Hello, welcome to the Nokia third quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would 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 third quarter 2019 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 risk 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 risk in more detail on pages 60 through 75 of our 2018 annual report on Form 20-F, our financial report for Q3 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 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 third quarter was solid. We had guided to a quarter that would be soft and believe that the end result was better than that. Free cash flow was positive. Sales were up, including in four of our six regions. Operating margin was solid. Our strategic focus areas of Nokia Enterprise and Nokia Software performed well. IP Routing sales grew a fourth consecutive quarter. Our cost discipline was good. We continued to win new 5G deals and launch new 5G networks. As you will have seen in our release today, we also expect a strong fourth quarter with robust operating margins and a EUR 1.2 billion improvement in net cash, allowing us to end the year with a EUR 1.5 billion net cash balance.
Despite this progress, some of the risks that we flagged previously are materializing, and we believe these will create some challenges going forward. Several of these risks are related to the market, and others are specific to Nokia. I will talk about these risks in greater detail. You will have seen, however, that they caused us to revise our guidance for this year and the next, as well as define a longer-term operating margin target. In addition, our board of directors resolved not to distribute the third and fourth quarterly installments of the dividend for the financial year 2018. The board will continue to review dividends on a quarterly basis and expects to resume payments when our net cash position has improved to €2 billion.
We believe this approach gives us the necessary operational flexibility to increase investments in 5G, continue investments in growth in our strategic focus areas of Enterprise and Software, and strengthen our cash position. With that as an introduction, in the rest of my remarks today, I would like to address quarterly highlights, some of the risks that we are seeing, adjustments that we are making to our corporate strategy, and the drivers that position us well to create future value. First, the quarter. Net sales landed at EUR 5.7 billion, up 1% year-on-year in constant currency. Non-IFRS operating margin was 8.4%, down 50 basis points. Earnings per share were EUR 0.05, down EUR 0.01 from the same quarter last year. While Kristian will talk more about cash, let me provide an update on two important areas. First, free cash flow was positive in the quarter at about EUR 300 million.
While not where we want it to be, this was a good reversal from the negative trend in the first half of the year. Second, while our net cash decreased in Q3, the change was less than the €320 million in dividend payments we made in the quarter. We also had meaningful cash outflows from restructuring as well as from cash taxes and CapEx. We have actions underway in pretty much every part of the company to improve our cash performance. We have strengthened our centralized pricing war room and margin management controls, tightened our deal decision-making process to include a greater focus on cash and return on capital employed, reinforced mandatory contractual terms, and realigned planned management incentives for 2020. We're also reviewing existing contracts to ensure that they continue to make commercial sense, and we will look to renegotiate or exit where they do not.
This could result in some country exits if we find that the overall mix of projects in any particular country does not meet our standards. We're already seeing early signs of progress. As I noted, we expect to see the impact already in Q4, with more to come in the following quarters. Turning to our business groups, the underlying story of Q3 was challenges in Mobile Access and Fixed Access, strength in our other units. Consider the following. Nokia Software saw year-on-year sales growth of 5% in constant currency and a more than doubling of absolute operating profit. Yes, there was some benefit from strong in-quarter completions and acceptances. You could also see the sustainable power of the underlying product and go-to-market improvements that we have made. Nokia Enterprise maintained its trajectory to grow in double digits for full year 2019.
Sales were up well over 20% in the quarter, and we continue to add new customers at a rapid pace. In fact, we added more than 30 new customers in Q3 alone, bringing the year-to-date total to 84. Across the spectrum of vertical Enterprise segments that we are targeting, energy, transportation, web-scale companies in the public sector, the need for mission-critical networking is clear. Whether it is providing private wireless networks, helping mining companies automate, improving safety and efficiency in transportation systems, or enabling smart cities, our work is putting us at the heart of the industrial automation that will be so important in years to come. As I've said before, quarterly results in Enterprise will be a bit lumpy as we push to drive fast growth, and that remains true. The opportunity for us remains large, and it is high on my list of priorities.
IP Routing maintained its excellent momentum with year-on-year sales up 13% in constant currency and clear product leadership. Our FP4-based products are performing very well, and we continue to increase our footprint and displace competitors. Optical Networks saw a sales decline after several quarters of strong performance. I'm not concerned by this as it was largely driven by a tough compare to last year and project timing. Orders were up sharply in the quarter. Most importantly, products based on our industry-leading PSE-3 chipset are now in the hands of select customers for testing, with a full ramp-up to follow in the coming quarters. Nokia Technologies grew by 2% in constant currency while maintaining strong profitability. You may have seen our press release after the close of the quarter announcing that we have declared more than 2,000 patent families as essential for the 5G standard.
