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Nokia Corp. (NYSE:NOK)

Q2 2010 Earnings Conference Call

July 22, 2010 8:00 AM ET

Executives

Kristian Pullola – VP, Head of Treasury and IR

Olli-Pekka Kallasvuo – President and CEO

Timo Ihamuotila – EVP and CFO

Analysts

Rod Hall – JP Morgan

Andrew Griffin – Bank of America

Mark Sue – RBC Capital Market

Gareth Jenkin – UBS

Ittai Kidron – Oppenheimer

Stuart Jeffrey – Nomura

Tim Boddy – Goldman Sachs

Tim Long – Bank of Montreal

Pierre Ferragu – Bernstein

Andrew Gardiner

Kristian Pullola

Ladies and gentlemen, welcome to Nokia's Second Quarter 2010 conference call. I am Kristian Pullola, the Head of Investor Relations. Olli-Pekka, CEO of Nokia and Timo Ihamuotila, CFO of Nokia here in Espoo with me today.

During this briefing and call, we will be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. These statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external, such as general, economic, and industry conditions as well as internal operating factors. We have identified these in more detail on pages 11 to 32 in our 2009 20-F and in our press release issued today.

Our aim is to finish this call in approximately one hour. To view the supporting slides while listening to the call, please go to the IR website. Please note that today's press release and this presentation includes non-IFRS results information in addition to the reported results information. Our quarterly results release includes a detailed explanation of the content of the non-IFRS information as well as a reconciliation between the two.

With that, Olli-Pekka, please go ahead.

Olli-Pekka Kallasvuo

Thank you, Kristian. Good morning and good afternoon. Considering our mid quarter update and the competitive challenges we faced in the quarter, our Q2 ended on a relatively solid note. As I noted in today's press release, there are several reasons for us to be optimistic about the future.

I'll start my comments by taking you through my thought process, why I am confident that Nokia will make a comeback at the higher end of the smartphone market. Then I will review our highlights for Q2.

First of all, we have been taking action to improve our execution. In Q2, we reorganized our Devices & Services business. Now, each of our product making units are vertically integrated. Each unit has its own dedicative resources including R&D, product portfolio management, and software assets. They [inaudible] direct control. This should improve both the speed and quality of execution, enabling us to deliver more innovative mobile solutions to the market and helping us to expand our leadership in mobile phones.

Looking at our current Devices portfolio, it is clear that the current situation is very tough at the high end. And I don't expect it to get easier in Q2 – sorry Q3. But towards the end of Q3, we expect to start shipping the Nokia N8, our first device that runs on the new Symbian 3 operating system.

There has been quite a lot of speculation on the N8 and Symbian 3, and I want to set the record straight on four key points. First, there will be a family of Symbian 3 devices. In fact, over the coming years, we aim to ship over 50 million Symbian based devices, 5-0 conservatively. We expect consumer demand for Symbian 3 devices to continue for quite sometime.

Second, we have made a lot of changes in how we approach development in the last 24 months. With Symbian 3, we are leveraging a software-centric platform approach, which provides distinct benefits for internal and external developers. This is really important.

For internal development teams after the first Symbian 3 device starts shipping, we can strive to deliver a more steady cadence of mid-to-high end device launches. This is because the Symbian 3 software will be uniform across the range of devices. This will also make application development more scalable for external developers. It will be much easier to make an application work across our Symbian 3 family of devices.

Third, it has to be clear on the distinct roles that Symbian and MeeGo play in our mid-to-high end portfolio. Symbian is about leveraging scale and expanding the smartphone category to cover a broad mass market footprint. In contrast, MeeGo is about leveraging speed and innovation to create industry leading flagship solutions. Symbian and MeeGo have different sweet spots. We intend to capitalize on the unique strengths of each platform.

And fourth, the feedback from operators on the N8 and Symbian 3 has been very good. The Nokia N8 will have a user experience superior to that of any smartphone Nokia has produced. Therefore, I am optimistic that the N8 will be an important step towards overcoming the challenges we face at the high end of our portfolio.

It's also worthwhile to highlight that it takes more than a good product to succeed. Many other elements can be crucial factors including customer loyalty, distribution channel and the strategic alignment with operators. We excel in all of these areas because of the expertise and efforts of each individual in our market's organization. Improving our smartphone competitiveness will enable us to once again leverage these assets to the fullest.

I am also optimistic about our future for four additional reasons. The overall handset industry remains healthy. We have continued to deliver solid performance in our mobile phones category supported by continuous product renewal. We have made good progress broadening the reach of our location services and we have continued to generate healthy cash flow. I will cover these topics in my review of Q2.

