Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Shimau, Head of Investor Relations. Sir, you may begin.
Ladies and gentlemen, welcome to Nokia's Q2 2018 conference call. I'm Matt Shimau, Head of Nokia Investor Relations. Rajiv Suri, President and CEO of Nokia and Christian Pulola, 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. Security 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 information in addition to the reported results information. Our complete financial report with tables available on our website includes a detailed explanation of the content of the non IFRS information and a reconciliation between the non IFRS and the reported information. With that, Rajeev, over to you.
Thanks, Matt, and thanks to all of you for joining today. Nokia's 2nd quarter results were consistent with the view that we shared last quarter. At that time, I said that the first half of the year would be challenging, followed by a more robust second half. That view remains true today. Given what we are seeing in the market and how we are delivering on our strategy, I have confidence that we will be able to deliver on our full year 2018 guidance.
Our top line results in the Q2 certainly point to improving conditions. Net sales were approximately flat at both a group and networks level on a constant currency basis, a pleasing result given the declines we have seen in the last couple of years. Equally pleasing is the fact that the top line improvement was widespread. 3 of our 6 regions, Latin America, Middle East and Africa and North America showed year on year growth in constant currency with our largest market North America up a healthy 6%. 3 of our 5 networks business groups, mobile networks, IP Optical Networks and Nokia Software also grew in constant currency in the quarter compared to last year.
Nokia Technologies had an excellent performance with recurring licensing revenues up 23% compared to last year. Our strategic efforts to expand into vertical markets outside of our traditional telco operator customers continue to deliver with sales growth in the double digits and expansion of our footprint to 37 new customers. And the strength of our end to end portfolio remains a differentiator. And when you look at our sales pipeline, 40% of it is now comprised of end to end deals. That is the highest level we have seen to date.
In short, we are making good progress in getting our top line back on track. In terms of margins, our group level non IFRS operating margin of 6.3% was helped by another excellent quarter from Nokia Technologies, which posted a stellar 27% year on year increase in operating profit. Our networks gross margin of 34.8 percent and operating margin of 1.5%, however, were disappointing even if not a complete surprise. We have been open for some time about the fact that 2018 would be a year of margin pressure. As I noted on the Q4 2017 earnings call, we see a clear path to stronger performance in 2019 and even more in 2020 as the 5 gs super cycle takes hold.
That view remains absolutely true today. We have also said that the first half of twenty eighteen would be soft, followed by a much more robust second half. Again, that view remains true today. We have reiterated our guidance for 2018 and still expect to deliver within the 6% to 9% guidance range. We believe this is possible because the 5 gs cycle will start to ramp up in Q3 and accelerate significantly in Q4 and Q4 of course will also benefit from typical seasonality.
Our first half margin challenges were largely driven by 2 issues. The first is our product and regional mix, as I noted last quarter. The second is related to the acceleration of 5 gs and near term actions in a small number of large customers to fund their 5 gs 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 are seeing 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-five gs rollouts. We are very focused on improving the performance of Global Services and I will return to the 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 5 gs footprint, but nothing particularly unusual. What we're seeing instead is a small number of customers with considerable purchasing power looking to fund their earlier than expected entry into 5 gs and asking us for price reductions is one way to do that. We 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 won 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 €1,200,000,000 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 5 gs. 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 3 gs and 4 gs to just a few months for 5 gs.
With that intensity, if any company tells you they have everything done and dusted for 5 gs, well, I would approach that claim with more than a little skepticism. We all face some risks as we push to get 5 gs 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 gain share in 4 gs 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 2 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 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 close the gap to the one competitor ahead of us and increase the gap from a major competitor who is already below us, another good sign of strength.
2nd, 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 long standing 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 5 gs.
In 2 other large North American operators, we are gaining meaningful share in mobile radio. In a 4th, we are holding steady. In the coming few days, you should expect to hear more as we have a large signed deal with 1 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 competitive fuel 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 software.
Turning to Global Services. As you are aware, we recently appointed Sanjay Goyal 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 2 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 AVWA 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 and 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 2 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 and the public sector as well as webscale 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 Alcatlusson third party integration business that we are exiting. 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 2nd quarter after adding 33 new ones in Q1.
