Hello, and welcome to the Nokia Strategy Update Teleconference and Video Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. If you are also viewing the video webcast, please remember to mute the audio on your computer before asking your question as there is a 30 second delay. Please note that this event is being recorded.
I would now like to turn the conference over to Mr. Matt Schimmel, Head of Investor Relations. Sir, you may begin.
Ladies and gentlemen, welcome to Nokia's strategy and operating model update. I'm Matt Shimao, Head of Nokia Investor Relations Pekka Lundbach, President and CEO of Nokia and Marco Witten, CFO of Nokia, are here with me via teleconference and video today. During this call, we'll be making forward looking statements regarding our future business and financial performance, and 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 as well as internal operating factors.
We have identified such risks in more detail in the section titled Operating and Financial Review and Prospects Risk Factors of our 2019 Annual Report on Form 20 F, our financial report for Q1 published on April 30 on Form 6 ks as well as our other filings with the U. S. Securities and Exchange Commission. Please note that our presentation includes comparable figures in addition to the reported results information. Today's stock exchange release and presentation can be found on the Investor Relations section of the Nokia website.
With that, I would now like to turn the call over to Pekka.
Thank you very much, Matt, and thank you, everybody, for joining us today. We've been looking forward to this event quite a lot because as promised, we are today going to provide an update on the strategy and operational model work. We gave you some basic kind of principles in connection with our Q3 result a few weeks ago, and this is one step in a way midway update on our road towards the Capital Market Day in March. I'm going to be talking about the world around us, then I will explain to you what the current positioning and in a way the key drivers in our business groups are. And then after that, Marco will zoom deeper into the principles of the operational model and capital allocation and some other financial matters as well.
Before I talk about the world around us, I would like to emphasize that this is going to be a longer journey. This is going to be a 3 year journey. And as I have said earlier, as we have said earlier, next year will be challenging. Of course, 7% to 10% expected comparable operating margin is not a bad starting point for this journey, but of course, our longer term ambition is higher than that. But the interesting thing is that we expect to achieve that 7% to 10% despite the fact that we are investing a lot in mobile networks.
And as you will have seen earlier in our release today, we expect mobile networks to approximately breakeven in terms of profitability next year. So despite that, we expect 7% to 10% for the group. But before talking about the businesses and profitability drivers, A couple of comments about the world around us and especially what's going on in terms of the role of technology. Because unfortunately, as we all know, COVID-nineteen is not the only challenge that the world is facing. Pressure on the planet is increasing.
We have far too high CO2 emissions. COVID-nineteen is only temporarily taking them down. But when the world returns to normal, hopefully, sometime next year, we are back to the same old story. There is an urgent need to reduce emissions. But it's not the only issue we are facing.
We have serious issues about biodiversity over usage of natural scarce resources of the planet and many consequences that could, in the mid- to long term, be quite severe to the conditions of living on the planet. At the same time, productivity is stalling. When you look at the big picture and compare how fast the productivity growth in the world was 20, 30 years ago, it's now 90% slower than it was then. So we do have a productivity challenge in the world. And then very importantly, a third issue is that access to opportunity remains very unequal when we talk about opportunities to work, opportunities to get health care, education and so on.
But the interesting thing is that technology will be, if not the only solution, but it will be a significant part of the solution. 5 gs is expected to add USD $8,000,001,000,000,000 to global GDP by 2,030. These technologies that we are talking about will be vital to dealing with the climate problems and many of the other problems that I mentioned. And we do believe that Nokia will have an opportunity to play a significant role in all of this. We have developed a concept of 6 strategic beliefs that I'm now going to go through with you.
And the first one is really that referring to what I just said, networks play an increasingly important role in society, and they have a direct connection to solving some of these challenges that I mentioned. This means for us that we will be able to extend our focus to serving so called critical networks beyond the traditional CSP networks that we are today serving. And then the question is that, okay, what are these critical networks then that we are going to focus on? Critical networks deliver carrier grade performance, high availability and resilience. But in addition, they are elastic and self defined to offer tailor made performance on demand.
So they will have very high requirements. And in a way, they are advanced networks that run mission critical services for companies and societies. And they combine the best features of carrier grade resilience and then what we have seen on the IT and Internet webscale service side elasticity and flexibility. This type of networks will be in very high demand in the future. We will be talking about precision manufacturing.
We will be talking about automated driving. We will be talking about transportation, logistics, new generation of energy networks, new generation networks for high frequency trading, even then little bit in the longer term remote surgery, new types of applications for delivering, for example, health care to remote places of the world. These are becoming increasingly important, and they will over the years to come, they will extend to all corners of society. And this does mean that Nokia's addressable market, as I explained, will extend from what today is known as the CSP market. And then as a separate thing, the enterprise market, it will evolve towards critical networks that sometimes are run directly by enterprises and industries of this world, but very, very often, they will be run by their partners.
That could be either current CSPs or new types of CSPs that we also expect to emerge on the market in the future. These are challenging networks to run. And because they require carrier grade resilience, ultra low latency and high degree of safety and security. Very often, I believe that enterprises and industries will opt not to run these networks themselves but rely on a partner. This is a segment that will provide very interesting opportunities for us going forward.
So this is the first strategic belief, critical networks, then and the concept of critical networks. Then the second belief is that these networks will be built by our customers on a so called best of breed approach, which means that they will select different network elements and different parts of the network, usually separately based on a very careful and competitive analysis on total cost of ownership in relation to the expected performance parameters. Of course, there can be cases, and there will be cases, where the customer buys the whole network in one project or in one deal, but we believe that this will be a clear minority of the cases. We are happy to participate in such cases, but we believe that most of the cases will be built on best of breed type of approach, which then leads to the 3rd strategic belief, which is that technology leadership is absolutely necessary if we want to deliver economic value. We are seeing that today in Nokia's portfolio.
