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Nokia (NYSE:NOK)
Q1 2018 Earnings Conference Call
April 26, 2018 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to the Nokia first-quarter 2018 earnings results conference call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Matt Shimao, head of investor relations. Sir, you may begin.

Matt Shimao -- Head of Investor Relations

Ladies and gentlemen, welcome to Nokia's first-quarter 2018 conference call. I'm Matt Shimao, head of Nokia investor relations. Rajeev Suri, president and CEO of Nokia, and Kristian Pullola, CFO of Nokia, are here in Espoo with me today. During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry.

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 such as general, economic and industry conditions, as well as internal operating factors. We have identified such risks in more detail on pages 71 through 89 of our 2017 Annual Report on Form 20-F, our financial report for Q1 2018 issued today, as well as our other filings with the U.S. Securities and Exchange Commission.

Please note that our results release, the complete interim report with tables and the presentation on our website include non-IFRS results information in addition to the reported results information. Our complete financial report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and a reconciliation between the non-IFRS and the reported information. With that, Rajeev, over to you.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Matt. And thanks to all of you for joining today. Nokia's first quarter was mixed but underlying those results were some upbeat developments that give us considerable confidence in our ability to meet our guidance for the full year 2018. In fact, we see an improvement in market conditions from what we shared last quarter.

We believe that Nokia is well-positioned to outperform in that strength in the market and expect that the mix of issues that impacted our gross margin in the fourth quarter is largely temporary in nature and expect it to improve in the second half of 2018. At a group level, our net sales were approximately flat year on year while networks was down by 2.7% both on a constant-currency basis. Nokia technologies had a stellar quarter, driven by recurring licensing revenue with sales up 49% year on year also on constant currency. Non-IFRS group operating profit was 4.8% in the quarter, down 150 basis points from one year ago.

Underlying this was weak profitability in networks offset partially by considerable strength in Nokia technologies. Pleasingly, networks order intake and backlog were excellent in the quarter, particularly in North America. In fact, both were among the best that I can recall. We also saw further progress in our diversification efforts as momentum continued with large enterprise and webscale customers.

To put our Q1 performance in more perspective, I would like to focus the rest of my remarks on three key topics. First, market developments, particularly related to 5G. Second, our networks gross -margin performance, and third, progress on executing our strategy. Let me start with market development, and you will have seen that we shared an improved view of market conditions in our earnings report.

We also said we expect our networks business to outperform the market. The primary driver for the market improvement is that 5G momentum is building fast. And Nokia is remarkably well-positioned as that happens. We now expect meaningful commercial roll-outs in the United States to start in the second half of this year followed by large-scale commercial deployments in this and other geographies in 2019.

There are three things driving this trend. The first is the ever-growing consumer demand for capacity. I have talked to a number of our customers who are straining to meet traffic growth and need the significant capacity increase and lower cost per bit that comes with 5G. The second driver we see for 5G momentum is competition.

There is no doubt that operators are looking at their competitors and worrying about potentially facing someone else's powerful 5G marketing and network performance. They do not want to be exposed and know they will need to move to address this competitive threat. I would also note that there is competition between countries on 5G, with many pushing to be first. The United States and China to be sure, Japan and South Korea, but also within the Nordics and the Middle East.

The third 5G momentum driver is industrial use cases. While the opportunity here will take longer to develop, we certainly believe the potential is there for enterprises to achieve a step-change in productivity with the use of next-generation networks. The interest is real, as just one example, I had dinner the other night with a half-dozen CEOs of industrial companies, all of whom saw the promise of improving efficiency through the use of dedicated 5G network slices that provide end-to-end security and ultra-low latency.From a geographical perspective, things really start with North America. Even if we had a soft first quarter in that part of the world, we see excellent momentum building for the second half of this year, both for the market and for Nokia.

This is not based on expectation alone -- it is also based on deals that we are winning and orders that we have already received. As I mentioned earlier, we expect commercial 5G roll-out in North America later this year, along with an overall focus on delivering improved mobile broadband network performance in the region. There is, of course, a risk that operator consolidation could put a slight damper [ph] on our optimistic view, but we would not expect that to fully derail the trends we are seeing.Then China. Our current view is that commercial deployments of 5G will start around the middle of 2019, although we know that if China decides to accelerate, things can change very fast.

Current trade tensions add some uncertainty to our business in China, but at this point, we expect that prudence will prevail and given the overall market dynamics in China, we do not expect European companies such as Nokia to see an impact within the country. The Nordics, Japan, South Korea, parts of the Middle East, all can be expected to move fast with 5G as well. In short, and recognizing that there are some skeptics, we see 5G coming fast and coming big. As this happens, we expect an atypical seasonal trend with softness in the first half of this year offset by a very dynamic second half.

And as I said earlier, we are confident that we can outperform a strengthening market and meet our full-year guidance. Just to get a quick snapshot of networks' regional performance in the first quarter, we saw three of our reported regions, Asia Pacific, China, and North America, decline in terms of net sales on a constant-currency basis while the other three, Europe, the Middle East and Africa, and Latin America, all grew. Quite pleasingly, both Latin America and the Middle East and Africa were up in double-digit percentages, again in constant currency. Latin America delivered an excellent performance across all networks business groups and particularly in mobile networks.

