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Executives

Olli-Pekka Kallasvuo - President and Chief Executive Officer

Rick Simonson - Chief Financial Officer

Kristian Pullola - Vice President, Head of Treasury and Investor Relations

Analysts

Stuart Jeffrey - Nomura

Mike Walkley - Piper Jaffray

Andrew Griffin - Merrill Lynch

Gareth Jenkins - UBS

Jeff Kvaal - Barclays Capital

Kulbinder Garcha - Credit Suisse

Tim Boddy - Goldman Sachs

Rod Hall - JP Morgan

Pierre Ferragu - Bernstein

Nokia Corporation (NOK) Q1 2009 Earnings Call April 16, 2009 8:00 AM ET

Operator

Good morning. My name is Georgina and I will be your conference operator today. At this time, I would like to welcome everyone to the Nokia first quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Kristian Pullola, Vice President, Head of Treasury and Investor Relations. Sir, you may begin.

Kristian Pullola

Ladies and gentlemen, welcome to Nokia’s first quarter 2009 conference call. I am Kristian Pullola, Head of Nokia Investor Relations. Rick Simonson, CFO of Nokia is here with me in Espoo today, and Olli-Pekka Kallasvuo, President and CEO of Nokia joins us on the line from New York. Given, we are hosting the call from two locations, please be patient with us, particularly during the Q-and-A session, so that we can direct your question appropriately to Olli-Pekka and Rick.

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 materially differ 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 11 to 28 in our 2008 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 website.

Please note that today’s press release and this presentation includes non-IFRS results information in addition to the reported results information. The press release issued today includes a reconciliation between the two.

With that, over to New York; Ollie-Pekka, please go ahead.

Olli-Pekka Kallasvuo

Thanks Kristian. Good morning and good afternoon. In Q1, Nokia executed well, given the exceptionally challenging macro environment. 2009 started with a market that was decelerating dramatically, as macro forces were compounded by extremely rapid inventory destocking by our distribution partners.

In Q1, channel inventories came down from approximately five to six weeks to approximately four to five weeks, and ASPs contracted significantly, as the trading down we talked about last quarter took hold. Even as this happened, our supply chain team was able to deliver product cost reductions that allowed our Devices & Services business to maintain flat gross margin sequentially at a solid 33.8%.

Challenging industry conditions will continue in Q2. However, the vast majority of the channel inventory destocking appears to be behind us, and this will lead to lower industry volatility compared to the past two quarters. Nevertheless, it is too early to conclude that the end-user demand has touched bottom. While certain regions may be showing signs of stabilization, the global economy as a whole remains weak, and we are planning our business accordingly.

I believe the current environment favors Nokia, as our financial strength allows us to maintain focus on our strategic objectives. We have transformed the way people connect, by adding a social location dimension to the Internet and making the experience as personal and instinctive as possible.

People want solutions, devices and services integrated together. To deliver this, we are improving the flexibility, innovation and speed of our operations. These are significant changes that will position Nokia to capture value as mobile devices and Internet services converge.

Along these lines, in Q1, the Nokia 5800 XpressMusic, our first mass market touch screen product, combined with our Comes With Music service was a big success story. The Nokia 5800 has seen very strong demand in every country, where it has been launched. Already in Q1, the 5800 was Nokia’s number one revenue and gross margin generating product and was the number one volume and value product in the UK.

Despite some capacity constraints, we received approximately 2.6 million units in Q1, as the product ramped up globally. Today, all sales channels are open. We have increased our capacity and we are shipping the Nokia 5800 at the rate of more than 1 million units per month.

Encouragingly, the Nokia 5800 has been a big hit, packaged together with our Comes With Music service. In Q1, we launched Comes With Music in Singapore and Australia very successfully. The results are in fact quite interesting. Comes With Music users have been downloading a healthy mix of both new and older songs, while also exploring and consuming a far wide range of music. This demonstrates that Comes With Music can help the record labels to monetize their back catalogs and other long tail content.

In addition, we have already seen Comes With Music customers download millions of tracks and approximately 20% of all tracks have been downloaded over the air, which shows that Comes With Music can be a valuable traffic generator for the operators as well. Also, based on our early data, Comes With Music is projected to increase the value of the digital music market in Singapore by approximately 30%. In summary, a win-win for consumers, operators, record labels, publishing houses, recording artists and Nokia.

So, now let’s take a closer look at the overall device market and our market share in the first quarter. According to our estimates, the mobile device market was 255 million units in the quarter, down 16% sequentially and 14% year-on-year. The sequential decline was attributable to seasonality and continued macro weakness. The year-over-year decline was attributable to the macro weakness.

According to our estimate, our device market share was 37% in Q1, flat on a sequential basis. We calculated the geographical market share figures in Q1, were distorted by the inventory destocking. Also across the border trading related to the currency volatility had an impact, similar to Q4.

