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Nokia Corporation (NYSE:NOK)

Q3 2008 Earnings Call

October 16, 2008 8:00 am ET

Executives

Bill Seymour - Head of IR

Olli-Pekka Kallasvuo - President and CEO

Rick Simonson - EVP and CFO

Analysts

Tim Long - Banc of America Securities

Tim Boddy - Goldman Sachs

Mike Walkley - Piper Jaffray

James Dawson - Morgan Stanley

Jeff Kvaal - Barclays Capital

Andrew Griffin - Merrill Lynch

Mark Sue - RBC

Sherief Bakr - Citi

Gareth Jenkins – UBS

Richard Kramer - Arete Research

Operator

Good morning. At this time, I would like to welcome everyone to the Nokia third quarter 2008 earnings call. (Operator Instructions).

I would now turn the call over to Mr. Bill Seymour, Head of Investor Relations. Mr. Seymour you may begin your conference.

Bill Seymour

Thank you. Ladies and gentlemen, welcome to Nokia's third quarter 2008 conference call. I am Bill Seymour, Head of Nokia Investor Relations. Olli-Pekka Kallasvuo, President and CEO of Nokia and Rick Simonson, CFO of Nokia, are with me today.

During this briefing and call, we will be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. These statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external, such as general economic and industry conditions, as well as, internal operating factors. We have identified these in more detail on pages 10 to 25 in our 2007 20-F and in our press release issued today.

Our aim is to finish this call in approximately one hour. To view the supporting slides while listening to the call, please go to the IR site. You also may note for your background information, we have provided additional slides in the appendix of this presentation.

As you saw on today's earnings release, we have added non-IFRS results information in the quarterly announcement format, in the table on the front page and in the tables at the end of the earnings release and on our website. The release includes both reported and non-IFRS results as well as the detailed explanation of the contents of the non-IFRS results and reconciliation between the two. The release is available at nokia.com.

I would like to remind you that we will host our annual Capital Markets Day in New York on Thursday December 4th. This will be a full day event featuring key note presentations in the morning and the afternoon breakup sessions we will focus on key topics, and during the evening we will have dinner with senior members of our executive team.

We will also have an expo area so you can interact hands-on with our latest devices and services. You could find more information by going to nokia.com/cmd2008.

We sent out a registration email yesterday, if you have not receive this from us please contact Investor Relations, we hope to see you there.

With that Olli-Pekka, please go ahead.

Olli-Pekka Kallasvuo

Thanks, Bill, and good morning and good afternoon. In the third quarter there were challenges that were specific to Nokia and there has been a great deal of turmoil in the financial markets and it is unclear how this will impact different markets. However, given the challenges margin performance was solid in both devices and services and in NSN.

Cash flow was EUR1.3 billion. Our services and software business continued to progress.

We started to shift great new products in Q3 that will be key to our improved device portfolio in Q4, and beyond. During the third quarter we completed the acquisition of NAVTEQ.

Now, let’s discuss how we see the market and consumer behavior. The world is made up of many markets, with quite different growth prospects. Many of these markets continue to grow like China, India, Asia Pacific, Middle East, and Africa and Latin America. Nokia is the clear leader in all these regions.

Many consumers in these markets have month to month disposable incomes that have always been subject to volatility and require them to continually prioritize their spending decisions. Last year and earlier this year many consumers in emerging market economies were facing material rising food and energy costs that were clearly reducing their disposable income, but we have seen the commodities cost bubble burst and this is now having a favorable impact on many consumers.

In fact, the global commodities indices have declined year-to-date by about the same amount as to world's major equities market. Oil below $80 a barrel and rice prices back to levels that do not make headlines are welcome developments that help consumers the world over and help mitigate consumer economic uncertainty.

However, we would be naïve if we ignored what is happening in the macroeconomic environment in many markets and we are fully prepared and are acting accordingly.

In this time of economic uncertainty I like our relative position. Nokia is strong, we have scale. We have one of the best brands in the world. We are generating good cash flow. We have a flexible capital structure and we can make continuing product investments in technology and services, all of which will further differentiate us from the competition.

Historically, Nokia has benefited and become stronger in times of uncertainty. We have outperformed the competition, and we have been less volatile. I would expect this to be the case again.

Now, let's take a look at the overall device market and our market share in the third quarter. According to our estimates, the mobile device market was 310 million units in Q3, up 3% sequentially, a bit lower than what we have seen in recent years. The forecast that the market will be approximately 1.26 billion units in 2008, over 10% growth.

But as we have said in our update last month that weaker consumer confidence in multiple markets has had an impact on the market. We expect a seasonal uptick in the fourth quarter in the device market, but as our guidance implies, slightly muted. According to our estimates, our device market share was 38% in Q3, down as we indicated it would be in our update last month.

Clearly, some competitors have been more price-aggressive recently in an effort to either clear stock or try to gain badly needed scale. We have not broadly participated in what we believe to be unsustainable price moves by certain competitors. However, we do not intend to give the competition a free ride, and economic gravity will apply to them.

