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Nokia Corporation (NYSE:NOK)

Q4 2013 Earnings Conference Call

January 23, 2014 8:00 AM ET

Executives

Matt Shimao – Head-Nokia Investor Relations

Timo Ihamuotila – Interim President and Chief Financial Officer

Rajeev Suri – Chief Executive Officer-NSN

Analysts

Gareth Jenkins – UBS Limited

Michael Walkley – Canaccord Genuity

Pierre C. Ferragu – Sanford C. Bernstein & Co. LLC

Andrew M. Gardiner – Barclays Capital Securities Ltd.

Kulbinder S. Garcha – Credit Suisse Securities LLC

Francois A. Meunier – Morgan Stanley & Co. International Plc

Simon F. Schäfer – Goldman Sachs International

Didier C. Scemama – Merrill Lynch International

Sandeep S. Deshpande – JPMorgan Securities Plc

Stuart A. Jeffrey – Nomura Securities International, Inc.

Mark Sue – RBC Capital Markets LLC

Kai Korschelt – Deutsche Bank

Ehud A. Gelblum – Citigroup Global Markets Inc.

Tim Long – BMO Capital Markets

Maynard Um Maynard J. Um – Wells Fargo Securities LLC

Operator

Good day. My name is Carmen and I will be your conference operator today. At this time, I would like to welcome everyone for the Nokia Fourth Quarter 2013 and Full Year 2013 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I will now turn the conference over to Matt Shimao, Head of Investor Relations. Please go ahead.

Matt Shimao

Ladies and gentlemen, welcome to Nokia’s fourth quarter and full year 2013 conference call. I’m Matt Shimao, Head of Nokia Investor Relations; Timo Ihamuotila, CFO and Interim President of Nokia and Rajeev Suri, CEO of NSN 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 on Pages 12 through 47 of our 2012 20-F and in our results report issued today.

Please note that our results press release, the complete interim report with tables and the presentation on our website include non-IFRS results information in addition to the reported results information. Our complete results report with tables available on our website includes a detailed explanation of the content of non-IFRS information and a reconciliation between the non-IFRS and the reported information.

With that, Timo over to you.

Timo Ihamuotila

Thank you, Matt. Before I hand over to Rajeev, who will update you on NSN. I will briefly comment on our reporting structure this quarter and provide some high level remarks about the performance of our continuing operations in Q4. After receiving approval at our extraordinary general meetings for the proposed transaction with Microsoft, we have presented the business transferring at discontinued operations.

In order to help you with your models and to provide more historical context, we have also disclosed the performance of the continuing operations over the previous four quarters and for the full years of 2012 and 2013. We continue to expect the transaction with Microsoft deploys during Q1, subject to receiving the remaining regulatory approvals. We have already received the majority of the approvals during Q4 and are working with the remaining regulatory bodies as part of the overall deal closing process.

Please note that since the transaction has not closed, we are not announcing any proposals for this year’s annual general meeting of shareholders today. In previous years, proposals for matters such as board compensation and dividend recommendation would have typically been announced in conjunction with our Q4 and full year results. The board continues to plan to make its approved proposals for the AGM after the transaction has closed and the strategy review has been completed. We have today confirmed that the AGM is scheduled to be held on June 17th.

Turning to the continuing operations in Q4, in the fourth quarter Nokia’s continuing operations generated the net sales of €3.5 billion and a non-IFRS operating margin of 11.7%, the 18% sequential increase in net sales was primarily driven by NSN and a lesser degree from HERE. Continuing operations non-IFRS operating margin was flat sequentially. NSN had another solid quarter in Q4 and its recent deal momentum is encouraging for its long-term position in its focused areas.

And with that I’ll hand over the call to Rajeev to discuss NSN's Q4 performance.

Rajeev Suri

Thank you Timo, and hello to everyone on the line. In many ways NSN's performance for the fourth quarter reflected a continuation of recent trends, excellent profitability and cash flow with weaker year-on-year top line. In the fourth quarter of 2013, we delivered our highest ever reported net profit, the second highest non-IFRS gross margin in our history, a strong non-IFRS operating margin and our ninth consecutive quarter of positive free cash flow.

In my remarks today, I will take you through our Q4 numbers and share some highlights of our business performance including the progress we are making in mobile broadband within the areas of TD-LTE and Telco Cloud our excellent results in global services and how the real world performance of our offerings is becoming a differentiator for NSN.

Our net sales in the quarter were €3.1 billion, representing a year-on-year decline of 22% but a sequential increase of 20%, consistent with strong industry seasonality. Approximately half of the year-on-year decline resulted from divestments, the negative effects from foreign exchange fluctuations and customer contract and country exits. We are not satisfied with our top line results and as I noted on the third quarter call, we are taking steps to improve our performance in this area. I will talk more about this topic shortly.

To give some regional perspective, we are seeing excellent momentum in Greater China where we believe we are on track to become the leading foreign vendor. Europe remained challenging in Q4, but we are seeing some early signs of increased CapEx spending from certain customers in Western Europe and Russia, APAC saw a good performance in Korea, Indonesia and Australia with strong deal momentum in India, Middle East and Africa an area that was heavily affected by country exits during our restructuring delivered very good sequential growth.

With our business now stabilized in this region, we see it as an area with considerable future opportunity. Latin America continues to face CapEx constraints and finally in Q4 North America saw declines as our large roll out at T-Mobile tapered down, but we are optimistic that our large win with Sprint will help balance our revenue trends in the region in future quarters.

