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Here’s the entire text of the Q&A from Nokia’s (ticker: NOK) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Questions and Answers

[Operator]:

Thank you Ms James [OPERATOR INSTRUCTINS] your first question comes from the line Kim Long with Banc of America securities.

[Kim Long]

Thank you just a question on one of the product transition, that you mentioned regarding the volumes shipments in September of the 1110, could you talk a little bit about how quickly we should expect the 1110 to replace the 1100 how many quarter should that taken with the linear and also if you can just give us census what the actual margin in ASP difference for that key product update, thank you?

[Jorma Ollila]

Yeah I think SI indicate the new engine which is a base for that particular 1110 had ramped up very well from the outset, so we can expect very speedy ramp up from here on, I think a little speedier than what you would physically expect, it is very good base, the engine gives the very good base for the product and its expected only to take a couple of quarters to get very significant volumes, I suppose to significant if you look at the engine on the 1110 is both the which bypassing 1100 in the course of Q1. And that 1100 has been a huge sale, so it is a very speedy ramp up, the 1600 and 6030 are also shipping in the same way, and then accelerate the pace in contrast to what it typically would be in ramp ups for such product which about the very early stage reach volumes of tens of millions rather than millions. So I think this extremely collective to see there our delivery organization being able to ramp up that well, that not as the volumes are huge and approaching, pretty fast sort of 100 million mark, 100 million per quarter. So some of it’s key products you are getting tens of millions on a particular engine which is the base, base product, which has it’s a very good but all of the states good news in terms of margin because it has the volume margin contribution than the regular market series would have important, would do. With that combining those two in the next couple of quarters, we’ve a lot of leverage in positioning the product and its really positioned as well in terms of how we can cover the low end.

In a customer, friendly way at the same time, leaving estimates, do not put the money on the table, so yes it is a good situation something to look forward to and something that really gives us perhaps a little bit of perspective I hope to be, obviously saying that couple of percentage points of ASP turned downed would be a big issue, because it is not, if we have the cottage, you are under control as we so nicely have going to the new engine and family of folks, its also being demonstrated, it was already in China with the 6L 30, which is doing very well so that part of the story, so to speak the 1110 and as you expected I understand, it’s a 18 points in how we got the couple of the low-end during the next 4 to 8 quarters.

[Kim Long]

And next I will find out the new competition in the lower end?

[Jorma Ollila]

It certainly will give the run for their money.

[Kim Long]

Okay.

[Ulla James]

Thank you Kim and we will take the next question please.

[Operator]

Your next question comes from Inge Heydorn with Deutsche Bank.

[Inge Heydorn]

Good afternoon two quick questions firstly you mentioned already Jorma that’s you had some problems in Latin America with inventory bill last in Q2, that’s the difference, how do you between the sell off the selling in the quarter, is that correct now going into Q4 and number two Nokia network margins were quite bad given that you had 176 in the quarter if you exclude and it was down at 6%,7% in Q3, could we expect to recover already in Q4 in margins networks or is it going to take a longer time?

[Jorma Ollila]

The some of judgment we issued in Latin America which has been sorted out, we are also moving with the improved portfolio to the Latin America market so you can expect a clearly improved market share picture for us in Latin America in Q4, so that situation clearly, it is kind of typical quarterly fluctuation which you see quite a bit in Latin America, so yet we want to give you updated on those fluctuation so both on inventory as well as shipments by the Reebok and I note that our competitors typically don’t do it on a quarterly basis indebtedly in the season, and there by lot of people, want to make much more out of it, as if there was a huge build up or problem, its more of a typical fluctuation with Latin America being a case in point fluctuates more than other regions. So that sort of working out as expected and we will have a higher market share in Latin America after a better product portfolio. Nokia network yes we are working on, for any improved quarter, typically we have that on the fourth quarter, no drama expected here, but obviously we are working very hard to get that. thank you.

[Ulla James]

Thank you and then go to the next question please.

[Operator]

Your next question comes from Boy Teck with Bear Stearns.

[Boy Teck]

Thank you a question from both Jorma and Rick. One of the concerns that are out there is the deterioration as the gross margin declining in the last few quarters and peoples are asking at certain points, there is only so much you can squeeze from the operating margins. When we look next quarter as well as over next year how do you see you talked about some of the low-end you covered the low end that should start help the selling from the operating margins but either if you look at your high end offering did you expect to move up, did you see that those gross margins started stabilizing at certain level or is this something we should better get use to any of them offsetting with the operating margins can you give us one or two specific examples what where you can squeeze where you can get cost or product mixture that gives us more confidence because the stock is very attractive we have 18% to 17% operating margins from the handsets its probably not as attractive it is a low key operating margins so I am just curious if you could walk us through those kinds of dynamics as you see that the margin structure building growth and operating in next few quarters.

