Nokia (NOK) Q2 2021 Earnings Call Transcript

Nokia (NOK -0.81%)
Q2 2021 Earnings Call
Jul 29, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

David Mulholland

Good morning, ladies and gentlemen. Welcome to Nokia's second-quarter 2021 conference call. I'm David Mulholland, head of Nokia's investor relations. Today, we have Pekka Lundmark, our president and CEO; along with our CFO, Marco Wiren, connected with us via video and audio from our Espoo offices.

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 factors in the section titled Operating and financial review and prospects-Risk factors of our 2020 annual report on Form 20-F, as well as our other filings with the U.S.

Securities and Exchange Commission. Within the presentation today, unless stated otherwise, references to growth rates will mostly be on a constant-currency growth rate basis, and margins will be based on our comparable reporting. Please note that our results release, the complete report with tables and the presentation on our website include comparable results information in addition to the reported results information. Our complete financial tables available on our website includes a detailed explanation of the content of the comparable information and a reconciliation between the comparable and the reported information.

Today's stock exchange release and presentation can be found on our Investor Relations website. With that, I would now like to turn the call over to Pekka.

Pekka Lundmark -- President and Chief Executive Officer

Thank you, David, and hello, everyone, and thanks for joining the call. I hope you and your families remain safe and well. Our great start to 2021 continued in Q2, and this has enabled us to increase our outlook for the full year. My presentation today will include a brief overview of our financial performance, followed by an update on the progress we have made in each business group against the strategy we outlined earlier in the year.

I will then hand over to Marco to go through the financial performance in more detail. As highlighted on the slide, in the second quarter, we delivered 9% constant-currency net sales growth. That was primarily driven by Network Infrastructure with 20% growth in constant currency and strong performance across all product areas. We are benefiting from a robust end-market dynamic, particularly in Fixed Networks, but we are also achieving meaningful market share gains and very strong demand for submarine networks.

Nokia Technologies saw new deals in automotive and some one-off brand licensing deals. In addition, our underlying recurring royalty base expanded double digits year on year. Positively despite being in the reset phase of the strategy, both Mobile Networks and Cloud and Network Services also delivered growth in constant currency. Profitability-wise, our comparable gross margin expanded 270 basis points year on year.

This benefited from a one-off software deal in Mobile Networks, but we saw a strong underlying expansion even excluding that deal. Comparable operating margin came in ahead of our expectations as strong growth in Network Infrastructure and good cost discipline across businesses drove good operating leverage. This shows that the underlying potential of the business exists but we still see headwinds into the second half of the year, which we will visit later. Back in March, we announced our new three-phase strategy to achieve sustainable profitable growth and technology leadership.

In Q2, we saw progress in a number of areas against this strategy. The most notable of these in Q2 were our major product launch just over a month ago in Mobile Networks, our established technology leadership in Network Infrastructure that has seen us gain market share, and in the new automotive license -- and the new automotive licenses signed in Nokia Technologies. I will revert to these highlights in more detail shortly, but I just want to emphasize that we are seeing progress in all areas of the business and across all elements of the strategy. I am grateful and proud of how quickly the Nokia team has adapted to our new operating model and we are already starting to see some benefits from the new structure.

Our business groups are taking clear accountability and ownership for their financial performance, which has helped expand margins. Let's now look into some of the specifics of the quarter, business group by business group and starting with Mobile Networks. Earlier in the year, we said we were targeting full portfolio competitiveness through 2021. The launch of our new AirScale radio and baseband product platforms at the end of June was a major piece of that.

All the new AirScale product platforms are based on new ReefShark system on chips, and as a result, this launch was key to us remaining on track with our ReefShark targets. As a reminder, we said that by year-end, we want 70% of shipments to be ReefShark-based with a target of increasing 100% by the end of 2022. The launch included a series of new massive MIMO active antenna radios, all of which are the industry's widest bandwidth support of up to 400 megahertz. This can help operators to make efficient use of fragmented spectrum allocations.

The new ReefShark SoCs will also be used in our 8T8R radio in addition to massive MIMO. I would also like to highlight that our 32TRX massive MIMO active antenna, which is typically enjoying the largest volumes in operator deployments, is the industry's lightest. This is a very important factor for customers in terms of ease of deployment and loading of site infrastructure. With the new baseband boards, we now can take the box of having common baseband for 5G and previous radio technologies.

The baseband products we have launched can support up to 90,000 connected users with 84 gigabits per second air interface throughput. We expect to have largely caught up with the competition by the end of the year, and as you can see from these features, in some areas, we could even lead the market. Importantly, for both our commitment to efficiency and sustainability, the baseband product is also up to 75% more power-efficient. This is important not only for us but for our customers, as well as we all work to reduce our environmental footprint.

Nokia remains committed to our stated goal of reducing our greenhouse gas emissions, including in the use of our products, by 50% between 2019 and 2030. The new AirScale products will really help us to hit that figure. The customer response to the launch has so far been very strong. If you want to launch -- if you watched the launch video on our website, you can see a number of the customer endorsements we have received.