Our smartphone volumes were up sequentially in the third quarter, but we estimate we lost share. Our share would have been closer to flat if it was not for the ramp-up problem in the previously mentioned mid-range smartphone. However, with products like Nokia 5800, E71, E66, N79, N85 and N96, our smartphone portfolio is improved and is gaining momentum this quarter.

Let's take a brief look at the number of product and services highlights for the third and the fourth quarter. The Nokia E71 had a great first quarter of sales in Q3, shipping almost 1 million units. The response to the E71 has been overwhelmingly positive.

This is the first through mass market QWERTY device we have had, and it is the most fully featured QWERTY device on the market. We have seen really positive momentum in e-mail activations with this product both for consumers and for the enterprise. The E71 will continue to be a very competitive and popular product in Q4 and beyond.

The Nokia N96 started shipping in September and did well in its first months. So far, the N96 has been a good addition to our N95 flagship products. The combined volumes of the N95 and N96 products were up sequentially from Q2 to Q3.

Two weeks ago, we announced our first mass market touchscreen device, the Nokia 5800. It has some great features, high-resolution screen, touch feedback and innovative contacts bar and media bar, browser incorporating Flash, handwriting recognition and Comes With Music for half the price of the iPod.

There is a growing market for touch-based devices globally. At the right price for the current times, this product has been very positively received by our trade customers.

As you can see on the slide, we have good offering of new products in our Q4 lineup. We feel good about our improved portfolio and our ability to deliver in a seasonally up fourth quarter.

Services and software had EUR115 million of net sales and total billings of EUR140 million. Billings grew 15% sequentially. Navigation has been and continues to be our lead service. Our success in bundling navigation services with our devices continues in Q3. We sold almost 7 million GPS-enabled devices, up over 50% from Q2 and the bundled navigation now on over 70% of those.

If you want to boil down both our opportunity and advantage in services, it is the ability for us to sell services to our large base of users bundled with our industry-leading volumes.

Two weeks ago, along with the 5800 touchscreen device launch, we announced a Comes With Music digital entertainment service. Customers who buy a Comes With Music device will be able to enjoy a diverse catalog of music from international and local artists and access to millions of tracks.

Comes With Music will be available across a range of Nokia devices, including the new Nokia 5800. The UK will be the first market to offer Comes With Music with sales through Carphone Warehouse. I am also happy to announce today that starting in November; the UK operator 3 will be offering the Nokia N95 8 gig with Comes With Music on an 18-month contract.

We are making real progress in enabling email on our devices to the delight of the consumers. Here are some facts on email. Over half of our devices sold now come with email. We are beta testing our new consumer push email solution, which we plan to rollout commercially soon.

We are continuing to improve the service with frequent releases adding additional languages and all key ISPs. AND in an effort to further advance our efforts in consumer email, a few weeks ago we announced the acquisition of OZ Communications. OZ will provide us a platform for delivering instant email and messaging for the mass market.

In order to cover the entire spectrum of consumer email, you need two distinct services. One is the full function aritz consumer email for the high-end and the second is for less frequent usage when the cost is the determining competitive factor.

For enterprise email, we have had recent success enabling Mail for Exchange on our devices. A lot of companies are warming up to Mail for Exchange. In this environment of potentially over IT budgets, Mail for Exchange is a robust lower cost solution.

Software and services has focused its business. There are lots of opportunities out there but we need to focus our investments on the ones with the credit payback. This focus has led to some impressive OpEx saving while continuing to grow the topline.

As so far of this refocusing, we recently announced our plans to consolidate our media and content aggregation services to one single service, cease developing and marketing behind-the-firewall business mobility solutions and sell the enterprise security business.

On to Nokia Siemens Networks; during the third quarter, Nokia Siemens Networks continued to show good broadcast. NSN's focus has and continues to be on deal discipline, margin expansion and cash generation. The impact of the synergy program is increasingly visible into P&L, both in margin quality and lower operating expenses.

The development source of NSN has it more forward in a competitive and increasingly uncertain market. Now, I will pass over to Rick for more on the financials.

Rick Simonson

Thanks, Olli-Pekka. Looking at overall Nokia, I would like to highlight at gross margin performance. In quarter three, Nokia's non-IFRS gross margin was 35.7%, up 100 basis points sequentially. This captures the extent to which Nokia is a variable cost business.

Our gross margins improved even as we shipped fewer devices than we expected during the third quarter. We are able to deliver solid margins because of our market position, cost advantage and a world class supply chain.

Our gross margins also reflect our strong IPR position. The impact of the licensing into agreements we announced with Qualcomm and certain other companies were slightly positive to our quarter three gross margins. It will continue to provide us with a comparative advantage over the next years and many to come.

