Nokia Earnings Call: AI Bets Offset Margin Pressures

Nokia ((NOK)) has held its Q4 earnings call. Read on for the main highlights of the call.

Nokia Earnings Call Balances AI-Driven Upside With Near-Term Margin Strain

Nokia’s latest earnings call struck a tone of cautious optimism, as management highlighted modest top-line growth, strong momentum in high-value Network Infrastructure and AI & cloud segments, and a solid balance sheet, while openly flagging near-term margin pressure from heavy investment, acquisitions and restructuring. The company framed 2025–2026 as a transition period: short-term profitability is under strain from integration costs, product ramps and regional headwinds, but management argued that these moves are laying the foundation for stronger multi-year growth and margin expansion.

Steady Revenue Growth and Solid 2025 Profit Delivery

Nokia reported Q4 net sales of EUR 6.1 billion, up 3% year over year, capping 2025 full-year net sales at EUR 19.9 billion. Full-year operating profit reached EUR 2.0 billion, slightly above the midpoint of guidance, providing some reassurance that the company can navigate a complex demand environment while investing heavily for future growth. The numbers underscore a business that is not in hyper-growth mode but is steadily expanding, with profitability holding up reasonably well despite product and portfolio transitions.

Cash Generation Remains a Key Strength

The company delivered Q4 free cash flow of EUR 226 million and a full-year 2025 free cash flow conversion of 72%, squarely within the guided 50%–80% range. Nokia ended the quarter with net cash of EUR 3.4 billion, including a EUR 0.9 billion equity investment in NVIDIA, underpinning its ability to fund capex, acquisitions and restructuring. For investors, the strong net cash position and consistent cash conversion help buffer the earnings volatility expected from ongoing portfolio repositioning and integration programs.

Network Infrastructure and Optical Networks Drive Growth

Network Infrastructure was a clear bright spot, with net sales up 7% in Q4 and Optical Networks particularly strong at 17% growth. The segment’s book-to-bill was above 1, indicating demand is outpacing reported revenue and building a healthy backlog. Management tied much of this strength to AI and cloud-related demand, positioning Network Infrastructure as a core engine of Nokia’s medium-term growth story and a counterweight to softer mobile-related markets.

AI & Cloud Customers Becoming a Growth Engine

AI and cloud customers now represent a meaningful share of Nokia’s business, accounting for 16% of Q4 net sales and 30% of Optical Networks revenue. The company reported EUR 2.4 billion of orders from AI & cloud customers in 2025, illustrating that cloud service providers and AI data-center players are becoming central to the growth thesis. This diversification away from traditional telecom operators supports a structurally higher growth profile but also demands significant upfront investment in capacity and technology.

Optical Product Ramps Back the AI Narrative

Nokia’s 800G ZR and ZR+ pluggable optical products are now shipping, with initial field performance described as positive, and the company has secured multiple design wins and is supplying into scale deployments. The near-term focus is on ramping production, which is capital-intensive but critical to capturing the wave of AI and cloud network upgrades. Successful execution in this ramp will be important for translating the strong order book into sustained revenue and margin expansion.

IP Networking and Automation Push Into Data Centers

In IP networking, Nokia launched the 7220 IXR-H6 data center switching platform and introduced Agentic AI event-driven automation, which it claims can reduce network downtime by up to 96%. The company also secured a design win for its next-generation data center switching platform, signaling growing relevance in cloud-scale data centers. These advances indicate that Nokia aims to compete not just in transport, but also in the data-center fabric and automation layers that are critical to AI workloads.

Strategic Acquisitions and New Units Reshape the Portfolio

The completion of the Infinera acquisition is central to Nokia’s strategy to scale and deepen its optical capabilities, particularly for AI and cloud traffic. At the same time, the company has reorganized into a new Mobile Infrastructure segment encompassing Core Software, Radio Networks and Technology Standards, and launched a Nokia Defense incubation unit to pursue defense and NATO-related opportunities. These moves signal a push into higher-value, more defensible segments while streamlining how the core telecom and networking assets are managed.