Our non-IFRS gross margin for the quarter was 37.6% this compares to 36% one year ago and 36.6% last quarter, our recent gross margin trends underlines the strength of the foundation we have built at NSN, the year-on-year increase was driven by a higher gross margin and global services due to significant efficiency improvement as a well as a higher proportion of mobile broadband in the overall sales mix, this was partially offset by a slightly lower gross margin in mobile broadband due to lower net sales in the higher margin markets of Japan and North America, costs related to the start of several large new network deployments in China and the absence of non-recurring IPR income which benefited Q4 2012 by approximately €30 million.

NSN's non-IFRS operating margin in Q4 was 11.2%, note that other expenses in the fourth quarter was at elevated levels reflecting non-recurring charges and higher than normal costs related to doubtful accounts and asset retirements. At normalized other expenses levels, our non-IFRS operating margin would have been slightly above the 12% mid point of the non-IFRS operating margin outlook that we had provided for Q4.

Reported net profit for the quarter was €171 million giving us a reported net profit for the full year, another milestone achievement for NSN and gross and net cash balance increased sequentially reflecting strong profitability and good working capital management. Timo, will share more cash flow details in a few minutes.

Before I take you through our business segments, I would like to spend a few additional minutes on our net sales trend. As I shared on the third quarter call, our strategic choices over the past two years divestments, country and contract exits focused on profitability and cash have all had an impact on our net sales and we have taken steps over recent quarters to strengthen our performance in this area.

To be clear however, we expect top line performance to remain challenging particularly in the first half of the year. Then our year-on-year comparisons will continue to be impacted by divestments and exits such as our BSS and optical network business until the anniversary of their sales in Q2 2014. During the first quarter of 2014 we also expect some pressure on profitability given lower seasonal net sales as well as lower margins during the initial phases of several strategic new network deployments. Given this, we expect Q1 2014 non-IFRS operating margin to be in the range of approximately 5% plus or minus four percentage points.

Consistent with our increasing focus on top line we saw good deal momentum in Q4 and this has continued into Q1. Recent customer wins includes Sprint in the U.S., China Mobile and Chine Telecom in China, VimpelCom in Russia. Telkomsel, in Indonesia, Chunghwa Telecom in Taiwan, Oi in Brazil, Vodacom in Tanzania and an entry into Myanmar with Ooredoo.

I’m also proud that we are the sole supplier for Elisa’s nationwide LTE network here in Finland, as announced earlier today and it’s always nice to win in your home country. Thus looking more broadly at the year ahead, we believe we are well positioned for another solid year in 2014. We are targeting to deliver full year non-IFRS operating margin towards the higher end of our longer term 5% to 10% range. Consistent with our efforts to improve year-on-year net sales trends in the second half of the year.

Then let me turn to a discussion of our business segments starting with mobile broadband. Net sales for mobile broadband saw a year-on-year decline largely driven by a decrease in revenues in maturing technologies in both radio and call. Contribution margin for the quarter was 7.5% reflecting lower year-on-year net sales in North America and Japan as well as the headwinds from the strategic new network deployment project that I already mentioned.

Our Q4 LTE sales were strong particularly in TD-LTE. Some of our competitors initially dismissed TD-LTE as a China only technology that might even struggle in China. We took a view that not only would TD be critical for success in China, but that it would also become a global technology given that 50% or more of the spectrum available to operators globally will be for TD-LTE. As a result, we have a leading position in TD-LTE with considerable commonality between our FD and TD hardware and software being a significant differentiator.

While the majority of LTE deployments to-date have been based on FD technology that will start to change with upcoming deployments. This should serve NSN well, given our wins with customers including China Mobile, China Telecom and Sprint. Also in LTE, I would note that all three of the LTE advanced networks in commercial operation today use NSN radio technology, a clear sign of our technological strength.

We’ve also recorded notable innovations in developing Telco Cloud technology and in software defined networks, which are essential for our customers to control costs, increase business agility and enabled new services. We are focused on being a leader in the emerging Telco Cloud space moving to a fully virtualized network core offering in 2014, based on our liquid core technology. In Q4, we announced a network function virtualization proof-of-concept with SK Telecom in Korea and have won other deals including being selected by a major operator as partner of choice for core virtualization.

Then moving to Global Services, while net sales were down year-on-year, reflecting contract exits and lower network implementation activities, contribution margin reached a very strong 15.2%. This was a third consecutive quarter of double-digit contribution margin in Global Services. We have been selective in deals to ensure that we can add value that our customers will pay for, increased the proportion of our services that are delivered to our efficient global delivery centers and focused heavily on centralization, standardization and automation. I’m extremely pleased with the excellent execution in Global Services and believe that we have a very strong base for future profitable growth.

During Q4, we saw a good example of how the real world performance of our networks is becoming a strong differentiator for NSN. As we look at the market today, we are increasingly seeing what we call spec sheet competition where every vendor wants to show that they have an endless list of features, even if those features are not used, but have no real impact on actual network and business performance. That is not a path that we will go down and our focus will remain on technology that will deliver the best operational and business KPIs, technology that is judged on business case, rather than hype, technology that delivers performance in the real world. When we focus on features, we will do so that those requiring specific customization in order to meet the unique needs of individual major operators.

