Hello, and welcome to the Nokia 4th Quarter and Full Year 2019 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.
Matt Chimow, Head of Investor Relations. Sir, you may begin.
Ladies and gentlemen, welcome to Nokia's 4th quarter and full year 2019 conference call. I'm Matt Shimao, Head of Nokia Investor Relations Rajeev Suri, President and CEO of Nokia and Christian Pulola, CFO of Nokia are here in Espoo with me today. During this call, we will 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 60 through 75 of our 2018 Annual Report on Form 20 F, our financial report for Q4 full year 2019 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 concept 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. I would like to start my remarks today by talking about the two areas where we will have a particularly sharp focus this year, executing in mobile access and strengthening cash generation. I will then come back to an overview of our Q4 and give you some more on our results and what we see going forward. Executing in mobile access and strengthening cash generation are the 2 most pressing issues that we face. Since we announced our Q3 results, we have listened carefully to you, our investors and many other stakeholders.
We are committed to improving our performance, and based on the feedback we have received, are taking steps to provide greater transparency on progress against the commitments that we have made. Before going into the details, however, let me make 2 additional upfront comments. First, despite our strong 4th quarter results, we still have plenty of work to do, particularly in mobile access. We expect to make meaningful progress over the course of the year. And as I said a few months ago, expect our turnaround to have firmly taken hold by the end of this year.
2nd, while we are very focused on addressing the areas where we need to improve, we saw robust performance in many other parts of the company in both the Q4 and full year 2019. On a full year basis, IP routing continued its strong momentum, gaining significant market share and improving profitability. Nokia Software delivered on its promise with an operating margin that was up sharply from 2018. Nokia Enterprise also delivered exceedingly well, hitting its double digit sales growth target and considerably outperforming the market. And Nokia Technologies increased its already excellent profitability.
While all of this is good, we are well aware of the fact that access is not performing well, Nokia as a company will struggle to perform well. So let me turn to that now. To start, let me just be clear about terminology. When I talk about mobile access, I'm talking about the combination of our product focused mobile networks business group and our global services organization. This is the right grouping to look at overall mobile performance given the close linkage between the 2.
In our earnings release, we report net sales for mobile access for precisely this reason. Within mobile access, our focus is on 4 key areas: 1st, improving profitability through consistent product cost reductions 2nd, maintaining scale to be competitive 3rd, enhancing commercial management and deal discipline and 4th, further strengthening operational performance and services. Let me talk more about each of these topics, starting with improving profitability through consistent product cost reductions, which are essential to improving our Nokia level gross margins over time. We are highly competitive in 4 gs and are consistently rated as having the best performing 4 gs networks in North America, Europe and other parts of the world by 3rd parties such as RouteMetrics, Tutela and others. But as we discussed last quarter, we are facing challenges with high radio product costs in the early stages of 5 gs.
Our teams in mobile networks, procurement and others are working hard to optimize those costs by addressing every possible part of product bill of materials, including semiconductors, where a transition to system on chip is critical. We are making the right progress, but it will take time for those results to show in our financial performance. There is typically about a 6 month lag when a new cost optimized product is shipped and when it starts to impact the financials. Volumes need to increase and deployments need to take place. To address our 5 gs product cost issues and meet higher performance requirements, we have started rolling out Nokia's new system on chip 5 gs powered by ReefShark base station portfolio.
These new products made up about 10% of our 5 gs product shipments in Q4 2019, and we expect that number to increase progressively over the course of the year, ending at more than 35%. For full year 2021, we would be in the range of 70% and the transition would essentially be complete in 2022. To give you visibility to how we are performing, we will give quarterly updates this year on percentage of 5 gs powered by ReefShark base stations shipped and will flag any issues that we see, both positive and negative. As of today, we are tracking against our plan and have seen some of our SoC development proceeding slightly ahead of schedule. This is complex work, however, so there is always a risk of issues or delays.
That said, we are now shipping our 5 gs powered by ReefShark massive MIMO product, which launched at the end of 2019. Volumes will ramp up over the first half of the year as new variants are added, and we expect to have a full lineup of 5 gs powered by ReefShark Massive MIMO by the end of the Q2. New 5 gs ReefShark based products will continue to come, and we saw the successful tape out of 2 new chips in January. As I'm sure many of you know, tape out is the final step of the design process before chips are sent to be manufactured into engineering samples for product integration and testing. We're also making good progress on the next releases of 5 gs software with integration and verification showing improving quality and maturity compared to earlier releases.
These efforts are being boosted by both added R and D headcount and better productivity. In short, we are tracking well, but there is still plenty of work to do. The second issue I want to discuss is maintaining scale and specifically scale related to mobile radio products. We expect that when all the results are in, Nokia will have a 4 gs plus 5 gs market share in the range of 27% for 2019, excluding China. While this means we lost some share in the year in this part of our overall primary addressable market, we expect to stabilize at approximately the same level, 27% for 2020.
Normal footprint fluctuations, of course, are always possible, but we have and expect to continue to have the necessary scale to be competitive. One reason we have that confidence is that our 5 gs win rate remains strong. This metric factors in customer size and measures how we are doing in converting our end of 2018 4 gs footprint, as well as adding new 5 gs footprint where we did not previously have a 4 gs installed base. At the end of the Q4 2019, our 5 gs win rate was over 100%, excluding China, and in the mid-ninety percent range, including China. Reflected in this overall performance, we have seen gains in Korea, Japan and the Middle East, offset by some losses, including in limited parts of Europe.
