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Nokia Corporation (NYSE:NOK)

Q4 2011 Earnings Conference Call

January 26, 2012 8:00 AM ET

Executives

Matt Shimao – Head, Investor Relations

Stephen Elop – President and CEO

Timo Ihamuotila – Executive Vice President & Chief Financial Officer.

Analysts

Stuart Jeffrey – Nomura

Tim Long – Bank of Montreal

Gareth Jenkins – UBS

Mark Sue – RBC Capital Markets

Kulbinder Garcha – Credit Suisse

Pierre Ferragu – Bernstein

Jeff Kvaal – Barclays Capital

Sandeep Deshpande – JP Morgan

Francois Meunier – Morgan Stanley

Ittai Kidron – Oppenheimer

Operator

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Nokia fourth quarter and full year 2011 earnings 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)

I will now turn the call over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin.

Matt Shimao

Ladies and gentlemen, welcome to Nokia’s fourth quarter 2011 conference call. I’m Matt Shimao, Head of Nokia Investor Relations. Stephen Elop, President and CEO of Nokia, and Timo Ihamuotila, CFO of Nokia, are here in Espoo with me today.

During this 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 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 39 of our 2010 20-F and in our quarterly results press release issued today.

Please note that our quarterly 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 interim report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and the reconciliation between the non-IFRS and the reported information.

With that, Stephen, over to you.

Stephen Elop

Thank you, ladies and gentlemen, for joining us today for the Q4 2011 earnings call. The fourth quarter of 2011 marked a significant step in Nokia's transformation. As I have shared in my previous remarks, a transaction of the magnitude on which we have embarked is significant.

And while we progressed in the right direction in 2011, we still have a tremendous amount to accomplish in 2012 in order to properly position Nokia for sustainable long-term growth. We are now in the heart of our transaction. Most notably, in Q4 we introduced new mobile phones and smartphones, further evidence of the strategy shift in our Devices & Services business.

Overall, we are pleased with the performance of our mobile phones business, which benefited in Q4 from sequential double-digit percentage growth in our dual SIM business, with particular strength in India, Middle East and Africa, and Southeast Asia. In October, we introduced the Asha 200, 201, 300 and 303, which brought new mobile phones into 76 markets around the world. We are very pleased with the net promoter scores for Asha and consumers are responding positively to Asha’s great data capabilities, elegant design and value for money.

The operator channel also is responding positively to Asha, as the devices are bridging the gap between smartphones and feature phones. Because consumers are using their Asha devices for data and Internet, these devices are garnering a higher level of subsidy support from operators compared to traditional feature phones. Additionally, we have reached an important milestone in our mobile phones business. Quite recently, we sold our 1.5 billionth Series 40 device. Furthermore, we are building on this foundation with R&D investments as we continue our journey to bring the Internet to the next billion.

Shifting now to our Smart Devices business. In October, just six months after signing an agreement with Microsoft, we introduced our first two devices based on the Windows Phone platform, the Lumia 800 and the 710. We brought the Lumia 800 and 710 to market ahead of schedule, demonstrating that we are changing the clock speed of Nokia. To date, we have introduced Lumia to consumers in a number of European countries. We have also expanded the Lumia reach to Hong Kong, India, Russia, Singapore, Taiwan and South Korea.

We have also started our important re-entry into the North American market. Earlier this month, T-Mobile started selling the Lumia 710, and they are targeting the 150 million Americans still to make the transaction to smartphones. The Lumia 800 will also arrive in Microsoft retail and online stores in February. And starting in February, we expect to launch the Lumia 710 with Rogers and the 800 with TELUS to bring the Lumia experience to Canada.

And of course, we announced the new Lumia 900 for the US market in an exclusive partnership with AT&T. It is our third Lumia device and our first LTE device. Designed for the North American market, we expect the Lumia 900 to be available in the months ahead. The early reviews of the Lumia 900 have garnered an exceptionally positive pre-sales reception.

We introduced the Lumia 900 at the Consumer Electronics Show in Las Vegas where the new device was recognized with 13 awards from leading publications and technology associations. The awards range from Best of Show to CES Product of the Future to Top Gadget of CES 2012. While there are many challenges ahead, launching into the United States with the most recognized product at CES is a good starting point. And we won’t stop there. We plan to bring the Lumia series to additional markets, including China and Latin America, this half.

In the war of ecosystems, clearly there are some strong contenders already on the field. With Lumia, our specific intent has been to establish a beachhead in this war of ecosystems, and country-by-country that is precisely what we are now accomplishing. To date, we have sold well over 1 million Lumia devices.

Since mid-November, we went from zero markets to 15 markets, from zero devices to well over 1 million devices, from no presence in the US to being a lead in AT&T’s LTE launch. I’m pleased that we are moving from a standing start to gaining speed. From this beachhead, you will see us push forward with the sales, marketing and successive product introductions necessary to be successful.

Our performance with Lumia on a country-by-country basis varies, often as a combination of relative brand strength and retail execution capabilities. For example, in the United Kingdom, where competitive ecosystems are firmly entrenched, we have seen mixed retail execution around Lumia devices with a range of results among different locations, different chains, different stores and so on.

Contrarily, in German and Spain, we have seen steady weak-on-weak improvement in Lumia device activations up to the holiday season followed by a small expected dip during the last week of the year and then continued weak-on-weak growth in January. We are in the very early days in the United States with T-Mobile, and we are very encouraged with the early pickup that we have seen retail outlets.

