Nokia Oyj (NOK) Q3 2026 Earnings Call Transcript

David Mulholland: Hello, ladies and gentlemen, welcome to Nokia's Third Quarter 2026 Results Call. I'm David Mulholland, Head of Investor Relations. Today with me is Justin Hotard, our President and CEO; along with Marco Wiren, 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 may, therefore, differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in 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 Q3 report and a presentation that accompanies this call are published on our Investor Relations website. The report includes both reported and comparable financial results and reconciliation between the 2. In terms of the agenda for today, Justin will go through the strategic highlights and then Marco will go through our financial performance before we move to the Q&A. With that, let me hand over to Justin.

Justin Hotard: Thank you, David, and hello, everyone. Team Nokia continues to deliver on our commitments and execute on our strategy. Growth is accelerating in the areas where we have chosen to focus and invest. That growth is also beginning to translate into stronger operating leverage. In Q3, we grew net sales by 9% and expanded operating margin by 220 basis points to 11.7%. AI and cloud was again our largest growth engine, with earlier design wins converting into revenue in IP Networks and showing continued strength in Optical Networks. Mobile Infrastructure grew in the quarter as our focus remains on profitability and improving return on invested capital. Technology Standards continues to execute its strategy and licensing. We are tracking to deliver above the midpoint of our full year outlook. Before Marco takes you through the financial performance in more detail, I will give you an update on the progress that we are making against our strategic priorities. In AI and cloud, net sales grew 123% year-over-year and represented 12% of total group net sales in the quarter. Order intake was strong again, up 118% year-over-year to EUR 1.5 billion gross. Demand from AI and cloud drove IP Networks to grow 43% year-over-year as previously announced design wins began to convert into revenue. Optical Networks grew 18%, and still contributed the majority of our revenue in this customer segment. However, IP Networks is now playing a more prominent role. In both businesses, we continue to see demand that exceeds supply. The market continues to develop with demand accelerating across all segments, including scale across front-end networking and data center interconnect. Further, we also see demand extending into our telco customer base as they invest to support demand from AI and cloud customers. Optical Networks and IP Networks are now on track to grow somewhat above the 18% to 20% assumption we provided for the full year. For 2027, we now expect these businesses to grow between 25% and 30% on a combined basis, reflecting the strength of the underlying market and our position to capture that demand. The build-out of AI infrastructure is driving demand across Optical and IP Networks. Demand for our 800 gig coherent pluggables continues to accelerate, with shipment volumes increasing more than twofold sequentially. We're securing orders from both hyperscalers and major telcos. We now have design wins with 29 customers. We are also investing in our next-generation optical roadmap, developed in close collaboration with our hyperscale customers. In line systems, an important growth area where we have historically had less share, we are making meaningful progress. During this quarter, we secured a significant win with a large hyperscaler. Our multi-rail technology launched this past March delivers 25% higher density than competing solutions in the market and has secured 3 design wins with the first customer now receiving initial volumes. IP Networks momentum remains strong. We secured 2 additional hyperscaler design wins including an important next-generation data center gateway win. We also secured significant telco wins across edge and core routing, IP aggregation and 5G backhaul in Japan, Europe and the United States. Customers are modernizing their networks to support growing AI traffic. With demand for intelligence becoming more distributed and localized, this creates more data centers in more locations, which requires more connectivity to deliver services with the latency, performance, security and locality demanded by AI workloads. That means more AI compute in more places requiring more optical and IP capacity to connect them. For inference and workloads, security, trust and sovereignty are foundational for operators. We are the market leader in telco edge routing, and we have a rich optical portfolio, which uniquely positions us to deliver solutions to meet this market need. An example of this is helping our customer, Zayo, a major Internet backbone provider in the U.S., to create an architecture and service blueprint for connecting distributed inference across data centers for multiple partners. We're also seeing encouraging traction in out-of-band management, leveraging our passive optical technology from our Fixed Networks business. Out-of-band management provides data centers with an independent optical lifeline to critical IT infrastructure if the production network becomes unavailable. Compared with traditional Ethernet-based architectures, our solution can reduce energy consumption by 50%, reduce points of failure and improve network resilience through