NOKIA (NOKIA) Q2 2022 Earnings Call Transcript

NOKIA  (HEL:NOKIA) Q2 2022 earnings conference call dated Jul. 21, 2022

Corporate Participants:

Pekka Lundmark — President and Chief Executive Officer

Marco Wiren — Chief Financial Officer

David Mulholland — Investor Relations, UK

Analysts:

Alex Peterc — Societe Generale — Analyst

Andrew Gardiner — Citigroup Inc — Analyst

Sandeep Deshpande — JPMorgan Chase & Co — Analyst

Francois Bouvignies — UBS Investment Bank — Analyst

Peter Nielsen — ABG — Analyst

Richard Kramer — Arete Research Services — Analyst

Artem Beletski — SEB — Analyst

Simon Leopold — Raymond James — Analyst

Sami Sarkamies — Danske Bank A/S — Analyst

Paul Silverstein — Cowen — Analyst

Felix Henriksson — Nordea Markets — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to Nokia’s Second Quarter 2022 Results Call. I’m David Mulholland, Head of Nokia Investor Relations, and today with me is Pekka Lundmark, our President and CEO; along with Marco Wiren, our CFO. You will notice that we switched to an audio-only webcast this quarter. We will continue to use video for events where we see it adding value, such as our business group progress updates. For our quarterly updates considering we’re now on the road meeting many of you in person, we felt it more efficient to return to audio only.

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 mostly be on a constant currency basis, and on margins, it will be on our comparable reporting. You can find reconciliation tables in our Q2 reports back to our IFRS financials. Please note that our Q2 report and this presentation are published on our website on both the reconciliations in there. In terms of the agenda for today, Pekka will give a quick overview on our financial and strategic progress in the quarter; and Marco will then go into a bit more detail of some of the key factors impacting our financial performance and how we see the outlook for 2022.

With that, let me hand over to Pekka.

Pekka Lundmark — President and Chief Executive Officer

Thank you, David, and good morning to everybody. I’m pleased to say that we continue to execute well in Q2. As you can see on this slide, net sales grew 3% in constant currency. This was in spite of continuing supply chain challenges and timing issues in two contract renewals in Nokia Technologies. Gross margin was 40.6% and operating margin 12.2%, reflecting good progress in both mobile networks and network infrastructure. The margins declined slightly year-on-year due to the contract renewal timing in technologies, and that one-off software deal in mobile networks that, as you may remember that we highlighted in Q2 2021.

If you exclude last year’s software deal and Nokia Technologies from our results, operating margin would have improved by 330 basis points from 5.6 to 8.9 in Q2. And this does demonstrate the strength of the improvement in our product businesses. Our good Q2 performance was achieved, whilst we continue to invest in R&D. On this picture, you can see also on this chart on the screen, you can see that there has been a 13% increase in R&D expenditures since Q3 2020. And this has been funded through our improved gross margins and focus on efficiency in SG&A. We will continue this focus to further strengthen our technology leadership. And then I’ll say a few words on the performance across our business groups.

First, Mobile Networks, where I was pleased to see a return to growth with a 1% increase year-on-year in constant currency in spite of COVID-19-related lockdowns in the Shanghai region, supply chain challenges and a tough comparison caused by a one-off software deal in Q2 2021. We saw good growth in North America, Middle East and Africa and Latin America, which countered declines in some other regions, including the impact of our exit from Russia. Overall, this gives us confidence to grow net sales in 2022 at constant currency. While gross margin declined slightly year-on-year due to the one-off software deal in the previous year, operating margin did increase 70 basis points year-on-year, and you can see from the chart, the progress we continue to make on a 12-month rolling basis, 12-month rolling gross margin on the screen.

Also pleasingly, our ReefShark penetration increased again and is now at 91% and we are clearly on the track to the target of reaching 100% by the end of this year. Network Infrastructure continued its positive trend with all four divisions showing growth. As you can see, Fixed Networks and Submarine Networks had again a very strong quarter, with both delivering double-digit growth. Top line performance flowed through to both gross margin and operating margin in NI which increased by 10 and 240 basis points, respectively. There were some supplier-specific shortages impacting optical networks in the quarter which are expected to improve in the second half. But overall, Network Infrastructure had another really excellent quarter.

Cloud and Network Services, net sales were stable in the quarter. For the first half of the year, we saw growth of 3% and good progress in both gross margin and operating margin. Clearly, second quarter was a bit weaker, first quarter was strong, and overall, the first half of the year demonstrated good development in CNS. The work to rebalance the portfolio continues, and you hopefully heard the presentation from Raghav just over a month ago, where he highlighted some of the longer-term initiatives we have in the business to move towards a more securing SaaS-based revenue stream. The Nokia Technologies, as mentioned there, we were once again impacted by the ongoing litigation surrounding the Oppo and Vivo renewals.