In Q2, the overall handset market delivered volume growth of 5% sequentially and 14% year-over-year. This very healthy level of growth was led by strength in developing markets where we are strong.

In Europe, where growth has been – has not been as robust, we are approaching a turning point at the high end of our portfolio. In the second half of the year, we expect to move from a weakening competitive position to a strengthening competitive position.

In mobile phones, on a sequential basis in Q2, we delivered high volumes and net sales. The Nokia C3, our most attractively priced QWERTY phone started shipping towards to the end of Q2 and got off to a strong start. The C3 in combination with our Nokia Messaging Service, provides e-mail, instant messaging and social networking at a very affordable price. Capacity constraints limited our C3 volumes a bit in Q2, but we have prepared our supply chain to deliver increasing volumes in Q3 and Q4.

In India, we benefited from solid sales of the Nokia 2690, our lowest priced device with removable memory card and this helped us to end Q2 with higher market share in India than at the start of the quarter.

In Q3, we expect to start shipping the Nokia C1 dual sim phone. This is expected to further improve our portfolio in developing markets, especially in India, where dual sim is particularly popular.

In addition, we are focused on expanding our portfolio of TD-SCDMA devices which will help us to improve our competitive position in the China market over the next 12 months.

We are of course, working on even more. I feel very good about our mobile phones roadmap. From a strategic perspective, we extended the reach of our Ovi Map service this quarter in two ways. First, we have free navigation for our GPS-enabled smartphones. And second, by partnering with Yahoo! to power their web-based location services. One of our goals is to make Ovi a fundamental [enabled] location services. We are making good progress towards this by increasing the scope of consumer engagement and the frequency of usage of Ovi Maps. The early results clearly show that our decision to include navigation with our GPS-enables smartphones has improved the attractiveness of our offering.

This is not just a great deal for consumers, but also very good for Nokia as well. Consumers clearly value location services and we have positioned ourselves to play a central role here.

And now onto Nokia Siemens Networks. NSN has entered an agreement to acquire the majority of Motorola's networks business. The deal is expected to tremendously strengthen NSN's position particularly in North America and Japan with key customers including Verizon and KDDI and we believe that it gives Motorola's current customers a clear path for transitioning to next generation technologies. This deal is being self funded by NSN and is expected to be accretive.

The cash flow stream of the current business itself is attractive and on top of that there is a lot of potential upside. In Q2 NSN's net sales were impacted by two industry wise issues. First of all, delayed business activity related to local security review practices in India continued in Q2. We estimate that NSN lost upward EUR200 million in net sales in Q2 as a result of these delays.

Secondly, NSN has been impacted by industry component shortages. Despite these industry wise circumstances, NSN continues to generate momentum in key areas. NSN has the highest number of LTE and 3G references in the industry and in Q2 the wide-band CDMA business delivered significant year-over-year growth.

Professional services also continues to be an area of strength driven by strong growth in the managed services.

Nevertheless NSN has continued to improve its business performance and Q2 represents NSN's third consecutive profitable quarter on a non-IFRS basis. NSN's strategy is the right one and we continue to hear strong positive feedback from NSN's customer base.

Finally, at the overall Nokia level I want to highlight that our solid operating cash flow performance continued in Q2, which of course has implications for shareholder distributions. The dividend is our primary method of distributing cash to shareholders.

We view the dividend as a top priority and we continue to manage our business accordingly. Now I will hand it over to Timo.

Timo Ihamuotila

On reported basis, devices and services net sales of EUR6.8 billion were up 2% sequentially and up 3% year-over-year. The sequential increase in net sales was mainly driven by seasonality and FX partially offset by the competitive environment particularly at the high end of the market. On a constant currency basis, devices and services net sales were down 1% sequentially and down 2% year-over-year.

In Q2 services net sales were EUR158 million up 7% sequentially. Billings were EUR295 million in Q2, up 29% sequentially. As I have been mentioning the two previous quarters, you will see the gap between billings and net sales widened during 2010. In Q2 our active service users grew from 77 million to 114 million, just shy of our 115 million target driven by rapid growth across our core Ovi services especially the radio Ovi store and location services.

Our volumes were up 3% sequentially and 8% year-over-year. There are some indications that lead us to believe that our regional performance in Q2 was impacted by cross border trading related to currency volatility.

It seems to us that some devices in the distribution channel may have been moved by traders from Europe to dollar denominated regions particularly the Middle East and Africa in order to arbitrage the sharp depreciation of the euro.