The baseband products are already shipping with general availability later in the year. And meanwhile, our radio products are expected to start shipping later in the year with general availability coming early in 2022. In fact, the introduction of the new baseband board has been the fastest from the time of making the product decision to shipping product in at least two decades. And it may be the fastest-ever in Nokia's wireless business.

This is due to improvements in product development processes and tooling. Regarding progress on our 5G KPIs, we continued to see a good improvement in our ReefShark SoC-based deployment with 54% of 5G shipments in Q2. As said, that is on track to reach our 70% goal by the end of this year. On the conversion rate, excluding China, or the conversion rate that we are targeting and forecasting excluding China, remains approximately 90%, but it has improved slightly in the quarter.

We believe this number is now stabilizing and we see opportunities for it to improve, although the timing of those deals is uncertain. And finally, I would like to note the progress we have made with customers, including winning back a customer in Canada and the recently announced share we have provisionally won in the China Mobile tender. In China, as you will have seen, we were recently awarded 4% market share in the China Mobile and China Broadcast Network, 700 megahertz 5G joint bid positioning us as the third vendor. We believe this is a good endorsement of our improved product quality.

Moving on to Network Infrastructure. We have seen extremely strong growth in this business group in the first half with growth driven by all the businesses. Our Fixed Networks business continues to benefit from what we believe is a structural shift from operators across the globe to increase home broadband connectivity. This has been accelerated as many workforces are likely to move to a hybrid home-office working model in the future.

Nokia will actually be doing the same. We have also seen a significant acceleration in demand for our fixed wireless access solutions. I would also note that we are seeing good market share momentum in many areas of Network Infrastructure. This has been key to enabling our growth performance this year, and we have continued to work hard to deliver on our customers' increasing demand despite the global semiconductor shortage.

As we look toward the second half of the year, we faced tougher year-on-year comparisons from a growth perspective, but we feel confident about our midterm opportunities as we see a strong opportunity pipeline which, combined with new product launches to come in the second half of the year, should increase our product differentiation further. I want to highlight two other points from Q2 for Network Infrastructure. The first is that our optical business continues to make good progress. And the second is that we are also seeing strong momentum in submarine networks, as our previously mentioned backlog continues to flow through into sales as deployments progress.

Next is our Cloud and Network Services business, which continues to make good progress on its portfolio rebalancing. As a reminder, that includes focusing our R&D efforts on areas where we see strong growth opportunities in the midterm. I would highlight good progress in two areas already. Our 5G core product now has over 150 customers and over 200 networks.

We also made good progress with our private wireless enterprise solutions and now have more than 340 customers. Work is clearly still continuing in Cloud and Network Services as we refine our product -- as we refine our focus areas for the business to improve its financial performance, but I was pleased with the progress we saw in Q2. And finally, onto Nokia Technologies. As already mentioned, we signed two automotive licensing agreements in Q2, including with Daimler.

This shows the underlying strength of our portfolio and the growth prospects in the increasingly connected automotive market. We also continue to renew our industry-leading patent portfolio with investment in 5G, 6G and multimedia R&D. Before I hand over to Marco to look at the financials in more details, I wanted to touch on our progress with enterprise customers. For many years, we have been working to expand into the enterprise market, and this has paid off with double-digit growth in both the last two years.

In Q2, we saw a slight decline in enterprise sales, although in the first half, we still achieved solid 9% growth in constant currency. This slowdown in Q2 was largely a reflection of tough year-on-year comparisons and the lumpiness that can be present in some of the larger enterprise deals. However, we continue to make good progress in the business. We signed 63 new customers in Q2 and continue to have confidence in the pipeline for the full year.

I will now hand over to Marco for a little more detail.

Marco Wiren -- Chief Financial Officer

Thank you, Pekka, and good morning, everyone, from my side as well. I will now provide some more detail on our financial performance in the second quarter. As Pekka already mentioned, we continue to benefit from strengthening end markets. We have also increased our forecast for our addressable market in 2021 and we now estimate that the total addressable market will grow by 5% in constant currency in 2021.

And this is up from the previous estimate of 3%. And the increase has primarily been driven by Mobile Networks where we have seen rising investments in 5G. Note also that our forecast for mobile RAN growth in U.S. dollars would be consistent with the estimates for 2021 from third parties just like Dell'Oro.

If we investigate the drivers of our revenue growth, all of our business groups grew in constant currency. We saw particularly strong growth again from Network Infrastructure, as Pekka explained earlier, and Nokia Technologies as we signed new automotive licenses. From a regional perspective, the largest contributors in absolute terms in our growth were India and Latin America, up 75% and 57%, respectively, in constant currencies. And both regions benefited from stronger LTE deployments and demand for our fixed IP and optical products.

In Europe, we saw significant growth in 5G deployments with resilience in most other areas of the business. North America saw a robust performance despite the headwinds on market share and pricing based on the contracts negotiated in 2020. In Greater China, we saw a continuation of the strong Mobile Network capacity deployments that we saw in Q1. One area we wanted to provide some more visibility on our progress this quarter is our gross margin.