In Q2, three of Nokia’s patents were upheld by a German regional court with injunctions granted against Oppo. We will robustly defend the value of our patent portfolio, but we’ll do so fairly. And I am pleased to say the court also recognized we have complied with all negotiation obligations as a standard essential patent holder. In the quarter in Nokia Technologies, we also delivered some new catch-up sales related to new patent license agreements in the automotive and consumer electronics markets. And overall, as it also says on the slide, we do expect to return to the previously communicated annual run rate of EUR1.4 billion to EUR1.5 billion, with the assumption that the two ongoing contract renewals are concluded.

Then on the customer segments, and of course Enterprise, which we have highlighted as a separate segment, I was really pleased to see that Enterprise returned to growth this quarter, delivering an 8% increase year-on-year. And this business, of course, like the other businesses, were also impacted by some supply chain challenges, but this was despite those challenges, we grew 8%. In Enterprise, our order intake remains strong, and we expect to see accelerated growth in the second half of the year. As you remember, we have doubled down on our investments in private wireless, since the start of this year to strengthen our leadership, and that is showing results. We added 35 new customers in private wireless during the second quarter. And as you can see on the slide, we now have 485 customers in this space.

So overall, good progress in the Enterprise segment. And then finally, I’ll say a few words about the challenges in our wider operating environment next before handing over to Marco. Of course, the macroeconomic uncertainty is something we all need to pay attention to. So let me make a few points to clarify the current impacts as we see them. First of all, even though our business is not immune to macro trends, we continue to see strong investment trends in connectivity, particularly into 5G and fiber deployments. And those investments are very important for many of our customers to cope with increasing data consumption and the need to increase productivity, which networks enable.

Actually, in worst economic times, the need to increase productivity industrial operator typically increases, which could be good investments. So far, we have not seen any major changes in our demand outlook. Customer demand and order intake remains strong, and we continue to be more supply than demand limited. As you can see on the chart, the global penetration rates for both fiber and 5G excluding China remain low. For 5G sites globally, it’s around 15% and even in some of the more developed markets, less than 25%. And you also see the homes connected and homes passed as percentage of total homes in different parts of the world on the charts.

But the macro trends could impact the pace at which our customers invest. There can, for example, be some challenges in emerging markets where currency movements could impact the affordability of our products that are effectively priced in U.S. dollars or euros. More specifically on supply chains, as you know, this has been a really challenging situation globally, and we have been dealing with it in a number of ways since the pandemic hit. Towards the end of last year or actually throughout last year, we were facing constraints across a lot of suppliers in the business. In Q1, we said that the situation was changing a bit towards more supplier-specific challenges that were constraining our business.

Today, that largely remains the case, but we do see signs of the remaining challenges starting to ease in the second half of 2022 and into the first half of 2023. Last quarter, we also highlighted that we could potentially be impacted by COVID-19-related lockdowns in Q2, which was the case in the Shanghai region, but we did manage the situation quite well. And we have more or less recovered from that situation, which affected the supply chain in April and May.

So with that, over to you, Marco, and then after that, I look forward to the Q&A.

Marco Wiren — Chief Financial Officer

Thank you, Pekka, and good morning from my side as well. If we now look a little bit deeper in our financial results and starting with the regional performance and at the group level in reported currencies, the growth was 11% and of course FX had a strong impact here and 3% on a constant currency basis. And also here on the chart and on the report, you can see that we now provide the regional performance, excluding submarine networks. And this is due to the fact that the nature of the business and the volatility that it has between different regions, we feel that it’s better that show the actual demand trends we see across our regions. And we also have submarine separately, so you can see that there.

And if we start with looking at North America, we saw 19% year-on-year growth which reflected the double-digit growth in network infrastructure, where both fixed networks and IP networks had double-digit growth. Also mobile networks had a double-digit growth in North America. Then when it comes to Europe, you can see a decline, but remember, the large portion of this was related to the fact that we include all of our Nokia Technologies business in this region. And because the decision that to exit Russia that will impact also Europe. And Russia impact was about 100 million year-on-year impact. And lastly, as you see, submarines had a very good growth, 27% year-on-year.

So next, moving over to our operating profit development, once again, we saw a good improvement in mobile networks and network infrastructure businesses, with both operating profit and margin expanded. And impressively, the improvement in mobile networks came despite the one-off software deal that helped quarter two in 2021. However, these were largely masked by the fact that Nokia Technologies had a litigation with these two customers, and had also impacted our operating profit. Common also benefited from a positive currency revaluation related to our venture funds. And as Pekka mentioned, if we exclude the one-off software deal from Q2 last year and technologies as well this year and last year, the remaining business operating margin would have improved from 5.6% to 8.9%, which is quite impressive.

And looking briefly at our cash flow performance in the quarter, the free cash flow was negative in the quarter, and this was mainly due to changes in net working capital, which offset our adjusted profits. If you look to the slide, you can see that we have broken out the components of the change in net working capital, which mainly related to liabilities and more notably the payment of our 2021 related employee variable pay which we flagged already in quarter one. We also managed to increase inventories in the quarter, in the middle of an ongoing component situation, and these were somewhat offset by lower receivables, partially due to the higher sale of receivables in the quarter. We also saw about EUR200 million outflow related to payment of our quarterly dividend and the repurchase of shares. So this all led to a net cash position of 4.5 billion at the end of the quarter.

