along the same lines, in the recently announced $200 billion of U.S.

tariffs, have you had a look at that and how to think about how that may or may not affect Nokia going forward? Thank you..

Thanks, Stefan. So, yes, there have been some delays in China on account of that situation, as tendering decisions have been slightly delayed. We have benefited. Again, I've always said this is a long-term possible improvement in the industry structure.

But, yes, when it comes to fixed and optical and even mobile, we have won some deals in the quarter in that area from that competitor..

Outside of China..

Outside of China. And I'm talking also overseas, China..

Great, so thank you..

And I think on your – the kind of the trade war-related question, I think we are not seeing direct impact as we speak, but, of course, the overall uncertainty that increases as a result of this situation is, of course, impacting economic activity.

And as a result of that, the indirect implications is something that one needs to keep in mind at this point of time, but no direct impact..

Thank you, Stefan. Nicole, next question, please..

Our next question comes from Alexander Duval of Goldman Sachs. Please go ahead..

Yes, hi, many thanks for the question. Just noting that you grew 2% organically in your wireless business, which is quite similar to the growth rate of one of your key peers. I'm just wondering how confident you are that you can continue to see growth going forward in wireless and whether we might be troughing at this point in the market cycle.

Obviously, you've talked a lot about the U.S., 5G seems to be gaining a lot of traction, but I wondered if you could talk a bit about some of the other regions in wireless, particularly one of your competitors has been talking about growth in those other regions and it looks like you've seen some bright spots, too, so maybe to get some thoughts on that.

Many thanks..

Thanks, Alexander. So, with regard to 5G, it starts with North America, and as we discussed, there will be a couple of waves depending upon the spectrum awarded. There's South Korea going to happen later this year. There are trials ongoing right now, but that's going to start to move into rollouts.

And then you have Japan, we'll start at some point in the first quarter next year with real momentum in rollouts because remember the Summer Olympics that is driving that deadline. And then you have China, which at current course we expect will start around at the end of Q2, Q3 next year.

And then you have Middle Eastern countries that will also start in the first half, Nordic countries that will move into 5G at some point in the first half. So these are the lead countries. Nothing new. Also, the case in 4G, these were lead countries.

And so I think given that the super cycle is starting from Q3, potential growth in the wireless end of the market is here to sustain for a while..

I think maybe the only comment I would make is that I would, with caution, look at kind of wireless quarterly numbers and because, again, we all know that the timing of completion of project and acceptances are driving the revenue recognition in that business.

But as Rajeev said, when one looks at kind of over the quarterly cycle, the trend is strong..

Half yearly is a better thing..

Yep..

Thank you, Alex. And so, Nicole, we'll go to the next question..

Our next question comes from Simon Leopold of Raymond James. Please go ahead..

Great, thank you for taking my question. Yesterday on its conference call, AT&T commented on vendor financing. Could you help us understand how, or if, this affects your financials and if you're engaged in this or how it may play into competitive environment? Thank you..

I think in general, we have a fairly limited direct vendor financing exposure as we speak.

We are, of course, working together with our operator customers to provide them with alternative finance sources, working together with the export credit agencies in the countries where we have major operations, mainly for us Finland, Belgium, Canada, and so on.

And when it comes to some of the large North American customers, we have successfully been able to provide them with substantial facilities that have been backed by the export credit agencies. So, I think that's what we'll do now also, and try to see how we can help. But it is not resulting in a direct exposure on the Nokia balance sheet..

Thank you, Simon. Nicole, next question, please..

Our next question comes from Tim Long of BMO Capital Markets. Please go ahead..

Thank you. Just wanted to ask a little more detail on these end-to-end deals that you're getting, I think you mentioned 40% now. If you could just give us a sense as to how much that's grown as a percentage, if any point a year ago, or anything like that.

And just also when you think about just kind of the overall profitability that you would see from these type of deals relative to more deals that are more single product in nature. I'm assuming they might be a little lower because it sounds like some of them there's a give-back on maybe wireless to get in with the other pieces. Thank you..

