Nokia Corporation (NOK) Management Presents at Deutsche Bank 2020 Virtual Technology Conference (Transcript)

john rambo

Nokia Corporation (NYSE:NOK) Deutsche Bank 2020 Virtual Technology Conference Call September 14, 2020 10:45 AM ET Company Participants Bhaskar Gorti – President, Nokia Software and Chief Digital Officer Tom Bevilacqua – Investor Relations Conference Call Participants Rob Sanders – Deutsche Bank Rob Sanders Hello. Good morning. I am Rob Sanders, […]

Nokia Corporation (NYSE:NOK) Deutsche Bank 2020 Virtual Technology Conference Call September 14, 2020 10:45 AM ET

Company Participants

Bhaskar Gorti – President, Nokia Software and Chief Digital Officer

Tom Bevilacqua – Investor Relations

Conference Call Participants

Rob Sanders – Deutsche Bank

Rob Sanders

Hello. Good morning. I am Rob Sanders, Head of Tech Hardware in Europe at Deutsche Bank. I am delighted to welcome our speaker today, Bhaskar Gorti, the President of Nokia Software and Chief Digital Officer. Also joining us is Tom Bevilacqua, Investor Relations also at Nokia. The format today of this session is going to be a Q&A, but of course, please do write-in with your questions as we go along. We will be happy to take those questions as we go along, but well, let me just welcome you Bhaskar and maybe as part of your response, maybe you could just start by explaining your role at Nokia and a bit about your background.

Bhaskar Gorti

Sure. Good morning, and good afternoon, everyone, and thank you, Rob. So as Rob said, I’m Bhaskar Gorti. I’m based in San Jose, California. And my role at Nokia is, I’m the President of the Nokia Software business, which is reported now for the last six quarters as an independent segment. Also, I am the Chief Digital Officer, where Nokia is my own customer where I manage the IT and the digitalization of Nokia to serve our customers. My background, I’ve been in the valley for a couple of decades, primarily from the software industry. I’ve been in the telecom software for the last 15-plus years. And prior to this, I was with another large software house for a decade building the software business there. And I also have had the opportunity to work for small emerging companies. So that’s my background, Rob and the team.

Question-and-Answer Session

Q – Rob Sanders

That’s great. And so you mentioned Nokia Software as a separate reportable unit segment unlike your peers. I mean, I’d be interested to sort of know what was the reasoning behind moving to a separate reporting, but also for those that are not experts, maybe you can just explain what types of software do you sell and how it is that – what you do is different is — how is that different to – how is the software that you do different to the software or potentially adjacent to the software that you find alongside radio hardware?

Bhaskar Gorti

Sure. So if you look at Nokia, we are primarily in networks business, which is our mobile access, fixed access, IP routing and optical. So, we provide that as our networks business. Then we, of course, have our Nokia technology and patent licensing and in my business as a Nokia stand-alone software business. And we’ve been building the stand-alone business for now a little over 5 years. So, if you look at the telecom market, outside of the access infrastructure, there is a large market, which is defined as telecom software market. And what are the things that go into it, digital infrastructure, network automation and orchestration, automated assurance, monetization and charging platforms, service design and orchestration, customer engagement, CRM and also artificial intelligence and analytics. So that’s the telecom software market. And this market, from the very beginning, we wanted to be very clear is why we use the term stand-alone is that we want to be able to build software that can run on any kind of access, whether it’s fixed, or mobile or optics or routing. That’s number one. Number two, it also has to support standards and products of access from any network vendor. Be, it Nokia, obviously, or any other company who’s in the telecom access market. So to do that, we needed to – we decided that it needs to be an independent unit, built ground up with software skills and build a platform that can support any kind of access and then any kind of network, and in the last 2 to 3 years, if any kind of cloud. So that’s the whole rationale behind Nokia Software. Yes, there is software written in lots of parts of our networks business also, but that software is written primarily to drive our access business, whether it’s a radio or routing or optics or fixed broadband, but those – that software elements written is to drive that specific access portfolio. What we do is on top of that, once you deploy the access, how do you create a digital infrastructure and provide services and monetize an experience to your customer base, be it consumer or be it enterprise.

Rob Sanders

Got it. And I know in Nokia has actually recently been ranked number one in telecom software. But it does seem like the market is very fragmented. I was just wondering, maybe that’s because maybe vendors are not particularly committed to open standards or is it just because there’s not a kind of suite approach, it’s all kind of best-of-breed. I mean I’d love to get some more color around that?