[Jorma Ollila]

Sure I can take this Rick. In the short term as you say we make sure in the very short term i.e in the quarter that when we had a little bit of gross margin pressure you manage that level with the Apex and the overall and then you see how well we can live on that in Q3 but that ‘s not the answer to a long term,. The answer to long term is product portfolio first of all I will talk about that and you want just one over in the lower end what we were a doing we talked about how the new a low cost engine works there and yes that’s half as you say but it also gets you a pricing premium when you come in with the new product like that in the 1110 its not the same price as the 1100 and the 1600 has the colors screen and that differentiated but still on the same platform you may expect the product for so that would work gross margin now in the lower end and as you know we talk about we have successive products coming there, we are going to ramp it up into the tens and millions, if that doesn’t stop we got another family that will come after that so we would be more than giving others a run for their for money. And each time you look to command a premium there as well as handle the Apex so that’s lower end, in terms of the high end I think that truth is starting to show here, as we release these products and we get great filled in the market place. The 8800 is just a fantastic device and phone, it’s beautiful, it is getting a lot of hope and that works the gross margins you re seeing what is multimedia is doing around imaging, music, coming and ES as well. We are going to have a nice product portfolio there, but again it’s is going to give some pricing there on the high. Along with that of course comes quality. That’s the other element of gross margin I think we have to bring the focus here that quality really matters in managing the warranty and thee repair cost, that cost across all product is particularly critical in the low end, you cannot afford to have anything between quality and so that s what we are working on to make sure if we work on a longer term in gross margins and not just rely good in a quarter Apex.

[Boy Tech]

Rick, just could you just clarify something historically you did talk about normal seasonality and you’ve done in the handsets historically there used to be over 20%, I mean there were some course of size 27 but it never was less than 20%. Is that how we should be thinking about your handset business in Q4?

[Jorma]

Can you repeat that?

[Boy Tech]

Yeah. When you talk about normal historical pattern in your handset business, as long as we’ve been following you guys since a while now, Q4 used to be this sort of for you atleast for handset sales, which used to be atleast 50% sequential increase. Some obviously higher but register in the market may be noticed as good these days but atleast 20% kind of, is that the right way of thinking for Q4 sequential growth.

[Jorma Ollila]

Yeah, I mean if you look at it historically you are absolutely right. So if you look at something 20%, 27% that’s where we are, obviously, so I can’t tell you whether it could be 5.2 or where it’s going to fall in. We don’t know, you don’t know, nobody knows, I don’t think the operators have decided on how they would push from second week of December, they will decide in the first week of December as some of these certain actions. So there are really are variables affecting that, but I think you look at the economy, you look at the operator behavior and then you look at the historical gross rate of about 20% to 27%. And there we are, we all get atleast, that could have been usually better.

[Boy Teck]

Thank you.

[Ulla James]

Thank you we go the next question please.

[Operator]

The next question comes from Tim Luke with Lehman Brothers.

[Tim Luke]

Thank you, question for Rick. With the R&D moving lower in the quarter could you talk about how you seeing that shaping going forward and may be on the SG&A side what do we expect the, the marketing expenses and holiday season to little bit lower than the sales growth or how should we look at that.

[Rick Simonson]

Yeah Tim, on the marketing standard they outlaid going in some details we would expect that we have the normal seasonality on the US sales and some in the Q4 and we are expecting that the absolute in marketing of course will go up in Q4, but it’s going to be more muted in the sales, so that’s looks like what I was talking about in the last question. In terms of R&D we are progressing well there, in terms of all targets we laid out little bit more than a year and I feel good about the progress that’s being made there on R&D as a percentage of sales. On absolute basis we brought that to flat running for the year. And again we have a very strong focus on both R&D and sales and marketing compared to gross margin so that’s how we get organization aligned and improvise on that I think we are in good order towards meeting our goals, that we set out on R&D.

[Tim Luke]

With respect to the slight decline that your predicting in ASP levels should we thing about that being same kind of percentage as it was this quarter or should we think about it more sizes and range, how would we think about that?