In those segments where we can clearly show that we have a technology leadership that can be, in a way, hardwired and anchored in technical facts and getting the technology generations and their timing right, we immediately have a strong competitiveness. But if we do not have that technology leadership, then you don't have pricing power, you are bound to have a lower market share. So technology leadership is paramount if you want to deliver economic value. It varies between segments that how many companies will have space on the market to deliver economic value. Usually, it's 2, sometimes 3.
In exceptional cases, maybe 4. But leadership in practice will mean number 1 or number 2 position or sometimes number 3 position. That's absolutely necessary. So we want to reestablish technology leadership in those segments where we do not have it currently. We have it in many segments that I will go through soon.
But then a very critical belief that we will apply is that in cases where we will not be able to establish or show path to economic value creation, we will reassess our segment participation. So we will not automatically be in all different segments in cases we cannot show economic value creation. Then number 5, another very important thing. When we look at how these networks constructed and how they are built and how the different parts of the network develop, we do believe that over time, value in these networks will migrate away from, in a way, monolithic systems towards silicon on one hand and then software and services on the other hand. So you can choose different strategies to play for different segments, different ways to focus if you want to deliver value.
But you have to be really strong in some of these subsegments because that's where the value will be shifting to. Important is also that when we look at the development of the network architectures, there's a lot of moves towards open architectures, disaggregation of network players. And that means that there will be opportunities to capture this value through new types of business models. As we have seen in many other industries, a general shift towards as a service type of business is something that we believe that will be increasingly visible in our case as well. And then number 6, another important point, which is not only of a general importance for our businesses, that's long term technology research to secure, 1st of all, our technology intellectual property portfolio, but also to make sure that in addition to the roadmaps that the businesses are deciding, that we have enough long term innovation going on that we can secure technology leadership, not only in the short and midterm, but also in the longer term.
So these would be the 6 strategic beliefs that are, in a way, guiding our work when we continue to work towards the Capital Market Day in March. What we can say already today is that this will mean that our focus area will be to become a trusted partner for critical networks for our customers. And of course, once we do that, the ultimate goal will then be to deliver value to our shareholders. And I already said that we will have a pretty rigid and systematic approach to selecting where to play and where not to play, and we will only accept plays that have a path to shareholder value creation. I already a little bit touched on the Watt side, secure technology leadership that can be many mean many things.
In many cases, we are seeing a direct connection between our ability to deliver competitive custom silicon that will be the kind of the core of some of the products that we are making and our competitiveness. We are actually seeing that today very well that in cases like in IP routing and now also in fixed access where we are getting it right in terms of the generations for custom silicon, we are actually extremely competitive on technology, and that then gives us pricing power and market share and economic value. But we are also making a strong pivot to cloud and software, and I will talk more about that when I talk about the new business that we are starting on the 1st January, which is called Cloud and Network Services. And then the third element, we will continue to strengthen our long term research and patent portfolio. That is, of course, a business that is highly profitable, and it is really one of the best places for us to invest in order to deliver good shareholder returns going forward.
So that would be some of the strategic principles. And then I will move to the 4 businesses that we will be reporting from the beginning of next year. And the first one is our mobile networks business that will be led by Tommy Uitto. For the last 12 months ending at the Q3 of this year, this business was approximately 10,000,000,000 euros in size. And here, our main objective in the short- to mid term is very clear that we want to repeat our 4 gs success in 5 gs.
And I'll talk about that actually quite a bit because that's clearly the number one goal that we have here. But before that, I will talk a little bit about the current market position. Mobile Networks market, this is excluding the core network, which will be part of the cloud and network services market. This market is currently roughly €43,000,000,000 and it's expected to grow about 1% per year. There are growth pockets inside this market, and enterprise wireless is clearly something that is expected to grow much faster than the overall market.
And then over time, we also expect that Oren and V RAN segments of this market will also be growth drivers. We have currently, if we exclude China, we have approximately 27% combined 4 gs, 5 gs market share. This is for the last 12 months. But interestingly, this is not that different between 4 gs and 5 gs. The same 25 sorry, 27% applies also to 5 gs outside of China.
We are also, in addition to 2nd position number 2 position in 4 gs and 5 gs outside China. We are number 2 in rollout services globally. And of course, as a organizational move, as you may recall, when we are putting together this segment, mobile networks, we will include not only the mobile access products, base stations, etcetera, but we will also include the related network management software, and we will also include the deployment services. The expected profitability for this business, as you already most of you have seen in our stock exchange release, next year will be around 0. And we will and Marco will talk a little bit more about that in his part, but we will introduce a new reporting concept, which will be more transparent than the previous one.
We will stop talking about non IFRS results, but we will introduce a concept of comparable operating profits, where we will explain the difference between reported operating profit and comparable operating profit in quite detail. So comparable results will exclude amortization of acquired intangibles, restructuring and other items affecting comparability, and there will be full disclosure on these items. So the expectation is roughly 0 profitability. Longer term significant improvement. Next year will be a challenging year.
And in connection of our Q3 results, we were talking about some of these issues that are facing us. There is a top line challenge despite of the 27% market share, but we have a top line issue with 1 of our largest customers in North America. In addition to that, there is quite strong margin pressure and price pressure affecting the whole market in especially in North America. And when you combine that with the fact that we are actually increasing our R and D investment in this segment, that creates the combination of top line and cost that will deliver is expected to deliver roughly 0 profitability next year. But on the turnaround and the development road by itself, I have to say that I'm really optimistic about how things are going.
So when I look at the recent development, we now have 133 commercial 5 gs deals. We have 65 public 5 gs references, and we have 42 live 5 gs networks. And then in addition to this, we have a strong position in private 5 gs based wireless networks. We have really recently increased our R and D productivity and also R and D velocity a lot. We have increased our 5 gs R and D capacity with 40% since January 2019.
