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DATE

Thursday, July 23, 2026 at 8 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer - Justin Hotard
• Executive Vice President and Chief Financial Officer - Marco Wiren
• Head of Investor Relations - David Mulholland

TAKEAWAYS

• Net Sales -- grew 9% year over year, primarily supported by performance in the Network Infrastructure segment.
• Comparable Gross Margin -- expanded 70 basis points to 46%, reflecting growth in optical networks and the integration of Infinera.
• Comparable Operating Margin -- increased 70 basis points to 9%, though impacted by a 150 basis point headwind from stock-based compensation expenses driven by share price appreciation.
• AI and Cloud Segment Net Sales -- increased 105% to 446 million euros, driven by demand for data center interconnect and scale-across fabrics.
• AI and Cloud Order Intake -- reached 2.8 billion euros, with approximately 50% of this volume expected to convert to revenue within the next 12 months as customers secure supply in a constrained environment.
• Network Infrastructure Net Sales -- rose 12% on a constant currency basis, led by a 20% increase in optical networks and a 16% increase in IP networks.
• Mobile Infrastructure Net Sales -- grew 7%, supported by a 15% increase in Technology Standards and a 7% increase in Radio Networks.
• Mobile Infrastructure Gross Margin -- reached 49.3%, benefiting from favorable software revenue recognition phasing that shifted from the third quarter into the second quarter.
• Fixed Networks Net Sales -- declined 2%, as a 16% decrease in ONT sales offset an 18% increase in optical line terminal sales.
• Optical Networks Operating Margin -- improved by 170 basis points to 8.1%, attributed to higher scale and realized synergies from the Infinera acquisition.
• Free Cash Flow -- reported at negative 732 million euros, primarily due to the seasonal payment of annual employee incentives.
• Net Cash Position -- stood at 2.8 billion euros at the end of the quarter, providing what management described as significant financial flexibility.
• Restructuring Charges -- estimated at 800 million euros for the full year 2026, including 350 million euros related to the integration of Chinese operations.
• Manufacturing Capacity -- increased 10-fold for advanced test and packaging at the Pennsylvania facility to support optical system growth ambitions.
• Discontinued Operations Impact -- reduced comparable net sales by 66 million euros following the reclassification of the fixed wireless access and enterprise campus edge businesses.
• Third Quarter Guidance -- anticipates a sequential net sales increase between 3% to 7%, with operating profit expected to be broadly similar to the second quarter.
• Indium Phosphide Fab -- remains on track for volume production by the end of the year in San Jose, with additional capacity planned via the acquisition of an NXP site in Arizona.
• Cost Synergies -- targeted at 200 million euros from the integration of Chinese operations, with the timeline accelerated to two years.
• Internal AI Adoption -- reached nearly 100% across the software developer base, which management indicated is supporting efficiency targets and accelerating roadmap deliverables.
• AI RAN Performance -- expected to deliver more than 100% spectral efficiency gains by 2028, doubling existing capacity via software innovation.

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RISKS

• CFO Wiren stated, "we now expect to track towards the low end of our free cash flow conversion assumption of 55% to 75%," noting that increased restructuring costs and working capital investments are impacting cash generation.
• CEO Hotard stated, "there's clearly constraints there," in reference to memory and leading-edge silicon supply, which has led the company to elongate lead times and seek better visibility from customers.
• CEO Hotard noted, "order patterns in this market can be lumpy and we should not expect this level of intake every quarter," following the significant jump in AI and cloud orders.

SUMMARY

Nokia Oyj (NOK -5.50%) reported second-quarter results showing growth in net sales and margin expansion, led by demand in the AI and cloud customer segments. Management announced the reclassification of its fixed wireless access and enterprise campus edge units as discontinued operations following a sale agreement with Inseego. The company is increasing its investment in U.S.-based optical manufacturing, specifically focusing on indium phosphide fab capacity and advanced testing facilities. Financial guidance remains at the upper half of the previously stated range for operating profit, supported by expected fourth-quarter seasonality and AI-related growth.

• CEO Hotard noted that the company's new AI RAN platform represents a "fundamental shift from a hardware-defined radio network to software-defined platforms," allowing for capacity increases without additional hardware investment.
• The company secured its first multi-rail ILA design win with a major customer, utilizing new optical networking products launched in March.
• CFO Wiren stated that the mobile infrastructure gross margin in the third quarter is expected to be closer to 44% to 46% due to the "earlier software revenue phasing" that benefited the second quarter.
• CEO Hotard attributed sales momentum to demand for data center interconnect, stating, "we're seeing growth in both IP and optical elements" as customers build out AI factories.
• Nokia expanded its partnership with Google Cloud, integrating Gemini-powered AI agents into its autonomous networks portfolio to enhance network optimization.
• Management confirmed the acquisition of a manufacturing site from NXP in Arizona to expand indium phosphide fab capacity, aiming to mitigate industry-wide supply constraints.

INDUSTRY GLOSSARY

• AI RAN: Artificial Intelligence Radio Access Network; a platform that uses AI to optimize radio spectrum efficiency and network performance via software.
• DSP: Digital Signal Processor; a specialized microprocessor used to measure, filter, or compress continuous real-world analog signals.
• Indium Phosphide: A binary semiconductor used in high-power and high-frequency electronics, particularly in optical fiber communications.
• ONT: Optical Network Terminal; a device that connects the fiber optic line to a user's home or business.
• OLT: Optical Line Terminal; the endpoint hardware in a passive optical network that sends data to multiple ONTs.
• DCI: Data Center Interconnect; the technology that connects two or more data centers together over short, medium, or long distances.
• Scale-Across Fabric: Networking architecture designed to connect multiple data center clusters or campuses to act as a single large-scale AI processing unit.