Bhaskar Gorti

Sure. I think it is – so first of all, unlike the access business where you know exactly the number of base stations, you know the exact number of ports, the software business and the access business is largely the market has half a dozen or more vendors. And it’s a very standards based, 3GPP standards-based or IP standards-based market so you would have 6 to 8 players and about 3 to 4 with scale.

And that would pretty much serve, I would say, the total market size. But as when you come to software, it is a large market. The overall telecom software is about $60-plus billion in size. And it is served by a few large players like us, and it’s also served by a lot of small point product companies. And the third, it’s also served a lot of times, things are done in-house by bringing tools and platforms and build solutions in-house. So it’s – I would say it’s not a fragmented market as such, but it’s a market that has 3 of these big dynamics, big software companies and companies like us, then you have a lot of point products. And then you have custom build software that’s run in some of the operators. So that’s the market. And you are right, we, in ‘17, were ranked #1 from a product point of view. In 2018, we have been ranked number one. And I guess, every year, they announced the previous year market shares. So, we have been – for the last announced market share data, we are number one in the market from a software and software-related services point of view. And if you look at the market, I would say about 50% of the market is with large players. And then the remaining 50% is emerging and fragmented.

Rob Sanders

Got it. And when you compete, I’m just thinking of the more sort of advanced operators like AT&T, I just think about, when they did, for example, the own app project, it seemed like they tried to encourage fragmentation in the sense that they could say, “okay, here are these 16 network functions, you can only compete for 4, so take your pick.” So that seems to have been a strategy from the operators. But is there a particular area like orchestration or something that you think is kind of a way into really cross-selling from one point to another or is there a trend towards more suite approaches, for example?

Bhaskar Gorti

Yes. So I think the way I look at it, we’ve been very closely involved with AT&T and other operators who have these initiatives, whether it’s own app or there have been quite a few of these, we don’t see that as an intention to fragment. We see that as an intention to go away from customized monolithic black boxes, okay? We see that in terms of – so that has been a benefit for us, those kinds of initiatives is you are going to build specific segment products that are built on open standards, and then that can plug-in with either an existing product that an operator would have or it would plug-in with another company. So I think we see this as – we have a three-pronged strategy. We have products that we build, think of it like puzzle pieces. So we build individual puzzle pieces of the telecom software segment, and we sell them. We also integrate from an engineering point of view our puzzle piece is to create what we call an engineered suite of products. And then we also provide work with third parties and partner ecosystems. For example, in telecom software, a key segment is customer relationship management. With – this is where we, 5 years ago, decided, unlike some of our competitors that we will focus on what we do best and partner with industry leader on CRM. So we have a native engineered product with Salesforce and we are available on App Exchange as an example. So that’s an example of where we are engineering a solution with a partner. And then in terms of the segment, there are different layers. You have network automation and orchestration you think about it that as the baseline. And then if you go on top of that, you have monetization platforms, billing, charging, policy management, you have service delivery platforms that is how do you deliver the content and manage the content. How do you manage subscriber data. Then you have customer engagement where typically CRM and marketing plays into it. We do provide customer service. Then you have service design and orchestration, where it’s how do you take the order, how do you manage the order, how do you manage the inventory, how do you activate the service, and then how do you assure the service? And then on top of that, obviously, intelligence and analytics, so we provide network analytics and team up with companies, which provide business and customer analytics. And the most emerging market in the last 3, 4 years, is digital infrastructure, which is cloud NFVI or network functions and SDN.

Rob Sanders

Got it. And how much of the business be? I mean operators are notoriously, I mean, with a few exceptions, they are notoriously slow. Some of them are working off billing systems from 15 years ago, for example, today. How much of that market today is kind of legacy on, for example, specific hardware? And how much of the market is now hardware agnostic and truly open, what do you say?

Bhaskar Gorti

Yes. I think – I would say, today, in 2020, majority of it is no longer the old black box legacy systems. Yes, you may have that still in what I would call sun setting parts of your network, whether it’s 2G or 3G, as an example, in mobile. But in most of the 4G LTE, 5G business services, I think those are getting modernized over the last couple of years at a rapid pace. And of course, 5G, which is going to be hugely driven with network slicing and automation and new services beyond the traditional voice data and content will have to be done on the software layer. So I think the adoption is increasing at an alarming rate. Now if you think about a lot of systems, and we usually look at it. We have defined this, and we published it also. You have solutions that run what I call on bare metal, i.e., the hardware, everything is monolithic. I think the – I would say that’s a smaller piece now in the telecom software. A huge chunk of it is that software is now running on a virtualized environment. Now you may – so then you go into an x86, generic x86 server and storage, but it’s running on a VM environment. The second – the third step after that, many are doing is what we call cloud ready, where you are now moving from the – just the VM, and you are now moving into containers, micro services, starting to run on any cloud. And then the final one is cloud native, where it’s completely rewritten from scratch, micro services can learn on any infrastructure, whether it’s your private cloud, whether it’s any public cloud. So I would say it’s a – these are the 4 stages. And now I think a lot – pretty much every customer we have, the conversations are, how do I deploy cloud-native because I want the speed? I want to be able to bring innovation in weeks and months rather than in years. So like we have customers now in the past, they would upgrade once a year or once every 1.5 years. Now they are talking about a target goal of minimum upgrades and new features every 90 days.