The quality and ease of use of a Nokia device combined with a $50 price point is showing early signs of success as promotional activity begins. As we establish these early beachheads, developer interest is increasing. The number of applications that developers submit to the Windows Phone marketplace is at roughly three times the rate of submissions prior to our partnership announcement with Microsoft.

As a result, there are more than 14,000 developers and 55,000 new applications in the Windows Phone marketplace. As well, the Metro user interface that is on the Lumia device is expected to come soon to Microsoft PCs and tablets and increasingly to X-Box. Developers are therefore encouraged by the broadening opportunity.

But as I stated in my opening remarks, we are in the heart of our transition, which means as we bring the first of our new devices to market, there are areas where we are learning and areas where we must adjust. First, we are learning more about the variations in our store-by-store retail execution related to Lumia. Our consumer research indicates and the response that CES validates that when consumers use a Lumia device, the response is positive.

While we have secured strong support from the operators, we need to increase the engagement of the retail sales associates in the stores, because it is the retail associate who speaks with our consumers and puts the Lumia device in their hands. As a result, we are adjusting – we’re adjusting our retail tactics by increasing the quantity and quality of our retail associate training programs, seeding more Lumia devices into the market and increasing point of sales activities.

Second, through our continued focus on consumer net promoter scores, we are also learning about the areas where consumers are most favorable towards the specific capabilities of Lumia and those areas upon which we need to focus. For example, we receive very positive feedback on the elegance of design, ease of use, and absolute performance of the products.

On the other hand, consumers initially reported that battery performance needed focus. Thus we immediately adjusted to improve battery performance with software updates, which are now in market. This rapid cycle of consumer learning and Nokia response is a critical part of our improved approach to product management.

Third, we are learning that awareness of Lumia is steadily growing, assisted by each of the success of product and country launches that continue. As awareness grows, we are adjusting the focus of our marketing efforts from the aspirational aspects of a new launch towards an emphasis on the differentiated experiences and capabilities of the Lumia products.

And fourth, we are learning about the importance of truly breaking through. Thus we are adjusting our plans to increase the rate at which we enter new markets in the course of 2012. We also are increasing the focus of our corporate resources on continued marketing campaigns, and we are working to accelerate the introduction of a full breadth of products.

Overall, we are pursuing this pattern. We’ll take each step up the ladder one rung at a time, recognizing that the competitive dynamics vary country-by-country. This underscores the large amount of work immediately ahead of us to break through as the third ecosystem to capture the attention of retail sales associates, to convert the increasing awareness around Lumia into purchase intent and ultimately to delight our consumers.

Shifting now to Symbian. Early users of Symbian Belle have responded well to the advances that we have introduced to the Symbian user experience. Our plan is to continue to support the Symbian sales efforts, deliver ongoing improvements to the software experience, offer new products and continue to support Symbian through 2016.

As we have discussed, there are changing market conditions, which are putting increased pressure on Symbian. For example, Chinese operators are increasingly focused on driving the growth of 3G data subscribers. As a result, there has been an accelerating trend towards bundling retail rate plans. This in turn is driving larger volumes of lower price smartphones in configurations that are different from Symbian’s traditional strengths. As a result of the changing market conditions, combined with the increased focus on Lumia, we now believe that we will sell fewer Symbian devices than we previously anticipated.

During Q4, we also formed the Location & Commerce business to drive value from our leading mapping and location-based services platform. We conducted annual impairment testing in Q4 in the context of our new structure and plans for the future, and valued the Location & Commerce business at EUR4.1 billion, resulting in an impairment of EUR1.1 billion.

The Location & Commerce business is an important asset that is bringing differentiating location-based services to Nokia, and that serves as an important element of Microsoft services strategy. We believe this is the leading location-based services platform with an opportunity to become tremendously powerful, as computing goes more mobile and location increasingly becomes a critical organizing dimension for a person's experiences.

Through all of these changes, the passion, commitment and focus of Nokia’s employees serve us well. They are helping us accelerate the pace at which we operate at Nokia. In 2011, we made good progress in focusing our R&D teams adjusting our manufacturing capacity, renewing our manufacturing strategy, consolidating our location assets, and aligning our markets team and other supporting functions.

We have taken Nokia on an incredible journey in 2011. In 12 months, we have assessed and faced the realities of our business situation. We established a new strategy for long-term growth. We delivered the first devices in support of that new strategy ahead of schedule. And we are establishing beachheads around the globe from which we aim to win country-to-country, product-by-product, consumer-by-consumer.

In summary, with a strong balance sheet, our performance in mobile phones and the new excitement around Lumia, we are confident that we can build long-term value.

Thank you. And over to Timo.

Timo Ihamuotila

Thank you, Stephen. According to our preliminary estimates in terms of unit volumes, the overall handset market in Q4 grew by around 8%, both year-over-year and sequentially. In Q4, our Devices & Services volumes declined 8% year-over-year, but grew 6% sequentially, as Q4 is a seasonally stronger quarter.

In Q4, the percentage of our Devices & Services revenue from recently launched products increased, demonstrating that the shift to our new portfolios is underway. Our overall channel inventory increased on a sequential basis in Q4 but continued to be within our normal range of four to six weeks.