Shifting over to our addressable market, we have provided our usual quarterly upgrade here. While there were some movements between BTs, we continue to expect our targeted addressable market to grow at 4% at constant currencies in 2022. Our estimate for mobile networks TAM increased from 4% to 5%, and this is driven mainly by increased expectations for both North America and Europe. When it comes to network infrastructure, we estimate the market increase from 3% to 5%, and this is largely reflected the strong demand we have seen in fixed networks, mainly, related to upcoming broadband initiatives and fixed wireless access. When it comes to Cloud and Network Services, growth declined somewhat due to some adjustments we made to the market to better reflect the areas we are prioritizing.

And if we now look to our outlook for 2022, the demand environment remains strong, but uncertainties are now around technologies, contract renewals or the timing of that, potential additional COVID-19 lockdowns in China, and of course, the supply chain situation. Our full year net sales guidance remains unchanged in constant currencies and reflecting our current assumed euro-USD rate of 1.04, our net sales outlook is now 23.5 billion to 24.7 billion, and we are currently tracking towards the higher end of this range. And our comparable operating margin guidance remains as earlier between 11% to 13.5%. And here we are currently tracking towards the midpoint of this range as we manage the ongoing inflation, currency headwinds, which I will explain on the next slide. So let’s go there.

So this year has seen significant currency volatility with the US dollar strengthening around 10%. So we want to help you to understand our currency exposures here as well. Operationally, as you can see on the slide as well, we are relatively well-balanced between net sales and cost exposures in different currencies. The largest currency exposal we have is US dollar. And in quarter two, we had about 55% of net sales in USD compared to 50% to the cost, which is reinforcing my point that we are largely naturally hedged. And as a rule of thumb, a 10% strengthening of the USD would see an approximately a 5% benefit to our net sales. And from an operating margin perspective, before hedging, it would be slightly positive.

But we have the hedging program with a 12-month horizon to dampen the impact of currency fluctuations in our financial results, and this means in the current financial year, our operating profit in absolute terms is largely unaffected by changes in the USD. Given the immediate benefit, we see the net sales with operating profit unchanged. This will result in a negative impact to our operating margin in the short-term. And then, just to summarize that we had a strong start to 2022, and we are well on track to deliver on our full year targets. And clearly, compared to what we have expected at the start of the year, we are facing issues we didn’t expect from a geopolitical standpoint, and inflation has continued to gather pace as well. But despite these issues, we are still tracking towards the midpoint of our operating margin range, which emphasize also the progress we’ve been making in the business.

So with that, I hand back to David for Q&A.

David Mulholland — Investor Relations, UK

Thank you, Marco, and thank you, Pekka, as well for the comments you made. Before we move to the Q&A session, I just wanted to give you another date for your dairies. We are planning to hold our next progress update, which will focus on our group technology strategy with our Chief Strategy and Technology Officer, Nishant Batra, along with our Nokia Technologies business with its President, Jenni Lukander. The event will shift to being in person in New York on Friday, the 9th of September, but the event will also be webcast for those who are unable to join us in person.

So with that, let’s start the Q&A. And as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up. Darcy, could you please give the instructions?

Questions and Answers:

Operator

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] I will now hand the call back to Mr. David Mulholland.

David Mulholland — Investor Relations, UK

Thank you, Darcy. We’ll take our first question today from Alex Peterc from Societe Generale. Alex, please go ahead.

Alex Peterc — Societe Generale — Analyst

Yes, good morning, and thank you for the question. Congratulations with the solid results by the headwinds that we see everywhere. Now my first question would be on your ability to offset ongoing inflationary cost pressures to improve pricing. Are there any meaningful differences in this respect among your divisions? And is the frequency of new product releases similar across divisions? And do your long regulation contracts have any inflation-related repricing process? That will be my first question.

And a brief follow-up would be just if you could give us a trend on your levels of inventory. Are you now happy with where you are or do you need to increase the buffer or lower in the remainder of the year given what’s going on in the supply chain? Thanks a lot.

Pekka Lundmark — President and Chief Executive Officer

Okay, thank you. If I take the first one, and Marco takes the second one. First of all, as we all understand, there is a big difference between existing contracts and new contracts when you deal with inflation. We are, of course, in all our new contracts in all our businesses, when we are making offers and signing deals, we are taking into account all the cost information and the cost development estimates that we have available. And I guess good news is that we continue to — while doing that, we continue to have strong order intake. So this is definitely good news.

Then, the other side of the coin is that depending on the business. And I guess when you asked about the differences between business mobile networks would be the one where the contracts would be an average longer than in other businesses. So it is usually very hard to go back to an existing contract and start changing prices after the fact. We have to remember that this industry has been for a long time kind of thought into a mode where prices go down every year. And now this is quite a big educational effort for us all to change that because we are now an inflationary environment.

