Nokia (NYSE:NOK) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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The full earnings call is available at https://nokia-q226-results-call-july-2026.open-exchange.net/registration

Summary

Nokia Oyj reported a 9% increase in net sales for Q2 2026, with gross margin expanding by 70 basis points to 46% and operating margin by 70 basis points to 9%.

The company highlighted strong growth in Network Infrastructure, especially in Optical and IP Networks, driven by AI and cloud customer demand.

Nokia launched the industry's first commercial AI RAN platform, expecting it to be commercially available by 2027, with pilot deployments set for the end of 2026.

The company is scaling its manufacturing capacity, particularly in optical growth, with investments in Indium Phosphide semiconductor manufacturing in San Jose and acquiring a new site in Arizona.

Management reiterated a commitment to focusing on areas where Nokia can differentiate, such as AI and cloud, while divesting non-core assets like the fixed wireless access business.

Nokia expects to deliver above the midpoint of its operating profit guidance for the year, despite anticipating a sequentially similar operating profit for Q3 compared to Q2.

The restructuring program is on track to achieve 1.2 billion euros in gross cost savings by the end of 2026, with further efficiency programs expected, particularly in Europe.

Full Transcript

David Mulholland, Head of Investor Relations

Oh, good. All right. Good morning, ladies and gentlemen. Welcome to Nokia's second quarter 2026 results call. I'm David Mulholland, Head of Nokia Investor Relations, and today with me is Justin Hotard, our President and CEO, along with Marco Wirén, our CFO. Before we get started, a quick disclaimer. During this call we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties.

Actual results could 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 the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Within today's presentation, references to growth rates will be on a constant currency basis and other financial items will be based on our comparable reporting.

Please note that our Q2 report and a presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and reconciliation between the two. In terms of the agenda for today, Justin will go through the strategic highlights of the quarter and then Marco will go through our financial performance. We'll then move to Q&A. With that, let me hand over to Justin.

Justin Hotard, President and CEO

Thanks, David, and hello everyone. Our second quarter showed continued progress against the strategy we set at our Capital Markets Day. Our team is focused on maximizing our opportunity in the AI super cycle, and that focus is translating into early results. I'm pleased with the progress that Team Nokia has made. In the first half of 2026, in Q2, net sales grew 9%. We expanded our gross margin by 70 basis points to 46% and our operating margin by 70 basis points to 9%.

Network Infrastructure delivered strong growth led by Optical and IP Networks, with sales from AI and cloud customers more than doubling year on year. Mobile Infrastructure sales also grew, and the business delivered stable profitability largely driven by product mix. Marco will take you through the details of our financial performance in his update. In a moment, I want to take a step back and look at how our first half performance demonstrates progress against the strategy we set out last November.

As a reminder, these are the five priorities we've shared at our Capital Markets Day, and I'm pleased by the progress we've already made across each of these areas. Let me touch on a few highlights from Q2. AI and Cloud was the strongest growth driver in the quarter. Net sales more than doubled year on year to 446 million euros, and order intake grew to 2.8 billion euros. While we're very pleased with the order growth, it's important to put that number into a bit of context.

Q2 benefited from several significant long-term orders as our customers looked to secure supply in a constrained environment. To provide some reference, approximately half the order volume received in Q2 is expected to convert to revenue in the next 12 months. As I've said before, order patterns in this market can be lumpy and we should not expect this level of intake every quarter. As importantly, the strength was broad-based across Optical Networks and IP Networks and included some of the design wins we mentioned last quarter.

This was driven by growing demand for data center interconnect and scale across fabrics from our customer base. The demand primarily shows up in our AI and Cloud segment, but we're also seeing emerging signs of growth in telecom customers as they invest to support the increased data traffic driven by the AI super cycle. During this quarter we also secured our first multi-rail ILA design win with a major customer. This was one of the new optical networking products we launched at OFC this past March.

Last week we launched the industry's first commercial AI RAN platform, marking a fundamental shift from a hardware-defined radio network to software-defined platforms. This fundamentally changes the economics of radio networks. Our AI RAN platform gives our telco customers a path to improve network performance through software and AI innovation rather than relying on hardware upgrades as they have traditionally. The platform would deliver more than 100% spectral efficiency gains by 2028, doubling the capacity operators can get from their existing spectrum.

The performance benefits are tangible in 5G networks, and our AI RAN platform provides a software upgrade path to 6G to ensure continuity without additional hardware investment. The platform is also open, programmable, and O-RAN compliant. This gives operators greater flexibility as they evolve their networks. They can choose the hardware path that works best for them, adding AI acceleration into their existing Nokia AirScale infrastructure, deploying new AI RAN hardware, or moving to cloud-native AI RAN.

Ultimately, this is about delivering more performance, better returns, and faster delivery of new services for our customers. We're on track to enter pilot deployments at the end of this year and expect to be commercially available in 2027. As we've said previously, co-innovation is a powerful differentiator for Nokia. When we combine our technology leadership with the expertise and scale of our customers and partners, we accelerate innovation, bring solutions to market faster, and solve increasingly complex challenges together.

We're already demonstrating early results from this approach, and I will highlight four examples from Q2. First, we expanded our partnership with Google Cloud, bringing Gemini-powered AI agents into our Autonomous Networks portfolio. Second, with Vodafone Albania, we demonstrated AI-powered network slicing using agents to dynamically optimize network resources. Third, we expanded our relationship with Indosat Ooredoo Hutchison in Indonesia, supporting network modernization and the rollout of 5G while providing a seamless upgrade path to AI RAN.