1 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 a number of other countries. In the 3rd 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'm 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 4th 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 2 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 are 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. 2nd, 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 in a focused very deliberate way. 3rd, Asia Pacific, which includes India. For now, the India market remains on fire for Nokia. In Q2, we had our 7th 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 Christian for more on our financials. Christian?
Thank you, Rajiv. I will start today by spending a few minutes 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, Oke 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 these, 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 €1,400,000,000 Operating margin in Technologies reached 81% in the 2nd 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 Wixx. 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 3 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 2 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 lower 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 Q2 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 €350,000,000 in the full year 2018, up from our prior guidance of €300,000,000 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 €300,000,000 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 €2,000,000,000 with a quarter end balance at approximately €2,100,000,000 A clear majority of the sequential decrease in net cash was attributable to 2 expected items. First, the payment of our dividend, which totaled approximately €940,000,000 2nd, incentive payments related to our business performance in 2017, which was the primary driver of the €600,000,000 decrease in liabilities within working capital. Note that related to the dividend paid in Q2, we paid approximately €130,000,000 in withholding taxes in Q3.
Diving a bit more into details on our cash performance. Foreign exchange impact on net cash was approximately negative €170,000,000 in the 2nd 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.
On the other half was related to balance sheet items in various foreign liabilities within net working capital from certain hedging activities. Net cash used in operating activities was approximately €830,000,000 Within this, Nokia had approximately €130,000,000 of restructuring and associated cash outflows. Excluding restructuring, we experienced decrease in net cash related to net working capital of approximately €860,000,000 Looking at the individual components of net working capital, of the €860,000,000 change, approximately €600,000,000 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 €140,000,000 as we continue to plan for a higher level of equipment sales in the second half of twenty eighteen.
Receivables increased approximately €130,000,000 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 €100,000,000 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 €400,000,000 in 2018, down from our previous guidance of €450,000,000 Over the longer term, however, we continue to expect annual cash taxes to be approximately €450,000,000 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 €100,000,000 As such, we have reiterated our CapEx guidance to be €700,000,000 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 €1,200,000,000 of recurring annual cost savings in the full year 2018, of which €800,000,000 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 5 gs and our strategy to expand into select vertical markets.
We expect improving market conditions in the second half with particular acceleration in the Q4 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. 1st, 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.
2nd, 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 3rd, regarding the large scale 5 gs 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 twenty eighteen results to benefit from the start of 5 gs of the 5 gs cycle and the 5 gs momentum to continue in 2019 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 3 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 and A.
Thank you, Christian. For the Q and A session, please limit yourself to one question only. Nicole, please go ahead.
Thank you. We will now begin the question and answer session. 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 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 you've seen over the last couple of years, kind of intrigued as to why you are accepting that?
And then maybe if you could just add on to that, what actions you are 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 are now going to have to bring forward 5 gs. It's earlier than expected and we need to fund it within the current budget. So it's really to do with that.
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 way, in some cases, we do have to accept it because there's also 5 gs 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 actions, what are the second half. So in second half, we expect the cycle of 5 gs, the super cycle of 5 gs start in Q3.
And so we expect improvement in gross margin overall in the 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 portfolio. So for instance, IP routing versus optical and so on. So I'd say second half more robust from 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.
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.
Okay. 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 got you've announced over the past year and a half couple of major new products associated with, I mean, 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, SP4 and IP routing, PSE3 and 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 SP4 is starting to ship across the family of our platforms in a meaningful way from the second half onwards as well and benefiting in 2019 as you said.
Thank you, Sandeep. Nicole, we'll take our next question please.
Our next question comes from Alexander Peteric of Societe Generale. Please go ahead.
Yes. Hi. Thanks for taking my question. I'd just like to understand a little bit your message on the H2 recovery, thanks to the 5 gs 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 push out of recovery into year end? So everything happening slightly later than anticipated? Or is this 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 Q3 and January for H2 should be better, but already in Q3, we should see some improvement from the depressed levels in Q2. Thanks.