We have an increasing number of examples that illustrate the real world performance that we deliver. but for this call, let me focus on a single specific example. The Busan Fireworks Festival in Korea is a massive event, one of the world’s largest, in 2013 it had more than 1.5 million people participating, more than half of them on LTE networks with LTE data traffic well over three times that of the previous year.

NSN was the provider of one of the three LTE networks during the festival and the network we delivered performed superbly, while the other two were simply unavailable for significant parts of the event. Even when their networks were up and running it was still not much of a contest. Our average uplink data rate was nine times faster than one competitor, our average downlink rate was up to eight times faster than the others, and we had 23% better latency or responsiveness performance than one and 85% better than the other.

In summary, NSN has come a long way, in the end of 2013 marked a significant milestone. When we announced our new strategy and restructuring at the end of 2011, we said that we would reduce costs by €1 billion by the end of 2013. In July of last year, we increased our target to more than €1.5 billion and I’m extremely pleased to say that we achieved this goal.

Over the course of the past two years, we’ve made a wide range of structural changes that will continue to deliver long-term benefits in terms of management systems, pricing processes, quality, innovation and more. Having achieved this milestone, we are able to put the restructuring phase announced in 2011 largely behind us. We will certainly remain focused on ensuring our company is efficient and disciplined and that we make continuous improvement in the business.

At the same time, we are now well positioned to be increasingly assertive in the marketplace, leading in the technologies that matter. We are relentlessly focused on helping customers address the trend that will shape our world going forward.

With that Timo, back to you.

Timo Ihamuotila

Thank you, Rajeev, and now to an overview of the performance of HERE, Advanced Technologies and discontinued operations in Q4. Reported net sales of HERE were €254 million, down 9% year-on-year with an increase of 20%, compared to Q3. The year-end trend decline was due to significantly lower internal net sales, partially offset by a 10% increase in external net sales. On a sequential basis, HERE’s net sales increased primarily due to higher seasonal sales to vehicle and PND customers, which grow a 28% increase in HERE’s external net sales in the fourth quarter.

In Q4, HERE had sales of new vehicle licenses of 3.2 million units, up from 2.6 million in the third quarter, an increase of 23% sequentially and representing well over 50% of external net sales in the quarter. HERE’s non-IFRS gross margin in Q4 was 75.6%, down 640 basis points compared to the year ago quarter and 690 basis points sequentially. Both year-on-year and sequentially, this was primarily due a non-recurring licensing expense, as well as higher sales of upgrade units to vehicle customers, which carry lower margin.

In Q4, HERE’s non-IFRS operating margin was 9.8%. As I commented last quarter, we believe HERE has strong long-term prospects, most visible in the automotive segment, but we are also targeting further transformational growth opportunities in multiple industries.

Using on HERE’s industry-leading position, as well as its highest quality and persist in that asset, we intend to accelerate our investments during 2014 in areas such as the connected car, autonomous driving and next generation maps, in order to capitalize on these attractive long-term growth opportunities.

Earlier this month at CES in Las Vegas, one of the most discussed market segment was smartcars with a number of leading automotive manufacturers in attendance. For HERE, we view this as an opening of new value chain as it aims to capitalize our new licensing prospects and the potential to increase its ASPs. While we expect to see some progress in 2014, the more transformational revenue and profit opportunities are expected to have a greater impact in the years to come.

And now a few words on Advanced Technologies. As you can see from today’s press release, we have presented Advanced Technologies as a reportable segment for the first time. Q4 net sales of €121 million, compared to a €151 million in the year-ago quarter and €140 million in Q3. The year-on-year decline was primarily due to lower intellectual property licensing income from certain licensees that experienced lower levels of business activity.

In Q4, Advanced Technologies non-IFRS operating margin was 67.8%, an increase of 160 basis points year-on-year and 780 basis points sequentially. The higher year-on-year and sequential margin was driven by lower operating expenses, which more than offset the lower level of net sales. As I commented last quarter, our IPR licensing business is an area where we already have a proven track record and a successful business strategy that we will continue to implement going forward.

As an example of this, during the fourth quarter, we announced that Samsung had extended its patent license agreement with Nokia for five years. As part of this, Samsung will pay additional compensation to Nokia for the period commencing from January 1, 2014 onwards and the amount of compensation shall be finally settled in a binding arbitration, which is expected to be concluded during 2015. During the quarter, we also made good progress in our efforts to start broader licensing of our implementation patents.

Looking ahead, we expect Advanced Technologies annualized net sales run rate to increase to approximately €600 million during 2014 after Microsoft becomes a more significant intellectual property licensee in conjunction with the sale of our devices business. This compares to Advanced Technologies’ current annualized net sales run rate of approximately €500 million.

Then turning to discontinued operations. discontinued operations net sales of €2.6 billion, declined 29% year-on-year and 5% compared to Q3. On a sequential basis, the decline in net sales was primarily due to lower Smart Devices net sales. Mobile Phones net sales were approximately flat. Discontinued operations non-IFRS gross margin of 20.3% declined 60 basis points year-on-year, but increased 90 basis points compared to Q3.

The sequential increase was primarily due to higher mobile phones gross margin, partially offset by lower Smart Devices gross margin. Please note that Smart Devices non-IFRS gross margin in Q4 was negatively affected by approximately €50 million of inventory related allowances. Discontinued operations non-IFRS operating margin of negative 7.3% worsened by 600 basis points year-on-year and 260 basis points compared to Q3. on a sequential basis, this was primarily due to lower Smart Devices contribution margin, partially offset by higher mobile phones contribution margin.

