Timo Ihamuotila – Chief Financial Officer
Kulbinder Garcha – Credit Suisse
Nokia Corporation (NOK) Credit Suisse Group Technology Conference November 29, 2011 3:00 PM ET
Okay, I think we’ll get started. We’re very pleased to have Timo Ihamuotila, I think I got that right, the CFO of Nokia. I think he was going to speak for about 10 or so minutes and we’ll go into Q&A. So Timo, please.
Okay, thanks Kulbinder and ladies and gentlemen, thanks for taking the interest towards Nokia. So in this small opening remarks, I will talk briefly first about Nokia’s strategy, then I will talk about our smartphones and mobile phones business and about our new product launches and finally, little bit about our financial targets both for the quarter and as well as then for longer term after the transition period.
And we’ll have plenty of time for Q&A after that. But first, before I begin, I need to remind you that any forward-looking statements I may make are predictions that involve risks and uncertainties, actual results may therefore differ materially from results we currently expect. We have identified factors that could cause such differences on pages 12 through 39 on Nokia’s 2010 20-F. I tried to say this faster than Matt Shimao our Head of Investor Relations.
So then to our strategy. So, first point to note about Nokia’s strategy is that, we have a very clear strategy very straightforward towards speed and accountability. And this is really, really important in a company which is in transition because we as many companies do this employee surveys and in our latest employee survey 70% of Nokia employees say, they are aligned, they understand the strategies clear. This is up from 40% and I think it is significant contributor to the fact that we have been able to increase the clock speed at the company.
So then on the actual strategy on smart devices, our strategy is to win in smartphones and transition our primary smartphone platform to Windows Phone on our mobile phones are feature phones business in the middle here, the strategy is bring Internet to the next billion.
We are also investing in future disruptions like html-5 or sensors to drive further differentiation on our product portfolio and then we have certain key differentiators like location or imaging which go across the strategy. And a very important part of the change at Nokia is also changing the way we operate and I’ll talk a little bit more about that later.
So then couple of words about the feature phone market. So we loosely define this at market which is €100 or below, we think it’s a great opportunity that part of the market is also getting smarter and this is a pretty big change in Nokia’s strategy because earlier we were running the mobile phones market more like a cash cow and now we are investing somewhat more to this market for the Internet, for the next billion strategy.
According our estimates, there are approximately one billion people at the moment on the planet who have Internet access and more than four billion people who are actually inside mobile phones networks coverage. So this is approximately three billion people opportunity and to simply put it, our aim is to bring the total cost of ownership of Internet access down and we think this is a great opportunity.
So then if we look at some of this is on which we are tackling this opportunity. So these are the Asha family of products which we launched at Nokia World about two, three weeks ago and when you look at this device, it is important to note that these developing markets are not homogenous.
You need to have certain key enablers in place to make it broadly on this market. First of these to dual-SIM and basically you need to have dual-SIM , you need to have it also in different form factors. Now here in the middle, I have this Asha dual-SIM product which is here and basically, it is as simple as this.
So we have a slot where you can stick another SIM the product understands up to five SIMs automatically and you can swap them without changing – without switching off the product. We call this easy swap. And this is something what nobody else has and with this feature, actually we sold about two million dual-SIM products Q2, almost 18 million Q3.
So very fast run. An example of a differentiating feature on mobile phones area which is very understandable at point-of-sale. The second thing which is important is an efficient browser. In the new Nokia feature phones, we have the Nokia browser which comprises Internet data up to 90% and this is super important on bringing the Internet access cost down bringing the Internet to the next billion.
And the third key point is applications. So these are very smart feature phones and even if they are job abate they have application support to applications like Facebook, Angry Birds, or WhatsApp for messaging on those markets. So we think again Internet for the next billion is a great opportunity and a very clear strategy for our mobile phones business. And then move to talk about smart devices.
So clearly the smartphone market is a growth market where you can drive a lot of value by innovation. The dynamics however on this market has fundamentally changed, it’s changed from battle of products to war of ecosystems as we call it. And we think that Nokia and Microsoft have the right assets to win in this new game.