On a reported basis, Devices & Services net sales of EUR6 billion were up 11% sequentially and down 29% year-over-year. Note that in Q4, we did not have any non-recurring IPR royalty income, whereas in Q3, overall Devices & Services net sales benefited from the recognition of approximately EUR70 million of non-recurring IPR royalty income in Devices & Services other net sales.

In Q4, in our Smart Devices, net sales – our Smart Devices net sales increased 25% sequentially, as unit volumes increased by 17% and ASPs increased by 7%. On a sequential basis, Smart Devices net sales benefited from the introduction of new products at the higher end of our portfolio, including the Nokia N9 as well as the Lumia 800 and 710 in selected markets.

In Q4, our Mobile Phones net sales grew 4% sequentially, driven by growth in unit volumes and flat ASPs. We continued to broaden the availability of our growth in portfolio in Q4, and in percentage terms, dual SIM units grew strong double digits sequentially. In Q4, we maintained relatively stable prices across our Mobile Phones portfolio on a sequential basis. Also in Q4, we began sales of our new Asha family, which is positioned at the higher end of our Mobile Phones portfolio and will continue to ramp up in Q1.

Devices & Services non-IFRS gross margin in Q4 was 25.9%, up 20 basis points sequentially. The slight increase was primarily driven by a higher gross margin in Mobile Phones offset by a lower gross margin in Smart Devices and lower IPR royalty income, as we had no non-recurring IPR income in Q4, as mentioned earlier.

In Q4, Devices & Services overall non-IFRS gross margin was positively impacted by 50 basis points related to foreign currency hedging. At the present time, we expect 120 basis points positive impact of Q1 gross margins related to hedging activities, assuming static foreign currency rates at the end of Q4 levels. But this could change due to inter-quarter fluctuation in rates.

In Q4, Smart Devices gross margin decreased by 80 basis points sequentially primarily due to the competitive environment and the recognition of allowances for excess components and future purchase commitments related to Symbian partially offset by the lower deferral of revenue related to services sold in combination with our devices and lower fixed manufacturing costs.

In Q4, Mobile Phones gross margin increased by 410 basis points sequentially, as a large number of factors had a positive effect during the quarter, including greater cost erosion than price erosion, lower deferral of revenue related to services sold in combination with our devices, lower warranty costs, and more efficient utilization of our manufacturing capacity. While we are pleased with this performance, we would not expect to sustain all of these benefits in Q1, which is seasonally weaker quarter. In Q4, Devices & Services other gross margin was lower on a sequential basis due to the lack of non-recurring IPR royalty income in Q4, as mentioned earlier.

Moving on OpEx, in Q4, Devices & Services non-IFRS OpEx was EUR1.3 billion, up approximately EUR140 million on a sequential basis and up approximately 20 basis points as a percentage of net sales. On a sequential basis, research and development and sales and marketing increased as we invested to support our Internet for the next billion strategy as well as our new smartphone launches.

Year-over-year our Devices & Services OpEx was down 12%. Devices & Services non-IFRS operating margin was 4.9% in Q4, slightly up sequentially. The impact from non-recurring IPR was positive 120 basis points in Q3 and zero in Q4. Excluding non-recurring IPR, non-IFRS operating margin was up approximately 130 basis points sequentially.

And now on to Location & Commerce. Reported net sales in Q4 were EUR306 million, up 9% sequentially and 15% year-over-year. On a sequential basis, the increase in Location & Commerce net sales was primarily driven by seasonally strong sales of map licenses in the vehicle segment due to higher consumer update of vehicle navigation systems.

In Q4, Location & Commerce non-IFRS gross margin was 77.8%, down 380 basis points sequentially due to an increased proportion of lower gross margin sales and shift of R&D operating expenses to cost of sales as a result of the divestiture of the media advertising business. Location & Commerce non-IFRS operating margin was 9.5% in Q4, down 40 basis points sequentially.

Related to the formation of Location & Commerce, we provided recasted historical reported numbers yesterday. In the recast, the logic moves relate to the presentation of OpEx. The recast also impacted the presentation of historical net sales and cost of goods sold by reportable segment to reflect where and when the economic value is created and how the intercompany effect is eliminated.

Because a significant amount of OpEx was recasted from Devices & Services to Location & Commerce, the proper reference point for our Devices & Services restructuring program is no longer EUR5.65 billion in 2010, but it is now EUR5.35 billion in 2010 after the recast. We continue to target the reduced Devices & Services non-IFRS operating expenses by more than EUR1 billion for the full year of 2013.

Then, on the goodwill impairment of Location & Commerce, Stephen mentioned and I want to reiterate that we continue to see very strong potential to create shareholder value with this business. We are an industry leader and we are investing to drive differentiation and to capture broader opportunities to expand our position as a leading location-based services platform. Although we recorded a charge of EUR1.1 billion in conjunction with our annual goodwill impairment testing, the value of our Location & Commerce business was estimated to be EUR4.1 billion, reflecting the attractive longer term growth potential of this business.

Then, on to Nokia Siemens Networks. First of all, comparing full year 2011 to full year 2010, reported net sales were up 11%, excluding the benefit from the Motorola acquisition. Net sales would have increased 4%, still representing a solid performance considering NSN’s lower market share in regions such as the US, which saw strong growth in 2011.