Even though the business being transferred to Microsoft classified as discontinued operations in Q4 for accounting purposes, we remain highly focused on continuing to deliver innovation across the portfolio, as well as managing the cash performance of the business in the most optimal manner.

And now a few words on some of the below-the-line and cash flow items, which I hope will help you with your models. As you recall, that quarter, we disclosed that after performing an assessment of the potential recoverability of finished deferred tax assets currently subject evaluation allowance, we have the ability to shield approximately €11 billion of future profits made in Finland. We expect this to benefit our potential cash tax liabilities in the years to come.

Nevertheless as a company with significant operations and activities outside Finland, we continue to expect to incur quarterly tax expenses going forward. On a non-IFRS basis and on – until a pattern of tax profitability is reestablished in Finland, we expect to record annualized tax expense for continuing operations of approximately €250 million, which corresponds to the total anticipated cash tax obligations outside Finland for NSN, HERE, and Advanced Technologies. With regards to CapEx, we currently expect capital expenditure for the continuing business to be approximately €200 million in 2014 with NSN comprising the bulk of this total.

And quickly a couple of words on financial income and expense, in Q4, this was an expense of €50 million, compared to €63 million in Q3. On a sequential basis, the decrease was primarily due to the recognition of income related to one of our investments and lower investment paid expenses partially offset by higher FX related losses.

Moving to my quarterly review on our cash position and cash flow. On a sequential basis, Nokia gross cash decreased by approximately €160 million in Q4 with a quarter ending balance of €9 billion. Net cash and other liquid assets decreased by approximately €100 million sequentially, with a quarter ending balance of €2.3 billion. The sequential decline was driven by negative cash flow from discontinued operations, which more than offset the positive continuing operations cash flow from operating activities.

The increase in continuing operations, cash flow from operating activities was primarily driven by the increase in NSN’s profitability. Excluding approximately €150 million of restructuring related cash outflows, NSN generated approximately €80 million of cash from working capital.

At the end of Q4, NSN’s contribution to the Nokia Group gross cash was approximately €2.8 billion and its contribution to the Group net cash was approximately €1.7 billion, a sequential increase of around €110 million and €140 million respectively.

In conclusion, I’m pleased with the progress we have made in all three of our continuing businesses during Q4. NSN delivered another solid quarter with good gross margin development and execution relative to its strategy enrollments. I’m also very pleased with NSN’s more recent deal momentum particularly in TD-LTE as Rajeev said.

And having successfully achieved its cost saving target, NSN is well positioned going into 2014. HERE delivered solid year-on-year growth in its external revenues and we are accelerating our investments to capture longer-term value from the transformational growth opportunities in the automotive and other industries. And for Advanced Technologies, we are focused on continuing to investing innovation and on implementing our successful business strategy of licensing our industry leading intellectual property.

We have three strong businesses and a solid financial foundation. We look forward to sharing more with you about how we plan to build the next chapter for Nokia after the closing of the transaction with Microsoft, which we continue to expect in the first quarter of 2014.

And now I will turn the call back to Matt for Q&A.

Matt Shimao

Thank you, Timo. For the Q&A session, please limit yourself to one question only. Carmen, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll start your first question with Gareth Jenkins from UBS.

Gareth Jenkins – UBS Limited

The intellectual property where you’re targeting €600 million. Timo, can you say what that would be excluding Microsoft during the course of this year, I know it’s obviously subject to what, when Microsoft closes or maybe you could give us a sense of what the underlying run rate for €500 million will look like by the year-end? Thank you.

Timo Ihamuotila

So as we said today, we expect the revenue run rate from the Advanced Technologies to be €600 million after the Microsoft transaction closes up from the €500 million earlier. I will don’t think I can give more color on the topic. So we are again expecting to move to that run rate after the Microsoft transaction closes.

Matt Shimao

Thank you, Gareth. Operator, next question please.

Operator

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

Michael Walkley – Canaccord Genuity

Great thank you. Rajeev, as we entered 2014, which reasons did you see the best growth opportunities. And are you still focused on some cost cutting areas. And basically just trying to get a feel for what opportunities you see driving year-over-year growth returning in second half of 2014? Thank you.

Rajeev Suri

Thanks Mike. We’ve not given specific guidance on the market as such for 2014 maybe you’ve said that NSN’s addressable market, may only show flat to modest growth in the coming years. In terms of regions where we see growth of China due to the acceleration of LTE and possibly Middle East & Africa, as they are moving into new technologies as well. So I hope that gives you some color, but overall I think we are well positioned that number of operators in those regions and Europe will also possibly accelerate LTE. But it will do so at the cost of reductions in CapEx in the legacy technologies, that’s going to be a little bit balanced.

Now from our perspective, you should also remember that our year-on-year top line comparison will be impacted in the first half of the year from these divestments to exist in some countries, sorry some contracts as well, we know that the optical and BSS anniversaries only in Q2 of 2014. So that’s why we’ve said the first half is a bit more challenging.

Matt Shimao

Thank you, Mike. Carmen, next question please.

Operator

Your next question comes from the line of Pierre Ferragu with Bernstein.