So, if we look at this from battle of devices to war of ecosystems and we look at the Microsoft and Nokia assets, these assets are very complementary. For example, great hardware, operating system and software, location, search, productivity tools, and entertainment like Xbox.
This is the fastest growing ecosystem at the moment, when Nokia launched its new strategy. In February, there were about 5,000 applications, on this ecosystem now there are more than 40,000 and also it’s worth noting that operators are really backing this ecosystem.
We provide the broadest operator billing network and of course we understand that we have to make great products and we have to have a consumer pool to make this happen. But the operators do not want to see it duopoly in this market that definitely backing our launch here on the third ecosystem.
So then, couple of words about the actual product which we launched in Nokia World. So first, the Nokia Lumia 800. Now this is simply a great smartphone. Fantastic smartphone with this polycarbonate unibody design which is actually important because it’s difficult to manufacture but also very difficult to copy.
And this design also you can see it wraps around really nicely about the operating system. So the operating system and hardware design actually complements each other. It has a fantastic clear back display, Carl Zeiss camera, and the new Windows Phone UI which supports for example, multi-tasking.
So we started the sales two weeks ago and it is very early days. We gave a short statement last week on this to the public I can talk more about how the sales are going, but it is off to a good start and the most important KPI we are following here is the net promoter score, i.e. what are the consumers who actually have both the device.
Well in return, we have the highest net promoter score of any Nokia device we have launched. Consumers are clearly positive on the people centricity of the UI, i.e. how the whole UI works and also very positive of the design of the product. We also have as I said, good operator support for the launch about three times bigger than any other launch Nokia has done.
And regarding pricing, we are pricing this below iPhones. So we want to be one tier below unsubsidized pricing here is approximately or is €420, whereas when we checked unsubsidized iPhone 4 €580 UK. So just to give you reference point. We also launched a second device, the Nokia Lumia 710 to take it down on price point.
Now this has the same UI, same processor, different camera, different display, different memory footprint, with this we are able to get the pricing down to €270. So, for 20 to 70 we are bringing Windows Phone to clearly lower price points than earlier. But it is not only about the product, it is also about go to market and how we do the marketing.
And here we think that there are two main reasons why Windows Phone has earlier not quite taken off. The first one is that there has been nobody who has really put their best work, best design behind it. As I said, we think our design fantastically complements the UI and the second thing is the marketing and go to market execution.
And here we are purposely launching in six key markets and we want to have the product, above the line marketing which really keeps the message of the UI of the tiles and how they are updating with information all the time.
We combine that with fantastic retail execution, retail incentives, seeding programs and so far and this all have to be placed at one time. And this is really biggest marketing effort we have done on any product. We have good support from the operators, we also have support from Microsoft in this one.
So then quickly going back to how we change the way we operate. So we got these products to the market faster than our original schedule in six to eight months and this would have not been possible unless we would have changed the way we operate.
So we announced in April restructuring in our research and development operations and in September we announced restructuring in our manufacturing and also corporate functions. We are really tightening our site focus every single site that Nokia will have a clear leader with clear accountability on the product going forward, same goes with manufacturing and corporate functions.
And with these changes, we are actually exiting about 10,000 people at Nokia and we are targeting to reduce our operating expenses by more than €1 billion when you compare to 2010 devices and services operating expenses to the 2030. But to drive sustained change, we also need to change the behavior in the company and we are driving three key behaviors here, accountability, urgency and empathy and with empathy here we mean, the opposite of arrogance.
We really have to be the challenger in this market and we understand what that means. So we are fundamentally changing the structure and we are also changing the behaviors in the company.
Then on financials. So key point to note from our Q3 was that we had a strong operative cash flow of about €850 million. We ended the quarter with €5.1 billion of net cash and €10.8 billion of gross cash. So we have strong balance sheet to help us drive through this transition what we are at the moment executing. And then post transition, we target to grow faster than the market and we target to have non-IFRS operating margins of 10% or more.