Regarding China, it does appear that consumer sentiment improved during Q1, but the situation is fragile and what appears to be the early success of the Chinese government’s stimulus plan will continue to be important in improving consumer confidence and increasing demand. 3G competition and rural subsidies should stimulate the mobile handset and infrastructure markets in the near-term.

When it comes to Nokia’s Q1 performance in China, our strong sequential improvement was largely due to the China inventory fluctuations that caused Q4 to be abnormally weak. In terms of end demand in China, we saw signs of relative stability developed during Q1 as opposed to a sharp uptick in the demand.

Industry price competition continued to be robust in Q1. It is becoming increasingly clear, that some of the pricing moves by our competitors have been supported by favorable currency fluctuations, while some others have been motivated by weakness. The price competition is coming primarily from our traditional competitors and it’s worth noting that these competitors have recently been making very small profits or in fact generating significant to cover losses.

We consider our scale and distribution to be key competitive advantages and we will continue to respond in a practical manner to pricing activities by our competitors. As always, our objective is to grow our market share in a sustainable way, while maximizing our longer term profits. Our smartphone volumes were 13.7 million in the first quarter and we estimate our share was 38%.

While our N Series products delivered lower volumes than we expected in Q1, we are confident that our high end portfolio is headed in the right direction. Currently, the two fastest growing categories of the smartphone segment are touch screen and QWERTY and in these areas we have strong momentum, led by the Nokia 5800 and the Nokia E71.

More importantly, we are building on our momentum this year. We plan to bring to the market a much broader range of touch screen and messaging services. With the Nokia 5800 we estimate that we captured approximately 20% of the overall touch screen device volumes with just one product. Clearly, we are just getting started but ultimately we target to be the industry’s top vendor of both touch screen and QWERTY solutions.

Now on to the product and services highlights for the first quarter of 2009; as I mentioned earlier, the Nokia 5800 has emerged as a very successful product. There are many elements that have come together to make this product a hit. One aspect that might not be appreciated is the value of Nokia’s core competitive advantages. The attractive price point, half the price of an iPhone is possible because of our scale, world class supply chain and strong intellectual property portfolio.

Also, the power of the Nokia brand and the distribution network enabled us to quickly ramp up the Nokia 5800 globally. I believe Nokia’s core competitive advantages are meaningful not only in the low end, but also in the mid-range and high end. Our Eseries devices also continued solid performance in Q1, led by the Nokia E71. In fact, we shipped a record 3.3 million Eseries devices in Q1, which represents a year-over-year growth of approximately 85%.

We introduced the Nokia E75, our flagship email device and the Nokia E55, our most compact messaging device. Both of these products feature Nokia messaging, our new consumer messaging application. I really encourage you to try out the new Nokia messaging software. It’s a giant step forward, truly easy to use and set up and the user experience is fantastic.

Our graphite devices now include the E71, the E71x at AT&T. The attractively priced E63, the E75, the E55, the highly anticipated N97 and the 5730 XpressMusic and we are planning more introductions this year.

We are also taking the next step, leveraging our progress in creative messaging solutions by increasing our go-to-market efforts with operators. Simply put, we believe Nokia messaging is the easiest and most efficient consumer messaging solution for operators to provide to their customers.

We have negotiated contracts with Yahoo! Mail, Windows Live Hotmail, Gmail, as well as thousands of other ISPs around the globe. Nokia messaging can also integrate with the operators on email offering.

We currently offer Nokia messaging together with Telefonica Spain, SingTel and Vodafone Portugal and we are in discussions with many additional operators and in fact I think outside the script that we did announce this morning also corporation with Orange in the area of messaging. So I would have to add that to the list.

In Q1, we announced Ovi Store a one-stop shop that offer consumers relevant targeted media. The Ovi Store will intelligently help users to discover applications and content. The Ovi store is expected to launch in Q2 and will be showcased on our flagship convergence device, the N97.

We are continuing to deliver innovations that leveraged our strength in location-based services. In Q1, Nokia introduced a beta version of an application called Point & Find in the United States and in the UK. You simply point your mobile phone camera at the real life object and you can get relevant information and services via the Internet. There is so much potential to create value with this kind of a source.

In Q1, services net sales were EUR150 million, down 5% sequentially, and up 79% year-over-year. Currently, we generate most of our services revenue in combination with sales of devices.

Even though the Nokia 5800 and the E71 sold well in Q1, our Nseries sales were disappointing and our sales of smartphones were down on a sequential basis. We are planning to launch more mid-range and high-end smartphones this year, and that are increasing the share towards our services and this is expected to be a catalyst for services growth in 2009.