NSN is 2011 solidified its market-leading position in wireless broadband. NSN has won a market-leading 48 commercial LTE deals, 36 commercial LTE networks have been launched to date, and 17 out of these 36 networks use NSN LTE equipment. In Q4, NSN’s reported net sales were EUR3.8 billion, a 12% sequential increase, driven by year-end seasonality.

Services represented slightly over 50% of NSN’s Q4 net sales. NSN’s non-IFRS gross margin in Q4 was 29.2%, up 240 basis points sequentially due primarily to a higher portion of software sales. In Q4, NSN’s non-IFRS operating margin was 4.6%, up 440 basis points sequentially, reflecting the higher net sales and gross margin.

NSN remains focused on driving further efficiencies while continuing to invest in its key strategic areas of mobile broadband and services. On November 23, NSN announced a new strategy and restructuring program. The announced restructuring is targeting to reduce NSN’s non-IFRS annualized operating expenses and production overheads by EUR1 billion by the end of 2013 compared to the end of 2011. This is part of NSN ongoing work to strengthen its position as an industry leader and become a more independent entity.

NSN’s contribution to Nokia’s cash flow from operations was positive EUR499 million in Q4. At the end of Q4, NSN’s contribution to Nokia’s gross cash was EUR1.6 billion and NSN’s contribution to Nokia’s net cash was approximately zero. In Q4, NSN entered into a new EUR1.3 billion unsecured debt facility with 50% term loan maturing in June 2013 and 50% revolving credit facility expiring in June 2015. This new facility is non-recourse to Nokia.

Then turning back to Nokia as a whole, in Q4, financial income and expenses net had a larger negative impact on a sequential basis. Remember that financial net in Q3 included exceptional hedging and investment gains. For 2012, we expect financial net to be approximately EUR300 million negative due to higher net costs related to hedging our cash balances as well as higher costs related to NSN financing.

Nokia taxes continued to be unfavorably impacted by NSN’s taxes as no tax benefits are recognized for certain NSN’s deferred tax items In Q4 2011, the Finnish statutory tax rate change also had a one-quarter negative impact. If Nokia's estimated long-term tax rate of 26% had been applied, non-IFRS Nokia EPS would have been approximately 1.2 euro cents higher in Q4 2011.

And then on cash, we ended the third quarter with a net cash balance of EUR5.6 billion and gross cash of EUR10.9 billion. We have a clean balance sheet, conservative capital structure, and strong liquidity profile. Sequentially, net cash and other liquid assets increased by EUR514 million primarily due to underlying profitability, networking capital improvement in Nokia Siemens Networks, cash inflows related to IPR, positive foreign exchange impact on our cash balances, and the receipt of a platform support payment from Microsoft. This was partially offset by net cash outflows related to taxes, capital expenditures, and hedging activities.

We mentioned on the previous call that we received quarterly platform support payments from Microsoft related to our broad strategic agreement. In Q4, we received the first quarter quarterly payment of approximately EUR180 million or $250 million. We have started to recognize a portion of the platform support payments at a benefit to our Smart Devices cost of goods sold.

Also, we have started to ship devices that use the Windows Phone operating system. We are paying Microsoft a software royalty fee and recording this as royalty expenses in our Smart Devices cost of goods sold. We have a competitive software royalty structure, which includes minimum software royalty commitments. Over the life of the agreement, both the platform support payments and the minimum software royalty commitment are expected to measure in the billions of US dollars.

Now turning to our guidance. In the press release, you will find the full details of our guidance, but I just wanted to highlight that we are operating with limited near-term visibility in Devices & Services and NSN. Finally, on proposed dividend, the Nokia Board is recommending that shareholders approve a dividend of EUR0.20 per share. The Board is also seeking to renew the share repurchase authorization in order to maintain flexibility but does not have plans currently for repurchases during 2012. Both of these proposals are pending approval by shareholders at the Annual General Meeting on May 3.

And with that, I will hand over to Matt for Q&A.

Matt Shimao

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

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line of Stuart Jeffrey with Nomura.

Stuart Jeffrey – Nomura

Hi there. Thanks very much. I wanted to start on the dividends number and maybe you could explain the reasoning behind that. And historically you’ve paid a 30% payout ratio and paying EUR0.20, which obviously is a very high payout ratio. Are you trying to send a signal to the market that you do think that EUR0.50, EUR0.60 of earnings is possible on a sort of a two, three-year objective? And linked to that, you also say you’re in the heart of your transition. And again, should we put those two data points together to conclude that you think the first half really is the low point in your business? And what is it that gives you that confidence that that isn’t sustained through the second half of the year [ph]?

Stephen Elop

Thanks for the question. I’ll take that. First of all, as it relates to signaling or what have you, the guidance is our principle form of providing guidance. I would have you just focus on guidance as any sort of signaling. The second point I would make is that the primary mechanism for Nokia continues to be the dividend for the distribution of earnings to shareholders and we anticipate that to continue.

As it relates to the thought process that went into the dividend, what I can say in general without saying too much about Board-level conversations is that clearly elements like the strength of the current balance sheet were considered, the profits generated in 2011, and also an assessment of the potential sources and uses of cash in the time period ahead. So bringing all of those factors together, the Board is making a recommendation still to be reviewed and voted on by the shareholders of the EUR0.20.

Timo Ihamuotila

And maybe – Timo here. Just a quick comment on the payout ratio. So last year, we had about the same payout ratio as currently i.e., from about EUR0.60 to EUR0.40 and now from about EUR0.30 to EUR0.20. Just note that – prior that, the payout ratio has been 30% to 40%, yes.