We have tripled the number of system on chip engineers and doubled the number of certain segments in software development such as bin forming. The feedback from customers is growingly encouraging. We have closed, as you have seen, significant deals recently, And we have currently CSPs sorry, 5 gs business with all top 3 CSPs in Japan, all three key CSPs in the South Korean market. We are the only non Korean vendor that is working on 5 gs with all South Korean operators, and we are also working with almost all top European CSPs. And then in addition to that, we do have despite the recent decision by one of the American customers, we continue to have a very strong position in North America.
And clearly, the product development is delivering the target for reef shark system on ship share of all shipments by the end of this year is over 35%, and we are on track to achieve this target. And the target for the end of 2021 continues to be approximately 70%. So clearly, in those parts of the feature set where there has been gaps, that is narrowing, and there are already now quite a lot of cases actually where we are either on par or even ahead of competition. This journey is not over yet. And of course, it will take until '22 before 100 percent of new shipments will continue to be or will be reef shark based.
And that's then the ultimate time when the entire cost challenge that we have had because of the FPGA chipsets instead of systems on chip will have been sold. So that's the situation in Mobile Networks target to improve profitability significantly in the longer term. Then the second business that we will report from the beginning of next year, that will be called Network Infrastructure. You may recall that there was an earlier name, IP and fixed networks, but there is also optical networks and there is the submarine network. So we decided to call this business group network infrastructure.
And the objective of this is obviously to be the world's most trusted partner with best of breed solutions for the most critical networks in the world. And now we want to up our position a little bit more in the various segments that we have. Here you see that our market share globally in CSP routing is 18%, optical networking 11% and fixed access 19%. If we take these numbers excluding China, they would be 25%, 17% and 32%, respectively. In IP routing, we have market leading routing silicon, routing software and network automation and analytics capabilities.
This is a segment where we have a strong position, and it will be further strengthened through the next product introductions that we have in the pipeline. In Optical Networks, our market share is lower, but we have recently made some very important technology introductions, the market, and I'll talk about those just in a second. But the key market driver for optical networks is actually very attractive because it is the basically the same 5 gs deployment that is going on that is driving mobile network demand, but it requires that for the edge cloud architectures, the backhaul, midhaul and fronthaul connections will need to be upgraded in capacity, and this will lead to a lot of investments by the owners of these networks. And then in fixed networks, the key driver obviously is fiber buildout and fiber to the home buildout, which is not mutually exclusive with 5 gs. We believe that our customers will invest in both.
And then in Alcatel Submarine Network Business, that's an interesting segment as well where we are a leader in the whole world at the moment, and that is a fast growing business at the moment, which is turning to profitability. We'll give you more information at Capital Market Day. But it is, in a pretty attractive way, driven by the investments in submarine networks by the webscale customers of this world. Strategic imperatives for this is, 1st of all, to expand leadership in IP routing for CSPs and then also to gradually expand the market position that we have in CSPs to enterprise and web scale. We continue to invest in custom silicon for high performance needs, but we also invest in data center switching solutions, which are often based on various software solutions.
Then in optical networks, we have recently launched a new generation chipset, PSE 5. PSE stands for Photonic Service Engine that will be our kind of key element of driving our transition from the 100 gigabit per second capacity to the 400 gigabit per second capacity. In addition to that, in 2021, the positive effects of the acquisition of Elenion will start to be visible, and that will drive cost efficiencies with silicon photonics, which is obviously a growing technology trend in this segment of the market. Then in fiber access, we have also recently made a very significant technology and product launch with our 25 gigabit per second PON passive optical network solution, which is now at a pretty attractive time when fiber deployment and fiber to the home is increasing in importance, is taking a technology leadership position actually in the whole world. And when you combine that with the market shares that you saw earlier, that puts the fixed access business in a pretty interesting position.
This, in addition to the fixed wireless access, which is also a growing segment. And then last but not least for this business, we want to expand our leadership position in submarine networks, which I already explained will be a growth segment going forward as well. Then to the next business, which will be roughly €3,000,000,000 Sorry, what I forgot to mention about the previous business. Still, you probably saw it, but current situation or next year, high single digit for network infrastructure and then longer term goal will be gradual improvement. But now to Cloud and Network Services business.
Approximately EUR 3,000,000,000 euros business for the last 12 months. The objective is clearly to create value by leading the transition to cloud native software and as a service delivery models that I was talking about earlier. So this is really our pivot to that world. This is also a fairly large market, €26,000,000,000 in total today, but it's important to zoom deeper into this market and understand that what the attractive growth segments of this market are. We have a strong starting position.
We are number 1 in telecommunications, software and services. This is a fragmented market, as you can see in the 7% market share. But we are also a leader in cognitive automation and in private industrial, private wireless. So our starting point for this is strong, but it's very important to understand that what this €10,000,000,000 market, which will grow 17 sorry, is expected to grow 14 percent per year to €16,000,000,000 by 2023. What that includes and that includes the cloud native software, advanced cognitive services, as a service delivery models and various types of Industry 4.0 solutions.
So that's the list of Innovate solutions that we will be focusing on in this market. So this means that from the starting point, which is actually a collection of various businesses where we are in at the moment, about mid single digit profitability, we see a potential for significant improvement over longer term. And again, strategic imperatives listed here already mentioned to a large degree, transition to cloud native, leadership in private wireless and transition to as a service delivery models. And then the 4th business, approximately €1,400,000,000 for the last 12 months, our technology licensing business, which is number 2 in technology licensing in the world. On this slide, you see a list of various deals that or agreements that we have reached over the past few years.
There was one more quite important 5 gs agreement actually signed in the Q3 this year, but unfortunately, we are not able to disclose the name of that customer. But what I can confirm is that we have a portfolio of approximately 20,000 patent families, including and this is really important, including about 3,500 5 gs standard essential patent families. And recently, an independent report concluded that Nokia is number 1 in the world for ownership of granted patents that have been found essential to the 5 gs standard. So this does give us a strong foundation to build on. And what we are going to do is to continue to invest in 5 gs and multimedia research and standardization to continue to further develop and renew the patent portfolio.