Full Conference Call Transcript

David Mulholland: Good morning, ladies and gentlemen. Welcome to Nokia's Second Quarter 2026 Results Call. I'm David Mulholland, Head of Nokia Investor Relations. And today with me is Justin Hotard, our President and CEO; along with Marco Wiren, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results could, therefore, differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors.

We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Within today's presentation, references to growth rates will be on a constant currency basis and other financial items will be based on our comparable reporting. Please note that our Q2 report and a presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and reconciliation between the two. In terms of the agenda for today, Justin will go through the strategic highlights of the quarter and then Marco will go through our financial performance. We'll then move to Q&A.

With that, let me hand over to Justin.

Justin Hotard: Thanks, David, and hello, everyone. Our second quarter showed continued progress against the strategy we set at our Capital Markets Day. Our team is focused on maximizing our opportunity in the AI super cycle, and that focus is translating into early results. I'm pleased with the progress that team Nokia has made in the first half of 2026. In Q2, net sales grew 9%. We expanded our gross margin by 70 basis points to 46% and our operating margin by 70 basis points to 9%. Network infrastructure delivered strong growth led by optical and IP networks with sales from AI and cloud customers more than doubling year-on-year.

Mobile infrastructure sales also grew, and the business delivered stable profitability, largely driven by product mix. Marco will take you through the details of our financial performance in his update in a moment. I want to take a step back and look at how our first half performance demonstrates progress against the strategy we set out in last November. As a reminder, these are the five priorities we shared at our Capital Markets Day, and I'm pleased by the progress we've already made across each of these areas. Let me touch on a few highlights from Q2. AI and cloud was the strongest growth driver in the quarter.

Net sales more than doubled year-on-year to EUR 446 million and order intake grew to EUR 2.8 billion. While we're very pleased with the order growth, it's important to put that number into a bit of context. Q2 benefited from several significant long-term orders as our customers look to secure supply in a constrained environment. To provide some reference, approximately half the order volume received in Q2 is expected to convert to revenue in the next 12 months. As I've said before, order patterns in this market can be lumpy and we should not expect this level of intake every quarter.

As importantly, the strength was broad-based across optical networks and IP networks and included some of the design wins we mentioned last quarter. This was driven by growing demand for data center interconnect and scale across fabrics from our customer base. The demand primarily shows up in our AI and cloud segment, but we're also seeing emerging signs of growth in telecom customers as they invest to support the increased data traffic driven by the AR super cycle. During this quarter, we also secured our first multi-rail ILA design win with a major customer. This is one of the new optical networking products we launched at OFC this past March.

Last week, we launched the industry's first commercial AI RAN platform, marking a fundamental shift from a hardware-defined radio network to software-defined platforms. This fundamentally changes the economics of radio networks. Our AI RAN platform gives our telco customers a path to improved network performance through software and AI innovation rather than relying on hardware upgrades as they have traditionally. The platform would deliver more than 100% spectral efficiency gains by 2028, doubling the capacity operators can get from their existing spectrum. The performance benefits are tangible in 5G networks, and our AI RAN platform provides a software upgrade path to 6G to ensure continuity without additional hardware investment. The platform is also open, programmable and ORAN compliant.

This gives operators greater flexibility as they evolve their networks. They can choose the hardware path that works best for them, adding AI acceleration into their existing Nokia AirScale infrastructure, deploying new AI RAN hardware or moving to cloud native AI RAN. Ultimately, this is about delivering more performance, better returns and faster delivery of new service for our customers. We're on track to enter pilot deployments at the end of this year and expect to be commercially available in 2027, as we've said previously. Co-innovation is a powerful differentiator for Nokia.

When we combine our technology leadership with the expertise and scale of our customers and partners, we accelerate innovation, bring solutions to market faster and solve increasingly complex challenges together. We're already demonstrating early results from this approach, and I will highlight four examples from Q2. First, we expanded our partnership with Google Cloud, bringing Gemini-powered AI agents into our autonomous networks portfolio. Second, with Vodafone Albania, we demonstrated AI-powered network slicing using agents to dynamically optimize network resources. Third, we expanded our relationship with Indosat or Hutchinson in Indonesia, supporting network monetization and the rollout of 5G, while providing a seamless upgrade path to AI RAN.

And fourth, we entered trials with a U.S. hyperscaler for a new out-of-band management solution that goes inside the data center, leveraging the passive optical technology that we deliver in our fixed networks business. We're also making progress to focus Nokia where we can differentiate and create long-term value. This means we are investing where we see long-term demand and we believe Nokia can be a unique winner and at the same time, reducing exposure to areas where we are less differentiated. In November, we shared that our fixed wireless access customer premise equipment portfolio is not core to the future of our strategy.

The sale we announced this past quarter to Inseego is an example of our disciplined approach to capital allocation and allows us to concentrate resources on higher priority opportunities. The sale is on track to close by the end of the year. Talking about higher priority opportunities, one area of focused investment is scaling the capacity needed to support our optical growth ambitions, particularly around indium phosphide semiconductor manufacturing. In San Jose, our new indium phosphide fab is now processing test waivers as we move closer to product qualification. It remains on track for volume production by the end of the year.

In June, we announced a new commitment we are making to scale our Pennsylvania facility, increasing our advanced test and packaging capacity for optical systems in that facility by 10 times. In addition, today, we announced the acquisition of a manufacturing site from NXP in Arizona, where we plan to increase our indium phosphide fab capacity. This gives us additional capacity to support our own demand and greater optionality, recognizing the supply constraints in the market today. Altogether, these investments continue to strengthen and secure U.S.-based optical manufacturing capacity for the long term. While Marco will update you on our restructuring progress, I wanted to touch on one key area where we are making progress in driving incremental productivity.