We achieved our objectives with the Qualcomm deal. Nokia has an active, revenue generating pass license program that provides us increasing revenue. Huawei is the 35th company to join Nokia Cellular standards licensing program.

Our IPR strength is a key competitive differentiator and we believe there are many opportunities for us to collect the royalties from traditional and new industry players. We have stepped up our efforts and you will see more of this in the future.

Turning to Devices and Services, on a reported and constant currency basis, Devices and Services net sales were down 5% sequentially, and year-on-year were down 7% on a reported basis, and 1% on a constant currency basis.

Our services in software revenue in Q3 was EUR115 million, services billings were EUR140 million, up 15% sequentially. We highlighted during the earnings call last quarter that our services and software revenue would be impacted by a greater amount of revenue deferrals, since an increasing amount of our services and delivered over time. For example, a 12-month navigations license is built up, but revenue is recognized ratably over the year.

Also related to Services and Software, at the end of Q3 we announced that we are in advance discussions to sell our enterprise security business. We report enterprise security revenues in services and software revenue. Therefore, if this transaction is completed, our services to software revenue is expected to decrease.

Remember in 2008, enterprise security net sales have been below EUR50 million each quarter, and importantly, all of our recent services and software growth has been coming from outside of this security business.

Nokia’s device average selling price in the third quarter was EUR72, down from EUR74 in the second quarter. The lower ASP was primarily due to a higher proportion of lower priced products. The weaker year-on-year dollar caused over 50% of the year-on-year average selling price decline.

Devices and services gross margin in Q3 was 36.5% up 40 basis points from quarter two. This was good performance, particularly considering the challenges we faced in Q3. We plan to deliver improved product portfolio execution in Q4.

On a sequential basis in quarter three, device and services operating expenses was up 2%, both in absolute terms and as a percentage of sales. Devices and services non-IFRS operating margin decreased to 150 basis points sequentially to 18.6% in quarter three, as we were unable to fully offset the lower net sales.

On to NAVTEQ, as mentioned, the transaction closed in quarter three, and we are reporting NAVTEQ as a reportable segment. Revenues in Q3 were EUR156 million. Non-IFRS operating profit was EUR29 million or 18.5% margin. Important to point out, this business usually has strong fourth quarter seasonality, typically resulting in higher sales and higher operating margins.

Now a few comments; Nokia Siemens Networks, with regard to the financials. From a seasonally strong quarter two, NSN’s net sales were down 14% sequentially and 5% year-on-year and were down 14% and flat on a constant currency basis. In Q3 NSN's non-IFRS gross margin was 31.2%, down slightly compared to Q2. This was a good performance given the sharp net sales decline in tough industry environment.

Over the past three quarters NSN has achieved and sustained solid gross margin performance, driven by structural improvements including, better deal discipline, improved mix, a higher proportion of software sales and cost of good sales related synergies. NSN's non-IFRS operating margin was 5.1% in quarter three, down from 6.7% in quarter two. This was due primarily to negative leverage associated with the lower revenues in the seasonally lower Q3.

As Olli-Pekka noted the infrastructure market is in a little tough environment and somewhat uncertain. In the face of the challenging market, NSN will continue to focus on profitability and cash, achieving its synergy targets, vigorous cost control, higher margin opportunities in services, solutions and software, and leveraging its large install base.

Overall, we are encouraged by the improved profitability shown in Nokia Siemens Networks in a seasonally weak quarter. We believe this confirms NSN has the right strategy and in fact is executing well.

Turning back to Nokia Group, financial income and expense in Q3 was an expense of EUR57 million. This compared to income of EUR3 million in Q2. The lower financial income and expense is primarily due to a combination of our lower cash position and higher debt position as a result from the NAVTEQ acquisition.

We have also had lower interest income resulting from Nokia's months ago moving to more liquid and even shorter length securities, reflecting our early move to extreme safety of principle from our normal position of safety and conservatism.

Going forward, you should expect financial income and expenses to be approximately minus EUR20 to minus EUR30 per quarter, EUR30 million and that is minus EUR20 to EUR30 million.

Next, let’s look at some of Nokia’s balance sheet and cash flow items; first of all on our capital structure. Let me reassure you, we are structuring in a way that we can sustain and execute our operations unencumbered by the current state of the financial market distress. For a long time our philosophy on capital structure has been appropriately conservative and as a result, our liquidity position today is solid. Many others can not say the same.

We have a very comfortable level of instant liquidity. Since 2007, we have focused our investments toward shorter duration, higher quality instruments, such as short-dated government securities and high quality liquidity funds.

In connection with the NAVTEQ acquisition, we introduced a moderate amount of leverage to our capital structure through the issuance of commercial paper. At the end of quarter three, outstandings were $3.5 billion. Since mid-September, despite extremely challenging market conditions, we have been successfully refinancing our maturing commercial paper.

Even though the credit market is very tight, it continues to be open for Nokia.

Our cash and other liquid assets totaled EUR7.2 billion at the end of third quarter.