And this quarter has shown the importance of gross margin expansion in driving our overall financial performance. At the group level, our gross margin saw a slight headwind from product mix as we saw stronger growth in lower-margin products, including Fixed Networks and submarine. This was then offset by better regional mix along with volume benefits and good cost control under our new operating model, giving much greater accountability to the business groups for their financial performance. Finally, we would also -- we also benefit from FX and Mobile Networks' one-off software deal, which has been previously mentioned, and that contributed about a third of our gross margin expansion.

If we then focus on specifically on Mobile Networks, while we have seen some financial benefits from our product mix shifting toward 5G ReefShark-based products, there are also other important factors to be aware of that are driving our progress. In Mobile Networks, regional mix was of limited benefit, but we saw a significant improvement from the new operating model. You also see the FX benefit and the impact of the Mobile Networks one-off in the quarter. And looking at the group comparable operating margin performance, you can clearly see the structural improvements we're making in our operating margin.

We did face some one-off benefits in the quarter, but even despite those, we continue to make good structural progress. Our cost base remains well-managed. In addition to the benefit of the MN one-off, we saw positive fluctuation in other operating income and expenses related to both etching and venture fund gains. It is also worth noting that in Q2, the stronger business outlook led to greater incentive accruals that partially offset our efforts and cost.

Despite this progress, it is worth noting that we face many headwinds still in the second half of the year, as Pekka will highlight in our guidance, but we are encouraged by the progress we've made. And then moving to the financial performance of our individual BGs. I already touched upon the gross margin performance in Mobile Networks earlier, and the comparable operating margin in Mobile Networks, excluding the one-off, would have been essentially stable year on year as the improved gross margin was offset by higher R&D investments. In Network Infrastructure, we saw good evidence on how our plan from the Capital Markets Day is playing out.

The growth in the business, combined with stable gross margin and stable opex, led to strong expansion in operating margins. Now we do expect to see some increased R&D expense in the second half of the year as we continue to invest in the future products to extend our differentiation, but we are pleased to see the operating performance that we have in H1. And Nokia Technologies. Just like Pekka mentioned, we benefited from two automotive licensing agreements signed in the quarter, and the underlying revenue run rate grew and is now between EUR 1.4 billion to EUR 1.5 billion per year.

The quarter was largely uneventful from a cash perspective. We generated strong operating profit, but then we saw a meaningful net working capital increase as we paid 2020-related performance incentives to employees and also invested in inventory as we continue to see rising demand for our products and freight payables were largely stable in the quarter. We further reduced the sale of receivables in the quarter. And at this point, I'm very pleased with the underlying cash performance in the business.

We have now delivered also a fifth quarter of positive free cash flow. And in quarter two, we generated about EUR 80 million of free cash flow. And the final point I wanted to make today was to remind you of the value Nokia has within our venture funds. In recent quarters, you've seen a positive revaluation gain impacting our other operating income as investments within various funds have matured.

Whilst there is never any guarantee of performance, these investments have delivered typically between 15% to 20% IRRs to Nokia by maturity. There have also been other benefits to Nokia's core business in both licensing opportunities and partnerships with companies within the venture funds. Some of the investments within the venture fund have now seen cash distributions back to Nokia, and we continue to have about EUR 760 million book value of assets in our balance sheet that we believe can be accretive to Nokia's value creation going forward. Now back to you, Pekka.

Pekka Lundmark -- President and Chief Executive Officer

Thank you, Marco. Given the strong Q2 and first-half results, we have today revised our full-year 2021 outlook upwards. From a net sales perspective, we now expect to land between EUR 21.7 billion and EUR 22.7 billion, as we are now assuming actual currency rates for the first half and that the end of June rate continues into the second half. We have also revised our comparable operating margin outlook, now expecting it to be in the range of 10% to 12%.

While our first-half results provide a strong foundation for the rest of the year, we still expect the earlier communicated headwinds to impact us in the second half. More specifically, this is related to market share and pricing in North America in regards to contracts made in 2020. Therefore, we still expect typical quarterly earnings seasonality to be less pronounced in 2021. In addition, we continue to accelerate R&D investments.

And of course, we are also monitoring the component situation, working very closely with our suppliers to ensure we can meet the strong customer demand we are seeing. We have also adjusted our free cash flow and comparable return on invested capital guidance today based on our first-half results. So in summary, I'm pleased with our strong performance in the first half of the year. Our team has done a great job in establishing such a firm foundation.

But as we have said, it is important to bear in mind that our results benefited from some one-offs, and we have a lot of work ahead of us. We are only in the first phase of our strategy execution. But with a good start for the year, we are confident that we are on the right track to achieve our long-term targets. Thank you.

David Mulholland

Thank you, Pekka. We'll now move over to the Q&A session. [Operator instructions] With that, I'll hand over to the operator, Rachel, who will give the instructions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from Dominik Olszewski from Morgan Stanley. Please go ahead.

Dominik Olszewski -- Morgan Stanley -- Analyst

Good morning, everyone. Thank you for taking the question. So the main question would be whether you could discuss the puts and takes around the outlook for 2023. Obviously, you had a very strong performance in the first half of this year and improved guidance for this year.