separation from the production network. We announced our first design win last quarter and are now actively engaged with additional customers. In addition, in our core Fixed Networks business, we are focused on growing our optical line terminal business through continued innovation and differentiation while we bring greater discipline to our customer premises equipment business. In optical line terminals, we continue to lead the market with approximately 45% port share globally, excluding China. Last week, we announced an industry-first 16-port line card that supports 10 gig, 25 gig and 50 gig PON on every port. SoftBank completed Japan's first commercial implementation of this new solution, demonstrating that GPON, 10 gig XGS-PON and 50 gig PON can coexist on the same fiber. It gives them the opportunity to invest in higher-speed capacity as demand grows without requiring replacement of equipment. SoftBank is one of several customers in Japan moving from its legacy EPON-based to this technology, creating a new serviceable market for our portfolio. With AI RAN, we are transforming the radio network into a platform for physical AI. This is critical for emerging applications such as autonomous mobility, industrial automation robotics and augmented reality. The technology industry has a long history of moving workloads from proprietary silicon to general-purpose computing platforms. For example, over the past decade, we have seen this happen in data storage and in mobile core networks. RAN is entering the same transition driven by the unique requirements of serving intelligence. We are positioning Nokia to lead this shift in partnership with NVIDIA. Nokia's AI-native anyRAN software running on NVIDIA's Aerial RAN Computer provides a software-defined foundation for integrating AI-powered radio functions that improve network capacity and performance. This means our customers can adopt new capabilities as their needs evolve, including a software upgrade path to 6G. This past weekend, T-Mobile completed their first live voice call over AI RAN in its production network. In addition, Elisa yesterday announced that they have run voice, mobile data and AI workloads simultaneously on the same AI RAN platform in their commercial network. Together, these milestones show that AI RAN is nearing commercial deployment. In live environments, we've already demonstrated spectral efficiency gains of more than 20%, increasing capacity and improving network economics against our roadmap of 100% improvement in spectral efficiency gains in 2028. Our general-purpose approach allows new applications and services to be built on the network. At our Radio World event in September with our partners DeepSig, ZaiNar and Cohere, we showcased real-time sensing of the physical world to enable precise network-based location capabilities using only existing wireless infrastructure. This creates the potential for new telco services and a path to monetize AI. Accelerated computing moves radio networks beyond the architecture that the industry has deployed since 3G. Our customers are telling us we're on the right track and engagement is accelerating with 19 customers from around the world now working with us. Alongside our progress in AI and cloud and AI-native networks, we're working more closely with customers to shape the next generation of network technology. That collaboration is translating into meaningful wins. Our partnership with Google in support of the EUR 13 billion investment in Finland is a great example of this. It shows how our Optical and IP Networks will help to connect the next generation of AI infrastructure within and between data centers. We are also making progress with our Nokia Defense incubation unit. Last month, we announced a strategic partnership with ICEYE to build secure, sovereign low-Earth orbit satellite communication systems for governments and defense clients. Alongside these efforts, we continue to execute our focused capital initiatives, investing for growth and simplifying our portfolio. In optical manufacturing, our new San Jose fab remains on track to start production before the end of the year. We've completed 90% of the process development and the process recipes and expect 24/7 operations to begin by the end of this month. At the same time, we've completed the sale of our fixed wireless access business to Inseego and signed an agreement to sell our enterprise campus edge business to AURELIUS. Finally, we remain focused on delivering sustainable returns. In Q3, operating margin expanded by 220 basis points, and we are delivering on our cost savings commitments. We are accelerating restructuring in Europe, and expect the integration work in China to be 90% complete by the end of the year. The Infinera integration is largely complete, and we are on track to achieve the EUR 200 million synergy target by the end of this year, 1 year ahead of schedule. These actions taken together provide a more durable operating cost base for the company. In closing, growth is accelerating, operating leverage is becoming more visible and our investments are strengthening Nokia's position in the technology transitions that are reshaping connectivity in the AI supercycle. We remain focused on delivering our full year commitments and building the foundation for sustained growth and long-term value creation for our customers and shareholders. With that, I'll turn it over to Marco to take you through the financial performance in more detail.