Then, of course, a very important goal is to renew the major mobile device deals at as favorable rates and as possible. There are still some uncontracted vendors that we are approaching. And in addition to that, in addition to 5 gs mobile customers, we have a goal to gradually diversify to new segments. And here, automotive and certain segments of consumer electronics are the most important segments, for example, to leverage our multimedia assets. And then the number 4 goal of this business is to build brand partnerships to grow the value and develop new opportunities for the Nokia brand.
So these are the 4 businesses. And then this whole thing will be supported by quite a big exercise that may perhaps look small when you look from outside, but believe me, this is really, really big. We are refreshing our operational model. It's not only that we are building these 4 business groups that will then be tied together in the customer interface through our account teams and the customer experience organization. But it also means that we are actually building a very lean corporate center, and Marco will talk a little bit more about this.
This is a big transformation, and it will not be done overnight. This is a fundamental change in philosophy. We want more accountability, but more decentralized decision making and a leaner competent, yes, but leaner corporate center. We want to decentralize more, not centralize more of the decision making, really making the business group leaders that you saw on the previous slide fully accountable for the products that they develop and also the success of the products on the market. Then these four businesses will be supported by a strategy and technology organization that will be responsible for the long term research and working very closely with the technology licensing business, but not only that, also scouting technologies, startups, establishing cooperations with research institutes and then continuously challenging the 4 business groups as to what will be possible on technology.
And then for, in a way, perhaps more traditional corporate center functions, the finance organization and corporate affairs, legal and compliance and people. With that, over to Marco.
Thank you, Pekka, and hello from my side as well. And I will touch upon 4 different areas now. And I start with why a strong capital structure is important for us and how we are driving improved focus on capital allocation as well. And the second item is that how we're creating long term shareholder value by prioritizing towards the areas where we can lead. And then also I will get back to that.
Pekka just mentioned about the lean corporate structure and why it's important for us. And then I end my presentation share with that we are highly committed to clear and transparent reporting and communication. So with this, I will start with our capital structure. And actually customers see a strong capital structure as a sign of strength and that reflects our ability to invest in R and D as well and drive that technological leadership that we need to do. But in addition to that, also our customers want to have a long term partner.
When they invest in a huge networks, this is a long term journey, not a one off deal. And that's why it is important for us that we show that we have that strong capital or financial position over longer term as well. And in connection with this, we also have a target that we aim to investment credit rating. And also we stated before as well that when it comes to the liquid assets, we want them to be about 30% of our net sales. So and how we are working with this, we actually think that each of the capital allocation decisions should be done exactly like any investment decision and thinking, which means that we are looking into is that right area and what is the return of that investment.
And that's where we allocate our resources as well when it comes to financial resources. And then of course, we have a very stringent performance management, so we will follow this up just like any other investment. And this is a little bit changing in the way we are doing that today. And of course, when we see that businesses are now responsible, they have the clear P and L responsibility. We will also focus more on the capital returns from businesses.
So we will assess basically doing a portfolio analysis on a continuous basis, not only at the group level, but also the same task has given to the new presidents of the businesses. So they will do continuous evaluations of their portfolio and offerings that they have so that we can try that value in these businesses. Then consistent with our capital structure philosophy, We have a clear set of capital allocation priorities as well. And of course, the primary focus is deploying capital to R and D in the areas where we want to win. We want to drive that technological development and that is primary focus.
Then we have also other investments in our core businesses that we can see that they will create shareholder value. So value creation again is the key here. And of course, with these, we can provide shareholders the capital returns. And of course, when we are now looking into financial targets and coming back to those at latest at the Capital Markets Day, we'll also look into the dividend policy. So we will get back to that as well.
And then going to value creating long term shareholder value and how we prioritize our capital. Focusing on the best of breed vendors like Pekka mentioned earlier is extremely impairment for us. So that's why it is important that the businesses feel they are empowered to do what is needed to improve the businesses step by step continuously. And that's why when we set the targets as well, we look what is our capabilities, what is the technological development, how is the market outside of us looking And how are customer investment plans developing? So that's the way we set the targets on businesses.
And as I said, the thinking is that they have to improve their business operations continuously. And it's not longer justified to just exist because you're part of end to end offering. So this is very clear change that we have. And when our business leaders have this empowerment, accountability and responsibility all the way from top line to bottom line. So they have power to change what is needed in their businesses.
And this is why also why we want to change the corporate function cost base. And if we now go to that section as well, So why is it so important in this new operational model that corporate staff functions are lean? Today, the situation is quite different. We actually have a lot of people in corporate functions. And we are now moving all the costs and headcount to beaches and keep a lean focused headquarter functions.
And just an example giving you numbers here, we are moving about 14,000 full time employees from corporate to PGs. And how we've been doing this earlier is that we have been allocated that cost based on a key, usually net sales, to the business leaders, which means that big part of their cost, they actually haven't been able to influence. But now the situation will be different. And then to the reporting. As I said, clear and transparent reporting is our target.
And the ambition is that now we only have this new operational model with clear 4 business groups with the committed P and L responsibilities. We aim to report those exactly the same way as we are following it internally. So we will show you P and Ls on these four business groups on a quarterly basis in our interim reports. And we hope that all this will be easier for you to assess the value of these different businesses and especially when you're doing some of the barge valuations, so we hope that now it's easy to do. Another issue that we will change is that we will implement again a regular cadence of Capital Markets Days.
And I know the last time we had a Capital Markets Day was actually 2016, but now we're going to do those more on a regular basis as well. And the next one is next year, March 18. And I hope that you all can join that meeting as well. And let's see if that's going to be a physical meeting or if it's going to be virtual. And then back to Pekka's comment about the reporting.
So we want to simplify the reports as well. And it's clear for you and easy to find the information which is important for you. And just like Pekka said, we will not use the term non IFRS, but we will use term comparable operating profit. And we will show that very easily just like here on the slide, the bridge between reported results and what is the comparable results and all the items which are affecting the comparability. And we believe that the new reports that we will present from Q1 2021, it will be easier for you to see what is the underlying business performance, but also it will be easier for you to compare Nokia with our peers.