Full Ownership of Nokia Shanghai Bell and Synergy Plan

Nokia has closed the transaction to take full ownership of Nokia Shanghai Bell (NSB), aiming to unlock around EUR 200 million in run-rate cost synergies over 24–36 months. However, the integration will not be cheap, with expected costs of EUR 350–400 million over that period. Investors should expect a meaningful gap between comparable and reported earnings as these integration expenses are absorbed, but the company argues the structural cost benefits will enhance competitiveness and margins over the longer term.

Ambitious 2026 and 2028 Profitability Targets

Management laid out clear multi-year financial targets, including a 2026 operating profit range of EUR 2.0–2.5 billion. For Network Infrastructure, Nokia is targeting a 6%–8% CAGR in net sales from 2025–2028, rising to 10%–12% for the combined Optical and IP businesses, with operating margins aiming for 13%–17% by 2028 versus 9.5% in 2025. Mobile Infrastructure is targeted to deliver at least EUR 1.5 billion in operating profit, underlining the company’s expectation that this segment stabilizes and contributes solidly even as growth is driven elsewhere.

Core Software and Standards Maintain Commercial Traction

Within Core Software, Nokia highlighted a notable 5G core win with Telia and continued expansion of its Network as Code platform, which now counts over 75 partners, including 43 telecom operators. Meanwhile, the Technology Standards business maintains a contracted net sales run rate of around EUR 1.4 billion, providing a relatively steady and high-margin revenue base. These activities underscore that Nokia’s software and licensing assets continue to support the broader group, even as other segments undergo more volatility.

Investments and Ramps Squeeze Operating Margins

Despite the growth pockets, Q4 operating margin slipped to 17.3%, 90 basis points lower than a year earlier. Management attributed this to stepped-up investments in growth areas, including Infinera-related costs, and the margin drag from ramping new products that initially ship at lower profitability. While investors may be wary of the near-term compression, the company framed this as a deliberate trade-off to capture long-term growth in AI, cloud and optical.

Network Infrastructure Margins Hit by Costs and Mix

Within Network Infrastructure, gross margin declined by 80 basis points to 44.6% in Q4, with operating margin further pressured by increased R&D spending and acquisition-related costs. The margin deterioration reflects both the cost of building out next-generation products and the mix effect of rapid growth in areas that are still maturing from a profitability perspective. Nokia is effectively front-loading costs in a segment it expects to be the cornerstone of its medium-term margin expansion.

Nokia Technologies Sees Revenue Drop and Impairment

Nokia Technologies, the company’s licensing and intellectual property arm, posted a 17% year-over-year decline in Q4 net sales and recorded a EUR 20 million impairment against a prior asset purchase. This underlines that the business is not immune to volatility and contract timing and that it cannot be relied upon as a consistently growing profit pool. While still a valuable contributor, the quarter’s performance reinforces management’s shift in focus toward infrastructure and cloud-driven growth engines.

Cloud & Network Services Affected by Timing, Not Trend

Cloud and Network Services (CNS) revenue declined 4% in Q4, but the company emphasized that this was driven by revenue recognition phasing rather than underlying weakness, with full-year growth of 6%. Gross margin in the quarter benefited from a one-off EUR 37 million provision reversal, flattered by this non-recurring item. Investors should view CNS as a steadily growing but somewhat lumpy business where quarterly swings can be misleading relative to the full-year trajectory.

Fixed Networks Flat as Lower-Margin Products Are Deprioritized

Fixed Networks delivered flat performance in Q4 overall, even though fiber OLT sales grew 16% year over year. The muted top-line outcome reflects a deliberate choice by Nokia to deprioritize certain CPE products that dilute margins. This indicates a continued focus on quality of revenue and margin protection rather than chasing volume in commoditized hardware, a theme that fits with the company’s broader portfolio discipline.

