Nokia continues to ride what it calls the “AI supercycle” with sales up across its portfolio, though supply chain constraints are starting to creep.

The Finnish firm saw operating profits for the third quarter ending June 30 rise to $677 million, a 35% rise year over year. Driving the increase was sales to AI and cloud customers, which grew 123%. The segment has repeatedly propelled Nokia in recent earnings, and this time was no different; CEO Justin Hotard told investors demand from AI and cloud drove a 43% increase in its IP Networks buisness.

Hotard revealed during the company’s earnings call that telecom firms were also investing to support demand from AI and cloud customers, with sales from this segment accounting for 12% of Nokia’s total group net sales for the quarter. The CEO said “a fair amount” of AI and cloud demand driving telecom was coming from the U.S., “because it's tied to where the data center investment is and it's driving interconnect.”

AI demand also buoyed Nokia’s Optical and IP Network units, with the former growing 18% and accounting for the majority of revenue from AI and cloud customers. The vendor is now tracking the segments to grow above the 18% to 20% assumptions provided for the full year, with both expected to pull in between 25% and 30% on a combined basis.

“Demand for our 800G coherent pluggables continues to accelerate, with shipment volumes increasing more than twofold sequentially. We're securing orders from both hyperscalers and major telcos. We now have design wins with 29 customers,” Hotard told investors. “We are also investing in our next-generation optical roadmap, developed in close collaboration with our hyperscale customers.”

To support ongoing optical demand, Nokia is building a new fab in San Jose, California, a site that the CEO revealed remains on track to start production before the end of the year, adding: “We've completed 90% of the process development and the process recipes and expect 24/7 operations to begin by the end of this month.”

Nokia also saw hyperscale wins from its line system offerings, with the CEO detailing a "significant win” from a “large” unnamed hyperscaler.

Beyond AI, Nokia’s Q3 was a bit of a mixed bag. Net sales in its Mobile Infrastructure unit grew 5% in the quarter, while Radio Networks grew 10%. But for Core Software – the segment providing cloud-native and AI-native core network solutions – sales declined 13% year over year, a drop Nokia attributed to deemphasizing “certain applications.”

The company also attributed its software slump to supply chain constraints, with CFO Marco Wirén contending the impact stemmed from operators delaying projects as a result of server infrastructure delays.

Hotard also referenced supply chain headaches during Nokia’s earnings call, saying: "All of the things we're seeing in demand in AI and cloud is putting pressure on the supply chain. That supply chain is … that's driving impacts, as we've talked about previously for mobile. And it's not just pricing. Obviously, commercial terms and costs … are increasing.”

The Nokia CEO called on customers to give it early visibility over the next 12 to 18 months “so that we can plan,” adding: “Some customers take that and say, 'if you've got availability, I'll take it,' and you saw a little bit of that acceleration; others are working with us to just give us better visibility.”

Hotard told investors that the current supply environment is “more broad-based” than in years previous, extending beyond the well-documented memory shortage.

“It's not just a shortage. It's also a structural cost increase that we're seeing in the supply chain,” Hotard added.