We believe that to be a relevant technology provider in the AI super cycle, we need to be a leading adopter of AI internally. Last year, we established a team to deploy AI test beds across multiple functions within Nokia. One area where we're seeing early traction is software development where we now have nearly 100% adoption across our developer base. This is already yielding significant productivity returns, supporting our efficiency targets and accelerating road map deliverables. We will continue to scale this initiative across every function of the organization as our test beds yield tangible results.

We see this as essential not only to unlock sustainable returns, but also to be a better partner in support of our customers as we help them unlock the full potential of the AI super cycle. So in closing, I want to recognize and thank team Nokia for a strong first half of the year. We are focused on our key priorities and have begun to fundamentally change how we work. I'm pleased to see our efforts are already reflected in our results. We're entering the second half with good momentum and remain on track to deliver somewhat above the midpoint of our operating profit guidance.

And now I will turn the call over to Marco to dive into our financial performance.

Marco Wiren: Thank you, Justin, and hello from my side as well. Before looking at the quarterly performance, let me start with reporting changes we announced this morning. As we have agreed to sell our fixed wireless access business to Inseego, we now consider the sale of enterprise campus edge highly probable. As a result, both businesses are classified as discontinued operations. We have published recast historical numbers for 2025 and quarter 1, 2026, to support comparability. In quarter 2 2026, this reporting change reduced comparable net sales by EUR 66 million and increased the comparable operating profit by EUR 13 million.

It also led to minor adjustments in cost allocations between network infrastructure and mobile infrastructure with an impact of approximately EUR 1 million to EUR 2 million per quarter. Turning to performance. Net sales grew 9% in the quarter, supported mainly by network infrastructure. First profit was EUR 2.2 billion, and gross margin increased 70 basis points to 46%. The margin expansion was driven by network infrastructure and particularly optical networks, where we continue to benefit from both strong demand and the integration of Infinera. Operating profit was $434 million, and operating margin increased 70 basis points to 9%. The quarter benefited from some software revenue recognition coming in quarter 2 instead of quarter 3.

We also incurred higher stock-based compensation expense which represented 150 basis points headwind to our operating margin in quarter 2 year-on-year, and this was driven by Nokia's share price increase, an increase in the program and the issuance happening earlier in this year. Financial income and expenses benefited from a positive venture fund revaluation during the quarter, which supported both net profit and EPS, earnings per share. Free cash flow was negative EUR 732 million. And as you know, quarter 2 is typically the weakest quarter for cash generation as employee cash incentives are paid in quarter 2. We also saw some increase in working capital during the quarter.

We ended quarter 2 with a net cash position of EUR 2.8 billion, maintaining a strong balance sheet and significant financial flexibility. Let me now turn to network infrastructure. Net sales grew 12% in the quarter, reflecting continued strength across the business. Optical networks grew 20% and growth was supported by continued demand from AI and cloud customers, but we also saw healthy demand from telecom customers investing in transport infrastructure. IP Networks grew 16%. The strong order momentum that began in the second half of 2025 is now translating into revenue growth. Fixed Networks declined 2%. The areas where we are prioritizing investment performed well.

Optical line terminal sales grew 18%, while O&T sales declined 16% as we continue to focus on higher-value parts of the portfolio. Gross margin increased 240 basis points to 42.7%. This improvement was driven by 3 factors. First, we benefited from a higher scale as revenue increased; second, we continued to realize synergies from the Infinera acquisition; and third, we saw more favorable mix within fixed networks. The gross margin improvement was partially offset by growth investments we are making across optical networks and IP networks as we position ourselves to capture the long-term opportunity in AI infrastructure. And finally, operating margin increased 170 basis points to 8.1%. And turning to mobile infrastructure.

Net sales grew 7% in the quarter, Core Software grew 1%, Radio Networks 7% and Technology Standards increased 15%. And Technology Standards benefited from signing a few new agreements during the quarter and included some catch-up revenue recognition. Looking at the full year, we continue to expect Technology Standards to deliver a similar level of sales and profitability as in 2025. Gross margin was 49.3%, which was somewhat better than we expected entering the quarter. And the main driver was a higher contribution from software sales as some revenue were expected in quarter 3 ended up benefiting quarter 2 gross margin.

Looking ahead, because of the earlier software revenue phasing, we currently expect mobile infrastructure gross margin in quarter 3 to be closer to 44% to 46%, reflecting a lower software contribution before improving again in quarter 4, in line with normal seasonality, and operating profit was stable year-on-year. Looking at sales by customer segment. AI and Cloud was again the fastest-growing segment, with net sales increasing 105% year-on-year. Growth was broad-based across both optical and IP networks. Telecom sales increased 4%, while technology licensing grew 15%. And we remain optimistic about the long-term AI and Cloud opportunity and continue to see strong customer demand. At the same time, our expectations for the telecom market remain mostly unchanged.

Turning to restructuring and integration costs. First, we are on track to complete our 2023, 2026 restructuring program this year and achieved EUR 1.2 billion in gross cost savings. The second area is the integration of our Chinese operations into Nokia's global operating model after taking full ownership at the end of 2025. As we discussed previously, we continue to adjust our operating structure to reflect market conditions and improve competitiveness. As a reminder, this program was expected to achieve EUR 200 million in cost synergies with onetime charges of between EUR 350 million and EUR 400 million over 2- to 3-year period.