Our volume disclosure indicates the region to which we shipped the product.

We ended Q2 with normal channel inventories between four to six weeks, a level we are comfortable with given expected market demand.

Industry price competition was robust in Q2. Nokia's ASP in Q2 was EUR61 including service revenue down EUR1 sequentially.

Our sequential ASP decline was primarily driven by price pressure particularly in the high end smart phones offset to some extent by the appreciation of certain currencies against the euro and converged mobile devices representing a greater proportion of our overall mobile devices volumes.

In Q2 our converged mobile device ASP was EUR143 compared to an ASP of EUR155 in Q1. This is consistent with the commentary we provided in our mid quarter update. The sequential decline in our converged mobile devices ASP was mainly due to a mixed shift towards lower price Smartphones as well as price pressure particularly in certain high end Smartphones.

Mobile phones ASP was EUR39 in Q2 unchanged on sequential basis, a solid accomplishment.

Devices and services gross margins in Q2 were 30.2%, down 220 basis points sequentially. Approximately half of the sequential net decline was due to faster price erosion than product material cost erosion especially in our Smartphone portfolio.

In Q2 the impact of the selective price moves that we have done to improve the competitiveness of some of our devices was felt. Also, tightness in the supply chain limited our cost erosion in Q2 and we expect the situation to persist throughout the third quarter.

The remaining Q2 gross margin decline was primarily due to the depreciation of the euro, which lead to higher cost of goods sold as well as lower growth margin benefits from our hedging activities.

In Q2 our gross margins benefited by approximately 60 basis points from our hedging activities compared to approximately 150 basis points in Q1. We expect a similar level of benefit in Q3 as in Q2 assuming static following currency rate at the end of Q2 levels.

In Q2, devices and services non-IFRS OpEx was EUR1.4 billion, up approximately EUR60 million on a sequential basis and approximately 60 basis points as percentage of net sales. We reiterated our 2010 devices and services non-IFRS OpEx guidance of approximately EUR5.7 billion even though OpEx has been a headwind.

The sale of our modem based [inaudible] will help us to achieve this target even as we continue to ramp up investments in areas such as MeeGo. Note that we are continuing to invest in radio IPR creation to ensure our long-term IPR position remains strong.

Devices and services non-IFRS operating margin was 9.5% in Q2 down 260 basis points sequentially.

Then moving onto Nokia Siemens Networks and Navtech. NSN's net sales were EUR3 billion in Q2, a 12% sequential increase and a 5% year-over-year decline. As Olli-Pekka highlighted NSN delivered solid performance in the seasonally strong Q2 even in the face of the industry wide challenges.

The issues that impacted sales in Q2 particularly components shortages are expected to present challenges in Q3 as well.

Non-IFRS gross margin was 30.8% down 60 basis points sequentially and up 280 basis points year-over-year. On a sequential basis, the decline was primary due to product mix, the year-over-year improvement was primarily due to continued progress on product cost reductions and a favorable regional mix.

Non-IFRS operating margin was 1.7%, up 110 basis points sequentially and up 160 basis points year-over-year.

NSN continues to target reducing its non-IFRS annualized operating expenses and [product] overheads by EUR500 million by the end of 2011 compared to the end of 2009.

NSN's contribution to Nokia's cash flow from operations was negative at EUR270 million in Q2. At the end of Q2 NSN's contribution to Nokia's gross cash was EUR746 million and NSN's contribution to Nokia's net cash was negative at EUR689 million.

Then on Navtech non-IFRS net sales in Q2 were EUR553 million, up 34% sequentially and up 71% year-over-year. In Q2, Navtech benefited from improved conditions in the automotive industry and growth in mobile device sales. Non-IFRS operating margins were 19.8% compared to 21.7% in Q1. This quarter, I think it's worth spending on additional meaning here to help you with the modeling of the required elimination phase that we book on an overall Nokia Group level.

There are two additional tables in our press released this quarter. Net sales by reportable segment and operating profit by reportable segment. There are two distinct elements captures in the elimination entries. First, in the net sales by reportable segment table, we showed our elimination of inter-segment activity between NAVTEQ and Devices & Services. And second, in the operating profit by reportable segment table, we show the eliminations of profits recorded in NAVTEQ related to the Ovi Map service sold in combination with our GPS enabled smartphones.

In short, although we received cash upfront, the accounting treatment requires us to defer a portion of NAVTEQ's profits at the overall Nokia Group level and this is booked as an elimination entry. This is over and above the significant and growing deferrals we are booking in Devices & Services. The elimination entries will continue on an ongoing basis so I would recommend that you factor these into your models.