So this is clearly the reason why we said already at the end of last year that even though we expect the underlying improvements in our profitability and our competitiveness to continue this year, the inflation does dampen some of the profit improvement potential during this year. And this all has been, of course, included and incorporated in our guidance, including what we said today that we are expecting to land somewhere around the midpoint of the 11% to 13.5% range.

Marco Wiren — Chief Financial Officer

And when it comes to the inventory levels and where we want to be, as you’ve seen, we’ve been working to build inventories to just have more safety stocks than normal. And the reason for business being that it has been difficult to understand exact lead times, they’ve been quite volatile. And that’s why it’s good to have some buffers. In quarter two, for example, we increased inventories by 240 million. And we believe that until the supply chain has returned to more normal and we can trust on the lead times that we get from our suppliers, we prefer to have at least the level we have today and have a little bit buffers.

David Mulholland — Investor Relations, UK

Thank you, Alex. We’ll take our next question from Andrew Gardiner from Citi. Andrew, please go ahead.

Andrew Gardiner — Citigroup Inc — Analyst

Good morning, David. Good morning, guys. Thank you for taking my question. Just another one to follow up on Alex’s point on margins, if I think through the progression through the year based on the guidance you’re giving, and if we assume technologies is in there for the full year in terms of a full complement of licensees, are you effectively implying mobile declines half and half?

So from the 9.5% you’ve just done for the first half of the year somewhere in the mid-8% range. Network infrastructure declined a bit as well. Now I hear what you’re saying in terms of supply chain constraints and inflation and FX, I was just wondering whether — is there anything specific that you’re already seeing in second half costs that, is going to drive that, or are you just being prudent in terms of the current environment?

Marco Wiren — Chief Financial Officer

Yeah. I can start. And first of all, we have been executing extremely well and if you see the first half year, we have a supply chain situation, which has been quite challenging. We see that it should improve in the second half, but it’s more supply specific issues that we still see than a broad-based issue for the whole industry. And what comes to the operating margin, I would highlight at least two main reasons why we are guiding towards the midpoint. And one is the inflation that we have implicated early as well and also the fact that we actually have our annual salary adjustment will come now from July and onwards. And additionally, we have our hedging program that I mentioned also in the presentation.

Pekka Lundmark — President and Chief Executive Officer

And maybe, Marco, just to add — sorry, just to add one thing that is also important, is just specifically about Mobile Networks. We had a pretty strong mix in H1. And you saw the comments in North America. So this mix is expected to be less favorable in the second half of the year. And again, all this has been incorporated into the forecast of being closer to the midpoint of the range.

Andrew Gardiner — Citigroup Inc — Analyst

Thanks so much.

David Mulholland — Investor Relations, UK

Did you have a follow-up, Andrew? On the hedging impact.

Marco Wiren — Chief Financial Officer

Yes. What I mean by the hedge impact is that we hedge our operating profit in absolute terms. And when we’ve seen now, for example, very strong USD growth, we will get higher sales, but we will keep the operating profit at the same level. And that will have a negative impact on the operating margin. But this is just a timing issue, so it is step-by-step going in because we have a rolling 12-month hedging program. Just to dampen the big swings that we see in currency fluctuations.

David Mulholland — Investor Relations, UK

Thank you, Andrew. We’ll take our next question from Alex Duval from Goldman Sachs. Alex, please go ahead.

Alex Peterc — Societe Generale — Analyst

Yes. Hi, many thanks indeed for the question. We’ve seen one of your peers talk about the solid 5G backdrop this year, adopting rates. Marco, you’ve talked about a good situation there as well. I just wondered if you could give us some color on the sustainability of the RAN market into next year. Obviously, one tends to think about target customers being somewhat less macro sensitive. And you’ve talked today about confidence that you’re not going to have a big impact near term from macro. But would be great to get a bit of context on your view into next year? Many thanks.

Pekka Lundmark — President and Chief Executive Officer

Okay. Thanks, Alex, that’s obviously an enormously important question. And again, none of us have a crystal ball on this one. But when we look at what we are seeing today, what we are seeing today and hearing from our customers, the plans for 2023 seem to be pretty strong. And we have to remember that there are countries and regions which haven’t even really started in 5G yet.

And obviously, India is one of the most important one here. Latin America, the same thing. It’s only starting. So that’s why we do believe that we are still early in the 5G cycle. As you saw on the slide, the penetration of 5G sites is only 15% outside of China in the world. Again, this does not mean that we would be immune to any macroeconomic cycles. Of course, they do play a role, but all we can comment is what we are seeing today. And then we are arguing that the underlying kind of almost secular, not cyclical trends should continue to be there for quite some time.

David Mulholland — Investor Relations, UK

Did you have a follow-up, Alex?

Alex Peterc — Societe Generale — Analyst

Just very briefly on one of the earlier questions talking about the supply chain using in the second half. Some investors have been asking about press reports, talking about chipmakers taking up prices in some areas, including in communication chips in coming quarters. Just wondered, if you can comment at all on that and how you factor that into your statement of supply chain easing in the next couple of quarters? Many thanks.