Marco Wiren: Thank you, Justin, and hello from my side as well. We had a strong quarter 3. Net sales grew by 9%, supported by both Network Infrastructure and Mobile Infrastructure. Gross profit was EUR 2.3 billion, and gross margin was largely stable at 44.6%. The improvement in Mobile Infrastructure gross margin was offset by product mix in Network Infrastructure and the costs associated with ramping new products. Operating profit was EUR 605 million, and operating margin increased 220 basis points to 11.7%. The improvement mainly reflected higher sales and continued operating leverage across the group. Financial income and expenses benefited from positive venture fund revaluations during the quarter. This supported both net profit and earnings per share. Free cash flow was negative EUR 99 million. We ended quarter 3 with a net cash position of EUR 2.6 billion, maintaining both a strong balance sheet and financial flexibility. Looking now at Network Infrastructure. Net sales grew 15% in the quarter, reflecting continued positive momentum across Optical Networks and IP Networks. Optical Networks grew 18%, and the growth was supported by continued demand from AI and cloud customers. But we also saw healthy demand from telco customers investing in transport infrastructure. IP Networks grew 43% and the strong order momentum we saw in the second quarter is now translating into a significant acceleration in revenue growth. Fixed Networks declined 22%, reflecting the portfolio actions we are taking to prioritize higher-margin products. Sales of our optical line terminal products were stable with the underlying business remaining healthy. Gross margin declined 150 basis points to 41.2%. And this was mainly driven by product mix and the ramp-up of new products for AI and cloud customers in IP Networks. We currently expect gross margin to improve in the fourth quarter. Operating margin increased 230 basis points to 10%. The improvement was mainly driven by operating leverage as revenue increased. Turning now to Mobile Infrastructure, where net sales grew 5% in the quarter, and Radio Networks grew 10%, benefiting from some contract deliveries moving from the fourth quarter into the third quarter. Core Software declined 13% as we deemphasize certain applications, and we also saw some operators delay projects due to the supply chain constraints for server infrastructure. Technology Standards grew 8%, supported by the signing of several licensing agreements and the recognition of some catch-up net sales during the quarter. We have seen a strong performance in the business year-to-date in signing new deals. In quarter 4, we expect slower deal activity and therefore, a lower revenue level than what we have seen in the last few quarters. MI gross margin was 47.5%, largely stable compared with the previous year. The quarter benefited from acceleration of revenue from quarter 4 into quarter 3 in Radio Networks, operating efficiency and higher contribution from Technology Standards. Operating profit increased, reflecting higher gross profit and lower SG&A expenses. This was partially offset by other operating income, which had benefited from a positive hedging impact in the third quarter of 2025. Turning to sales by customer segment. AI and cloud was again the fastest-growing segment with net sales increasing 123% year-on-year. Sales to telecom customers were stable while Mission-Critical Enterprise grew 7% and technology licensing grew 8%. As you heard from Justin, we are confident in the growth potential for AI and cloud given our backlog and pipeline. At the same time, our expectations for a stable telecom market remain largely unchanged with some pockets of growth in IP and optical driven by data center connectivity. Turning to restructuring and integration costs. As part of our strategy, we drive long-term operating leverage and to ensure we are investing our resources in the areas that drive the greatest long-term growth opportunities for Nokia, we have further accelerated some of our restructuring actions. We are focused on simplifying our processes, streamlining our operations and consolidating locations. We're also driving a faster integration of our China operations as Justin mentioned. We now expect restructuring charges of approximately EUR 1.1 billion in 2026, and restructuring and associated cash outflows will now be between EUR 800 million and EUR 900 million. Turning now to cash flow. Free cash flow was negative EUR 99 million in the third quarter. Cash generation was impacted by restructuring payments and a further buildup in working capital. This included higher receivables and inventory as growth accelerates. Given the strength of the demand opportunity and the growth we now expect in 2027, we plan to invest an additional EUR 400 million in working capital compared to our expectations at the start of the year. As a result, we now expect free cash flow conversion for 2026 to be between 35% and 55%. While this outcome is partly due to acceleration in growth, we continue to focus strongly on cash flow and ensuring we can accelerate our cash conversion as some of the working capital pressures ease. Finally, turning to our outlook. There is no change to our comparable operating profit guidance. We continue to track above the midpoint of our comparable operating profit guidance range. The strength of the performance we saw in quarter 3 reflected some pull-forward from quarter 4 as we work to improve linearity. Looking at the fourth quarter specifically, we currently assume a sequential increase in net sales of between 20% and 24%, although the pull-forward will dampen the normal seasonality we would see in Mobile Infrastructure. Overall, quarter 3 was a solid quarter, and we remain focused on both capturing growth and driving the operational rigor required to maximize the long-term value creation potential of the company. With that, let me hand back to David for Q&A.