We are clearly on the right track here with the Nokia 5800 combined with Comes With Music and our broad range of QWERTY devices combined Nokia Messaging, but there’s a lot more to do and we need to move faster.

On to Nokia Siemens Networks. The first quarter, which is seasonally the weakest quarter of the year, was a tough one for NSN. The macro environment clearly pressured the infrastructure industry in Q1 and NSN experienced extreme customer caution. However, that now seems to be slowly moderating as operators have assessed their own business performance and expectations for 2009.

The fundamental industry drivers continue particularly data traffic growth and emerging market subscriber growth. In addition, operators are focused on efficiency and business transformation and this provides opportunities in areas such as managed services and systems integration where NSN has momentum. That said, the overall industry continues to face macro headwinds. Therefore, NSN’s focus on cost control and working capital management will continue to be key priorities.

Now I’ll pass it over to Rick for more on the finances.

Rick Simonson

Thanks, Ollie-Pekka. This quarter I’d like to start by highlighting our continuing efforts to reduce our operating expenses. We are targeting a Devices & Services operating expense run rate of less than EUR6 billion by the end of 2010, compared to the run rate at the beginning of 2009 of approximately EUR6.7 billion. We are making good progress, and in fact we are working to accelerate the realization of these cost savings. We’re taking a coordinated action across the company.

We have in fact pruned and continue to prune our mobile device portfolio to match the current markets’ outlook; adjusted our mobile device production capacity accordingly; focused our resources on five core consumer Internet services; sold our enterprise firewall business; cut subcontracting external consultants; struck more favorable terms with suppliers; frozen salaries for the whole of 2009; restricted travel; scaled back Devices & Services R&D activities, Vancouver as an example, focusing R&D on fewer sites; focused and narrowed our long-term Nokia Research Center research agenda, and we stepped back from Japan in mobile devices.

The headcount impact of measures, we’ve announced and commenced in the first quarter includes approximately 1,700 people affected by actions to scale back Devices & Services sales, marketing and technology management operations, streamline Nokia’s device R&D organization, and increased efficiency in certain global support functions.

Approximately 1,000 people leaving Nokia Devices & Services and global support functions through our voluntary resignation package and reductions due to closure of our Jyvaskyla mobile device R&D facility. This totals approximately 3,000 people; excluding temporary layoffs affecting around 2,500 people on a rotational basis at our Salo mobile device manufacturing facility.

In quarter one; we took total charges of EUR93 million, related to these and other cost actions. In Q1, our strong operating expense performance in Devices & Services was attributed primarily to disciplined control over discretionary expenses. In Q2, on a sequential basis, we expect that our Device & Services OpEx will increase slightly in absolute Euro terms, driven by marketing and R&D expenditure for product launches, offset partially by our cost reduction actions.

As a management team, we are firmly committed to reducing our operating expenses. We have a realistic view of the macroeconomic downturn, and we do not expect a quick or strong recovery. We will continuously assess our cost structure and take action, so that we maintain the financial strength that allows us to sustain the investments that will drive our future revenues and margins.

Now, let’s look specifically at Devices & Services performance in Q1. On a reported basis, Devices & Services net sales were down 24% sequentially and 33% year-over-year. On a constant currency basis, net sales were down 23% sequentially and 31% year-over-year. The sequential and year-over-year declines were attributable to lower volumes and lower ASPs.

Although the rate of decline moderated significantly in the latter part of quarter one, it’s too early to say that end-user demand has bottomed. In Q1, services net sales were EUR150 million, down 5% sequentially. Billings were EUR166 million, down 9% sequentially. Olli-Pekka already indicated our net services sales were impacted in Q1, due to the lower sales of our higher end devices.

We expect the gap between billings and net sales to widen, as we bill some of our services in advance, like a subscription and recognize the revenue ratably over the contract period. Also related to our services business, we announced in quarter one that we would sell our enterprise firewall business to Check Point Software Technologies. This transaction closed earlier this week.

We’ve been reporting the enterprise firewall sales as services net sales and, therefore, our services business will see a corresponding net sales decrease in Q2. For reference, each of the last five quarters, our enterprise firewall quarterly net sales were below EUR50 million.

Nokia’s device average selling price in the first quarter was EUR65, down 8% from EUR71 in the fourth quarter. On a constant currency basis, the sequential decline was 6%.

Devices & Services gross margin in Q1, 33.8%, flat compared to Q4. Our gross margins were impacted by lower ASPs, offset by lower cost of sales. ASPs declined sequentially, primarily driven by general pricing pressure, a higher portion of sales of lower priced products, and lower than expected device volumes in our Nseries range of high-end devices.

We offset the sequential ASP decline with lower cost of sales. We have worked closely with our strategic suppliers to achieve sustainable cost improvements, the bulk of which is expected to impact our results beginning in Q2.

