All right. Thank you very much. My name is François-Xavier Bouvignies. I head the European Tech Hardware and Summit Team at UBS. I'm very happy to have Justin Hotard, CEO of Nokia. So thank you very much for being here.
Great to be here, François.
Justin, I think a lot of things have happened since you joined. You provided a very interesting capital markets there. We will go through that in detail, if that's okay with you.
Sure.
I will start maybe with the network infrastructure that seems to be a very important focus for you. So how does Nokia plan to capitalize on the AI superstructure, as you call it, especially on the network infrastructure side? That would be a good starting point.
Yeah. If you look at it today, particularly on Network Infrastructure, we see most of the opportunities in our current portfolio. And that's primarily in IP switching and optical networking. And again, if you think about the company, definitely pre-Infinera acquisition, but even with Infinera, still very heavily exposed to telcos, less focused on AI and cloud. So really the big shift in bringing Infinera in and integrating it pretty aggressively was shifting the team to focus on being much more competitive in AI and cloud. And that's why we gave the guidance we did around 10%-12% growth in IP and optical. Longer term, we think it's favorable for access networks, right? Because as more applications get used and built, and physical AI happens, we believe it'll move into, of course, our fixed access business, which sits within NI, and then, of course, mobile networks.
But the big opportunity for us is to be really focused on where we see demand in optical and IP switching. And that's largely around, obviously, the AI factory builds, which includes scale across, which is largely an optical piece, but also drags our IP routing platforms. Obviously, we've had little footholds in IP switching, but we're not a leading player there. And I've been pretty clear that that's a place where we see longer-term opportunity, but it's a start. And David Heard, who runs our business for us, also shared that.
And then we think what differentiates us in this space is the opportunity around, particularly around optical, where we've got vertically integrated manufacturing, but we build everything from the silicon for photonic or not silicon, the semiconductors for photonic integrated circuits with indium phosphide, all the way up to line systems and the control point software.
When you guided for NI to be up 6%-8%, Kagar, and you mentioned a bit more than 10% for the optical and AI part, when we look from the outside, it might seem a bit conservative. I mean, we thought it would be more, like in terms of traction, at least if we look at the news flow, there is a bit of a disconnect here.
Yeah.
Is it a function of you getting into a conservative approach as you want to start to run the business conservatively? Or is there anything we should be aware of that would limit your upside?
Yeah. I think there's three things that we consider in the guidance. So first of all, you have to consider fixed networks in that. And obviously, fiber access, this is a place where we're a very strong market leader. We have good position. But in the past, we've been chasing revenue more on the client side of that, so the customer premises equipment. So we made one announcement as a part of our portfolio companies around moving fixed wireless access out into our portfolio companies, a business that we think is good, but not a business that fits us. But there's also areas there where we think we need to be more disciplined around where we think we're the right provider of optical network termination points. But we're probably not the best provider in some of the other spaces.
We have to be really disciplined around that business. That creates a little bit of headwind on growth. That's one. That's really, if you think about the six to eight versus the 10 to 12, it's really about being disciplined there. When you think about the 10 to 12 and you look at that, okay, well, first of all, if you look at our position in the market, we're much more exposed today in telcos than we are in CSPs, and certainly versus if you look at optical, certainly versus our peer there or the faster-growing players in IP switching and routing. When you look at it from that standpoint, you say, okay, well, even if you're growing quickly, you have to look at the math of this part of my business is growing faster, but this customer segment is growing slower.
And so just the math of that comes into the 10 to 12. And then the third thing is just prudently, look, we were late to market on 800 gig. We're now, as you heard from David, we're committed to catching up in 1.6 and driving hard to do that. And that's a real jumpstart for the team. And then if you think about IP switching, while we're strong in IP routing, IP switching is a place where we've been a really small player. In fact, we really didn't focus on, let alone AI, but the cloud even, right? So coming into that market. And so also just being reasonable about the time it takes to get into those design cycles, when, and actually see the growth materialize. What I think is encouraging is there's a lot of positive response. There's a lot of demand.
We're starting to engage with the customers in the way we need to, which is deep technical and roadmap engagement, as well as being really rigorous around operational execution and scaling our capabilities to be able to support them. David talked a little about that at the factory level, but of course, it's not just at the fabrication and factory level, but also all of the capabilities in the business. All of that equates to what we think is a more measured view.
Then, of course, the last thing I'll say is, if you look at the history of Nokia, if I'd put a big number out, you'd remind me that we haven't been very good about hitting our targets and delivering on our commitments. And that's probably a little bit more of a macro view, but I want to make sure we're disciplined in setting expectations that are realistic and achievable. And we get into being much more predictable in terms of our track record of execution.
