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Nokia Corporation (NYSE:NOK)

Merger and Acquisition Call

September 03, 2013 08:00 AM ET

Executives

Matt Shimao - Head-IR

Timo Ihamuotila - EVP and CFO

Risto Siilasmaa - Chairman and Interim CEO

Analysts

Gareth Jenkins - UBS

Simon Schafer - Goldman Sachs

Alexander Peterc - Exane BNP Paribas

Kulbinder Garcha - Credit Suisse

Pierre Ferragu - Sanford Bernstein

Didier Scemama Bank - America Merrill Lynch

Stuart Jeffrey - Nomura

Kai Korschelt - Deutsche Bank

Jim Suva - Citigroup

Sandeep Deshpande - JPMorgan

Francois Monier - Morgan Stanley

Tim Long - BMO Capital Markets

James Fawcett - Pacific Crest

Mark Sue - RBC Capital

Matt Shimao

Ladies and gentlemen, welcome to Nokia’s Investor Conference Call, during which we will discuss the transaction announced today. We intend this to be a 45 minute call. I am Matt Shimao, Head of Nokia Investor Relations; Mr. Siilasmaa, Chairman and Interim CEO of Nokia; and Timo Ihamuotila, CFO and Interim President of Nokia are here in Espoo with me today.

During this call, we’ll 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 we currently expect.

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 in the release we issues today on the transaction on Pages 12 through 47 of our 2012 20-F and in our most recent interim report.

With that, Timo over to you.

Timo Ihamuotila

Thank you, Matt and good morning or good afternoon to those of you joining us on the call to discuss the transaction announced today which we believe is clearly value creating for our shareholders. I would like to spend a few minutes discussing the terms of the transaction, how Nokia would look from a financial perspective after the closing, as well as some comments on our balance sheet and planned shareholder returns. Then I will turn the call over to Risto, who will discuss our continuing businesses and the timeline going forward in more detail.

Under the terms of the agreement announced today, Microsoft will acquire substantially all of Nokia’s devices and services business including the mobile phones and smart devices business units as well as an industry-leading design team, operations including all Nokia devices and services production facilities, devices and services-related sales and marketing activities, and related support functions.

Nokia’s cheap technology office organization and patent portfolio will remain within the Nokia Group. With these world class teams and assets, we can drive further value by building on our leading edge innovation and advanced research and development capabilities, as well as expanding our patent licensing activities.

Subject to approval by Nokia shareholders, regulatory approvals and other customary closing conditions, the transaction is expected to close in the first quarter of 2014 at which point approximately 32,000 people are expected to transfer to Microsoft.

As part of the transaction, Nokia will grant Microsoft a 10 year non-exclusive license to its patents at the time of the closing, and Microsoft will grant Nokia reciprocal rights to utilize Microsoft’s patents in its HERE services. Nokia will as well, grant Microsoft an option to extend this mutual patent agreement to perpetuity.

Additionally, Microsoft will become a strategic licensee of the HERE platform and will separately pay Nokia for a four year license. This revenue stream will substantially replace the internal revenue stream HERE is currently receiving from the devices and services business. If the transaction closes, Microsoft will become one of the top three customers of HERE.

Of the total purchase price of EUR5.44 billion, EUR3.79 billion relates to the purchase of substantially all of the devices and services business and EUR1.65 billion relates to the mutual patent agreement and future option. In conjunction with the closing of the transaction we expect to book a gain on sale of approximately EUR3.2 billion excluding any potential gains or losses related to the currency translation differences triggered by the transaction.

In addition, we will be required to evaluate upon closing whether the transaction will trigger any changes to the carrying values of any of our remaining assets or liabilities including for example, a review of existing goodwill balances or impairment and the potential write back of deferred tax assets.

Following the transaction, Nokia plans to focus on its three established businesses each of which is a leader in enabling mobility in its respective market segment, Nokia Solutions and Networks, a leader in network infrastructure and services; HERE, a leader in mapping and location services, and Advanced Technologies, a leader in technology development and licensing, and Risto will elaborate on this in a few moments.