We now expect to recognize approximately EUR 350 million of the planned onetime charges by the end of 2026 as we accelerated the integration to complete it within 2 years. And the third area is a set of new efficiency progress, mainly impacting Europe. These programs are expected to lead to restructuring charges of EUR 200 million in 2026. These actions are focused on simplifying the organization, improving productivity, and ensuring resources are aligned with our strategic priorities. Overall, we expect restructuring charges of approximately EUR 800 million in 2026. Then let's go to cash. With respect to cash flow, the quarter followed the normal seasonality we typically see in quarter 2.

The largest impact was the payment of annual employee incentives related to 2025 performance. We also saw some working capital buildup during the quarter reflecting the continued growth of the business. Despite these seasonal factors, our overall cash generation profile remains unchanged. Considering some of the increased restructuring costs and as we make some investments in working capital to prepare for growth, we now expect to track towards the low end of our free cash flow conversion assumption of 55% to 75%. And finally, turning to our outlook. There is no operational change to our comparable operating profit guidance. The only adjustment is the technical change resulting from the move of fixed-line access and enterprise campus edge into discontinued operations.

And we continue to track somewhat above the midpoint of our operating profit range. Looking at quarter 3, specifically, we currently assume a sequential increase in net sales of between 3% and 7%. For operating profit, we currently expect a result broadly similar to quarter 2 due to the phasing of software sales in mobile infrastructure between quarter 2 and quarter 3, followed by a meaningful improvement in quarter 4. And this is a combination of the normal seasonality we see in our telco business and the contribution from year-on-year growth in AI and cloud sales. Aside from the discontinued operations adjustment, our outlook assumptions remain largely unchanged.

The demand environment remains supportive, and we allocate capital where we see the strongest opportunities for long-term growth while maintaining discipline on profitability and cash generation.

David Mulholland: Thank you, Justin and Marco. As usual, for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to one question and a brief follow-up. Operator, could you please give the instructions?

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

David Mulholland: Thanks, Anny. We'll take our first question today from Terence Tsui from Morgan Stanley.

Terence Tsui: I hope you can hear me okay. I had a question around capacity and particularly around the 4 new DSPs planned by the end of 2027. So this is actually a big ramp-up compared to the previous run rate. Can you give us some milestones to lookout for and reassurance that this could be achieved?

Justin Hotard: Sure, Terence. I mean, I think, first of all, we talked about these going into customer trial in '27 and then become commercially available towards the end of '27. I think the thing I would just emphasize and remind you of on this is that Nokia and Infinera, previously were each building two DSPs individually. So collectively, a total of four DSPs. One of the decisions we made, and I've talked about this a bit as we saw the growth opportunity emerging in optical was to maintain the DSP team as is versus reducing them.

And the reason we did that was we felt quite strongly in spending time with our customers that we could actually deliver more differentiated products to them with four unique DSPs versus the traditional two that we had been delivering in each company independently. And that laid out and supported the road map that we launched at OFC in March, and I touched on that a bit in last quarter's call.

So the view here is that we think this gives us better market coverage aligned to where the market is evolving, specifically given the amount of investment we're seeing across the different layers of optical fabric from the scale across fabric to what we see in data center interconnect to metro network to long-haul transport. So across all of that, we've got -- we think we have a much better portfolio in 2027 to address each of the unique evolving solutions than we would have had if we had only kept two versions.

David Mulholland: Do you have a follow-up, Terence?

Terence Tsui: A real quick follow-up on the comments around the order book potentially being lumpy. Do you still expect like an upward to try over the longer term from these levels, albeit it would come along the way?

Justin Hotard: Yes. Look, I think two things about this quarter -- this quarter's order book. I mean obviously, if you do the book-to-bill on this, it's a significant jump up. So I think for me, that's a data point around a little bit of lumpiness, but the other is the elongation of the orders, which we've been talking about expecting and we're seeing here. So I think we have to look at it in both those dimensions. And -- the way I think about orders is I think about orders in a period of time, right?

Because it's easy to give you a headline number and then say, well, the next question is, is that over quarter period, a 4-quarter period, an 8-quarter, 12-quarter, et cetera. And so for me, that's really where we're focused, is not necessarily on. Are we getting big order pops consistently, but rather are we seeing the order momentum grow as we look at it over a time period. And right now, what we're seeing is continued growth and continued demand in the market. And as I said in my comments is still largely driven by AI and cloud, particularly around scale across and data center interconnect. And then we're starting to see some emerging growth.

We saw some of it in sales this year in our telco customer base. And we believe that's also tied to AI demand.

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

Simon Leopold: Can you hear me now, David?

David Mulholland: Yes, go ahead, Simon.

Simon Leopold: Okay. Great. Great. I didn't expect that button to pop up, sorry. I wanted to see if you could rank order and characterize supply chain risk. And I'm thinking about issues like memory printed circuit boards and even indium phosphide wafers. Maybe a particular focus on that latter one, the wafers given the factory expansion, whether or not you can get the material? And then I've got a quick follow-up after.

Justin Hotard: Sure. Look, I think the most -- if I think about the supply chain risks or the time that we're spending in this, first of all, as you rightly point out, it's broad-based, right? So I think we talk a lot about memory. And memory is significant just given the amount of demand that is in the market. I think this has been talked about quite a bit across multiple companies and multiple parts of this ecosystem. So there's clearly constraints there. And then obviously, the pricing -- the significant change in pricing driven by that shortage which, again, has been talked about very broadly across the tech ecosystem. So that's probably the one that we see as most significant.