In addition, we added 2 new communication service provider customers where we do not currently have a 4 gs footprint, one of those being the publicly announced deal with Vodafone Hutchison Australia, the other is a European operator that is not public. In short, outside of China, our position remains strong with customers where we have an existing 4 gs base, and we've added some new 5 gs customers as well. As of today, we have 66 5 gs deal wins and 19 live networks deployed. Pleasingly, we also added 2 new enterprise 5 gs customers, including Deutsche Bahn. So that you can track our progress going forward, we will give quarterly updates on our win rate as well as a qualitative view on customer developments that we are seeing.
While the win rate is a good way to look at longer term developments, near term outcomes will be impacted by things like purchase orders, network rollout time lines, deliveries and customer acceptances. As additional background, three comments. 1st, we are focused on 4 gs plus 5 gs share figures as that is the best way to assess the question of scale purchasing power. It is also increasingly difficult to disaggregate the 2 technologies as products like massive MIMO can be used for either one. 2nd, we are looking at our 4 gs plus 5 gs share, excluding China, given that pursuing share in China presents significant profitability challenges and the market has some unique dynamics.
As you know, we are a long term player in China and have worked hard to meet requirements in the country, including support for the TDS CDMA standard when no other Western vendor stepped up. We will continue to engage with our operator customers in China to support their 5 gs ambitions, but what we do with them needs to work for Nokia as well. I want to be very clear that we are not backing away from China, but simply executing against a clear strategic goal to improve our overall business mix in the country. This means that we will be prudent in 5 gs, while targeting more attractive opportunities with service providers in core, routing, transport, fixed access and our current 4 gs business as well as with enterprise and web scale customers. We still expect to be a sizable player in China well into the future and with the procurement rounds still to come, our final position in 5 gs will only be clear in time.
3rd, I want to emphasize that if you look at our performance in 2019 against our total primary addressable market, excluding China, we were in line with market growth. The losses in mobile radio that I just mentioned were largely offset by gains in IP routing, optical and mobile packet core. The next focus area in mobile access is enhancing commercial management and deal discipline. Over the course of 2019, we have put in place strengthened commercial management processes designed to drive better performance in current contracts and improve outcomes in new ones. Deal decisions now include a sharp focus on cash and return on capital employed metrics, improved contractual terms and formal upsell commitments as well as our standard revenue and margin requirements.
We've also reviewed projects and customers that do not perform to our standard and have identified levers to enable better future outcomes. In some cases, there are projects where we will renegotiate terms, and in fact, there are some where we are already doing so. As expected, these new processes have already generated meaningful margin opportunities for Nokia in 2020, and we services, where, as I've noted before, a turnaround is starting to take hold as we increase operational discipline and enhance our efforts to manage for margin and cash. I'm pleased that we saw progress in our Global Services operating margin in full year 2019 compared to 2018, even if we are still below what we believe we can achieve. I also expect progress to continue in 2020 given better execution, although we will have some headwinds given a roughly similar level of network deployment services as in 2019 as new 5 gs builds proceed.
Improvements in 2019, particularly in the second half, were driven by a number of things, including including turnaround of poorly performing projects, strict execution discipline and enforcement of standard delivery models resulting in fast and first time right network deployments investments in digitalization and automation driven productivity, which are starting to show results the exit of 6 low margin managed services deals tighter control of inventories and strengthened capabilities and new customers in higher margin growth areas. All of this work should be reflected over time in our networks' gross margin as the drivers and actions I just discussed take hold. So to conclude on mobile access, we will start to provide regular updates on: 1, progress on improving 5 gs product cost through a transition to our 5 gs powered by ReefShark portfolio 2, a qualitative assessment of progress against our goal to stabilize our 2020 4 gs plus 5 gs market share level, excluding China, at a similar level to 2019 and 3, our 5 gs win rate, which is a good proxy for our longer term 5 gs market share position. Now let me turn to our 2nd focus area of strengthening cash generation. We saw solid cash performance in the 4th quarter with a €1,400,000,000 increase in our net cash position, allowing us to end the year with a net cash balance of €1,730,000,000 We expect 2020 to be free cash flow positive.
As we noted in our Q3 announcement, our Board said that it expects to resume dividend distributions after Nokia's net cash position rises to approximately €2,000,000,000 Given typical cash seasonality, we would not expect to reach that level in the 1st 3 quarters of this year. Should we exceed the €2,000,000,000 level after that point, the Board will assess the possibility of proposing a dividend distribution for financial year 2020. In his remarks today, Christian will give a deeper perspective on the drivers of cash this year, where we face some particular headwinds related to Nokia Technologies and restructuring. We have a structured program in place, including a centralized war room to drive a company wide focus on free cash flow and release of working capital, project asset optimization, strengthened contractual terms with customers and suppliers and reinforced controls across our supply chain and management of inventory. With the work we did in 2019, we were able to reduce inventories in the Q4 to the lowest level since the Q1 of 2018.