With our Japanese yen-based suppliers, we have negotiated lower prices and where appropriate, we have negotiated to do business with them in currencies other than the yen. We have also made a decision to shift some sourcing to non-yen based suppliers.

In Q1, we benefited from foreign currency hedging gains. However, these hedging gains had a relatively small impact on our gross margins, compared to our cost of sales improvements. While our Japanese yen hedges are expected to roll-off beginning early Q3, I believe the risk to our gross margins have been significantly mitigated by the combination of the efforts of our supply chain team as just mentioned and the weakening of the yen as compared to three to four months ago.

On a sequential basis in Q1, Devices & Services, non-IFRS OpEx was down 14.6%, in absolute terms and up 260 basis points on a percentage of net sales. In Q1, we had good controls over discretionary expenses as sales contracted sequentially.

Devices & Services, non-IFRS operating margin decreased 170 basis points sequentially to 10.4% in Q1, driven primarily by lower sales. We are maintaining our targets for Devices & Services, non-IFRS operating margins to be more than 10% in the first half of 2009 and to be in the teens for the second half of 2009.

Moving to NAVTEQ. In the seasonally weak first quarter, NAVTEQ experienced sharp declines in auto navigation systems and mobile navigation devices due to the macro environment and destocking. This resulted in a greater than normal seasonal decline in net sales and operating margins in Q1. Net sales were EUR132 million, a decrease of 36% sequentially. Non-IFRS operating margins were 3.7%, down 2,200 basis points sequentially.

Now, for commentary on Nokia Siemens Networks. Net sales were EUR3 billion in Q1, reflecting a greater than normal seasonal decline, challenging market conditions and competitive factors. In Q1, NSN’s non-IFRS gross margin was 25.6%, impacted by lower volumes, price erosion and a mixed shift towards services. In addition, note that the non-IFRS gross margin contained a charge of EUR36 million related to a large customer contract in China.

In Q1 NSN’s non-IFRS operating loss was minus 4.1% of net sales. Although the quarter was particularly tough, NSN delivered good results in some key areas. The services business performed well and represented over 40% of NSN’s net sales in Q1. Professional services grew at strong double-digit level year-over-yearend software sales also continued to grow, increasing as a percentage of NSN’s net sales since Q1 2008.

Cost control remained solid with non-IFRS operating expenses down 6% year-over-year. Nokia and Nokia Siemens Networks now expect the mobile infrastructure and fixed infrastructure and related services market to decline approximately 10% in euro terms in 2009 as compared to 2008 levels.

This is an update to Nokia’s and NSN’s earlier estimate than in 2009 the mobile infrastructure and fixed infrastructure and related services markets would decline 5% or more in euro terms in 2009 as compared to 2008 levels.

Our latest estimate is driven by operator belt tightening, availability of credit and growing demand for vendor financing, slowed spending of state operators in countries facing elections and/or changes in government and in China, a preference toward local vendors as well as significant pricing pressure.

Nokia and Nokia Siemens Networks continue to target for Nokia Siemens Networks market share to remain constant in 2009 compared to 2008.

Nokia’s financial income and expenses in Q1 was an expense of EUR77 million, compared to an expense of EUR16 million in Q4. The sequentially higher net expense was partly due to FX losses as we were not able to hedge some contracts, receivables, exposure to the Russian ruble, during parts of the quarter given extreme market volatility. These losses amounted to EUR42 million in Q1.

On this slide you see we show both the quarter one reported and non-IFRS income statements. We lay out these items that are excluded from reported to get to the non-IFRS numbers in our press release.

Next, let’s move and look at some of Nokia’s financial position and cash flow items. Our cash flow from operations was EUR276 million for the quarter, below our expectations. Let me take you through the major drivers.

Lower profitability overall, despite the relatively good performance by Devices & Services, this was partially offset by good working capital management on an overall basis. The Devices & Services business delivered approximately EUR600 million of working capital improvements on a sequential basis, driven by the strong accounts receivables collection and inventory management.

NSN, however, experienced a deterioration quarter-on-quarter of approximately EUR300 million, due to restructuring related payments as well as decline in accounts payable. In addition, we had approximately EUR400 million of cash outflows related to cash settlement of foreign currency hedging contracts. Our cash and other liquid assets totaled EUR8.1 billion at the end of the first quarter.

During the quarter, we successfully launched our inaugural euro bond transaction. With the dual trenches 5 and 10 year transaction we raised EUR1.75 billion in total and used the proceeds to repay outstanding commercial paper. We also closed a EUR500 million loan with a European investment bank to fund R&D activities related to the development of open source software linked to the Symbian foundation.

Here this slide covers the currency situation and constant currency reconciliation. With that I hand it back to Olli-Pekka in New York.