While our focus remains on patent quality, we are delivering that quality in increasingly large numbers. My point here is that much of Nokia is performing very well. Our Access businesses, on the other hand, are facing some challenges. Fixed Access, which saw a 10% decline in constant currency sales in Q3, is, as I've noted before, in the midst of a significant market transition as copper declines and fiber grows. We have traditionally had very strong market share in copper access, but a significantly lower, although still strong position in fiber. By default, that means we are losing operating leverage as the market changes. Offsetting cost reductions and expansion in areas such as fixed wireless access is underway, but a full turnaround will still take more time. Mobile Access, where many things are working very well.
We continue to deliver the world's best performing 4G networks, have unified our SingleRAN product on a common platform after years of acquisitions, have been rated as the top small cell vendor for the fifth year in a row, and Global Services, which we now report within Mobile Access, is fast getting back on track. Sanjay Goel, who took over leadership of Global Services a bit more than one year ago, has moved swiftly to fix poorly performing projects, improve operational efficiency through digitalization and automation, protect the profitability of care services, reduce overall costs, and introduce new offerings with robust, longer-term profit potential. The results are starting to show, and we expect to benefit further as low-margin deployment services decline over the course of next year.
5G is where we still have work to do, even if we continue to win deals and have successfully launched 15 live networks. Those networks include some of the world's largest, with customers like Sprint, Verizon, AT&T, and T-Mobile in the U.S., Vodafone Italy, Zain in Saudi Arabia, and SK Telecom, Korea Telecom, and LG Uplus in Korea. With one customer in Washington, D.C., we saw download speeds reaching a blazing 2.3 gigabits per second. Absolutely amazing when you experience it. As you will recall, I talked openly in Q1 about some of the issues we are facing in Mobile, and I noted that higher radio product costs also had an impact on gross margins. Given the importance of this topic, let me go into some more detail. It is not unusual at this early stage in a new technology cycle to have high product costs.
Those costs typically go down significantly as scale increases and cost optimization work proceeds. This is certainly true for 5G, where we have a comprehensive ongoing program to address every possible part of product bill of materials, PCBs, power supplies, RF and other analog components, materials and mechanical components, and of course, semiconductors, which are a large cost driver. Over the course of 2020, we expect our cost reduction efforts to deliver results, particularly related to semiconductors. Our 5G product mix should improve considerably with a constantly increasing share of hardware based on our cost-competitive ReefShark system-on-chip products. To ensure that we execute on this fast and effectively, we are increasing investment in system-on-chip capabilities and moving aggressively to strengthen and diversify our supplier base. While we have a near-term challenge, no denial about that, I am confident that we are taking the right steps to resolve the issue.
Given the complexity and lead times associated with semiconductor technology, however, it will take some time to improve the situation. Our current expectation is that our 5G product costs will improve progressively over 2020. We will start 2021 in a much stronger position. Of course, even as ReefShark lowers costs, it also provides significantly improved performance as well. As I think many of you are aware, we appointed a new leader of Mobile Networks, Tommi Uitto, about nine months ago. Tommi and his team have developed a comprehensive plan to ensure Nokia is competitive in 5G. They are relentlessly executing against that plan. Tommi is a strong leader. He has my full support. One other comment that I would make related to mobile is that we are seeing some selective pricing pressure as competitors seek to gain footprint in 5G.
As some of these deals also involve upgrades to 4G, we're not seeing the margin uplift in 4G that one would normally expect at this stage of the cycle. We believe this situation will be short-lived and not extend beyond a small number of large early deals. To look at things from a regional perspective, where our story in Q3 was one of weakness in China and Middle East and Africa, growth in North America, but less than expected, and relative strength elsewhere. China, where sales were down 23% in constant currency, was not a surprise. We have consistently flagged concerns about our ability to deliver adequate returns in that country, particularly in Mobile Access, and that view remains unchanged. While we have admiration for China's fast move to 5G and overall technological progress, we still take a prudent approach to the market.
If there are deals that make commercial sense on their own terms, we will take them. If there are not, we will not. Simple as that. I expect that this may lead to some tough decisions in the upcoming procurement rounds in China, but that remains to be seen. North America. Overall, we remain strong in North America and grew 2% in the region in Q3 in constant currency. Unfortunately, however, our progress fell short of what we expected, given 5G project acceptances and completions and uncertainty related to the announced operator merger where we have a particularly large footprint. We cannot predict how long this situation will continue and hope that the relevant authorities will move quickly to find a resolution. Next, let me talk about strategy. While I'm not satisfied with our current performance, I am confident that our strategy remains the right one.
We are, however, making two adjustments that I would like to share with you. First, we are updating how we think about both enterprise and software given the progress that we have made. On the enterprise side, we originally talked about expanding network sales into select vertical markets. With the progress that I discussed earlier, we believe we have successfully shown that enterprise can be a meaningful business for Nokia. Now, we are setting our sights on growth and on consistently and significantly outgrowing the market. In terms of software, our initial focus was on building a strong standalone software business. We have made massive improvements, re-architecting many of our products, moving to become truly cloud native, and creating a strong, experienced software sales force. For two years in a row now, Analysys Mason has ranked Nokia as the top telecom software provider.