For Nokia shareholders, the transaction is expected to be significantly earnings accretive and will strengthen Nokia Group’s financial position. We believe this will provide a solid basis for future investment in Nokia’s continuing businesses and the potential to distribute deemed excess capital to our shareholders following the Board’s evaluation of the optimal corporate and capital structure for Nokia.

On Slide 6 we have provided previously published and pro forma full year 2012 and first half 2013 non-IFRS operating margin for Nokia Group. You can see the much higher non-IFRS operating margin of our pro forma continuing business compared to the previously published Nokia Group results.

For the full year 2012, our pro forma non-IFRS operating margin would have been 8.5%. This compares favorably to the previously published non-IFRS operating margin of 0.4%. For the first half 2013, our pro forma non-IFRS operating margin would have been 12.1%. This compares favorably to the previously published non-IFRS operating margin of 4.2%.

And now a few words on financing and balance sheet. In today’s press release, we disclosed that Microsoft will immediately make available to Nokia EUR1.5 billion of financing at Nokia’s discretion in the form of three EUR500 million tranches of convertible notes. Importantly, this financing is not conditional to the transaction closing. If the transaction closes, the outstanding bonds will be netted against the deal proceeds at principal and accrued interest. This financing option gives us additional ability to meet our shorter term debt obligations and we believe the terms I just described are attractive.

In conclusion, following this transaction, Nokia’s financial position is expected to be significantly stronger and Nokia’s earnings profile is expected to be significantly improved. If this transaction as well as Nokia’s acquisition of 50% of NSN would have closed before the end of the second quarter 2013, Nokia would have ended the quarter with gross cash of EUR14.9 billion and net cash of EUR7.8 billion. This compares to the previously published amounts of EUR9.5 billion of gross cash and EUR4.1 billion of net cash at the end of Q2. We will manage Nokia’s businesses prudently and pragmatically consistent with the guiding principal of maximizing shareholder value.

With that, I will hand over to Risto.

Risto Siilasmaa

Thank you, Timo. Let me start by saying that today is an important moment of change and reinvention for Nokia and its employees. Today’s announcement is the start of another exciting chapter in the history of our Company. After a thorough assessment of how to maximize shareholder value, including consideration of a variety of alternatives, Nokia has signed an agreement whereby Microsoft will purchase substantially all of Nokia’s devices and services business in an all cost transaction of EUR5.44 billion.

As part of today’s release and as a result of the proposed transaction, we also announced changes to our leadership. With immediate effect, I will be assuming an Interim CEO role for Nokia while continuing to serve as Chairman of the Nokia Board of Directors.

In addition, Timo Ihamuotila becomes Interim President of Nokia while also continuing to serve as Chief Financial Officer. Timo will also assume the responsibility of Chair in the Nokia leadership team. To avoid any potential conflict of interests between now and the pending closer of the transaction, Stephen Elop will step aside as President and CEO, resign from the Board of Directors and will become Executive Vice President of Devices and Services.

On Slide 9, we have provided an expected timeline from today’s announcement to receiving regulatory approval and closing. The transaction is subject to approval by Nokia’s shareholders and we plan to hold an extraordinary general meeting on November 19th 2013. Later this month, we intend to publish a notice to the meeting and make available more information on the transaction and its background.

Between signing and closing, Nokia's Board of Directors is conducting a strategy evaluation for Nokia Group, comprising of evaluations of strategies for each of Nokia's three businesses and possible synergies between them. After the evaluation is complete we plan to distribute deemed excess capital to shareholders.

As we look forward to the new opportunities for change and reinvention for Nokia, I'm encouraged by the leading positions of NSN here and advanced technologies and I would like to spend the next few minutes sharing some of my perspective on each of these.

First, NSN is focused on providing the world's most efficient and highest quality mobile networks pushing the boundaries of connecting people by leveraging its industry leading LTE and future technology roadmap. Having successfully refocused and executed on its strategic objectives delivering strong underlying profitability and cost generation in recent quarters, we will continue to manage NSN as a strong independent entity.

Second, here we'll continue to leverage its industry leading position and execute its strategy to become the leading independent location cloud company, offering mapping and location services across different markets, devices and operating systems. To date we have mapped more than 190 countries and four out of five cars with in-dash (ph) navigation use HERE maps, a strong foundation on which we can build future revenue streams.