Going forward, we have further increased the weight of cash targets in the incentives not just for Nokia senior leaders, but for many on the frontline with customers. We expect this change will ensure that we maintain our momentum in this critical area. Christian will also talk about how we will adjust our approach to earnings per share guidance. But now let me turn to the Q4 where we delivered strong results. While Nokia level constant currency net sales were down, we slightly increased operating margin compared to the same period last year, generated strong free cash flow and increased our net cash balance to €1,730,000,000 as I said.
Despite the generally good performance in the quarter, our networks gross margin is where we face challenges, coming in at 34.2% for Q4 2019 versus 36.3% in Q4 twenty eighteen. On a full year basis, networks gross margin was 30.6% for 2019 compared to 34.7% in 2018. On a full year 2019 basis, Nokia level net sales were up 1% in constant currency globally and 5% excluding China. And our non IFRS operating margin was down about 1 percentage point versus 2018. We remain on track with cost reduction initiatives relative to our commitment to reduce 2020 costs by €500,000,000 compared to 2018.
In 2019, we achieved €200,000,000 of recurring cost savings as expected, even when you exclude the savings benefit from the release of employee incentives. We did this despite facing considerable currency exchange headwinds of €125,000,000 Given that I've already addressed mobile access, let me talk briefly about the Q4 performance in our other business groups, starting with IP and Optical Networks, or ION. Overall, our momentum in this business was very good. ION's best quarter ever in terms of both absolute profits and profitability and one of the best as far as sales go. Our SP4 product leadership in IP routing combined with the power of the global Nokia sales channel helped deliver constant currency growth of 6% in the quarter and 12% for the full year, excluding the video business that we are exiting.
At a time when the routing market is declining, we are clearly gaining share while also improving profitability. Optical Networks had a good year and 4th quarter. Constant currency Q4 sales rose 16% year on year and profitability increased meaningfully for the full year. Even if there is plenty of work still to do, including continuously reducing product costs, we can now say with confidence that we are one of the scale players in optical. Pleasingly, our leading PSE 3 chipset is shipping in volume and is already being deployed in the first direct optical connection between the USA and Africa with Angola cables.
Next, Nokia Software, where our underlying performance has also been strong. Profitability, as I said, was very good with full year operating profit that was up sharply by 31% compared to 2018. Software sales were down in the for the full year on a constant currency basis, but I want to make 2 points to put those results in context. First, we had a tough compare in the 4th quarter given that the same period in 2018 was Nokia Software's strongest top line quarter on record. 2nd, on a full year basis, software confident that the trajectory is in the right direction for our software business.
Then Nokia Enterprise. I talked on previous calls about a goal of double digit growth for full year 2019, and the team delivered that. Constant currency year on year net sales growth was 33% in Q4 and 18% for the full year versus 2018. Q4 and full year 2019 absolute profits and profitability both improved year on year. For 2020, we are aiming for double digit sales growth again.
Importantly, for a business in growth mode, we added nearly 40 new customers in Q4, including Microsoft, to close with 122 new logos for the year, excellent growth. Two important things for you to consider when assessing our enterprise business. First, we have moved quickly to grow the business from less than 5% of our total revenue to about 7% in 2019. If we maintain our trajectory, I see no reason why we cannot get to 10% and even beyond. 2nd, while we have been very successful in leveraging our routing and optical portfolios in the enterprise, we're now seeing rapid uptake of our wireless capabilities.
We more than doubled the number of private wireless customers in 2019 to around 130 in total and see continued robust demand in the market. Next, fixed networks, which continues to face challenges in the market transition from copper to fiber, as I have noted before. We saw some initial signs of progress in Q4, including a lower decline rate in constant currency year on year sales and strongly improved profitability compared to the 1st three quarters of the year. On a full year basis, however, the results from fixed were disappointing. We continue to have a sharp focus on costs and have targeted selective expansion in new areas, particularly fixed wireless access, where the pipeline is robust.
Finally, even though Nokia Technologies sales were down in both Q4 and full year 2019, profitability remained robust with a 3 20 basis point increase in operating margin for the full year compared to 2018. Excluding 2018 revenue from our divested digital health business, licensing revenues in 2019 were roughly stable. Our existing license agreements provide us with some near term stability in this business. And as renewal deals come up, we will be adding our strong portfolio of 5 gs patents into the current licensing package of earlier generations of mobile technology. We believe We that we expect that when all the results are in, we will have gained share in our primary addressable market in every region with the exception of China and Asia Pacific.
Asia Pacific, while very strong in many countries, was impacted by India, more on that in just a moment, where we had a slight decline in share, we will not be sure of how much until we see all of the operators report their 2019 CapEx. On a constant currency full year 2019 basis, we saw sales increase in Asia Pacific, Europe, Latin America and North America. Sales were down for the same period in Middle East and Africa by 2%, but that was still a good performance in the context of challenging market dynamics. It is also pleasing to see that we have now been chosen by early adopter operators in the leading 5 gs markets from Sprint and Verizon in the U. S.