Olli-Pekka Kallasvuo

Thank you, Rick. So, in Q1, Nokia managed through an unprecedented channel inventory contraction and I was pleased with our relative performance. Although, the trajectory of end demand remains unclear, we believe the market is no longer falling in an uncontrolled manner. I’m encouraged by the signs of stabilization we saw towards the end of the first quarter.

The utility that handsets provide has not disappeared. Rather, the macro environment is causing many people to trade down and purchase lower priced handsets. With our broad portfolio and strong lineup of lower end devices, Nokia can meet this need in a way that some of our competitors simply cannot.

Also, Internet services are dramatically improving utility, particularly at the high end of the market. People are enjoying improved experiences with touch screen devices and improved efficiency with the QWERTY devices. Nokia is starting to make great progress in delivering solutions that consumer’s value. Our progress is happening in stages.

We have established key foundational elements with the launch of our Ovi services and our first highly successful touch screen and QWERTY products, but more importantly, we are starting to become good at combining devices with services to create solutions. In 2009, we are building on top of this as we significantly broaden our portfolio of touch screen and QWERTY based solutions.

We believe Nokia will be a catalyst driving the next wave of growth and as the industry embraces Internet services at the high end as well as the mass market level and in our, usual fashion we will leverage our scale, brand and distribution to bring compelling and attractively priced solutions to people globally. Thanks very much.

Kristian Pullola

Thank you, Ollie-Pekka. We will now continue with a Q-and-A session. Please limit yourself to one question only. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Stuart Jeffrey - Nomura.

Stuart Jeffrey - Nomura

I just wanted to delve a bit more into the infrastructure changing guidance. Could you perhaps detail a bit more where the weakness is? Is it really just a pause for breath or do you think that the full first half is being impacted?

And then also, and we’ve seen NSN focus heavily on cash conversion and on margins. That’s still challenging. How much confidence do you have that some of the weakness you’re seeing is in NSN losing market share rather than the overall market being weak? Thank you.

Kristian Pullola

Maybe, we’ll start in New York with Ollie-Pekka.

Ollie-Pekka Kallasvuo

Yes, of course we did change our guidance there and that’s of course a very important and it relates to total understanding we have on the market, market right now. The markets have continued to be weak overall that was included in the earlier guidance already, but we have definitely seen further decline in our understanding in how the markets will develop in many markets.

Eastern Europe, Eurasia, Russia and some areas in Asia-Pacific are included here. So there is a change, a small change but a change anyhow to our market size estimate in the business. Of course, one needs to remember that Q1 is seasonally weak and in that way too many conclusions based on that cannot be drawn but nevertheless.

Now, the market share guidance continues to be the same as we have had, so we estimate our target to maintain the market share in that business. It’s a situation which is rather difficult to read. It’s very clear, there’s been one quarter, seasonally weak, but we feel the outlook has come down a bit as far as the total market is concerned, that’s what I’m talking about here. Rick, you might want to add something.

Rick Simonson

Yes. Stuart, in terms of you mentioned is this sustainable on their net working capital. We had a bit of a slip here. We talked in Q4 they had excellent performance on net working capital. I talked to you and everybody a lot about, we wouldn’t be able to repeat that year event in first quarter but we didn’t want to give it all back either and I think that’s essentially what Q1 was, somewhere in between there, kind as we expected.

We’ve got to work hard and then get further improvement. On a year-on-year basis, we have shown improvement in the net working capital, still even Q1 to Q1 year-on-year and we got to make sure that that continues to happen in each of the quarters going forward on a yearly basis.

There is much more work to be done there. There’s a strong focus on that and also I want to point out here, we didn’t spend much time elaborating on the OpEx measures and cost savings that NSN is driving. That’s because they’ve been at that full force since the day of the merger and it continues now.

So I didn’t feel that that was needed to be called out. They live and breathe that and are continuing that and it’s necessary in the environment as Olli-Pekka pointed out.

Operator

Your next question comes from Mike Walkley - Piper Jaffray.

Mike Walkley - Piper Jaffray

Great, thank you very much. Just wanted to go a little bit through the inventory destocking. If we are nearing lower levels, why wouldn’t we expect Q2 to be up a little more over Q1 levels for the industry? Also with your goal to gain market share, can you elaborate where you believe your best opportunities to gain share is, is it including smartphone portfolio or is it more on a regional basis such as markets like the US and Korea?

Olli-Pekka

Yes. I think we have seen and we saw lot of destocking happening in the first quarter, you are right and like I said, in terms of days of supplies or DOS, we came down from five to six to four to five weeks and I think this is quite strong destocking. I think the destocking in fact it has in most of the markets now reached the bottom. There is a certain level of stock the industry needs in order to be functional and we are close to that now in terms of days of supply.