Of a note on working capital for quarter three, inventories were up sequentially in the third quarter for both devices and services and NSN, as both businesses are geared for the seasonally up fourth quarter. I think we can do more to improve our working capital management in both devices and services business and in NSN. This is a high priority as we close the year.

Let me make a reminder regarding the Qualcomm settlement. The Qualcomm licensing agreement we entered into in quarter three includes an upfront cash payment in quarter four. The EUR1.7 billion lump sum payment to Qualcomm will be reported in our cash flow statement in quarter four as an operating cash outflow.

The bulk of the payment, the reason I say the bulk is remember that some of the payment goes to the historical amount that was due from the time of April 7th until we reached the agreement when Qualcomm was not accepting any of our payments towards them. So the bulk of the payment is essentially a prepayment of cost to goods sold and therefore will be expensed in subsequent quarters until the end of the contract period in 2022. As a result, in the future, our cash payments to Qualcomm will be lower than what is expensed in the P&L.

The new agreement with Qualcomm has a positive impact to our gross margins. We already saw a benefit to gross margin after we started providing in a significantly lower royalty rate after the old license agreement with Qualcomm expired in the second quarter of 2007. Going forward, we will see a slight additional benefit to gross margins as the settlement was somewhat more favorable than what we were providing for.

Let me give you a quick update on the share buyback. During the third quarter, we used EUR250 million to repurchase 14 million shares. Since 2004, Nokia has reduced its share count by more than 22%. That is more than 1 billion shares. In early August, however, we put our share buyback program on pause. While I continue to view buyback as an efficient means of distributing excess cash, given the current environment, we think it is prudent to conserve and build up cash, and we do not currently plan to buyback stock in the fourth quarter.

In term of dividends, we run our business with the intent to generate strong profits and to pay a dividend. That is business as usual on that front.

Olli-Pekka Kallasvuo

Thanks very much, Rick. In closing, please be assured that we have our eyes wide open to what is happening out there. We are closely monitoring our markets, our customers and suppliers. Nokia's business is a highly variable cost business with 80% to 90% of our COGS, cost of good sold, variable.

We are currently doing our financial planning for next year, and we will be appropriately prudent when planning OpEx. We are operating from a position of strength. We have almost the same unit volume as the next four biggest competitors combined. We are secure in our financial position, and our strategic direction remains solid. We believe that we will naturally remain the preferred partner in the industry, as all industry players de-risk their business.

For operators and other trade partners, we are the best partner because of our flexible distribution, product quality and strong brand. For our suppliers, we are the best partner, because we are the biggest, have the most reliable supply chain and are the most financially stable. We will take the appropriate actions in this uncertain environment to ensure that we can leverage these trends and competitive advantage even more.

I strongly believe that despite this uncertain environment, there are a lot of exciting things happening in our industry. Mobile devices are evolving rapidly and consumers are becoming more and more eager to use their mobile devices in new ways. We will continue to put the consumer at the center of the device experience and we see tremendous opportunities to create value in this evolving industry. Thank you very much.

Bill Seymour

Thank you, Olli-Pekka. We will now take the Q&A. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Tim Long with Banc of America Securities.

Tim Long - Banc of America Securities

Thank you very much. Just two on the overall industry and outlook. I understand this still north of 10%, but if we back into quarterly units that you have given for the first three, that implies somewhere in the 10% to 15% sequential for Q4. I just want to make sure that math is right and there was not a lot of restatement in those numbers.

Then, Olli-Pekka, if you would talk a little bit about some of the macro uncertainty and tie it to the results where we saw a big drop off in Latin America and a little bit in Asia. It looks to me by looking at the numbers that some of that could have been inventory correction. So, could you maybe just tie together some of the potential areas or weakness and what is end market and what could potentially be inventory correction? Thank you.

Rick Simonson

Yes. So, Tim, this is Rick. I will take the first. You did your math right. I think it is around 14%.

Olli-Pekka

Yes, and I will continue from there. So, I think you have noticed this and it is well spotted. Inventories come to play here as well. So overall, if you look at the situation, I have made this comment many times here already. So, this is definitely not a situation where one economic formula would be applicable to all markets. The markets really are behaving differently in this respect. So it is not like one size would fit all here either.

When it comes to your comment about inventory, so, in fact, our inventory level was very healthy at the end of the quarter. In fact, it was better in terms of days of sales than at the end of Q2, better. In that way some of that improvement definitely has been seen in the marketplace. Your reference is to these two markets that you made, yes, inventories come to play there. In that way, that needs to be brought into the talk here.

Tim Long - Banc of America Securities

Thank you, very much.

Bill Seymour

Next question?

Operator

Your next question comes from the line of Tim Boddy with Goldman Sachs.

Tim Boddy - Goldman Sachs

Yes. Thanks for taking the question. I want to ask a bit about liquidity but not from your own business but from your customers. We continue to hear anecdotes about distributors particularly in emerging markets like Russia, facing a few challenges in, obviously doing their business because they rely on credit. Equally there are some stories of operators feeling pressure in refinancing gross debt obligations.