In addition, as we continue to horizontalize our location platform. We see tremendous opportunities to build on our recent deals with companies such as Amazon, Microsoft and Yahoo.

And third, our Advanced Technologies business which is comprised of Nokia's advanced technology development within the chief technology office organization and licensing activities for Nokia's industry leading patent portfolio. This business will explore new opportunities through advanced R&D and concept products in areas such as connectivity, sensing, and material technologies as well as web and cloud technologies. At the same time, we will continue to build our patent portfolio and expand our industry leading technology licensing program.

Nokia has around 10,000 patent families comprising around 30,000 patents and applications. Currently around half our new filings come from the CTO organization. In addition we have one of the broadest and strongest portfolios in the industry. Two thirds of our current patents will be still be in force 10 years from now. Our patent portfolio which will be retained within Nokia Group remains a source of tremendous value going forward.

In closing, as Chairman of Nokia Board of Directors, I believe this transaction maximizes value for Nokia and its shareholders and as said in the release today, the Nokia board recommends that shareholders vote to approve this transaction.

With that, I'll hand it over to Matt for Q&A.

Matt Shimao

Thank you, Risto, for the Q&A session, please limit yourself to one question only. Operator, please go ahead.

Question-and-Answer Session

Operator

And your first question comes from the line of Gareth Jenkins with UBS.

Gareth Jenkins - UBS

I just wondered if you could maybe clarify, you obviously got a large net cash position, I just wondered if you could clarify what are potential uses for that cash and what's the time frame you're thinking, should we expect a kind of special dividend or maybe some consolidation in the industry. Yes, that's first question.

Matt Shimao

Okay, thanks Gareth. As Risto said, we'll conduct a pro strategy evaluation of the three businesses as well as possible synergies between those businesses and the corporate structure. And I said based on that analysis then for the excess cash would be distributed to shareholders, I think it's premature to talk about the mechanism on how that cash or capital would be distributed to shareholders. Clearly we will try to do any such transaction in an optimal way when the time is right to publish such a decision. But you are right; the cash position will be strong. We are expecting to have net cash of around 8 billion when you compare to end of Q2 numbers.

Operator

Your next question comes from the line of Simon Schafer with Goldman Sachs.

Simon Schafer - Goldman Sachs

So just on top of the excess cash question, beyond that do you embed it's much of a strategic shift in the way that you've been looking at NSN. Obviously your strategy over the last two years or so has been little bit tentative, actually retrenching and shrinking the business to focus on a profitable nucleus. Is there going to be a change in strategy? Are you going to be a lot more aggressive on redeploying capital on growing that asset? What synergies in your strategies as you commit to that change?

Matt Shimao

Well, first of all we believe the transaction announced today will be positive for NSN from the point of view of NSN's customers who typically commit to NSN solutions for a prolonged period of time and a strong balance sheet for NSN and Nokia who support NSN in the eyes of its customers. We definitely will have a stronger balance sheet which enables us to support the future research and development efforts in all our three businesses. What I would like to say about the process leading to the transaction is that it has been an extremely pragmatic and deeply analytical process where we have left no stones unturned in order to understand all the possible alternatives for the Company going forward and made a very pragmatic decision based on that analysis and evaluation. And that is exactly the same principal we will follow going forward.

Risto Siilasmaa

Yeah maybe if I can comment here just on the operating side of the NSN business, Simon, so clearly you are correct that NSN focus or focusing of NSN's business is in many ways complete at the moment and now I think it is time to invest but invest in a very prudent way into top-line growth as well in that business.

Matt Shimao

Thank you Simon. Operator next question please.

Operator

Your next question comes from the line of Alexander Peterc with Exane BNP Paribas.

Alexander Peterc - Exane BNP Paribas

I would just like to understand looking at Nokia post deals, what exactly is making sort of saying that NSN is your core business. It is up so now 90% of your sales, it's a fairly solid business. So I would just like to understand why this is also [indiscernible]. Thank you.