Matt Shimao

Thank you, Stuart. Operator, next question, please.

Operator

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

Tim Long – Bank of Montreal

Thank you. Just if you could clarify a little bit more on the greater than normal seasonality in Q1. It sounds like you’re happy with the initial Windows product and it sounds like it’s going to be in a lot more markets and more products of much more availability. So could you balance that with, is it inventory, is it – what is it that’s causing the above normal despite having a much better distribution of some of your new products? Thank you.

Timo Ihamuotila

Thank you. Timo here. Maybe I will take this and talk a little bit about the Q1 guidance on Devices & Services operating margin and taking that question and that part of it. So first of all, as Stephen said, we are in the heart of our transition and operating with limited visibility, and therefore our guidance is limited. And when we are breaking down the numbers, of course, when you look at the guidance, the three main factors that lead to our Devices & Services operating margin guidance are net sales, which you’re referring to gross margin and OpEx.

And on net sales, in Q1, we expect greater than normal seasonal decline, which would naturally lead to also a negative operating leverage. Now we have said that we are seeing pressure in Symbian, which is where we see now in percentage terms the greatest risk of sequential unit decline. And also this year, Chinese New Year occurred early, which shifted some of the revenue towards Q4 and away from Q1.

Then the second driver here is gross margin where we do not expect gross margin to be the primary driver or a primary driver of the change in Devices & Services operating margin from Q4 to Q1. And here we anticipate three factors actually. So first, as I indicated in my prepared comments, all the positives, what we benefited or what would have benefited Mobile Phones gross margin during Q4, we are not expecting to sustain in the seasonally weaker Q1. Then on the other hand, in Q1, we don’t expect a similar level of allowances in Smart Devices compared to Q4. And thirdly, we are expecting a higher level of net hedging benefits in Q1.

And then finally on OpEx, so due to our investments, we expect a lower than seasonal decline in OpEx during Q1. So while we continue to make progress towards achieving our targets of reducing our longer term operating expenses with more than EUR1 billion by 2013, we are simultaneously continuing to invest to drive our strategy. So we are investing in Smart Devices marketing to support Lumia and we are also investing in Mobile Phones R&D to support the Internet for the next billion strategy. (inaudible) the limited – visibility is limited, our primary combination of top line and OpEx is what we see as the primary drivers for the Q1 operating margin guidance.

Matt Shimao

Okay. Thanks, Tim. Operator, next question, please.

Operator

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

Gareth Jenkins – UBS

Yes. Thanks. I just wondered if I could follow-up on two things. One, could you just give us a sense of how much the allowances affected your G4 and also the proportion of the EUR180 million Microsoft payment was in terms of P&L impact. And then just second quick one, I was wondering if you could help us with the Asha product family. You gave us good steer on what Lumia did, but can you give us a sense of how Asha is progressing in terms of units? Thank you.

Timo Ihamuotila

Yes. Timo here. So maybe I’ll start here. So regarding the allowances in Smart Devices, we call that out as one of the drivers that we are quantifying. We are not quantifying it further at this stage, but clearly it was a meaningful number as we called it out as one of the drivers. And then what comes to the platform payment of EUR180 million, so as we have said earlier, we are recording part of that in our Smart Devices cost of goods sold and we did not call this out as a driver, which often also means that that was not a meaningful driver for our gross margin performance in Smart Devices during Q4.

Stephen Elop

And I’ll take the question on Asha. As I said in my prepared remarks, we’re quite pleased with the progress that Asha is making. The – as I said, the NPS scores, the consumer response is positive and we’re obviously early in the launches with this. So we look at those numbers first. One thing I’d steer you a bit towards in terms of the numbers though is the comments I made about dual SIM because of course there are some dual SIM Asha products that are contributing very much to the dual SIM phenomena that served us very well in Q3 and then again in Q4.

Matt Shimao

Thanks, Gareth. Operator, next question, please.

Operator

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

Mark Sue – RBC Capital Markets

Thank you. Steve, for Nokia to succeed, Windows has to succeed, and for Windows to succeed, the operators need a vested interest. So I’m just trying to get a sense of the motivation for the carriers to sustain a long period of investment in a third OS beyond the initial trial phase. Do they really want a third OS or do they just want to keep Apple and Android on us and how Nokia might be able to distribute the risk and reward between Microsoft and the operators beyond the initial starting phase?

Stephen Elop

Very interesting question, because the – it is the case, having even very recently met with a number of the larger operators around the world. The third ecosystem strategic desire from the operators is very strong. It’s something that they believe, if I may speak on some of their behalf, is critical in terms of, from their perspective, maintaining some degree of balance and, if you like, one more knob to control in the context of their revenue mix, their traffic mix and what have you.

Recently, I was with one group of operator executives, and one of the comments that was made there that I thought was quite insightful is, if you go into a typical store, there is one corner reserved for a particular ecosystem with bright lights on it and what have you. And that's moving traffic and so forth. And then there is quite a mélange of devices from another ecosystem that if you stand back a few steps and look out, you’ll say, okay, so what’s happening here and maybe there is a Device of the Month, which means next month there will be another Device of the Month. And that's interesting but somewhat similar to the leading ecosystem there.