And fourth, we entered trials with a US hyperscaler for a new out-of-band management solution that goes inside the data center, leveraging the passive optical technology that we deliver in our Fixed Networks business. We're also making progress to focus Nokia where we can differentiate and create long-term value. This means we are investing where we see long-term demand and we believe Nokia can be a unique winner, and at the same time reducing exposure to areas where we are less differentiated.

In November we shared that our Fixed Wireless Access customer premise equipment portfolio is not core to the future of our strategy. The sale we announced this past quarter to Inseego is an example of our disciplined approach to capital allocation and allows us to concentrate resources on higher priority opportunities. The sale is on track to close by the end of the year. Talking about higher priority opportunities, one area of focused investment is scaling the capacity needed to support our optical growth ambitions, particularly around Indium Phosphide semiconductor manufacturing in San Jose.

Our new Indium Phosphide fab is now processing test wafers as we move closer to product qualification. It remains on track for volume production by the end of the year. In June we announced a new commitment we are making to scale our Pennsylvania facility, increasing our advanced test and packaging capacity for optical systems in that facility by 10 times. In addition, today we announced the acquisition of a manufacturing site from NXP in Arizona, where we plan to increase our Indium Phosphide fab capacity.

This gives us additional capacity to support our own demand and greater optionality, recognizing the supply constraints in the market today. Altogether, these investments continue to strengthen and secure US-based optical manufacturing capacity for the long term. While Marco will update you on our restructuring progress, I wanted to touch on one key area where we are making progress in driving incremental productivity. We believe that to be a relevant technology provider in the AI super cycle, we need to be a leading adopter of AI internally.

Last year we established a team to deploy AI testbeds across multiple functions within Nokia. One area where we're seeing early traction is software development, where we now have nearly 100% adoption across our developer base. This is already yielding significant productivity returns, supporting our efficiency targets and accelerating roadmap deliverables. We will continue to scale this initiative across every function of the organization as our testbeds yield tangible results.

We see this as essential not only to unlock sustainable returns, but also to be a better partner in support of our customers as we help them unlock the full potential of the AI super cycle. So in closing, I want to recognize and thank Team Nokia for a strong first half of the year. We are focused on our key priorities and have begun to fundamentally change how we work. I'm pleased to see our efforts are already reflected in our results. We're entering the second half with good momentum and remain on track to deliver somewhat above the midpoint of our operating profit guidance.

And now I will turn the call over to Marco to dive into our financial performance.

Marco Wirén, Chief Financial Officer

Thank you, Justin, and hello from my side as well. Before looking at the quarterly performance, let me start with reporting changes we announced this morning. As we have agreed to sell our fixed wireless access business to Inseego, we now consider the sale of Enterprise Campus Edge highly probable. As a result, both businesses are classified as discontinued operations. We have published recast historical numbers for 2025 and quarter one 2026 to support comparability in quarter two 2026.

This reporting change reduced comparable net sales by 66 million and increased the comparable operating profit by 13 million. It also led to minor adjustments in cost allocations between Network Infrastructure and Mobile Infrastructure, with an impact of approximately 1 to 2 million per quarter. Turning to performance, net sales grew 9% in the quarter, supported mainly by Network Infrastructure. Gross profit was 2.2 billion and gross margin increased 70 basis points to 46%.

The margin expansion was driven by Network Infrastructure and particularly Optical Networks, where we continue to benefit from both strong demand and the integration of Infinera. Operating profit was 434 million and operating margin increased 70 basis points to 9%. The quarter benefited from some software revenue recognition coming in in quarter two instead of quarter three. We also incurred higher stock-based compensation expense which represented 150 basis points headwind to our operating margin in quarter two year on year, and this was driven by Nokia's share price increase, an increase in the program, and the issuance happening earlier in this year. Financial income and expenses benefited from a positive venture fund revaluation during the quarter which supported both net profit and EPS. Earnings per share free cash flow was negative 732 million and, as you know, quarter two is typically the weakest quarter for cash generation as employee cash incentives are paid in quarter two. We also saw some increase in working capital during the quarter. We ended Q2 with a net cash position of 2.8 billion, maintaining a strong balance sheet and significant financial flexibility.

Let me now turn to Network Infrastructure. Net sales grew 12% in the quarter reflecting continued strength across the business. Optical Networks grew 20% and growth was supported by continued demand from AI and cloud customers, but we also saw healthy demand from telecom customers investing in transport infrastructure. IP Networks grew 16%. The stronger order momentum that began in the second half of 2025 is now translating into revenue growth. Fixed Networks declined 2%.

The areas where we are prioritizing investment performed well. Optical line terminal sales grew 18% while ONT sales declined 16%. As we continue to focus on higher-value parts of the portfolio, gross margin increased 240 basis points to 42.7%. This improvement was driven by three factors. First, we benefited from higher scale as revenue increased. Second, we continued to realize synergies from the Infinera acquisition and, third, we saw more favorable mix within Fixed Networks.

The gross margin improvement was partially offset by growth investments we are making across Optical Networks and IP Networks as we position ourselves to capture the long-term opportunity in AI infrastructure. And finally, operating margin increased 170 basis points to 8.1%. And turning to Mobile Infrastructure, net sales grew 7% in the quarter: core software grew 1%, Radio Networks 7% and Technology Standards increased 15%. And Technology Standards benefited from signing a few new agreements during the quarter and included some catch-up revenue recognition.