Yes. So it will thanks, Alexandra. So the rollouts that we've won, the deals from North America, 5 gs, including 4 gs, 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, Alex. Nicole, we'll take our next question.
Our next question comes from Sebastian Kaplowitz of Kepler Cheuvreux. Please go ahead.
Yes. 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, notably during the integration process, even though it seems that there is a rather limited overlap between the two companies? Thank you.
Thank you, Sebastian. First of all, we see that as a good thing. 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 Deloro, number 1 in Europe, Middle East and Africa for a couple of quarters in a row. We've been very successful with web scale. We're 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, Sebastian. 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 webscale customers. Can you and you talked sort of loosely earlier about the end to end success.
I'm just interested in a bit more detail as to whether the that sort of toehold that you've had with optical into webscale, 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 webscale space? Thank you.
Yes. 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 FB4?
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 in 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 webscale customers.
Thank you, Andrew. Nicole, we'll take our next question, please.
Our next question
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 5 gs 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 5 gs, then you get a 3 year contract. In other places, you might get a 1 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 5 gs rollouts would be done on what we call non standalone 5 gs. So it sits on the 4 gs installed base, so your installed base does matter. In the second wave, there'll be the standalone 5 gs networks and that's more for industrial applications with a separate core network. So I'd say 1 year to 3 year, it 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 5 gs 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'll be a 3rd 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 awarded in the U. S, which is about 3.7, to 4.2 this mid band. So there will be a second wave of North America 5 gs rollout and a third wave because of industrial, as Christian says.
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 the 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 flattish 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 Christian, 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. 3rd, web scale 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 enterprise, 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 high margin over time because by the very nature of it, they are not RFQ driven. They're driven out of cycles. They are proactive sales. So yes, mix will improve. And then again, whenever you have 5 gs 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 will 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 3 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.
Our next question comes from Stefan Solinski 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, that's 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 $200,000,000,000 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. So I'm talking also overseas
of 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 impacts.
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. 5 gs 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 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.
Thanks.
Thanks, Alexander. So with regard to 5 gs, 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 Q1 next year with real momentum and rollouts because remember the Summer Olympics is driving that deadline. And then you have China, which at current course we expect will start around 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 5 gs at some point in the first half. So these are the lead countries, nothing new that were also the case in 4 gs, these were the 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 caution look at kind of wireless quarterly numbers and because again we all know that the timing of completion of projects and acceptances are driving the revenue recognition quarterly cycle, the trend is strong.
Farfilly is a better thing.
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 and 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 fairly limited direct vendor financing exposure as we speak. We are of course working together with our operator customers to try 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 will 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 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 nature single product in nature?
I'm assuming they might be a little lower because it sounds like some of them you're there's a give back on maybe wireless to get in with the other pieces. Thank you.
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 relevance of the overall pipeline of 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 margins 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 of discounted loss in one place or the other.
So 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 movement, specifically in Ultra Broadband. So if I look at it compared to your peak margins in the Q1 of 2017, it's down 7 points. And that's how 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 feels like a lot because I imagine that in 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 deals has been hurt to the point that it's moving the needle by that much like 3, 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 5 quarters? Or am I just thinking about this 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 market, I usually expect to see similar trends happening like visible at all players. And if we look at Ericsson, we don't see a similar trend in gross margin.
And there is nothing really suggesting that Huawei
is under
like that
kind of margin different would be very helpful as well.
Thanks a lot. Thanks, Pierre. I'll give you a In North America, it was much lower because Q1 of 2017 was a very strong 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 1 in Q2 we saw.
And by the way, we also saw portfolio mix adversely move in Q1, a 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 to do with some of the installed 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 Q. 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 Kristen, and thanks to all of you for your good and thoughtful questions. Just a short closing comment. Yes, margins remained a challenge in the Q2, 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, stabilizing top line, 5 gs wins in the key market of North America and elsewhere, improving roadmaps in mobile networks, share gains and 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 half year twenty eighteen issued today, as well as our other filings with the U.
S. Securities and Exchange Commission. Thank you.