Restructuring and Integration Costs Weigh on Reported Numbers

Nokia flagged around EUR 300 million of restructuring in 2025 and guided roughly EUR 450 million of cash outflow for restructuring in 2026, alongside NSB integration costs of EUR 350–400 million over 24–36 months. These cash drains and P&L impacts will create a notable gap between reported and comparable earnings, complicating the near-term financial picture. Nonetheless, management argues that these programs are essential to support long-term cost competitiveness, scale and margin targets.

Seasonality and Q1 2026 Headwinds Loom

Management cautioned that Q1 2026 net sales are expected to fall somewhat more than the historical average sequential decline of around 24% (excluding Nokia Technologies), due to above-normal activity in Q4 2025. This guidance sets the stage for a weak first quarter headline, even if the underlying demand trends remain intact. Investors should therefore expect a soft start to the year, with the company asking the market to look past near-term seasonality to the stronger structural outlook.

Mobile Infrastructure Faces Regional and Contract Pressure

The Mobile Infrastructure segment continues to battle top-line headwinds linked to prior contract losses, particularly in North America tied to AT&T. Management also cited regional declines in India and Greater China, and noted that both CNS and Mobile Networks saw declines in North America during the quarter. While mobile remains a core business, the call made clear that growth in the near term will be uneven and heavily influenced by regional and customer-specific dynamics.

Supply Chain and Manufacturing Scale a Key Execution Risk

Nokia acknowledged ongoing supply constraints across the AI and data-center ecosystem and highlighted the need to scale optical manufacturing capacity, including higher capex and ramping new fabrication capacity. This introduces a tangible execution risk: if ramp-up timing lags demand, the company may not fully capture near-term revenue opportunities despite strong orders. Investors will be watching closely for progress on capacity expansions to ensure the AI and cloud opportunity translates into realized sales.

Wide Guidance Range Reflects Margin and Investment Uncertainty

The 2026 operating profit guidance of EUR 2.0–2.5 billion carries a relatively wide EUR 500 million range, underscoring uncertainty around the profitability impact of new product launches and AI & cloud investments. Management highlighted potential downward pressure on gross margin and operating expenses as these growth areas scale. While the top end of the range implies meaningful margin improvement, the breadth of the guidance is a reminder that the transition carries execution and market risks.

Forward-Looking Guidance: Growth in Infrastructure, Transition Elsewhere

Looking ahead, Nokia guided 2026 operating profit of EUR 2.0–2.5 billion and expects Network Infrastructure growth in 2026 to track its 2025–2028 CAGR targets of 6%–8% overall and 10%–12% for Optical and IP combined. The company aims to lift Network Infrastructure operating margins toward 13%–17% by 2028 from 9.5% in 2025, while Mobile Infrastructure is targeted to deliver at least EUR 1.5 billion in operating profit in 2026, roughly in line with 2025. Portfolio Businesses are expected to reduce their operating loss from 2025’s EUR 97 million, and Group Common costs are forecast to fall to about EUR 150 million from EUR 190 million. Key modelling assumptions include positive comparable net financial income, a tax rate around 26%–27% with about EUR 500 million of cash tax outflows, capex of EUR 900–1,000 million mainly to expand optical manufacturing, and free cash flow conversion of 65%–75%. Management also flagged FX sensitivity, expected Q1 2026 seasonality-driven revenue declines, and NSB integration synergies of roughly EUR 200 million at run rate against integration costs of EUR 350–400 million over 24–36 months.

Nokia’s earnings call painted the picture of a company mid-transition: leveraging strong cash generation and a fortified balance sheet to invest aggressively in AI, cloud, optical and defense while digesting acquisitions and weathering mobile and regional headwinds. The overall sentiment leaned positive, with clear multi-year growth and margin targets and strong demand indicators in Network Infrastructure and AI-related segments, even as near-term margins, restructuring costs and Q1 seasonality temper the outlook. For investors, the story now hinges on execution—scaling manufacturing, integrating acquisitions and delivering on cost synergy and margin expansion promises over the next several years.