Yeah, thanks, Tim. In Q1 we said that was around 30%, 35%-ish. Now, we have 40%, about a year ago it was around 30%, as I recall it. So, it is growing. And this is the pipeline, remember this is the overall pipeline and what is the percentage of end-to-end deals within that pipeline. And then, of course, we fight for the conversion factor.

It's already good news and that means that the end-to-end portfolio is being recognized, more and more operators want to buy more end-to-end from us. There's no – I can't give you a clear answer on our margin is better or not, it really is case-by-case.

But you lock in the customer on various fronts, you get more strategic, you're talking about long-term network architecture if you have more of the end-to-end portfolio, you have more offsetting mechanisms if discount is asked in one place or the others. Overall, it's a healthy thing to do for us to go more end-to-end..

Thank you, Tim. Nicole, next question, please..

Our next question comes from Pierre Ferragu of New Street Research. Please go ahead..

Hey, thank you for letting me on. So, Rajeev, I just wanted to come back on the gross margin movements, specifically in ultra-broadband. So, if I look at it compared to your fleet margins in the first quarter of 2017, it's down 7 points. And that half (55:04) that decline actually came in the last like sequentially between Q1 and Q2 this year.

And so, I'm thinking, well, if it's related to pricing, to pricing pressure, it seems like a lot because I imagine that in your revenues in any given quarter only a small portion of these revenues are coming from new deals and a lot of revenues are coming from older deals.

So, if pricing on new deal has been hurt to the point that it's moving the needle by that much, like 3 points, 4 points sequentially and 7 points year-on-year, it feels like prices have been slashed.

So, my question would be am I missing other moving parts that are very significant, in this 7 points margin decline over five quarters, or am I thinking that it's pricing pressure the wrong way? And then as a quick follow-up on the same topic, when I think of the pricing pressure in the markets, I usually expect to see similar trends happening like visible at all players, and if we do get Ericsson, we don't see a similar trend in gross margins and there is nothing really suggesting that Huawei is under like that kind of margin trajectory, so any thoughts you could have on why it could be different, would be very helpful as well.

Thanks a lot..

Thanks, Pierre, I'll give you a few points. So, one is mix. So, Q1 we saw an adverse mix in North America was much lower because Q1 of 2017 was a very strong North America quarter relative to that. There was a compare issue.

But, of course, the mix was adverse from a regional point of view plus some other lower-margin regions in comparison grew quite a bit. So, that's one. In Q2 we saw – and by the way, we also saw portfolio mix adversely move in Q1, lot more optical, less IP routing.

In Q2 we saw, again, the same thing, more network implementation, less higher-margin care, and most notably, much stronger optical, less IP routing. Unfortunately, we missed a meaningful amount of revenue we could have captured in IP routing in Q2 because of some of the supply shortages.

So, one is both the portfolio and the regional mix and the second is only part of it is the pricing thing, and it's not pricing to do with necessarily a new deal of future, it's to do with some of the install base we have, hence it's affected the first half.

Now, we are saying that that is going to reverse to some degree in Q3 and more particularly in Q4..

So, thank you, Pierre. And based on the timing, it looks like we didn't quite get to the end of our queue, really apologize for that. But thank you all for your good questions today. And now, I'd like to turn the call back over to Rajeev..

Thanks, Matt and Kristian, and thanks to all of you for your good and thoughtful questions. Just a short closing comment. Yes, margins remained a challenge in the second quarter, but as I shared earlier, we expect improvement as we proceed through this year and beyond.

We also see considerable progress in many areas across our business, a stabilizing top line, 5G wins in the key market of North America and elsewhere, improving roadmaps in mobile networks, share gains in IP routing, a return to growth in our software business, meaningful progress in our strategy to expand into the enterprise, and continued strength in our licensing business.

With that, thanks again to all of you for joining and have a great day. Matt, back over to you..

Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected.

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

We have identified these in more detail on pages 71 through 89 of our 2017 Annual Report on Form 20-F, our financial report for Q2 and half-year 2018 issued today, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you..

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