Looking at the full year, we continue to expect Technology Standards to deliver a similar level of sales and profitability as in 2025. Gross margin was 49.3% which was somewhat better than we expected entering the quarter, and the main driver was a higher contribution from software sales as some revenue that were expected in quarter three ended up benefiting quarter two. Looking ahead, because of the earlier software revenue phasing, we currently expect Mobile Infrastructure gross margin in Q3 to be closer to 44% to 46% reflecting lower software contribution before improving again in Q4 in line with normal seasonality, and operating profit was stable year on year. Looking at sales by customer segment, AI and cloud was again the fastest growing segment with net sales increasing 105% year on year. Growth was broad-based across both Optical and IP Networks. Telecom sales increased 4% while Technology Licensing grew 15%, and we remain optimistic about the long-term AI and cloud opportunity and continue to see strong customer demand. At the same time, our expectations for the telecom market remain largely unchanged.

Turning to restructuring and integration costs: first, we are on track to complete our 2023–2026 restructuring program this year and achieve 1.2 billion euros in gross cost savings. The second area is the integration of our Chinese operations into Nokia's global operating model after taking full ownership at the end of 2025. As we discussed previously, we continue to adjust our operating structure to reflect market conditions and improve competitiveness.

As a reminder, this program was expected to achieve 200 million euros in cost synergies with one-time charges of between 350 and 400 million euros over a two- to three-year period. We now expect to recognize approximately 350 million of the planned one-time charges by the end of 2026 as we accelerate the integration to complete it within two years. And the third area is a set of new efficiency programs mainly impacting Europe. These programs are expected to lead to restructuring charges of 200 million euros in 2026.

These actions are focused on simplifying the organization, improving productivity, and ensuring resources are aligned with our strategic priorities. Overall, we expect restructuring charges of approximately 800 million in 2026. Then let's go to cash. With respect to cash flow, the quarter followed the normal seasonality we typically see in quarter two. The largest impact was the payment of annual employee incentives related to 2025 performance. We also saw some working capital build-up during the quarter reflecting the continuous growth of the business.

Despite these seasonal factors, our overall cash generation profile remains unchanged. Considering some of the increased restructuring costs and as we make some investments in working capital to prepare for growth, we now expect to track towards the low end of our free cash flow conversion assumption of 55% to 75%. And finally, turning to our outlook, there is no operational change to our comparable operating profit guidance. The only adjustment is the technical change resulting from the move of Fixed Wireless Access and Enterprise Campus Edge into discontinued operations, and we continue to track somewhat above the midpoint of our operating profit range. Looking at quarter three specifically, we currently assume a sequential increase in net sales of between 3% and 7%. For operating profit, we currently expect a result broadly similar to quarter two due to the phasing of software sales in Mobile Infrastructure between quarter two and quarter three, followed by a meaningful improvement in quarter four. And this is a combination of the normal seasonality we see in our Telco business and the contribution from year-on-year growth in AI and cloud sales.

Aside from the discontinued operations adjustment, our outlook assumptions remain largely unchanged. The demand environment remains supportive and we allocate capital where we see the strongest opportunities for long-term growth while maintaining discipline on profitability and cash generation.

David Mulholland, Head of Investor Relations

Thank you, Justin and Marco. As usual for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up. Operator, could you please give the instructions?

OPERATOR

Ladies and gentlemen, we will now begin the Q&A session. If you have a question and are using the Zoom app, we ask that you please use the raised hand function at the bottom of your Zoom screen or by clicking on the three dots on the black bar at the bottom of your Zoom screen. Alternatively, if you have joined via Zoom browser, please click the Reactions button at the bottom of your Zoom page and then select Raised Hand. If you have dialed in by phone today and wish to ask a question, please use star-9 on your keypad to raise your hand and then star-6 to unmute.

Once your name has been announced, you may ask your question. If you want to withdraw your question, please lower your hand by using the raised hand function or star-9 if you have dialed in. I will now hand the call back to David Mulholland, Head of Investor Relations, for the Q&A. Thank you.

David Mulholland, Head of Investor Relations

Thanks, Danny. We'll take our first question today from Terence from Morgan Stanley. Terence, please go ahead.

Terence, Analyst at Morgan Stanley

Yep, thank you very much. I hope you can hear me okay. I had a question around capacity and particularly around the four new DSPs planned by the end of 2027. So this is actually a big ramp-up compared to the previous run-rate. Can you give us some milestones to look out for and reassurance that this could be achieved?

David Mulholland, Head of Investor Relations

Thank you.

Justin Hotard, President and CEO

Sure, Terence. I mean, I think first of all we talked about these going into customer trial in ’27 and then becoming commercially available towards the end of ’27. I think the thing I would just emphasize and remind you of on this is that Nokia and Infinera previously were each building two DSPs individually, so collectively a total of four DSPs. One of the decisions we made, and I've talked about this a bit as we saw the growth opportunity emerging in Optical, was to maintain the DSP team as is versus reducing them.

And the reason we did that was we felt quite strongly, in spending time with our customers, that we could actually deliver more differentiated products to them with four unique DSPs versus the traditional two that we had been delivering in each company independently. And that laid out and supported the roadmap that we launched at OFC in March, and I touched on that a bit in last quarter's call. So the view here is that we think this gives us better market coverage aligned to where the market is evolving, specifically given the amount of investment we're seeing across the different layers of optical fabric, from the scale across fabric to what we see in data center interconnect to metro network to long-haul transport. So across all of that, we think we have a much better portfolio in 2027 to address each of the unique evolving solutions than we would have had if we had only kept two versions.

David Mulholland, Head of Investor Relations

Did you have a follow-up, Terence?