Now we talked about this last quarter. I think I don't need to repeat what I said last quarter, but maybe briefly. Our focus is on securing supply, simplifying our designs, looking at where we can reduce scope wherever possible on our designs. And of course, then passing that on to customers. And I think -- if you look at what we said last quarter, there were some companies with us last quarter. It seems like more companies have joined us in some of the more recent earnings call now making that same comment. The key thing for me here is also really talking to our customers, not the AI and cloud customers, they understand this well.

But really making sure our telco, our mission-critical customers understand that we have elongated lead times, which means better visibility, better planning, and something that we need to team with them on. So particularly important in that regard. And then as you touch on, there's a broad base across the board. On the indium phosphide question you asked, Simon, the comment I'll make is this new fab is really looking at -- is looking at coming online probably earliest in '29. And if you think about our capacity, we've got significant jump up with San Jose coming, call it, '27 as it ramps volume, right, manufacturing later this year or volume manufacturing later this year.

So '27, it ramps, then we kind of line up for a '29 ramp in incremental capacity. As you know, that's kind of the time lines that you have to take with these investments. And I think as we're looking at it, we're looking out at different solutions to get indium phosphide capacity at that time. That's obviously an industry issue, though, it's something that all of us in the industry need to enable, and it's something that I think collectively, we need to solve even across the ecosystem.

David Mulholland: Simon, do you have a follow-up?

Simon Leopold: Yes. I wanted to see if maybe you could offer us your view on the scale across market and your ambitions -- Nokia's ambitions for this particular application considering optical and IP routing?

Justin Hotard: Yes. Yes, absolutely. I mean I think, first of all, Simon, I think there's a lot of I'm going to be a little technical, but scale across is technically was talking about data centers within a given campus area that were strung together as an AI factory. And one of the things I talked about last -- on the last call was the demand we're seeing in data center interconnect. So my point in saying that is some of what we're seeing is just increased data center interconnect. Now you can call it scale across or some folks may want to label it one way or another. To me, they're very different. They're complementary and very important applications.

Because one is back-end connectivity, which is providing connectivity to expand the back end for scale out, which is the scale of cost fabric. The other is data center interconnect providing higher bandwidth between data centers over a long haul on the front end. Both of those have a routing element. Obviously, the data center interconnect has a very significant demand growth in routing. And if you look at our opportunity and why we're talking about growth and in both IP and optical, it's because we're seeing growth in both of those elements. So they are complementary they are reinforcing. The other thing I'll say is, it's not limited to that.

We are seeing some traction in back -- in some of the back-end switching. It's on a limited basis, obviously, without getting into all the market dynamics there. But all of this is encouraging in terms of our focus in this area and the traction we're starting to make.

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

Sami Sarkamies: My question would be on your supply capability in optical networks. Are you fully constrained? Or have you been able to build any inventory during the first half of the year?

Justin Hotard: Yes. I would say, Sami, it's a good question. There are always pockets think of legacy products and those areas where we probably have some supply. But in general, I would think of us as being constrained, right? When we talk about lead times elongating it's because we're seeing constraints and particularly on the leading edge products. And by the way, I don't think we're unique in that. I think that's -- if you look at our ecosystem, again, I think you see the constraints and you see that across the component suppliers or some of our peers, et cetera. So obviously, we're working aggressively on that and maximizing the supply.

But as I've said as well, if you look at our forecast, what we've included in our forecast is the demand that we have line of sight to shipping and we recognize even that has some risk because that assumes continuity of supply, no disruptions. Everything goes perfectly. So when we're thinking about this, we're thinking about it from a constraint perspective, aligned to what we have line of sight to in supply. But absolutely, if there was more supply, I think we'd probably generate more revenue.

David Mulholland: Did you have a follow-up, Sami?

Sami Sarkamies: Yes. Regarding radio networks, just curious, do you think you are currently gaining share? You had a 5% organic growth in the first half of the year I think that's a bit more than your main European rival is having or is it just like timing?

Justin Hotard: Yes. My view on this, Sami, is it's timing. We talked about -- actually, Marco talked about the timing around the software revenue recognition we had in Q2, which is tied to our radio software platforms. So I would call this timing. I also think looking at market share on a quarterly basis in this industry is super challenging to get any kind of good signal. I think you have to look at it certainly on an annual basis.

David Mulholland: Let's take our next question from Alex Duval from Goldman Sachs.

Alexander Duval: You talked about further progress in AI RAN. I wondered if you could talk a bit about the time line this benefiting Nokia in terms of revenue and competitive position, and what your discussions with telco are suggesting in that area? And secondly, back to the AI side, I wondered if you could give an update on switching and the progress you make there? Could you help us understand the latest thoughts on switching design-ins and when we should expect orders and revenue momentum given the progress you're delivering?

Justin Hotard: Let me answer the second one first. In terms of the switching design wins, we talked about this a little bit last quarter. We said we expect -- we expected orders this year. We saw a lot of those orders come in Q2. Obviously, as you know, in the design win process, you start small, you get traction and then you build on top of that as you validate and execute for performance. So we're continuing to drive that across a number of customers. Obviously, we're pleased with the progress we had in Q2. And then can you just repeat your first question?

Alexander Duval: Yes, absolutely, Justin. It was just -- you had mentioned further progress on AI RAN. I'm just curious how you think about the customer feedback and the time lines for that impacting your revenues?

Justin Hotard: Yes. I mean, look, I think basically, Alex, everything is consistent with what we've said. Pilots at the end of '26 commercially available in '27. Obviously, we'd anticipate more significant volume going into '28, and that continues to be our expectation in terms of AI RAN.

David Mulholland: We'll take our next question from Ulrich Rathe from Bernstein.

