Nokia Oyj (NOK) Earnings

Management highlights

### Strategic Focus on AI Super Cycle Opportunity - Leadership prioritizes capturing long-term growth from the AI super cycle, with early results already translating to 105% year-on-year sales growth in the AI and cloud customer segment, where Q2 order intake reached 2.8 billion euros, driven by strong demand for data center interconnect and optical fabric scale. - New product launches include the first commercial AI RAN platform, with the multi-rail ILA optical product launched at OFC in March 2026 now securing its first design win. AI RAN is on track for pilot deployments at end of 2026 and commercial launch in 2027, enabling flexible hardware choices and AI acceleration for existing Nokia AirScale infrastructure. ### Strategic Partnerships and Co-Innovation - Expanded partnership with Google Cloud to integrate Gemini-powered AI agents into Nokia's autonomous networks portfolio. - Demonstrated AI-powered dynamic network slicing with Vodafone Albania. - Expanded network modernization and 5G rollout partnership with Indosat Ooredoo Hutchinson in Indonesia, with a seamless upgrade path to AI RAN. - Entered trials for a new out-of-band management solution (leveraging Nokia's passive optical technology) with a U.S. hyperscaler. ### Capital Allocation and Portfolio Rationalization - Completed the announced sale of the non-core fixed wireless access customer premise equipment portfolio to Insego, which remains on track to close by the end of 2026, aligning with Nokia's disciplined approach to focusing capital on high-value differentiated opportunities. ### Capacity Expansion for Optical Growth - The new indium phosphide fab in San Jose is currently processing test wafers, remains on track for volume production by the end of 2026. - Announced a 10x capacity expansion for Nokia's Pennsylvania manufacturing facility, and an acquisition of an NXP manufacturing site in Arizona to increase long-term U.S.-based optical manufacturing capacity to meet growing AI-driven demand. ### Internal AI Adoption and Productivity - Deploying AI testbeds across all business functions to improve internal productivity and deliver better customer outcomes, with scaling planned as testbeds deliver tangible results. Restructuring and Cost Savings - The 2023-2026 global restructuring program is on track to complete this year, delivering 1.2 billion euros in total cost savings. - Integration of fully acquired Chinese operations into Nokia's global model is accelerated to complete by end of 2026, with 200 million euros in expected annual cost savings and 350 million euros of the planned 350-400 million euros in one-time charges expected to be recognized in 2026. - New efficiency programs focused on simplifying European operations are expected to incur 200 million euros in restructuring charges in 2026, bringing total expected 2026 restructuring charges to approximately 800 million euros.

Guidance

- Full-year 2026 comparable operating profit guidance is maintained unchanged, with management still tracking to deliver results somewhat above the midpoint of the guided range. - Q3 2026 net sales are expected to increase 3-7% sequentially, consistent with Q2 2026 sequential growth due to software revenue seasonality. - Free cash flow conversion is now expected to track towards the low end of the prior 55-75% guided range, due to working capital investments to support future business growth and seasonal cash outflows for employee incentives and restructuring. - Mobile infrastructure full-year 2026 gross margin is expected to come in between 44% and 46% after stronger than expected Q2 2026 software revenue pulled forward seasonal gains, with improvement expected in later quarters.

Segment performance

Network Infrastructure: The segment delivered strong revenue growth, driven by optical and IP networks. Optical and line terminal sales grew 18% year-on-year, with gross margin increasing 240 basis points to 42.7%. Operating margin for the segment rose 170 basis points to 8.1%, as synergy realization from the Infinera acquisition and strong product mix offset ongoing growth investments for AI infrastructure. Fixed networks declined 2% year-on-year. By customer segment, AI and cloud was the fastest growing category, with net sales increasing 105% year-on-year; sales to telecom customers grew 4% year-on-year. Mobile Infrastructure: Net sales grew 7% year-on-year, with higher than expected software revenue contribution in Q2 pushing full-year 2026 gross margin expectations to 44-46% (down from prior guidance due to seasonal revenue shifting, with improvement expected later). Operating profit was stable year-on-year, in line with normal seasonality. Overall company: Total net sales grew 9% year-on-year, gross margin expanded 70 basis points to 46%, and operating margin increased 70 basis points to 9%. Fixed wireless access is classified as a discontinued operation following the announced sale to Insego, reducing comparable net sales by 66 million euros.