Then turning back to Nokia as a whole. Nokia's financial income and expenses in Q2 was an expense of EUR 68 million compared to an expense of EUR 73 million in Q1. Our Q – in Q2 our cash flow from operations was EUR 944 million compared to EUR 955 million in Q1. The flattish sequential performance even with lower earnings was primary attributable to favorable networking capital changes partially offset by net outflows related to financial income and expense.

Devices & Services continues to target a negative cash flow conversion cycle into Q2, this goal was achieved. We ended Q2 with total cash and other liquid assets of EUR 9.5 billion and net cash of EUR 4.1 billion. Note that this is after paying the EUR 1.5 billion dividend for 2009 in Q2 2010. Then a note on taxes. Nokia's Q2 taxes were again negatively impacted by NSN's taxes. Since no tax benefits are recognized for NSN's finished tax losses, we talked about this in the previous two quarters.

In the shorter term, the negative impact of NSN's taxes on Nokia's tax rate is expected to continue. So if you want to model taxes more accurately I would recommend that you model all the way down to after tax profits for each of our reportable segments. To do this, you need two additional estimates. First, for financial income and expenses, allocate approximately two-thirds of the total to NSN and approximately one-third of the total to Devices & Services.

Second, use a tax expense of approximately EUR 50 million each quarter for NSN, while using the long-term tax rate of 26% for the remainder of our businesses. After NSN achieves a sufficient level of profitability then you can go back to using the overall long-term tax rate of 26%. I encourage all of you to update your models in this way.

Now let's look at our Q3 and 2010 guidance, which we are providing to you in the release and on the attached slide.

In Q3, we expect Devices & Services net sales to be between EUR 6.7 and EUR 7.2 billion and we expect NSN net sales to be between EUR 2.7 and EUR 3.1 billion. In Q3, we expect Devices & Services non-IFRS operating margins to be between 7% and 10% and we expect NSN non-IFRS operating margins to be between negative 2% and positive 2%.

And for the full-year of 2010, we target Devices & Services non- IFRS operating margins to be between 10% and 11% and we expect NSN non-IFRS operating margins to be between breakeven and 2%.

And with that I'll hand back to Olli-Pekka.

Olli-Pekka Kallasvuo

Thank you Timo. Briefly, we are approaching the end of this painful product transition of the high-end of our portfolio, delivering the N8 with a high quality user experience will mark the beginning of our renewal. And as we go forward, I believe we will achieve our potential and regain high-end leadership in our industry. Thank you.

Kristian Pullola

Thank you, Olli-Pekka. We will now continue with the Q&A session. I would like to remind you to limit your question to one question only. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Rod Hall with JP Morgan.

Rod Hall – JP Morgan

Yes, thanks for taking my question. My first question is for Olli-Pekka. Olli-Pekka, one of the key markets for smartphones in the US mainly because of the developer base and the value of that developer base. I wonder if you could say whether you agree with that or not and then with the better product pipeline lined up for the backend of the year and the beginning of next year, if you could just talk to us a little bit about when we're going to see you getting more aggressing in the US to go after that opportunity?

Olli-Pekka Kallasvuo

Okay, I'll go. So yes, I very much agree with your comment or statement in the beginning. So there is no doubt about in my mind about that and definitely to the Nokia team as a whole is opinion strongly and has felt the pain also in that respect.

Now secondly, and this is of course the big question here. So why have we not been successful in the US smartphone market. And we have been thinking about, there is a lot we have been sort of assessing our situation. We have to remember that the US market is not similar to any other market. The operator testing that you need to have in the US is definitely the far more than you do anywhere else, also time wise. And you need to really sort of a situation where you are quick to the market in order to be able to have that benefit. And frankly we have been trying many times but it has turned out to be an – this is a painful experience learning a Symbian earlier generations have not been from the time to market for interview fast enough in making that hurdle and am getting through the operator's testing early enough.

Its I just meant that we have missed some time windows. And now if you look at the Symbian^3 overall and the massive rewriting of the code base there, we have been doing here, during the last 24 months. This is a massive operation. It's the biggest software project of Nokia in its history. I believe we can also from the US market point of view come to a situation where we can launch products based on Symbian early enough. And definitely this is not a comment that has been made in isolation because of the fact of course we have a constant dialog with the US carriers and very much also when it comes to Symbian^3.