So when we think about the way you want to run the company, I mean, with a cost-disciplined manner, and you have these two moving parts. You have this AI opportunity, and you have this maybe more telcos or legacy business, let's call it this way, where you see a bit less momentum. How do you intend to allocate capital? I mean, is it the telcos part that needs to come down, basically, and then you move away everything to AI? Do you still need to invest a lot in the telcos part of the business?
Yeah. I mean, look, telcos are a very important customer for us. I think if you look at the way we've addressed this or the way we're structured, now with Raghav in the chief customer role, his focus is going to be on telco and what we call large mission-critical enterprises. Think of this as utilities, rail. There's some oil and gas customers in there that we work with around providing critical infrastructure for them. So they're going to continue to be critical. The shift is a lot more of the left edge, the early technology is being driven by the hyperscalers. And I think in AI and cloud, that's probably been the truth in cloud. We just weren't participating in it. But now we see it in AI, both on IP and optical. And so really leaning into that from an investment perspective.
But the other side is when you get out of the U.S. and you look at where do we see the early opportunities in sovereign cloud, a lot of that is with our telco customers. And my sense is those roadmaps will continue to converge because the shift has already happened in IP switching. I think it's happening in IP routing because what we're building for scale across is pushing the speed and the performance speed and security, reliability barriers that we've had in the past. So the boundaries are being pushed on that side. But that's ultimately going to fall back into telcos as well. And I think that's the shift from an allocating capital perspective, but also really who's driving the roadmap. And then continuing to invest and co-create with our telco customers to make sure that the features, the capabilities, and the requirements they have are supported so that we're not growing in one segment and then obviously shrinking in another.
So when we look at your backlog, I mean, obviously, it seems to be building up very nicely on the backlog. Can you provide a bit more color on, at least qualitatively, what's in your backlog? Is it like a big range of customers? Is it driven by one in particular? Just to understand a bit the drivers of your business. And as we look beyond, I mean, should we expect you to announce any bigger hyperscalers when you have it? I mean, how do you intend to communicate to the market your momentum, like KPIs?
Yeah. So for me, there's a couple of things that are going on. One is the backlog is not it's not one customer. It's multiple. The second thing I would say, particularly in optical, is we are seeing orders with longer durations come in. I think this is happening in the industry. And it's not a surprise as demand grows that customers are looking to place orders, recognizing that the supply chain needs that forward visibility to be able to build capacity. So I think it's probably the one when we look at the one and a half. I would say you'd see the duration moving out a little bit versus maybe what we saw four quarters ago, or certainly even when I started. On the other side, as I think about the business, I'm really not worried about customer announcements.
If our customers want to make announcements, I'm all for it. That's great. It'll be something we're happy to do. We're supportive. I really like them when they're industry shaping, and we just announced one today or yesterday with du on the mobile side around autonomous network slicing. Those things, I think, are great because they show where we're headed as an industry and innovation. But I don't actually think customer announcements are as valuable as showing orders and revenue, and so for me, that's really what I'm focused on, and so that's really going to be my North Star, is are we growing orders? Are we executing and converting those orders in line with our customer commitments? That's what I care about.
Moving to history, you addressed it a little bit already, but the IP, I mean, switching part and routing, it's quite complex. You come from a long way versus very established peers. What makes you confident that this time you can really grab some market share? Is it because you have a high growth, so you need some diversity of supply? Is there a quality element that you manage to catch up? If yes, what exactly it is? Just to provide a bit more of the confidence here.
Yeah. I mean, look, I think on IP, there are two things. One is data center builds are driving routing, but the equation on driving routing is driven by the data center, not how many switches or the switch capacity inside the data centers. But the fact that we're building more data centers is driving routing growth. And we feel pretty good. That's a place where we've had a pretty strong position. We've had presence with hyperscalers and AI and cloud providers for some time. But it doesn't grow at the same rate just because the unit of measure is a data center versus the number of racks.
On the IP switching side, I think it really is around our software stack, our tooling, and then candidly, just the openness of being in and co-developing and co-innovating with our customers. But we've also been very measured because we recognize that there's others that have a much, much bigger footprint and lead. And so we think this is one where we've got opportunity, but we've got to spend time really deeply co-engineering and doing the kind of innovative work with our customers that will ultimately mean that they'll select us because they like our switch fabric, they like our technology, and they see differentiation and value in it.
