Nokia Corporation Q2 2008 Earnings Call Transcript

| About: Nokia Corporation (NOK)

Nokia Corporation (NYSE:NOK)

Q2 2008 Earnings Call

July 17, 2008 8:00 am ET



Olli-Pekka Kallasvuo – President and Chief Executive Officer

Richard Simonson – Executive Vice President and Chief Financial Officer

Kai Oistamo – Executive Vice President, Devices

William Seymour – Head of Investor Relations



Mark McKechnie – American Technology Research

Sherief Bakr - Citi

Richard Kramer - Arete Research

Tim Boddy - Goldman Sachs

Mark Sue - RBC Capital Markets

Andrew Griffin - Merrill Lynch

Timothy Long - Banc of America

Gareth Jenkins - UBS

Michael Walkley - Piper Jaffray



Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Nokia second quarter 2008 earnings 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 would now turn the call over to Mr. William Seymour, Head of Investor Relations.

William Seymour

Ladies and gentlemen, welcome to Nokia’s second quarter 2008 conference call. I’m William Seymour, Head of Nokia Investor Relations. Olli-Pekka Kallasvuo, President and CEO of Nokia; Kai Oistamo, Head of Nokia’s Device Unit; and Rick Simonson, CFO of Nokia, are with me today.

During this briefing and call, we will be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. These statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected.

Factors that could cause such differences can be both external, such as general economic and industry conditions, as well as internal operating factors. We have identified these in more detail on pages 10 to 25 in our 2007 20-F and in our press release issued today.

Our aim is to finish this call in approximately one hour. To view supporting slides while listening to the call, please go to the IR site. You may also note that for your background information, we have provided additional slides in the appendix to this presentation.

A replay of this call will be available until next Thursday and the call will be archived on our website.

As you saw today, we made some format changes to our earnings release. First we modified the table on the first page so it breaks out key items both reported and excluding special items. We also provided for the first time EPS excluding special items and excluding Nokia Siemens Networks Purchase Price Accounting.

We provided constant currency information on net sales for Nokia Devices and Services, Nokia Siemens Networks. You can find these figures in the table on the financial highlights section of the release. You could also find in the device ASP constant currency information in the financial highlights section of the release in the highlights on the first page.

With that, Olli-Pekka, please go ahead.

Olli-Pekka Kallasvuo

Thanks. Good morning and good afternoon. Let me start by saying that I am happy with our performance in the second quarter. I think there were several things to be pleased about this quarter.

Our device market share was up both sequentially and year-on-year. Device and Services operating margin were solid in the quarter, helped by good and prudent cost control. Services and Software saw strong growth in net sales in its early phase of rollout.

Nokia Siemens Networks had an encouraging quarter with good net sales growth and solid margin improvement.

We had some other very significant developments. Last month, Nokia announced plans to acquire Symbian Limited and at the same time Nokia and nine other industry leaders established the Symbian Foundation.

As of today, a total of 30 companies have publicly given their support and commitment to the Symbian Foundation and more than 150 have expressed interest in joining. Last week we completed our acquisition of NAVTEQ.

Taking a quick look ahead to the rest of the second half, I want to say that I feel good about the new devices we plan to be selling. In fact, the feedback has been very positive on many of those devices and we look forward to updating you soon.

Now let’s take a closer look at the overall device market and our market share in the second quarter. According to our estimates, the mobile device market was 303 million units in the quarter, up 15% year-on-year and up 3% sequentially, which was in line with normal seasonality.

Today, we updated our forecast for the 2008 device market. We now forecast that the market will grow by 10% or more in volume in 2008. We feel comfortable with this estimate given that we are already more than halfway through the year and based on how we see the state of the market today.

According to our estimates, our overall global device market share was 40% in Q2, up 2% year-on-year and up 1% sequentially. Sequentially, our share was up in all regions except China and Latin America.

Sequentially, our market share was down slightly in Latin America, but it was up 8 points year-on-year. Our share was up nicely sequentially in Europe and we had good share gains in many markets such as Spain, Italy, and the U.K.

Our device volume was up almost 80% sequentially in the U.S., giving us a good share gain for the quarter. While I’m happy about making progress in the U.S., we have a lot more work to do until I’ll be satisfied with our position there.

We estimate we lost a bit of share in smart phones in the second quarter, but not a big surprise to us given our lack of new smart phones selling in volume in the second quarter. However, our portfolio will improve. So far this year, we have already publicly announced 10 new smart phones that we’ll sell in the second half.

Additionally, we expect to announce several more, some of which will hit the market before the end of the year. But bear in mind that the smart phone market does not represent the entire higher end of the market.

