Nokia (NOK) Q4 2025: Optical Networks Jump 17% as AI and Cloud Orders Reshape Growth Trajectory
Nokia’s Q4 was defined by surging optical network demand, driven by AI and cloud infrastructure buildouts, as management sharpened its strategic focus and streamlined operations for long-term value creation. Investment in capacity and a disciplined capital allocation underline a pivot toward differentiated, higher-margin segments, while ongoing cost actions and portfolio pruning signal a pragmatic approach to legacy businesses. Forward visibility remains anchored in robust order momentum and measured guidance, with execution risk as the company navigates secular and cyclical shifts.
Summary
- AI and Cloud Demand: Optical and IP network strength is now the core growth engine as hyperscaler orders accelerate.
- Portfolio Realignment: Legacy and underperforming units are deprioritized or carved out, sharpening capital focus on scalable, differentiated platforms.
- Execution Discipline: Guidance reflects both market optimism and a measured stance on production scaling and new product ramp risks.
Performance Analysis
Nokia’s Q4 financials reflected a business in transition, with net sales up 3% year-on-year to €6.1 billion and operating profit at €1 billion, marginally above guidance midpoint. The standout was network infrastructure, which grew 7% in the quarter, powered by a 17% surge in optical networks as AI and cloud customers drove €2.4 billion in annual orders. Book-to-bill was above one in both optical and IP networks, signaling sustained demand tailwinds.
Gross margin improved by 90 basis points to 48.1%, largely on stronger mobile and cloud/network services mix, though operating margin fell 90 basis points as R&D and integration investments weighed. Free cash flow for the quarter was €226 million, with net cash at €3.4 billion, providing flexibility for ongoing capex and integration of Infinera and Nokia Shanghai Bell. Notably, Nokia Technologies saw a 17% revenue decline due to lower catch-up sales, highlighting ongoing IP monetization headwinds. Regional performance was mixed: North America saw network infrastructure growth but softness elsewhere, while APAC and Europe delivered stable to modest gains.
- Optical Networks Outperformance: AI and cloud orders now represent 16% of total network infrastructure sales, up from a telco-centric base.
- Margin Dynamics: Investment in growth and product launches pressured operating margins, but gross margin benefited from mix and cost controls.
- Regional Divergence: North America’s strength in infrastructure offset mobile network declines; APAC’s growth was concentrated in Japan and Indonesia.
The quarter’s results underscore a pivot toward higher-growth, higher-margin segments, but also reveal the cost and complexity of transformation, especially as legacy and lower-differentiation businesses are rationalized or exited.
Executive Commentary
"We strengthened our portfolio with the acquisition of Infinera, simplified our operating model, and set a clear strategy at our capital markets day to focus the company on the areas where we see opportunities for differentiation, scale, and sustainable market leadership."
Justin, Chief Executive Officer
"Net sales were 6.1 billion euros, that's up 3% on the prior year. First margin was 48.1%, an improvement of 90 basis points driven by improvements in mobile networks and cloud and network services. Operating margin was 17.3%, and this is 90 basis points below the prior year, impacted primarily by increased investments in growth areas, including the internal acquisition."
Marco, Chief Financial Officer
Strategic Positioning
1. Optical and IP Networks as Growth Engines
Nokia’s shift toward optical and IP networks is foundational, targeting the AI and cloud super cycle as a secular growth driver. The company is investing in next-generation pluggable optics and data center switching, with multiple design wins and a focus on ramping production to meet demand. AI and cloud accounted for 30% of optical network sales, and management is guiding for 10% to 12% growth in these areas for 2026, emphasizing both near-term execution and long-term market expansion.
2. Portfolio Simplification and Margin Focus
Legacy and lower-margin segments, such as certain customer premises equipment and microwave radio, have been carved out into a new portfolio businesses unit. These units, which generated €850 million in sales but posted a €97 million loss in 2025, are under strategic review for future direction. The approach is to prioritize differentiated, scalable platforms and improve group margin by reducing exposure to commoditized or structurally challenged products.
3. Mobile Infrastructure Restructuring
The consolidation of core software, radio networks, and technology standards into a new mobile infrastructure segment aims to sharpen accountability and profitability. The focus has shifted from chasing revenue to maximizing gross margin and operating profit, with selective investment in 5G, O-RAN, and early 6G/AI-native RAN leadership. Partnerships with NVIDIA and major telcos, plus new design wins, reinforce a strategy of co-innovation and customer stickiness.