I think it is safe to say we have delivered on our original intent. Going forward, it is about strengthening, about taking the foundations that we have built and making them stronger. As examples, we see opportunities to move even more products onto our common software foundation and further develop a recurring revenue business model. The second thing we have done is to explicitly define those businesses for which we will prioritize profit and cash and those for which we will prioritize growth. In particular, our Mobile and Fixed Access businesses will focus on profit and cash. This approach will largely be reflected in how we address the market in terms of deals that we are willing to accept and how we structure our offers. It does not mean that we will stop investing in the business or pursuing growth in 5G.
We absolutely will do both, but there will be no pursuit of share just to gain share. In fact, we will work relentlessly to drive advantage through strong technology, time to market, and significantly lower product cost in 5G while leveraging our differentiation in superior 4G network performance and the most comprehensive small cell portfolio. IP Routing, Optical Networks, Nokia Software, and Nokia Enterprise will all be aimed at growth. Not growth by sacrificing margins, but growth based on other competitive advantages. We believe that IP Routing can expand based on product leadership. Nokia Enterprise can outperform a growing market given the demand for our mission-critical networking capabilities, and Nokia Software can leverage the strong product and sales foundation we have built to target robust growth opportunities. Optical Networks is in a position of technological strength that will get even better with its coming PSE-3 products.
Additional scale in optical can drive meaningful profitability improvements, and that is what we are aiming for. Nokia Technologies will target significant cash generation in its core patent licensing activities, as well as growth through diversification into IoT and consumer electronics. These changes will be reflected in how we set targets and how we set management incentives. It is important to recognize that they are designed to reflect priorities so that when the inevitable choices need to be made, we have clear guardrails in place. We expect this change to slow our growth slightly, and as a result, you will have seen in our earnings release that we now expect to grow in line with the market, not outperform it as previously mentioned. This change in growth expectations is just one of several amendments we made to our guidance today.
Given the risks that I talked about earlier, we are lowering our expectation for full year 2019 and 2020. For operating margin in 2019, that means we now expect 8.5% ± one percentage point. For 2020, our operating margin guidance is now 9.5% ± 1.5 percentage point. At the same time, we have been clear about the fact that we expect 2021 to be better than 2020 as we make progress towards our longer-term target to deliver an operating margin of 12%-14%. One other comment on our guidance related to costs. As you will have seen, we also reduced our target to deliver EUR 700 million in cost reductions in full year 2020 to EUR 500 million. As I noted before, we believe there is a need to increase investments in 5G System-on-Chip capabilities.
We also intend to invest further in the digitalization of internal process. We expect this will improve productivity and generate further cost reduction opportunities beyond 2020. As we make these important additional investments, rest assured that we are not taking our eye off the cost ball. We have been making progress reducing both absolute OpEx and OpEx as a percentage of net sales sharply from €1.6 billion or 31% of net sales in Q3 of 2018 to €1.56 billion or 27% of net sales in this past quarter. When and where we see further opportunities to reduce costs, we will do so, even if it requires additional restructuring. That is just the nature of our industry today. With all of this context, let me take a step back and talk about five drivers that give me confidence in our ability to meet our longer-term goals.
First, our unique end-to-end portfolio will allow us to drive a strong share of wallet and benefit from the virtuous 5G cycle of investment that I have talked about before. A cycle that covers multiple domains of CapEx spending, spanning mobile and fixed access, transport, services, and software. Second, Nokia has a demonstrated ability to create value and drive cash flow through product leadership. For proof, look no further than our FP4-based routing products. As I noted earlier, we have our challenges in the early stages of 5G, but expect progressive improvement over the course of 2020 and to be in a much stronger position in 2021. We have a clear record of providing the world's best 4G networks and see no reason why we cannot in time do the same in 5G.
In fact, as a barometer of that, we have converted all of our 4G customers who already have selected a 5G vendor to Nokia. A 100% conversion rate of 4G customers and plenty more still to go. Third, we expect to continue our successful diversification into enterprise and software. Both are meaningfully accretive opportunities for our margins as well as our cash position. Our progress has been good, and the market opportunity remains very large. Fourth, our cash generator patent licensing business with mobile phone makers is large and sustainable for many years to come. We also see no reason to limit this business to mobile devices and see meaningful opportunities for diversification of our licensing activities into IoT verticals and consumer electronics. Finally, we continue to see opportunities for significant cost reductions enabled by digitalization and automation of processes.
Product cost innovation, ongoing R&D efficiencies and related site consolidation, procurement savings, improved product serviceability, and more. As I said earlier, I'm not satisfied with our performance, but we see good reasons to have confidence in the future. We have given guidance for 2020 and expect our turnaround to firmly have taken hold by the end of that year. 2021 should be better than 2020 as we proceed on our path to deliver on our long-term targets. With that, over to Kristian.