The Middle East and Africa were favorably impacted by increased demand for broadband services benefiting mobile networks and fixed networks. And we also saw good results in Nokia software in the region. Then the second topic I want to cover, networks gross margins. As you will have seen, networks non-IFRS gross margins dropped year on year by 370 basis points and I would like to put that in some context for you.

While I'm certainly not pleased with the decline, we saw a bit of a perfect storm when it came to product and services as well as regional mix. On the regional side, we saw soft sales in North America, which were the primary driver of the margin decline. North American sales as a percentage of revenue were among the lowest in many quarters. As a reminder, we had a strong Q1 2017 in North America with unusually high spending from two customers in particular, giving us a tough year-on-year compare.

Latin America and the Middle East and Africa, on the other hand, had a strong top-line quarter. And while that is a good thing, those markets tend to have lower margins than North America. On the product and services side, we saw good IP routing sales performance offset by even stronger, but lower-margin optical sales, a poor financial quarter for Nokia software that included delays of certain projects and a lower-than-the-typical conversion of orders to sales, and a significant portion of global services sales coming from network implementation. Despite what we saw in Q1, the primary underlying reasons for networks' gross-margin performance, the regional and product mix issues I just cited, are largely temporary in nature, and as I said at the start, expect it to improve in the second half of 2018.

North America should ramp significantly for us starting in the second half as our customers turn from planning for 5G to getting execution under way. As more of our FP4-based routers come to a market, we should see a better balance between IP routing and optical. In mobile networks, our underlying cost base should improve significantly as we increase shipments of the latest AirScale products. Software orders were up by strong double digits in Q1 indicating forthcoming improvement.

In services, we have a high level of network implementation that will continue as pre-5G roll-outs proceed and of course, as sales increase particularly in the second half, operating leverage will support better performance. I would also note that when we look at margins of specific product lines, we have not seen unusual margin compression. Products that were typically strong in earlier quarters remained robust in Q1, those that were softer remained that way. And we certainly saw considerably more of those softer products and services as a percentage of total sales in Q1.

In short, we do not have any reason to believe that Q1 was a new normal for our gross margins and remain confident that things will start to rebound in the coming quarters. Now the third point I want to cover, execution of our strategy where we are making considerable progress. I will start with leading in high-performance, end-to-end networks for communication service providers. Not only are we positioned very well in key parts of our portfolio, but the strength of our end-to-end capabilities is resonating with customers.

I have talked about the power of end-to-end before, and we are now seeing it really take hold. In fact, when you look at our sales pipeline, 35% of it is now comprised of multibusiness group deals. On the individual product side, our innovation engine is delivering well. Among other things, in the quarter we announced two new chipsets: ReefShark for mobile networks and our Photonic Service Engine 3, or PSE-3, for optical networks.

Both are leaps ahead of the competition and both will give us differentiation for some time to come, as creating your own silicon takes time, effort, and, above all, expertise. In addition, and as I said earlier, we are in a very strong position for 5G. Our AirScale platform is performing very well in the field. Recent software releases are at the highest-quality levels ever and the road map issues we saw last year are largely behind us, even if there is plenty of heavy R&D lifting still to come in the sprint to 5G.

By the end of Q1, we had around 55 engagements with customers in 17 countries on the design, trial, and testing of 5G solutions. These include major players such as AT&T, T-Mobile, Sprint, Verizon, NTT DOCOMO, Korea Telecom, SKT, China Mobile, STC, and others. I would also note that in Q1 we won the biggest deal in Nokia's recent history and that deal is very much about 5G. Let me share just a few other highlights from the quarter that were relevant to this part of our strategy.

Our worldwide IoT network grid, or WING, a new offering, now has three customers and massive interest from others. As a reminder, WING gives operators a ready-to-go solution for monetizing IoT connections through a recurring pricing model. AirScale migrations in North America are now ahead of customer commitments. New deals were won in the quarter that expanded our footprint with customers such as Telenor Pakistan and Orange in the Middle East and Africa, with whom Nokia will build a single radio access network in seven African countries.

Continued progress was made on fixed-networks entry into the cable market with our games-based portfolio. And this progress included, just after the quarter ended, an important agreement with a big cable player. On to the next pillar of our strategy, expanding in select vertical markets needing high-performing secure networks, and this is now on a clear trajectory to reach the scale necessary to become a meaningful part of a business. Excluding the third-party business that I've mentioned before and that we are in the process of exiting, our year-on-year sales to enterprise and webscale companies were up almost 20% in the quarter and orders grew even faster.

Our performance in this area is one of the reasons that I believe Nokia can outperform our primary addressable market in 2018. The second reason being the deals we are winning and the orders we're receiving in North America, which we expect will benefit our results in the second half of the year. Our product competitiveness for the areas that we're targeting is very good and showing in our results. Take, for example, our IP/optical networks business group, which delivered excellent year-on-year sales growth of 7% in constant currency.