Could you just give us some color on that, talk about the risk that creates? Would you extend using your own balance sheet? Would you consider using your own balance sheet on a short-term basis to support other network operator customers or handset distributors in the near term? Thank you.

Bill Seymour

Okay, Olli-Pekka.

Olli-Pekka Kallasvuo

Yes, Olli-Pekka. I simply need to take this opportunity to formally let Rick answer this question, right; I think he is quite emotional about this one.

Rick Simonson

Thanks, Olli-Pekka. I think Tim what Olli-Pekka is referring to about whether we would use our own balance sheet. Olli-Pekka actually hired me to Nokia seven years ago….

Tim Boddy - Goldman Sachs

Seven years.

Rick Simonson

…to unwind EUR6.6 Euros of vendor financing that had been done in the infrastructure market. We successfully unwound that to zero and we essentially lost no money on that, and we have never gone back to that model. So, I do have some aversion to that.

The important thing is that let's understand first from the operators then let me take distributors. You know the operators are in a situation where they have been in pretty weird health here over several years. They have had EBITDA margins that I find envious. They have cash positions that are pretty good and they de-levered from a number of years ago when we had the licensing payments.

So, all in all, most of the operators are in pretty good shape. Distributors, retailers, people in the chain, of course, they are more relying on short-term credit, because it is the nature of those businesses. We have very sophisticated and ongoing evaluation of this liquidity and the financial structure of both our suppliers and in our customers and distributors. So, we worked to make sure we understand where they are. We do trade and extend short-term credit appropriately based on that.

So, in that regard, we do not think we are going to see any surprises. There is no doubt that one of the troubling impacts in the overall financial crisis is this freezing liquidity in certain markets. I think the actions that the governments have taken on a more coordinated basis here, which as we all are well aware of, are starting to show signs of improvements of bringing little bit more liquidity into the money market, the commercial paper markets, and then needs to start having regional banks to provide credit, where it is due and we think that it is important that it goes back to the purpose point in the conference call.

We are going to be the preferred trading partner for those, and we have already chosen both suppliers and trade customers and distributors that we think are the ones that are the best run and have more financial flexibility than others. So there has already been a business self-selection there. We will work at that one, but I am not a bank.

Tim Boddy - Goldman Sachs

So just to clarify, your 14% sequential growth is the real end demand you see, and there is no haircut in that credit-driven, short-term disruption?

Rick Simonson

It recognizes the situation we are in and that sequential growth is somewhat more muted than it is been in the past. That is as Olli-Pekka referred to, and as we did five weeks ago, also, on our call. So it fully bakes that in. That is our best view.

Tim Boddy - Goldman Sachs

Okay, thanks very much.

Bill Seymour

Thanks, Tim.

Operator

Your next question comes from the line of Mike Walkley with Piper Jaffray.

Mike Walkley - Piper Jaffray

Great, thank you. I was wondering if you could update us on the competitive pricing environment and Nokia's plan to potentially reactivate more on a market-by-market, competitor-by-competitor basis, or there are certain to global market share that Nokia did not want to maintain. Also given your scale advantages, how long do you think some of your smaller competitors could sustain a potential price score?

Bill Seymour

Okay, Olli-Pekka?

Olli-Pekka Kallasvuo

Yes, it is a very dynamic situation as always. In that way, I think it is very important to bear in mind that when we spoke about the aggressive competition by some competitors in the third quarter, we were referring to a phenomena that some times happens in the marketplace, and this time we decided tactically not to broadly participate in that price competition.

This all relates to what we have said several times, that this will be our strategy here. We will try and take markets share in a sustainable manner. We know our responsibility also as the market leader, because when the market leader moves, the rest of the market will move, and we need to also look at that responsibility and look at the overall situation in the industry.

Having said that, we will continue to manage our business tactically also and look each quarter, each situation in a different and new way, and in order to maximize the bottom line; meaning, getting the right competition of the margin, a combination of the margin and the market share. This will be the case in the fourth quarter; it will be the case in the first quarter of next year as planned and beyond.

So, in that way I almost have the temptation to say that this is a very typical market situation where some competitors have been pretty aggressive at times; we are managing that and like I said in my opening, I believe has been the case every time before. At the end of the day the scale is what counts, the market position and the brand is what counts. It is your distribution capabilities that counts and economic gravity will definitely prevail here when it comes to overly aggressive competition.

Bill Seymour

Thank you, Mike. Next question, please?

Operator

Your next question comes from the line of James Dawson with Morgan Stanley.

James Dawson - Morgan Stanley

Hi, there. Just had a question on your smartphone volume. We expected it to come down. Just in terms of the N Series, we have some new devices there. Do you think that what we have in the pipeline for Q4 is enough to see you gain back some market share as quickly as Q4? Also just in terms of the pipeline of products in the N Series, do we expect significant refresh through the first half of next year?