Having said all this, I also believe we need MeeGo in the US and that's so, so to speak needs to be carried out by Symbian^3 and future generations of Symbian as far as MeeGo where definitely the MeeGo team has very much been instructed and this is very clear in their minds have been instructed or one might even use the word ordered to give priorities to the US market. And that's very much in the plans, in the roadmaps, in the thinking meaning that you know if you have thinking goals, if you are competitive enough in the US you then can be competitive elsewhere as well. The situation is not always the same like we unfortunately have been able to experience when it comes to the opposite.

So it's both MeeGo and Symbian and I really think the painful learning here has taken place and I won't emphasize, I've been speaking many times about this heavy lifting we have been doing with Symbain^3, its really been heavy lifting because it's not simply coming out with a new lesson, its rewinding the code base and that's been a long effort. So in that way I think I'll stop here and Kristian.

Kristian Pullola

Yes. So could we have operator the next question, please?

Operator

Your next question comes from the line of Andrew Griffin with Bank of America.

Andrew Griffin – Bank of America

Hi. Just talking about the N8 release later in the quarter, can you confirm that it will be a worldwide launch, I'm just thinking compared with your first touch screen phone, the 5800, which was in limited countries. And then, secondly, will it be aggressively supported by appropriate applications and services which is I think a bit of a differentiated view?

Timo Ihamuotila

Okay, this is Timo, I'll take a shot on this. So, as we said, we expect to be Symbian 3 to start shipping towards the end of Q3. And we're of course aiming to start the ship at many markets. And, but, I want to highlight that the real meaning for if you look at kind of like geographical launches then are likely more going to be during Q4, so this is how I would sort of take the geographical questions.

So, again, we will have some impact in Q3, but the major or bigger impact will be Q4. And then what comes to the support to the services, so clearly we are aiming to launch the product with as broad over service offering, both regarding Nokia services as well as external or other services if possible. I don't know Olli-Pekka, if you want to add.

Olli-Pekka Kallasvuo

No, no, that's how launches go. They go to from one market to another and also from one channel to another. And, but, of course, a lot of work here has been ongoing in order to be able to launch as – with as many operators at the outset as possible and a very good work has been ongoing there with them as and on goes as we speak.

And also we have to remember there are different channels based, operator channel, there's the open channel, and the dynamics go in different ways in these channels. So it's a – it's something that requires quite a lot of experience and understanding on how market, different markets and channels [inaudible].

Andrew Griffin – Bank of America

Thank you very much.

Kristian Pullola

Could we –

Operator

Your next question comes from the line of Mark Sue with RBC Capital Market.

Mark Sue – RBC Capital Market

Thank you. Is the recovery and operating margins a secondary focus, since Nokia needs to quickly get new devices to the market which might be the primary focus? Or is 7% to 10% operating margins in the third quarter the bottom, since most of the heavy listing has already been completed for Symbian 3? And then, separately, if you can just comment on how we – you came up with the 50 million Symbian 3 devices, is that from operator commitments?

Timo Ihamuotila

Okay, maybe I'll start this one on the 7% to 10%. So as we said, the N8 will start to ship towards the latter part of the quarter, so you should not read into this guidance, that's kind of like a binary factor. Inside here, we have some elements which are continuing the competitive challenges on the high end of the market as well as then as we mentioned we have some component constraint on industry-wide issue ongoing and that is also putting pressure on the margin.

On the other side, we are launching some new product as well or getting some new products to volume, better way to say it. During Q3, like the C3 what Olli-Pekka was talking about maybe to mention Aero so, the X2 and X3. And then on the current Symbian version, we have the C5 and C6 products for example and we're of course then using this tool box to try to mitigate this profitability situation.

And then, I don't know on the 50 million, maybe I'll just take that. That 50 million is really not an operator commitment. I mean if we look at that number, we said, 50 million and we're talking about the Symbian 3 as a platform, so 50 million or more unified during the – let's call it less time.

Mark Sue – RBC Capital Market

Less time, thank you.

Operator

Your next question comes from the line of Gareth Jenkin with UBS.

Gareth Jenkin – UBS

Yes, thanks. First one is just regarding your cash flow is just strong in the quarter. Just wondering what – you've mentioned that you're intending to protect the dividend and I'm just wondered what sort of level you intend to protect the dividend and what you're thinking holistically with regard to buyback at the current levels of the share price? And then just related to cash flow, just wondered, if you could help us on NSN and what the cash impact will be from Light Squared? Thank you.