Rob Sanders

Got it. And how does – I mean, when you think about the addressable market, do you have any idea of how fast this market can grow over the medium term and how much is 5G a driver of that growth as you think about it today?

Bhaskar Gorti

Yes. So if you think about – I mean, definitely, 5G is a growth factor. Industrial automation and enterprise digitization is another growth factor where 4G LTE is still a primary driver. And then I think here is where we are finding a lot of business and opportunity for us growing it 5G is definitely an accelerator. No doubt because that’s not so much the 5G standard so much, but it’s about the ability to start modernizing and using this as an opportunity to move away from bare metal black box systems into a lot more horizontal platform based approach to the market. So we are definitely seeing a lot of growth in our network automation, our orchestration products, our digital infrastructure, how do you design, how do you orchestrate? How do you create a network slice on demand, both create provision, monitor the usage, charge for it and then retire. So that’s what I would say. And then the second area, which, of course, these days, I think, has changed is the security and endpoint security has dramatically increased the need to start natively looking at how do you build a secure platform to start with and not have security as a bolt-on on top of it.

Rob Sanders

Got it. And just in terms of the engagement model with these operators, how much is to the sort of CTO organization and how much is to the CIO organization or is that partitioning kind of a bit redundant? How do services companies and consultants play a role in your go-to-market?

Bhaskar Gorti

Yes. So I think – I wouldn’t say it is redundant, but I see most modern operators and actually more and more and more, the network and IT are blurring now, because it’s no longer 2 separate organizations, one builds and throws it over the wall. I think in many places, even they have organizationally come together under one person. So the CTIO function is becoming a lot more important. Now, of course, there are IT parts of what I would say, ERP and HR systems, I am not talking about that. I am talking about your business support systems, your operational support systems, your customer service systems. That is getting closely connected. So – and this is where we like it, where we come from a Nokia Software and Nokia point of view is we can connect the network and the business as a glue. So I would say the CTIO function is definitely happening pretty much everywhere. I rarely come across now a customer where it is loosely coupled, it’s very tightly coupled, if not all the way under one organization. So – and then we are seeing a big need today as decision players from the Chief Customer Care Officer of the company. And also more and more, the side of the operator that’s focused on enterprise, enterprise customers beyond access, how do you provide private wireless, how do you provide network slicing, how do you move towards industrial automation? So I would – at this point, it’s 50-50 to a pure network function versus a pure IT organization. And the way we look at this, Rob, is it’s like a Venn diagram where you have on the network side, scale, performance, latency. So we have customers who use our products for hundreds of billions of subscribers. Okay. And it’s really standards based, I would say, 3GPP standards base. On the other side, you have pure software solutions or software companies that can provide flexibility, integration, customization, but they will lack in terms of 99.999% and latency and performance. So we – our aspiration, and we have delivered now solutions that sit in that intersection of those two. And then the third one, that last 3 years, we have been – we have made quite a few announcements and made it public. We have R&D collaboration and joint products with pretty much most of the private and public cloud companies in the market.

Rob Sanders

Yes. No, and I will come on to that. I mean, maybe just quickly, just to talk about the deal structure. I think our clients are familiar with SAP license deals and then moving to more of a recurring model. What portion today of the business is a kind of recurring model? Does that mean shorter – lower revenue in the short-term, but more stability? How advanced are we in that transition today?