Within that, our optical business was up sharply in the quarter compared to last year. And while a large portion of these sales was to communication service providers, our fastest growth is with webscale companies. In IP routing sales, we're roughly flat year on year across all customers while both sales and orders from enterprise and webscale customers were up nicely in the period. I would also note that we're seeing excellent interest in our FP4-based products and now have trials under way or planned with more than 60 customers.

Results of those trials look very good. Separately, we landed some meaningful new wins in the quarter, including our largest-ever GSM railway contract, a good example of our ability to bring an end-to-end solution together including GSM-R and mission-critical IP/MPLS and optical transport as well as managed services to enhance railway security and reliability. In the third pillar of our strategy, building a strong software business at scale, we hit a performance speed bump in Q1. But our year-on-year order growth in Nokia software was the best of any of our networks business groups, almost in the mid-double digits.

As I've said on past calls, we've done a massive amount of foundational work over the past two years, rearchitecting our products onto a common software foundation, strengthening our go-to-market capabilities and more. We're also bringing modern, differentiated applications to market. And in Q1, we launched our artificial intelligence-powered cognitive analytics for customer insight designed to help operators efficiently deliver a superior real-time customer experience. And also in the quarter, U.S.

Cellular selected Nokia's Customer Experience Management portfolio, which includes that new analytics product. This progress combined with our robust orders and backlog and recognizing that Q1 was impacted by the timing of certain projects and overall softness in North America, give me confidence that we are tracking in the right direction, even if it is also time for increased vigilance and a greater focus on sales execution. In the fourth pillar, building new business and licensing opportunities in the consumer ecosystem, there are two developments I would like to share. The first is the strength of our licensing business where Q1 recurring revenue was up 65% year on year.

Based on that result, we are now at an annual recurring revenue run rate of approximately 1.4 billion euros and we see additional opportunities this year with Chinese mobile phone companies and in the automotive sector. We also see the potential, although not yet proven, opportunity to build meaningful businesses in brand licensing in new categories beyond our successful phone collaboration with HMD Global and in technology licensing leveraging some of our unique assets. The performance we are seeing gives me confidence that we are on track to meet our goal of driving a CAGR of approximately 10% for recurring net sales for the three-year period up to 2020. The second development is the strategic review of our digital health business that we announced in the quarter.

That review is ongoing, and we continue to take costs out of Nokia technologies as we ramp down direct-to-consumer incubation projects. Our goal is to ensure that tech is a highly focused driver of licensing activities, patent, technology, and brand for the company, and we're moving fast in the direction. With that, I'd like to turn the call over to Kristian for more on our financials. Kristian?

Kristian Pullola -- Chief Financial Officer

Thank you, Rajeev. I will start today by spending a few minutes on the financial performance of Nokia technologies then a few words on taxes and financial income and expense. Next, I will take you through our cash performance in Q1 and key cash items for Q2. And finally, I will walk you through our guidance.

Starting with Nokia technologies, we delivered strong performance in the business in Q1 with net sales up 49% year on year at constant currency and operating profit up 136% with growth reflecting very strong execution by our licensing team over the past quarters. And we believe we are well-positioned to extend our track record and deliver on our long-term guidance. On a sequential basis, our recurring net sales increased, primarily based on earlier signed agreements kicking in. You can calculate that we are now at an annual recurring net sales level of approximately 1.4 billion euros.

The operating margin for technologies reached 75% in the first quarter, driven primarily by higher net sales as well as a decrease in operating expenses. In addition to continued efforts to optimize costs related to our patent portfolio, R&D expenses benefited from the reduced investments in digital media. SG&A expenses also declined, mainly due to the absence of the litigation costs related to Apple, which impacted the year-ago quarter. As Rajeev said, we have announced that we put our digital health business under strategic review, which is ongoing.

In Nokia technologies, we are continuing to operate with a very disciplined approach, keeping a close eye on ensuring appropriate investment levels.Moving on to taxes and financial income and expense. As you may remember, we have been involved in a long-standing tax dispute in India related to our legacy devices and services business. The Indian and Finnish governments reached a resolution in Q1, which Nokia accepted, resulting in a one-time tax expense of approximately 200 million euros. This resolution also resulted in a cash outflow of approximately 100 million euros in Q1 as we had already paid 100 million earlier euros.

We are pleased to put this tax dispute behind us. The resolution allowed us to release earlier booked provisions and ultimately resulted in a positive net P&L impact of approximately 160 million euros. Note that this positive impact was reported in discontinued operations and not in our results from continuing operations. Also note that in Q2, we expect to release of approximately 100 million euros of frozen cash assets in India.

This can be seen as offsetting the negative Q1 cash impact. Our non-IFRS tax rate for the first quarter was 30% in line with our full-year 2018 guidance, which we have reiterated today. Turning to non-IFRS financial income and expense, our Q1 results reflected our adoption of IFRS 9 and IFRS 15 and now include in financial income and expense new items such as costs related to the sale of receivables and financing elements from customer and contracts, which were not in FIE in 2017. In addition to these expenses, FIE reflected expenses associated with the financial liability related to Nokia Shanghai Bell, higher losses from foreign exchange fluctuations, partly offset by lower overall interest expenses.