Timo Ihamuotila

So Timo here thanks Alex for the question. So clearly NSN is the biggest part of the business measured by turnover. But if we look at the profitability, we will have to note that technology licensing business actually is a big business as well. So it depends if you look at this from top-line or from profitability perspective.

And we also have to note that all of these three businesses are actually creators of innovation and creators or IPR. And that is one of the areas where we need to estimate potential synergies but of course NSN will be the biggest part of the business and that is one of the reasons why we are saying already at this juncture that we think that it is the right target for Nokia to return to an investment grade company.

Matt Shimao

Thank you Alexander. Operator next question please.

Operator

Our next question comes from the line of Kulbinder Garcha with Credit Suisse.

Kulbinder Garcha - Credit Suisse

Thanks, I have a question just on the licensing business. Can you speak about how you can run that going forward given that you are signing certain agreements I think to Microsoft. And what I am really curious about is, is that EUR500 million your run rate still on a pro forma basis? What that business would have done on this new deal structure and can you actually grow it and renegotiate with some of your licensees or is it much more incremental? Any insight you can provide on how you are going to run that going forward? And what revenue run rate would help? Thanks.

Timo Ihamuotila

Thanks Kulbinder, Timo here. So that's actually a really good question. So thanks for the question, because there was earlier some discussion on this topic. It is very important that we separate two items on the overall licensing. So there is the Nokia patent portfolio, the 10,000 patent families which we are licensing to other people. And then there are licensees which we have utilized and are still utilizing of course at the moment in our running handset business. The Qualcomm license belongs to the latter category and thus as a cross license will not be something which Nokia would further call it need to utilize in a similar way as of course now when we're running a handset business which has volumes of tens of millions of units a quarter.

Then there are the patents, the 10,000 patent families and these are the patents which are really the patents and technologies licensed and of course developed and owned by Nokia where we’re then getting licensing revenue from people who are licensing those patents, and this needs to be looked at separately. So again, Nokia will continue to own this patent portfolio and the Qualcomm license discussion is different from that really relates to the running devices and services business.

Then we have not said anything new on the running or the expected revenue of that business, but we do not foresee that this transaction would be negative to that business. Quite the contrary, we think that there actually could be further opportunities on that business but you will know that this is a business which has very long term dynamics and thus it has to be estimated on a very long term basis. But we think we have a very solid position there.

Matt Shimao

Thank you Kulbinder. Operator, next question please.

Operator

Yes, your next question is from the line of Pierre Ferragu with Bernstein.

Pierre Ferragu - Sanford Bernstein

I just wanted to have some clarification specifically on the rationale of the credit line that you negotiated noticeably related to trading (inaudible). Why did you include or what was the rationale included I think in the package like an immediate credit line for you guys, is that because you said you needed some additional funding in the short term or you got something to give Nokia has more room from another in case the deal doesn’t close, any color on that would very helpful. Thank you.

Risto Siilasmaa

So, we actually think that this credit line fits this particular transaction from two perspectives. So, first of all you are all aware that we purchased 50% of NSN in a deal which we think was and is a very advantageous to Nokia and because of that deal we have some financing which is maturing plus we have some bonds which also were maturing or are maturing in the first half of the 2014. And clearly, one reason for the financing is to prudent to make sure that we have enough capital to pay back all those liabilities what we have. And I want iterate that this is an option for Nokia to draw in the financing, Nokia has not yet report on the financing, but it’s an option we can utilize.

The second important thing here is the nature of the financing. This is purposely designed as a convertible bond instrument because would the deal not close, then clearly Microsoft and Nokia will continue to be partners and in that situation, Nokia will continue to make Windows phones and as a convertible instrument holder, Microsoft would get some upside on the Nokia stock from that business performance. So that’s in the scenario that the transaction would enclose which we think is unlikely.

In the scenario the transaction closes, this funding if drawn will simply be knitted against the transaction proceeds at nominal value plus interest. So again, we think it fits very well to this transaction structure to Nokia’s debt maturity profile and the strategy.

Matt Shimao

Thank you, Peter. Operator, next question please?

Operator

Your next question comes from the line of Didier Scemama with Bank of America Merrill Lynch.