[Rick Simonson]

Tim now you give me precise guidance aim, we’ve been pretty consistent here talking since the second quarter about how (3840) develop in third quarter and fourth quarter now. And I guess I will leave it at that, the point is, as Jorma talked about the somewhat decline in the ASPs really isn’t the story when you can build off the world cost platform devices and the pool what you get from the market place there so would expect that and again just get back to managing for overall, behind the same work.

[Tim Luke]

Okay. Thanks.

[Ulla James]

Okay thank you and we will move on to the next question please.

[Operator]

The next question comes from Sandy Malhotra with Merrill Lynch.

[Sandy Malhotra]

Thank you. Hello Jorma, hello Rick, Ulla. Congratulations on the introduction of new products especially the E61 could you comment bit on your relationship with RIM especially at you have given your license Blackberry Connect and the Nokia’s new enterprise devices will be directly competitive with BlackBerry and the second part of my question is how do you see the size of this enterprise smart phone market evolving,

[Jorma Ollila]

Very specific question about but thanks. First of all the relationship with RIM, I think that we have talked to them for a long, long time we landed with them a contract somewhat 18 months two years ago and we were first one to talk to them because we saw the potential in e-mail, then the well known and well popularized event, that will advertised NTP issue surface and thus of kind of whole to the discussion on how we can but one can implement our growth market strategy. And with all of that obviously that also made us to look at, how do we find of strategy which for long term will be customer friendly and enable us to bring value to table to the cooperate customer. With our unique capability and implementing CapEx on handsets features, so that led up during the last 18 months or so to implement the strategy where we support, a variety of email solutions not just RIM, even if we worked at a very early stage with RIM and that has been reference to many people in their mindset anyway. And we launched our own business center context, Nokia business center as well. Now obviously the RIM will (indiscernible) 42:04 we have a contract with them and we will continue to implement, we will support RIM where we see fit, and where we see the customer, customer wanting us to work with the RIM client. And have them use RIM having capability and service etc, but this when you look at the other alternatives they have a lot of traction as well, with many operators for understandable reason so RIM is not only one which has been looked up by those operators or by corporates. And there is a lot of real good food for our own business center concept because they see a lot of benefits for using that kind of capability. It is a nascent market with a lot of potential. So from our point of view if you really look at what happened here is that when we get our cup of alliance and theoretic to-date enterprise handsets into the market place in the first six months of next year. That will really be the path for us. And open the next era after what has been a very good communicator driven Nokia enterprise network. And (indiscernible) are doing just excellent work so I have a lot of expectations on what we can do next year in putting all those things, which we have in the pipeline into the market. And in the capital market today in early December in New York, we will really be looking at all of that, not just our capability but, what our offering is but also the market size and the real potential of how we see it for the enterprise solutions. But it’s just appropriate to say at this point that yes we see a lot of potential and I think one way of looking at it is just that you will really see the opportunity that series 60 provides us. When we will see the series 60 news version next year with the thing not on the with some of those multimedia things like music but think really about what we can do in the area of the enterprise. So the series 60 platform is just gives a lot of unique stuff to put not only the email client but lot of those enterprise masters into a shape which gives us very, very strong position and going towards the second half of next year.

[Sandy Malhotra]

Just a quick follow up question, maybe this ones for Rick, the gross margins and enterprises were up come 46% last quarter to 50.7% this quarter is that more of a blip, because hardware sales aren’t as strong and in the future should we be expecting the software component of the enterprise business to decline over the period of time as the hardware ramps.

[Rick Simonson]

As we said the 9300 and 9500 really driving that higher gross margin in enterprises and that sales though has taken a higher percentage than the older messenger device in our portfolio and again we said for sometime that we’ve set the goal and the expectation based on what we believe is tip of the exploding market going to offer that the ES is going to expect the high gross margin business. And we said for sometime that we expect that in the high 40’s and that’s how we work on it and we are going to progress through the first half of next year based on the refreshment of the product portfolio, again in the small size of that portfolio, when we get a real big uptake from these great new communicator and smart phone products 9300, 9500 versus the older products in the messenger that’s what you get this talk about 50?

[Sandy Malhotra]

Thanks very much that’s very helpful.

[Ulla James]

Thank you Sandy We will move on to the next question please.

[Operator]

The next question comes from Paul Sagawa with Sanford C Bernstein Stearns.