For more details on the impact of the adoption of IFRS 9 and IFRS 15, you can refer to Note 14 in our first-quarter release. Next moving to our cash performance in Q1 and key cash items for Q2. On a sequential basis, Nokia's net cash decreased by approximately 340 million euros with a quarter-end balance of approximately 4.2 billion euros. The sequential decrease was mostly attributable to net cash used in investing activities, primarily due to capital expenditures.

Capex came in particularly high in the quarter totaling 260 million euros, of which approximately 100 million euros was non-recurring in nature. I would like to point out that we have reiterated our capex guidance for the full year to be 700 million euros. So for the remainder of 2018, we expect our quarterly capex to go back to a more normalized level similar to that what we saw in 2017. Net cash used in operating activities was approximately 110 million euros.

Within this, Nokia had approximately 130 million euros of restructuring and associated cash outflows, excluding restructuring, we experienced an increase in net cash related to the net working capital of approximately 100 million euros. This was primarily due to a decrease in receivables which was driven by a payment we received related to a licensing agreement signed in the fourth quarter 2017 in addition to typical seasonal decline.This was offset by an increase in inventories and a decrease in short-term liabilities, both of which were also primarily driven by typical seasonality. Cash taxes amounted to approximately 190 million euros in the quarter, more than half of which was related to the Indian tax dispute that I discussed earlier. We had already taken this payment into consideration when providing our 2018 cash tax outlook so, therefore, no change in guidance.

Looking ahead into Q2, there are two key items related to cash that I would like to remind you about. First, our board of directors has proposed a dividend of €0.19 per share for 2017, the payment of which will have a negative impact on our cash balance of approximately 1 billion euros when paid out to shareholders after our AGM to be held next month.In addition, as is typical in Q2, bonuses paid under our annual employee incentive plans will have a negative impact on cash.Finally, turning to our guidance. I will touch upon a few of the key updates we have made today. At a Nokia level, we have reiterated our 2018 and 2020 guidance for both non-IFRS operating margin and EPS.

Moving on to our cost savings program, we remain on target to deliver the 1.2 billion euros of recurring annual cost savings in the full year 2018 with 800 million euros expected to come from operating expenses. Given our active efforts to drive 5G adoption in 2018, we now expect these savings to be partly offset by approximately 100 million euros to 200 million euros of the incremental temporary expenses in 2018 related to 5G customer trials. This is an update compared to the 100 million euros that we previously guided for. To be clear, these incremental expenses are specific to 2018.

Then moving on specifically to networks, given the acceleration that we have seen in 5G, particularly in North America, we have updated our views on our primary addressable market in 2018. We now expect a decline of approximately 1% to 3% on a constant-currency basis, an improvement compared to our previous guidance for a decline of approximately 2% to 4%.We have also updated our net sales guidance for 2018 and now expect to outperform our primary addressable market. This view is primarily based on two things: first, customer demand for 5G. We see 5G accelerating further with commercial network deployments beginning near the end of 2018 and increasing through 2020.

Second, in addition to 5G acceleration, our progress in our strategy to diversify and expand in targeted adjacencies also supports our confidence that we can outperform our primary addressable market this year. We have also reiterated our operating margin for networks to be in the 6% to 9% range for the full year 2018. It is important to know that we are guiding for top-line weakness to persist in the first half of 2018 as we expect the Q1 demand and mix dynamics to continue into Q2. Let me also remind you that there will be a negative impact due to FX on our reported net sales in the second quarter 2018 and full year 2018, assuming the Q1 foreign exchange rates and currency mix.

For networks overall, the math would yield an approximately 8% year-on-year headwind in Q2 net sales and an approximately 6% headwind on full-year 2018 only due to FX. So please take this into consideration as you update your models. Over the long term, we continue to expect to outperform our primary addressable market. We are very well-positioned to benefit from our end-to-end strategy as the 5G investment cycle ramps.The progress we are making with diversifying toward attractive adjacent markets and building a strong stand-alone software business also positions us well to outperform our competitors over the long term.

Finally, on the licensing business within Nokia technologies. We reiterated our guidance for recurring net sales to grow at a 10% CAGR over the three-year period ending 2020 and continue to expect to reach operating margins of 85% for the full year 2020. Based on Q1, we are already off to a great start to the year in this business. With that, over to Matt for Q&A.

Matt Shimao -- Head of Investor Relations

Thank you, Kristian. For the Q&A session please limit yourself to one question only. Nicole, please go ahead.

Questions and Answers:

Operator

Thank you. Our first question comes from Alexander Peterc of Société Générale. Please go ahead.

Alexander Peterc -- Societe Generale -- Analyst

Yes. Hi. Thanks for taking the question. I'm just wondering on 5G, do you see primarily the U.

S. market accelerating here or pushing for faster rollouts or are there other regions going the same way that primary to 2019? And also will these first rollouts be for stand-alone 5G networks or non-stand-alone? Thanks.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Alex. So, let me give some color here and expand on this properly. So we see the U.S. doing commercial rollouts beginning in the second half of this year, but we're talking large meaningful commercial rollouts.