David Mulholland: 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 only a brief follow-up. Jenny, could you please give the instructions?

Operator: [Operator Instructions] I'll now hand back to David Mulholland, Head of Investor Relations for the Q&A.

David Mulholland: Thanks, Jenny. We'll take our first question today from Rob Sanders from Deutsche Bank.

Robert Sanders: Maybe if you could just give an update around your 6-inch ramp in indium phosphide, how are yields progressing? Are you confident of the ramp as you go into next year? And how many more milestones do you need to cross before getting really high conviction on that ramp?

Justin Hotard: Yes. Thanks, Rob. So I think I touched on this a little bit. Fab 2 is our 6-inch indium phosphide fab. Fab 1 is 3-inch wafers. And in that regard, we're very pleased with the ramp. I touched on this in my comments, 90% of the process development is done moving into 24/7 operations. Obviously, the key milestone is seeing us enter production by year-end, and then continuing to see production ramp through the year next year. So we've got a set of milestones that start to move into obviously, the volume and yield and those are the things we'll be watching. But obviously, we'll probably -- we'll give you another update in January, but we're quite pleased with the progress and obviously touched on it today. Did you have a quick follow-up, Rob?

Robert Sanders: Maybe if you could just address the opportunity in satellite in North America just given recent market developments.

Justin Hotard: Yes. Two things on that one, Rob. I guess one is our focus in the partnership with ICEYE is going after sovereign communication networks. And these are really networks, particularly what we see in Europe initially, is networks that are being upgraded from legacy SATCOMs that's been deployed. And I think the way I think about those are 2G or 3G wireless communication SATCOM solutions that need to be upgraded, one, to get to modern technology to meet the demands today for SATCOM. But two, to also provide the capabilities for the future. And so that's a big focus for us on this initial partnership with ICEYE. Beyond that, look, I think there's a lot of discussion in the U.S. about SATCOM. I think we've been really clear that with the amount of connectivity demand coming from physical AI, we think connectivity is going to grow. Demand for connectivity is going to grow. Demand for persistent connectivity is going to grow, and we think satellite is going to be a part of the solution. So the work that we're doing is looking at how we enable that. And that's a key part of why we're also investing in AI RAN because AI RAN provides spectral efficiency that will also be necessary to support that increasing demand.

David Mulholland: We'll take our next question from Simon Leopold from Raymond James.

Simon Leopold: I'll ask both upfront. The first one is you've talked about the order patterns of the IP and Optical together. I appreciate if maybe you could double-click and drill down on the IP, the routing and switching in particular, and help us gain a better understanding of where you are in terms of expansion in verticals beyond the telcos. It sounded like that's got better. I'd like to make sure I understand that. And just I'll give you the follow-up right now to hopefully help out. One of your competitors has offered a forecast for the optical business growing on the order of 30% in each of the next 2 years. Now I appreciate Nokia's customer base is somewhat different. But how do you see this particular market shaping up over that kind of time frame?

Justin Hotard: Thanks for the question. So first of all, on the order patterns and sales funnel, I would say 2 things on this. One is what we're seeing, and I touched on this again a little bit in my comments, is that the demand is in 3 areas for optical and IP routing and switching. And it's really in these areas around front-end networking, data center interconnect and then obviously, scale across. Scale across for us today, is much more of an optical play. The others are much more around -- much more a balance of optical and IP. What we're seeing rapidly evolve, and you can't -- you don't really see it in the quarter because there's some other moving parts with what we're doing with deemphasizing nonprofitable parts of our ONT business, a little bit of the discipline we're getting in the portfolio that Marco talked about in Core. When you look underneath our numbers, what you do see is more investment by the telcos also in providing effectively connectivity for east-west traffic. And this is data center interconnect, long haul, et cetera. And that investment continues to come. Obviously, we're watching the CapEx guides very closely as you guys are from our customers. But we're quite optimistic that, that's going to be a place where they're going to deploy capital and see a very attractive return. Because despite a lot of the sentiment in the market, the demand for connectivity in AI and cloud is massive and it's insatiable. And it's driven by the fact that if compute is constrained, connectivity becomes another way to maximize the access to the assets or the utilization of the compute assets. And so that's -- hopefully, it gives you a little bit more color, but we're seeing -- obviously, we started from a lower base. We talked about this a little bit last quarter, lower base on IP. And now we're seeing more of that come through in revenue. We expect to continue to see order strength in IP Networks as we go forward from AI and cloud customers. And then in Optical Networks, we're continuing to see that demand on both ends. And again, we're very supply constrained. And then as you think about the growth, I mean, maybe just to go to that one for a minute, look, we're providing a view of IP and optical combined of 25% to 30%. I would just say that our view right now is that as we build momentum in our portfolio, we build out our supply capacity, including the investments we talked about in Fab 2, we have some optimism that optical can be a bigger contributor to that growth. And look, for me, I think the only other thing I'll say about '27 versus '27 and '28, I think this is the third time I've given you an update on our growth assumptions since November, since the CMD last year. I want to give you a concrete view of '27. Rest assured, we see a very durable market here. We wouldn't be investing at the pace and the scale that we are or in the portfolio if we didn't, and that extends well beyond '27.

David Mulholland: We'll take our next question from Artem Beletski from SEB.

Artem Beletski: I would like to ask about highlighted several design wins that you have received in the quarter, so related to multi-rail, pluggables and also IP in particular. Is it fair to assume that momentum is strengthening what you see on that front? And hence, we should be assuming that these wins should be converted into orders, let's say, maybe even later on this year. And just in terms of multi-rail 800 gig pluggables as we are still in early phase of this product ramp-up, how do you see you have been managing compared to competition on that one?