[Paul Sagawa]

Hi, Nokia has made it fairly clear that your newer products tend to have better margin than the older products in some sense during some of the more difficult quarters in 2004, but the issue was a an older product line, one of you if you can take, just give us idea about the, what percentage of your current shipment from products, that have been introduced in the last year versus where was it a year ago, and then looking forward you have a new design paradigm that is modular etc, would we expect then that percentage of products are new to go up, as we look into 2006. And does the new modular designed paradigm give you any certain advantages in terms of bringing products much faster reducing sort of the useful lifetime of the following so that you can be refreshing the product line more quickly, thank you?

[Jorma Ollila]

Yeah Thanks Paul, the product talk and then continue, if we look at the situation has we’ve done from second quarter to third quarter, as an example in the third quarter we had a higher share for new product revenue than what the case in the second quarter and our definition we use the slightly different definition. For us the new product is something, which has been in the market in volume for 6 months and when we go to the seventh markets in old product. And we are shooting to have 35% - 40%, in terms of new product at the particular quarter and when we get towards the higher end of that band usually you will see a pick in the margin, for that particular quarter and that just one of those interesting parameters, which we follow and gives us the very good clue and understanding, we’ve gone nicely up in the last three or four quarters and we were nowhere near, where we wanted to be in the course of 2004, so if you look at the few four and onwards we expect to go up but Q4 perhaps, not very much, rather stable or off the base and then next year again because there have been quite a lot of introductions during in the first half, you will see an up pick but we are on the trend line we are on the way up and that it’s an extremely encouraging sign with the strength in ramp up which we discussed earlier during this call, it just gives a good feel of going forward.

[Rick Simonson]

Yeah and then you call US about the fabs market and I think we’ve started to articulate increase of turn starting to understand this strategy about speed the market but in different segment and using particular, so called S curve of the products here and you got to be fab the market on the, high spec new design, cutting edge products and we rush that into the market you take advantages of that and then you bring those as you go up the S curve and we start to hit the massive volumes you bring that across the platform and across the broader family of products to optimize there, so again the different speed to market on this products but there is a reason for it and then as you go further up the S curve, you really maximize them, your whole cost structure and the feature mix, and again, taking advantage of the platform so what we are working then I think you seeing the delivery alert with the pace and the rhythm of our new product launches and leading in the high end with the right mix of specs and yes we are making that S curve strategy working and that does bring the appropriate products faster to the market and then works to optimize that and take advantage of our platform as you go out that so called S curves.

[Paul Sagawa]

You put 18% out of sort of minimum future margin target, will that remain the margin target and also what kind of timeframe should we be thinking about to the holding to you reaching those sorts of goals?

[Jorma Ollila]

Well Paul, First of all if we look at the margin in the third quarter which Rick just announced in both mobile phones and multimedia 70% and 69% pretty close to 17 to 18 which was our target, in the last couple of months. We, that’s the target, it’s really a good target, and we have done pretty well again what you said to be some tough competition by some people. So, we clearly are well above the rest of the pack in terms of how we are performing today in terms of margins and we will be when we look at how we go forward, obliviously we would discuss that in our market days in 6 weeks time.

[Ulla James]

Thank you Paul and we will move on to the next question please

[Operator]

The next question comes from Tim Boddy from Goldman Sachs.

[Tim Boddy]

Thanks very much. I should like to see these gross margin seen hopefully not the best. Its noticeable in the quarter that despite the sequential sales price gross profit, didn’t increase and its sounds like in Q4 we shouldn’t expect gross margin to improve and handset given stable mix of the products in deteriorating mix in terms of emerging markets develops. But the network business actually was the principle driver, disappointment like in Q3 or weakness and we haven’t told much about that, could you now just for the handset when we could expect to see improving gross margins in network and whether indeed long term margin targets in networks can be achieved without significant gross margin improvement there, thank you?

[Jorma Ollila]