Pekka Lundmark — President and Chief Executive Officer

I mean supply chain easing comment was more on the availability side. We all know that semiconductor inflation has been strong. We’ve been able to deal with it reasonably well, as you can see in the numbers. And then, of course, as I said, everything we are now seeing from our suppliers, we are taking into account in the new offers that we make. Then the billion dollar question is that if the economy weakens, we are now seeing that demand and some consumer equipment is going down how much of the relevant semiconductor capacity and the foundry capacity, substrate capacity will that release on the market and how will that be reflected on pricing. That remains to be seen. We have seen already that memory prices have come down, but then for the other parts, it still remains to be seen.

David Mulholland — Investor Relations, UK

Thank you, Alex. We’ll take our next question from Sandeep Deshpande from JPMorgan. Sandeep, please go ahead.

Sandeep Deshpande — JPMorgan Chase & Co — Analyst

Hi.

David Mulholland — Investor Relations, UK

Sandeep?

Sandeep Deshpande — JPMorgan Chase & Co — Analyst

Hi. Can you hear me? Hello.

David Mulholland — Investor Relations, UK

Yes. Go ahead, Sandeep.

Sandeep Deshpande — JPMorgan Chase & Co — Analyst

Yeah. Hi. My question is, when you look at your growth in mobile networks, in Q1 and Q2, it has been below market growth. Do you think that, that growth will accelerate now into the second half? And you will begin to take share because it looks like you have lost share in the market maybe because you could not ship. So now we did the shipments catch up to allow you to take share, which will allow you into the following year to go on to be a share taker in the market? And I have one quick follow-up on that.

Pekka Lundmark — President and Chief Executive Officer

Yes, thank you, Sandeep. The statement that we made at the Capital Market Day already more than a year ago is still valid that we did admit then that we had lost market share in the early stages of 5G. That is now changing. We have caught up on technology. Now in this quarter, as you saw, we have returned to growth. And especially, if you were to exclude that 80 million one-off software deal in the comparison quarter, the growth would actually have been stronger. And we do expect this trend to continue, a positive trend in terms of top-line and market share, to continue in the second half of the year.

Marco Wiren — Chief Financial Officer

And just to build on what Pekka said, Sandeep, also, if you look at the quarter two mobile network sales, we had a very good development on the RAN side, the equipment side. And we liberally actually have been taking down, deploy services in certain geographies and certain customers where we don’t believe that we are profitable enough. So this is also impacting the mix.

Pekka Lundmark — President and Chief Executive Officer

This is Sandeep, a very important point that Marco is raising. The equipment and software growth is much higher actually than the top-line headline figure on mobile networks. And on the services side, Marco mentioned deploy services. There we are getting, kind of, becoming more and more selective when it comes to the types of deals that we make, and we are moving priority in services to higher-margin support and customer care services from deployed, which is the fact of low-margin installation work.

Sandeep Deshpande — JPMorgan Chase & Co — Analyst

Thank you. Just one follow-up on that was when we look at the market, I mean, when investors, all of them talk about, are we at peak 5G and you presented some data on how many base stations have been installed in terms of how many need to be installed. Is that the case in North America as well, where 5G rollout started before other parts of your market?

Pekka Lundmark — President and Chief Executive Officer

North America is obviously ahead of some other markets, and I refer to India, which has not even started yet. I mean, you have seen — everybody has seen North American operators’ comments on their capex. It continues strong in 2023. And then for obvious reasons, they would probably start to see some normalization in 2024. But then, of course, in addition to that, there is then the Enterprise side, the enterprise digitalization side, which is only now picking up. So, it’s — I mean, there’s multiple factors playing into this equation.

David Mulholland — Investor Relations, UK

Thank you, Sandeep. We’ll take our next question from Francois Bouvignies from UBS. Francois, please go ahead.

Francois Bouvignies — UBS Investment Bank — Analyst

Thank you very much. I was just wondering, what is your sales growth, excluding technology and Russia in Europe, just to have a feel of where you are in terms of growth rate and market share given maybe there is some swap out with Huawei. That’s my first question.

Marco Wiren — Chief Financial Officer

Yeah, I can start. When it comes to Europe, just like I mentioned in the presentation as well that — remember that on those figures, we have technology — the whole technology sales, and then we had about 100 million impact from Russia, exiting Russia. So that’s impacting. When it comes to the otherwise Europe, I would say that we have been quite successful in those cases where our customers have been replacing the supplier base, and we won about half of those cases. Just remember here as well, that in the beginning of that contract, we do the swaps, and that’s when we don’t see that big impact in our P&L, in our profit line. It takes some time before that starts to come through.

David Mulholland — Investor Relations, UK

Do you have a follow-up Francois?

Francois Bouvignies — UBS Investment Bank — Analyst

Yeah, quick follow-up is on the 5G side penetration of what you disclosed 15% excluding China. I was just wondering how you think about this percentage penetration 5G given maybe the lack of penetration, maybe more use for urban areas. I mean do you expect this penetration to be like 100% or it’s going to be lower focusing on urban in the first stage and maybe more rural, but in the longer term? Just trying to feel about how should we think about the site penetration level in the near future.