And in the U.S., the Operators will make use of whatever spectrum assets they have.Millimeter wave in case of Verizon and AT&T, some other low band spectrum AT&T might have, T-Mobile 600 MHz, Sprint 2.5 gigs, so the spectrum they have. And then after that, we see, of course, that expanding in 2019. And then in early 2019, we see South Korea that will do a nationwide 5G build. Japan that will get its spectrum in the mid-band around the first quarter of 2019 and then will start to build basically in time for Summer Olympics in 2020.

Then you'll get China starting in around mid-2019 with tendering activity happening in the first quarter of 2019, so rollouts begin in mid-2019, that will continue in 2020. Then you have the Middle East around the same time in 2019 as well, so many advanced countries in the Middle East, Saudi Arabia, Qatar and so on. Nordic countries; Finland, Sweden, Denmark.And then, you'll get a second wave of 5G happening when the mid-band is allocated in the U.S. as well and that will happen around sort of late 2019 and so on.

So that's how we see the lay of the land. Then after that will be India because the capacity needs there are becoming quite extreme, say in 2020, and Europe around that same time frame and then 2021 onwards, the rest of the world.

Matt Shimao -- Head of Investor Relations

Thank you, Alex.

Rajeev Suri -- President and Chief Executive Officer

Sorry, I didn't answer your non-stand-alone. Let me finish that. So most of the deals we're looking at right now, most of the activity is non-stand-alone, but there is a discussion on stand-alone. Stand-alone 5G will come later, particularly for network slicing for industrial use cases.

Matt Shimao -- Head of Investor Relations

OK. Now thank you, Alex. Nicole, please go ahead with the next question.

Operator

Our next question comes from Sandeep Deshpande of J.P.Morgan. Please go ahead.

Sandeep Deshpande -- J.P.Morgan -- Analyst

Yes. Thank you for letting me on. Rajeev, you talked about how you see the orders into the second half of the year in 5G, but you've had low visibility on orders in the rest of the business, 3G, 4G over the last couple of years. So how do we get some sense of your view into these orders and how they're going to progress through the year? Because if you do get strong 5G orders, but in the others, at this point, there's still some risk.

Rajeev Suri -- President and Chief Executive Officer

Yeah. Thanks, Sandeep. I think in a typical year, a more normal year, you get your ups and downs. You look at your order intake, backlog and book-to-bill and that gives you some limited form of visibility.

What's different in this year is right at the start of the year we have large, commercial, build-oriented 5G contracts that are in the bag at this point in time. We're actually moving from converting those orders to starting to execute, get the supplies in motion, prepare the services. So that is really different that we have these large contracts already in the U.S. which we know will clearly be there in second half and then we'll start to expand in 2019.

Matt Shimao -- Head of Investor Relations

Thank you, Sandeep. Nicole, next question, please.

Operator

Our next question comes from Richard Kramer of Arete Research. Please go ahead.

Richard Kramer -- Arete Research -- Analyst

Hi. Thanks very much. Just following on from that. We've now seen three quarters in a row where North America orders are down or sales, sorry, are down 20% to 30%, in some cases against declines in the previous year, and you're mentioning this large orders.

I guess, the bigger question is, are you looking for the recovery to be a sort of mean revision where you get back to previous levels? Or do you think when you look at your order book within both carriers and webscale players and others that they are large incremental bits of business for you to go after either in areas that you weren't present before or where you will take material share? And I guess, for the same notion in China, do you think there is an opportunity for given Nokia Shanghai Bell that you can take materially higher share or get incremental business that you simply weren't seeing before? Or is this just a return to the spending levels we were seeing a couple of years ago? Thanks.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Richard. So just at the highest level, I think I will say that the end-to-end portfolio is resonating with customers, particularly in the world of 5G, because 5G is such a reinvention of the network and end-to-end matters much more now than before. Second, I will say that we are well-positioned even this year to gain share in mobile, and IT and optical. And in the case of mobile, I see it coming from essentially 5G.

And of course, with 5G there's always a bit of acceleration that happens in carrier aggregation LTE-advanced 4G. And then, in the case of IP, routing and optical, it's because of doing well in the service provider space, but also because of our success in enterprise and webscale. So I'll leave it there at the highest level. Of course, China we'll see when the opportunity comes.

Matt Shimao -- Head of Investor Relations

Thank you, Richard. Nicole, we'll take the next question, please.

Operator

Our next question comes from Andrew Gardiner of Barclays. Please go ahead.

Andrew Gardiner -- Barclays -- Analyst

Good afternoon. Thank you. So another one on the 5G side of things, specifically, on the rise in opex related to the trials going from 100 million euros to 200 million euros. Can you give us any more detail in terms of what has changed relative to January, February time when you first gave that number? Is it in a particular region relative to sort of how you described things in the first question? Or can you give us an idea of how many trials you're working on and how that's increased since earlier this year, just sort of driving the incremental expense?