So I end my presentation here and turn back to Matt for Q and A. Thank you, Matt.
Thank you, Marco. For the Q and A session, please limit yourself to one question only as a courtesy to everyone else in the queue. Cole, please go ahead.
Thank you. And we will now begin the question and answer session. First question today will come from Domenick Oluszewski with Morgan Stanley. Please go ahead.
Hi, good afternoon, everyone. Just one question focused on the philosophy for R and D spending. Obviously, today you've emphasized the value of R and D and the importance of technology leadership. So are you protecting the R and D budget spend next year? To put the question another way, are you willing to accept a negative operating margin in mobile networks?
Or is the R and D spend effectively limited by the ability of mobile networks to show a flat margin?
Well, the reality when you talk about R and D is that those costs are something that you can very easily drive up or down. So we are looking at a certain R and D target, which, of course, can be flexed a little bit up or down, but it's still fairly rigid because you're talking about people and you're talking about hiring people. I mean, that expected profitability for Bomba Networks is approximately 0%. But of course, there is always a potential swing factor. And there are uncertainties up or down because we do not know exactly yet how much next year's top line will be.
There are still deals to make to complete the volume picture for next year.
Thank you, Dominic. Cole, we'll take our next question, please.
Our next question will come from Sebastian Zapotzik with Kepler Cheuvreux. Please go ahead.
Yes. Hello, everyone, and thanks for taking my questions. This is Sebastien Your dodgy competitor has started IP contract renewal session with couple of its large patent licenses, notably to include the 5 gs technology into patent agreements. Have you started the negotiations with your licenses around 5 gs? And any update there will be very helpful.
Thank you.
Thank you for the question. And I understand the question based on what you've seen, Ericsson. But actually, what we believe is that we have a very good patent portfolio. And just like we mentioned earlier, on the 5 gs, we have 3,500 SEP patents and we are a leading actor there. And we believe that we have very good base here.
And of course, litigations are never something that we want to enter in, but sometimes it happens. But it's very difficult to also say what is the outcome of this. What comes to the specific deals and so forth, we cannot go into details. And I believe that so far we've been quite successful in those cases that we have had litigations. And usually, we do a very good evaluation before we enter the litigation, what is our ability to win.
And that's why I think we've been quite successful so far.
And Marco, maybe just to add one thing since you specifically asked about 5 gs patent deals. Yes, we do have already signed deals in 5 gs. So we have been able to demonstrate our capability to kind of migrate from the era 4 gs to 5 gs also in the Patent Licensing business.
Thank you, Sebastian. Cole, we'll take our next question.
And our next question will come from David Mulholland with UBS. Please go ahead.
Hi. Thanks for taking the question. Just in terms of the reorganization within the business, one of the challenges, I guess, Nokia has faced the last few years is driving coordination between what were historically separate business units, even within Alcatel and Alcatel Luz and then combining with Nokia within Mobile Networks. Where do you think you are on that and the ability of the company to move forward with, I guess, with one agenda and everyone singing from the same hymn sheet. I'd love to just get your take on, yeah, where we are in that transition.
Thank you. That's a great question. And I believe that this simplification of the whole operational model will play a really key role in this because what we have done is really designed these 4 businesses around customers' typical buying situations. The current organization that is still valid until the end of the year, In many parts of it, it's actually fairly complicated. And the current management team is 17 people, which it's very large.
From the beginning of next year, it will be 11 people. And a couple of concrete examples. One is that in today's model, even in a fairly straightforward mobile access deal, there are 5 management team members that are, in a way, partially responsible for that deal, and that takes a lot of coordination and effort and everything. From the beginning of next year, it will be very simple. It will be in one business group, that whole part of the network.
And the same logic follows to the other parts of the network as well. So each business has its clear strategic role. That's my first point. But then the second point is that, of course, as I said, these businesses will not operate in silos, and there are 2 places where breaking these silos will be extremely important, and the structure will make it easier than today. The first one is the customer interface, where we are account teams that will be working with the businesses when they serve their customers.
And as I said, we are more than happy to engage in end to end type of network architecture or technology discussions with the customer. And then the second thing is that I said that in addition to businesses in the leadership team, there will be a role called strategic technology. And one key task of that role and that organization will be the overall network and technology architecture, including the harmonization and management of the software stack architectures across the businesses. So that's a great question. And I believe that this new model will be a fundamental element in addressing that challenge.
Thank you, David. Carl, we'll take our next question please.
And our next question will come from Sami Sarkomis with Nordea Markets. Please go ahead.
Hi, thanks for taking my question. You made it very clear that you would be ready to consider divestments in case businesses were not able to reach competitive margin levels. You did also discuss the margin upside in various business groups. My question would be that, do the targeted improvements in profitability include potential impacts from divestments? Or would those represent additional margin upside?
These targets that we have now as we have now presented them is more or less following the current business structure. Then it's very important now what I said in the beginning that this will be a 3 year journey. And now these businesses will start remember, they will start on the 1st January. So now it's very important that we give them time to work on the strategies, value creation strategies. And then as we said in the beginning of the presentation, we will then discuss with the businesses to the extent there are segments where we cannot see a path for value creation.
And that's then the point when, of course, reassessing the strategy for that particular segment comes into question. Also there, you mentioned divestments, but we have to remember that when we talk about strategic reassessment, there can be other ways as well. There can be partnering. There can be different types of portfolio arrangements with some other players. You do this and you do that.
So there's a multiple of different strategic routes that can be taken for those businesses that may not have a stand alone path to value creation.
Thank you, Sami. Cole, we'll take our next question, please.
And our next question will come from Sandeep Deshpande with JPMorgan. Please go ahead.