And the key drivers for this is, first, operating leverage i.e. the more than €1 billion cost reduction and second top-line growth. This is more difficult to see the percentage of our gross margin expansion as we are really driving for volume to make this new ecosystem happen. So again, coming primarily from operating leverage, but also from top-line growth.
So, ladies and gentlemen, we at Nokia have a clear strategy. We have some exciting new products. We are changing the way we operate and we are working hard on all of these to improve both the growth as well as operating margin performance of the company. Thank you and with that, we can go to Q&A.
Thanks, for the presentation Timo. If I kick off with a couple of questions, just my first one is given the very targeted and selected approach which you are training up people and rolling the Windows Phones out, could you speak about how many markets you are in, six now. How will the rollout of Windows happen through that do they reach global rollout? Is that 12 months when how might you build up?
Yeah, happy to sell. There is a little echo here but then if I understood like how do we expand from here on different markets and basically we are launching in six key European markets at first and we are then expanding at latter part of this quarter to some Asian markets, Taiwan, Hong Kong for example, also India.
And we are of course trying to take all the learnings from these launches, because we are launching a new platform here and this is a new thing for us as well. Regarding 2012, we are bringing products also during the first half of beginning of the year to the US market as well as to the China market we will expand the portfolio to both LTE as well as CDMA and we will also be expanding the price point coverage i.e. we will go lower than this euro 270. We also think that we have tools to drive higher pricing as well with innovation during 2012. So broader price band CDMA, LTE, US, China.
And then my next question is just in terms of on Symbian, what can you do to realistically manage the decline of that platform over the next 12 months? So you don’t surprise, let’s say that it will ultimately decline in the next two or three quarters.
Yeah, that is a really, really good question. So firs of all, we are not launching the Windows Phone platform in many markets at the moment where Symbian is strong. Like for example, Middle East and Africa and some other markets at the moment, like for example, China and in that sense consumer awareness of this platform is more kind of like driven by financial press, which is not exactly what every consumer reads.
Also, Windows will support the local languages which Windows phone – sorry – the Symbian will support local languages which Windows Phone does not currently support. And there will be a clear differentiation on the markets where Windows Phone will be and where Symbian will be. And, finally then, regarding price point coverage, the expensive Symbian devices will be clearly below this €270 where the Lumia 710 is.
So we have a differentiation in that way as well. And now, these markets where we have these products simultaneously are actually the most difficult to estimate, because when we launched our dual-SIM line-up in India, we did get a so-called halo effect, where there was a really interesting product from Nokia, people who could not afford the dual-SIM actually tended to buy other Nokia.
Now we do not know if this is going to work here. We put a lot of money behind the marketing message of the Lumia line-up. There will be more affordable Nokia devices on the same market but on different operating systems. It could work so that the halo will pull this product, it could also be the opposite, so we don’t know.
But there will be many markets where the Windows Phone or the Lumia will not be launched where we will be selling Symbian solo and that should give it sustainability. And by the way, the new Symbian Belle software is actually, very, very good. So these are good value for money smartphones on this below €200 price points.
One final one from me. Just on the dual-SIM, recovery that you saw recently. How sustainable do you think that is? Is that a case of now rolling out those dual-SIM devices more globally? Or is it expanding the portfolio? Or what can you mean that, I guess the concern that I'd have is on the dual-SIM side is a very competitive market, it’s very low-end. And you could see volumes actually take a fall again very soon, what are doing to sustain the growth you’ve seen in the last quarter?
So, first of all, dual-SIM will become a key feature on mid to higher end of our feature phones. I mean, in that sense it is expected that as dual-SIM grows, the other part of feature phone sales will also volume-wise go down. But hen we think that we have a clear edge being the first to the market on this easy swap on dual-SIM and as dual-SIM becomes only one feature it is also the other features what I spoke about which will sustain our mobile phones business i.e. this Internet for the next billion strategy.