Olli-Pekka Kallasvuo

Yes, I think it is very important to remember that when we are talking about smartphones, we are talking about natively programmable operating systems and I mean, now okay that means series only, it is not N series only, it is not E series only, but it is really various Symbian series, 60 overall and in that way it is more than N series and E series that you need to look at here.

With N series and E series, it is a marketing positioning question as opposed to a technology difference here. That is very important to understand. I made a reference in my opening also to the renewed portfolio, all the smartphones in the fourth quarter and if I look at the N96, I look at E71, I look at N79, N85, and I also look at the 5800, the touschscreen phone, that is a smartphone.

So I am quite confident about position there is stronger than it has been during the last couple of quarters. Of course here we will continue to renew the portfolio also going forward in the first half of the year.

In that way, we need to maintain this share of new product revenue in the total revenue. It is quite clear that we had a too low a number here when it comes to new product revenue in Q2 and in fact in the early part of Q3. Here, I think the situation is different right now.

James Dawson - Morgan Stanley

Just on that, on the new product revenue, was it 20% in Q2? I think you said, but do you have a number for Q3 and how it developed through the quarter? Can you give us anything there?

Rick Simonson

James, as we said, it was low or below what we like in Q2. With the delay in the smartphone ramp in Q3, it actually fell a bit further, and now we are seeing and expect quite a bit of improvement to the levels that we like and need based on the products that Olli-Pekka has lined out. So, that is how it is developed Q2, Q3 and how we see it go in Q4.

James Dawson - Morgan Stanley

Thanks very much.

Bill Seymour

Thanks, James. Next question.

Operator

Your next question comes from the line of Jeff Kvaal with Barclays Capital.

Jeff Kvaal - Barclays Capital

Yes. Thanks very much. I was wondering, Rick, perhaps if you could about the trajectory of margins that we might expect in the next couple of quarters or some of the variables that we should think about when weighing our own estimates? Thank you.

Rick Simonson

Yes, Jeff, thanks. I hate to be a broken record, but the positive-negative drivers remain pretty consistent, and the positive ones, the improving product portfolio in the mid and high end and then have some stability in the low.

We have pointed out here that, yes, we were not where we wanted to be in Q2 and Q3 on the high end in the smartphone market, but we have a stronger portfolio that we have shown you. You can touch it. You can buy it and consumers are. So, in fourth quarter, we think that is one thing on the positive side.

Also, there still is in some of the other, which you consider value markets, smartphone, multimedia, WCDMA, those are growing little faster than the other markets. Of course, we have the benefit in gross margins of the advantage of scale and some of the cost factors.

While we and others were impacted at the beginning of the year through not having a strong cost erosion because some pressure on the inputs there, I do not think we are going to see more negative surprise there, because there actually has started to be a little bit of a fall-off in some of those pressures that have come from energy prices, from metals prices, cost prices those things.

On the negative side, it is general competitive factors in overall. As Olli-Pekka says nothing new there. That has happened every quarter since this business existed. Sometimes, it can be about the lines you expect. Other times, people can take actions that are little more aggressive than you think. Of course, we have to see in fact how competitive our overall product is.

We feel and we have given you some indications of where we believe we are getting indications from consumers and from the trades that indeed our relative competitiveness has improved since Q2, Q3, but of course we have to wait to see how Q4 turns out. So, that is how I would handicap it.

Jeff Kvaal - Barclays Capital

Rick, do you think --?

Rick Simonson

Go ahead, Jeff.

Jeff Kvaal - Barclays Capital

Sorry, Bill. Rick, do you think it is possible should things erode in the overall market that you folks would revisit the margin loads that you saw in, 2005? Or are you measuring OpEx more costly than that?

Rick Simonson

Yes, Jeff, I mean that is a good question. We have had our medium-term targets, right, that we set out sometime ago in terms of operating margin, and we performed well against those. We have been slightly above. We have been in line or we have been a little bit below like we were here in third quarter. Of course, we will come back to that those target settings and the pluses, minuses as we do every year at Capital Markets Day that Bill mentioned at the beginning of the call.

I think Q3 was a good example how we optimized profitability while we did not try to unduly optimize market share. So we do have that flexibility. Q4, we think we are little bit better product portfolio, and of course, we do have the levers in terms of OpEx and variable cost in overall, and so, things like components costs, direct labor, customs freight, warranty, royalties all of those are the variable cost that Olli-Pekka mentioned comprised 80%, 90% of our COGS.

So we are not a semiconductor chipsets business here, however, a fab business. We are variable cost and so we have that ability. Of course, we have shown that we have taken away a lot of volatility over the years through good matching of OpEx to what is available on the topline in the gross margin lines. So we are just going to try to continue to practice in that way.

Jeff Kvaal - Barclays Capital

Thank you.

Bill Seymour

Okay, thanks, Jeff. Next question please?