Pekka Lundmark — President and Chief Executive Officer

That’s, of course, a very good question, but also very difficult to give a detailed answer. The way it, of course, goes is that that the installation start in urban areas, you build first urban coverage and then at the same time, when you start adding capacity in the [Technical Issues] rural, more rural coverage and this goes gradually. But of course, there is a lot of areas in the world, rural areas, where it will take — take a long, long time before there will be coverage. So it will never go to 100%. But the pace of this with which this will happen, of course, would require a longer and more detailed conversation than what is possible at this time.

David Mulholland — Investor Relations, UK

Thank you, Francois. We’ll take our next question from Peter Nielsen from ABG. Peter, please go ahead.

Peter Nielsen — ABG — Analyst

Thanks very much. I’d like to return to North America if I may, please. Can we take your comments, previous comments about growth going forward? To imply that the issues, which hampered your sales in North America at the latter part of last year and again Q1 are now behind you completely, and we are sort of looking at more growth in line with the market sort of based on market dynamics and competition, etc., but there should be no structural factors hampering your sales in North America going forward, if I understand your comments correctly.

And my quick follow-up would just be, Pekka, you mentioned accelerated growth in enterprises in the second half. Can we also assume that the investments in enterprises will also accelerate going forward and perhaps the profit contribution in the near-term will be more negative sort of in the near-term? Thank you.

Pekka Lundmark — President and Chief Executive Officer

At least when it comes to North America, I can confirm that what we are hearing from customers now is that we are now fully competitive when it comes to — comes to technology. Then, of course, there is, always new deals, deals to be made on a continuous basis. And of course, our goal is now that we would at least grow with the market. And in any business, of course, we want to — we have lost market share in the market, our goal would be to win it back. So that’s at least the fundamental basis for competitiveness, which is technology is there, which gives us good possibilities to then fight even harder on the market.

Then on the enterprise side, yes, we do see enterprise investment accelerating. As a whole, the service provider market is — has always been and will be a low growth market. But the enterprise market, in many cases, grows double-digit. And as we have said many times, only a small part of the enterprise or industrial digitalization potential has been captured yet. And this is something that we expect to be mega-trend in the world that is driving that part of the market throughout this decade actually. And that’s why, well, enterprise is now 7% roughly of our sales. Our goal absolutely is to make that relative share grow going forward so that we would get it into double-digit in the coming years.

David Mulholland — Investor Relations, UK

Thank you Peter. We’ll take our next question from Richard Kramer from Arete. Richard, please go ahead.

Richard Kramer — Arete Research Services — Analyst

Hi. Thanks very much. I’d like to ask this very specifically because I’m just trying to understand the shortfall in technologies. Are you currently in dispute with any other large licensees beyond OPPO/VIVO that might be impacting the Technologies business? And do you anticipate any potential license renewals between now and the end of the year having an impact on those numbers, because they obviously have a huge impact on profitability. Thanks.

Marco Wiren — Chief Financial Officer

Yeah. Thank you. And it’s OPPO and VIVO, just like we’ve been saying as well. So we have in several countries, we have a litigation with them. And I suppose you saw also the latest outcome from Germany that it seems that listen German Court was very positive how we have been handling these negotiations. So — and we just want to emphasize once again that we want to protect the value of our patent portfolio before specific timing, and we are very confident that we have a very good patent portfolio as well.

David Mulholland — Investor Relations, UK

Did you have a…

Richard Kramer — Arete Research Services — Analyst

Yes, please. And just a quick follow-up on this, on Sandeep’s question about the US and whether it might have a peak in capex in 2023, can you lay out whether you’re still expecting that you can win back market share at Verizon since that’s obviously has been a 10% plus customer of Nokia in the past. And can you talk a little bit about the competitiveness of your products at the 3.5 gig level on the radio side? Thanks.

Pekka Lundmark — President and Chief Executive Officer

We believe that we have a fully competitive product on 3.5 and in 5G overall. I mean, just as one — one example, if you look at the recent Ookla measurements in North America and how they are rating the different carriers and our largest or one of the large customers that we have, T-Mobile and the performance of their network where a significant part of that network is the competitiveness — this is true to both 3.5 and then the other frequencies as well. Then when it comes to specific customers and the market shares of win backs. As I said on a general level, of course, our goal is to maximize our market share. And if we have lost market share somewhere, our goal is to win it back. But if those things would happen, that’s something that I do not want to speculate on.

David Mulholland — Investor Relations, UK

Thank you, Richard. We’ll take our next question from Artem Beletski from SEB. Artem, please go ahead.

Artem Beletski — SEB — Analyst

Yes. Thank you for taking my question. I would like to ask about the network infrastructure growth that continues to surprise us positively. And whether you see that this type of double-digit development could be sustained going forward, or would there come some type of capacity limitations to you? And I guess, like networks is particularly the part that has been showing good development. And maybe my quick follow-up is relating to supply chain-related revenue impact would you provide some type of indication how big this impact has been in first half of this year? Just to get a clue how big acceleration we could see going forward if situation normalizes.