Bhaskar Gorti

Sure. So, a couple of things. One, as Nokia Software, as I said, 5 years plus ago, we started building a cloud-native foundation. So we first focused a lot on our platform and foundation and products built on that. Now it’s almost 4, 5 years. So we are getting a momentum on that. The other thing we did 3 years ago, Rob, which was very important, which I have learned in my career from the past, is we need to have a very dedicated go-to-market and customer engagement model. So 3 years ago, myself and my team, we built a dedicated software sales organization, right, because the software sale is a very different motion, a business value, business benefit, integration. So we built a software sales force that directly reports to me, so we have that expertise, and we have hired these people from software industry in the market. So when you – and so our deal structures are – it’s a combination and it is transitioning, obviously, a large chunk of our business today in the telecom market is on-prem perpetual. We do about – a 1/3 of it is recurring, I would say, for our business today. And that is slowly moving to, I would say, in a 2-step process, depending on the sub-segment. One of the key things that’s moving is how do you move that onetime license plus professional services and annual maintenance and enhancements to what we call software subscription services. So we are doing a lot of those subscription services, SRS, we call it, or subscription deals, but the system is still on-prem, that will be that way, yes. The third new emerging area because especially unlike HR, unlike Salesforce or unlike some other functions, there is data residency rules, there are regulatory rules, there are latency rules. So the migration to a pure SaaS off-prem cloud is at early stages of the market, but it is picking up momentum very, very fast. So I would say, look at it in 3 buckets: perpetual and current way of doing things, where we do one-third of it is recurring. Things are moving rapidly to our subscription model, 3 years, 5 years and then a SaaS model. So yes, financially – but there will be some change in a quarterly profile, but we are looking at these 3 or 5-year deals or subscription or more. So I don’t see that as a huge difference. If there is anything, we want to accelerate that because that increases predictability, that ties us much, much closer to the success of the customer. So coming from the software world, doing subscription and SaaS is very familiar to us.

Rob Sanders

Great. And maybe I should just let listeners know that they can ask a question, please feel free. We have got a few, just before I take one of the questions on the web, maybe just talk about the competitive environment. I think U.S. investors will be familiar with Amdocs. They’ll be familiar with Ericsson. And there’s a lot of these startup type companies that have recently been swallowed up by some of the giants like Microsoft has just bought a couple of these big – small players, but for big ticket. So yes, I would love to get a feel for who you see and deal most commonly, does it vary by geography, etcetera?

Bhaskar Gorti

Yes. So I think we see our competitors in three categories. Definitely, we have what I would call companies that are coming from the network side, like an Ericsson or Huawei or other players.

Definitely, we see them. I think and where – how we differentiate with them is we make sure that our products not only run on our access element, but run on any of them, and we have an independent sales motion and a common software platform. So that’s how we differentiate with them. And in that big category, we also have players like, as you said, Amdocs or Netcracker from NEC or others. So they are in that play. So we definitely see them as a competitor. So that would be, I would say, big company competitors who would come in from a portfolio, a larger suite approach. Then we definitely see – and it’s a coopetition there, in some cases, a smaller segment where system integrators want to build custom things. And we are seeing that less and less these days, and we have a very strong partnership ecosystem with, name the top 5 or 6 system integrators in the world, we are doing projects with them everywhere. And then the third category, you rightfully brought up. There are a lot of emerging companies that have a single product or a single sub-segment. You referred to Microsoft’s acquisitions. There are quite a few of them. We do see them, absolutely. And we compete in all of these three categories. And that is one of the reasons, especially in the third category for us to compete and further distance ourselves from the large players was an attempt that we started 4, 5 years ago to build our cloud-native foundation and create a platform and then start rewriting new products on that. And that gives us a differentiation with I would say, the emerging players who have one product, they may have a few customers, there may be a departmental win, but they don’t have the scale to deploy and operate and run it. So we kind of – those are the three categories of players we see. We take every competitor very, very seriously. And therefore, being number one, we know everybody is chasing us. So, we are very conscious on how we can differentiate ourselves, both with our products, our services and engagement.

Rob Sanders

Got it. And I spoke to your CTO about this three months ago. I mean, how do you see Microsoft and other cloud guys? Are you – I mean, he would seem to think – your CTO said basically you could coexist and they would do the kind of smaller workloads, and you would still do the kind of heavy-duty workloads. I am thinking, particularly, for example, Open RAN, for example. And – but it does seem like the Tier 1 cloud guys are kind of waking up to the opportunities that 5G gives them as given the edge is becoming much more critical than it was. So, do you think you have been sort of coexist with these guys? Can you partner up? Is it kind of coopetition or do you think will sort of stay in separate verticals? I’m thinking Azure, for example, has an enormous presence with the Fortune 5000, I doubt Nokia will ever be able to kind of challenge?