And on the optical side, I mean, I think it's a very interesting area because obviously you have high-end demand, very supportive. But at the same time, when you look at the past, it's not an area that is very profitable, at least relative to maybe some other kind of products, like IP, for example, which we just talked about. So an Infinera acquisition, when you look at the profitability, was maybe what Nokia was. So how can you be confident about not only the top line, but also the profitability? How can you make it more profitable as well, of course?
Yeah, a few things. I think first of all, there are cycles in this business, and because we're vertically integrated and we're building indium phosphide fabs, some of this is also fab ramp and utilization. You also see this when you deploy line systems first, that the line systems tend to be at lower margins, and then it's what's now largely becoming pluggables, right? The pluggables drive margin over time. We still have a cost curve that everybody is coming down in the industry to support the demand, and so all of those things are there. The discipline for us is making sure we're hitting our cost targets.
We're being very focused on pricing rigor across the portfolio, which I think something that David's brought in as a discipline, and then candidly, the last one is scale. I mean, I think this is the problem that both Nokia and Infinera had separately that they now we've addressed is just the scale, the scale of the amortization of the R&D in the business. And the reality is the two of us together are now at a scale level, we're starting to become closer to Ciena in size. And that's probably a pretty good indication, but not just Ciena. Look at Huawei as an example, as a global competitor.
You announced the U.S. manufacturing. I mean, how important is it, I mean, in terms of winning business, actually, to have a U.S. footprint manufacturing? Is it actually one of the ways to win share as well, how strategic it is?
Yeah. So two things on that, first of all. I think one is if you look at what we're doing in semiconductor manufacturing, that's a place where we've always been. Infinera had always been US-based. We do think it's important. We're really pleased to be a part of the U.S., the CHIPS Act, and obviously announcing the support and the partnership with the Department of Commerce a couple of weeks ago because we believe that fundamentally manufacturing in the U.S. and some of these technologies is good for the U.S. By the way, it's also good for Europe. It's good for the Western world. So building this competency here and extending the competency we had made sense. That was also the lowest risk alternative from a capital perspective, was to deploy in markets that we were adjacent in regions that we were adjacent to. So that's one.
The second thing is broadly in the supply chain is regionalization of manufacturing. We've got operations today in Europe, in Southeast Asia, in India, and in the United States. And I think that's where my view is that's the direction of travel we've been on since we had the supply chain disruptions at the tail end of COVID. And those are much more around final assembly. And in those areas, I think that's where we're going to continue to head. I think you'll see us do more investment, make more investments in localization aligned to where demand is. And we opened a new factory in Oulu, Finland in the north of Finland in September. It's got both engineering and new product introduction, but capacity to support manufacturing there as we see demand in Europe for radio products.
We'll continue to invest in this regionalization aligned to where we see demand because it's actually one of the things we need to do around resiliency. The next thing is continue to build component resiliency where there's still work in process, right? And that's not a Nokia issue because we don't drive independently enough volume. It's an industry issue that we all need to focus on. But localized manufacturing, I think, is a really good thing. And certainly from a U.S. perspective, I think our customers are very positive that they see support from us for being local. And that gives us a sense, a capability in terms of being more agile and better suppliers to them as their needs evolve.
Makes sense. Thank you, Justin. So that's for the network infrastructure. Let's move on to the mobile infrastructure.
Mobile. So, how important is it for Nokia? I mean, when I look at your guidance, you provided that operating profit will be flat or up by 2028. So, I mean, from outside, you would think, "Okay, nice, but what's the game here?" So, how important it is for you to keep that business? You could argue you could do something else with it or maybe trim down, like a bit more strategic decisions. You seem to be in a pause with this, like trying to stabilize it. And if you ask me, I have the feeling it's more because of beyond 2028 you think that something can happen and you keep it around for that opportunity. So, how should we think about that?
First of all, I think if I look at this business today, we're talking about AI sitting in data centers, right, on our devices, largely on top of the connected internet, right? We see it in mobile data services. When you think about the world that we're heading into with physical AI, autonomous vehicles, robotics, drones, AR, VR, digital twins, all of these things are going to require persistent trusted connectivity. The reality is that means persistent trusted connectivity means wide area networks and mobile networks. Now, it will also mean connectivity with satellites. It'll probably mean more demand for campus and edge networking. There's other adjacencies for us. I also believe it's going to drive more demand for fiber access. That's one of the places we talked about briefly in NI, but really core for us in the business as well.