To SoftBank in Japan to Korea Telecom in South Korea, amongst others, in addition to being selected by Orange Brands and O2 in the U. K. I've already talked in detail about China and would now like to share some more color on North and India. With 5 gs deployments progressing in 2019, North America saw 1% constant currency sales growth for the full year, despite a 5% constant currency decline in the 4th quarter. Uncertainty related to the announced operator merger, where we have a large footprint, has ended the year having launched 5 gs networks in many U.
S. Markets and expect that progress to continue in 2020. Next, India, which we report as part of the Asia Pacific region and which is a country where we have a long history and robust share. As I'm sure you know, India's telecom sector is in the midst of some serious turbulence, A general market slowdown after multiple years of heavy 3 gs and 4 gs investments by operators was exacerbated when the Indian Supreme Court recently ruled that operators need to pay large accumulated financial liabilities dating back several years. Like other companies in this market, Nokia is now trying to fully understand the full potential impact of these developments and their impact on customer demand and overall market risk.
It is too early to say how the situation will play out, but it is certainly an area that we are watching closely. With that, let me turn the call over to Christian.
Thank you, Rajiv. I will take a different approach today than in previous quarters. I will start with cash as this is what we internally nowadays in all our meetings to remind the organization of the focus needed. I will then continue with a brief summary of our financial results for Nokia Technologies and Group Common and Other, then take a look at group level results in Q4 and full year 2019, and finally, I will quickly provide on our cost savings program and close with some remarks on our guidance. Okay.
Let's start with our cash performance in Q4. On a sequential basis, Nokia's net cash increased approximately €1,400,000,000 to a quarter end balance of approximately €1,700,000,000 dollars The higher than expected cash balance was partly driven by lower than expected restructuring cash outflows where approximately €100,000,000 moved from 'nineteen to 'twenty. Free cash flow was positive €1,400,000,000 in Q4, primarily driven by operating cash flow, which benefited from a solid adjusted net profit, net cash inflows from net working capital and a one time benefit as a result of settling certain interest rate derivatives. This one time benefit totaled €190,000,000 of which €160,000,000 positively impacted free cash flow and €30,000,000 positively impacted cash from financing activities. These inflows were partly offset by outflows related to CapEx, restructuring, cash taxes and a convertible loan to one of our partners.
To dive a bit deeper into net working capital, excluding restructuring cash outflows, we generated €320,000,000 from net working capital, primarily driven by a €680,000,000 decrease in inventories as expected. There were 2 key parts to achieving this. 1st, our solid Q4 net sales enabled us to reduce our previously existing inventories in accordance with our plans. Secondly, our efforts to optimize our incoming inventories has kicked in strongly. The team has quickly resumed disciplined execution and we are pleased to see the improvement in our numbers.
Offsetting this, receivables increased €360,000,000 mostly driven by seasonality, partly offset by improved collections, including higher sales of receivables. In Q4, we were also able to collect a portion of the overdue receivable from a state owned operator, we expect to collect the remainder in the upcoming quarters. Liabilities were approximately flat as we did not see typical seasonal increases in accounts payable. This was due to a combination of 2 things. 1st, already having high inventory levels earlier in the year and second, our successful efforts in improving our inventory management.
The strong free cash flow performance in Q4 led to a full year free cash flow that was somewhat negative as expected. While we are showing signs of progress, there is clearly still more work to be done here. We have plans for this and we are making needed changes and we'll track the execution very closely throughout 2020. As I have explained in the past quarters, the whole Nokia organization has put extensive focus on free cash flow. One area I would like to provide a bit more clarity around is our cash conversion, meaning converting our non IFRS profits into free cash flow.
We are focused on improving our cash conversion over time. We do, however, have 2 large headwinds in 2020. First, our free cash flow continues to be negatively impacted by restructuring. These outflows amounted to €450,000,000 in 'nineteen and are expected to be €550,000,000 in 'twenty. 2nd, while Nokia Technologies business generates a strong operating profit, the annual free cash flow performance can differ significantly from our P and L performance both up and down.
This has to do with the structure of some of the agreements where we receive large prepayments in cash. We put this on our balance sheet and recognize this as net sales over the lifetime of the agreement. Due to these factors, we expect a substantial gap between P and L performance and free cash flow performance in 2020. Of course, over the life of for our cash conversion in 2020. First, the fact that our CapEx is lower than our depreciation and amortization, mainly due to the adoption of IFRS 16.
2nd, our pensions related cash outflows are less than our P and L expenses as we can utilize our pension surpluses to offset cash requirements. 3rd, financial interest where our cash outflows are less than our non IFRS P and L expenses mainly due to some non cash expenses related to the interest component of certain customer contract booked in financial interest. And 4th, taxes where our cash taxes are lower than our non IFRS P and L taxes due to the utilization of deferred tax assets. The 4 tailwinds are relatively small in size and as a result we face significant overall headwinds when it comes to converting our non IFRS profits into free cash flow in 2020. Therefore, our positive recurring free cash flow guidance in 2020 is driven by our assumptions of improvement in net working capital performance as well as improved operational results.
This will be partly offset by a larger expected difference in 2020 between profits and free cash flow in Nokia Technologies. Over time, we expect the gap between our non IFRS net profit and free cash flow to narrow, particularly as our restructuring cash flows decline. Of course, if we signed any new license agreements that include large cash prepayments, our free cash flow performance could be better than our non IFRS net profit in 1 quarter or a year and then the gap between our non IFRS net profit and free cash flow could re expand. Two final points here. 1st, a purely accounting topic and this relates to the implementation of IFRS 16, which involves leasing payments.