Yes. Hi. Thanks for letting me on. My question is regarding again back again to your mobile infrastructure business. Your product has been less competitive over the last few years, which has caused some share losses.
But there is huge opportunity in terms of share gains because of various geopolitical issues. How are you seeing that progressing at this point? Or do you need that product to be at that 2022 level of productivity to be able to win significant footprint as is becoming available because of the issues in the market.
We don't need to wait until 2022 for that. And we are actually seeing a lot of opportunities today. There has been some deals where these factors have been part of the logic behind. And our estimate is that we have actually caught over 40% of the value of such opportunities. So we are getting there right now with even with the current portfolio, no need to wait until 2022.
And our next question will come from Achal Sultania with Credit Suisse. Please go ahead.
Hi, good afternoon. Can you just help us clarify one of the comments on the patchings business? So when you talk about keeping that business profitability at a stable level long term. Can you just help us understand how much in that of the contribution today is coming from the amortized portion of some of the deals that you have done in the past, where you've received an upfront licensing payment for future periods? And if that's the case, does keeping that business stable in the long term, does it mean that you have to win a lot more deals to offset the headwind as those amortized portion of revenues go away in the future at some
point? Thank you.
Thank you. Very good question. And what comes to the structure of deals, we have given you information earlier as well that about €600,000,000 is the difference between what we have as a profit and what is the cash flow and that's because of the prepayments that we have received earlier years. And this is varying a lot. We don't know how that's going to continue going forward.
Will we get the prepayments again? Or will they pay as we go? So that is still open and we see that on a deal basis actually. When it comes to portfolio itself, as we already mentioned as well, we have over 3,500 5 gs patents already. And if you just look at the development of 5 gs mobile phones, there's a huge development and estimates are that in 2023, for example, half of the mobile phones that are sold will be 5 gs mobile phones.
So we see very good opportunities. But in addition to that, also video and IoT and in the automotive side, we see different opportunities in consumer electronics just like we said earlier. So there's definitely a lot of opportunities going forward. Now what we are guiding here is what we see right now and this will definitely develop and we will get back to you as well. So if you just look the current patent portfolio, we have actually these are very long term opportunities here.
So it's not only next 5 years, it's actually more than that. It's up to 10 years and so forth. And these are very good patents and this will be needed as well by many, many other companies.
Thank you, Achal. Cole, we'll take our next question, please.
And our next
I had another one on timing. So first a clarification. Pekka, when you say a 3 year journey, just want to make sure we're all on the same page. I mean, are you therefore intending to achieve whatever your eventual target profitability and returns might be, say, late 2023, early 2024? And then to the point you made on the continuous review of your competitive positions, in an earlier answer, you obviously acknowledged that this plan is going to begin on the 1st January.
You've got to give them some time to execute the business plan. But how long do you give them with a 3 year journey in mind? I mean, are these businesses going to have a year, 18 months? At what point should we expect to see some action around that sort of those reviews?
I understand the question, but there is no definitive deadline that I could quote. I mean, this will be a continuous discussion between Marco and myself and the leaders of the business. And there can be different situations also in from timing perspective. Then that 3 year journey was not an indication that, that would be anything particular about profitability guidance. It's more of an indication that we are now building or starting to build a solid foundation for the next years, and this is something that will take time.
And 3 years, what does that mean? That is the period of time within which when you start from the basics and start investing in new operational model and getting the product right, increasing investment in R and D, getting the focus technology focus in a sharp order. That's roughly what it takes before you can produce or expect any meaningful results. I'm not saying that there could not be improvements before that, but that's not a specific deadline for any of the targets that were published today if you talk about the longer term targets that we were quoting for the different businesses. It's a continuous journey.
Thank you, Andrew. Cole, we'll move on to the next question, please.
And our next question will come from Frank Maoui with DNB. Please go ahead.
So my question will be relating to the
mobile networks, building on the previous
question, where you talked about
several factors. But
we'd like if you may
if you're able to break down what the main levers levers of margin improvement will be that you're pointing towards from today's kind of breakeven level in the longer term? Will that, for instance, be more relating to scale? Or do you see improvements on the gross margin side as the business transitions more to software, for instance? Or do you see efficiency gains on the OpEx side, for instance? So if you could give us some more color on exactly what kind of drivers you see for on that side of the business to get to a more acceptable level of margins?
Actually, all those drivers that you mentioned are important. Of course, top line and volume is extremely important. And there again, we are still in the very early phases of the 5 gs cycle. Gross margin drivers, clearly product cost, which has a connection to the system on chip roadmap and some other development initiatives that we have ongoing. But it's not only these 2.
Then it's also SG and A, which will be under a lot of scrutiny. And this new operational model will be also there, I would say, an enabler. As Marco explained, we are pushing quite much more direct responsibility of fixed cost S and A in general to that businesses. But I will have to ask you to wait for the Capital Market Day before we may be able to give you more granularity as to where the future improvement would come from. I'm not able to or I do not want to go into more detail on this one today.
And our next question will come from Stefan Slowinski with Exane BNP Paribas. Please go ahead.
Great. Thank you. And thanks Pekka and Marco for the presentation. I just wanted to come back to the question around that journey and maybe the destination of the margin. Can you say that it would be at least kind of in line with the targets the company has had in the past of around 12% to 14%?
And I think just based on your previous comments there, are we right to assume that, that won't be a linear progression and that even if we get improvements coming through in the near term from ReefShark deployment, those will be reinvested and more of the benefits could come in the later part of that journey?
The only annual or year specific guidances that we are currently giving is, of course, for this year and the next year. And then we as you saw, we opened up ourselves a little bit in terms of our longer term ambition. But more than that, we are not going to provide today. Capital Markets Day will then be the opportunity to get and produce more detailed longer term targets. But we are not going to make comments on the longer term in a more detailed manner than what we said today.
Thank you, Stefan. Cole, we'll take our next question, please.
And the next question will come from Robert Sanders with Deutsche Bank. Please go ahead.