Thank you, Rajeev. Today, I will take you through the financial performance of Nokia Technologies and Group Common and Other, as well as group-level results. I will be quicker than normal in this section in order to focus my prepared remarks on four key topics: our cash performance, our cost savings programs, our outlook, and what makes Nokia a compelling long-term investment. First, starting with Nokia Technologies. The 2% year-on-year growth in Q3 primarily reflected higher one-time licensing net sales, which totaled EUR 10 million in Q3 2019 compared to zero in the year-ago quarter. Our annualized licensing run rate continued to be EUR 1.4 billion. From a profitability perspective, operating margin in Q3 was 82.1% compared to 82.6% in the year-ago quarter. This was driven by a decline in gross margin, which was largely offset by lower operating expenses.
The gross margin decline was mainly related to a one-time sale of patent assets. The operating expense improvements were primarily driven by lower patent litigation costs, lower patent licensing costs, and lower incentive accruals in the quarter. All in all, the performance of Nokia Technologies continues to be solid and as expected. Moving to Group Common and Other. Net sales were flat year-on-year, both on reported as well as constant currency basis, with Alcatel Submarine Networks net sales being up and Radio Frequency Systems net sales being down. The operating loss for Group Common and Other worsened year-on-year, primarily due to lower gross margins in both RFS and ASN and the digitalization investments that focus on driving automation and productivity that was then partly offset by lower incentive accruals.
As I said in the past, for modeling purposes, we continue to expect Group Common and Other operating expenses to be approximately €20 million per quarter higher than in 2018 due to investments we are making in digitalization. We see this also continuing in 2020. Moving to Nokia level results. Group level non-IFRS operating margin was 8.4% in Q3 '19 compared to 8.9% in the year-ago quarter. This largely reflected lower gross profits, partly offset by continued progress related to our cost savings program. Looking at non-IFRS financial income and expenses in Q3, we experienced higher expenses year-on-year, largely reflecting a deterioration in our FX results due to adverse currency movements.
Given that our year-to-date financial income and expenses and FX results are EUR 50 million higher than a year ago, they increased our full year 2019 assumption to now be EUR 400 million, up from EUR 350 million previously. Our non-IFRS tax rate came in at 27% in Q3 2019. We continue to expect full year non-IFRS tax rate to be approximately 28% for 2019. At the Nokia level, our non-IFRS diluted EPS was EUR 0.05 in Q3 compared to EUR 0.06 in the year ago quarter, primarily due to lower gross profit in networks and the negative fluctuation in financial income and expenses. This was partly offset by higher gross profit in Nokia Software, as well as solid progress related to our cost savings program. Let's turn to our cash flow performance in Q3.
On a sequential basis, Nokia's net cash decreased by approximately EUR 160 million to a quarter end balance of EUR 340 million. Within this decrease, we generated positive net cash from operating activities, which partly offset cash outflows from investing and financing activities, including the payment of the quarterly dividend. Our free cash flow was positive EUR 299 million in Q3, largely reflecting stronger operating cash flow. Excluding restructuring cash outflows, net working capital generated a decrease in net cash of EUR 50 million. Within working capital, liabilities decreased EUR 440 million, primarily related to a decrease in deferred revenues and advanced payments, a decrease in liabilities related to employee benefits, and a decrease in accounts payable. Receivables decreased EUR 390 million, primarily due to improved collections, which were achieved through higher sale of receivables.
On the last quarter call, we said that we were unable to collect approximately 350 million EUR of receivables, which negatively impacted cash flows in the quarter. In Q3 2019, we collected approximately half of the 350 million EUR. The other half, which entirely relates to the collection of a large receivable from a state-owned operator, we anticipate to recover in the coming quarters. Inventories were approximately flat sequentially. We expect our inventory levels to improve in Q4 as large-scale 5G deployments and acceptances accelerate meaningfully. In Q3, we showed some positive signs of improvement in our free cash flow efforts, with notable progress lowering central inventories. We expect ongoing progress to result in a stronger cash position in Q4 and for net cash to increase sequentially by approximately 1.2 billion EUR. Next, a quick update on our cost savings program.
On a year-to-date basis, excluding the impact of lower incentive accruals, we have already achieved approximately EUR 180 million of recurring cost savings. Even though FX is a significant headwind when it comes to our cost savings targets, we have executed well, and we are seeing good evidence of improved operational discipline, and we are well on our way to achieve our targets for 2019. Given the need for higher 5G and IT investments that we have spoken about, we now see that our cost savings program will yield EUR 500 million of net benefits compared to the previous target of EUR 700 million. We have also updated the expected timeline for restructuring related cash outflows, and you can find these changes laid out in the cost savings section on page 13 in our Q3 release.