Olli-Pekka Kallasvuo

I took up the dividend, so I'll answer that as well. So – and I think the point that I made was I think there are two dimensions. One dimension was the fact that dividend is important and we feel that we need to manage our business in a way that we can respond to that importance.

And the second point was really to highlight the cash flow element here. But I think we have been pretty good in generating the cash flow here from these earnings and the thinking here – and that caused some – unnoticed sometime. And, of course, there is a link between the two and that was also the point. But, to come up with a level, I would not go in there it's not the right time to do that. And then, there was NSN.

Timo Ihamuotila

Yes, I think there was a NSN related data question to Harbinger or what was called Light Squared. I apologize that name slipped my mind. But we have to just note that this transaction of course in an NSN transaction and it really is as was said is in a letter of intent type of situation I would say, so we no further comments on that topic.

Kristian Pullola

Thank you. Could we have the next question please?

Operator

Your next question comes from the line of Ittai Kidron with Oppenheimer.

Ittai Kidron – Oppenheimer

Hi, thank you. Just I had a question on with regards to your market share assumptions. In the first two quarters of the year, you lost market share in every quarter. Your guidance for the third assumes that you're moving at the same pace as the market. And so for you to reach the 10% year-over-year growth as you expected the market to maintain those share, the fourth quarter of the year needs to be sequentially up close to 20%. I mean, if you can give us some more color exactly on how you intend to achieve that and especially with the environments still being somewhat uncertain macro wise?

Timo Ihamuotila

Okay, so, I mean the guidance is what we have out there and if you went through the math, I don't think I have any further quantification. I mean, traditionally, we have had sequentially strong fourth quarter and that is the target what we have set forth to aim. And naturally we are using the tools for both current products as well as new products what we're planning to launch on the market and that's how that works.

Kristian Pullola

Thank you. Could we have the next question please?

Operator

Your next question comes from the line of Stuart Jeffrey with Nomura.

Stuart Jeffrey – Nomura

Hi, and thank you very much. You mentioned the Amiga and Symbian differentiation before and I was hoping you could expand on that. You've made clear that Symbian's low and mid range and Amiga at the high end. But I'm just started confuses there will add between those two when you had multimedia, you will add a gap to not in the high-end feature phone segment. So I was trying to understand personally what you're doing to make sure that kind of gap doesn't live up again? And then trying to understand from a consumer perspective, will I notice much of a difference between a Symbian and an Amiga phone? Can you use Qt to blend it quite nicely or is it going to be a fundamentally different user experience? Thanks.

Timo Ihamuotila

Yes, I think I have to thank you for the question, because I think indeed there has been some confusion and I'm really happy to clarify the thinking here. So to start with, we believe that Symbian and Amiga are the best top player, a combination of software platform for our smartest devices. And our focus in Amiga is on the highest end mobile computing user experience beyond, I would say beyond card and smart phones.

Symbian is and will continue to be our core operating system as we lead the democratization of the smartphones. So without pre-announcing any new product, we are and then we will continue to have Symbian based devices across our end [inaudible] of devices, both at the high end and lower price points. Mid N-Series also here which is basically how high is and being a strong possibility.

The Nokia N8 will be our only N-Series device on Symbian 3, but I would reiterate my earlier comment on our conservative aim to ship over 50 million Symbian 3 devices over the coming years. And here, of course, there's something – something that we need to manage. I mean, it's of course, your point is absolutely correct, because you don't want to have overlap, but you don't want to have greyer areas in between either. I mean in that way, the segment base in another way we come up with the roadmaps, all looking at me go on Symbian. That's of course extremely important that here.

In fact, there have been – we have put sort of an experience Nokia leader, a leader to run the mobile solutions. And of course, it's his job to really make sure that you know, we really explore this opportunity in the right way. And that clarity and crispness needs to be there from the road-mapping point of view. But we also should remember that the smartphones if you include now this mobile computing they actually should, extend really from 100 euros to 500 or 600 euros, then it comes to a sort of trade pricing. And it's quite clear that they are horses for causes here as well. And they're trying to sort of tackle too much with one platform, has proven out to be challenging. But of course, we need to manage this dynamics in a very dynamic way. And make the right calls in practice. And that's all about the road mapping here.

But I indeed believe, and of course, we've got roadmaps here that we have that we can make the best out of the combination in fact.

Timo Ihamuotila

And I'll take a quick one on the queued question here of course. That was part of it as well. So we really with Qt, we aim to simplicity, ease of use and productivity for developers for the internal and external through common application program and interfaces I.E. APIs leveraging our Qt assets. And really utilizing the same set of APIs. So with these developers, we'll be able to easily forward applications between Symbian and MeeGo, without the need for extensive recoding. So really, improving developer productivity and global reach.