Because ultimately, if you look at the history of compute and connectivity, they always parallel. The demands always grow, and you're not going to want an autonomous vehicle that cannot connect to the internet, and the reality is we tolerate a lot of that today on phone calls, on data services where we have interruptions, so I think networks are going to have to go through a renaissance to be able to support the demand. By the way, for the Western world, there's two scale players and one challenger, one of the two scale players, and I think for the Western world, it's an incredibly important thing because think about how much of our economy runs on mobile connectivity today, and so from that standpoint, falling behind is not an option.
Now, what I also firmly believe is the way that you compete and win is not necessarily by one, by being fully vertically integrated. And I touched on this a little bit in the CMD, but doing the things that we do that drive differentiation and partnering elsewhere. We do that. There's lots of examples we just touched on in NI. But a great example is what we did in core networks where we got out of being vertically integrated with appliances, led in cloud core. We're now the leader, I think, in voice core in the Western world. We're making a lot of traction on 5G standalone projects as that's happening. But the big thing here is the telcos are also going to have to innovate.
And what we recognize is the model we all have today isn't generating sufficient returns. It's not generated sufficient returns for investors in our business, particularly around radio networks. And arguably, if you look at our other Western peer and you look at equity performance, it's not generating returns. And of course, for the telcos themselves, we all know that there's many of them that aren't returning their cost of capital. So we need to find a way to change the game. And what we're looking at doing and why we did what we did on the guidance is to be measured to allow us the time to go transform the business. And the partnership with NVIDIA we see as critical. And the reason we see it as strategic is all of those devices don't happen if they don't have trusted connectivity.
So all those things that NVIDIA and Jensen envision in the future don't happen if you don't have trusted mobile connectivity. Therefore, we need to continue to innovate in mobile. And the reality for us is that we think the future of the business is one that's more software-driven. We think that radio hardware can and will need to become more commodity because it drives so much CapEx. But you also can't have an environment, if you think about how fast we're moving in AI, you can't have an environment where your competition is dictated by hardware deployment cycles. You need to have ongoing software enhancements and software features. We're already seeing this in core. It has to transmit to the radio network because in the future, every device will not be a mobile device. All these other devices will require different services, different levels of quality, different levels of trust, different levels of bandwidth, different levels of mobility, and that's why we think the business is going to be so different.
I think NVIDIA announcement was quite interesting and surprising for many, I guess. When do you think you could see the first benefit of these partnerships? That would be my first question on that.
Yeah. Look, I mean, on that, I think we've been pretty clear, 2026 for POCs, 2027 for initial commercial deployment, and then obviously we'd anticipate 2028 for volume. And the reality from our standpoint, and obviously like theirs, is this is a place where we've been working together for some time around AI RAN doing a lot. So we've got a pretty good confidence in our ability to execute with them in terms of the timelines, but also it depends on market dynamics and other things. But we feel pretty good about where we are today. And obviously at CMD, we added two more customers to the POC list with SoftBank and IOH.
I guess it's going to be interesting to track that. Now, if you don't mind me asking, I mean, if you look at Imagine, you have AI RAN with NVIDIA. Obviously, NVIDIA is a very successful company with a very high gross margin. Let's put it this way. The challenge with that is they capture a lot of the value of the product. The consequence is the others, they don't have much left. My question to you is that how can you manage to have a collaboration with NVIDIA, but also capturing a decent value of the share? Because you are with someone that takes actually a big chunk of it. You see what I mean?
Yeah.
So when you do an analogy with data centers, you can see, right, NVIDIA is like 60%-70% of the bill of materials of a data center right now. And when I look at the margins of the others, it's not the same. So do you see what I mean?
Yeah. I mean, I think first of all, recognize that when we talk about moving to standard hardware, that model is true across platforms. But I'll give you an example, and probably the best one is storage. If you think about the storage industry, standardized on networking, computational silicon, obviously commodity memory and or sorry, not commodity memory, but also on flash and magnetic drive. When you look at that business, a lot of the value is in the software. And this is what I mean by a software-driven business model, even though the hardware is being packaged. And when I think about NVIDIA in this space, I see it very similarly. Yes, there's a lot of value in that silicon. The margins are going to be very good. But ultimately, the value on top is the software stack.
It's layer one, layer two, all the different elements of the stack. And by the way, go look at history and the number of players that have tried to get into this and have struggled to do it at scale. So even if we were critical of our returns or our peers' returns, on balance, I think we're earning better returns. The opportunity for us is actually to deliver more value through more services and features on top. And the other thing I will just say when you think about the AI world is there's a lot of people making a lot of money in AI on top of NVIDIA, the hyperscalers, the AI model providers. So there's value to be had on top. And in fact, I would say they've probably enabled a lot more value than they've captured. They're capturing just a fraction of it. And that's where I think we have the same opportunity as we look at these networks. But we have to build them differently than we have in the past.