So could you just talk about the puts and takes for 2023? Obviously, no change to the midterm outlook. So that's the main question. And then the follow-up is just around the gross margin bridge you gave showing the fixed business and the submarine networks business was a drag on gross margin. So given you feel confident in those businesses, going forward in terms of backlog, can you talk about whether those become less sort of a headwind going forward? Thank you.

Pekka Lundmark -- President and Chief Executive Officer

OK. Thank you. If I take the first one and, Marco, if you take the gross margin question. Look, we are still in the early stages of executing on our strategy.

Of course, we are really happy with the H1 results, but there were also some one-offs that were helping us there, and then we have the earlier communicated headwinds in the second half of the year. So H1 provides a very good foundation, but it's only four months since we announced our 2023 outlook. So we do not see a reason to change it today.

Marco Wiren -- Chief Financial Officer

And what comes to the mix changes and their impact on our gross margins mixes are going up and down quarter by quarter. And that's why we believe that it's better to look in the longer term, the business. Of course, if we have continuation of a strong growth in our lower-margin businesses, that will hit and -- our future gross margins and whatever mixes we see, those have been already taken into account in our guidance for '21 as well. So I would say that there's the puts and takes in all of our businesses, not only with these two.

David Mulholland

Thank you, Dom. Rachel, next question, please.

Operator

Thank you. Your next question comes from Alex Duval from Goldman Sachs. Please go ahead.

Alex Duval -- Goldman Sachs -- Analyst

Yes. Good morning, everyone, and many thanks for the question. Firstly, your gross margins are obviously very strong. You've quantified the product mix benefits in wireless but it would be interesting to know a bit more about the extent to which customers now reward you with better prices to add a mobile product, in the extent to which mobile gross margins have further to expand in coming quarters or years if you make further improvements on the wireless side.

And then my quick follow-up would just be on Network Infrastructure revenues. You referenced the strength and the growth there. I wondered to what extent do you see that as sustainable given you did reference work-from-home demand being a booster, which arguably could start to run into hard comps at some point. I'm wondering if there are key product cycles you could point us to or whether you're seeing sustainable demand driven by digitalization more broadly.

Many thanks.

Pekka Lundmark -- President and Chief Executive Officer

OK. Thanks, Alex. So if I take the Network Infrastructure and Marco continues to be our gross margin expert, right? So Network Infrastructure, of course, I mean, look, 20% growth in the quarter, and you saw even some higher numbers in the individual businesses. We do believe that there is some kind of structural underlying changes in the market, especially the home connectivity, home broadband connectivity.

And then actually, we are starting to see the effects of the 5G deployment also when you need connectivity for base stations, and all that capacity that is then needed is then also boosting the IP and Optical Networks market. And there are reasons to believe that this trend will continue. And when you then move to the next phase of the mobile network development when the small cells and millimeter-wave radios start to get more common, you will need even more capacity in base station connectivity. So we are optimistic about the structural development of this market.

But just to be realistic on numbers, we will already, in the second half, start facing tougher comparables. So don't just automatically assume that these percentages will continue. But structurally, good market going forward.

Marco Wiren -- Chief Financial Officer

And when it comes to the gross margin, as you saw in the bridge as well, we have regional mixes that impact positively volume and, of course, the cost. And -- but in the Mobile Networks, we have of course, the 5G ReefShark that is impacting, but also within that, there's cost elements that we have been able to improve and also in the Mobile Networks, services part is improving our gross margin in the quarter as well and as they've been cleaning up the portfolio and agreements as well. So there are different elements that are impacting how that will continue in the future. That, we will get back to you in our guidance.

And of course, we -- our ambition is that we will be as good as we can and customers actually expecting as well that we have to show cost improvements in our products.

David Mulholland

Thank you, Alex. Rachel, next question, please.

Operator

Thank you. The next question is from Sandeep Deshpande from J.P. Morgan. Please go ahead.

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

Yeah. Hi. Thanks for letting me on. Two quick questions, if I may.

Firstly, as you're showing progress now in China, you've taken some share in China in the more recent auctions. Have you seen any progress with your updated products in the United States where -- which is the other region where you had a significant change in market share over the last few years? And then secondly, on the gross margin in the mobile business. There clearly is a dent -- there is a hysteresis between your shipment of your ReefShark product and your revenue recognition of that ReefShark product. So I mean given that you are saying you're -- given where you are today in terms of shipping ReefShark-based products within your mobile business, where are you in terms of recognizing them in terms of your gross margin today?

Pekka Lundmark -- President and Chief Executive Officer

Yes, thank you, Sandeep.

Marco Wiren -- Chief Financial Officer

I will take -- same mix.

Pekka Lundmark -- President and Chief Executive Officer

Yes, let's do that. So you take the gross margin part. And yes, the U.S. market, I mean the good news is that these much-discussed headwinds in terms of market share and pricing, they have been quite well understood already since October last year when we, for the first time, started to talk about them because they relate to earlier things, earlier contracts, 2020 matters.

We are actually pretty confident on the U.S. market situation. We have signed, as you have seen, five-year 5G deals now with both T-Mobile and AT&T. And we also have to remember that Verizon continues to be a very big and important customer to us in many segment.