Turning to our guidance, where I would like to spend a bit more time explaining the rationale for the changes we have made today. Even if some of this is repetitive, I want to be clear and complete. First, starting in 2019. As Rajeev mentioned in his prepared remarks, we have updated our outlook to reflect the number of risks that we have previously flagged, which have materialized in Q3. These are driving margin pressure in our networks business. In response from a product perspective, we have made the decision to increase 5G investments focused on accelerating our product roadmaps and our product cost reductions. Specifically, these investment areas include our System-on-Chip-based 5G hardware, including diversifying and strengthening the related supplier base. This will help us drive lower 5G hardware product cost over the medium to long term.
We also see the need for additional digitalization investments in IT tools and operational processes, which I mentioned earlier. Additionally, from a regional perspective, we are also experiencing temporary CapEx constraints in North America related to the customer merger activities and profitability challenges in Greater China. Given these developments, we now expect the following for full year 2019. Our non-IFRS diluted EPS to be EUR 0.21 ± EUR 0.03. Our non-IFRS operating margin to be 8.5% ± 1 percentage points, and our recurring cash flow is now expected to be somewhat negative. Implied in that, we still expect a strong Q4. We are now guiding using a range around the midpoint.
For Q4, our guidance mathematically implies a diluted non-IFRS EPS of EUR 0.135, a non-IFRS operating margin of 16.5%, and net cash increasing sequentially to approximately EUR 1.5 billion at the end of the year. We have also lowered our 2020 outlook and now expect non-IFRS diluted EPS to be EUR 0.25, plus or minus EUR 0.05, and our non-IFRS operating margin to be 9.5%, plus or minus 1.5 percentage points. The recurring free cash flow is now expected to be positive. Over the longer term, which we define as three to five years, we believe that we can deliver Nokia-level, non-IFRS operating margin in the 12%-14% range.
Finally, as CFO of Nokia, I expect to be asked many times over the coming months by many of you, "Why should I continue to be or become a Nokia shareholder?" While I acknowledge that our performance has not lived up to our potential, I believe that we have the right assets and are taking the right actions to fix our short-term issues and to unlock significant value as the 5G cycle expands to address not only consumer use cases, but also the industrial productivity use cases. Nokia has unique long-term value drivers. These include the unique end-to-end portfolio we have, the product leadership position, diversification into enterprise and software, our sustainable patent licensing business, and last but not least, our structural cost reductions. We believe, and I believe, that these will enable us to expand margins and generate significant cash flow over the longer term.
With that, I will hand over to Matt for Q&A.
Thank you, Kristian. For the Q&A session, please limit yourself to one question only as a courtesy to everyone else in the queue. Nicole, please go ahead.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Again, please limit yourself to one question only. Our first question comes from Andrew Gardiner of Barclays. Please go ahead.
Good afternoon, guys. Thanks for taking the question. I could ask a bit about the increased 5G investment that you've been talking about. You spent a lot of time on the call just now talking about the semiconductor side of things, the SoC strategy in particular. Can you just give us a bit more detail around what's happening with ReefShark in terms of the internal development versus external development? You mentioned, Rajeev, diversifying the supplier base. Are you having to now invest, spend your own money in order to get outside suppliers in and restart the chipset strategy around 5G, and so we're going to see both your own internally developed ASICs with an outside SoC provider? Just, how long it's going to take to fix that and then get to the lower product cost that you've highlighted? Thank you.
Thank you, Andrew. Number one, this is not a new strategy. We started working on the System-on-Chip strategy already in 2018, right? When Tommi joined, we started accelerating that. We're already on a path here. Specifically, last year, we started to diversify our suppliers. Those decisions have been made over the last several months. What's happening right now is when we moved to 5G, we chose FPGA-based products. They give you flexibility. They give you time to market advantage, but then they're expensive. What we're doing is we're moving to SoC-based products, which will progressively start shipping during 2020. It's not like it'll all come at one go at the end of 2020 or something. It's going to progressively start shipping, and hence we think it will progressively mitigate. Why are we spending even more?
We want to be continuing to be aggressive there and accelerate what we've already started. Yes, we do our own sort of SoC design, but now we're working with multiple suppliers.
Thank you, Andrew. Nicole, next question, please.
Our next question comes from Sandeep Deshpande of J.P. Morgan. Please go ahead.
Hi. Thanks for letting me on for a question. My question is, when we look at your Q3 results in terms of your performance on the margin front, on your cash generation front, and in terms of what you're guiding to cash generation into the Q4, what I'm trying to understand is why are you signaling this dividend deferment or cut to the market when you are indicating that by the end of this year, your cash position will be at the higher EUR 1.5 billion? A cut in dividend would have been fair given the more difficult environment, why this complete lack of dividend? Is this a signal that you expect this business to remain very difficult through 2021 or 2022? The kind of dividend cut you've instituted seems to suggest a much more difficult environment.