Operator

Your next question comes from Andrew Griffin with Merrill Lynch.

Andrew Griffin - Merrill Lynch

Hi, there. I just want to know about your senses of operator subsidiary strategies right now, if we go through this uncertain time.

Olli-Pekka Kallasvuo

Yes, Olli-Pekka here. Yes, I think it is a good question and one needs to really look back in history also and looking at how has the operator subsidiary thinking developed. In fact, overall, it has been a stable situation in the markets where the subsidy is a relevant concept. Because the operators are competing against each other, they need the possibility to promote their sales.

Now, when several new interesting concepts are happening, Comes With Music is a great example of that, so, operators feel they need to promote something new as opposed to a device only. So, of course, time will tell. In the past this has been a pretty stable situation and I am looking at that in that light.

Of course, you have to remember that the big bulk of all revenue is derived from markets. The operator subsidy is not the relevant concept.

Bill Seymour

Okay, thanks. Next question please?

Operator

The next question comes from Mark Sue with RBC.

Mark Sue - RBC

Olli-Pekka, from your observations any thoughts on why we would not have volume growth next year. It sounds like you are relieved with the decreasing commodity prices. Can it be another 10% here? Do you have any evidence that the replacement cycle are lengthening?

Olli-Pekka Kallasvuo

No, I think in this situation what we are doing; we are estimating the fourth quarter of this year. I'd like to mention, we are seeing growth in a situation where the final surprise has been there for sometime. Having said that, of course, the amount of uncertainty is much more than typically seen.

In that way, we really will assess the situation and communicate our understanding of the market sizes like, we normally do, as opposed to taking an exceptional approach at this time.

At the end of the day, as moves in mobile industry, mobile telephone industry, the decisions to buy or not to buy, made by hundreds of millions or more than a billions consumers all over the world, in all parts of the world, not in some markets only. The market size of course will be a combination of those decisions made by the consumers, but in the fourth quarter, this is what we are seeing.

Mark Sue - RBC

Got it. Rick maybe just a quick one. Did you say you will resume your buyback in Q1?

Rick Simonson

No, Mark what I said was we have stopped it and we do not expect to resume it in Q4.

Mark Sue - RBC

Okay. BUT can we assume that you will do it Q1?

Rick Simonson

Look at Q4 and then I will tell you in as we get closer to Q1.

Mark Sue - RBC

Okay. Thank you gentleman.

Bill Seymour

Thanks Mark. Next question.

Operator

Your next question comes from Sherief Bakr with Citi.

Sherief Bakr - Citi

Thank you very much. My question relates to your market share outlook for Q4. Given that you have lost over 200 basis points of share in Q3 and you talk about the positive momentum of the portfolio in Q4, particularly in small funds given that the issues that you had Q3. Looking at your outlook for shares to be only flat to slightly up, it does not necessarily all add up. I am just trying to understand why you are only looking for relatively small if any share gains in Q4, is it because the price aggression that you saw in Q3 you think will be sustained into Q4 or is it because competition in the high-end you feel is going to be more intense than may be otherwise? Thanks.

Olli-Pekka Kallasvuo

Olli-Pekka. It is an excellent question. Thank you. However, I will have referred to what I said earlier, so also in fourth quarter we will try and maximize the bottom-line and manage the market share situation here tactically.

There is tough competition out there. I believe the economic gravity will prevail at the end of the day. We need to see where we can get to. Of course, from the mindset point of view, it is quite clear that we continue to believe in the market share and we continue to believe in the benefits and scale benefits higher markets would give.

That thinking definitely has not changed. That very much will continue to be in the center of our thinking, but at the same time, we just need to manage this quarter in the best possible way when it comes to the bottom line. Hence that is the estimate that we are giving at this point of time.

Sherief Bakr - Citi

Just as a quick follow-up; the price aggressiveness that you talked about in Q3, are you seeing any signs of that changing as you head into Q4?

Olli-Pekka Kallasvuo

It is an excellent question again, and I am sure many people are thinking about that. I just again need to refer to the fact that it is not one dynamism only here. There are different markets, different situations, different competitors, active not on a daily basis but on a weekly and monthly basis here.

The fine art of managing the mobile handset business comes to play here; so how do you maneuver in any given market, at any given point of time, I think there is quite a lot of volatility here when it comes to competitive pricing and in that way let’s see how things develop.

Sherief Bakr - Citi

Okay, thank you very much.

Bill Seymour

Thanks. Next question please?

Operator

Your next question comes from Gareth Jenkins with UBS.

Gareth Jenkins – UBS

Firstly on China; it looks like the device market slowed around the Olympics in Q3, but your market share held up very well, should we expect the reverse of that into Q4 so your market share coming down on reacceleration of growth?

Then also in China, on the weak infrastructure sales, is that just a pause before a big Q4, given some of the build-outs that we are seeing there?

