Executive Summary / Key Takeaways

• Strategic Reorientation Towards High-Growth Segments: Nokia is aggressively pivoting beyond traditional communication service providers (CSPs) to capitalize on the "AI supercycle," targeting hyperscale data centers, enterprise private wireless, and the defense sector as primary growth engines. This includes a significant EUR 100 million annual investment in IP networks to drive EUR 1 billion in incremental net sales by 2028.
• Technological Leadership and Portfolio Strength: The company leverages its deep expertise in 5G, optical, and IP networking, reinforced by Nokia Bell Labs, to deliver high-performance, secure, and cloud-native solutions. Key differentiators include 800 gig ZR/ZR+ pluggables, the PSE-6s optical engine, and the Event-Driven Automation (EDA) platform, crucial for AI-driven infrastructure.
• Mixed Financial Performance with Underlying Strength: While Q2 2025 comparable operating profit was impacted by currency headwinds and tariffs, the underlying business performance remained in line with expectations. Network Infrastructure and Cloud and Network Services showed robust growth, offset by Mobile Networks' decline due to prior-year accelerated revenue recognition.
• Enhanced Operational Efficiency and Cost Discipline: Nokia has made substantial progress in cost savings, lowering the Mobile Networks' revenue threshold for double-digit operating margins to EUR 9.5 billion by 2026. Recent leadership and organizational changes aim to further streamline operations and unlock operating leverage.
• Outlook and Risks: The revised 2025 comparable operating profit guidance of EUR 1.6 billion to EUR 2.1 billion reflects external currency and tariff pressures. However, strong free cash flow generation and a growing order backlog, particularly in Network Infrastructure, signal improving momentum, though market recovery remains slower than initially anticipated.

Nokia's Evolution and Strategic Pivot Towards New Frontiers

Nokia Oyj, a company with a rich heritage dating back to 1865, has undergone a profound transformation to solidify its position as a global leader in business-to-business (B2B) technology innovation. The company's core mission revolves around pioneering networks that sense, think, and act, leveraging its extensive work across mobile, fixed, and cloud networks. This strategic evolution has been critical in adapting to a rapidly changing industry landscape, moving beyond its legacy as a consumer electronics giant to become a foundational enabler of digital infrastructure.

The industry is currently experiencing an "AI supercycle," where connectivity is emerging as a critical differentiator. This trend is not only evident among hyperscalers but also increasingly important for communication service providers (CSPs), and in specialized areas like defense and national security. Nokia's comprehensive portfolio, spanning mobile and fiber access, transport, and data center networks, uniquely positions it to lead in this market transition. The company's strategic response involves a deliberate diversification beyond traditional CSPs into high-growth non-CSP markets, including hyperscale, enterprise, and defense. This pivot is supported by a new operational model, implemented in 2021, designed to enhance speed, agility, and accountability across its business groups.

Technological Edge: Fueling the Future of Connectivity

Nokia's investment thesis is deeply rooted in its technological prowess and innovation, particularly through its renowned Nokia Bell Labs. The company's core differentiated technologies span advanced 5G solutions, high-capacity optical networks, and intelligent IP routing. These foundational technologies are critical for building the next generation of digital infrastructure.

In optical networking, Nokia's PSE-6s coherent optics engine has positioned the company in a technology leadership role, resonating strongly with customers. The company has also made significant strides with its 800 gig ZR/ZR+ pluggables, securing its first award from a hyperscaler. These pluggable solutions are crucial for high-density, high-speed data center interconnects, offering tangible benefits in terms of bandwidth efficiency and reduced operational complexity. The Infinera (INFN) acquisition, which closed in Q1 2025, further bolsters Nokia's optical capabilities and significantly increases its exposure to webscale customers, particularly in North America. This integration is expected to accelerate product roadmaps and drive more innovation in the fast-growing data center market.