Thanks, Sandeep. I think I'd call it pause, is the right word. What have the board decided? We resolved to not distribute the third and fourth quarterly installments of the dividend for the financial year 2018, right? Number one. Now, why is that the case? One, we want to guarantee our ability to increase 5G investments. Two, we want to continue investing in the growth areas that are accretive to Nokia, whether you look at margins or you look at cash positions. Those are Enterprise and Software. C, to strengthen Nokia's overall cash position. What we've said is that the board expects to resume dividend distribution after the net cash position of Nokia improves to approximately EUR 2 billion. That's when we'll be able to resume.
The mechanics of that are that the board will seek a dividend authorization from next annual general meeting and will continue to review dividend distributions on a quarterly basis from there. I think the key word for me is pause.
I think that's good. Thank you, Sandeep. Nicole, next question, please.
Our next question comes from Richard Kramer of Arete Research. Please go ahead.
Thanks very much. Rajeev, I just want to get your take on what's been missing in the execution and leadership in Mobile Access, because that seems to be your principal area where you're having difficulty. You've had three leaders in four years. I know you've had very difficult integration. You've staked out some time ago that your desire to lead in 5G. What is it specifically over the last few years that has been so difficult in the execution in that area? How confident can you be now that that's going to change into 2020 and beyond, given how difficult the environment is for many of your large operator customers? Thanks.
Thanks, Richard. Fair question. I changed leadership in Mobile Access. First, we've broken it 2, and I sort of brought in Sanjay Goel for leading the services side. We're already seeing results and proof points of that business turning, right? It'll be less and less on the watch list, if I can call it like that, by next year. I expect a substantial turnaround there. Okay? We're seeing automation of services. We're seeing digital workflow systems. We're seeing new growth potential services like cognitive AI-driven services, enterprise services, IoT services, which have higher margins. We're seeing better management of prices and hence protection of margins in care and technical support services. We're reducing deploy rollout, which is traditionally lower margin. We're seeing more remote delivery and global delivery.
I think that will start to be out of the woods in the next few months, although it'll be very critically on my watch list. That's number 1. Sanjay has brought in that sort of change. To mmi has taken the list of 10 major steps that he's taking to drive performance improvements, and we're already seeing proof points of that, not least evidenced by the fact that we have got these 48 deals, and we are launching 15 commercial networks as well. If you go back a couple of years, what really happened was that, of course, Nokia was dealing with the migration of the portfolio that nobody else in the industry had to deal with regard to this Alcatel-Lucent phase out. You recall, we had some delays in 2017 as well with our migration projects.
We got out of that in a way that we are now the best performing 4G networks vendor. Whether you look at RootMetrics, which is an external study, it's not a Nokia study, or if you look at Ookla, these folks have said in 125 metro markets in the U.S., both in 2018, the first half of 2019, pointing to the AirScale product that we've helped our customers get number one position for network performance. That gives me confidence that we're going to be able to do the same in 5G. The reason we chose FPGA was that when we were dealing with sort of the footprint migration of former Alcatel-Lucent, we wanted to ensure that we get time to market catch up as soon as possible. That is not the most efficient from a cost point of view.
That is why we diversified our supplier base, and admittedly, one supplier let us down as well. We diversified our supplier base and started ramping up the SoC thing. It is not starting now. It's already been in progress. It's the shipments that will start to begin in our portfolio that will make the difference. I expect that we'll be in a much better position at the end of 2020, beginning of 2021, but it will progressively mitigate over the course of the year. I'm watching this very closely with Tommi, with Sanjay, and the teams, and I have confidence. The last thing I will say, Richard, is that 5G NR is based on NSA non-standalone. What really matters is your 4G install base.
That is our strongest competitive advantage because we have the best performing 4G networks, and there is no 5G network that performs well without an underlying strong 4G layer. This is why our customers will stick with us through this situation.
Thank you, Richard. Nicole, next question, please.
Our next question comes from Aleksander Peterc of Société Générale. Please go ahead.
Yes, hi. Thanks for taking my question. I'd just like to understand, given the sizable cut to your 2020 margin outlook, would you be able to give us more color on whether that is more of a scale or top line issue, a growth margin issue maybe related to pricing pressures, or an OpEx issue? I know it's a combo of those, which is the most important here? Thanks.
Thanks. We've said, Alex, that next year that we could expect to grow in line with the market as opposed to outgrow the market. It's also driven by our prioritizing cash and profit over growth. What has changed: four things. Like we said, high cost associated with the early generation 5G products, the first-generation products. Profitability challenges in China, which we think will continue given the nature of aggressive price making expected there in 5G. Some pricing pressure in early 5G deals. I'll say it's selective. Of course, uncertainty related to the announced operator merger in North America, where we have a particularly large footprint. We saw that impact in Q3. We're likely going to see it in Q4. We can't predict when that will close. It could also likely be for the first half of next year.
I think in that order, it's gross margin because of this product cost issue, which will progressively mitigate over 2020.
Of course, on top of that, we do have the negative impact that comes from the additional investments that we are now making in 5G as well as in IT and digitalization, which is also kind of impacting then operating margins.