Justin Hotard: Yes. Two things I would say. Obviously, if you look at our assumption around growth this year that we've updated and then what we're saying about growth next year. And then just the order momentum we've had in the year. I think it's fair to say we're quite confident that things are moving forward. Things are accelerating, and we continue to build momentum. Obviously, as I said in Q2, we had a huge intake in Q2, and we said at that point, we thought this would be a little bit lumpy. But when I look at it, I look at what we see in the pipeline in the funnel, what I continue to see is tremendous demand. And as I said just now with Simon's question, our focus is on investing to meet that demand. Then in terms of pluggables and multi-rail or just the broader line system market that we play in. This is a place where we were, I'd say, very transparently, we were underpenetrated, right, both as Nokia and Infinera, it's been something as we've come together, the team has done a great job of doubling down on in terms of getting the portfolio right and now building the capacity. And it takes a little bit of time to show up. I'm probably one of the least patient people for seeing that show up, but it does take a little bit of time to show up. And I'm really pleased with the way this team has come together as one company, one team, to build the portfolio and ramp production. But that doesn't mean that we don't have more to do. And as I said before, we're not demand constrained today. So if we could ship more, we would certainly do it.

Artem Beletski: Just a quick follow-up. Related to IP Networks and nice growth acceleration in the quarter to more than 40%. Do you think that such growth pace would be maintained short term? Or are you already starting to be constrained on that front?

Justin Hotard: Yes. I mean I think we feel pretty good about the assumption we shared in the update, and I'll kind of let you guys work through the math. But again, on IP Networks, we're starting from a pretty low base. And as I just touched on in Simon's question, as we think about '27, we -- right now, what we see is Optical contributing a little bit more. But that's not to say there's not more potential out there for us in IP. It's just what we see today.

David Mulholland: We'll take our next question from Daniel Djurberg from Handelsbanken.

Daniel Djurberg: I just wanted to ask a little bit. You mentioned that you saw some increased demand from -- on investments from CSPs on AI traffic. And you also saw a strong Mobile Infrastructure and especially, radio demand or revenue in the quarter with Japan, EMEA being strong, partly perhaps pre-buying. But can you give us some more insight into this? And we should expect this strength to continue into '27? Or if it is a trend with some investments on the back of the AI demand?

Justin Hotard: Yes. I mean, I would say -- I think I made some comments on the AI and cloud demand that's driving telco. I mean, obviously, a fair amount of that is in the U.S. because it's tied to where the data center investment is and it's driving interconnect. But it's -- it's not just limited to that. We're seeing investment in subsea, in AI and cloud that also means that players in subsea or more what you might consider more traditional service provider players in subsea are investing. Obviously, that doesn't have the density that things like scale across or even DCI have. But as we talked about, too, I think this is going to be a place where we expect to see more investment. I touched on the work we're doing with Zayo, who's one of the operators in this space. On the other side, on mobile, look, I would just say the following on mobile. I think we touched on this, Marco referenced in his comments. The trend right now, all of the things we're seeing in demand in AI and cloud is putting pressure on the supply chain. That supply chain is -- that's driving impacts, as we've talked about previously for mobile. And it's not just pricing. Obviously, commercial terms and costs are going -- are increasing. We're addressing that through greater commercial discipline, as we talked about. But it's also a concern around supply and visibility. And so the conversation that I have with customers is around forward visibility, give us line of sight of your plans over the next 12 to 18 months. Give us early visibility so that we can plan. Some customers take that and say, if you've got availability, I'll take it, and you saw a little bit of that acceleration, others are working with us to just give us better visibility. That is a shift from certainly where we were when I started in this role just 18 months ago, where there was a bit more of a, I would call it, more of a normalized hand-to-mouth ordering cycle with something like 6-month lead times. So that dialogue we're having with our customers. And obviously, I think we've got some great partners and customers in telco, and they're working with us around that. And I think that's what we're going to have to continue to do. It's a bit of a different -- a lot of people talk about the supply constraints in '21, but that was very narrow, very targeted in some ways to some specific nodes. This is much more broad-based, touches all the leading-edge nodes, touches memory, also touches some of the sourced materials, PCBs, et cetera. And it's not just a shortage. It's also a structural cost increase that we're seeing in the supply chain.

Daniel Djurberg: Okay. So can I just have a follow-up on that, and it will be on your Nordic peer commented about gross margin headwinds in '27 based on the constraints and the price increases that is harder to work around. Is that your view as well with regards to radio again, perhaps?

Justin Hotard: Do you want to take that one, Marco?

Marco Wiren: Yes, I can take. Yes. Just like Justin alluded as well, that there are broad-based constraints when it comes to supply and price increases, we see that as well and that's why we are working on different fields to try to mitigate those impacts for us as well and try to secure that we can deliver for those demands that our customers have. And just like Justin said, the telco side is quite aware of this now, are getting more and more aware that lead times are slipping when it comes to component supplies and prices are increasing.

David Mulholland: We'll take our next question from Sami Sarkamies from Danske Bank.