Ulrich Rathe: Sorry, take some time for the button to appear here. Apologies. So I wanted to come back to the very strong AI cloud order intake, put it into perspective already with regards to the longer the elongation of the order book, as you call it. I was wondering in supply-constrained markets, we often do see double ordering, which does create a full signal for suppliers such as Nokia. How do you see this risk? Are there any specific reasons why this would be an unlikely factor for Nokia?

Justin Hotard: Yes. Look, I think, first of all -- if you think about the customers -- the level of sophistication and the customers that are placing these orders, we get to step back and ask what the incentive is for double ordering. I've absolutely seen this much like you in supply-constrained markets that I've worked in, in the past, and it's particularly prevalent in markets where you're focused on enterprise customers where you've got channels because the customers tend to diversify and look for allocation.

But in this environment, the thing that I would flag is for one of these customers to come in and say, I'm going to double order with you when ultimately that goes back to supply of leading-edge silicon manufacturing capacity on optical components that the -- they can actively inspect and we transparently share the progress. The question for them would be what does it do in terms of incentives. The other thing I would say is we're -- obviously, as we're making commitments on a longer-term basis, we're expecting those commitments from customers as well.

Ulrich Rathe: That's helpful. If I may follow up with one clarification. What would you call a normal length for an order book? Is that essentially 100% of the orders within the next 12 months? Because you highlighted sort of the difference with half of the revenues, is 12 months for 100% "normal" here or not?

Justin Hotard: Yes. Ulrich, that's a good question. So I think typically, we have seen orders within 12 months in our customer base. Now again, there's two factors to this. Obviously, one is the growing demand is the fact that AI and cloud is a new segment for us, right? So I would say we've had less exposure to this, obviously, seasonally less exposure to this in the past. And then the second thing is obviously the supply constraint. So I think both of those are factors.

But if you think about our traditional business with telco customer -- heavily concentrated with telco customers and then obviously some in mission-critical those orders, we may get -- win a contract award, but we would not -- we would see orders typically within 12 months, and that's really the shift. And -- that's why when I talk about the -- our telco customer base, one of the conversations we're having with those customers is getting more visibility going forward because they're also used to giving us fairly short term within 12 months visibility, and we need to be planning even further.

And so this is something that we're -- with all of our sales teams having this conversation to make sure that we're getting better visibility, not because it implies a commitment, but because the risks given the supply constraints in the industry are. We don't want to miss any of their deliveries while we continue to support them given their importance to us as well as customers.

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

Jakob Bluestone: You're obviously ramping up in terms of AI and cloud revenues. I guess we're not yet seeing it in terms of margins. And I guess my question is just when -- and I appreciate that's obviously, as these businesses scale, margins will go up. And particularly on the IP side, you're just sort of starting to scale now. But just be interested how long do you think it actually takes before these revenues become materially accretive?

Justin Hotard: Yes. I think two things, Jacob. So one is gross margin and then the other is operating leverage, right? And as we talked about in Capital Markets Day, we -- we're doing a lot of work at the front end of the 3-year period to really set the company up to become more efficient, more nimble, more scalable and get the operating leverage as we drive growth in the business. So that's a key focus. And we talked about that by nature, that would be a little bit back-end loaded. Now like I said, I'm very pleased with the progress we're making.

And obviously, with the demand accelerating higher than what we said at Capital Markets Day, we've got optimism on progress there that will continue to improve. On the other side, on the gross margin side, this is an area where I think we're dealing with just a lot of complexity in the mix. And this is a little bit of supply chain. This is also us -- we talked about the focus we're making in FN on exiting low-margin business. So some of those things are just playing through in the business, and you're not quite seeing a drop to the bottom line yet. But obviously, we're very clear on what we're anticipating.

And based on the assumptions we shared at Capital Markets Day, and the progress that we're making ahead of those in terms of revenue growth.

Jakob Bluestone: Very clear. And if I can just ask a quick follow-up. Just -- I mean, you mentioned you've got several customers coming in on the IP side, I think you said. And I'd just be interested in understanding just sort of the level of concentration of that customer mix. I mean, would you say you're well represented across the different hyperscaler customers or would you say still a relatively narrow segment?

Justin Hotard: Yes, I think we've talked about this a little bit before. It's fairly concentrated today. But that's the way you build the business, right? And so I think we've got very good partnerships and relationships across many of the AI and cloud players, the hyperscalers. The focus right now is obviously on making sure where we do have demand that we're delivering it and we're continuing to innovate for those customers and then over time, obviously, expanding that footprint.

David Mulholland: We'll take our next question from Oliver Wong from Bank of America.

Oliver Wong: My first question is in terms of the EUR 2.8 billion AI orders in the quarter, I understand that a significant portion pertains to some of your significant design wins in data center switches from last quarter. So I think it will be helpful if you could maybe try to quantify or guide us a little bit on kind of how much of the order or the total AI orders this quarter that kind of comprised just so that we can have a better sense of underlying optical related demand in the quarter?

Justin Hotard: Yes. I mean I think I would say it was -- it was driven by optical and IP weighted towards optical, and that's probably not a surprise given the momentum we're seeing right now in that market.

Oliver Wong: Got it. And a quick follow-up. In terms of within optical, you mentioned you discussed briefly about sort of skilled cross versus regular DCI. I was just wondering what the composition of demand is right now between the two?

Justin Hotard: Yes. I don't think we're breaking that out right now. I just would highlight that I think there's a significant amount of demand in DCI as well as scale across. And I think that gets -- I think the two kind of get either pushed together or maybe the DCI piece gets underappreciated. But that's certainly where for us, we're seeing traction on both.

David Mulholland: Our next question is from Richard Kramer from Arete.