Rajeev Suri -- President and Chief Executive Officer

Yeah. Thanks, Andrew. I think the first thing to say is that we are kind of creating the market here. We see ourselves as really driving the adoption of 5G.

For me, it's a good thing that there is more trial activity because it will be a temporarily expense in cost of sales and opex, but will drive the long-term super cycle that we're so eagerly waiting for. So we are now doing about 55 trials in about 17 countries, as I said earlier. So that's really what's driving the incrementally high expenses. So I think we will fuel the adoption as needed but, of course, we'll optimize our trial expenses to the extent possible.

Matt Shimao -- Head of Investor Relations

Great. Thank you, Andrew. Nicole, next question, please.

Operator

Our next question comes from David Mulholland from UBS. Please go ahead.

David Mulholland -- UBS -- Analyst

Hi. Thanks so much. Just coming back on the gross margin point. You did quite a good job of answering what's happened in Q1, but if we look back over, say, the last five or six quarters.

It's been on a bit of a downward trajectory even before this quarter. Can you just help us understand what's been going on over the last 18 months? And just to clarify, on the commentary you're giving on improving, how should we think about Q2 specifically? You've been pretty clear on H2 improving, but does that already start moving in the right direction in Q2 as well?

Kristian Pullola -- Chief Financial Officer

I think, David, on your question. First of all, I'm not sure if I fully agree with your analysis. We have seen kind of mix shifts that have also earlier driven gross margin for us. Now as Rajeev said in his prepared remarks, we had a bit of a perfect storm when it comes to both regional as well as business mix, impacting the gross margin.

As I said, I think some of the revenue and mix dynamics that we saw in Q1 we also expect to continue going into the second quarter. But then with the 5G acceleration and that happening in North America, we do see things kind of improving going into the second half.I think it's clear also that this continues to be a competitive industry in which deal discipline, as well as continuous cost execution, is important. We do need to continue to design for serviceability. We need to continue to take product cost out in the business to be able to maintain the good margin performance we've had also in the future.

Matt Shimao -- Head of Investor Relations

Thank you, David. Nicole, next question, please.

Operator

Our next question comes from Alexander Duval of Goldman Sachs. Please go ahead.

Alexander Duval -- Goldman Sachs -- Analyst

Yes. Hi, everyone. Many thanks for the question. Just want to ask a question on the competitive landscape.

There've been some news reports about ZTE being subject potentially to ban receiving some components and now also about the possibility of Huawei being subject to restrictions driven by the U.S.? I wonder to what degree that could open up any opportunities for Nokia either from a share gain or profitability perspective as we look forward? Many thanks.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Alex. We want to focus on our strengths. We believe we are the only player that has an end-to-end portfolio that operates in a scale way in all markets around the world. And as I've said earlier, really, really think that with 5G end-to-end matters much more, because it is really end-to-end solution.

You can't go to 5G just with radio if we don't do mid-haul and backhaul and fronthaul. You need to able to access fixed wireless access. There are multiple ways to do it. You could do with a fixed proposition like we have called FastMile or with 5G or with 60G-PON solutions and so on.

So I think end-to-end will matter much more.It's too early to say what will happen with these sanctions, the impact from our competitors. Having said that, we're a company focused very much on trust and security that's our branding, and we do see longer-term potential opportunities, especially where we compete with them in areas such as optical and fixed and mobile.

Matt Shimao -- Head of Investor Relations

Thank you, Alex. Nicole, we will take the next question, please.

Operator

Our next question comes from Achal Sultania of Credit Suisse. Please go ahead.

Achal Sultania -- Credit Suisse -- Analyst

Hi, thanks. Just Rajeev, one clarification on the outlook comment. So I guess you're talking about losing like 1% to 3% decline in your primary TAM. And basically, if I compare that to your European competition, they're also talking about similar levels.

And then, both companies are saying that they're basically going to outgrow the end markets. So I'm just trying to tie this up that are you basically trying to imply that like the European companies are going to take share versus the Chinese or is it a function of the fact maybe as you go through the year the demand is much stronger, and we end up seeing a situation where market shares are flat, but the end demand, actually, ended up being much, much better? Thank you.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Achal. So what we see at the moment based on our contracts we have for 5G and particularly this North American contract base that we're talking about that will kick in the second half, I would say that we are well-positioned to take share in 4G, to take share in 5G, in IP routing as well as in optical. And in the case of optical, it's driven by 5G and webscale. In the case of IP routing, it's driven by, to some extent by 5G, but also by webscale and enterprise, and of course, 4G and 5G are fueled by radio itself.

And we have notably, if you look at the Dell'Oro reports, of course, our own internal analysis suggests that we actually took share in all of these portfolios in the recent quarters as well. So then, of course, it depends upon who is taking from whom, but I think we've been taking share. And I think we're well-positioned to continue to take share. We will outperform.

Kristian Pullola -- Chief Financial Officer

And I think it's good to note that when we and our European competitor talks about the market, we talk about the different market because our product portfolios address different markets. Their market is more the RAN market. When we talk about our primary addressable market, it is the full market of fixed routing, optical and mobile and the related services. So take that also into account when you do make comparisons between our comments.