This was implemented at the start of 2019, which means that our 2018 2019 cash flow statements are not fully comparable. Approximately $220,000,000 of cash outflows that were shown in cash outflows from operating activities in 2018 are now shown as cash outflows from financing activities. This has a positive impact on our net cash from operating activities and a negative impact on our cash net cash from financing activities. Also this had a positive impact on our recurring free cash flow calculation in 2019, however, no impact on net cash. 2nd, FX moves can have a large impact on net cash.
Then over to Nokia Technologies where the team finished 'nineteen with good results. While Q4 net sales declined 11% year on year, this was primarily related to higher one time sales in the year ago quarter. Excluding these, net sales would have declined slightly year on year. Our annualized licensing run rate continues to be 1.4 €1,000,000,000 From a profitability perspective, Q4 operating margin improved 3 10 basis points. This was primarily due to lower patent portfolio costs and lower licensing related litigation costs.
Moving on to Group Common and Other. Net sales declined 11% year on year on a constant currency basis as declines in radio frequency systems or RFS were partly offset by growth in Alcatel Submarine Networks or ASN. In negatively impacted by temporary CapEx constraints in North America related to ongoing merger activity as well as the absence of a large customer rollout, which benefited the year ago quarter. In ASN, growth was driven by the ramp up of new projects, which are also expected to benefit 2020. ASN closed the year with a very strong order book.
The operating loss in Group Common and Other worsened year on year reflecting the following four items. 1st, a negative fluctuation in other income and expenses due to lower gains from our venture fund investments, which benefited the year ago quarter. 2nd, our continued digitalization investments. As I have explained in recent quarters, we are focused on driving automation and increasing productivity. This 2018 shown in Group Common and Other, and we expect to continue to invest in digitalization at similar levels in 2020.
3rd, a higher operating loss in RFS, which were primarily driven by lower net sales and a lower gross margin due to unfavorable regional mix. And 4th, the previous three items were partly offset by higher operating profit in ASN, primarily resulting from lower operating expenses. Then looking at Nokia Group level results, net sales were flat in Q4 on a reported basis. That said, we grew 3% excluding the Greater China region where an increase in competitive intensity combined with our prudent approach towards deal making had negative impact on both our Networks business as well as on Nokia Software. Our non IFRS operating profit increased slightly year on year as our continued cost saving progress was partly offset by lower operating sorry lower gross profit in Networks.
Financial income and expense was an expense of approximately $340,000,000 for the full year 2019 and came in below our guidance assumption of $400,000,000 This was primarily due to lower interest expenses and improved FX results in Q4 2019. Taxes for full year 2019 were slightly better compared to our expectations. Consequentially, our results for the full year 'nineteen were in line the revised guidance range that we provided last quarter. Next, a quick update on our cost savings program. 2019 marked a year when we made considerable strong progress on our cost savings initiatives.
Excluding the impact of lower incentive accruals, we successfully achieved approximately €200,000,000 of recurring cost savings in 2019 as planned, all of which was attributable to operating expenses. As we complete our program in 2020, we expect to drive an additional €300,000,000 of cost savings. We believe we have good visibility on achieving these savings. Lower incentive accruals had a positive impact on our overall results. This was reflected in our group level operating expenses for the full year 2019 that benefited by approximately 200,000,000 dollars Therefore, modeling group level operating expenses for 2020, assuming we pay out on target annual assuming we pay out on target annual incentives and assuming we achieve our expected cost savings targets, our non IFRS operating expenses in 2020 would be approximately $50,000,000 higher than in 2019.
On restructuring cash outflows, as I mentioned earlier, we shifted approximately $19,000,000 to $20,000,000 and now expect cash outflows of approximately $550,000,000 in 2020. Regarding our network equipment swaps, we have now completed this program with an end result of
coming in
€50,000,000 less than what we originally anticipated. Then turning to our guidance. We have today reiterated our outlook for 2020 non IFRS diluted EPS, operating margin and recurring free cash flow. As Rajiv mentioned, I wanted to touch briefly on our EPS guidance for full year 2020. Our current guidance is for €0.25 plusminus0.05 We intend on providing updates each quarter on our progress against this range and we'll adjust the midpoint accordingly if necessary.
We have maintained our guidance this quarter. Please note that we expect 2020 to be back end loaded, similar to what we experienced in 2019 with the majority of operating profit and free cash flow to be generated in the Q4. Finally, I wanted to note 2 additional risks that we had flagged in our commentary today. First regarding India where customer demand could weaken and risk could increase further after the Supreme Court upheld a ruling that telecom companies must pay retroactive license and spectrum fees. This potential impact has not been factored into our outlook for full year 2020.
The second risk is regarding the coronavirus and specifically on the potential for temporary disruption, particularly in our supply chain. While our global supply chain helps to mitigate some of the risk, it is a bit too early to tell if this will have a material impact on our business. Needless to say that we are monitoring the situation closely. In summary, we intend to show progressive signs of improvements over the course of 2020. We clearly have a lot of work ahead of us and we will stay focused to ensure continued solid execution in accordance with our plans.