Pierre C. Ferragu – Sanford C. Bernstein & Co. LLC

Hi, good morning and thank you for taking my question. Timo, I’d like to get back to the run rate you’re getting for on the Advanced Technologies. And the comments you’ve made about – like the lower number you reported in Q4 that is due to, to be so much of your licenses, generating like [indiscernible] business. My question is about how much more downside risk lies in this revenue stream that could come from people who are paying you today and on preferences that maybe does not correspondent to the importance we have in the industry. And I assume you fully have visibility on when these contracts will be renewed. So my first question would be – are there such deadlines to expect in 2014 being consumed of course. And then my second question is how do you, in your planning assumptions, how do you handle this – the potential downside was for these negotiations.

Timo Ihamuotila

Okay, Pierre. Thanks for the question. so first of all, regarding the €600 million run rate, so clearly, we have taken into account all that relevant factors in that run rate estimate after the Microsoft transaction closes. And that is the run rate what we expect after closing of the Microsoft transaction. And of course, then in late or if there is new information, we will share, but that encompasses all the relevant information we have now there.

And what comes then to the opportunities, so we feel that we have opportunities both regarding our essential patents portfolio, regarding mainly the current mobile phone space. And then we also feel that we have opportunities regarding our implementation patent portfolio. And that can be both in the mobile space, but also broader, because that is some of the innovation what we will no longer utilize in our own productization in the handsets after the Microsoft transaction closes. So that is really where we see the opportunity space but the 600 encompasses as we see the situation after the deal closes.

Matt Shimao

Thank you, Pierre. Carmen, next question please.

Operator

Your next question is from the line of Andrew Gardiner with Barclays.

Andrew M. Gardiner – Barclays Capital Securities Ltd.

Good afternoon, thank you for taking the question. I do have a one for Rajeev on NSN. you’ve highlighted the aim to get back to year-on-year revenue growth in the second half. I’m just wondering if you can give us a bit more color where how much of that is going to be driven by sort of what you are seeing for the industry or your market share gains and as more pointedly, do you have sufficient sort of contracts in the bag today to ensure that you can get to that year-on-year revenue growth or are you looking for further contract wins over the coming couple of quarters to make sure that you can hit that target.

Rajeev Suri

Thanks, Andrew. so we’ve seen some good deal momentum in Q4 and also coming into Q1, I’d say both on roadmap competitiveness and deal momentum were coming back in Europe and I think we are looking to do well out of the whole China LTE development. And then of course, we have Sprint. so the elements that give us confidence that we can drive efforts to grow the top line et cetera.

Matt Shimao

Thank you, Andrew. Carmen, next question please.

Operator

Your next question is from the line of Kulbinder Garcha with Credit Suisse.

Kulbinder S. Garcha – Credit Suisse Securities LLC

Hi, my question is an – really on margins and the profitability outlook for the overall new Nokia as we go through this year, kind of split into two parts for Rajeev and [indiscernible] margin this year and I guess you’re still going to have some negative impact as we ramp up from China and you’re going to also seeing contracts and probably some negative impact I imagine from Sprint on new network rollouts. So normally when main productive vendors go through this period, the margin pressure can be really quite meaningful. So year-to-year from 2014 to 2013 is there something that you’ll also deal with your cost base to make sure you get the high single-digit margin for the year. And then my question from Timo on margins is, you’re going to spend more money in here, it sounds like – and one kind of continued to buy HERE as a R&D to sales ratio 47%. so shouldn’t you be repositioning to how you spend that money as apposed to spending even more or am I missing something – many things?

Rajeev Suri

Well, let me start so, first, yes, some of the network deployments will result, because they are coverage related, will result in some margin dilution and that’s why we’ve said the guidance that we have about Q1. Having said that, there are other projects that also are moving into the capacity phase and some of the more advanced markets and again, we have been quite selective and strategic about where we are looking for a tradeoff a penny between growth and profit. This is not an across the board thing. we’re very disciplined in terms of our pricing processes and so on.

So I believe if we execute well, we can end up at the higher end of the range that we’ve given in guidance. In terms of cost, as we said, we are largely done with our restructuring program that we announced in 2011, but we will continue to be a prudent company, lean with investment strength and continuous improvement is just going to be part of our discipline going forward.

Timo Ihamuotila

Okay. and regarding HERE, I think your question is absolutely valid, but of course, we simultaneously drive efficiency in the basic math, but we also have to and think that it makes sense to invest in the future opportunities in HERE and this would be in areas like for example 3D and visuals where we have done the Earthmine acquisition in the areas of connected cars. And if we look a little bit further worldwide, it is really real-time analytics, because if we think about the future math, it will become more and more real-time, which we’ll need to all the time get information from the cloud and these are really the investment area. so of course, we are simultaneously efficient in the core map, basic map area, but we feel that this is the right time to increase investment.

Matt Shimao

Thank you, Kulbinder. Carmen, next question please.

Operator

Your next question is from the line of Francois Meunier with Morgan Stanley.

Francois A. Meunier – Morgan Stanley & Co. International Plc

Yes, thanks for taking my question. I’m afraid I’m going to ask a question again, but the patents on your €600 million guidance. It includes Samsung and I think everyone was expecting Samsung to be a quite significant. So how cautious have you been in the accounting of what Samsung could pay, is it something, which is less than €100 million or is more than €100 million or is this €600 million guidance?