Nokia's IP Networks business is a leader in edge routing, holding the #1 position, and is #2 in total routing. The company is actively investing to accelerate growth in AI infrastructure, participating in consortiums bidding for the EU's EUR 20 billion program to build AI gigafactories. A notable technological differentiator is Nokia's Event-Driven Automation (EDA) platform, which automates the entire data center network lifecycle from design to deployment and operation. This platform, complemented by its SR Linux network operating system, abstracts the complexity of managing multi-vendor networks, offering superior operational efficiency and reliability. The company's IP routing products are already being deployed across Microsoft (MSFT) data centers in over 30 countries globally.

In Mobile Networks, Nokia is optimistic about the potential of 3GPP technology in the defense sector, having partnered with blackned to deliver Banshee Radio units to the U.S. Marine Corps. This highlights the adaptability of its mobile technology beyond traditional telecom. Furthermore, Nokia's leadership in the cloudification of the core network, moving software to cloud-native functions (CNFs), is a critical enabler for efficient network automation. This transformation allows operators greater flexibility in network deployment, reduces operational costs, and facilitates the launch of new services. The company's Network as Code platform, with 57 partners by Q2 2025, aims to monetize network capabilities through APIs, fostering a vibrant ecosystem for application developers.

The "so what" for investors is clear: Nokia's continuous investment in and refinement of its core technologies provides a strong competitive moat. These technological differentiators translate into higher performance, greater energy efficiency, and enhanced security for its customers, enabling Nokia to command premium positioning and capture market share in high-growth segments. The strategic intent behind its R&D, particularly in AI and cloud-native solutions, is to drive long-term value by addressing the evolving demands of hyperscalers, enterprises, and defense, thereby securing future revenue streams and improving overall profitability.

Financial Performance: A Mixed but Improving Picture

Nokia's financial performance in recent quarters presents a mixed but ultimately improving picture, reflecting both market challenges and the early benefits of its strategic shifts and operational discipline. The company's full-year 2024 results showcased a strong finish, with net sales growth of 9% in Q4 2024, contributing to a comparable gross margin of 47.2% and an operating margin of 19.1%—the highest quarterly operating margin since 2015. Free cash flow generation was robust, reaching EUR 2 billion for the full year 2024, with a year-end net cash balance of EUR 4.9 billion.

Looking into 2025, Q1 saw net sales decline by 3% year-over-year on a constant currency and portfolio basis, primarily due to a challenging comparison in Nokia Technologies. However, Network Infrastructure grew 11%, Cloud and Network Services grew 8%, and Mobile Networks stabilized with 2% growth. Q1 profitability was impacted by a EUR 120 million one-time contract settlement in Mobile Networks. In Q2 2025, net sales declined 1% on a constant currency and portfolio basis to EUR 4.55 billion. Network Infrastructure delivered 8% growth, and Cloud and Network Services grew 14%, while Mobile Networks declined 13% due to accelerated revenue recognition in the prior year. Gross margin remained stable at 44.7% in Q2 2025, but operating margin declined to 6.6%, largely due to currency fluctuations and tariff impacts.

Nokia's liquidity remains strong, with EUR 2.9 billion in net cash at the end of Q2 2025, and over EUR 800 million in free cash flow generated in the first half of the year. The company's commitment to shareholder returns is evident in the proposed dividend authorization of EUR 0.14 per share for 2024, an increase from EUR 0.13.

Competitive Financial Standing

Nokia's financial ratios reflect its position in a capital-intensive and competitive industry. With a TTM Gross Profit Margin of 60.58% and an Operating Profit Margin of 6.38%, Nokia demonstrates solid operational efficiency, though these metrics can fluctuate with market dynamics and product mix. Its Debt/Equity ratio of 0.21 indicates a healthy balance sheet.