Matt Shimao -- Head of Investor Relations

Thank you, Achal, for your question. Nicole, we'll take the next one.

Operator

Our next question comes from Mike Walkley of Canaccord Genuity. Please go ahead.

T. Michael Walkley -- Canaccord Genuity -- Analyst

Great, thanks. Just a question about internally developed silicon such as ReefShark. Can you share with us kind of customer feedback? How might margins be impacted when the new product ship, is ReefShark is still on track for the second half of the year and could it be possible some customers waiting for the new architecture creating a much stronger second half versus the first half of the year? Thank you.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Mike. Customer feedback is fantastic both on this as well as the new chipset in optical PSE-3 because this makes massive MIMO much more relevant because massive MIMO then can be rolled out in the scale sort of way because it reduces the power consumption quite meaningfully by almost half, but also the size of the massive MIMO antenna size that you can actually carry it on the top of the tower as opposed using cranes and so on. So, of course, everything changes with that sort of massive MIMO antenna because then you can really scale it.So, great feedback. It will improve the cost structure over the long term.

That's the point of having a competitive cost base product. It will not stop AirScale deployments because AirScale deployments are continuing to grow. And when this comes, which it will still be on track for the second half, this will only help scale it even further with massive MIMO and 4G as well as 5G.

Matt Shimao -- Head of Investor Relations

Thank you, Mike. Nicole, next question, please.

Operator

Our next question comes from Simon Leopold of Raymond James. Please go ahead.

Simon Leopold -- Raymond James -- Analyst

Great. Thanks for taking my question. I appreciate the remarks about the strategic shift to diversify away from telco into markets like enterprise, webscale and cable TV. I am hoping we could get some aspect of quantification of what percentage of your overall sales have come from these verticals historically, where we are today, to help us assess the progress in this diversification effort.

Thank you.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Simon. So I'll just give you a couple of data points. We said that we grew around 20% this quarter in that business. We grew about 21% in Q4 last year.

Overall, last year, we had double-digit growth sort of in the range of about 13% for the full year, last year. So of course, momentum is continued to build. And we did say in Q4 that this was around 5% of our overall networks revenue.

Matt Shimao -- Head of Investor Relations

Right. Small, but growing fast. Thank you, Simon. Nicole, next question, please.

Operator

Our next question comes from Sébastien Sztabowicz of Kepler Cheuvreux. Please go ahead.

Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst

Yeah. Hello. One question on AT& T because they target to replace 60,000 third-party routers with their own white box routers notably running on their own operating system. Do you know what kind of routers are we talking about here? And is this something that could impact negatively your IP routing business going forward?

Rajeev Suri -- President and Chief Executive Officer

Thank you, Sébastien. I think, I don't know the exact detail of that, but they're probably smaller routers, so they don't typically compete with the kind of stuff that we put to market. So I don't see an impact there.

Matt Shimao -- Head of Investor Relations

OK. Sébastien. We'll maybe follow up with you in more detail later on that one. And Nicole, we'll take the next question, please.

Operator

Our next question comes from Tim Long of BMO Capital Markets. Please go ahead.

Tim Long -- BMO Capital Markets -- Analyst

Thank you. Just following on the routers. Rajeev, you mentioned a lot of trials for the new routing platform. Can you talk a little bit about the timing there? And I know you think it's going to help move the webscale and enterprise business.

If you could just talk a little bit about routing and also as you move optical in there more, so what do you think margin impact for those businesses will be? Will there be a little cost to get in and then also those customers are known to be difficult on the profitability front? Thank you.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Tim. So we are doing about 60 trials, as I said, with FP4. The first part of the routers in FP4 or FP4-based routers have already started shipping in December, the 7750 SR-1 routers. So all on track there, very good customer feedback.

Fortunately, this FP4 has also provided a tailwind to our FP3 product set because we have a competitive portfolio and hence we've seen more momentum in the current business as well.If you observe over the last quarters, including this latest one, we are taking share relative to our peers and overall because I think the last two quarters we were just about flat. This time, we were flat on an underlying basis. It's all going well with the portfolio, great feedback on that.In optical, great momentum with webscale. As I said, we've seen now two quarters of extremely good growth in webscale.

I would say overall, if you look at enterprise and webscale, they are structurally more attractive on the whole, i.e., higher margin potential in the long term as well as higher growth.

Matt Shimao -- Head of Investor Relations

Thank you, Tim. Nicole, next question, please.

Operator

Our next question comes from Douglas Smith of Agency Partners. Please go ahead.

Douglas Smith -- Agency Partners -- Analyst

Yeah. Hi, there. You've kept your guidance for 2018 exactly the same in terms of earnings. But within that, considering the report today, has the shift of earnings tilted more toward Nokia technologies and away from Nokia networks? Or when all is said and done at the end of the year, will the balance of networks and technologies be the same as the assumptions at the start of the year?

Kristian Pullola -- Chief Financial Officer

So I don't think the shift between the businesses is anything to comment here. I think what has happened, as you saw from the change in our guidance is that we do see that on the networks side the top-line performance will be slightly better than what we guided for previously. But then to offset that impact, we also see that to drive the early adoption of 5G there will be more investment going into trials and so on which then kind of means that there was nothing to update on the profitability and EPS level for the year.