Didier Scemama Bank - America Merrill Lynch

I was just wondering if you could clarify two elements, one is the sale taxable for Nokia and second one was with regards to the ongoing restructuring in the D&S division, what’s the cash outflow you expect over the coming three quarters, e.g. ahead of the transaction closing. Thank you.

Risto Siilasmaa

Okay so first on the tax, so clearly the transaction would be taxable normally in Finland but we have to remember that Nokia has quite a few tax loss carry forwards and in that sense we think that those can likely be utilized in large extent here.

And then on the second, on the restructuring, so we have not given any new information on that so you can find our estimate deed restructuring cash outflows from our Q2 release. So again, it’s a going concern business and we will continue to run it that way before the transaction closes.

Matt Shimao

Thank you, Didier. Operator, next question please?

Operator

Next question comes from the line of Stuart Jeffrey with Nomura.

Stuart Jeffrey - Nomura

Question on the patents, the Microsoft payment, does that mean there will be no ongoing revenue income from Microsoft going forward for the next 10 years and again, you’ve mentioned, made a comment in the presentation that two-thirds of your patents will remain for the next 10 years, can we use that as a proxy for the 500 million of revenue run rate to assume that at least two-thirds of that have a 10 year run rate. Thank you.

Timo Ihamuotila

Okay, I will take first, the latter question, Timo here. So, no I don’t think we can use two-thirds as a proxy. That’s not the right way to think about it but as I said earlier in the call, we think that we have good prospects for that business and…

Risto Siilasmaa

Timo, let me add something there, roughly 50% or more of the patent applications we filed comes from the CTO organization which we retained in its entirety. So we will retain an ability to renew our patent portfolio going forward. So for that purpose also the proxy idea is not a valid one.

Timo Ihamuotila

I think that’s a really-really good point. So clearly again I want to highlight what Risto says here, so we will continue to be an innovator in the area of mobility at large through the Advanced Technologies in NSN which will be creating patents and of course here which will be creating and is creating very important implementation patents. So we will continue to create both essential and implementation patents, so thanks Risto for that addition, very-very important on this part of the question.

And then on the Microsoft patent license, so first of all I want to highlight that this is not only a one side deed license, this is a net payment because we are also getting rights to utilize Microsoft innovation in the HERE business and in that ways that goes two ways that 1.65 billion in cash, you are correct to point out that this is something where we would get the money upfront and then you know likely that would show in P&L through time.

Matt Shimao

Thank you, Stuart. Operator, next question please.

Operator

Your next question comes from the line of Kai Korschelt with Deutsche Bank.

Kai Korschelt - Deutsche Bank

I just want to follow on sort of may be slightly mid or longer term question around, and really here about strategy, I mean obviously it's been a very successful turnaround, shrinking the business, getting margins up. But also we started to see revenue declines in the first half of this year, potentially the gross margin being at very high levels, so maybe not lot of room to expand further which suggest that, that maybe the sort of NSN profitability may have or maybe running at around a peak run rate right now and I think there is also some new slow around on another potential restructuring on NSN. So I am just wondering with your big net cash position with the strategy of maybe expanding or growing NSN and then maybe rebuilding the product portfolio, would that change? Would you start to deviate from that strategy of shrinking NSN? Or how do you think about the long term sort of position of NSN in a still relatively tough industry? Thank you.

Timo Ihamuotila

Okay. Thanks Kai, Timo here. First of all, our strategy is absolutely not to shrink and change NSN, our strategy has been to focus NSN on businesses where it can be leader in the global arena and make money, so that’s our focus on NSN. And then you pointed out the recent NSN profitability, I want to highlight that we have the long term profitability target for NSN which is [indiscernible] can invest in a prudent way in the right way to growth. So yes we believe that, that we should invest in a growth, but it has to be done in a smart way and of course thinking about value creation.

Matt Shimao

Thank you, Kai. Operator, next question please.

Operator

Next question comes from the line of Jim Suva with Citigroup.

Jim Suva - Citigroup

Can you just confirm that I believe NSN, HERE and Advanced Technologies are kind of right now run as three completely individual businesses, meaning that it’d be relatively easy to divest or make some type of transaction with HERE or Advanced Technologies? And then again what was the comment you mentioned about for the amount of excess cash that you’d be looking at returning to shareholders after this transaction? Thank you.