But then what a lot of people are interested in is what’s the alternative, what is the other opportunity, where is the leader in innovation, where are those other capabilities, what’s the alternative point of view? And very much the belief is that the dynamics, both from an operator strategic perspective and also as it relates to what’s going on in the stores and how they manage that environment, they believe the third ecosystem is quite important. So the signs of continued support from the operators is there.

I'd refer you to CES. You saw jointly ourselves – We had Ralph de la Vega from AT&T, Steve Ballmer from Microsoft together really making that point. And you can see the degree of support that that is very much there. Now, it is the case I think as well that some of the dynamics will evolve over time because – and I’ve said this before, the broader digital experience is coming into focus as it relates to ecosystem, like the ecosystem being about a broader and broader digital ecosystem, while we have not announced other product plans and other product families and so forth. Certainly if you look at, for example, the overall Microsoft strategy, you see the consistency of user experience and increasingly commonality from a developer perspective across PCs, tablets, phones, gaming platforms, and so forth.

And for the operators, I would suspect that they see an opportunity to participate in a larger play when a consumer walks through their door. So there’s a bunch of different opportunities for each of us in thinking about how that plays out over time. So I think that the dynamics and the fundamental points of strategy are in our favor. All of that being said, we have to earn that as well. We have to have great products, we are proud of the work we've done so far, and we have a lot more to come in that area.

Matt Shimao

Thank you, Mark. Operator, next question, please.

Operator

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

Kulbinder Garcha – Credit Suisse

Hi, thanks. I have a couple of clarifications really. And for Stephen, first of all, on Lumia, I take your point, but there has been lots of mixed news commentary in the press, amongst the investment community just a very mixed sell-through. How decent the sell-through is going to be Lumia (inaudible) you sold? And then you also spoke about accelerating Windows Phones’ launch this year. I would have thought that given your product and that is relatively planned out six to nine months, the ability to launch new products earlier may be more challenging. Could you just amplify on that? Then for Timo, on the Symbian allowance, I assume it is non-recurring or is it? That’s my question. And then finally, if it’s not meaningful, then why is it in the press release? I’m kind of confused as to why you bother even calling out if it’s not a meaningful amount. Thanks.

Stephen Elop

Okay. Thanks for your question. As it relates to sell-through, I think the – when you see different experiences and so forth, obviously what we are focusing on is where and how are those experiences different. So, for example, as I said in my prepared remarks, we do see different experiences and patterns in different countries somewhat related to the competitive dynamics, the brand strength, our retail capability and so forth.

And so, for example, a lot of those reports tend to focus on the United Kingdom, which in the context of Europe, is the hardest market in terms of breaking through the strength of the competing ecosystems and so forth. So you see a lot of balance in that direction. But what’s really interesting is – and this is – we are so much in the very early days so that you have to really dig into the details, is even when you are in the UK, and I was there a couple of days ago, and as you can imagine going store to store to store and asking, tell me about smart phones and what’s new and all of that type of thing, you see a great variability of in-store performance in terms of the retail experience.

And so, for example, you can go into certain stores where the retail presentation is great, the associates are well-trained, everything is right, and of course, it correlates very closely with the success that we’re seeing in certain chains of stores in certain areas and so forth. Very good performance. And yet in other areas, we’re not as far along as we need to be. We need better retail execution. The associates are not as well prepared or there’s other dynamics at play.

The reason I tell you about this variability is because the – first of all, how people reported depends very much on the experience they have and it is mixed from location to location in some countries. But also, as you assess that, okay, as we apply more resource, as we make sure that we are very focused on getting everyone up to the base level, if not the excellent level of retail execution, we can clearly see our way through the work that we need to get done in order to deliver the results we want to continue to deliver.

Now, as it relates to accelerating the efforts around Windows Phone, we’re clearly making some very conscious decisions relative to the plans we had going into the year. For example, we had sequenced out which countries when would get which products and so forth. And as we see the dynamics of the early product launches, as we get increasing demand from certain countries that were later in the cycle, as we get extra work done with Microsoft around the availability of particular language variance and/or marketplace activation, which we need in most countries to get started, there’s all of these things that we’re not working on and we’re working on accelerating and pulling some of those things forward. So certain countries will get product and full launches sooner than we anticipated. So there are opportunities to accelerate and to focus resources to continue to push on the Lumia opportunity.

Timo Ihamuotila

Okay. And then on the Symbian allowance, so – sorry if I was not as clear as I should be. So there is now – there are two topics here, which I was discussing about. There was the Symbian allowance topic and then the platform payment and the impact of the platform payment into the Smart Devices Q4 gross margin. So, two different things here.

And regarding the Symbian allowance, this is part of our normal provisions process. It had a meaningful impact on the Q4 Smart Devices gross margin. That’s why we called it out as a driver, but we are quantifying it further. It is non-recurring though as a provision. And then regarding the platform payment, as we have said earlier, we are receiving the platform payment from Microsoft. When the payment comes, it will hit our balance sheet and then we partially recognize that as part of the Smart Devices cost of goods sold. And as I said, that part was not a meaningful driver for Smart Devices gross margin during Q4.

Matt Shimao

Thank you, Kulbinder. Operator, next question, please.