Timo Ihamuotila

Okay, thanks Francois. So basically, what we have said about Samsung transaction is that the final amount will be settled in arbitration in 2015. and that settlement will include payments of course, from 2014 or beginning of 2014 onwards, because that’s when the previous deal with Samsung expired. And we have of course, taken a normal prudent approach on looking through that in our accounts and as we do not know what the final amount will be. so we have needed to take a prudent approach, I don’t think I can share much more color into that again the arbitration in 2015 will really define the final outcome.

Matt Shimao

Right. Thank you, Francois. Carmen, we’ll take the next question.

Operator

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

Simon F. Schäfer – Goldman Sachs International

Yes, thanks so much. It is a question for Rajeev. Rajeev, you said about – of course, you’ve been very successful in getting new significant commercial deals specifically in China and Sprint of course, as you highlighted and you also talk about prudent investment. but more broadly on a multiyear point of view, do you think this business now has sufficient scale in the long run to compete against significant – the significant players at the top of the three if you will in terms of the real scale guys. So I’m just wondering as to whether you think going forward that you may actually have to reinvest a significant amount of the excess profitability that you’ve been earning over that you think that from now, if you call it you can be very prudent in the amount of reallocation of that profit or costs?

Timo Ihamuotila

Thanks, Simon. So we are – we’re clearly escaped there in the mobile broadband addressable market that we’re playing and of course, if you attack services. And I think market forces are determining preferences such that the top three players are getting a bigger part of the pie.

Our cost structure is such that we have good operating leverage, as we grow our top line that we can continue to benefit from the profitability that we’ve sort of demonstrated and hence the target of 5% to 10% longer-term. and for 2014, if you execute well, we can end up higher end of the range.

Of course, we’ll continue to be efficient as well. But when I look at R&D investments, that’s spending competitively, we are increasing our investments in next generation core telco cloud in the areas such as those, we are increasing our investments in LTE and all of the new generation technologies, including small cells. So we have a very robust portfolio coming out in small cells and other such areas. So I’m confident that we have scaled there and I’m confident that we are addressing appropriately for what is required to be competitive in R&D.

Matt Shimao

Thank you, Simon. Carmen, next question please.

Operator

Your next question is from the line of Didier Scemama with Merrill Lynch

Didier C. Scemama – Merrill Lynch International

Yes, thanks very much for taking my questions, gentlemen. Just going back to patent from Q4, one of the elements you mentioned on the press release is maybe some issues related to a revenue recognition. So I was just wondering whether that that sort of €30 million or €40 million-ish on Q4 is going to snap back at some points whether it’s Q1 or Q2 in 2014 that’d be great if you could answer that? Thanks.

Timo Ihamuotila

Okay, Didier. so I don’t think we had any sort of specific revenue recognition things during the Q4. so really, as we said in the release a little bit lower number was mainly driven by lower business volume with some of our customers. and on the other hand, as we have said, we expect now the run rate to increase to approximately €600 million then after the Microsoft deal closes and for the full year, we were slightly above the €500 million in AT. so those are really the numbers in question.

Matt Shimao

Thank you, Didier. Carmen, next question please.

Operator

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

Sandeep S. Deshpande – JPMorgan Securities Plc

Yes, hi, thanks. And can I revisit the IT and the Advanced Technologies question. Can we understand Timo, regarding – within Advanced Technologies, two things, one is cost, now once the handset business goes away, will you have to increase R&D cost within Advanced Technologies to be able to continue IT development into the – for the future for Nokia. And secondly, with regards to these earlier questions regarding Samsung et cetera, this movement from the 530 or to 600 is taking into account – the main delta is Microsoft, less whatever Microsoft was already in the numbers or is it that some other pluses and minuses from that? Thank you.

Timo Ihamuotila

Okay, thanks, Sandeep for the questions. So first on the cost side, so we have had as you can see from the releases what we have given during the last couple of days that the cost run rate has been overall somewhere around €200 million and maybe, €150 million, €160 million of that has been R&D-ed [ph]. If we look at the patent creation during last year, we made about 900 patent applications and two thirds of that came from Advanced Technologies organization and HERE, if we look at the overall sort of Nokia excluding NSN.

So the innovation proportion opted to old Nokia is very good. I don’t think we want to roll out possible investment in AT, as long as we can see good return prospects for that. So clearly, that’s an area as we have said where we see good opportunities as in the essential patents in implementation patents and as we have spoken about earlier also in the future possibly in technology licensing, because especially on the implementation innovation while it’s more used by Nokia devices business, we can also see technology licensing as an opportunity and then what comes to 600 run rate.

So again, as I said earlier, it clearly includes growth component we are saying that that would be the run rate after the Microsoft transaction closes. So it includes the Microsoft delta as you call, but it can also include other positives and negative customary of course, in business.

Matt Shimao

Okay. Thank you, Sandeep. Carmen, next question please.

Operator

The next question is from the line of Stuart Jeffrey with Nomura.

Stuart A. Jeffrey – Nomura Securities International, Inc.

Hi, guys. Thanks everyone. Question on the U.S., you have managed to break from T-Mobile into a bit of Sprint as well, but I guess it was just concerned as you go into a market, where your market shares is significantly below the incumbents that maybe, it’s hard to scale on a fixed costs to be really profitable. So I was trying to understand whether the U.S. business for you is a profitable one, whether you’re having to make significant investments to scale up and whether the current footprint is enough for you to generate good long-term profits or whether you think you need to do some other actions to try and break into the top two covers in particular, and what opportunities you see for that over the next year or two? Thanks.