Risto Siilasmaa

This is Risto. The three ongoing businesses are being managed somewhat separately. It’s a spectrum of different levels of separateness with NSN as a strong independent entity. HERE has been functionally integrated to the parent company, but operated as a different division. And the Advanced Technologies, the CTO Office and the technology licensing business has been integrated into the parent entity. But it is clearly a separate business area with separate sub-organization running it.

Timo Ihamuotila

Yes, and if I complement this on kind of like how our P&L will or is planned to look going forward if the transaction goes forward. So clearly, we will have NSN, HERE and Advanced Technologies as businesses and in NSN as you know, we already as part of the NSN reporting report separately mobile broadband and services so that’s likely going to be kind of like the reporting structure and of course then describes these businesses can be followed also by the market separately and Advanced Technologies will be sort of, now there is a broad statement, quite close to what is currently at [indiscernible].

Risto Siilasmaa

And then on the excess cash that you also asked about. As mentioned before, we have run a very pragmatic analytical process this far related to the transaction announced today and we plan to do the same going forward. Obviously we’ll only get the cash as the transaction closes. So we will use that time to pragmatically look at our strategy, the related structure, the leadership and the related capital structure. And we are planning to distribute the excess cash at the right time.

Matt Shimao

Thank you, Jim. Operator, next question please.

Operator

Your next question comes from the line of Sandeep Deshpande with JPMorgan.

Sandeep Deshpande - JPMorgan

My question is again regarding HERE and patent licensing of the Advanced Technologies business. I mean the Advanced Technologies business benefited from DNS in terms of product patents et cetera. How do you plan to continue to upgrade those patents with the business not there anymore?

And secondly, within HERE at some point in the past you had moved some businesses from the location and services into the handset business. Do those businesses now come back into HERE and does that enhance the margin of HERE? Thanks.

Timo Ihamuotila

So, first of all, on the Advanced Technologies, so you are correct that clearly some of the patents have been coming from the product creation units which are moving but as Risto said earlier, about half of the patents have been coming from the technology organization and clearly over half of the patents if we also take HERE into the equation.

And in that sense we think we have a good patent generation capability on the Advanced Technologies, but the Advanced Technologies will not only be for patent creation, clearly that can be also an embroil for net innovation and businesses which we can also sell to the market. So we don’t have to only think about this monetization possibility as patent monetization there are other opportunities.

I want to also remind that we are going to continue to own the Nokia brand and that is an asset as well, so Microsoft will have a 10 year license to Nokia brand owned S30 and S40 mobile phones products, but other than that the Nokia brand will be owned by Nokia. Nokia is not allowed to use the brand in the smartphone business before the end of 2015 and is not allowed to license it forward in 30 months from closing for a smartphone business, but other than that the Nokia brand is an asset and we feel it’s an asset which we need to think about in the same context of the IPR and licensing.

Matt Shimao

Thank you, Sandeep. Operator, next question please.

Operator

Your next question comes from the line of Francois Monier with Morgan Stanley.

Francois Monier - Morgan Stanley

Yes, I've got a question about NSN actually. It's true that you've done very well in terms of margins improvements, but it's pretty sure that Japan and South Korea have done great things in terms of margins for you in the past 12 to 18 months, so well done on that, but maybe this is the end of it. In Europe you have lost market share basically because Ericsson and Huawei have been pretty aggressive on the -- on pricing and gaining market share from you, and in the US you have only 10% market share I reckon in the wireless equipment market. So do you think today your geographical exposure is broad enough and what do you think you might do to basically have a more structural scale in this business, long term?

Risto Siilasmaa

I think in general we will talk more about the NSN business clearly when we report our Q3 numbers on that call, but I'll just touch up on the point what you've made here. So you're right to point out that some of those big rollouts in Japan and Korea are coming to an end but of course there still will continue to be a normal business which will continue to be kind of like the normal replacement cycle but still will happen with those customers. In Europe, yes, we need to do better. That's one of the areas where we are absolutely committed to investing also into the roadmap making sure that we are very competitive on the LTE rollouts in Europe. And US 10% market share I would say that's an opportunity for NSN to grow in one of the markets where there is clear growth in that segment. So that's how I would see the situation. So again we feel that this transaction would allow Nokia and NSN to really make sure we can go after the opportunities which are in the marketplace.