Operator

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

Pierre Ferragu – Bernstein

Good morning, and thank you. I’d just like to ask you a few questions on your gross margin in smartphones. The sort of 20% level that you have today is lower than a lot of your competitors, and how would you interpret that? Does it mean that your product lacks traction in the market? And in that case, is there a significant difference between the gross margin you are realizing today on your new Windows Phones and the Symbian phones? And is there anything else that we would have seen there? Is there something different in your cost structure? Or do you have a different cost terms in your cost structure? Do you have a different cost of goods sold? And then lastly, going forward, I would imagine that’s the level of gross margin that’s not like a long-term gross margin you would like to have in your business. What driver did you see on like two, three years to get back to more – to gross margin more similar to your competitors? Thank you.

Timo Ihamuotila

Okay, thank you. So maybe – Timo here. Maybe I’ll start this one. So first of all, we are not giving a gross margin guidance. And when we look at the Smart Devices gross margin, so – as was discussed in conjunction with the previous question, we had the Symbian allowance as one of the drivers for the gross margin in Smart Devices. When we look at the gross margin levels, i.e., you referred to this approximately 20%, what we had during Q4. So we can say that the Lumia gross margin is higher than the Symbian gross margin as part of that. But then, when you talk about the gross margin dynamics and driving higher gross margins, so clearly it has to come through innovation and good product.

Stephen Elop

Yes. Let me comment on that because this is an important pattern to look forward to as it relates to Lumia products. We have shown our first three Lumia products done in record time. It’s important to note that we’ve joined the Windows Phone family of partners late in the software development cycle. And obviously, we moved very quickly on the hardware side getting our first devices out. We’re really proud of what we accomplished in that time. Winning awards in CES and so forth says we are on the right track. But with each successive wave of product introduction with the new hardware, software and services efforts ahead, the opportunity for differentiation is very clearly there. And the way to drive increased gross margin over time is to show that increased differentiation, and we have our sites very clearly set on accomplishing that.

Matt Shimao

Thanks, Pierre. Operator, next question, please.

Operator

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

Jeff Kvaal – Barclays Capital

Yes. Thank you very much for the question. Could you comment further please on what you are seeing in smartphone competition? Your commentary suggested that it was primarily in low end in China. I’m wondering if those dynamics apply to other regions. And beyond that, do you feel that your next wave of Windows Phone devices will help you offset the challenges that you’re seeing in the low-end smartphone market? Thank you.

Stephen Elop

Good. Thanks for the question. As it relates to the China dynamics, the phenomena that’s going on here is that the Chinese operators are increasing and, on an accelerating basis, entering into structure where there is effectively retail rate plan bundling going on at the store. The operators are driving very hard for the volume of 3G data subscribers. And it’s not necessarily an economic measure as it is driving volume on certain networks with certain technologies.

I think those targets are probably set more broadly for all of the operators. And the impact of that is that they are discovering that with very low-priced devices on radio technologies that they can drive a lot of volume at those levels. And so we are seeing, for example, a very significant uptick in the number of low-priced devices that are on CDMA. There’s also a very significant focus on the Chinese technology TD-SCDMA. Again, all at the low levels, all to drive these volumes.

My comment in the prepared remarks is that Symbian is not well positioned today against that. We do not have Symbian CDMA products at all. So we’re not participating in that part of the market. So, as part of the market grows, our addressable market has gone down because of that. In TD-SCDMA, we do have some products in that space, but not at the price points and configurations that is the real focus of this market. And this is when you look at the numbers, a very substantial trend that has affected us has affected others as well I’m sure. And it’s something that we expect to continue, and that is the principal driver of our comments around the Symbian side.

Now, we have not yet announced our specific products for the Chinese market, but I will say that when we first announced our launch plans I think all the way back in October, we did highlight that we would have CDMA-based Windows Phone products and TD-SCDMA Windows Phone products. That being said, it is the case that we have work to do to successively drive the prices down further and further and further. That will take a bit of time, but it’s clearly a pattern that you’re going to see us on in the months ahead. So, we will recognize this phenomenon. I think what we are saying today in our prepared remarks is we’ve seen that they accelerate further, thus the changes in commentary, but nonetheless, it was a phenomena we are well familiar with and something that’s contemplated in our future product plans.

Matt Shimao

Thank you, Jeff. Operator, next question, please.

Operator

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

Sandeep Deshpande – JP Morgan

Yes, hi. Thanks. A couple of questions. Firstly, regarding the Windows Phone, I mean, we’ve seen all these. I mean, there was this earlier question on the lack of sell-through or what is happening. I mean, what is it that Nokia can do to differentiate the Windows Phones, whether it is via applications or whether it’s via different retail experience? And what is being considered within Nokia to be able to create a differentiated experience in this regard? And secondly, a quick follow-up on the earlier question on the Chinese market, do you think that the Windows ecosystem is rapidly scalable into this low-end close to $100 smartphone market or is it going to take a couple of years to get there? Thank you.

Stephen Elop

Great. Thanks very much for your question. In terms of driving differentiation with existing products, we have some very clear points of differentiation. And this is showing up in the retail experience. So, again referring back to last week’s trip in the stores throughout London, for example, one of the very striking experiences that you have and indeed some of the store visits that I had presented it is as such. It was essentially, here is the Lumia opportunity here against here are these 15 devices from Android, for example. And the striking element of it and how it was presented was, let me compare the Android thing to the Windows Phone thing.