Rajeev Suri

Thanks, Stuart. So yes, we’ve got business with T-Mobiles both on the radio and core, we have Sprint of course we’ve broken through into now. We also have Verizon remember sort of with IMS, which is of course, next generation core, and then we have AT&T as well, although it’s largely legacy embedded. So yes we have the required scale and the only investments you need to make really are in the services business that frankly comes to the territory and its part of your gross margin in any events. So we have the required scale to be profitable and we want to continue to grow that market, it’s a breakthrough market for us.

Timo Ihamuotila

And we do not give sort of profitability figures by market or guidance.

Rajeev Suri

Yes, but it adds to the overall top line and margin for the company.

Matt Shimao

Great. Thank you, Stuart. Carmen, next question please.

Operator

Our next question is from the line of Mark Sue with RBC Capital Markets.

Mark Sue – RBC Capital Markets LLC

Thank you, good morning. Timo just on the licensing, is the broad sense the intent to expand the base or drive collection from though that might not be paying or not might be paying the appropriate rate, how should we think about the costs related to kind of the collection of that? And then just at the Nokia case forum, how should we think about the framework for the appropriate capital structure, perhaps an early sense of problem you are thinking of returns of cash, excess cash to shareholders?

Timo Ihamuotila

Okay. Thanks, Mark for the question. So on the licensing again, this goes back to both essential patents and then implementation patent. So yes we think that particularly regarding the implementation patent, we would have possibility to expand the base as well as you call it, but of course these are long-term efforts and not something which would happen immediately. And as we have said earlier, we expect that essential patterns would continue to form the bulk of the licensing revenues also kind of like a short to medium term, but those are exactly the areas, which we look at investing into both regarding the business model and then on the technology side as we are no longer needing that differentiation in our devices business.

And then regarding frame for the capital structure, so again, just a reminder that as we have said, the board is conducting the overall strategy evaluation, which encompasses strategy corporate structure and also capital structure considerations and after the Microsoft deal closes, we hope to be in position to talk more about that detail. And what we have said earlier, regarding the capital structure is that we aim to become an investment grade company through times, so it’s not like that’s a first priority at any cost on a really short period of time.

So through time by of course, business execution and then working towards a call it more suitable capital structure for these business, because if you for example look at how much debt the company – the continuing company will have, it is clearly somewhat more than we would optimally like to have, we know that we have done the Nokia convert well over a year ago, we have done [indiscernible] NSN after the Microsoft transaction closes maybe, it would have not been necessary, but it was I think exactly the right thing to do at the time to run financials for the company. In a prudent way and in that sense we will be talking more about this topic when we come up with our – when we talk more about our financial evaluation and/or slightly after the Microsoft transaction closes.

Matt Shimao

Thank you, Mark. Carmen, we will take our next question please.

Operator

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

Kai Korschelt – Deutsche Bank

Yes, fine, thanks for taking my question. I apologies, but another question on the Advanced Technologies and so I just wanted to make sure I understand the math right, my understanding is you are expecting something like a €150 million in income from Microsoft this year and so your guidance essentially implies that ex-Microsoft your revenues will be around 450 in terms of run rate and that would seem to be a 10% decline versus last year. I’m just wondering is there like a flushing out of maybe less property licensees or I'm just wondering why such volatility in the business. And then my second question was also in terms of the – if we have margin run rates we should be expecting – should be more in the 50s or in the 60s? Thank you.

Timo Ihamuotila

Thanks Kai for the question. That’s a very important thing to clarify. So again when we closed the deal with Microsoft, Microsoft will become a more significant licensee on Nokia’s intellectual portfolio, but Microsoft has already been a licensee and its really a net impact one needs to look at and not the before €150. And that is something what we not – we have not exactly quantified, but it is really a net impact I mean that cannot draw the conclusion what you said that call it ex-Microsoft run rate would have gone to 450 that’s not the way this thing works. And then we are really not giving any margin guidance for the business at the moment, but as you can see from the historical at least on the gross margin level it’s been fairly stable.

Matt Shimao

Thank you, Kai. Carmen we will take our next question.

Operator

Your next question is from the line of Ehud Gelblum with Citi.

Ehud A. Gelblum – Citigroup Global Markets Inc.

Hello, thank you very much. So I don’t want to beat a dead horse too much, but I do have clarification I wanted to understand about Advanced Technologies and then question for you Rajeev more on strategy on NSN. First of Samsung any Advanced Technology revenue in the Q4 numbers you reported or not and then when Samsung finally, when – I’m assuming that there was some run rate numbers that for Samsung that you have put into your 2014 estimate and once the arbitrations completed in 2015 whatever that number might be, my guess is it will be higher because you had probably been conservative for 2014 then we start seeing that run rate in 2015 and beyond and I’m wondering do they actually pay maybe a lump sum for the amount of the new rate for 2014, so do we see that come back, just trying to understand that. And then the – whatever delta you know that you are talking about for Microsoft I’m wondering what are the assumptions that you are putting into that in terms of the unit level that Microsoft actually will be generating this year and is it just safe to assume that if Microsoft can grow the Lumia base in 2015 and beyond, it should grow proportionally relatively with that base growth.