Sami Sarkamies: Can you still try to unpack the gross margin dynamics we're seeing at Network Infrastructure. You were at a 43% level in the first half of the year, now at 41%, even though you probably benefited from lower ONT volumes. How material a headwind are you seeing from new products? And what would you be thinking about Q4 when you had 45% last year?

Marco Wiren: Yes. Thank you, Sami. I would say that it's always when you have new products, we're ramping up, it takes some time before you get the right cost base and profitability on those. And that's why we saw also in quarter 3 now specifically, on the IP Networks side, that we have this situation. We believe that this dilution that we've seen is temporary. And also that in quarter 4, we should see improvement in the gross margin levels and AI and cloud bring very strong incremental gross profit and is accretive to operating margin as well. And we believe this is a very good business for us going forward. And then your comment on ONT, we are working through throughout the whole year now to prune the portfolio and basically securing that our portfolio and offerings going forward are the best suitable for us, and that's why we are taking down those low-margin customer premises equipment offerings. But because of some longer-term contracts, which are working throughout the year. So it takes this throughout this year to be able to do that. And then -- that's why it takes some time before you can see the impact as well.

Justin Hotard: And Sami, I would just maybe make 2 comments on this as well. I mean one is, if you look at the Fixed Networks business in Q3, effectively, the decline was the reduction in ONT volume. And then obviously, the growth was -- the growth came across Optical and IP, but there's also a bit of a -- it's a bit of an addition, subtraction, it doesn't move the margins that much because we're not talking about business that was loss-making, right? We were talking about business that was dilutive to our profitability. So I think it's a little bit of that probably in addition to what Marco highlighted that it doesn't move the needle as much as we would like. But I think over time, as we scale what we're building in IP Networks and obviously continue to scale in Optical and as Marco said, play through the transformation that the team is driving in Fixed Networks. I think that's where you'll start to see the healthier margin profile.

Marco Wiren: And also, remember that size-wise, Fixed Networks is much smaller than Optical and IP, and the ONT business and customer premises business is even smaller.

David Mulholland: We'll take our next question from Richard Kramer, Arete.

Richard Kramer: Justin, you just mentioned visibility. You've given a roughly EUR 5 billion AI and cloud order book in the last 5 quarters, but we don't know the timing. So could you maybe shed some light on roughly what portion of those orders are for 12-month delivery versus long-term deals? And when, given Marco's comments about near-term dilution, do you expect that AI and cloud, which is now 12% of sales, translate into neutral or even accretive margins. Is that a 2027 event? Or is that further down the road?

Justin Hotard: So why don't I take the first part and Marco, you can take the second. So in terms of the growth that we see in the order book and what we're -- what we continue to see is the majority of orders are -- majority of orders we've seen are kind of in a 12-month time frame. There's some portion that are moving outside of 12 months, but I would say still largely within '27. So the demand -- and again, the constraint here isn't demand, it's supply. So some of this is obviously -- I think our customers would take more if we could deliver it faster, obviously, was implicit in my comment. But for now, the way I would think about it is we have a lot of backlog towards building towards '27.

Marco Wiren: Yes. And when it comes to profitability, as I said, we definitely believe this is accretive for the company, and this is why we're investing in this as well and believe that this is value creating for our shareholders also. It's always so that especially if you look at IP now that I mentioned specifically for quarter 3, we are starting from quite low levels. So it takes some time before we get that volume up. And when we get the volumes up, then, of course, get more operating leverage as well and with profitability. So that's why you saw a little bit lower margins. But as I said, we expect quarter 4 to be better than quarter 3.

David Mulholland: We'll take our next question from Emil Immonen from DNB Carnegie.

Emil Immonen: Maybe to touch a bit still on Mobile Infrastructure where -- especially, Radio Networks, you're seeing quite good sales. Just wondering if your customers are seeing cost inflation? Are they then doing a lot of prebuying now? Or what's your view on that market going into, well, Q4 and then 2027?

Justin Hotard: Yes. Emil, it's a good question. I don't see people prebuying. And the reality is, given the constraints, I don't think we can pre-supply. If there was a huge bubble, I think, one, I think we would all know about it because you'd see it in the numbers. Two, given the supply constraints, it's not like we can just respond and support it. But what we do anticipate is that we're going to see more stable forecasting. I think the other thing that I don't see is I don't see an imminent investment cycle. I think the market continues to be flat as we look ahead, and we've been pretty vocal and transparent about this. And I think that's consistent with what others see. You may have a certain market that drives demand up or down. We've talked about certain markets where things slide and that will continue. But overall, we expect the market to be flat. However, we expect -- given the cost inflation, we expect pricing to go up.