The 3G Wideband CDMA market is also a good representation of the higher end of the market, and in fact we estimate our 3G Wideband CDMA market share was up 3% sequentially in the second quarter.

Now, I’ll hand over to Kai to cover Devices.

Kai Oistamo

Thanks, Olli-Pekka. Let’s take a look at product highlights for the second quarter. As Olli-Pekka said, our portfolio was pretty similar to the first quarter. In Entry, the Nokia 1200 and 1208 were the biggest volume products again, together shipping almost 40 million units during the quarter.

In Connect, the Nokia 6300 was the best selling product in the second quarter. During the quarter, the combined volumes of Nokia 6500 Classic and 6500 Slide were up sequentially.

In Live, Nokia 6310 and 5610 XpressMusic devices were again the leading sellers in the category. In Explore, Nokia Nseries volumes were up sequentially over 10 million units during second quarter. The Nokia N95 products continued to do well, with volumes up over 20% sequentially in second quarter.

In Achieve, the Nokia Eseries had volumes of almost 2 million units during second quarter. The Nokia E65 and E51 were the best selling products there.

As Olli-Pekka said, we expect to have a good line of products for the rest of this year. In fact, we announced 21 new products in the second quarter alone covering low-end, mid-range, and the high-end. There are more announcements to come.

There are a lot of new products with great potential. But let me highlight a few. Let’s start with Nokia E71, which started to sell at the end of June. We are really excited about this device and the feedback and demand from our customers has been very good.

It is a beautifully engineered phone with great looks, slim build, and fantastic ergonomics. It has wonderful battery life, a superb screen, effective GPS, and fast mobile data.

Better than all that, it is reasonably priced. These are not my words; they are actually from a review last week from a popular online publication, TrustedReviews. But I do agree with every word that they said.

As you can see from the slide, we have compared it to RIM Bold, and the Nokia E71 stacks up more than well. It is the world’s thinnest QWERTY device, which is impressive given the specs.

It has very impressive operating times. It has HSDPA, a 3.2 megapixel camera, GPS, Wi-Fi, a music player, stainless steel casing, and the list goes on and on. Perhaps more importantly, the E71 supports a simple two-step setup for email accounts from more than 1,000 ISPs around the world including Gmail, Yahoo! Mail, Hotmail, and it also supports the corporate email solutions, including Microsoft Exchange and Nokia Intellisync Wireless Email solution.

We are not done improving the email experience on our devices. There is more to come here soon. You can get an early peek at the new beta consumer push email service at

I would like to briefly touch on the next product in our highly successful N95 franchise, the Nokia N96, which we expect to start selling in this quarter. We believe that N96 will help extend the success of the N95 devices.

There are plenty of reasons to upgrade to the N96. The N96 is truly optimized for media consumption including video and mobile TV. It is thinner than N95, features more memory, 16 GB; a larger, brighter display, and also up to five hours video playback; 14 hours of music playback, and up to 4 hours of TV playback. We expect this product will do well and will be ranged globally.

In our mid-range, the Connect business, we’ve recently announced a bunch of new products that we are excited about, including the ones listed on this slide:

The Nokia 6210 Navigator, a HSDPA Series 60 device with built-in compass for pedestrian navigation;

The Nokia 6220, a HSDPA S60 device that brings a lot of specs and a 5 megapixel camera to the mid-range;

And the very sleek Nokia 6000 which comes in clamshell or a slide version.

All are recent and very good additions to our mid-range offering. The Nokia 6210 and 6220 have already started shipping and the Nokia 6600 devices are expected to ship during this quarter.

I want to emphasize the importance of mid-range as its significance can sometimes be lost between the mass volumes of the entry and the innovation of the high-end. The mid-range is actually the largest part of our overall device market, making up over 50% of the total value of the market according to our estimates. So, it is very important to Nokia that we have a strong offering here.

We surely have not taken our eye off the ball in the entry level. We believe that we have the best product range, leading brand, lowest cost, most efficient supply chain, widest distribution, and the highest quality in the industry.

Our recent announcements clearly demonstrate that we can offer the most diversified range in the entry level. For example, the Nokia 6280, the first slide device for the entry level; the Nokia 1680, the lowest priced device with both GPRS and camera; and the Nokia 5000, our first megapixel device for under €100.

There is definitely a lot of opportunity to innovate in the entry level and we intend to continue to be the leader in this market.

Let’s talk for a moment about the touch input devices. We are fully committed to bringing out to the market a complete portfolio of touch devices. For the mass market, the high-end, and even at the low-end. Playing at the Nokia strengths, we aim to appeal to the broadest possible market, and leverage our advantages in brand, scale, platforms, manufacturing, and distribution.