Terence, Analyst at Morgan Stanley

A real quick follow-up on the comments around the order book potentially being lumpy. Do you still expect an upward trajectory over the longer term from these levels, albeit with some bumps along the way?

Justin Hotard, President and CEO

Yeah, look, I think two things about this quarter, this quarter's order book. I mean, obviously if you do the book-to-bill on this, it's a significant jump up. So I think, you know, I think for me that's a data point around a little bit of lumpiness. But the other is the elongation of the orders which we've been talking about expecting and we're seeing here. So I think we have to look at it in both those dimensions. And the way I think about orders is, I think about orders in a period of time, right.

Because it's easy to give you a headline number and then say, well, the next question is, is that over a quarter period, a four-quarter period, an eight-quarter, twelve-quarter, et cetera. And so for me, that's really where we're focused is not necessarily on are we getting big order pops consistently, but rather are we seeing the order momentum grow as we look at it over a time period? And right now, what we're seeing is continued growth and continued demand in the market.

And as I said in my comments, it's still largely driven by AI and cloud, particularly around scale across and data center interconnect. And then we're starting to see some emerging growth. We saw some of it in sales this year in our telco customer base. And we believe that's also tied to AI demand.

David Mulholland, Head of Investor Relations

Thanks, Terence. We'll take our next question from Simon Leopold, from Raymond James. Simon, please go ahead. Simon, have you unmuted yourself?

Simon Leopold, Analyst at Raymond James

There we go. Can you hear me now, David?

David Mulholland, Head of Investor Relations

Yes, go ahead, Simon.

Simon Leopold, Analyst at Raymond James

Okay, great. I didn't expect that button to pop up. Sorry. I wanted to see if you could rank order and characterize supply chain risk. And I'm thinking about issues like memory, printed circuit boards and even indium phosphide wafers. Maybe a particular focus on that latter one, the wafers, given the factory expansion, whether or not you can get the materials. And then I've got a quick follow up after. Thank you.

Justin Hotard, President and CEO

Sure. Look, I think the most, you know, if I think about the supply chain risks or the time that we're spending in this, first of all, as you rightly point out, it's broad based. Right. So I think we talk a lot about memory and memory is significant just given the amount of demand that is in the market. I think this has been talked about quite a bit across multiple companies and multiple parts of this ecosystem. So there's clearly constraints there and then obviously the significant change in pricing driven by that shortage, which again has been talked about very broadly across the tech ecosystem.

So that's probably the one that we see as most significant. Now we talked about this last quarter. I don't need to repeat what I said last quarter, but maybe briefly, our focus is on securing supply, simplifying our designs, looking at where we can reduce scope wherever possible in our designs and of course then passing that on to customers. And I think if you look at what we said last quarter, there were some companies with us last quarter, it seems like more companies have joined us in some of the more recent earnings calls now making that same comment.

The key thing for me here is also really talking to our customers, not the AI and cloud customers, they understand this well, but really making sure our telco, our mission-critical customers understand that we have elongated lead times which means better visibility, better planning and something that we need to team with them on. So particularly important in that regard. And then, as you touch on, there's a broad base across the board. On the indium phosphide question you asked, Simon, the comment I'll make is this: this new fab is really looking at coming online probably earliest in '29.

And if you think about our capacity, we've got a significant jump up with San Jose coming, call it '27 as it ramps volume—manufacturing later this year or volume manufacturing later this year, so '27 it ramps. Then we kind of line up for a '29 ramp and an incremental capacity. As you know, that's kind of the timelines that you have to take with these investments. And I think as we're looking at it, we're looking out at different solutions to get indium phosphide capacity at that time.

That's obviously an industry issue, though. It's something that all of us in the industry need to enable and it's something that I think collectively we need to solve, even across the ecosystem.

David Mulholland, Head of Investor Relations

Thanks, Simon. Did you have a follow-up?

Simon Leopold, Analyst at Raymond James

Yeah. I wanted to see if maybe you could offer us your view on the scale across market and your ambitions, Nokia's ambitions for this particular application considering optical and IP routing. Thank you.

Justin Hotard, President and CEO

Yep. Yeah, absolutely. I mean, I think, first of all, Simon, I think there's a lot of—I'm going to be a little technical, but scale across is technically talking about data centers within a given campus area that were strung together as an AI factory. And one of the things I talked about on the last call was the demand we're seeing in data center interconnect. So my point in saying that is some of what we're seeing is just increased data center interconnect.

Now you can call it scale across or, you know, some folks may want to label it one way or another. To me they're very different, they're complementary and very important applications because one is back-end connectivity which is providing connectivity to expand the back end for scale-out, which is the scale across fabric. The other is data center interconnect providing higher bandwidth between data centers over a long haul. On the front end, both of those have a routing element.

Obviously the data center interconnect has a very significant demand growth in routing. And if you look at our opportunity and why we're talking about growth in both IP and optical, it's because we're seeing growth in both of those elements. So they are complementary, they are reinforcing. Now the other thing I'll say is it's not limited to that. We are seeing some traction in some of the back-end switching. It's on a limited basis, obviously without getting into all the market dynamics there.

But all of this is encouraging in terms of our focus in this area and the traction we're starting to make.

David Mulholland, Head of Investor Relations

Thanks, Simon. We'll take our next question from Sami Sarkamis from Danske Bank. Sami, please go ahead.

Sami Sarkamis, Analyst at Danske Bank

Hi. My question would be on your supply capability in optical networks. Are you fully constrained or have you been able to build any inventory during the first half of the year?