Risks & headwinds

- Component supply constraints, particularly for memory chips driven by overwhelming industry AI demand, are the most significant current supply chain risk, leading to price increases and elongated lead times for leading edge products; Nokia is not unique in facing these constraints. In general, Nokia is currently supply-constrained on optical products, would generate higher revenue if more component supply was available, and only includes revenue it has clear line of sight to deliver in current forecasts. - The strong Q2 2026 order intake is lumpy due to a small number of large long-term orders, with conversion to revenue spread across multiple quarters rather than just the next 12 months. - Ongoing growth investments in AI and optical infrastructure offset near-term margin expansion, with margin accretion from new AI-focused product lines expected to be back-loaded over a 3-year scaling period. - Current AI and cloud revenue is fairly concentrated among a small set of hyperscaler customers, though Nokia is actively expanding partnerships across more players.

Analyst Q&A

• Q: What milestones are in place for the large optical capacity ramp, and what is the long-term trajectory for order growth after the lumpy Q2 2026 order intake? /

  A: Nokia is maintaining the full combined DSP product portfolio from both Nokia and pre-acquisition Infinera to deliver more differentiated customer solutions, with a full upgraded optical portfolio planned to launch commercially in 2027. While Q2 orders were lumpy with a large one-time step up in the book-to-bill ratio, management notes sustained growing order momentum across multi-quarter time frames, with all growth driven by ongoing AI and cloud demand. (297 characters)

• Q: How would you rank current supply chain risks, especially for memory and wafers, given your factory expansion plans? /

  A: Memory is the most significant current supply chain risk, with broad industry-wide shortages driving large price increases across the tech ecosystem. Nokia is focused on securing supply where possible and simplifying designs to reduce scope of constrained components. New in-house fabs are being ramped on schedule: San Jose will enter volume production late 2026, with incremental capacity ramping through 2027 and 2029 to match growing demand. (349 characters)

• Q: Could you address the risk of double ordering in the current supply-constrained AI market, and what share of Q2 orders will convert to revenue within 12 months? /

  A: Double ordering is far less prevalent in Nokia's AI customer base, which consists of highly sophisticated hyperscalers that face their own constraints on leading edge optical silicon manufacturing, giving them little incentive to place unnecessary duplicate orders. Both growing overall demand and current supply constraints have elongated order lead times, with a larger share of large Q2 orders converting to revenue beyond the next 12 months compared to Nokia's historical business. (393 characters)

• Q: When will scaling AI and cloud, especially IP routing, deliver material margin accretion, and how concentrated is the current hyperscaler customer base? /

  A: Early-stage investments in product development and capacity scaling mean margin improvements from AI-focused businesses are back-loaded over a three-year period, so bottom-line accretion is not yet visible. Near-term gross margins are also impacted by supply chain complexity and new product mix. The current AI customer base is fairly concentrated, which is typical for early-stage market development; Nokia is focused on delivering for existing customers while expanding partnerships across all major hyperscalers. (386 characters)

• Q: What is the commercial traction and timeline for AI RAN, and what share of top U.S. operators have committed to deployments? /

  A: Nokia has 10 public announced pilot customers, with all pilots on track to launch by end of 2026, commercial availability in 2027, and meaningful volume not expected before 2028, consistent with prior guidance. In the U.S. top three operators, only one has committed to be Nokia's lead pilot partner, while the other two are still evaluating the technology. AI RAN delivers compelling spectral efficiency improvements that are most valuable for dense urban network operations. (357 characters)