Comparing Nokia to its key competitors:

• Ericsson (ERIC): Ericsson's P/E ratio of 17.27 suggests a potentially more attractive valuation relative to earnings compared to Nokia's TTM P/E of 21.19. However, direct margin comparisons are not readily available.
• Cisco Systems (CSCO): Cisco's P/E of 26.15 and P/B of 5.68 are higher than Nokia's, indicating a potentially richer valuation by the market, possibly due to its broader enterprise market penetration and recurring software revenue.
• Juniper Networks (JNPR): Juniper's P/E of 37.73 and P/B of 2.76 suggest a higher valuation, likely reflecting its specialized focus on high-performance networking and AI-driven automation.
• Ciena Corporation (CIEN): Ciena's significantly higher P/E of 142.42 and P/B of 7.20 point to a market that anticipates substantial future growth, particularly in optical networking, where Ciena is a focused player.

While Nokia's valuation metrics are generally lower than some peers, suggesting it may be undervalued by the market, its financial health, characterized by strong cash flows and a manageable debt load, underpins its resilience and positions it for long-term growth. The company's ability to generate consistent free cash flow, even amidst market headwinds, provides flexibility for strategic investments.

Segment Deep Dive: Growth Engines and Strategic Shifts

Nokia's operational strategy is executed through its four distinct business groups, each contributing uniquely to the company's overall narrative.

Network Infrastructure (NI)

NI is a critical growth engine, delivering 8% growth in Q2 2025, with Fixed Networks growing 17%, Optical Networks 6%, and IP Networks 3%. The segment benefits from strong demand in Optical Networks, particularly with the positive reception to the Infinera acquisition. Hyperscalers are a significant growth opportunity, accounting for 5% of Nokia's net sales in Q2 2025 and driving substantial order intake. Nokia holds a leading position in edge routing (#1) and is #2 in total routing. The company is making a targeted annual investment of EUR 100 million in its IP networks business, aiming to generate EUR 1 billion in incremental net sales by 2028, specifically targeting hyperscalers, telco cloud, and enterprise segments. This investment will bolster R&D and accelerate go-to-market efforts. The appetite for fiber among Tier 1 CSPs remains strong, with expectations for fiber build programs in the U.S. (supported by the "Big Beautiful Bill") and Europe to accelerate into 2026. Nokia has also strengthened its market leadership in operator premise equipment (OLT) and is investing in Passive Optical Networks innovation.

Mobile Networks (MN)

Mobile Networks remains a strategically important, albeit challenging, business. Q2 2025 net sales declined by 13%, largely due to a EUR 150 million accelerated revenue recognition in the prior year. Despite this, Nokia secured an extension to its RAN agreement with T-Mobile U.S. (TMUS) and announced 5G deals with Elisa (ELISA) in Finland and Optus in Australia. The company is focused on preserving market share in a largely flat market and is actively pursuing growth opportunities in the defense sector, demonstrating optimism about 3GPP technology's potential. Cost management has been a key focus, with the required net sales level to achieve a double-digit operating margin lowered from EUR 11.5 billion to EUR 9.5 billion by 2026. This reflects internal preparedness and efficiency gains.

Cloud and Network Services (CNS)

CNS delivered strong performance in Q2 2025, with net sales growing 14% and significant improvements in both gross and operating margins. This momentum is driven by new 5G core wins and deployments across India, Europe, and the Middle East. Nokia leads globally in live 5G Core Networks, emphasizing its cloud-native transformation strategy to enable efficient network automation for operators. The "Network as Code" platform is progressing, with 57 partners announced by Q2 2025, aiming to help operators monetize their networks through APIs, fostering a vibrant ecosystem for application developers. The private wireless market is also a strong growth area, with Nokia now serving over 850 customers.

Nokia Technologies (NT)

Nokia Technologies continues to generate stable and high-margin revenue through intellectual property licensing. Net sales increased by 3% on a constant currency basis in Q2 2025, with new agreements signed in growth areas such as automotive, consumer electronics, IoT, and multimedia. The annual net sales run rate remains approximately EUR 1.4 billion, and the segment is expected to deliver EUR 1.1 billion in operating profit for 2025. This segment provides a consistent revenue stream and contributes significantly to Nokia's overall profitability.