And then the U.S. market is actually a lot more than these three large operators. There is a significant number of smaller operators that we are working with, and we are fairly confident in our position there. And on top of all of this, there is a growing enterprise market, private wireless market.

And now as we have recently seen, there is a high likelihood that also the government-driven programs in terms of connectivity will increase going forward. So we have every reason to be optimistic about the U.S. market.

Marco Wiren -- Chief Financial Officer

And when it comes to the Mobile Networks gross margin, before I touch upon the ReefShark shipments versus revenues, I just want to highlight once more that, remember, there are other factors as well that are important for the gross margin expansion and improvement that we've seen in the first half. And if we look at what Tommi and his team in Mobile Networks have done in 5G, the way we are producing and developing 5G is much more efficient today than it was just a year ago. Then of course, when we see the volumes are increasing, that will also impact our ability to improve the cost base in that product area. In addition, that -- we have other areas in Mobile Networks, just like I mentioned about the services, that are impacting as well.

When it comes to ReefShark, that's one part of the improvement and we said that there's about a six-months delay between the shipment until we recognize that in our P&L. And I would say that that's about the same today and it was a year ago. So you can use that as a rule of thumb and see about what is the relation between shipments and revenue recognition on ReefShark-based products.

David Mulholland

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

Operator

Thank you. The next question is from Sami Sarkamies from Nordea Markets. Please go ahead.

Sami Sarkamies -- Nordea Markets -- Analyst

Hi. thanks. My question would be on Mobile Networks where you're materially upgrading your margin assumptions. Can you explain what has surprised you on the upside this year and also why you have chosen not to move the goal post for '23, even though you will still materially benefit from a system-on-chip transition? And then maybe a follow-up, any reason why you couldn't get to Ericsson gross margin levels in Mobile Networks once you have completed the system-on-chip transition? I think they are at 44% excluding IPR revenues.

Thanks.

Pekka Lundmark -- President and Chief Executive Officer

Thank you, Sami. If I start with that 2023, I think I actually already answered that question. Of course, we are pleased with our H1, even excluding the effect of some of the one-offs we've been talking about. The issues that are going to face us in the second half of the year, meaning that the typical seasonality that we have seen will be less pronounced this year and this is only four months since we published the '23 targets.

So we do not feel that today is the right time to revisit them. Then when it comes to the Mobile Networks surprises, and then, Marco, you can then go deeper into the margins, if needed, but -- of course, one thing that has clearly changed in the last few months is the market itself. There is strong demand on the market. We have, as you saw, we upgraded also our market size, market growth forecast this year.

Our product execution has been faster. We've been able to speed up there as Marco explained. And then on top of that, very good operational cost control. And here, I would say that the simplification of the operational model that we did where in the earlier setup, we had actually multiple, sometimes even five, management team members being partially responsible for one Mobile Network deal.

Now it's all in the Mobile Network business, and Tommi is fully responsible for that. So that is already showing its effects, positive effects.

Marco Wiren -- Chief Financial Officer

And just building on that, when it comes to the new operational model, it's extremely nice to see that each of the businesses have really taken that responsibility and focus on the cost, but also on a top line and seeing how can we improve the business. And we have totally different discussions today than we had before the new operational model, so I'm very pleased to see as well how that has landed.

David Mulholland

Thank you, Sami. Rachel, next question, please.

Operator

Thank you. The next question comes from Simon Leopold from Raymond James. Please go ahead.

Simon Leopold -- Raymond James -- Analyst

Thanks for taking my question. I want to ask two. One, I think is a quick one. The other one is a little bit more strategic.

In terms of the quick one, with the award of the Chinese 700-megahertz project, I presume that's a little bit of a gross margin headwind. Could you help us understand how that particular project factors into your overall thinking, and if in fact, the assumption is correct? And then in terms of the strategic question, I want to get an understanding of your priorities, specifically in your optical business, given that you currently lag the sector leaders in technology and profitability. How do you address or solve those problems? Is your priority to close the product gap or the profitability gap? How can you do both? Thank you.

Pekka Lundmark -- President and Chief Executive Officer

OK. Just quickly, the China question, the effect on volumes and margins this year will be -- will not be material. We do not comment on margins on individual deals, but it is, of course, known that the Chinese market is highly competitive. And typically in these type of deals, the margin is lower in the beginning and then there is an opportunity to increase over time.

But of course, 4% is 4%, it's not more. It's 19,200 base stations. So you have to put it into perspective. So it is not really material.

Then, I mean, we are right now moving to the fifth generation of optical coherent technologies with the PSE-V architecture. We are seeing our technology competitiveness clearly increase. With this technology, we have optimized in a way the cost-to-performance ratio for the sweet spot of 400 gig and sometimes 600-gig connectivity in metro, regional and even long-distance networks. 800 gig can be implemented by 2x400 line card, but that's only a very small part, maybe 2% to 3% of the total demand at the moment.