But of course, as Olli-Pekka was saying, Symbian and MeeGo need to be somewhat different. So we are planning to have a somewhat more advanced capabilities in MeeGo

And we will probably reach your set of Qt APIs for MeeGo computers. So you can view it in a way that you have a MeeGo set, and then the Symbian will be a subset of that.

And actually, the feedback from developers regarding Qt as a tool is very good.

Yes, so that's very important from the developer point of view and they're glad the commonalty needs to be there. But then if the question is this, is the User Interface with Symbian and MeeGo be the same? The answer is no. Could we have the next question please?

Operator

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

Tim Boddy – Goldman Sachs

Thanks. I wanted to ask a bit more about the margin guidance and the way it relates to your product launches. I'm having a hard time understanding how you could do a 7% margin in the third quarter, given that your sales are likely flat or up sequentially. You're not seeing a significant foreign-currency hits on the gross margin. And you already had a pretty weak quarter in the high end. If anything, you could argue behind could be a bit better sequentially with an 8% at the end of the quarter. So if you could help me understand that, I'd be grateful? And then related to that, if it is 7%, you need a really fantastic fourth quarter. And I just wanted to get your confidence that there will be a family of new products behind the N8 in time for that fourth quarter? And you said soon in your press release, but soon wasn't very specific. Thank you.

Timo Ihamuotila

Okay, why don't I start here, this is Timo. So really regarding the Q3, I mean we gave the gross margin drivers. And I've said, the potential negative drivers for Q3 are pricing pressure, especially on the high-end segments where our portfolio clearly is the most challenged. We have somewhat edge in smartphone portfolio, and then, we also mentioned the component shortages, which are industry wide. And I mean for example, I saw this on high news today. So this is really happening throughout the industry. And then, we have some positive drivers which are product renewal, particularly in mobile phones where we have the C3 product. And as you mentioned, maybe some operating leverage or should have slight operating leverage from the increased pipeline. But these are really the drivers. And then looking at Q4, I don't think I can say more what I said earlier, I mean you went through the map, and it will give clearly wide range to Q4. And then there goes the Symbian 3 family question. How soon is soon?

Olli-Pekka Kallasvuo

How soon is soon? Is it soon enough? I guess, that is the question. And so of course, we are talking about sort of one Symbian platform here, Symbian 3. And then the question really is sort of, what type of form factors and used cases, you build that sort of platform, where you build on top of that platform. And of course here, we are working on several projects at the same time, as opposed to have a situation where we will do one and then another one. And it's a great question about form factors and the appearance and the used case. And in that way, it's not trivial of course. Not trivial at all. But the whole thinking is to multiply as fast as possible to different used cases. So I'm really sort of, let's put it that way. Getting the software platform ready, yes, we need to meet that challenge and we have commented that many times today. But I think it's a less-demanding task than to multiply that platform into different used cases and form factors. So there's quite a lot of confidence that we can do that.

Timo Ihamuotila

But maybe on the how soon is soon, and referring to the family of product if I may, Olli-Pekka, just to clarify that the family, using that word and giving you nothing more to it, would be there during Q4.

Operator

Your next question comes from the line of Tim Long with Bank of Montreal.

Tim Long – Bank of Montreal

Thank you. Just a two part around ASPs for your devices if I could. First, the flattish performance for mobile phones in the quarter, could you talk a little bit about that? I assume there's a little bit of currency benefit. But was there anything in the product pipeline that leads us to think that will be sustainable? And then on the converged device side, down pretty big again but lesser than last quarter, what's the outlook there? Could the N8 and the other products maybe not in Q3 but in Q4, expecting we could start to see that get back into positive territory.

Timo Ihamuotila

Okay. So let's talk a little bit about that and the ASPs. So first, on the mobile phones.

Sequentially flat at 39. So there is the FX component there, because of the depreciation of euro but it's not the only thing. We have a strong portfolio in mobile phones. I said helped by for example, the C3 product, as well as our lowest memory device. The Nokia 2690, which is being important in India. Then when we look at ASP for the third converged mobile devices segment. So I would use the word stabilized here with the new portfolio coming in during latter part of Q3 and Q4.