With that, I hand over to Matt for Q and A. Thank you, Christian.
Carrie, please go ahead.
We will now begin the question and answer session. The first question will come from Alexander Paturk of Societe Generale CIB.
Yes, good afternoon and thanks for taking my question. Can I come first on your new KPI here? The 35% target that you have for the 5 gs powered by ReefShark, is this target constrained by the supply of SoC components or by the timing of supply? Can this improve meaningfully in the course of 2020? I mean, is this a minimum?
Or is there any downside risk to this target? Thanks.
Thank you, Alexander. So the nature of the risk is very conventional rather than unique. We are now executing on a normal path with multiple partners instead of only 1, as we said last time. Yes, there are both internal risks and external risks that we need to track and manage. While I don't think the timeline can necessarily be accelerated, we have improved our capability to track and manage the risks.
We have increased our SoC R and D capacity by about 60% over the past year, and we continue to ramp up in 2020, so that we can ensure that we have the capability to track and manage both the internal and external risks. And for 2020, we have 3 BPH SHOCK SOCs under development. As I said, 2 of these have been taped out already, which is an important milestone. So while there remains work ahead, this inherently means that some of the overall risk is now in our rearview mirror.
The next question will come from David Mulholland of UBS.
Thanks very much. Just wanted to follow-up a little bit on the last question. Obviously, you've talked a little bit about working with other suppliers in terms of your ASIC strategy, but can you just help us to understand how does your breakdown, particularly in the mobile business this year between your own internal developed products manufactured at foundry with 3rd party providers? And how do you still drive differentiation when you're using a 3rd party? Are you giving your own IP going into those products as well?
Or is it more of an off the shelf solution?
Yes. Thanks, David. So our SoC strategy has all along been a bit like this. We specify a custom SoC with a partner. We develop some IP blocks for it.
Our SoC partner has or developed some IP blocks. And then this SoC partner packages the custom SoC for us using our IP blocks, their IP blocks and 3rd party IP blocks such as ARM Processors and the likes and takes the design to foundry. Now what has changed is that we no longer work with only one supplier, but with 2 other SoC partners making custom silicon for us in mobile networks. And they all have some unique assets, be it in RF or baseband. We've also ramped up significantly our own R and D capacity for specification, design and validation of the chips working with SoC partners.
When we selected new partners, we also made sure that we select somebody who already has some knowledge and has done work with somebody else. So it gives us a running start.
Thank you, David. Carrie, we'll take our next question, please.
The next question is from Tal Liani of Bank of America.
Hi, guys. First question is just about the coronavirus. What's the impact if you see it all? And more importantly, I want to speak about software and about semiconductors. Last quarter, you spoke about the need for ASIC versus FPGAs.
You noted it in the prepared remarks, you related to it. Would you mind to discuss where you are in the process? And how does it help you to bring up gross margins? Thanks.
I think on the coronavirus, as I said, we are monitoring the situation closely. It's too early to call if this will have a material impact or not, if we'll be able to mitigate the situation. On the other hand, our global supply chain helps us as a starting point here. We'll update you as we move along here.
And, Talia, on the question regarding to system 1 chip, so we are transitioning from FPGA to system on chip. And this is the metric that we'll give you an update. And this is that we got to 10% of the 5 gs powered by Reef Sharp system on chip portfolio. We started ramping up volumes, and that will get to 35% by the end of this year, greater than 35% and then 70% by the end of 'twenty one, and then the whole thing will be complete about 100% in 2022.
Thank you, Tal. Cary, next question please.
The next question comes from Richard Kramer of Arete Research.
Thanks very much. Rajeev, potentially turning your back on the China RAN market is a very big move given the volumes that historically have been coming out of that market. So can you talk a little bit more about how you balance having your supply chain there, the R and D efforts and specifically what the fate of Nokia Shanghai Bell might be if you decide that the profit pool in RAN there isn't worth participating in? Thanks very much.
Thanks, Richard. So we are not turning our back on China. I want to be very clear about that. We are trying to change our strategy to change our business mix in China, right? So we want to sell more to webscale players, to state owned enterprises.
And with the service providers, I. E, the operators, we want to change the business mix towards a higher proportion of core, routing, fixed access, naturally be in the game in 4 gs as well as transport. So increase the business mix with higher margin components. On 5 gs, we expect that there'll be significant profitability challenges. Again, we'll look at the case.
It needs to make sense for us on a 3 to 4 year basis. And we don't know yet because the procurement round is yet to come. But overall, I'd say that we'll still be a sizable player in China. We want to go with the strategy that allows us to increase the business mix in a way that margins are better as well as cash flow is stronger.
Thank you, Richard. Carrie, next question please.
The next question comes from Alexander Duvall of Goldman Sachs.
Yes, hi there. Alexander Duval speaking. You're guiding for your overall addressable market for the group not to grow in 2020 and then market share stay stable, meaning implicitly the Nokia wouldn't grow. Given that in 2019, the wireless market actually grew at its fastest rate for some years, with Nokia growing 1%. And then now we're still in the early innings of 5 gs into 2020.
And you're talking about a lower market growth rate and implicitly a lower growth rate for Nokia, does that mean that beyond 2021 there's no further growth in the next couple of years for the company?