There are some markets here that might continue to experience some of that and I would call out the Latin America, that seems to be lagging a bit behind when it comes to the economic cycle overall and I think in that market we might see some of that, but now I’m talking about the destocking and I’m talking about sort of us maybe seeing the bottom in terms of DOS. The market share overall, as to thinking with us, continues to be go for the market share and I saw no change there and that’s applicable to all the markets, definitely.

We see our services thinking here, the fact that we can add services on top of the device platform, that will give us a lot of opportunities, especially in high-end and mid-tier, but services thinking of course need to be applicable to the low-end as well, and we need to look at the emerging market services to support us there.

Operator

Your next question comes from Andrew Griffin - Merrill Lynch.

Andrew Griffin - Merrill Lynch

Hi, there. Just looking at the North America market, where it looks like you had pretty good revenue, sequential increase. Was that driven by the GSM/WCDMA market there or is this impact of some of the CDMA handset, seen again shipped into the CDMA operators?

Olli-Pekka Kallasvuo

That assembly is both; it’s both CDMA and GSM and yes, you are right in pointing out that we, in fact, did gain market share in North America, both year-over-year and sequentially as well.

Operator

Your next question comes from Gareth Jenkins - UBS.

Gareth Jenkins - UBS

Devices & Services gross margin, it looks like your cost of sales fell slightly faster than your revenues year-over-year in the quarter and you’ve provided some detail on the levels of that. But I just wondered, given your statement about make a gain in the second part of the quarter and coming through into Q2, can we expect that trend to continue in Q2, namely, the cost of sales force faster than revs in Devices & Services?

And then just a second one; just a clarification Rick on NSN. Did you say that you would expect the losses to improve quarter-over-quarter through 2009? If not, could we get some clarification there? Thanks.

Rick Simonson

Yes, Gareth thanks. On the cost of goods sold and gross margin and looking forward, as always, there’s many moving parts here on gross margin, some favorable things, some negative and we were able to offset the ASP decline, which often is associated with pressure on gross margin through the cost of goods sold actions and other.

As we had said, worked to make sure that our fixed production overheads were minimized so that our variable costs were as much variable as possible as we came in this downturn, and that’s reflective of what we’ve done with the contract to manufacturers. We’ve stopped working with them. We’ve brought our production here. We’ve scaled back our operations. We’ve had some rotating furloughs at some of the plants. So it’s a combination of those things that allowed us to do that.

Going forward it’s hard to predict, because again, as I mentioned also on the impact on currencies, as I said we’ve had ability to what I characterize as significantly mitigate the worst case of the yen appreciation factor through the three methods I mentioned, but that’s assuming that the yen doesn’t go back and strengthen, and I can’t predict that for you, and so there is always some residual risk to that. But we’ll work hard to make sure that the cost savings that we’ve gained and that we have planned help us with this gross margin as we go into Q2.

I think we’ve shown over the years that we’re pretty good at getting continuing constant component cost declines, and that’s operating pretty much normal. I don’t see anything terribly different about how that operates in the second quarter compared to what we’ve historically done and then NSN, I didn’t understand the question, I’m afraid. Could you repeat that?

Gareth Jenkins - UBS

Yes. It is just a question on the progression of losses. You lost 122 million in Q1. I just wondered what was the phasing of returning to profit in NSN is. Do we just assume this is kind of linear progression and then obviously a big Q4?

Rick Simonson

You’re looking for profit guidance on NSN on the quarter. Can’t go there with you, Gareth, but, what I said was just wanted to point out what has been historically the case and I think continues to be. Q1, for the infrastructure industry, that NSN is in, is always the seasonally weakest. So what we’ll try to do is take advantage of quarter two being a bit stronger in the industry and for NSN and we’ll have to see where it comes out on the bottom line.

I know, we and the management team are focused on making sure that we do what’s in our control to try to make the second quarter behave like it has in the past, which is a little seasonally and sequentially stronger. We have to see where the accounting comes out.

Operator

The next question comes from Jeff Kvaal - Barclays Capital.

Jeff Kvaal - Barclays Capital

Yes, thanks very much. Rick, the teens margin that you cited in the handsets is obviously pretty broad. I was wondering if you could provide some of the variables that would drive things to the high or low end of the range.

Rick Simonson

Yes Jeff, what I think, the best way I can answer that, is go back to what we talked at last quarter and also at Capital Markets Day, and I told you guys there when we made the change. We wouldn’t have said teens if it was in the mid or the high. So I mean there is nothing to add to that. We’ve said that very clearly at Capital Markets Day. We said it very clearly at the Q4 results and I’m saying it very clearly here today.

Operator

Your next question comes from Kulbinder Garcha - Credit Suisse.