Richard Kramer: Justin, my first question for you is on the AI RAN transition, your customer installed base runs on Nokia proprietary silicon. Do you see the industry long term shifting away from that proprietary silicon-based set of solutions? And what are the implications for what is a EUR 3 billion run rate of mobile R&D? And what will Networks margins for that transition?

Justin Hotard: Richard, so a couple of things on this. First of all, I've talked about this pretty openly. I think we're at a point where the industry has to transition. I think we look at what we see on AI RAN and the spectral efficiency, by the way, we'll have special efficiency on our existing hardware. We'll have some improvements in software. But there'll be an order of magnitude below what we're talking about on AI RAN. But the second thing here is that when you look at leading-edge silicon, you do the math on the cost of leading-edge silicon.

And then, by the way, the supply constraints on leading-edge silicon, in my mind, this is a very clear industry shift that has to happen on the baseband, and that is a shift to general purpose silicon. And of course, we're partnered with NVIDIA in launching the AI RAN solution. There are other players out there with general purpose-based solutions that are delivering virtualized RAN stacks. So I don't think we're alone in this move. Fundamentally, as we think about the R&D in this space, this is the other thing I've touched on. When you look at this industry, there's two fundamental challenges and certainly from 4G and 5G.

One of them is that the cost of capital, the return on invested capital in -- at an operator level in aggregate hasn't delivered, right, in terms of the investment, certainly looking at 5G, but also 4G. If you look at it from a supplier perspective, a technology provider like us, it also hasn't been acceptable on our side. And so I think we also have to look at how we shift investment and generate a better return on invested capital. Getting out of purpose silicon on the baseband is a step in that direction. And that's why we said that's the long-term direction. I think it's incredibly compelling when you can also say to customer.

By the way, look at the better efficiency you can get on your hardware, which means you're going to get a better return on that hardware investment. And then the last thing we're saying is, by the way, when we deliver the hardware, that's not the best performance you're going to get. We'll continue to provide performance enhancements. As an industry, we've always added features, but the fact that we're now adding performance capabilities in our software stack, we think is a huge advantage. And the final point I'll make is, as we've talked about in the software stack, this is a single software stack.

So we've got capabilities to optimize it for different hardware, including our legacy stack and of course, the NVIDIA GPUs that are now making -- they're now coming into our portfolio on the AI RAN platform, but it's a single software stack. So we're getting a tremendous amount of leverage out of that stack. So this is right on that path.

Richard Kramer: Okay. And then a quick follow-up for Marco, if I may. Your comments about being above the midpoint of your full year profit guidance, but having flattish profits in third quarter suggests you're going to more than double profits in Q4. Can you talk through the drivers of that, be it software revenue recognition, licensing, product deliveries, cost reductions, especially given the cash outflows for restructuring CapEx, working capital, et cetera, that we're seeing now and can expect in second half?

Marco Wiren: Yes. Thank you. I would say that if you look the normal seasonality that the industry has, specifically on a telecom customer base side is usually very Q4 delivery heavy. And that's why we've seen in the past years as well that, that part of the industry usually generates the biggest profits and sales as well in quarter 4. And now in addition, then we see also increase in AI and cloud customer base that is also impacting the seasonality of our operations and also profit generation. What comes to restructuring that we -- the program that we announced in '23 -- end of '23, that we will end in end of this year.

And we expect that we will get those EUR 1.2 billion accumulated gross cost savings, just like we said as well. and nation that we expect to actually accelerate the synergy program that I mentioned earlier, when it comes to the China company that we took over 100%. And then also, we had some additional voluntary based cost savings restructuring also in Europe and those we will take this year as well. But altogether, if you look at our cash position, we have a very strong position. Now we had EUR 2.8 billion net cash end of quarter 2. We had some inventory and working capital increase in quarter 2 to secure also deliveries going forward.

And then, of course, we can't recipes follow normal sales pattern as well. But we believe also by the end of the year, we have very good financial position and cash position. So I don't see any issues there.

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

Sandeep Deshpande: I want to understand from your order book in on cloud in the quarter [Technical Difficulty]

David Mulholland: Sandeep, we're really struggling to hear you, Sandeep.

Sandeep Deshpande: Do you hear me? Can you hear me better now?

David Mulholland: That's a little better.

Sandeep Deshpande: Yes. So you now strong in cloud in the quarter. How much -- I mean, last quarter, you had said that the EUR 1 billion of orders, what an ongoing order intake, even though you will have lumpiness in your orders, how much of this EUR 2.8 billion is an ongoing order in equity you characterized? And then secondly, regarding AI and cloud, how should we be looking at a run rate on revenue in this business between optical and IP route?

Justin Hotard: Sure. So on the first one, I think we've broken it out for you that what we saw in next 12 months and forward. And I'm not going to break it out any further in terms of -- or try to estimate that for you. But it gives -- that should give you a good view on what's in the coming 4 quarters and what's beyond that. And then in terms of the mix, I think I touched on this. I mean, optical is growing a little bit faster this quarter than IP. But of course, it's starting from a healthier -- just a stronger position.

IP were just as we said, we're just starting to ramp in design wins and deliver those. We talked about that last quarter. So I'm pleased with the momentum. And I think if you look at it from the other side, which is 100% year-over-year growth, I think we're set up for a very good continued growth forecast from the AI and cloud segment.

David Mulholland: We'll take our next question from Sébastien Sztabowicz from Kepler Cheuvreux.

Sébastien Sztabowicz: On Iran coming back, have you seen a specific commercial traction over the past few months? I view being added any new customers trailing your solution. And you are targeting twice more spectral efficiency by 2028. What about the total cost of ownership of the solution? And next to the baseband, do you plan to partner with NVIDIA on GPU for radios? Or it will be mostly focused on the baseband?