Matt Shimao

Thank you, Francois. Operator, next question please.

Operator

Next question comes from the line of Tim Long with BMO Capital markets.

Tim Long - BMO Capital Markets

Just wanted to go back at the patents, just to first clarify something and then on the cross licensing. First you mentioned 50% of patents coming from the CTO office. I'm just more curious on the essential patents, the 1,200 patent families that are deemed essential. Would you say 50% of those also come from CTO office and then just going back to the cross licensing deals, I want to make sure I understand, if you have a cross license -- Nokia has a cross license deal with another OEM, does that fully transition over to Microsoft. In other words, Microsoft does not have to incur a larger royalty payment because of that and therefore Nokia cannot go after an incremental revenue opportunity or is it the type of thing where it has to be renegotiated and maybe Nokia's revenues can go up and Microsoft has to pay more, thank you.

Timo Ihamuotila

So, first on the patent side, Timo here, so I don't think we have given a kind of like granularity on the CTO patents, but clearly some of the core radio technology knowledge is and resides in the CTO organization where many of the essential patents are coming from, so we have a strong position on that front, but I can't give you any further percentages on that. And what comes to cross licensees, so I would say clearly the Qualcomm situation is somewhat unique because this is a non-exclusive license what we are granting to Microsoft and in that sense does not have impact on other activities, what Nokia is conducting on that area. And I want to again reiterate that it's a net proceeds from the license structure where we are giving a non-exclusive license, but we're also getting right to use Microsoft IPR for our HERE business.

Matt Shimao

Great, thank you, Tim. Operator, next question please.

Operator

Next question comes from the line of James Fawcett with Pacific Crest.

James Fawcett - Pacific Crest

Just wanted to go back to the credit line and I know that you're -- it's at your discretion whether you can draw on it or not but just want to get your sense as to how likely it is that you'll draw on at least part of that before the closing of the deal and how we should think about the likelihood and the drivers of needing to draw on that credit line. Thank you very much.

Timo Ihamuotila

Yes, so as I said earlier, this is an option for Nokia to -- actually I wouldn't call it draw a credit line; it's an option for Nokia to issue convertible bonds which Microsoft would purchase. And in that sense, we will evaluate the situation now, actually it is not between signing and closing we need to [indiscernible] and evaluate the situation what we do on that, but we have not made a decision nor can we give any further information on the likelihood. I think earlier in the call I described the dynamics of the funding and it's important to note that if the deal closes, we would be able to net that financing against the deal proceeds with nominal value and accrued interest. So again, quite nominal value and accrued interest and that's a very, very important parameter in the decision making, what we will utilize here.

Matt Shimao

Thank you, James. Operator, we'll now take our last question.

Operator

And your final question comes from the line of Mark Sue with RBC Capital.

Mark Sue - RBC Capital

Timo, if I can ask the thought on the networks business and overall in terms of expanding the scale of your operations going forward. Any thoughts of expanding, making it build bigger bolting on acquisitions or separately, would there be some thoughts of reinstating or -- the dividend back to what it was in the past for investors. Maybe just share thoughts of how you could take the cash and deploy it from a business point of view and from an investor point of view.

Timo Ihamuotila

I don't think I have much to add what -- to what I said earlier on the topics. So, again, as I said, our aim is clearly to grow the networks business in a profitable way. It is clearly a cash generating business where we can invest into the future growth. There was a discussion on Europe we can now make sure that we are investing in the parts of the roadmap which are important to be a real global leader in the mobile broadband. Also in the services business our business model is quite different than we are drawing better gross margins, so I think investing to that side is also possible. But again I want to highlight that we will do that in a prudent and pragmatic way to drive value.

Matt Shimao

Thank you. 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 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 in the release we issued today on the transaction on Pages 12 through 47 of our 2012 20-F and in our most recent interim report. Thank you.

Operator

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