And that's why the full portfolio that we are now having with -- having launched PSE-V has greatly increased in competitiveness. And if and when there is then a phase where 800 with the direct implementation would become a mass market, we will certainly be there at the right time as well.

David Mulholland

Thank you, Simon. Rachel, next question, please.

Operator

Thank you. The next question is from Francois Bouvignies from UBS. Please go ahead.

Francois Bouvignies -- UBS -- Analyst

Hi, everyone. I have a follow-up on the 2023. So I know I understand that, Pekka, that you don't want to increase now because it's been only four months, and I totally understand that. I just wanted to understand the moving parts.

So if we look at the full-year '21, you already will have 10% to 12%; '23, you have 10% to 13%. If we look at -- this 10% to 12% already includes the headwinds of pricing, of Verizon, so something that possibly will be less of a headwind in the next two years. And then you have this AirScale, ReefShark benefit that would probably increase your cost -- improve your cost, sorry. Strong Network Infrastructure with structural demand with a positive mix if we look at your full-year '23 guidance for operating margin for this division.

And then you have the C-band in the U.S., which possibly with geographic mix. So my question is what -- is there anything that I missed? Or what kind of a headwind we should expect in the next two years that would offset negatively these drivers? Just trying to understand the moving parts, please.

Pekka Lundmark -- President and Chief Executive Officer

Thank you. And I don't disagree with your facts, but again, H1 strong foundation boosted by certain one-offs. The component market situation will remain tight. There could be always surprises there.

This will continue well into 2022. Some analysts are even saying -- this is not necessarily our estimate, but some are even saying that it will continue into 2023. So there is also -- even though we are seeing strong demand, there is also uncertainties there. So we just feel that this is not the right time.

We are only four months into the execution of this strategy. We are still in the reset phase, and let's now focus on the day-to-day hard work and we do not want to speculate anything more on 2023.

David Mulholland

Thank you, Francois. Rachel, next question, please.

Operator

Thank you. The next question is from Aleksander Peterc from Societe Generale CIB. Please go ahead.

Aleksander Peterc -- Societe Generale -- Analyst

Yes, hi, and thanks for taking my question. Good morning to all. Firstly, just on Network Infrastructure. If you look at the underlying businesses and the growth rates so far this year, could you comment whether you're gaining share in IP or in optical and in Fixed Access? And the second, a small follow-up, just on the component situation, can you confirm that despite the tightness, you don't see any top-line headwind in the current year from the component situation, i.e., no sale will be held back by the shortages? Thanks a lot.

Pekka Lundmark -- President and Chief Executive Officer

OK. Thank you. If I take the component question, and, Marco, if you take the NI growth prospect question. I mean, as we have said, the component market is tight.

And I think I said in -- after Q1 that you have to fight for your share every day, and that situation continues. We are on daily calls with many suppliers. We have been, for the most part, able to deal very well with this situation. But it actually is interestingly that we could grow even faster if there were more components available.

But all this is included and assumed in our guidance. And of course, if it's any comfort as to regarding our ability to deal with the situation, as you saw, we upgraded our top-line guidance by roughly EUR 1 billion. So it just shows that, yes, we are able to deliver. Then on top of that, I'm saying that it could even have been a bit more if there were more components available.

Marco Wiren -- Chief Financial Officer

And when it comes to the IP and Fixed Networks, these are the two areas, actually, where we have a technological advantage. We have, in the IP side, we've been gaining market shares in certain regions. And we see that we are actually taking -- getting closer to No. 1.

In certain areas like Europe, we are No. 1 already. And definitely, the technological leadership is extremely important here. And this is one reason why we believe that in a tech -- high-tech industry, you have to have a very good focus on technology and securing that you are absolutely top-notch on technology side.

And that's why we invest in R&D. The same actually goes for Fixed Networks. So if you look, we are the only one that can offer 25-gig solutions in the fixed networks. And this has definitely shown as a very good sales pitch toward our customers.

And especially when we see that in the connectivity, demand is increasing very heavily, not only because of the 5G but also because of the COVID situation and remote and flexible working solutions. So I would say that in both those areas, we are definitely seeing a positive development.

Pekka Lundmark -- President and Chief Executive Officer

And maybe just to add, I mean, just looking purely at that number, so our first-half top-line growth in IP Networks is 15%; in Optical Networks, 10%; and Fixed Networks, 37%. We are saying that the market growth is maybe 4% or something like that. There could be faster-growing pockets, yes. But with these numbers, I think it's absolutely clear that we are taking market share.

David Mulholland

Thank you, Aleks. Rachel, next question, please.

Operator

Thank you. The next question is from Andrew Gardiner from Barclays. Please go ahead.

Andrew Gardiner -- Barclays -- Analyst

Hi. Good morning. Thank you for taking the question. Sort of a follow-up to that last one really on Network Infrastructure.

Just to the point that you were making, really, I mean you're talking about the 4% growth in the TAM for NI this year, yet qualitatively, you're sounding very bullish and yet you haven't upgraded the TAM. I think I can see, as you guys have said, you're clearly gaining market share. So two-part question. One, why is there not a bit more upside to that TAM given the end market trends you're seeing? And in terms of market share, you guys are showing real strength in fixed in terms of the year-on-year growth, submarine as well, perhaps to a slightly lesser extent in optical, but still good growth.