Justin Hotard, President and CEO

Yeah, I would say, Sami, it's a good question. There are always pockets—think of legacy products and those areas where we have some supply. But in general I would think of us as being constrained. We talk about lead times elongating, it's because we're seeing constraints and particularly on the leading-edge products. And by the way, I don't think we're unique in that. I think that's—if you look at our ecosystem again, I think you see the constraints and you see that across the component suppliers, some of our peers, et cetera.

So obviously we're working aggressively on that and maximizing the supply. But as I've said as well, if you look at our forecast, what we've included in our forecast is the demand that we have line of sight to shipping, and we recognize even that has some risk because that assumes continuity of supply, no disruptions, everything goes perfectly. So when we're thinking about this, we're thinking about it from a constraint perspective, aligned to what we have line of sight to in supply.

But absolutely, if there was more supply, I think we'd probably generate more revenue.

David Mulholland, Head of Investor Relations

Did you have a follow up, Sami?

Sami Sarkamis, Analyst at Danske Bank

Yeah. Regarding radio networks, just curious, do you think you are currently gaining share? You had 5% organic growth in the first half of the year. I think that's a bit more than your main European rival is having. Or is it just like timing?

Justin Hotard, President and CEO

Yeah. My view on this is it's timing. We talked about—actually Marco talked about—the timing around the software revenue recognition we had in Q2, which is tied to our radio software platforms. So I would call this timing. I also think looking at market share on a quarterly basis in this industry is super challenging. To get any kind of good signal, I think you have to look at it certainly on an annual basis.

David Mulholland, Head of Investor Relations

Thanks, Sami. Thanks. Our next question from Alex Duvall from Goldman Sachs. Alex, please go ahead.

Alex Duvall, Analyst at Goldman Sachs

Yes, thank you very much. You talked about further progress in AI RAN. I wondered if you could talk a bit about the timeline for this benefiting Nokia in terms of revenue and competitive position and what your discussions with telco are suggesting in that area. And secondly, back to the AI side, I wondered if you could give an update on switching and the progress you make there. Could you help us understand the latest thoughts on switching design-ins and when we should expect orders and revenue momentum given the progress you're delivering.

Justin Hotard, President and CEO

Let me answer the second one first. In terms of the switching design wins, we talked about this a little bit last quarter. We said we expected orders this year. We saw a lot of those orders come in in Q2. Obviously as you know in the design win process you start small, you get traction and then you build on top of that as you validate and execute for performance. You know, we're continuing to drive that across a number of customers. Obviously we're pleased with the progress we had in Q2 and then.

Can you just repeat your first question?

Alex Duvall, Analyst at Goldman Sachs

Yeah, absolutely, Justin, it was just you had mentioned further progress on AI RAN. Just curious how you think about the customer feedback and the timelines for that impacting your revenues.

Justin Hotard, President and CEO

Yeah, I mean look, I think basically, Alex, everything is consistent with what we've said. Pilots at the end of '26, commercially available in '27. Obviously we'd anticipate more significant volume going into '28 and that continues to be our expectation in terms of AI RAN.

David Mulholland, Head of Investor Relations

Thanks, Alex. We'll take our next question from Ulrich Roth from Bernstein. Ulrich, please go ahead. I think we've lost Ulrich, thank you. Are you there, Ulrich?

Ulrich Roth, Analyst at Bernstein

Sorry, it takes some time. Yeah, takes some time for the button to appear here.

David Mulholland, Head of Investor Relations

Apologies.

Ulrich Roth, Analyst at Bernstein

So I wanted to come back to the very strong AI cloud order intake. Put it into perspective already with regards to the elongation of the order book as you call it. I was wondering, in supply constrained markets we often do see double ordering which does create a false signal for suppliers such as Nokia. How do you see this risk? Are there any specific reasons why this would be an unlikely factor for Nokia?

Justin Hotard, President and CEO

Yeah, look, I think first of all if you think about the customers, the level of sophistication in the customers that are placing these orders, I think you have to step back and ask what the incentive is for double ordering. I've absolutely seen this much like you in supply constrained markets that I've worked in in the past and it's particularly prevalent in markets where you're focused on enterprise customers or you've got channels because customers tend to diversify and look for allocation.

But in this environment the thing that I would flag is for one of these customers to come in and say I'm going to double order with you when ultimately that goes back to supply of leading-edge silicon manufacturing capacity on optical components that they can actively inspect and we transparently share the progress—the question for them would be what does it do in terms of incentives? The other thing I would say is we're obviously, as we're making commitments on a longer-term basis, we're expecting those commitments from customers as well.

Ulrich Roth, Analyst at Bernstein

That's helpful. If I may follow up with one clarification, what would you call a normal length of an order book? Is it essentially 100% of the orders within the next 12 months? Because you highlighted the difference with half of the revenues. Is 12 months 400% the normal here or not?

Justin Hotard, President and CEO

Yeah, Ulrich, that's a good question. So I think typically we have seen orders within 12 months in our customer base. Now again, there's two factors to this obviously. One is the growing demand, the fact that AI and cloud is a new segment for us. So I would say we've had less exposure to this, obviously substantially less exposure to this in the past. And then the second thing is obviously the supply constraints. So I think both of those are factors.

But if you think about our traditional business with telco customers, heavily concentrated with telco customers and then obviously some in mission critical, those orders—we may win a contract award, but we would see orders typically within 12 months. And that's really the shift. And that's why when I talk about our telco customer base, one of the conversations we're having with those customers is getting more visibility going forward because they're also used to giving us fairly short-term, within-12-months visibility, and we need to be planning even further.