Marco Wiren: Yes. And there are some pockets of opportunities. As I mentioned earlier, IP and Optical side on the telco side. But the broader telco, we expect to be quite a flattish market. And also back to your comment about pre-buying, the quarter 3 movements that we had from quarter 4, specifically on the radio side, I would say that it's not pre-buying. It's just that sometimes projects are proceeding faster than expected. And that's why we were able to deliver and conclude those deliveries already in quarter 3 instead of quarter 4.

David Mulholland: We'll take our next question from Felix Henriksson from Nordea.

Felix Henriksson: I appreciate the initial guide for optical and IP growth for 2027. But how would you describe the expected operating leverage on that growth? I know we discussed about gross margin already a little bit, but are there any larger incremental OpEx needs to enable this growth going into next year?

Marco Wiren: Yes. Thank you. I can take that one. And of course, the product mix has an impact on gross margin. And what we -- as I said earlier, we definitely see improvement in NI. And when it comes to all the different mitigation actions we are doing and focusing on not only in NI, but the whole group, is to secure that we are getting the operating leverage and mitigating potential cost increases on the component side, we definitely believe that we have opportunities for all parts of the company to improve profitability going forward. Also, when it comes to the capacity investments, we invest in those areas where we believe that we can create shareholder value in the long term. And if those opportunities occur, we will definitely take those opportunities and invest in those. And this is something that we do actually throughout the whole year of the capital allocation decisions. So it's not a once-per-year decision. This is the ongoing running discussions that we have on a weekly basis basically that where should we allocate our resources and capital and we make those decisions on a running basis basically.

Justin Hotard: Maybe, Emil, can I add one comment to Felix's question. So a couple of things. One is, we touched on the fact that we're starting to see operating leverage in Q3. And again, just to remind you, if you look at where we are, this operating leverage that we're starting to see is also hidden by the fact that we've got a bunch of these portfolio moves. The ones that we've talked about quite openly in portfolio businesses, but also the -- and obviously, the ONT one we were talking about earlier with Sami, but also the continued cleanup of some of the areas where we're focusing on profitability even inside Core Networks and in Radio Networks. And so that hides this a little bit in the short term as we make those decisions. But also if you look back where we're highlighting the operating leverage in the quarter, and we're also saying we're now moving to above the midpoint of the range, which is a signal up from where we were last quarter because we see that -- we're starting to see that potential improved profitability, and that's a sign from the set of actions we're taking, both in cleaning up the portfolio as well as some of the more formal restructuring elements we've talked about.

David Mulholland: We'll take our next question from Jakob Bluestone from BNP Paribas.

Jakob Bluestone: A question around expansion of your fab capacity. You obviously talked about the ramp in San Jose. I was wondering if you could talk a little bit about the ramp at Chandler. I appreciate it hasn't closed yet, but if you can maybe share a little bit what are your plans? What will it focus on? Is it just indium phosphide? And I guess, I mean, given how much capacity you're adding, can you maybe comment on how closely are you working with your customers to support the decision to have so much manufacturing capacity sort of in the midterm?

Justin Hotard: Yes. Maybe I'll start on that side and then work the other way. I would say, we talked about this a little bit at ECOC or the team, the team talked about this a little bit at ECOC because I wasn't there. So -- but one of the things that we -- as we think about is we've got a set of building blocks and capabilities in optical that give us a lot of flexibility in terms of building solutions and what's becoming more and more apparent is that optical demand, optical penetration and demand is going to continue to increase. And it's a factor of the tremendous increase in bandwidth demand that's going to touch every part of the network that we serve today. And then obviously, the power efficiency for solutions. And you look at things even like what we're doing in out-of-band management as an example of that. The reason I say that is that, that's enabling us to have earlier discussions around solutions and really co-innovate and co-develop these platforms. And if you go back to OFC, we announced products that we're going to release in '27. That's a sign of the left shift that's happening and the longer-term visibility that our customers have on the demand. The key thing there is building the fab in Chandler, the investment acquisition we're making from NXP of that facility right now is -- I'm not going to give you specific metrics. What I will tell you is we are positioning that to give us the flexibility to support the demand as it emerges. And we've talked about that being a '29 time frame solution. But we think we've got lots of different avenues to monetize that facility through indium phosphide manufacturing. And obviously, as we get closer and we complete the transition and we work on it, we'll talk more about where we are, and we'll give you similar milestones to what we're giving you on Fab 2. But in terms of near-term execution, the focus right now, 100% is on making sure we get Fab 2 up and running and supporting the growth and, of course, hitting the yield and output targets that we expect.

David Mulholland: We'll take our next question from Janardan Menon from Jefferies.