To be clear, that's OpEx and it's not Comp. Yeah.
Okay. Thank you, Alex. Nicole, next question please.
Our next question comes from David Mulholland of UBS. Please go ahead.
Hi. Thanks, guys. There's been discussions and questions around the competitiveness of your portfolio or whether we call it price competitiveness or performance for quite a while, and I think it was about two years ago now that we saw Ericsson saying they were facing issues in reinvesting. It seems to be now largely executing on that from a gross margin perspective. Why has it taken so long to come to this realization of the need to reinvest as you look into next year?
Yeah. Thanks, David. 5G only started meaningfully rolling out this year. This, for us, is not a 4G product cost issue, it's a 5G product cost issue. That's started from the beginning of this year. Like I said earlier, the System-on-Chip strategy has been put into motion already a while ago, diversified our supplier base. We are increasing the investments purely because we want to increase even more the SoC penetration in our products and continue that. Of course, we know how to do System-on-Chip. Yes, we started with FPGA with 5G because it gave us that time to market catch-up advantage, but we do that in much of our portfolio with FP4 and PSE-3. We're just replicating that in mobile now.
Thank you, David. Nicole, we'll take our next question, please.
Our next question comes from Achal Sultania of Credit Suisse. Please go ahead.
Hi, good afternoon. I'm just trying to understand how you're positioning with your product on the 4G side of the market. I think when we look at your revenues in a number of regions, for example, China, U.S., Korea, I think we've seen that there's a big divergence between your performance and your key competition's performance year to date. U.S. and Korea, I can understand predominantly because there was a first-mover advantage with 5G. China, still 5G hasn't actually started in full flow, yet there is a big divergence, and still, we haven't seen any gross margin impact on your competition. Just trying to understand, are you losing share on 4G because of these issues that you are facing on 5G? How does that position you going into next year and your ability to actually grow in line with the market next year? Thank you.
Thanks, Achal. I just try to step back and sort of look at that question. I think the issue we've seen in Q3, what we're pointing to also in Q4 is the impact of this one operative situation with regard to the merger activity where we have a particularly large footprint. That impacts us more than the other players, and so that reduces or negatively impacts the business mix. That's what I would say to that answer. When it comes to China, I know 5G has not started, but the reality is that even in the underlying business, there are sort of profitability challenges, hence our priority on profit and cash in that market.
Thank you, Achal. Nicole, next question, please.
Our next question comes from Robert Sanders of Deutsche Bank. Please go ahead.
Yeah. Just a question on your 5G SoC strategy. I was just interested in understanding what your view is on ASIC versus ASSP. You had this issue with ReefShark, with Intel's 10 nanometer process. It seems like you're over-engineered for what the customers want. Given you've got these challenges now, wouldn't it make sense just to switch to an ASSP vendor like a Marvell to just get your time to market right rather than pursuing this ASIC strategy at all costs, given that they are typically more expensive chips and take longer to get to market? Thanks.
Thanks, Robert. Nothing much to add apart from what I've already said. It's not a case of over-engineering the product. That's not what we see. It is the case of shipping more SoC relative to FPGA, and that's as simple as that. When we get more SoC being shipped in our products, which will progressively happen in 2020, we'll start to see the gross margin benefit.
Okay, Rob, thank you. Nicole, we'll take our next question.
Our next question comes from Stefan Slowinski of Exane BNP Paribas. Please go ahead.
Yeah, hi. Thanks for taking my question. Just had a question regarding, I think, comments you made about country exits, potentially exiting countries as you focus on profitability and margins and cash flow. You've specifically called out China multiple times as being challenged from a profitability standpoint. Are you suggesting that potentially China could be a country that is a candidate for exiting altogether, at least for part of your business? How would that impact your ability to have enough share globally to continue to invest in order to maintain the product? Thank you.
Thanks, Stefan. No, I think we'll be a significant player in China for a long time to come. Look, let's just talk about China for a minute. The China volume of base stations in the world are approximately 60%, right? The revenue share of that volume is approximately half that. The profit share of that volume in the medium term is negligible. That, to me, explains the China question. In China, we are going to change our business mix, more private networks with state-owned enterprises. It will take some time. More core networks, higher margin, more routing and transport and backhaul, higher margin with service providers. Obviously, 4G radio, and we'll see what happens with 5G radio. More routing and transport and optical with web-scale players. Now we're not starting this now. We already have that underway. The business mix might change.
The cash flow will get better and the contribution margin, as the quality improves, yes, the revenue might come down. If that's the case in some other markets, we'll do the same. Again, there might be some projects we have to do it, but there's no wholesale country exits per se.
Thank you, Stefan. Nicole, next question, please.
Our next question comes from Pierre Ferragu of New Street Research. Please go ahead.