Kulbinder Garcha - Credit Suisse

Thanks. I’ve got a question again on margins and it’s kind of linked. The first one is Rick, historically you spoke about in the Device & Services business in particular, having a gross profit OpEx kind of discipline and if you look back over the years you’ve held that ratio remarkably constant.

I understand while in 2009, you kind of certainly stick for historic discipline, where you had a gross profit OpEx ratio close to two times. But has anything fundamentally changed in your view in the industry of Nokia while on long-term basis you couldn’t operate over those levels of efficiency?

The second question is linked to margins again. Just on the smartphone business, for Ollie-Pekka, really. You spoke about touch screen and bringing out more products. Obviously you’ve had the first couple of announcements. Are there major further touch screen products that you will announce and ship in 2009 or could that be 2010 phenomena, do you think?

Rick Simonson

Okay. Kulbinder, this is Rick. I’ll take the first one and as you say the smartphone question for Ollie-Pekka. You know, has anything changed? Well, what’s changed is of course the world is in a brutal downturn on a macro economic and of course that’s what’s changed. You properly pointed that out and that’s why while we’re doing better than most, we’re not doing well, like we used to do.

In terms of the margin compression we’re taking the OpEx actions to try to offset that. There’s obviously a lag here, and we’re going to have to get some help in the macro environment before we can even talk about and have a meaningful discussion about what these might return to. You know, we’ve given a pretty clear view of the ranges we think we can operate in the current environment and looking at the second half of the year and it’s the normal factors and the things that are in our control of course on the gross margin.

On the topside of your ratio, are product portfolio and solutions portfolio and increasingly we’re going to be talking more and more and being able to measure more the solutions portfolio that Ollie-Pekka talked about in his opening, but those are coming in stages as he said. We have more to do. So we’ve got to give it some quarters there and so I then turn it to Ollie-Pekka on the smartphone question.

Olli-Pekka Kallasvuo

Yes, in fact it was not a smartphone question it was a touch question. But nevertheless, I think it’s important to realize that both touch and QWERTY and smartphone in general are important and we really need to sort of renew our portfolio here in a very meaningful way.

So if you look at Q2 only, we will start shipping seven new smartphones; the N97, the N86, E75, E55, 5630, 5730 and 6720. So a lot of smartphones coming and they will be ramped up.

Then of course towards the end of the year, this will continue. It’s very clear that we are renewing our portfolio here, both in the mid-tier, lower mid-tier, high tier, or high end, to cover more and more QWERTY and touch as well and the combination of the two and so that will happen in stages during 2009 and that renewal will have an impact already in 2009 and of course even more so in 2010.

Operator

Your next question comes from Tim Boddy - Goldman Sachs.

Tim Boddy - Goldman Sachs

Yes, thanks. I just wanted once again to talk about the teens margin guidance. It sounds as though the yen affects, with currencies where they are is now not a meaningful factor. If I’ve understood you correctly, which basically leaves sort of two levers to get to those margins, one being the seasonal demand recovery and the other being obviously significant product success.

It will be helpful if you could just talk about the outlook for strengthening volumes in the second half and secondly, when do you think N97 will be shipping in full volumes and could it be a million plus unit seller within a quarter? Thank you.

Rick Simonson

Yes. Tim, teams again, I want to emphasize, that’s when we set out teams for the second half, that’s when we had to bring down our previous guidance, right and bring it down in a significant way because it was reflecting the significant economic downturn and the significant decline in our own industry and we’re working to get the teams from the 10.4 that we were today in the first quarter.

So I want to emphasize that where we are in getting two teams and that’s we’re working hard to do. There aren’t any guarantees in life and I wouldn’t agree with saying the yen effect is not meaningful.

What I wanted to try to point out and appreciate the opportunity that your question gave me on this, Tim, is that we’ve mitigated some of the impact that could have been the worst case as it looked when we last talked in the last two times we’ve talked on this yen effect and that’s through, one, the yen has weakened somewhat from its strongest point.

But if that goes back, then of course that’s going to be incrementally negative. We have moved some of our supply away from yen but as I’ve said, that’s percentage points movement from where we were approximately around a quarter of our supplies and we’ve negotiated meaningful reductions with our suppliers.

We really appreciate how they’re working with us to try to make this long-term sustainable, sharing the pain and it is painful and so from that we’ve done some mitigation but we still have impact from that. The seasonal aspect that you speak to is very important. We reiterated that for the year, we see approximately 10% down in unit volumes, the decline here in the first quarter on our estimate of 255 million for the industry.

We do need to see some stability in the macro economic to get there, nothing new there, same factors rule. Then on the product, we’ve talked about that how some of the product that Ollie-Pekka just talked about needs to get in the market and needs to resonate with consumers and we think it will, to able to have us reach this target.

So with that, I’d ask Ollie-Pekka to address the product more and solutions.