Matt Shimao -- Head of Investor Relations

Thank you, Doug. Nicole, next question, please.

Operator

Our next question comes from Daniel Djurberg of Handelsbanken. Please go ahead.

Daniel Djurberg -- Handelsbanken -- Analyst

Thank you very much. Most questions are answered, but I will ask you about the Nokia software down 3% in Q1 at constant currency including Comptel. Could you give us the organic growth number at constant currency? And also perhaps comment a bit on the ongoing transmission in this segment? Also if you do have ambition for the enterprise, webscale in this rebuild, and also if you are again interested in looking into the BSS side after exiting the business in 2013? Thanks.

Kristian Pullola -- Chief Financial Officer

I think maybe first on the organic. So we didn't break it out, but it would have been somewhat more of a decline than the 3%.

Rajeev Suri -- President and Chief Executive Officer

Yeah, thanks, Daniel. On the question of the portfolio, so the strategy is working. Yes, there was a speed bump in terms of the financial results in Q1. Having said that, the order intake was quite strong.

We're moving with a good backlog. We have been putting a lot of our assets on common software foundation because that will give us agility. It'll also give us a better cost base. We can come quickly with new products and new features and customers like that.

Great feedback from customers. It's basically an agile Dev-Ops way of operating. We have built a good sales capability that can target chief marketing officers and CIOs and that's starting to work. So overall, I think the strategy is tracking well, although of course, I'm not pleased about Q1 in itself.

In terms of BSS, in many of these BSS transformation cases, OSS transformation cases, a lot of our portfolio is in use and then we partner with other players on a select basis and that seems to work well in deal-making.

Matt Shimao -- Head of Investor Relations

Thank you, Daniel. Nicole, I think we have one more question in the queue. So we'll take that.

Operator

Our next question comes from Josep Bori of Berenberg Bank. Please go ahead.

Josep Bori -- Berenberg Bank -- Analyst

Hi, good afternoon. Thanks for squeezing me in. One last question here. Ask you if you could provide a bit of an update on what level of demand you're seeing for your routers based on the FP4 chip? Specifically, could you provide some sort of maybe anecdotal evidence of success with your petabyte class router, I think it's the Nokia 7950.

Is this being looked at by webscalers or is this pretty much a big telco type of sale? Thank you.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Josep. Yes, it is being looked at by webscale players. And of course, a lot of the large operators such as even British Telecom that was there with us on stage when we launched the product, very interested in that product. So I think both on the telco service provider side, but also on the webscale side, there is clear interest.

This is the sweet spot product for exactly the webscale.

Matt Shimao -- Head of Investor Relations

So thank you, everyone, for your questions today. I'd like to now turn the call back to Rajeev.

Rajeev Suri -- President and Chief Executive Officer

Thanks, Matt, and thanks, Kristian. And thanks to all for the good questions. I would like to close on a note of optimism, tempered with the reality of some hard work to come, a need to run fast and execute superbly. The reason for optimism is clear: improved market conditions this year as well Nokia's ability to outperform in those improved conditions.

We are at the start of a 5G-driven cycle, and there is plenty of opportunities ahead of us. For 2018, we need to run at full tilt to the end of the year. Customer demands will be high and meeting that demand will require tight alignment between our product groups, manufacturing, delivery, and services. Of course, these are the kinds of challenges we like, challenges coming from an upswing in the market and strong demand for our excellent products and services.

In fact, those challenges are real opportunities, and we intend to seize as many of those opportunities as we possibly can.Thanks, again, to all of you for joining and have a great day. With that, Matt, back over to you.

Matt Shimao -- Head of Investor Relations

Ladies and gentlemen, this concludes our conference call. I'd like to remind you that during the conference 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, such as general, economic and industry conditions; as well as internal operating factors.

We have identified these in more detail on pages 71 through 89 of our 2017 Annual Report on Form 20-F, our financial report for Q1 2018 issued today, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you.

Operator

[Operator signoff]

Duration: 55 minutes

Call Participants:

Matt Shimao -- Head of Investor Relations

Rajeev Suri -- President and Chief Executive Officer

Kristian Pullola -- Chief Financial Officer

Alexander Peterc -- Societe Generale -- Analyst

Sandeep Deshpande -- J.P.Morgan -- Analyst

Richard Kramer -- Arete Research -- Analyst

Andrew Gardiner -- Barclays -- Analyst

David Mulholland -- UBS -- Analyst

Alexander Duval -- Goldman Sachs -- Analyst

Achal Sultania -- Credit Suisse -- Analyst

T. Michael Walkley -- Canaccord Genuity -- Analyst

Simon Leopold -- Raymond James -- Analyst

Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst

Tim Long -- BMO Capital Markets -- Analyst

Douglas Smith -- Agency Partners -- Analyst

Daniel Djurberg -- Handelsbanken -- Analyst

Josep Bori -- Berenberg Bank -- Analyst

More NOK analysis

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