Bhaskar Gorti

No, no. In fact, I mean, myself, and I am assuming you’re referring to Marcus Weldon our CTO, myself and my team almost 4-plus years ago, we have been very aggressively partnering with public cloud companies. In fact, quite a few of our applications today are generally available on, whether it’s an AWS stack or an Azure stack. So, we see these companies as partners. And yes, in any time when you have large companies, there will be some gray zone, but we see them actually accelerating the move towards what – cloud-native, any cloud. So, we run on AWS. We run on Azure. We run on Google Cloud. We natively support Red Hat, OpenStack, Linux environment. We run on VMware and with all of them. So we see that as more of a partner. Yes, maybe one example where a firm may have been bought by Microsoft. But I think when we look at our bigger partnership with them and the other cloud players, from a software point of view, we don’t see that to be threatening because we see that only as an accelerator. And it makes it easier for us to give you a very simple example we have built a common cloud platform that runs on any cloud. So, an operator can move workloads from in-house to tomorrow to a VMware cloud in-house or they can go to a public cloud. We don’t have to redevelop our product. So we – when we GA a product, we certify these platforms.

Rob Sanders

Got it. I will just take the first question we had in the queue from a Scandinavian client. I am just going to read it verbatim, if you forgive me, Bhaskar. Could you please elaborate on what kind of opportunities and threats Open RAN would bring in the operator software business? Would this open the market up to new competitors, for example?

Bhaskar Gorti

So if you follow the Open RAN, we have been – we were one of the only large companies that have been supporting and participating and driving and sharing some of the committees of vRAN and O-RAN for the last couple of years. So we see that as a natural evolution where people are going to start looking at how to decompose the RU, DU and CU and then different deployment models out there. So we don’t see that, as a threat, we see that as a natural evolution of things moving there. So we have been in that from the very beginning in terms of driving. And what we bring is not just the software standards, but also how do you deploy and scale these at massive? How do you provide an entire country coverage with O-RAN. So unlike some of the other large radio players, we have been a supporter, and we see this as an acceleration towards better economics for both sides and faster agility. So, we don’t see that. I mean, if you think about our most recent announcement today that we made that I think Rob, you saw it, about one of the operators in the U.S., DISH, they are going down a very novel approach towards access, and they wanted to make sure that they are, at the same time, being able to accelerate. So they picked Nokia as their entire 5G core, both our software and our services, so we coexist. We see that not as a threat, but as an accelerator and better economics on both sides.

Rob Sanders

No, no, I think that…

Bhaskar Gorti

We see that in Japan in Rakuten. I’ve been with them for quite some time. We see that over there. We see many operators in Europe now are pushing. And especially, I think what is the exciting part about it is as these networks will move towards serving industrial automation, enterprises to bring information technology and their operational technology together, I think that is where standards based, small footprint, quick deployment. Of course, there’s a whole spectrum issue that people have to address, but I don’t focus on, but we see this as something that will help the industry.

Rob Sanders

No. I think the DISH deal is a great proof point that came in today. Maybe you could just express a bit about stand-alone 5G and 5G core. I don’t know if you can size that business or anything. But obviously, it seems like operators are very keen to get away from non-stand-alone to get to stand-alone. I think there’s a lot of consumers have been – there’s a bit of a kind of – there’s a lot of unhappiness out there with some of the 5G service today, particularly in the U.S. But what are you seeing from operators in terms of appetite to move to stand-alone and really get harness these new services in industrial, for example?

Bhaskar Gorti

Yes. I think we are still at very early stages of 5G. Let’s just be very clear. I mean, every one of these generations of wireless networks have been a marathon. And we are still in the first few miles of this 5G marathon, okay? So, leaving aside the marketing towards the consumer, I think networks are getting rolled out. Services are getting rolled out. They’re getting fine-tuned. So, I think we’re still in the early stages. So, we see both models are going to be there in the early stages. But we – this particular announcement we did is about a stand-alone because in this particular case, it’s a Greenfield operator. But in some operators, they will have a hybrid approach. So we see we’re in the early stages of it. And then also on the enterprise side, you still don’t have to wait yet for the 5G. 4G, 5G LTE is a very rapid growing business. And so we – we’re at the early stages of it, I would say. I think with marketing, it leans forward. But we have live networks of 5G now all over the world and of course, North America, Asia. So I think that is already happening. And these services will get fine-tuned, and experience will get better and better beyond just more bandwidth.

Rob Sanders

Got it. Well, Bhaskar, I am afraid we have run out of time. Sorry that we couldn’t answer all the questions, but I really appreciate the time and thank you, Tom, as well and we will hopefully speak to all the investors soon and thanks a lot for joining.

Bhaskar Gorti

Thank you. Thank you, Rob, and thanks for the time. Thanks, everyone. Thank you.

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