And so this is something that we're, with all of our sales teams, having this conversation to make sure that we're getting better visibility, not because it implies a commitment but because the risks, given the supply constraints in the industry, are we don't want to miss any of their deliveries while we continue to support them, given their importance to us as customers.

OPERATOR

Thanks, Ulrich. We'll take our next question from Jacob Bluestein from BNP Paribas. Jacob, please go ahead.

Jacob Bluestein, Analyst at BNP Paribas

Great, thanks for taking the question. You're obviously ramping up in terms of AI and cloud revenues. I guess we're not yet seeing it in terms of margins. I guess my question is just when—and I appreciate that, obviously, as these businesses scale, margins will go up, and particularly on the IP side, you're just sort of starting to scale now—but just be interested, how long do you think it actually takes before these revenues become materially accretive?

Justin Hotard, President and CEO

Yeah, I think two things, Jacob. So one is gross margin and then the other is operating leverage, right. And as we talked about in Capital Markets Day, we're doing a lot of work at the front end of the three-year period to really set the company up to become more efficient, more nimble, more scalable, and get the operating leverage as we drive growth in the business. So that's a key focus and we talked about that. By nature, that would be a little bit back-end loaded.

Now, like I said, I'm very pleased with the progress we're making and, obviously, with the demand accelerating higher than what we said at Capital Markets Day, we've got optimism on progress there that will continue to improve. On the other side, on the gross margin side, this is an area where I think we're dealing with just a lot of complexity in the mix, and this is a little bit of supply chain. This is also us—we talked about the focus we're making in FN on exiting low margin business.

So some of those things are just playing through in the business, and you're not quite seeing a drop to the bottom line yet. But obviously we're very clear on what we're anticipating, and based on the assumptions we shared at Capital Markets Day and the progress that we're making ahead of those in terms of revenue growth.

Jacob Bluestein, Analyst at BNP Paribas

Very clear. And if I just ask a quick follow-up: you mentioned you've got several customers coming in on the IP side, I think you said, and I'd just be interested in understanding the level of concentration of that customer mix. I mean, would you say you're well represented across the different hyperscaler customers, or would you say it's still a relatively narrow segment?

Justin Hotard, President and CEO

Yeah, I think we've talked about this a little bit before. It's fairly concentrated today. But that's the way that, you know, that's the way you build the business, right? And so I think we've got very good partnerships and relationships across many of the AI and cloud players, the hyperscalers. The focus right now is obviously on making sure where we do have demand that we're delivering it and we're continuing to innovate for those customers and then, over time, obviously expanding that footprint.

Jacob Bluestein, Analyst at BNP Paribas

Thanks, very helpful.

Justin Hotard, President and CEO

Thank you.

OPERATOR

We'll take our next question from Oliver Wong from Bank of America. Oliver, please go ahead.

Oliver Wong, Analyst at Bank of America

Hey guys, thanks for taking my question. My first question is in terms of the 2.8 billion AI orders in the quarter. I understand that a significant portion pertains to some of your significant design wins in data center switches from last quarter. So I think what would be helpful is if you could maybe try to quantify or guide us a little bit on how much of the total orders this quarter that comprised, just so that we can have a better sense of underlying optical-related demand in the quarter.

Justin Hotard, President and CEO

Yeah, I mean, I think I would say it was driven by optical and IP, weighted towards optical. And that's probably not a surprise given the momentum we're seeing right now in that market.

Oliver Wong, Analyst at Bank of America

Got it. And a quick follow-up in terms of, you know, within optical. You mentioned—you discussed briefly—about sort of scale across versus regular DCI. I was just wondering what the composition of demand is right now between the two.

Justin Hotard, President and CEO

Yeah, I don't think we're breaking that out right now. I just would highlight that I think there's a significant amount of demand in DCI as well as scale across, and I think the two kind of get either pushed together or maybe the DCI piece gets underappreciated. But that's certainly where, for us, we're seeing traction on both.

OPERATOR

Thanks, Oliver. Our next question from Richard Kramer from Arete. Richard, please go ahead.

Richard Kramer, Analyst at Arete Research

Thanks. Hey Justin, my first question for you is on the AI RAN transition. Your customer installed base runs on Nokia proprietary silicon. Do you see the industry long term shifting away from that proprietary silicon-based set of solutions, and what are the implications for what is a 3 billion euro run rate of Mobile R&D and Mobile Networks margins for that transition? Thanks.

Justin Hotard, President and CEO

Hey Richard, so a couple of things on this. First of all, I've talked about this pretty openly. I think we're at a point where the industry has to transition. I think we look at what we see on AI RAN and the spectral efficiency. By the way, we'll have spectral efficiency on our existing hardware, we'll have some improvements in software, but they'll be an order of magnitude below what we're talking about on AI RAN. But the second thing here is that when you look at leading-edge silicon—you do the math on the cost of leading-edge silicon and then, by the way, the supply constraints on leading-edge silicon—in my mind, this is a very clear industry shift that has to happen on the baseband, and that is a shift to general-purpose silicon. And of course we are partnered with NVIDIA in launching the AI RAN solution. There are other players out there with general-purpose-based solutions that are delivering virtualized RAN stacks. So I don't think we're alone in this move. Fundamentally, as we think about the R&D in this space, this is the other thing I've touched on. When you look at this industry, there are two fundamental challenges, and certainly from 4G and 5G, one of them is that the cost of capital, the return on invested capital at an operator level in aggregate, hasn't delivered in terms of the investment—certainly looking at 5G but also 4G. If you look at it from a supplier perspective, a technology provider like us, it also hasn't been acceptable on our side. And so I think we also have to look at how we shift investment and generate a better return on invested capital. Getting out of purpose-built silicon on the baseband is a step in that direction, and that's why we've said that's the long-term direction. I think it's incredibly compelling when you can also say to a customer, by the way, look at the better efficiency you can get on your hardware, which means you're going to get a better return on that hardware investment.