Yes. Hi, there. I just got a question on mobile networks. When is the earliest quarter when you could actually return to growth given FX and horizon headwinds? I'm just wondering if it was doable by Q4 next year.
I mean, I guess what I'm trying to understand is where are you relative to your previous run rate of that U. S. Customer? How much is behind us and how much is ahead of us as we look into 'twenty one in terms of the negative impact?
So now the line was breaking up, so I could hear only part of the question. But Was it about us versus competition in product features or road maps? So can you clarify, please?
Yes, sure, Peter. Sorry. Can you hear me now?
Yes.
Yes.
Yes. So the question was about mobile networks. And what is the earliest quarter when you could return to growth given FX and Verizon headwinds? And the reason I'm asking the question
is just because it's not clear to me how
far how much is behind us in terms of the Verizon impact and how much is still ahead of us? I mean, could you potentially grow that business year on year by Q4 'twenty one? Is that something that you think is achievable?
We are unfortunately, I do not want to get into that because we are not yet providing top line guidance for next year or any of the coming years. When it comes to Verizon, of course, we have to remember that they will continue to be among our top three customers also going forward, and there is a lot of opportunities. We actually recently published a DSS dynamic network dynamic spectrum sharing software deal with them. So we continue to work with them in many segments. We recently published a 5 gs private wireless deal with them as well.
So we do not at all see it that way that we would somehow be excluded from some of the segments with them going forward. We are then, of course, very strong on the software side and in the core network as well. But more than that, unfortunately, I do not want to say because we are not providing top line guidance at this time.
Thank you, Raub. Col, next question please.
And our next question will come from Alexander Peterk with Societe Generale CIB. Please go ahead.
Yes, good afternoon. Thank you for the update and thanks for the question. Just on the group covenant other people that you're moving into business units, so the 14,000 is indeed a wondering if you could put a number on what kind
of savings you're targeting with this additional personnel customer relation?
Yes. Thank you for the question. And in this first phase, we are now reorganizing the whole group and we are moving people and entities to different places now. And of course, just like we said earlier, when PG Presidents now have the empowerment and ability to actually assess the whole of their business and see what are you know what is the capabilities they need and what is the cost base that they believe is optimal for them. And after that, we can see what is the outcome of that.
Before that, it's premature. And just like Pekka said, remember, they start with these new businesses 1st January 2021. So we will have to get back to you on that one.
Thank you, Alex. Call, next question please.
And our next question will come from Simon Leopold with Raymond James. Please go ahead.
Thanks for taking the question. I'd like to understand what you're saying to your customers, particularly regarding the potential for exiting some products or businesses. I have to imagine that that could make them nervous. What kind of assurances can you give them? Thanks.
Well, this is precisely the reason why we are now working on the strategy on all of these businesses, including all the products. We have not made any announcements as to any strategy reassessments on anything. And this is a discussion that obviously our customers are very interested in, and they do want assurances from us that we will continue to take care of them regardless of which strategy routes we would take. This is a very important part of the way how we are developing this strategy, and we are in continuous discussions with our customers around the overall strategy. And I have to say that the general feedback from customers on this strategy has been fairly positive because they feel that this will clarify the way how they should work with us.
This will shorten the distance between the customer and the key R and D decisions. And this whole kind of complex matrix management that has been quite visible in the customer interface. That will be simplified a lot. And the ultimate goal, of course, is that we want to be in a position to serve our customers even better than today.
Thank you, Simon. Cole, we'll take our next question.
And our next question will come from Peter Nielsen with ABG. Please go ahead.
Thank you very much. I'd just like to go back to the R and D spend, please. You have indicated, of course, that there'll be several drivers of the improved profitability going forward, lower cost, better top line. Nonetheless, given your introductory comments on the evolutions of networks and the need to be technology to have technology leadership, which suggests that a lot of this comes from this related to R and D and increased R and D spend. I believe that at the Q3 results, you indicated that R and D spend would increase by a few $100,000,000 which doesn't sound that much.
I mean, if that will do it, it would indicate a very good return on that incremental R and D spend. Could you elaborate a bit on whether you're firming your beliefs that this would be enough? And is it mainly a question of reallocating your R and D spend towards 5 gs? Any additional comments here would be appreciated. Thank you.
Thank you. I would say that the R and D spend that we believe is needed, that's what we are now putting in next year. And it's not only reallocating more the 5 gs, we do that as well. But also if you look at the total R and D in mobile networks, we are increasing that and we believe that we are already today in a very good position. We have to remember that we are not starting from scratch today.
We have done extremely good job in the past 2 years actually. We have increased the efficiency of the R and D. We have improved a number of different areas there and having a very good traction. And we believe that with these investments that we put in place right now, we can actually be definitely a leading position in near future. I don't know if Pekka, you want to add something?
Thank you, Peter.
No. Sorry. Just I mean, it's exactly as Marco said, and maybe just one additional point. Now the beaches are working on strategies, and this work will, of course, continue. And part of the strategy work is, of course, R and D investments.
And from our point of view, there will be attractive opportunities to invest in R and D, but we will exercise a very high degree of scrutiny as to going through those R and D investments. And as I said earlier, there needs to be a credible path to value creation. And if they are R and D investments where there is shareholder value creation visible, then of course, it makes sense to do them. But how much exactly the total R and D will be over the coming years, That is not something that we are able to say at this time. The assumptions as we have them today, they are now built in their business group strategies and the general ambitions that we have when it comes to the operating profit performance of those businesses going forward.
Okay. Thank you, Pekka and Marco. And thank you, Peter, Kurt. Cole, we'll take our next question, please.
And the next question will come from Richard Kramer with Arete Research. Please go ahead.
Thanks very much. When we look at your targets sort of both near term and longer term, they are sort of less precise than Nokia has given in the past. And you stress the accountability of each of the 4 business unit heads. In some past years, Mark, I am sure you will know, Nokia has had very large cash costs at the end of the year, Q2 following the year for employee bonuses. Is that going to be made transparent to investors whether these units are meeting their goals and what sort of cash liabilities that might involve for meeting these targets?