Pekka Lundmark — President and Chief Executive Officer

For network infrastructure, we do see the underlying strong trends to continue. And you saw on that Slide 1 KPI, which is the home passed and homes connected. But the interesting thing for NI is that now when we are building home broadband and building 5G base stations, that is driving the backhauling market. It’s driving the IP routing market, and it’s starting to drive the optical regional, and then optical backbone market as well. And typically, the access markets take a first that we have seen both for base stations and fixed broadband access and then the natural assumption would be that then next, we would see an acceleration in IP and optical. And the good thing is that we have we have a pretty strong technology position here.

Of course, then, if you ask that how long will the double-digit growth continues — it’s impossible to say the comparables are, of course, getting tougher if you take fixed access or fixed broadband grew 35% last year, 29% in Q1 and 22% in Q2. So, yes, comparables are getting tough. But we have good market share. The market share has grown in GPON or ex-GPON optical line terminals, we have more than 50% market share. So — and that is one of the strongholds that we have in that business. And — and again, even on this access network level, there is a lot of work to do that remains. So that’s why we are really proud of what MI has achieved in the last couple of years and there is every reason to be — optimistic about the future as well.

Marco Wiren — Chief Financial Officer

And just building on what Pekka said, if you look at the US government and also European Union are heavily focusing on this area, when it comes to connectivity. And we see a lot of good opportunities for us as a market leader and — to capture good share here as well.

David Mulholland — Investor Relations, UK

Thank you, Artem. We’ll take our next question from Simon Leopold from Raymond James. Simon, please go ahead.

Simon Leopold — Raymond James — Analyst

Thank you very much. I just want to get a really easy clarification than my question. On the clarification, I just want to verify that the rationale for the higher revenue outlook for the full year is fully reflective of currency and not other factors? And in terms of my question, I want to get a better understanding of your goals and opportunities for non-telco revenue. As we look out into the future, whether it’s coming from routing, private wireless, what kind of verticals, government versus hyperscale, we could unpack what’s driving that. I did hear earlier, the 7% base and the goal for double-digits, I want to get a better understanding of what drives it, where does it come from? Thank you.

Marco Wiren — Chief Financial Officer

Yes, I can start, and when it comes to the guidance on the top-line, this is purely adjustment to the current FX rates that we have. So we keep the guidance as we had earlier. The only thing that we now narrowed down a little bit, we say that on the upper end of that interval. So we give a little bit more understanding where we are in that guidance. What comes to the ambitions to grow beyond operators, today we have about 18% sales outside of CSPs. And just like Pekka mentioned earlier, we believe that within this market, enterprise sector has definitely much higher growth outlook than CSP market, and we believe that big part of that growth that we see in the coming years is coming from the enterprise sector and web scalers.

Pekka Lundmark — President and Chief Executive Officer

Just to build on that, I mean, in addition to — I mean, when we talk about non-telco, it’s important to qualify what that means because there are several different types of quite different types of business opportunities. Obviously, in that 18%, which is non-telco, for us, yes, we have the summary in networks. For webscalers, for example, we have the licensing business. But the real enterprise, one business case is clearly enterprise network infrastructure, optical and routing for enterprise.

Then the other business case is webscalers, which is a fast growing market when you look at the market growth estimates while again, while telco growth is slow when you look at what webscalers are estimated to invest in connectivity and in networking, it’s really growing fast. And from that point of view, the breakthrough that we made into the Microsoft switching is really an important one. And we have similar attempts going on, on the optical side with some of the webscalers as well. And then, of course, there is this big opportunity of private wireless campus wireless networks that we are getting into.

Then another opportunity is authority networks, which are getting modernized and new generations with additional security for authorities and public services, such as police, fire brigades, ambulance and so on and so on. There’s a lot of going on there as well. And then, of course, Government’s own networks. US government is investing a lot. We have started a special unit for that, a lot of opportunities there as well. So, this is quite — when we talk about enterprise or non-telco it’s really broad based and we are moving on several fronts there.

David Mulholland — Investor Relations, UK

Thank you, Simon. We’ll take our next question from Sami Sarkamies from Danske Bank. Sami, please go ahead.

Sami Sarkamies — Danske Bank A/S — Analyst

Good afternoon. Thanks for being very clear with the guidance. I would still like to check one more thing. When you say that you’re expecting to be around the midpoint of the guidance range in terms of EBIT margin, do you think you will be able to reach the midpoint even if the pending IPR renewals don’t happen this year?

Marco Wiren — Chief Financial Officer

Yeah, thank you. The assumption that we have in the outlook is that these two deals that we are in the litigation right now will be solved. So this is baked in, in our outlook as well.

Sami Sarkamies — Danske Bank A/S — Analyst

Okay. And as a follow-up, could you please disclose the IPR catch-up payments you recorded now in the second quarter and a year ago?