Clearly, you've got a major competitor there in Huawei. Can you talk about the trade-war backdrop and how that -- this has been sort of obviously ongoing for a number of years now. Do you feel like the share gains that you're seeing now are -- you're being boosted by that effect in many of these markets, particularly outside of China? Thank you.

Pekka Lundmark -- President and Chief Executive Officer

Yeah, I don't think those things that you referred to that they would have, at least so far, been a big needle-mover in IP, optical or Fixed Networks. There has been occasional tenders or occasional situations where that could have played into it, but not in any big way. This really comes from our technology competitiveness. That is it.

And then when it comes to the market size estimates. I think your question is fair. We have not yet seen what the -- and the markets analyst houses are saying about Q2. We don't have those numbers available yet.

So let's see what they have said then we have to see if we keep this or if there is reason to change. But we are clearly seeing strength in this market.

David Mulholland

Thanks, Andrew. Rachel, next question, please.

Operator

Thank you. The next question is from Daniel Djurberg from Handelsbanken. Please go ahead.

Daniel Djurberg -- Handelsbaken Capital Markets -- Analyst

Thank you, operator, for taking my question, and congrats to a solid report. My question has mainly been asked already, but I could ask you about Japan perhaps. I think you mentioned in Q1 that it was a little bit product -- temporary product differences to your key components or Ericsson that had super-strong first half. Can you comment a little bit on the Japanese market outlook? And also I guess we saw APAC ex Greater China, I mean, was down 4% in the quarter.

Thanks.

Pekka Lundmark -- President and Chief Executive Officer

Yeah, that was really -- APAC and Japan was the only market which was slightly down. We had six or seven markets where we're growing. The primary country that affected that slightly negative number, remember, it was only slightly negative, was Korea. It was not Japan.

The picture in Japan remains strong, and the same statement as we made after Q1 remains that there seem to be certain timing differences between -- in operators' plans between our -- in a way, our regions in 5G and then in some of our competitors' regions. And that is our understanding as to why you may have seen some differences in statements about growth in Japan.

Marco Wiren -- Chief Financial Officer

And just building on that, remember that we are a customer -- or supplier to all top CSPs in Japan as well.

David Mulholland

Thanks, Daniel. Rachel, next question, please.

Operator

Thank you. The next question is from Robert Sanders from Deutsche Bank. Please go ahead.

Robert Sanders -- Deutsche BankAnalyst

Yeah, good morning. Just really one question, which is just about your commentary around North America on share loss and price erosion in the second half. I was just wondering if you thought that might continue into the first half because obviously with you saying a lot of the first half is temporary or one-time effects, there could be a difficult comparison to the first half of '22. So I just want to be certain that you are still on a growth path in the first half of '22 based on what you can see today.

Thanks.

Pekka Lundmark -- President and Chief Executive Officer

Yeah, thank you. I mean as I said, those things are related to mostly events before this year. So the effect on the second half will be stronger than in the first half, but that should really then be it for the most part. But we have not given, of course, 2022 guidance.

I referred to what I said earlier that we remain kind of overall optimistic and confident on the North American market. There are no new headwinds, if you will, that would have surfaced after we first started to talk about this thing in October last year.

David Mulholland

Thank you, Rob. Rachel, next question, please.

Operator

Thank you. The next question is from Richard Kramer from Arete Research. Please go ahead.

Richard Kramer -- Arete Research -- Analyst

Thanks very much. One for Pekka, one for Marco. Pekka, you talked about your conversion rate and people have asked you about market share. But inside your installed base, clearly, a lot of customers were shared with Huawei.

So I'd like to know, and I'm certain that it's something you track, to what extent do you think your share gains are some sort of dividend which is coming in the wake of various carriers being obliged to exclude Huawei from many markets? How much do you think of the market share gains have come directly as a result of that? And then for Marco, maybe you could give us a little insight into the licensing pipeline. Was the renewal with Samsung including cellular standard central patents? Because it's not entirely clear from that. And do you have any material renewals coming up in the next year or two that could change the outlook in terms of the run rate you've laid out for the licensing business? Thank you.

Pekka Lundmark -- President and Chief Executive Officer

Yeah, thank you. When we look at the Mobile Network market share, our estimate continues to be for this year that it would be 25% to 27%, excluding China. That is slightly lower than what we had last year. And as we said, we now expect and target that the conversion rate would stabilize, indicating that there would not be further market share losses.

And hopefully, we will then start winning back customers and we have already done that now in China and in Canada. So there is -- there are cases, as you know, and as we have discussed, where operators for various, sometimes politically driven reasons, have decided to change supply -- switch suppliers. And we have already estimated and I can confirm that that we have won approximately 50% of such opportunities. But we are not publicly quantifying that, how much that would be in terms of revenue or margin.

Marco Wiren -- Chief Financial Officer

And when it comes to the pipeline in technologies, we basically have renewals continuously in different scales. And most of our agreements and what comes to also when the renewal is happening are confidential. But you could calculate that we have always a handful of renewals every year that we negotiate with, just like you've seen now that OPPO is, at the moment, on the table. So these are coming continuously.