Janardan Menon: Two questions. One is just a follow-up on those opportunities that you're seeing in the medium term on the optical side. You have come up with some products for optical solutions inside the data center outside of your core area of scale-out, DCI, et cetera. I'm talking about things like LPO pluggable and your external laser, et cetera. I know it's very early days, but can you give us any indication of how the response to those kind of products has been from potential customers? And do you see those kind of products as being a reasonable contributor to that medium-term outlook that you talked about? And then I'll just give my second question also right away. It's again on margins. But this time, just looking at the restructuring where you are accelerating it to EUR 1.1 billion, when should we expect to start seeing the results of this on your profitability? And does this restructuring start to taper off next year and then gradually we see the effect of that on profitability? And would that be coming more on the Mobile Infrastructure side, where some of that is more focused? Or will we see some of that coming through on the NI side as well?

Justin Hotard: I'll take them. I mean, I would just say on the optical side, I think I just answered the question. I mean we're not -- right now, what I will tell you is that the assumption that we provided for '27 doesn't assume anything outside of the portfolio we have and the orders we have. But of course, as I touched on, we see broader opportunity. And right now, we just want to continue to work with those customers to design the right solutions that they need.

Marco Wiren: Yes. When it comes to the restructuring, if I start with the China where we basically do the integration after we acquired the remaining part of the company. And we said originally that this will take up to 3 years, but now we're actually accelerating and we're able to do that in 12 to 24 months. The whole integration, and that's why we get the savings faster as well and synergies there. But this is, of course, aligned with restructuring costs. As you know, in China, as a Western company, it's quite limited what you can capture some market share there. And that's why we are adjusting basically the company to that reality that we see. Then the other parts that we are doing, of course, we are finalizing the '23 to '26 program. And here, we have actually maximized what we set the range, we said EUR 800 million to EUR 1.2 billion, and now we are at the top of that range, what we expect to get. And in addition to that, in quarter 2, we announced that we see further opportunities to streamline the company also when it comes to securing that we consolidate locations in Europe and other parts of the world. And just securing that we continuously seek for more efficient ways of doing business we are doing. And this will definitely help, I would say, the whole company, not only MI, but of course, considering also what you've heard from other companies that said that there's component constraints and component price increases. This is one way to mitigate those also going forward. And also in addition to what we're already doing when it comes to, of course, discussing with our customers, redesigning our products and so on. So there's definitely benefits in different parts.

David Mulholland: We'll take our next question and possibly last question from Sandeep Deshpande from JPMorgan.

Sandeep Deshpande: I have 2 questions, if I may. Firstly, regarding IP Networks. You're talking about 2 hyperscaler design wins. You already have multiple hyperscaler design wins in the IP Networks business. Are you expanding the number of customers that you have in IP Networks and thus do you expect that through '27 and '28, IP Networks will be a bigger percentage of your orders and sales in the AI and cloud segment? And then secondly, when you look at the kind of typical Q4 revenue growth that you have, you're already seeing some operational leverage in the business in Network Infrastructure associated with the growth in Optical and IP Networks. How should we look at, I mean, your guidance for the year? I mean, can you get to the top end of that EBIT guidance that you've given, given the kind of leverage you're now seeing in this business?

Justin Hotard: Okay. I think you were trying to ask a '28 question and a profit-oriented question, so either way, which I'm going to give you. So -- but look, I would just say in terms of the design wins, the way I think about it, I don't think about it at a customer-by-customer level. I think about it as a design win by design win level because each one of these is almost the magnitude of the product, each one of each design win in each customer is like its own product revenue stream and product life cycle. And so that's why you hear us talking about it that way, and that's the focus. And obviously, we're -- given the information we gave you on '27 and the ongoing demand that we saw in the order book we saw in Q3 alone on the back of what we did in Q2, we feel very good about the long-term potential of this business. And the feedback we get from the customers that we're working with is that we're quite competitive in our design work. So obviously, that gives us optimism to continue to invest. And then in terms of operating leverage. Look, my view and Marco can comment is this is something that, as you guys know, it takes a few quarters to work out. It never comes right away. There's a lot of work to get Nokia to the level of lean operating machine with the kind of different disciplined portfolio. We're not there yet. I'm incredibly proud of what the team is doing because I think they've done a great job, and they've moved faster than I thought in terms of portfolio clarity, but it doesn't mean that our work is done. And so we're going to continue to push hard and stay focused on providing that ongoing operating leverage as we drive scale because that's going to be fundamental.

Marco Wiren: Yes, when it comes to the full year guidance, just like Justin said earlier, that we changed a little bit the wording on the full year guidance. But the ranges are what the ranges are that we have said as well. And just consider also that linearity, especially on the MI side, is a little bit different considering that we saw some of the movements from quarter 4 to quarter 3. So -- but I think that we have given a good, I would say, path for you to see and calculate what you expect that we will land.

David Mulholland: Ladies and gentlemen, this concludes today's call. I would like to remind you that during this 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 all for joining us.

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