And then the last thing we're saying is, by the way, when we deliver the hardware, that's not the best performance you're going to get. We'll continue to provide performance enhancements. As an industry, we've always added features, but the fact that we're now adding performance capabilities in our software stack we think is a huge advantage. And the final point I'll make is, as we've talked about, in the software stack this is a single software stack, so we've got capabilities to optimize it for different hardware, including our legacy stack and, of course, the NVIDIA GPUs that are now coming into our portfolio on the AI RAN platform.

But it's a single software stack, so we're getting a tremendous amount of leverage out of that stack. So this is right on that path.

Richard Kramer, Analyst at Arete Research

And then a quick follow-up for Marco, if I may. You know, your comments about being above the midpoint of your full-year profit guidance, but having flattish profits in third quarter, suggests you're going to more than double profits in Q4. Can you talk through the drivers of that—be it software revenue recognition, licensing, product deliveries, cost reductions—especially given the cash outflows for restructuring, capex, working capital, et cetera that we're seeing now and can expect in second half?

Marco Wirén, Chief Financial Officer

Yeah, thank you. I would say that if you look at the normal seasonality that the industry has, specifically on the telecom customer base side, it's usually very Q4 delivery heavy. And that's why we've seen in the past years as well that that part of the industry usually generates the biggest profits and sales as well in quarter four. And now, in addition, we see also an increase in AI and cloud customer base that is also impacting the seasonality of our operations and also profit generation.

When it comes to restructuring, the program that we announced in the end of '23, that we will end in the end of this year, we expect that we'll get those 1.2 billion accumulated gross cost savings, just like we said as well. And in addition, we expect to actually accelerate the synergy program that I mentioned earlier when it comes to the China company that we took over 100%. And then also we had some additional voluntary-based cost saving restructuring also in Europe, and those we will take this year as well.

But altogether, if you look at our cash position, we have a very strong position now. We had 2.8 billion net cash end of quarter two. We had some inventory and working capital increase in quarter two to secure deliveries going forward. And then of course accounts receivables follow normal sales pattern as well. But we believe also by the end of the year we have a very good financial position and cash position. So I don't see any issues there.

OPERATOR

Thanks, Richard. We'll take our next question from Sandeep Deshpander from J.P. Morgan. Sandeep, go ahead.

Sandeep Deshpander, Analyst at J.P. Morgan

Hi, thanks for letting me on. I want to understand from your order and cloud in the quarter, we're really—

OPERATOR

We're struggling to hear you. Sandeep, can you hear me?

Sandeep Deshpander, Analyst at J.P. Morgan

Can you hear me better now?

OPERATOR

That's a little better, yeah.

Sandeep Deshpander, Analyst at J.P. Morgan

So you had a nice strong cloud in the quarter. How much? I mean, last quarter you had said the 1 billion euros of orders were an ongoing order intake. Even though you will have lumpiness in your orders. How much of this 2.8 billion euros is an ongoing order intake would you characterize? And then secondly, regarding AI and cloud, how should we be looking at a run rate on revenue in this business between optical and IP routing?

Justin Hotard, President and CEO

Sure. So on the first one, I think we've broken it out for you that, you know, what we saw in next 12 months and forward, and I'm not going to break it out any further in terms of, or try to estimate that for you, but it gives you, that should give you a good view on what's in, you know, what's in the coming four quarters and what's beyond that. And then in terms of the mix, I think I touched on this. I mean, optical is growing a little bit faster this quarter than IP, but of course it's starting from a healthier, just a stronger position.

IP, we're just, as we said, we're just starting to ramp in design wins and deliver those. We talked about that last quarter. I'm pleased with the momentum and I think if you look at it from the other side, which is 100% year-over-year growth, I think we're set up for a very good continued growth forecast from the AI and cloud segment. Thank you.

David Mulholland, Head of Investor Relations

Sandeep, did you have a follow-up?

Sandeep Deshpander, Analyst at J.P. Morgan

No, I'm fine, thank you.

David Mulholland, Head of Investor Relations

Thanks, Sandeep. We'll take our next question from Sebastian Stabovitz from Kepler Cheuvreux. Sebastian, please go ahead.

Sebastian Stabovitz, Analyst at Kepler Cheuvreux

Yeah. Hello everyone. Thanks for taking my question on AI RAN coming back. Have you seen a specific commercial traction over the past few months? Have you added any new customers trialing your solution? And you are targeting twice the spectral efficiency by 2028. What about the total cost of ownership of this solution? And next to the baseband, do you plan to partner with NVIDIA on GPUs for radios, or will it be mostly focused on the baseband? Thank you.

Justin Hotard, President and CEO

Okay, so three questions, let me hit them. First of all, I'll start actually with the last one. So the announcement that we made last week was around AI RAN for baseband and the NVIDIA GPU solution going into our AirScale platform, a future standalone platform, and also having a Cloud RAN common off-the-shelf server solution. So that's the current announcement. In terms of the spectral efficiency and TCO, as you probably know, that TCO ends up being a very customer-specific discussion.

But at the macro level, a hardware deployment with 100% spectral efficiency improvement, I think the math there speaks for itself in terms of the value creation potential for the operator. And the other key thing is that this is a software model. So the benefit for the operator is not just TCO, but it's also a CapEx to OpEx transition in terms of ongoing benefit without having to have hardware upgrades. So I think there's a tremendous amount of value when you look at it from a lifecycle standpoint.