And this is normal business for technologies. So -- and when it comes to Samsung deal we signed with them, it is covering a wide area of video systems and so forth. And we're quite happy with that system or that agreement as well.

David Mulholland

Thank you, Richard. Rachel, next question, please.

Operator

Thank you. The next question is from Frank Maao from DNB. Please go ahead.

Frank Maao -- DNB Markets -- Analyst

Hi. Good morning, all. And congrats on a great quarter here. Most of my questions have been answered, but I want to just follow up on the market share situation, especially in Mobile Networks outside of the U.S.

Now one thing is, of course, that in some countries, operators have been legally obliged to exclude Huawei or the Chinese vendors in general, but also there's a quite difficult chip supply situation for the market leader, potentially leading to inevitable loss of competitiveness. And as we have seen, Ericsson now also starting to win contracts in Chinese vendors' strongholds such as Malaysia for 5G and national network there. Now that is not due to legal obligations to exclude Huawei. Now to what extent are you seeing pipeline boost or contract wins that give you confidence with regards to being able to grow faster than the market also in Mobile Networks, especially in the light of these, yeah, developments? Thank you.

Pekka Lundmark -- President and Chief Executive Officer

Yeah, look, as I said, we are estimating 25% to 27%, excluding China, this year and the market share decline seems now to have been stopped. And as I said earlier, we have -- on the swap cases, we have won approximately 50%. There have been occasional cases where some of our competitors have had delivery difficulties because of various reasons. I think I said earlier that they have not been -- I think I commented, Network Infrastructure business, I said that they would not have been kind of big needle-movers, the same thing in Mobile Networks.

So we do not want to speculate on our competitors' ability to buy components. They have -- each and every one of us have to comment our own business. We do not want to comment on our competitors. We focus on our products, and we are highly confident that after the -- especially after the recent launches, we have regained so much of our product competitiveness that we are able to take care of our market share.

Marco Wiren -- Chief Financial Officer

And now we have the conversion rate that we published is now slightly above 90%. And we also stated that we are optimistic about the development there, and we could see some improvements there going forward.

David Mulholland

Thank you, Frank. Rachel, if we could now take our last question, please.

Operator

Thank you. The final question comes from Stefan Slowinski from Exane BNP Paribas. Please go ahead.Stefan Julien Henri SlowinskiYes, great. Thanks.

Good morning. Thanks for taking the question. Marco, just a question for you on cash flow. If I look at the last four quarters, you had EUR 2.3 billion of cash flow positive each quarter despite presumably some headwinds in terms of unwinding of factoring and the lower gross margins.

Were there any significant one-offs within those 12 months that benefited free cash flow? And when we look forward and we look at the improvements that are still to come in terms of gross margins and renewing some of those licensing deals, shouldn't we see that cash generation improve?

Marco Wiren -- Chief Financial Officer

Thank you. Yeah, you are totally correct. We have had very good cash collection. And if you look especially quarter one, that we had extremely good cash collection and came from accounts receivables.

And that always when you have a big swings in working capital, these are a little bit like one-offs because you get the new level and this is exactly what happened. So and that's why the rolling 12 is very good because we're comparing very -- quite good second half last year and very good first half of this year. Working capital is always a swing factor. And now we've said going forward that we are aiming to increase our inventories specifically on the semiconductor side, as we've seen that supply is quite tight, and it's good to have a little bit more buffers here.

Otherwise, in longer term, of course, I would say that our EBIT is pretty good measurement where our cash flow should land because our depreciations and capex are quite close to each other. And of course, when you have a big hikes in net sales, like we normally have seen in the past, in the fourth quarter that will also increase your accounts receivables, but normal development is basically based on what is our profit development.

David Mulholland

That's great. Thank you, Stefan, and thank you to Marco and Pekka. Thank you everyone for your questions today. And ladies and gentlemen, this does conclude today's call.

I would like to remind you that during the call, 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 these risks in more detail in the section titled Operating and financial review and Prospects-Risk factors of our 2020 annual report on Form 20-F, as well as other filings with the U.S.

Securities and Exchange Commission. With that, thank you very much for joining us, and enjoy the rest of your day. Goodbye.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

David Mulholland

Pekka Lundmark -- President and Chief Executive Officer

Marco Wiren -- Chief Financial Officer

Dominik Olszewski -- Morgan Stanley -- Analyst

Alex Duval -- Goldman Sachs -- Analyst

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

Sami Sarkamies -- Nordea Markets -- Analyst

Simon Leopold -- Raymond James -- Analyst

Francois Bouvignies -- UBS -- Analyst

Aleksander Peterc -- Societe Generale -- Analyst

Andrew Gardiner -- Barclays -- Analyst

Daniel Djurberg -- Handelsbaken Capital Markets -- Analyst

Robert Sanders -- Deutsche BankAnalyst

Richard Kramer -- Arete Research -- Analyst

Frank Maao -- DNB Markets -- Analyst

More NOK analysis

All earnings call transcripts