And Pekka, could you let us know the sort of you have 5 other ELT members who were business unit heads. Can you run through whether they are staying or leaving Nokia and whether they'll be there to sort of ensure the continuity that you described was going to be sort of reset at the beginning of the year? Thank you.
I can start the question about the transparency when it comes to the bonuses. Bonus system, we actually are disclosing quite clearly what is the bonus method that we have. And I understand, of course, it's not always easy to know exactly what is the cash cost of that. And so far, we haven't been disclosing that. But let me take that as a feedback and we look what we can do about that just to make it more easier for you to understand what is the cash flow impact of those.
And let's see what we can do about that.
And then the other part of the question. Of course, when we simplify and streamline the operational model, it does mean that there will not be as many seats on the group leadership team as earlier. And again, it will shrink from 17 to 11. And I fully understand that if those members of the current team who will not have seats in the future leadership team, if they want to do something else. I respect that.
And many of them have worked for us a long time. So from also their point of view, it may be time for change. Your specific question, Barry French, Markus Weldon and Sanjay Gaul, they will leave. That has been announced. We are discussing then with the remaining that in what capacity they could potentially be involved in the future, but there are no definitive decisions on them yet at this time.
Thank you, Richard. Carl, next question please.
And our next question will come from Amit Archandani with Citigroup. Please go ahead.
Hello everyone. Amit Archandani from Citi. Thanks for letting me on. Given a lot of strategic questions have been answered, if I could maybe just go back to the Technologies business, please, just as a clarification. You've talked about an impact of €600,000,000 between operating profit and FCF this year and next year, which again, please correct me, is 1.2% versus a deferred revenue of 7.70% at the end of 2019 on your balance sheet.
I can see the Microsoft contract flowing through from deferred revenue. Could you maybe help us understand what the rest of the math is? Because clearly, this €600,000,000 is more or less onethree of the consensus operating profit for 2021?
Yes. Thank you for the question. And this is consisting of several different customers that we have or patent licensees where we have prepayments. And as I said earlier, this varies a lot and that goes also in the future that it's difficult to say exactly how that's going to be. And when it comes to technology, the margins are very high in the technology part because these are R and D that we have been spending in 5 gs.
And in addition to that, we do some specific R and D on technology side as well. So we can utilize these technologies and then take a pattern of those that will be used in handheld devices. And that's why we have such a good patent portfolio, thanks to the general R and D that we have in the company. And that's why we see that this portfolio is very good even going forward.
Thank you, Amit. Cole, we'll take our next question please.
And our next question will come from Artem Bialdewski with CSEB.
I would like to ask on Network Infrastructure segment. And looking from our side, it still has quite a few different sub products and services. How do you see it from synergy potential? Are there any tangible synergies relating to R and D or, for example, sales and marketing business of products?
Well, there are certain synergies. Even though the 4 businesses, they can also be treated as 4 separate cases. And we will also disclose some of the financials separately for those 3 subsegments. Obviously, they have common customers, so there are customer synergies. And there are also certain technology synergies.
The submarine networks are optical networks, and we have optical network business. Then this whole question of routing and optics, silicon photonics development is driving these segments closer to each other. There might be common components between the two segments. So there are certain R and D synergies and then definitely customer synergies. But our kind of assumption is that we want to be able to treat this as separate business cases.
Thank you, Artem. Carl, we'll take our next question, please.
And our next question will come from Daniel Gerberg with Handelsbanken. Please go ahead.
Thank you, gentlemen, and thank you for letting me on. My question would be on the critical network focus. Can you comment on the size of the market mentioned with mobile networks? I believe EUR 43,000,000,000 this year, while SEK 44,000,000,000 2023. How large percentage of that would you state to be critical networks?
And then also, do you
believe that open virtual radio access networks can be critical as well? Or will they be more of common style? Thank you.
Yeah. I knew that we would get this question that when we start talking about critical networks that then how big how many percent of the networks are critical. We don't an answer to that question. I mean, that will come really through the applications that the customers will put on these networks. But the interesting thing is that the needs of the critical networks will be increasingly driving the new cases that we will be looking at.
So that's why it definitely makes sense to focus on that because we kind of have competencies on both sides of the spectrum when we look at the needs for the critical networks. Then O RAN VIRAN, we are fully endorsing these technologies. We are developing them next year. We will have a full suite of interfaces available. We have already done the first industrial vRAN implementations.
I have said many times that these will not be needle movers on the market in the short term, but they will gradually increase in importance. But when it comes to critical networks, in many cases, initially, these technologies, Oren and Wiran, will most likely be initially used in more simple cases. But there is nothing inherent in the technology itself that would exclude them from critical networks going forward. And especially industrial applications, campus networks, vRAN, where you have radios that you deploy fast to campus, and then you have interface to cloud based virtual baseband and then edge cloud based service management. That could be a very attractive business for many industrial customers who want to deploy fast, securely, cost efficiently some of their critical network functionalities.
So I believe it is coming, but again, not a needle mover in the short term.
Thank you, Daniel. And Cole, we're now ready to take our final question for today.
And our final question will come from Sami Sarkami with Nordea. Please go ahead. Hello, Sami. Your line is open.
Okay, Cole. I'm going to assume that Sami reentered the queue by accident. So what I will say is thank you to all of you for your questions today. Thank you also, Pek and Marco. Ladies and gentlemen, this concludes today's call.
I would like to remind you that during the call today,
we have made a number
of forward looking statements that involve risk and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in more detail in the section titled Operating and Financial Review and Prospects, Risk Factors of our 2019 Annual Report on Form 20 F, our financial report for Q1 published on April 30 on Form 6 ks, as well as our other filings with the U. S.
Securities and Exchange Commission. Thank you.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. And at this time, you may now disconnect.