4. Capital Allocation and Manufacturing Investment
Capex is set to rise to €900 million to €1 billion in 2026, primarily to expand optical manufacturing capacity, including new photonic integrated circuit fabs. Management frames these investments as essential to maintain vertical integration and meet robust AI/cloud demand, while keeping capex at a modest percentage of overall sales. The capital allocation framework emphasizes R&D and targeted M&A, with dividends and buybacks as secondary priorities.
5. Defense and Mission-Critical Enterprise Expansion
The launch of Nokia Defense and the integration of U.S. federal solutions, including Phoenix Group technology, signal a push into defense-grade 4G/5G and national security applications, especially in NATO countries. Early customer feedback suggests growing demand, and this unit is positioned as an innovation hub for future growth outside traditional telco markets.
Key Considerations
This quarter marks a clear inflection in Nokia’s business model, with management emphasizing scalable, differentiated platforms and operational discipline. While order momentum and strong book-to-bill ratios in optical and IP networks are encouraging, the transition brings execution and integration risks, particularly as new product ramps and portfolio exits play out over 2026.
Key Considerations:
- AI/Cloud Customer Mix: Rapid growth in hyperscaler orders is reshaping revenue composition and driving capital allocation toward optical and data center infrastructure.
- Product Ramp and Margin Pressure: New product launches and manufacturing scale-ups may weigh on margins in the near term, but are critical for long-term growth and differentiation.
- Portfolio Exit Execution: The ability to efficiently wind down or divest underperforming units without disrupting core operations is a key operational risk and opportunity.
- Regional Variability: North America and Europe are growth centers, but volatility persists in APAC and legacy telco segments, with headwinds from prior contract losses (notably AT&T).
Risks
Execution risk is elevated as Nokia ramps new optical capacity and integrates acquisitions, with potential for delays or cost overruns. Telco market cyclicality and contract churn (e.g., AT&T) remain headwinds, while supply chain constraints—especially in photonics and memory—could limit upside. Regulatory shifts, such as European cybersecurity mandates, introduce both opportunity and complexity. Management’s measured guidance reflects these crosscurrents, but investors should monitor for slippage in portfolio transition and margin realization.
Forward Outlook
For Q1 2026, Nokia guided to:
- Net sales to decline more than normal seasonality, following a strong Q4
- Operating margin only slightly better than prior year
For full-year 2026, management maintained guidance:
- Operating profit of €2.0 to €2.5 billion
- Capex of €900 million to €1 billion
- Free cash flow conversion of 55% to 75%
Management highlighted several factors that will shape 2026:
- Measured margin expansion as new products ramp and growth investments continue
- Lower operating losses in portfolio businesses as exits or restructuring progress
Takeaways
Nokia’s strategic pivot is gaining traction, with optical and IP networks emerging as secular growth drivers as hyperscaler demand intensifies. The company’s willingness to shed legacy baggage and double down on differentiated platforms is a positive, but the complexity of execution and integration will be a key watchpoint into 2026 and beyond.
- Growth Engine Shift: Optical and IP networks are now the clear focus, with strong order momentum and capital investment supporting a multi-year growth thesis.
- Margin and Portfolio Discipline: Management is prioritizing profitability and sustainability over top-line growth, with clear plans to exit or restructure loss-making units.
- Execution Watchpoint: New product ramps, manufacturing scale, and integration of recent acquisitions present material execution risk, especially against a backdrop of market and regulatory change.
Conclusion
Nokia’s Q4 signals a decisive shift toward scalable, differentiated growth in optical and IP networks, underpinned by disciplined capital allocation and portfolio simplification. While execution risks remain, particularly in new product scaling and integration, the company’s strategic clarity and robust order momentum position it well for the AI and cloud infrastructure cycle.
Industry Read-Through
Nokia’s results confirm a secular acceleration in optical and data center infrastructure demand as AI and cloud workloads drive hyperscaler investment. The company’s capital deployment and product focus highlight the growing importance of vertical integration and manufacturing agility in the photonics supply chain. The pivot away from commoditized, low-margin telco hardware is likely a harbinger for peers, reinforcing the need for portfolio discipline and R&D prioritization. Regulatory momentum in Europe around cybersecurity and network sovereignty could catalyze further investment cycles across the sector, benefiting vendors with trusted supply chains and differentiated technology.