The reason I highlight that is that’s the first point of differentiation. The overall user experience is differentiated. The Nokia devices with their design absolutely stand out. So, as opposed to being one of a large number of smartphones on the shelf, we are clearly and distinctively standing out that we have to do more work with retail sales associates to have more of those people telling the story to make sure the devices are presented that way more, but there’s clearly a pattern forming where we’re being presented as an alternative to a whole collection of other devices.

Now, within the device itself, not only is the design and the principal user interface differentiated, but we’re getting a lot of positive feedback from things like the music service that we’re including, in most markets included in the cost of the device, the location-based services, Nokia Drive, Nokia Maps, and we demonstrated a variety of other of those at CES and earlier at the Nokia World as well.

People are also responding to some of the partnerships we're doing. For example, as part of the launch at CES, it was even more visibility given to the work that we’re doing with ESPN, with CNN, with Univision, with Sesame Street, which in a number of markets turns out to be very interesting. So there’s a lot of these different elements that we’re doing to differentiate.

All of that being said, we do have to make sure that differentiation lands in the retail experience and people understand it. Part of what is helpful, and I made a comment about the very early and I emphasize very early experience in the T-Mobile shops in the US, is there we have retail associates who have been selling Windows Phone longer generally than in most of the other places that we’ve seen. And so the comfort level with being able to present the difference in user experience, but now with a device at a price point that is itself stand out, that is making a difference. So we can see that effect.

With respect to the second part of your question as it relates to Windows Phone and the low-end market, I won’t comment on the specific timeframe, but I just want to reiterate that a critical consideration for us when we entered into the arrangement with Microsoft is that we had line of sight engineering visibility into being able to do that work to drive the prices down where we can compete effectively at all the smartphone levels. That work is underway. You will see the stepwise progress in that direction in the periods ahead.

Matt Shimao

Thank you, Sandeep. Operator, next question, please.

Operator

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

Francois Meunier – Morgan Stanley

Hello, good afternoon, Stephen. Yes. I wanted to understand a bit more of the situation in Europe, in particular, in Q4. It looks like you've done a pretty good increase sequentially both in units and revenues. So I wanted to know you regained market share as you could please tell us if it’s sustainable in Q1 or if it was driven mainly by feature phones or was it with the Symbian phones in Q4?

Timo Ihamuotila

So – thanks, Francois. So – Timo here. So – yes, we had a good performance sequentially in Europe. And clearly in Europe, that is very much driven by the fact that we had higher ASP devices on the market in volume like the Lumia devices as well as the N9. Now clearly our aim is regarding Lumia to ramp it up to further markets going into Q1, but simultaneously, as we have said, we are expecting, now talking about Device & Services, overall a seasonally weaker quarter going into Q1 from Q4.

Matt Shimao

Thank you, Francois. Operator, I think we have time for just one last question.

Operator

Thank you. Today’s final question will come from the line of Ittai Kidron with Oppenheimer.

Ittai Kidron – Oppenheimer

I wanted to ask you, Timo, about the Mobile Phone business. You talked about your Symbian business eroding slightly faster than you would have hoped through the year ahead of us. And I’m wondering with the availability of very lower priced 3G devices, as you've talked about, could you see your feature phone business, which is your higher margin business at this point, actually also erode at a much faster pace as the upgrade cycle from feature phone into smartphone potentially accelerates even faster? How do we think about the evolution of that business through the year?

Timo Ihamuotila

Okay. So, as we have said, I think the big picture here is that we are investing into our Internet for the next billion strategy. And as you have seen us say many times, we are really doing this to blur the divide between the feature phones and smartphones. And in many markets, again, when you walk through a retail, people are not saying, is this a smartphone, is this a feature phone. They are really asking, what does this device do to me? And if you have a good browser, the needed application and so forth, we think we can be competitive on those markets. Having said that, and as we said and as I said also in my prepared remarks, we are not expecting all the positives what impacted the Mobile Phones business gross margin during Q4 to continue going into Q1.

Stephen Elop

Yes, and I’ll just – let me just add to that and then I’ll wrap the call. As it relates to the Mobile Phones business, while there has been a lot of focus on the transition in the Smart Devices business to the Windows Phone platform, we have highlighted that a key pillar of our strategy is to make R&D investments in the Internet for the next billion strategy.

As a result, what we think of as feature phones and how that market perceives is less about the collection of features and what it does or doesn’t do, but it’s more about the price band and the opportunity to drive increased sales in that area to serve consumers who don’t want to spend the money or don’t have the money to spend on what we would today consider a smartphone and so forth. So this is an area where there are certain trends where certain levels of feature may decline in price, but the opportunity to extract value from a certain price band of the market remains quite strong. And that’s something that we are focused on.

So, in summary, just to close the call, I wanted to just reiterate, obviously with strong mobile phone performance, as we were just talking about, a continued focus in retail, a major area of focus for us right now is as we get the early experience with Lumia. And with the new excitement around Lumia, including the new device that was launched in the US and the great excitement that we hold in advance of that, we’re clearly driving forward to build long-term value. That’s our focus here. We’ve got a lot of work to do, but we’re very pleased with the progress we are making.

Matt Shimao

Thank you, Stephen. Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external, such as general, economic and industry conditions, as well as internal operating factors. We have identified these in more detail on Pages 12 through 39 in our 2010 20-F and in our press release issued today. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s Nokia fourth quarter and full year 2011 earnings conference call. You may now disconnect.

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Source: Nokia Corporation CEO Discusses Q4 2011 Results - Earnings Call Transcript
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