Yeah. I think your observation about of the roll of networks is absolutely correct and not very many people have picked it up. Thanks for that. If we look at the networks, first of all, chasing long term targets, what we do very –very few days that our capital market day annually the forum where we look at long term targets, we fetch the target we comment on how we feel about that, why we have fetched them and what is the status and we haven’t done too badly if you look at where we’ve been after mid December of last year facts. Obliviously the market that evolved either way there are positive factors, there are negative factors both in the devices as well as in the infrastructure which impact the operating margin, the dynamics that determine the operating margin and they come from competitive situation and the effective of gross margin and then our Apex actions. On the handset obviously there are possibilities like the ramp up so that new products we have caused disposition and then in the high end including the 3G and particularly the breadth of our product trends in the negative which have effected and will be there in one form or other. First of all revise shipment to America, when one is moving to the most of the American market, the ASP’s are lower in the America, Barbados as well as Latin America than the global average. And on the 3G portfolio we will also moved to broad our price back so as the when the volumes go a real higher, so that the average 3G ASP’s is a bit low and so is the gross margin. There is some of those facts that affecting that, we will comment in a longer term if you see on the, all these in the capital markets day. Then on the infrastructure side clearly we have seen the emerging market to play a bigger role now in the last of couple of quarters. For which we should be mix of our customer base. With China and Europe being reasonably slow in investment. At the same time we have had gross of services business with the lower margin. So those are the main issues there. What’s the sustainable, a goal of 14% how do we look at that, clearly the main point, even after the articulating the all the reasons that are impacting, clearly the main point is that this is particularly, the operating margins particularly sensitive to the volume. We are at a very sensitive point, in terms of how we are as a company, because we have a very broad R&D base. We really global delivery, we are in China, we are in India. We are all over Apex, Latin America, US and our R&D across technologies is very broad. So the delivery organization R&D cost means that we have high cost operations. And that with the volumes of 1.5, 1.6 billion, yes it’s an issue, to get the 14%. It’s not easy with the current factors that are impacting. More discussion will follow on the Capital Market days. But that’s an introduction to that discussion.

[Tim Boddy]

You have might out there, your commented that networks in terms of contribution and in terms of the overall growth profit and again going quarter to quarter networks account for more than the slight decline that we had going from second quarter of ’05 of approximately 50 million in total gross margin that you see decline, in many different networks so the device business in contributing greater gross margin on a sequential and on a year on year basis.

[Ulla James]

Thanks Tim, and we will take our last question.

[Operator]

And our final question comes from Hasleen Malik from CitiGroup.

[Hasleen Malik]

Thanks, I just want to ask kind of wondering any question and that’s a few years ago your market share in western Europe looked pretty much unpredictable, yet we’ve seen decline as since, what makes you so confident that going forward we won’t see some similar over the few years with your share in the emerging markets which is currently extremely high.

[Jorma Ollila]

The emerging market share is strong, but so continues the western European market share and I don’t’ think there has a been change in dynamics in western Europe fundamentally. And there has been, we have the highest share in present markets that what we had two or three years ago, we’ve done markets where (indiscernible) lower share. The basic dynamics had not changed the strength of our products let it be with brand continue to be the main drivers in this business particularly when the volumes get higher and they will continue to get higher. If you then look at the emerging markets and the dynamics the distribution has even a bigger roll in the emerging market than has been the case in western Europe so the strength of distribution the way we have build it, through the last 10-years significantly differs from anything that has been done by anybody. The strength of our portfolio, it’s not about one or two product, it may worse, and we are expanding into the higher ends and if you look at the quality, when you have the complexity of the China’s and the Indian’s and the Brazilian, Brazilian are bit well, and if you avoid the returns numbers are not correct and then you will be hit twice as a hard in the developing economies where the infrastructure to handle the repairs and other quality is much better, so and obviously if you look at the statistics today and look at the brand statistics and the brand preference particularly in the emerging markets. It is a very strong situation and the brand preference has historically had a very strong bearing to what the market share is and that indicates that who is very good. You then look at China as an emerging market, what can you do in an emerging market, in a year we have increased our market share from above 22% to well over 30% and it’s not about these emerging markets that are stabilizing into some sort of a lower level where, at play like our sales could not use the position through the distribution , which Rich just described in order to increase market share. At the expense of the players who do not have those attributes in place. So in addition if you look at the China’s on the India’s, its not about stock being low and plain, we have a leading position in China, we have a lead play in all segments and that’s gives up a quite a lot of indication about what might be happening when we go forward.

[Hasleen Malik]

So it’s the trade is safe from all these however for you the really tee structural bearing to entry in the emerging markets and incase of developed once the investments should be made in the distribution channel.

[Jorma Ollila]

Well is it one of DEP yes.

[Hasleen Malik]

Thank you.

[Ulla James]

Thank you Malik. Ladies and gentleman this now concludes our conference call. I would just like to remained you that during the call today we have number forward looking statement that involved risks and uncertainties. Actual results may therefore differ materially from the results currently expected. That could cause discrepancy that have been identified in more detailed on pages 12, to 22, in our 2004 announced in our press release, issued today. Thank you and have a nice day.

[Operator]

Thank you for participating in Nokia’s third quarter 2005 Earnings Conference Call, you may now disconnect.

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Source: Full Transcript of Nokia’s 3Q05 Conference Call - Q&A (NOK)