Strategic Initiatives and Leadership Evolution

Nokia's commitment to its strategic evolution was underscored by recent leadership changes and the creation of two new organizations, effective October 1, 2025. The Technology and AI Organization (TAO), led by Pallavi Mahajan, integrates Nokia Bell Labs, Technology and AI Leadership, and Group Security. This move aims to strengthen technology innovation, particularly in security and AI, and maximize ecosystem partnerships. The Corporate Development Organization (CDO), led by Konstanty Owczarek, will integrate corporate development, strategic partnerships, mergers and acquisitions, and incubation activities. These changes are designed to accelerate strategy execution and foster more focused organizations, crucial for succeeding in the "AI supercycle." CEO Justin Hotard emphasizes that "connectivity will be a critical differentiator in the AI super cycle," and these organizational shifts are intended to unlock operating leverage and improve productivity.

Outlook and Guidance: Charting the Course Ahead

Nokia's full-year 2025 comparable operating profit outlook was revised downwards in Q2 2025 to a new range of EUR 1.6 billion to EUR 2.1 billion, from an initial EUR 1.9 billion to EUR 2.4 billion. This adjustment was primarily driven by external factors: a EUR 230 million headwind from currency fluctuations (with the euro-dollar rate moving from 1.04 to 1.17) and an anticipated EUR 50 million to EUR 80 million impact from tariffs. Despite these headwinds, management affirmed that the underlying business performance remains in line with initial expectations. The company's free cash flow conversion target remains robust at 50% to 80% of comparable operating profit.

Management maintains an optimistic view for the second half of 2025, expecting a stronger performance compared to the first half, consistent with historical seasonality. The order backlog continues to grow, particularly in Network Infrastructure, signaling improving demand. While the overall market recovery has been slower than initially expected, Nokia anticipates strong growth in Network Infrastructure, growth in Cloud and Network Services, and largely stable net sales in Mobile Networks for the full year. Nokia Technologies is expected to contribute EUR 1.1 billion in operating profit.

Risks and Challenges: Addressing Headwinds

Despite the positive strategic direction, Nokia faces several pertinent risks. Currency volatility, particularly the strengthening euro against the U.S. dollar, poses a significant headwind to operating profit. The ongoing tariff situation also presents a financial burden, with the full impact remaining somewhat uncertain. Macroeconomic uncertainties continue to influence customer spending, leading to slower conversion of orders into sales.

In the competitive landscape, Nokia is behind in market share penetration in optical networking within the AI and cloud space, though the Infinera acquisition is addressing this. The Mobile Networks segment faces intense competition, particularly from Chinese vendors employing aggressive pricing strategies in certain markets. While Nokia is committed to maintaining pricing discipline, this competitive pressure can impact market share and profitability. Customer concentration, particularly with large telecom operators, also presents a risk of revenue volatility if key contracts are lost or reduced.

Conclusion

Nokia is strategically repositioning itself as a vital enabler in the burgeoning AI supercycle, moving beyond its traditional telecom roots to capture high-growth opportunities in hyperscale data centers, enterprise private wireless, and defense. The company's deep technological expertise, particularly in 5G, optical, and IP networking, forms the bedrock of its competitive advantage, offering differentiated, high-performance, and secure solutions. While recent financial performance has been tempered by external currency and tariff headwinds, the underlying operational execution remains solid, with strong growth in Network Infrastructure and Cloud and Network Services.

The revised 2025 outlook reflects a prudent approach to these external pressures, yet the consistent free cash flow generation and a growing order backlog underscore the company's fundamental strength. With strategic investments in IP networks, a renewed focus on cost efficiency in Mobile Networks, and a leadership team geared towards innovation and corporate development, Nokia is actively shaping its future. Investors should recognize Nokia's commitment to leveraging its technological leadership and disciplined strategy to drive long-term value, even as it navigates a dynamic and competitive global market. The successful execution of its diversification strategy and the continued monetization of its intellectual property will be critical indicators of its future success.