Thanks, Alex. So, well, number 1, last year, excluding China, we grew at a much faster rate, closer to 5%. And then when it comes to this year, the main difference between our previous market outlook and our current market outlook is that we are now presenting these numbers excluding the China market. Excluding China, our views on the market have not changed significantly over the past 3 months. I've already added some color on China.
Then when it comes to the market overall, with regard to mobile access, we expect that this year, there will be a number of operators sort of last year was about last couple of years was about lead countries, lead operators in lead in lead countries. And now it's going to be about 80 to 100 operators starting to roll out 5 gs at some point this year. Next year, there'll be another 50, 60 operators rolling out 5 gs. Gs. So expect that 2021 should be the scale phase, maturity phase of 5 gs euros.
The next question is from Sandeep Deshpande of JPMorgan.
Yes, hi. My question is regarding Nokia Technology. I mean, over the last couple of years, I mean, the business has gone up and down, but it hasn't been growing very much. Are there more contracts to be got in terms of the smartphone vendors? Or is that all essentially done and now we are waiting for whenever the IoT market happens in Nokia Technology?
Or are there is there a near term growth driver for Nokia Technology? Thank you.
So I think it's fair to say that the majority of the smartphone volume is under license. There are still opportunities in the smaller players that we are going after. And from a smartphone point of view, the next thing will be then the renewals, which will then also include the 5 gs patents that we have and in general kind of going through the discussion on how devices have become less intelligent and the network more intelligent and because of that there is more value in other devices the second. Other devices the second. And there the team is making progress lending deals.
And some of that will take time, will involve longer discussions and some of those deals we are going after directly and some of that opportunity we are addressing through the established patent pools in the industry.
Thank you, Sandeep. Carey, we'll take our next question please.
The next question comes from Akal Sultania of Credit Suisse.
Yes, hi. Good afternoon. Just trying to Rajeev, I'm just trying to understand your comments on China again. I guess China revenues are obviously down for you a lot. You're saying that ex China, your TAM is flat and you grow in line.
So I'm just trying to understand if China has the potential to be down again in 2020 for you And can it have an impact on the growth assumptions for the networks business because it's still about 10% of network sales?
Thanks, Achal. So it's hard to predict China at this point because of the procurement round. It's gotten delayed, so we don't know what the outcome of the procurement round of 5 gs is, the CP1. But I would say that the strategy that I laid out obviously has it's a longer term strategy. All of it is not going to play out.
So hard to give a sizing of how China will evolve at this point in 2020.
Thank you, Achal. Carrie, we'll take our next question.
The next question is from Stefan Slowinski of Exane BNP Paribas.
Yes, hello. Thank you for taking my question. Just a follow-up on the Technologies business. There was already a gap, I guess, between the non IFRS profit and the cash generation over the past few years and well, except for some of the one offs. And now you're saying that gap is going to increase in 2020.
I mean, can you give us an idea of how much, what's the cash conversion going to be like for the Technologies business? And is that specific to 2020 in terms of timing of contracts? Should we expect that to kind of renormalize in 2021? Thank you.
Yes. So as I said in my prepared remarks, this is a business where we from time to time related to some of the contracts receive upfront payments or payments that are weighted towards the earlier years rather than paid equally over the life of the contract. And that is what is now having an impact on 2020. So the conversion will go down relative to 'nineteen. And then as I said, once we get to a phase where there will be renewals, then depending on how those new renewals pan out, there might be a uptick or we might actually get then large upfront payments again.
Let's see how those renewals go. I will I'm not in a position to quantify this. We just want to give you the puts and takes in terms of what is going to drive cash flow development 2019 to 2020. And as I said, the drivers there are why do we go from a slightly negative to a positive. We'll have an improvement in profitability.
We'll have an improvement in how we manage our net working capital, but then that will somewhat be offset by then the headwind created by the fact that the cash conversion related to Nokia Technologies is slightly worse in 2020 over 2019.
Thank you, Stefan. Carrie, we'll take our next question please.
The next question is from Domenick Olszewski of Morgan Stanley.
Hello. Thank you for taking my question. With regards to the useful KPI data you've given on the proportion of shipments on 5 gs ReefShark, maybe could you give us some idea of a sensitivity of how if that accelerates at a faster or slower pace than you expect, so versus, let's say, that's 85%, how that impacts your group margin?
First of all, I think it's fair to point out that when we talk about the percentage here, it's a shipment based metrics. And as a result of that, the financial implications of that will come with a lag of a couple of quarters. And of course, if we improve this, then we'll have the product cost improvements coming through earlier and that's of course what the team is focused on.
Thank you, Dominic. Carrie, next question please.
The next question is from Paul Silverstein with Cowen.
I appreciate you all taking the question. With respect to the margin improvement on mobile access, how much of the improvement, if any, is beyond the FPGA to SoC transition? What are the
other levers and what are the magnitude, if any?
Thanks, Paul. So the other levels are global services improvement and execution, which has already happened to some degree in 2019, but more needs to continue, automation, digitalization, better contract management, so on. There is the system on chip product cost that we talked about. And then there is the better commercial deal discipline, centralized pricing war rooms, equating some contracts or changing contract terms where there might be the option.