Hi, this is Raoul standing in for Pierre, who's in a noisy environment and on mute. Thanks for taking our question. You mentioned your hardware issues in your radio portfolio and how you plan to address them, and we were wondering what about software issues? You mentioned early this year some difficulties which led to revenue recognition, delayed revenue recognition, and radio software. There's been reports that you're meeting challenges on that front as well. Could you talk about the situation there and how you plan to address potential issues?
Thank you for the question. First of all, it's not in mobile radio, all of it. It's just in 5G. Only in 5G is what I mean, not in 4G, not in SingleRAN, not in 3G. It's in 5G. It is primarily product cost issue as we've just discussed. Tied to that SoC shipment or ReefShark family of chipset shipping in our base station are also some features that would be brought forward. We have the feature for launch. Even if some features might be delayed because of SoC, the reality is that there are workaround solutions all the time that we work with our customers on. We've launched 15 networks. We're winning 48 customers. We are converting 100% of our 4G customer base to 5G. It is the 5G product cost issue that's the primary thing.
Thank you, Raoul. Nicole, we'll take our next question.
Our next question comes from Sebastien Sztabowicz of Kepler Cheuvreux. Please go ahead.
Yeah, hello, thanks for taking my question. I know it is a bit early, but could you please help us understand what kind of growth do you see for your key market for 2020? Should we expect a better market environment in 2020 versus 2019? Where do you see, I would say, basically growth or top-line pressures in the coming quarters? Thank you.
Thanks. We see growth continue in 2020. Within that, there'll be a mixed dimension, depends on where the growth comes from. In general, we can expect transport to be strong. We can expect software, our success to continue there. We can expect enterprise growth to continue. Of course, 5G will drive growth as well. Overall, we say growth for the market will continue, and we'd likely be in line with the market.
Thank you, Sebastian. Nicole, next question, please.
Our next question comes from Simon Leopold of Raymond James. Please go ahead.
Thank you for taking the question. You've given us, I think, a lot of the breadcrumbs around the cash flow and the general trending, but I want to make sure I'm interpreting your expectations as to when you think you can resume paying a dividend. Roughly speaking, it sounds like you expect to be at the targeted levels of net cash by the end of 2020, perhaps early 2021. I just want to make sure I'm interpreting your commentary accurately, or if there are other variables I need to consider.
Let's just, if I kind of repeat the facts that Rajeev talked about. We've taken a pause on the dividend. The board had said that it will resume payments as we get to EUR 2 billion or so of net cash. We've also said that we will seek an authorization from the next AGM to be able to track the situation on a quarterly basis. That's all we have. Yes, we've also said that from a cash expectation point of view, we expect to end the year at EUR a billion and a half, and that we expect to generate positive cash flow in 2020. Clearly, our objective is to try to get to a dividend payment situation as quickly as possible.
Thank you, Simon. Nicole, I think we have time for one more question today.
Our next question comes from Stuart Jeffrey of Agency Partners. Please go ahead.
Hello. Thank you very much. I've just got a question again on the China angle, linking into economies of scale questions. I appreciate that you don't want to chase unprofitable business, but China 5G could be a huge proportion of 5G spend late next year and in 2021. If you don't play a role in that for margin issues, then doesn't that impact your ability to drive manufacturing economies of scale, R&D coverage, all those things that have historically led other companies to struggle for scale and then struggle to be competitive in the long term? I'd like to better understand, can you really pull out of some of these big contract opportunities without damaging your long-term competitiveness globally, not just in China?
Thanks, Stuart. First of all, I'm not giving any particular guidance on where we'll end up in share in 5G in China. I will say that, I'll just repeat, China 5G, just like China 4G, will be about 60% of the global volume of base stations, and half of that will be the revenue market share of that. In the next, let's say medium term, and for me, medium term, let's say it's about three years, the profit share of that will be negligible. The question on volume, do you need the strong China volumes, even if unprofitable, to help your overall situation? We've done the math on that. It is not decisive. No, we don't have to have them, just because we are always going to be in a scale position the way we see it.
For me, scale position is the market share that we are aspiring to globally. I think we'll be able to cover it. Remember also that we have recently increased our market share in Japan quite a bit with a couple customers, et cetera. On the whole, we will always be in a strong scale position and additional volume to China do not necessarily give us component purchasing economies of scale or manufacturing economies of scale.
Okay. Thank you, Stuart. Thank you everyone for your questions today. I'd now like to turn the call back to Rajeev.
Thank you, Matt and Kristian, thanks to all of you for your questions. If you take a step back and look at what we have said over the course of the call, I hope two things are clear. First, while our performance today is not where we want it to be, we have the right actions underway to drive meaningful improvement over the course of 2020 and a full turnaround in 2021. Second, we see a clear set of drivers for creating future value. Some of these are near term, some are midterm, and some have a longer horizon, but all are important, all will get our focus, and all can create value. With that, 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 risk 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 60 through 75 of our 2018 annual report on Form 20-F, our financial report for Q3 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.