Marco Wiren — Chief Financial Officer

And they were about the same level this quarter than last year.

Sami Sarkamies — Danske Bank A/S — Analyst

Which was?

Marco Wiren — Chief Financial Officer

We haven’t actually disclosed the number itself. And the reason is that if there’s one specific deal that we signed, we’re not allowed to disclose any details of those deals, and you could calculate backwards also in that case, what is the value of the deal. And unfortunately, we are not in a position to be able to do that.

David Mulholland — Investor Relations, UK

Okay. Thank you, Sami. We’ll take our next question from Paul Silverstein from Cowen. Paul, please go ahead.

Paul Silverstein — Cowen — Analyst

I appreciate you squeezing me in. Pekka and Marco, I appreciate your comments about the ongoing strength of demand, but concerns about macro. My specific question is can you [Technical Issues] insight on linearity in [Technical Issues] quarters? Have you seen consistent strength in your order book throughout the quarter, through the end of the quarter, and into the beginning of this quarter?

Pekka Lundmark — President and Chief Executive Officer

Yeah. We haven’t — We have not seen any major changes. Our order intake and the number of new opportunities that we have in the pipeline, has remained strong. Again, I’m not implying that we would be immune to anything that happens in the macro. We are all seeing the worrying development in macro. But all we can — we don’t have a crystal ball. All we can comment is what we are seeing from our customers, and there is no — on the kind of aggregate level, there is no — there is no change. There has been, cases especially in emerging markets where there have been countries hit by weak currencies and/or high inflation where capex plans have been indicated to be lower. But at this time, these have been more exceptions than rules. In the big picture, we have not seen at this time any meaningful change.

Paul Silverstein — Cowen — Analyst

And my follow-up, I have a similar question…

David Mulholland — Investor Relations, UK

Yeah.

Paul Silverstein — Cowen — Analyst

I have a similar question regarding supply chain improvement and inflation. Relative to your comments, are you just allowing for impact [Technical Issues] accounting for the obvious or have you actually seen inflation already just start to have an impact on your cost structure? And same thing with your comments about supply chain improvement, is that based on hope — are you actually seeing points that coming improvement in the second half?

Pekka Lundmark — President and Chief Executive Officer

Now the line was breaking up, so I’m not sure if I…

David Mulholland — Investor Relations, UK

He was asking on have we seen concrete evidence of the impact of inflation on our business. And what — do we have something concrete on the supply chain improvement in the second half.

Pekka Lundmark — President and Chief Executive Officer

I mean — well, absolutely, we are seeing inflation in our business, the semiconductor prices have gone up. There is inflation in pretty much everything that you touch in the world at the moment. And all of that has, of course, been incorporated in the guidance that we have given we’ve been able to mitigate some of that with the technology improvement with productivity improvement and so on. And that’s why we’ve been able to maintain a pretty solid profitability despite the inflation. And then when it comes to new deals, as I explained earlier.

Of course, in all new deals that we make, we take into account all cost information that we are seeing and what we are expecting to see in the coming years. Then specifically on semiconductors, the concrete evidence that you asked for. I mean, this is very tactical. We are in day-to-day discussions with all key suppliers and little and little-by-little, there are more cases where we see more components becoming available. And this is what we are expecting to see second half of the year. Then just to complete the answer on the cost of semiconductors, as I said earlier, we have seen that memory prices have turned. They have actually dropped, but this is not yet true to the broader component supplier base.

David Mulholland — Investor Relations, UK

Thank you, Paul. We’ll take our last question from Felix Henriksson from Nordea. Felix, please go ahead.

Felix Henriksson — Nordea Markets — Analyst

Hi. Thanks for taking my question. Just given that your re-struct penetration rose to only the one mobile networks and you’re say to achieve your 100% target by the year-end. How should we think about the gross margin upside in mobile networks heading towards the year-end and into the 2020 test inflationary headwinds are mouthing — how should we think about the different components? Thanks.

Pekka Lundmark — President and Chief Executive Officer

We are, of course, not giving any specific gross margin guidance. I mean, this is always like in any business, this is a game that you need — that you want to play between volume and margin so that you optimize the outcome for your shareholders. And that’s what we are doing top line is important. Margin is important. We are working with our suppliers to deal with the inflation. We are, of course, negotiating best possible prices in the deals, and as I said, optimizing volume and margin so that we get the best possible outcome.

I’m not really sure if I’m able to get into any more details than this. It depends a lot on the overall semiconductor cost development overall inflationary development regardless of all that, we still have potential to improve our technology position, our internal efficiency, our R&D productivity and so on. So there’s a lot to do in addition to working on the supply chain cost.

David Mulholland — Investor Relations, UK

Do you have a very quick follow-up, Felix.

Felix Henriksson — Nordea Markets — Analyst

No. that’s all for me. Thanks.

David Mulholland — Investor Relations, UK

That was our last question for today. Thank you for everyone for your questions. Thank you, Pekka and Marco, for your answers. Ladies and gentlemen, this does conclude 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 listening.

Operator

[Operator Closing Remarks]