And they're all important.
They're all important, absolutely.
Thank you, Paul. Carey, we'll take our next question, please.
The next question is from Sebastian Stavlovitz with Kepler Cheuvreux.
Hello, everyone, and thanks Have you quantified the opportunity to swap Warwave's equipment in the core networks in Europe? And also do you see any opportunity on the run market with 35% market share cap potentially on radio access network in Europe for IRIX vendor? Thank you.
Sebastian, so this is it's for policymakers to decide. We watch the situation closely. We're there for our customers when they need us. We have been we have, as we said in our conversion rate or the win rate of 5 gs outside of China, it's above 100%. We also won a very nice deal in Vodafone, Hutchison, Australia, which is a sole supplier deal.
In terms of core, yes, there is the opportunity in Europe, but we'll just watch it. And we have to be thoughtful about swap costs and things like that in terms of how much share we want to take prudently.
Thank you, Sebastien. Karru, we'll take our next question.
The next question is from Simon Leopold of Raymond James.
Thank you very much for taking the question. I wanted to see if maybe you could double click on attaching the changes in the mobility business to overall gross margin, specifically the effect of declining presumably profitable 4 gs business as you're making this transition to the system on a chip in 5 gs. How do we think about how material the effect of that would be on overall gross margin through the year? Thank you.
Okay.
As we've said, the more system and chip deliveries we get to, the better the cost position of the Nokia 5 gs product is. And that will then, all other things equal, flow through to an improvement in gross margin. With that, we will also be able to get as we get to scale in 5 gs to a situation where 5 gs gross margins in general are at a level that actually the shift in mix from 4 gs to 5 gs will have less of an impact on the gross margin development going forward. So I'm not sure if I understand the question, but that's of course what we manage. And then as Rajeev said, it's about how do we deal discipline, get further improvements, how do we get improvements through better operational performance in services and those things will also then drive gross margins going forward.
And of course, that's Simon on mobile access comment. And so when you step back and say better mix in enterprise and Nokia software and IP routing will also improve gross margins potentially.
Thank you, Simon. Carrie, I think we have time for our final question of the day.
The final question will come from Edward Snyder of Charter Equity.
Thanks a lot. Rajeev, I'd like to revisit Richard Kramer's question, I think. And correct me if I'm wrong, but he wasn't asking you about leaving China. He was asking about leaving the RAN market in China, which is I think a very valid question, given you've already pointed out that 60% of the market for this business. I mean, it's a little confusing on my end because you could rotate to the United States, but if you look at the lay of the land, the 2 major carriers, T Mobile and AT and T have backed off the discussions of millimeter wave.
T Mobile is going to put 5 key area has put it on band 71, which doesn't require MIMO at all. And AT and T has talked about putting on FirstNet, which is an established network that may not use MIMO. So I'm just curious, if you do back out of just the RAN market, not China completely, where do you rotate to, to gain share, especially if the U. S. Isn't going to be deploying a lot of MIMOs?
Verizon hits their 31 city target, but very few cells in many of the cities, maybe a couple of streets, and they're struggling to get siding requirements there. So can you maybe give us a little bit more detail on how that works to keep your costs and your scaling and RAN market competitive if you're not addressing China's RAN market? Appreciate it. Thank you.
Thanks, Edward. So just quick, in the U. S, there will be low band build that's starting to be underway now. There'll be mid band that'll still take maybe a couple of years, but the 3.7 to 4.2 CBR, etcetera. On the enterprise side, there'll be private wireless build.
Think about utilities, large field area network. So there are opportunities on the U. S. Side. Then of course, as I said, we expect some 80 to 100 operators starting to roll out 5 gs in the rest of the world.
And that's this year. And then next year, we expect another 50 or 60. So it'll start to be a scale market in terms of 5 gs maturity. On China, again, we're not saying we're backing out of the RAN market. We're still there in 4 gs.
We'll be prudent in 5 gs. I do want to point out that even if we say it's 60% of the global volume, it is roughly half of that in terms of revenue market share, I. E. China ran as a percentage of total market and it's minuscule in terms of profit contribution over the next 3 years or so.
Thank you, Ed, and thank you all for your questions today. I'd now like to turn the call back to Rajeev.
Thank you, Matt and Christian, and thanks to all of you for your questions. I'd like to close with a couple of brief thoughts. First, I want to say again that we have heard you, our investors and other stakeholders. We are taking steps to give you some better visibility to the work we have underway. And as part of that effort, Nokia will hold a Capital Markets Day for investors in the second half of this year in order to give you a deeper perspective on our strategy and operational progress.
2nd, despite the challenges we have faced in mobile access, other parts of our business continue to perform well in 2019. We closed the year demonstrating sustained momentum with product leadership in areas like our FP4 based routing products and made good progress in our strategic focus areas of enterprise and software. Finally, while I believe that 2020 will present its share of challenges, I remain confident that we are taking the right steps to deliver progressive improvement over the course of this year and to position us for a stronger 2021. With that, I'll hand the call back over to Matt.
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 60 through 75 of our 2018 Annual Report on Form 20 F, our financial report for Q4 and full year 2019 issued today, as well as our other filings with the U.
S. Securities and Exchange Commission.
Thank you.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.