Nokia Lifts 2027 Optical and IP Growth Target to 25% to 30% as AI Demand Outruns Supply, but Margin Dilution and Cash Burn Mount
Third-quarter 2026 earnings call, October 22, 2026
A higher 2027 growth bar for Optical and IP, with supply the binding constraint
Nokia said it now expects Optical Networks and IP Networks to grow between 25% and 30% on a combined basis in 2027. For 2026, the two businesses are on track to grow "somewhat above" the 18% to 20% assumption given earlier. CEO Justin Hotard framed the constraint as supply rather than demand: "We're not demand constrained today. So if we could ship more, we would certainly do it." He also noted this was the third update to the growth assumptions since the November 2025 capital markets day, and said the company wanted to give "a concrete view of '27" while insisting the market extends "well beyond '27."
Management offered some color on mix. Hotard said Optical may contribute somewhat more than IP to 2027 growth as capacity comes online, though he did not rule out upside in IP. He also said the 2027 assumption includes only the existing portfolio and orders, and excludes newer products such as LPO pluggables and external lasers. On order duration, the majority of the roughly EUR 5 billion of AI and cloud orders booked over the past five quarters sits within a 12-month window, with some extending beyond but "still largely within '27."
AI and cloud: 123% growth, but IP margins are diluting the mix
AI and cloud net sales rose 123% year-on-year and reached 12% of group sales. Gross order intake rose 118% to EUR 1.5 billion. IP Networks grew 43% as design wins from the second quarter's heavy order intake began converting to revenue. Optical Networks grew 18% and still contributes most of the segment's revenue. Nokia added two hyperscaler design wins in IP, including a next-generation data center gateway, and now has design wins with 29 customers for its 800 gig coherent pluggables. Shipment volumes of those pluggables more than doubled sequentially. In line systems, where Nokia has historically been underpenetrated, the company reported a significant win with a large hyperscaler. Its multi-rail platform, which it says offers 25% higher density than competing solutions, has three design wins.
The growth is coming at a cost to margins in the near term. Network Infrastructure gross margin fell 150 basis points to 41.2%, down from about 43% in the first half. CFO Marco Wiren attributed the decline to mix and to the ramp of new AI and cloud products in IP Networks, which start from a low volume base and carry an immature cost structure. He called the dilution "temporary" and expects gross margin to improve in the fourth quarter. Nokia maintains that AI and cloud is accretive to operating margin, though management declined to say when it becomes accretive at the gross margin level. The Fixed Networks clean-up also does little to help: Hotard noted that the discontinued customer premises equipment business was dilutive rather than loss-making, so exiting it "doesn't move the needle as much as we would like."
Cash conversion takes a visible hit
Free cash flow was negative EUR 99 million in the quarter, held back by restructuring payments and a further working capital build in receivables and inventory. Nokia will now invest an additional EUR 400 million in working capital relative to its start-of-year plan to support 2027 growth. As a result, 2026 free cash flow conversion is now guided to 35% to 55%. Net cash stood at EUR 2.6 billion. Wiren said conversion should improve as working capital pressures ease, but investors should note that the growth story is currently consuming cash.
Restructuring is also heavier. Nokia now expects charges of about EUR 1.1 billion in 2026 and associated cash outflows of EUR 800 million to EUR 900 million. The China integration has been compressed from as long as three years to 12 to 24 months, with 90% completion targeted by year-end. The 2023 to 2026 program is landing at the top of its EUR 800 million to EUR 1.2 billion savings range. The Infinera integration is largely complete, and the EUR 200 million synergy target should be reached by year-end, a year ahead of schedule.
Supply chain inflation is becoming structural, with a pricing response in Mobile
Hotard described a supply chain squeeze that is broader than the 2021 shortage. "That was very narrow, very targeted in some ways to some specific nodes. This is much more broad-based, touches all the leading-edge nodes, touches memory, also touches some of the sourced materials, PCBs, et cetera. And it's not just a shortage. It's also a structural cost increase." Lead times have stretched from roughly six months, and Nokia is asking operators for 12 to 18 months of forward visibility. Hotard expects the flat telecom market to see higher pricing as a result. Wiren acknowledged Nokia faces the same constraints and price increases that a Nordic peer had flagged as a 2027 gross margin headwind, and pointed to mitigation through commercial discipline, product redesign and cost restructuring rather than offering a margin outlook. Core Software, which fell 13%, was partly affected by operators delaying projects because of server supply constraints.
Management rejected the idea that the strong Radio Networks quarter, up 10%, reflected customer pre-buying. Wiren said some deliveries simply progressed faster than planned and moved from the fourth quarter into the third. Hotard said he does not see an imminent investment cycle and expects the telecom market to stay flat. The pull-forward flatters the third quarter and will dampen the normal Mobile Infrastructure seasonality in the fourth.
Guidance: above the midpoint, with fourth-quarter caveats
Net sales rose 9% to roughly EUR 5.2 billion, and operating profit was EUR 605 million, an 11.7% margin that is 220 basis points higher than a year earlier. Gross margin was 44.6%. Part of the bottom line benefited from positive venture fund revaluations in financial items. Nokia left its comparable operating profit guidance unchanged but now expects to land above the midpoint, and it assumes a 20% to 24% sequential increase in fourth-quarter net sales. Wiren cautioned that some of the third-quarter strength was a pull-forward from the fourth quarter. Technology Standards, which grew 8% on new licenses and catch-up sales, should also be lower in the fourth quarter on slower deal activity. Pressed on whether the top end of the range is within reach, Wiren declined to commit and said the ranges "are what the ranges are." Hotard cautioned that Nokia is "not there yet" in becoming a lean operating machine, and that the operating leverage is partly masked by the portfolio pruning.
Indium phosphide capacity is the gating item
Execution on optical supply is the key item to watch. The new San Jose 6-inch indium phosphide fab is on track to begin production before year-end, with 90% of process development complete and 24/7 operations expected to start by the end of October. Hotard gave no yield data and said volume and yield are the milestones to watch, with another update due in January. The planned Chandler facility, being acquired from NXP, is positioned as a roughly 2029 solution and will be treated as a flexible asset, with specifics to follow after closing. Hotard said the company is working closely with hyperscalers on the next-generation roadmap and that products for 2027 were already shown at OFC, which suggests customers have longer-term visibility on demand.
Telco spend, AI RAN and new adjacencies
Telecom customer sales were stable, but Nokia reports pockets of growth as operators build east-west connectivity, including data center interconnect, long haul and subsea, to serve AI traffic. The Zayo blueprint for distributed inference is an example. The company also reported early traction in out-of-band management using passive optical technology, which it says can cut energy use by 50% versus Ethernet-based architectures, and it has one design win with additional customers engaged. In Fixed Networks, Nokia holds about 45% optical line terminal port share outside China and launched a 16-port multi-speed PON line card, first deployed by SoftBank. Overall Fixed Networks sales fell 22% on the ONT pruning.
On AI RAN, T-Mobile completed its first live voice call on the platform in its production network and Elisa ran voice, data and AI workloads simultaneously. Nokia's software on NVIDIA's Aerial RAN Computer has delivered spectral efficiency gains of more than 20% in live environments against a 2028 roadmap target of a 100% improvement. Nineteen customers are now engaged. Revenue contribution is not yet quantified and commercial deployment is described as "nearing." In defense, Nokia announced a partnership with ICEYE on sovereign low-Earth orbit satellite communications, initially targeting the upgrade of legacy European SATCOM networks. Portfolio simplification continued with the completed sale of fixed wireless access to Inseego and an agreement to sell the enterprise campus edge business to AURELIUS.