Justin Hotard: Okay. So three questions. Let me hit them. First of all, I'll start actually with the last one. So the announcement that we made last week was around AI RAN for baseband and the NVIDIA GPU solution going into our AirScale platform, a future stand-alone platform and also having a Cloud RAN coming off-the-shelf server solution. So that's the current announcement. In terms of the spectral efficiency in TCO, as you probably know, that's a -- that TCO ends up being a very customer-specific discussion. But at the macro level, hardware deployment with 100% spectral efficiency improvement. I think the math there speaks for itself in terms of the value creation potential for the operator.

And the other key thing is that the software -- this is a software model. So the benefit for the operator is not just TCO, but it's also a CapEx to OpEx transition in terms of ongoing benefit without having to have hardware upgrades. So I think there's a tremendous amount of value when you look at it from a life cycle standpoint. And then in terms of the pilot deployments, we've got -- we've announced 10 public customers on track for later this year. There's many conversations going on about this. We expect to start the deployment of the pilots later this year. Obviously, we expect that will continue into '27.

And obviously, as we make progress and we continue to share the progress publicly as we can on the progress we're making, the capabilities we're delivering. But it's more than just spectral efficiency. It's also a platform that's extensible and we talked about this a little bit. It's a bit technical, but you can add -- you can actually put your own applications and services in at the radio layer. And this allows some new capabilities, which we think are going to be pretty attractive to a number of operators, things like sensing and other applications.

David Mulholland: We'll take our next question from Rob Sanders from Deutsche Bank.

Robert Sanders: First question would just be about the indium phosphide fab ramp. Do you have line of sight to hitting best-in-class 6-inch yields next year? Clearly, Coherent is already doing pretty well. Lumentum seems a bit behind. So where do you stand on that? And the second question would just be around AI RAN. If you look at the top three U.S. operators, how many do you think internally have already gone past the go no-go decision on whether to deploy AI RAN?

Justin Hotard: Okay. Got it. Rob, thanks. So I think obviously, we have one operator today in the U.S., Mr. I'll come back to indium phosphide. We have one operator in the U.S. that's got our RAN deployed at scale. That's T-Mobile. They announced that they're going to be our lead partner on the pilot. So obviously, we're working closely with them. I would assume that, that would lead us to conclude that they're probably not past the GoTo deployment path. On the others, I think it's a discussion that obviously we'll leave for them to assess.

But my view here is that the GPU performance is compelling, and it's particularly compelling in a business case where spectral efficiency matters, which is going to be more dense operations. But that's obviously -- they've got road maps and strategies is probably better to ask them than ask me. And then on the indium phosphide ramp, what I would say is we've got yield targets that we focused on both yield and volume targets we focused on through 2027 on the fab. My view is while we're -- you rightly said, well, the ecosystem is maturing, and it's not just the two you mentioned, but also the Chinese manufacturers in this space.

I also believe this is a place where we're going to go through a significant amount of maturity and learning as we scale -- and scale yield, and that's what I'm focused on with the team versus a specific target or a competitor reach. I think there's actually -- I think this is more about us learning and scaling and making sure we can deliver on our volume plans and obviously, our cost point.

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

Artem Beletski: Relating to A&I, could you maybe comment what type of order intake development you actually see outside of AI and cloud, so namely telcos and mission-critical. So how we should think about the revenue growth trajectory on this front looking at this year and also next year?

Marco Wiren: Yes. Thank you, Artem. Just like we mentioned earlier as well that we had a good order intake development and sales development in also non-cloud customer base. So telcos, we're investing more. And this is also driving because of their need to invest in their network to secure that they can deliver the demand that is coming from cloud and AI in general development. And most likely, this will happen broadly -- more broadly going forward as well because we believe that AI demand will continue -- the underlying demand will continue for a longer period of time. And without very good secure networks, it is very difficult to provide those improvements that AI is actually providing.

I don't know if you have something you want to add?

Justin Hotard: Yes. I would say -- the only thing I would say, Artem, is if you looked at NI specifically, the only headwind, which we talked about last quarter is obviously on the customer premise equipment side of fixed networks where we're getting much more disciplined on margin, that creates a bit of a headwind when you look at NI as a whole. Underneath that is the momentum that Marco talked about in IP and optical. And also, healthy -- obviously, a healthy growth in optical line terminals as well, which is the network side of the fixed networks business.

David Mulholland: We'll squeeze one last question in from Felix Henriksson from Nordea.

Felix Henriksson: Can you hear me now?

David Mulholland: Yes, go ahead.

Felix Henriksson: Perfect. So in the report, you say that the IP Networks product mix had an adverse impact on the NI gross margin. Was there something specific to the quarter? Or does this sort of imply that the margin profile in data gene switching products at this scale is sort of dilutive to your gross margins?

Justin Hotard: Yes. I think this is largely tied to what we said at the CMD. We'd see some gross margin headwinds as we ramp products in this space, and this is what we're seeing. What I'm focused on is it's -- the business is fundamentally accretive to gross profit and ultimately to our operating margins. And then as we talked about earlier in one of the -- answering one of the questions, making sure we're streamlining the company and driving efficiencies so that we unlock operating leverage. And that's our focus. I mean, obviously, we've got to show that, but when I think about where Marco and I are focused, we're very focused on that side right now.

And I think you'll see the margin as we mature in the space continue to improve.

David Mulholland: Ladies and gentlemen, that concludes today's call. I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may, therefore, differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Thank you for joining us today.