Olli-Pekka Kallasvuo

I would like to give you an example here about the dynamics. In reality in India in Q1, we were under tremendous attack from basically the Chinese competitors and the [long term] crowd in Q1. We were able, with a better portfolio, the 2690. And by improving our operations there. One more time, once again, this has happened in the past many times. The attack has come from Motorola, Samsung, now from the Chinese, we were really able to claim back and made some sort of markets again in India in Q2. And in fact, if you look at the product portfolio during the latter part of the year, so we definitely continue to improve in the mobile phones as well. And of course, you have not seen everything as of yet. So new product launches will come. So in that way, I think it's a good practice on what's happening here.

Timo Ihamuotila

And just to make sure that my stabilized comment is taken in the right way, apologies for not saying this, this right the way I meant during the second half, not during Q3. So stabilized the second half and clearly the new N8 and the family of Symbian 3 products is the important component here.

Tim Long – Bank of Montreal

Thank you.

Operator

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

Pierre Ferragu – Bernstein

Hi, thank you for taking my question. Just going back on the very wide rounds that you have on your guidance for Q3 and for the full year, I'm assuming there's a lot of timing in there? But are you also considering that from the disappointing performance of Symbian 3 and MeeGo? And do you have any B plan in mind? And are you already considering alternative scenarios going forward? Is this two new operating systems the very disappointing performance.

Timo Ihamuotila

Well, let's maybe – I don't know, Pekka, if you want to take some of the latter part, but clearly we do not, as we have said, have a major volume of Symbian 3 during Q3 because we are saying, as we expect it to start to ship during the latter part of the quarter. And so in that sense, kind of that being a meaningful swing back there inside the Q3 range, it's not [ph], it's clearly coming later. I think I went through the main drivers for the gross margin. We had some negative drivers at stead, the passing pressure on the higher-end segments. And it's clearly relating to the portfolio of competitiveness on the smartphones as well as this components software [ph] issue. And then, as said, trying to meet the get that way, but some of the positives on new products both on mobile phones as well then a couple of new smartphones. But on the thought of these other bigger alternatives, it's not really a Q3 thing.

Olli-Pekka Kallasvuo

Yes, and I would like to comment on that Symbian 3 question. And of course, while I pointed out this earlier – so of course we have been working with the operators who are the best possible experts on what to resonate in the market base and what not. And the operator response to Symbian 3 has been tremendous. So now it's really question about getting the quality right. And this is why we have said and this is why we basically postponed the Symbian 3 from Q2 to Q3 to get this right, because that's really the thing that we need to get right because the traction is there, and the products will resonate. And now we are day by day closer to that time when that milestone will be met. And so we as a team – I am not speaking on behalf of myself; I mean as a team, are strong believers in these guys. Strong. As a team.

Kristian Pullola

Operator, could we have one additional question, please?

Operator

Yes, sir. Your final question comes from the line of Andrew Gardiner with Barclays.

Andrew Gardiner – Barclays

Thank you very much for taking the question. I was wondering if we could touch on R&D just for a moment. You've reiterated the guidance for operating expenses for the License Services division for this year, so clearly no change there. But you also highlighted that the sale of the modem business to Nasis [ph] will – left you some savings. You seem to indicate that those savings wouldn't be retained but would rather be invested. And also another comment you made on R&D as it relates to the Symbian 3 development, you called it the largest software – the upgrade or development that Nokia has ever done. And I'm just wondering, perhaps without giving us point-to-point guidance, obviously. But indirectionally, does that mean that R&D can decline in 2011, relative to where it is at the moment and has been for the last year or so? Thank you.

Olli-Pekka Kallasvuo

So first let's take the approximately $5.7 billion guidance for 2010. So actually all of the three things you mentioned are inside our plan to get to approximately $5.7 billion for the year. And I don't think I'm going to comment them separately also. The Renaissance transaction as we said will help us to achieve that goal and I said we have had some FX headwinds regarding the OpEx. I mean if you look at our OpEx we have about half of our OpEx, approximately half of our OpEx in euro and half outside euro. And if we play with round numbers, you could say 5.7; say half of that is 3 even if it's not, just for ease in math. So you can say that 1% in FX can be $25 to $30 million on that number and clearly that has an impact then and that's why we are saying approximately $5.7 billion for the year. And going forward, we are not really here giving any guidance for 2011.

Kristian Pullola

Good. Thank you for the final question. 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 differ materially from the results currently expected. Factors that could cause such differences can be both external such as general economic conditions and industry conditions, as well as internal operating factors. We have identified these in more details on pages 11 to 32 in our 2009 20th in our press release issued today. Thank you.

Operator

Ladies and gentlemen, this concludes today's nosier second quarter conference call. You may now disconnect.

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