Olli-Pekka Kallasvuo

Yes, that simply was a question at the end. I wanted to comment about N97, that we plan to start to ship in June, in the way that it would be and will be of course when we ship, when it ships, a meaningful contribution to the top line and bottom line in Q2 as well, but of course, the product will go out in full volumes only in Q3, ramping up in June, full impact on Q3.

The question is, can it reach the million mark when it comes to monthly volumes? Yes, it could, of course. Although, always depends on the pricing. So in that way, we will try and maximize here of course the net sales and the bottom line impact and not go for the volume only. So I will not give an estimate there, but what I can say, the product has got a wonderful reception from the people who have seen that, tried that, tested that and there is a lot of interest in the marketplace for that one.

Operator

Your next question comes from Rod Hall – JP Morgan

Rod Hall - JPMorgan

The main question I’ve got is on services revenues. I mean, they seem to be stagnating a little bit and you guys have been pretty optimistic about where the direct contribution from those revenues could go to over the course of a few years. I wonder if you’re still thinking that or do you believe that services are more a driver of hardware sales and less a driver directly of revenues?

Rick Simonson

Yes. Rod, as I said in my commentary, when you have the overall device market. The industry volumes coming down in Q1 like they did and even more than the typical seasonal and of course ours follow that.

You’re going to have an impact on services because, again, our services now at this stage and for the foreseeable future are linked to how well they combine with our device portfolio. That is our competitive advantage. That’s how we plan to bring those out as solutions and so the volumes go down, then the revenue that comes from services is lower than what we would have expected if we didn’t have the macro decline.

Additionally, then we were impacted somewhat by again by the fact that our Nseries devices that embody and embrace a number of these services to create the solutions didn’t ship in the volumes that we would have hoped to.

So one macro, one partially our own portfolio, but again as we bring out these additional QWERTY, additional touch and smartphones that go across what used to be called the high end market and move into the mid-range market. Then those are going to be the solutions that are going to drive the service revenues.

So we stay comfortable that the service business is going to grow and the focus to services that we are delivering, are going to be well received in the marketplace.

Rod Hall - JPMorgan

Then if I could just follow-up, Rick. One thing I noticed on the regional ASPs is that European ASPs have dropped pretty precipitously. But then on the positive side, North American ASPs seem to have grown quite a bit. They’ve historically been pretty significantly different from each other with the European ASPs being a lot higher.

Now they seem to be kind of approaching each other, and I wonder whether, you think those are approaching some sort of an equilibrium or do you think that these big changes in ASPs will just continue?

Rick Simonson

Yes, Rod. I think equating those two with our portfolio isn’t meaningful, because our portfolio today in North America has been a very different portfolio than it has been in Europe, very much volume, lower end. Now we are moving to get products in like the E71 and the others in North America.

In Europe, of course as we said, as was talked about and Olli-Pekka talked about in last quarter; that there is some trading down going on in the marketplace. Some of that happens in Europe and it’s a little bit a function of quarter one. So I wouldn’t go predict and try to look at correlation between our North American group ASPs.

Operator

Your last question comes from Pierre Ferragu - Bernstein.

Pierre Ferragu - Bernstein

I just wanted to come back to your market share in converged devices that you seems to have at 38% this quarter and it seems that you estimate the overall market to 36 million, which is a huge decline from what you estimated for the first quarter 2008, 25%. So I just wanted to confirm that with you and get your comments on why this market has been declining more than the overall market? Thank you.

Olli-Pekka Kallasvuo

This is Ollie-Pekka; I’ll start here. Yes, we do confirm of course what we said. We said that when it comes to the total market size and there are different type of dynamics here ongoing.

I would say overall, we will continue to see the smartphone as a concept increasing in importance and will be interesting for consumers, but this decline that you referred to as far as total market size is concerned; I think those are the numbers we mentioned. I want to make sure here that that is the case and I am really sort of delighting for the fact that we did gain market share in smartphones here in Q1. I think that’s very, very important for us. It’s very encouraging and I think it’s a foundation we can build on.

Rick Simonson

And if I could add Pierre; this is Rick. We reported as you said the $48 million number in Q4. There are some other people that have reported significantly lower number for smartphones in the industry in that quarter.

You know, it’s hard to see how the measurements are, but there was a sequential decline as you pointed out in any case, and in any case, depending on whether you use our numbers or other estimates of the markets, we did have some sequential market share gain for the Nokia portfolio, even though the industry volumes went down sequentially in the weak quarter one, compared to the seasonally stronger quarter four.

Kristian Pullola

With that, ladies and gentlemen, we will conclude the call. I would like to remind you that during the conference call today, we have made a number of forward-looking statements 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 11 to 28 in our 2008 20-F and in our press release issued today. Thank you very much.

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Source: Nokia Corporation Q1 2009 Earnings Call Transcript
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