And then Rajeev on the NSN side, you used the word assertive when describing how you're going to be approaching the top line going forward with the Sprint and China Mobile deals behind you and bunch of others that you mentioned, can you just define what you mean by assertive, should we be looking for more lower margin deals as you try and build the business or define, thanks for using the word aggressive I like assertive better, but if you define what assertive of means.

Timo Ihamuotila

Okay, we will try to address the platter [ph] of questions thank you, so I will actually start with the Lumia question, because that's an important one to clarify. So we said that as part of the Microsoft transactions there is the IP licensing and at least for ten years and if I recall correctly that is €1.65 billion and €100 million of that is an option to continue the licensing into perpetuity only of course for the patents which have been valid 10 years prior and that’s why the value of the option is kind of like low if want to call it that as €100 million.

But it has then basically that €1.55 billion for the full period and that means that if the Lumia volumes would grow significantly then at back year’s portion to the volume it would be lower of course on the front years then it would be higher. If you want to use that kind of methodology, to look at this based on volumes, but one has to remember that there are many different ways to put together these licensing structures, they can be more volume based, they can have sort of kind like a fixed component and on top of that some volume elements and so forth.

So this is not really an exact tie-ins but that’s any how what we disclosed regarding the Microsoft contract and then what comes to sort of Samsung’s numbers in these exact numbers that I really cannot comment further what I have said so, so as I said we have been prudent in looking into the Samsung contract and in that 600 run rate we overall the relevant information including the net impact from Microsoft and what would then come to kind like whatever come out from the arbitration then we would need treat that at the time of course regarding whatever the results have been.

Rajeev Suri

And let me define asserted so when we talk about being creating any sort of margin for top line it is extremely selective, it’s only on the strategic deals long-term profitability profile being in the right ballpark is a must and I also meant to say that our technology is much more competitive than before, to be want to be assertive in the marketplace from that perspective and I think we are clearly seeing that we are coming back in Europe with a deal momentum.

Matt Shimao

Okay. Thank you Ehud. Carmen next question please.

Operator

Your next question comes from the line of Tim Long with BMO Capital Markets

Tim Long – BMO Capital Markets

Thank you, just related to that I wanted to talk a little bit about some of the new wins that you have highlighted, there has been lot in the press about the deals in China and the deal at Sprint being very cost competitive. So could you talk a little bit about what we should expect from gross margins as some of these big high profile wins start rolling out and would this be the standard type of thing where it’s a little bit lower margin initially and then overtime they improve. Thank you.

Rajeev Suri

Yes thanks for the question. So no I don’t think we should conclude that we are going in that direction sort of on a bigger scale kind of way, as I said selective strategic long-term profitability profiles, but I just want to come back to what we said without the guidance, so short-term we see challenging in the first of half of the year and second half we are driving efforts to come to growth but also if we execute well we can end up that the higher end of long-term 5% to 10% operating margin goal not withstanding all these things we’ve spoken about

Matt Shimao

Thank you Tim and Carmen for today, we’ll take our final question

Operator

And your final question comes from a line of Maynard Um with Wells Fargo

Maynard J. Um – Wells Fargo Securities LLC

Hi thank you, I just wanted to follow-up on Advance Technologies and the potential opportunities that – or the potential and the opportunities you talk about both for the essential and implementation portfolio, can you just talk about a little bit more about how you plan to monetize that I mean historically if you look competitors haven’t exactly been forthcoming and paying their royalties without being forced to. So can you just talk about I guess the cost of monetization for that patent portfolio and you did talk about it being a little bit further away, but in terms of I guess the thought process of how long it might take to monetize and then the cost associated with that, that would be great. Thank you.

Timo Ihamuotila

Okay, thanks for the question Joe. First of all on the essential patterns as you will know these are patterns which one needs to license in so called FRAND rates and then the question is more. How do you sort of define the proportion at FRAND rates between different companies and that is clearly dependent on the strength of the essential patent portfolio overall volume of business, where that business is being conducted and so forth there are multiple things impacting that but again, there you sort – not sort of but you need to license with the FRAND rates and then the discussion is really about what is the balance regarding that portfolio.

Then on the implementation patent these work in a way that you actually don’t have to license. And of course many of the implementation patterns earlier we have utilized in Nokia own devices, for example camera would be typical thing, where you could say, okay this is such a competitive advantage that we don’t want to license it at all. And in that sense if then somebody infringes then you would just say no, you know no licensing at any cost.

And I think that is maybe the way for example somebody like Apple would look at some of these things at the moment not knowing of course what they do about that sort of seems to be bit more the case. And in our case now regarding the implementation patterns we of course can look at either licensing the intellectual property or then as I said along or then if we create technology which is interesting to other companies and it could either even give those other companies possibility to differentiate all the market, would give them time to market advantage or cost advantage then we could also license the actual technology and not necessarily only the intellectual property, which would then be of course different business model and maybe less to the direction of what you indicated i.e. that people wouldn’t just want to pay. So those are things what we look into and sort of that’s the – I would take overall direction on that but of course its early days.

Matt Shimao

Thank you very much Maynard. Ladies and gentlemen this concludes our conference call. I would like to remind you that during the conference call today, we had 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 12 through 47 of our 2012 20-F and in our results reports issued today. Thank you.

Operator

Thank you for participating in today's conference. You may now disconnect.

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