Finally, probably just one for Rick, the working capital moved negatively. Was that NSN related? If so, was NSN actually free cash flow positive, including working capital? Thank you.

Bill Seymour

Okay, Olli-Pekka.

Olli-Pekka Kallasvuo

Yes, all I would like to mention China as an example of what I was referring to. In the opening, when I said that same economic rules are not necessarily applicable to the Chinese economy, it is continuing to grow nicely. There is a lot of activity in that market. In that way, it is not this one-size-fits-all thinking at all that you could apply to China.

Like I said, I think the inflation in China is easing. The lower oil price definitely has an impact in China. Then we just need to see what are the other dynamics there.

I would feel that when it comes to the fourth quarter overall, fourth quarter, I would see the situation in China quite stable. In fact, China was also one of the markets where in the third quarter we maintained our marker share.

Rick Simonson

Yes, Gareth. On terms of net working capital, again, we had a less like use of net working capital. Again, what we had is inventories up, as you would expect, going into the fourth quarter both at NSN and on the devices.

If I had my math right, that is actually less than last year, the sequential uptick. We do have a number of ramps in the devices and in services side. Of course, there is a pretty big seasonal change generally in the infrastructure market from Q3 to Q4. So that part is understandable.

On accounts receivable, actually they decreased sequentially both at absolute level and percentage of sales, and NSN did a good job of improving there, for instance. So it was, in my mind, overall better improvement sequentially when you allow for the fact that you have to build inventory coming into the fourth quarter, and we built it at a lower pace than we did last year at the same time.

NSN in the quarter actually delivered operating cash flow to the parents rather than used it, but the concept of free cash flow for a company that is not a standalone company, I do not think I would use that term, but they delivered some cash to us rather than using that cash.

Bill Seymour

Okay. Thank you. Operator, this will be the last question. Thanks.

Operator

Your last question comes from Richard Kramer with Arete Research.

Richard Kramer - Arete Research

Hi, thanks very much. Olli-Pekka, just to understand a little bit more the software and services strategy and in a challenging environment in '09 where you would see sources of growth, when we look at that business and we take away security, it is still under a EUR100 million run rate, which is quite small compared to EUR50 billion overall business.

Can you just enumerate for us two or three sources or areas that you think could provide meaningful growth for topline for Nokia in 2009 within software and services and where can we expect to look there for that SORT OF growth?

Maybe also just a comment about the unsustainable nature of competition. Looking out to '09, do you expect we will see fewer large competitors to Nokia than you see today? Thanks.

Bill Seymour

Okay, Olli-Pekka.

Olli-Pekka Kallasvuo

Yes, of course, Richard, you are right in pointing out that so far the numbers in comparison to the total size of Nokia are relatively small. You are also right in pointing out that the security business like Rick was speaking about, has been part of that.

I will also need to refer to what Rick said, all the new route in that part of the business, in the services part, has come from outside the security business. So, in fact, the growth rate there has been quite small, but really good growth rate. We are seeing it is getting a lot of traction, especially, navigation. That is very clear. So, in that when it comes to 2009 navigation location definitely will, I believe, will be the key contributor here.

Again, we can and we will leverage our handset position here, when it comes to driving up the new services. The word bundles we have mentioned couple of times here, it will be relevant when ramping up that business. The devices business and the services business will start to diverge as bundlers get less when it comes to the importance and separate streams of revenue, we will gain share of the total.

So, in that way our study here, something that I believe will be very substantial to Nokia in coming year. You are right, it is early yet. We, of course, as the management team need to prove that we can make that happen in practice.

Then it comes to your second question about fewer competitors in the future. So, I will not start to speculate on that one. I am not in a position to do that. Okay.

Richard Kramer - Arete Research

A very quick follow-up for Rick. Can you just give us, given your 8% change in currency estimate for fourth quarter? Can you talk us through what you think the currency impact on be better operating profit might be in Q4?

Rick Simonson

No, Richard, with the volatility in the currency markets I would be few fool to predict that. Remember what we have done is we have managed over time to mitigate swings in operating profit due to currency moves, but nothing involved in times there.

Richard Kramer - Arete Research

Okay, thanks.

Bill Seymour

Thanks, Richard. Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today, we have made a number of forward-looking statements that involves risks and uncertainties. Actual results may therefore differ materially from the results currently expected.

Factors that could cause such differences can be both external, such as general economic and industry conditions as well as internal operating factors. We have identified these in more detail on pages 10 to 25 in our 2007 20-F and in our press release issued today. Thank you and have a nice day.

Operator

Thank you for participating in today's Nokia third quarter 2008 earnings call. This call will be available for replay beginning today at 10 O'clock Eastern Standard Time and lasting through October 30th 2008.

The number to dial for the replay is 800-642-1687 for the US and 706-645-9291 for international callers. The conference ID number for the replay is 67678184. Again, the conference ID number for the replay is 67678184.

This concludes today’s conference call. Thank you again for participating. You may now disconnect.

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