And then in terms of the pilot deployments, you know, we've announced 10 public customers on track for later this year. There's many conversations going on about this. We expect to start the pilots later this year, obviously expect that will continue into 2027. And obviously as we make progress we'll continue to share the progress publicly as we can on the progress we're making, the capabilities we're delivering. But it's more than just spectral efficiency.

It's also a platform that's extensible, and we talked about this a little bit. It's a bit technical, but you can actually put your own applications and services in at the radio layer, and this allows some new capabilities which we think are going to be pretty attractive to a number of operators, things like sensing and other applications.

David Mulholland, Head of Investor Relations

Thanks, Sebastian. We'll take our next question from Rob Sanders from Deutsche Bank. Rob, please go ahead.

Rob Sanders, Analyst at Deutsche Bank

Yeah, hi. Thanks for taking my question. First question would just be about the indium phosphide fab ramp. Do you have line of sight to hitting best-in-class 6-inch yields next year? Clearly Coherent is already doing pretty well. Momentum seems a bit behind, so where do you stand on that? And the second question would just be around AI RAN. If you look at the top three U.S. operators, how many do you think internally have already gone past the go/no-go decision on whether to deploy AI RAN?

Thank you.

Justin Hotard, President and CEO

Okay, got it, Rob. Thanks. So I think obviously we have one operator today in the U.S.—I'm going to start with the AI RAN one, we'll come back to indium phosphide. On AI RAN, we have one operator in the U.S. that's got our RAN deployed at scale, that's T-Mobile. They announced that they're going to be our lead partner on the pilot. So obviously we're working closely with them. I would assume that that would lead us to conclude that they're probably not past the go/no-go deployment path.

On the others, I think it's a discussion that obviously we'll leave for them to assess. But my view here is that the GPU performance is compelling, and it's particularly compelling in a business case where spectral efficiency matters, which is going to be more dense operations. But that's, obviously, they've got roadmaps and strategies—probably better to ask them than ask me. And then on the indium phosphide ramp, what I would say is we've got yield targets that we've focused on—both yield and volume targets—we've focused on through 2027 on the fab.

My view is, as you rightly said, while the ecosystem is maturing, and it's not just the two you mentioned, but also the Chinese manufacturers in this space, I also believe this is a place where we're going to go through a significant amount of maturity and learning as we scale and scale yield, and that's what I'm focused on with the team versus a specific target or competitor reach. I think this is more about us learning and scaling and making sure we can deliver on our volume plans and obviously our cost point.

David Mulholland, Head of Investor Relations

Thanks, Rob. We'll take our next question from Artem Beletsky from SEB. Artem, please go ahead.

Artem Beletsky, Analyst at SEB

Yes, good afternoon and thank you for taking my question. Relating to NI, could you maybe comment what type of order intake development you actually see outside of AI and cloud, so namely telcos and mission critical? So how should we think about the revenue growth trajectory on this front looking at this year and also next year?

Marco Wirén, Chief Financial Officer

Yeah, thank you, Artem. Just like we mentioned earlier as well, we had a good order intake development and sales development also in the non–AI and cloud customer base, where telcos were investing more, and this is also driven by their need to invest in their networks to secure that they can deliver the demand that is coming from cloud and AI in general development. And most likely this will happen more broadly going forward as well because we believe that AI demand will continue—the underlying demand will continue for a longer period of time—and without very good secure networks, it is very difficult to provide those improvements that AI is actually providing. I don't know. You have something you want to add?

Justin Hotard, President and CEO

Yeah, I would say the only thing I would say, Artem, is if you looked at NI specifically, the only headwind which we talked about last quarter is obviously on the customer premises equipment side of Fixed Networks, where we're getting much more disciplined on margin. That creates a bit of a headwind when you look at NI as a whole. Underneath that is the momentum that Marco talked about in IP and optical, and also obviously a healthy growth in optical line terminals as well, which is the network side of the Fixed Networks business.

David Mulholland, Head of Investor Relations

Thanks, Artem. We'll squeeze one last question in from Felix Hendrickson from Nordea. Felix, please go ahead.

Felix Hendrickson, Analyst at Nordea

Can you hear me now?

David Mulholland, Head of Investor Relations

Yes, go ahead.

Felix Hendrickson, Analyst at Nordea

Perfect. Yeah, thanks for squeezing me in. So in the report you say that the IP Networks product mix had an adverse impact on the NI gross margin. Was there something specific to the quarter, or does this sort of imply that the margin profile in data center–switching products at this scale is sort of dilutive to your NI gross margins? Thank you.

Justin Hotard, President and CEO

Yeah, I think this is largely tied to what we said at the CMD. We'd see some gross margin headwinds as we ramp products in this space, and this is what we're seeing. What I'm focused on is the business is fundamentally accretive to gross profit and ultimately to our operating margins. And then, as we talked about earlier in answering one of the questions, making sure we're streamlining the company and driving efficiency so that we unlock operating leverage.

And that's our focus. I mean, obviously we've got to show that. But when I think about where Marco and I are focused, we're very focused on that side right now. And I think you'll see the margin, as we mature in this space, continue to improve.

David Mulholland, Head of Investor Relations

Thanks, Felix. Ladies and gentlemen, that 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 risks 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 the Risk Factors section of our annual report on Form 20-F, which is available on our investor relations website.

Thank you for joining us today.

OPERATOR

This concludes today's call. Thank you everyone for joining. You may now disconnect.

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