Very interesting. So when you look at the gross margin, I mean, that's your KPI as well for this business, obviously with operating profits, and you said 48%-50% versus 48% today. So very disciplined. You want to run this business on the profitability levels, which is most welcome for sure. But what does it mean in terms of measures?
Is it like if you see some pricing pressure somehow, you're going to let your market share slip just to protect your gross margin? And I think the answer you gave at the Capital Markets Day was interesting on this Huawei Opportunity Swap Out by saying, "Okay, I won't go to the deal unless we help or we finance it or subsidize because I don't want to start and do the swap out cost like maybe with Nokia and Alcatel acquisition. We know well the pain from it." So is that fair to say?
Yeah. I think it's about being disciplined on revenue and profit, right? And I think, again, if you look at core networks, it's a place where we're very disciplined on profit margins. It shows up now that we've pulled the ECE business out into portfolio companies, you see the profit improvement, right? Doubling of operating profit in that business while growing the business. The reason we guided the way we did is moving from a hardware-centric model to a software-driven business model usually puts pressure on top line, right? Just from experience. And then when you look at this business, if you look at the radio networks business today, you've got hardware, RAN software, and a variety of services. And then, of course, there's the regions where you play, right? And I talked about this a little bit on focusing customers where there's value.
And then, to your point, there's aggressively chasing share and swapping. And we're going to be disciplined across all of those levers, recognizing that we're pushing a business model transition. But I think the market, I think the market also will recognize that because I'm not sure when you look at those swap outs, if you're just swapping an existing customer or an existing provider for another with no technology jump, I'm not sure what you're getting as an operator, right? And that's why we talked a little bit about the potential of swaps in Europe with the high-risk vendors. And even in those cases, I think we need to find ways to help the operators do something that's value-creating, right? And that's one of the things we've been very clear is, look, you can't just expect an operator to replace an investment.
Sort of like if you're in the airlines just upgrading a five-year-old airplane and delivering exactly the same airplane, it doesn't make any sense. And so we recognize that as well. That's why we're trying to be disciplined about where we're investing. And then, of course, underneath all of this is the communication. And Marco talked about this in more depth, but I've talked about it quite a bit. And since I started, it's this discipline around operating leverage.
Makes sense. Moving to the group level, I mean, it's been a few months that you are CEO. What is the first thing you implemented when you joined Nokia? The first thing like.
The first thing that.
The first thing like in a meaningful way. I'm not asking.
You know he's going to.
Impactful.
I don't know if he's listening, so I can say this, but I think the biggest thing I did probably out of this shoot was the decision to put David Heard in and leading NI, and I think you could see it. If you watch the CMD, you see his energy and passion, but it's not just his energy and passion. It's the rigor he has around the technology and the commercial presence, and I think the results speak for themselves, even in the short time he's been in the role, so that was probably the first big move I made. There's been a lot of other little moves, but.
That's the first you mentioned, yeah.
Yeah.
Yeah. I have to say it's a different style versus the previous.
Yeah.
What is the most misunderstood thing about Nokia, you think, right now?
You know, François, it's funny. I still get people talking to me about their phones. So maybe if we're not a phone, do you still do phones? Yeah. I still get a lot of emails from people that want me to help them with their phones. Joking aside, I think what's not really understood is just how critical an infrastructure provider we are. And I think that's part of this focusing is also us telling a better story to the markets. And not just to the markets, but to the developer ecosystem, to our customers around where we're investing, where we're innovating, and where they can actually benefit by using our technology. And if you look at things like 70% share of broadband, right, the unique innovations we have that allow customers to deploy different generations of fiber broadband. If you look at all of the, that's one example.
What we just talked about in the transformation we're reshaping in cloud and core and the services that we're launching, I think those are the things that probably aren't well understood, and telling that story in a better way, telling it to our customers where it makes sense, telling it to our people where it makes sense, and then continuing to really focus on core innovation in the markets that we serve as a provider of critical infrastructure is something that is a great opportunity, and it's one that I'm proud to be a part of and helping lead because I think there's a great team here, a great group of people, and as I said before, unleashing and unlocking the potential of Team Nokia is the big opportunity.
Makes sense on that note. Thank you very much for your time, and thank you all for listening.
Thank you. Thanks, François. .