The really efficient Nokia proxy browser compressing as I said, up to 90% of the data and bringing Internet access to lower price points and also the smarter feature phones having the full applications port as was discussed.
Great. We’ll take a question from the audience.
Can you remind us what you have said regarding the Lumia 300? I think you have said publicly something on the introduction on the Lumia 800.
Well, we have said publicly that first of all, we have been now on the market approximately two weeks. So it’s very early days. We started selling, I think it was 16th of November in these six markets. We have also said, last week on the market that this has started well and that the key KPI what we are following is the net promoter score i.e. what are consumers saying about the product and the feedback is definitely positive net promoters course we are seeing of any Nokia product.
Can you talk about how the success of the Lumia line of products over – let’s say a six to nine months period impacts? How you think future form factors will do such as tablets, Windows based tablets? Or are they independent platforms in other words, one can succeed without necessarily the other one performing as well as you expect?
So, clearly there is some correlation, especially in the developed markets between the smart device, smartphone and the tablet. There are many markets where that correlation is not as big. So we are absolutely focusing now on driving the success of our smartphone line-up with the Lumia products. We have not launched a tablet, but clearly, we have taken a look at Windows 8. We think it’s a very interesting platform.
We also think that, even that it is tile-based and Windows 8 and the Windows Phone platform have a clear resemblance is important and we are looking at different form factors on that area, but ultimately as we have not launched any tablet, we recognize that it has not been easy to be successful on that market.
You really need to have a differentiated proposition as well. And so Nokia will not be the company as we have said earlier which will launch the so-called two hundred and second tablet which is non-differentiating, so that’s not where we are going to go here.
Hi, the whole learning platform, email, issue that you went through with Stephen when you first took over, really reflected I assume the long-term viability of the Symbian product line and yet it sounds us if you are still very, very dependent on Symbian in this kind of €200 and below price point for probably well into next year. Is that fair?
And what will that I mean, I hope it doesn’t end up with – I hope this doesn’t sound like RIM talking about what RIM, the OS 7 is going to do for RIM. What keeps people intrigued by Symbian when they know this Windows thing is out there? And is it just simply that you are competing against yourself, won’t there be low priced Android phones in these other markets? Won’t there be cheaper Apple Phones in these markets? Won’t there be alternative smartphones?
Yeah, there will absolutely be lower priced Android products on these markets, but it is simply wrong to say that on those price points, Symbian would not be competitive. I mean, if you look at like €100 price point and the Symbian products, for example the 5230 product which we are selling, I mean we sold over 70 million of these products during Q3.
And we need this platform for the transition period. We will sell it on the markets where it clearly has value. As I said, in those markets we have not launched the Nokia Lumia product and in markets like Middle East and Africa, or in Russia, we have a very strong position with Symbian products, Nokia’s brand preference is very high and we really have to see that there are different markets on the world.
And when you play with the new Symbian Belle product and you put it vis-à-vis the so-called low-end Android implementation which is fair to say it’s not the same as your high-end Android. It’s a very competitive offer. Simultaneously, as we said, we are transitioning our smartphone line-up into Windows Phone, but during this transition period, we will sell Symbian because it will give value to the company.
Timo, can you talk a little bit about your strategy for the US market? Just given your lack of presence in the US over the last couple of years, what are you doing now that’s different and could you maybe speak a little bit about the level of engagement that you have with carriers in the US?
Yeah. So, when we look at the US market, it’s totally fair to say, we are not at all where we should be. Now, the biggest difference between our engagement with the carriers at the moment and say previously with the previously – is that the carriers, the major US carriers are supporting the Windows Phone operating system.
And in that sense, our discussions are not like trying to sell in another operating system it’s like do you have interesting enough product implementation, what is the go to market and the marketing strategy, what is the value we can bring to the US consumers. So clearly, US is a very competitive market. We understand that together with the carrier partners, we need to bring real value to the consumers, but its a very different discussion what we are having at the moment vis-à-vis previous.
Okay, we are off time. Thanks very much Timo.