Our first touch device will be aimed solidly at the volume part of the market. It is competitively spec’ed, especially considering the price point. This product is scheduled to be out in the second half.

Following our first consumer Touch UI product, our platform approach to the software will allow us to roll out Touch across our entire range from top to bottom. It is just a matter of Nokia choosing what features and what specs do we want to include; for instance, the screen size, GPS, Wi-Fi, quality of the camera, or maybe even a QWERTY keypad.

With that, I would like to hand back to Olli-Pekka.

Olli-Pekka Kallasvuo

Thanks, Kai. I’d like now to cover our new Software and Services business. It had €119 million in net sales during Q2, up from €84 million in the first quarter. We’ve had a lot of activity in this business recently. Sony BMG Music Entertainment and Warner Music have now both signed up to support Nokia Comes With Music.

With these two and Universal Music, which we signed up last year, we estimate over 80% of the global majors music catalog will be available on Nokia Comes With Music when it launches later this year.

During the quarter, we opened new Nokia Online Music stores in Australia, France, Italy, The Netherlands, Singapore, and Sweden. This brought the total number of stores to 10 by the end of the quarter and we plan to have a total of 14 opened by the end of this year.

The N-Gage mobile games service became commercially available during the quarter. The service allows consumers to download N-Gage games on any of the tens of millions of compatible Nokia devices. Feedback so far on the service has been positive.

Also during the second quarter, Nokia Maps 2.0 was released. Nokia Maps 2.0 adds not only improved car navigation but also new features like Walk, pedestrian focused navigation; multimedia city guides, and satellite and hybrid images.

We also announced the acquisition and in fact the closing this week of Plazes, which we believe will help Nokia to accelerate its vision of bringing people and places closer together, in line with our broader services strategy.

Although we are still in the early stages of building a services business, our unique advantages from the scale of our Devices business are already clear. One example is that we estimate over 150 million of our devices currently in use have a download client which takes people right to the application store where consumers can buy applications. This is something that we are not yet fully leveraging. It presents a compelling opportunity going forward.

We’ve also had some early success in bundling navigation services with our device sales. In other words, when you buy a selected device at the store, we offer the navigation service with that device for a period of time.

In Q2, we sold over 4.5 million GPS-enabled devices, bundling navigation together with over 50% of those. This really demonstrates the power Nokia scales that we are aiming to bring to bear in our services business.

And then on to the Nokia Siemens Networks. During the second quarter, Nokia Siemens Networks continued to make encouraging progress in a challenging market. It was the first quarter where we have a year-on-year comparison for NSN and the growth and improvement in margins was impressive.

Importantly, during the quarter one can see the synergy benefits starting to flow to the P&L. Good progress has been made in lowering operating expenses. Given the changing competitive landscape, still more needs to be done in this area.

The gross margin has also been notching up over the last year, reflecting cost synergies, increased deal discipline, and positive mix changes. Notwithstanding the progress noted above, it will probably not come as a surprise to any of you that the market remained difficult. Competition remains tough.

I think the NSN leadership team has struck the right balance for this market:

Clear focus on profitability and cash rather than market share and growth at any cost;

Prudent portfolio management with the goal of driving growth in some parts of its business while optimizing other parts for profitability;

Rigorous cost control, including productivity improvements beyond synergy savings;

Strengthening its software and solutions capability to drive differentiation and margin growth,

And leveraging its greatest asset build-up over the years, namely its large installed customer base.

In this way, NSN will assure it is able to successfully invest to meet the long-term needs of its customers.

And now I’ll pass over to Rick for more on the financials.

Richard Simonson

Thanks Olli-Pekka. Let me give some color on the Nokia overall financials, then move to Devices and Services, and followed by Nokia Siemens Networks. In quarter two, Nokia gross margin excluding special items was 34.6%, down approximately 180 basis points compared to quarter one.

On a reported basis, Devices and Services net sales were down 2% sequentially and down 1% year-on-year. However, on a constant currency basis, Devices and Services net sales were up 1% sequentially and up 6% year-on-year. We delivered very good device unit growth, up 6% sequentially and 21% year-on-year.

I think this really illustrates the power of the brand, the distribution, the broad product portfolio, and the global diversification.

Nokia’s device average selling price in the second quarter was €74, down from €79 in the first quarter. The lower ASP was due to a higher mix of lower priced products and was significantly impacted by the weaker U.S. dollar. In fact, approximately 40% of the sequential decline in ASP was caused by currency moves.

The Devices and Services gross margin was 36.1%, down approximately 240 basis points from Q1. The impact to gross margins was expected, given a shift of lower end products, a considerable drop in our revenue from new products, and a shift to lower margin regions.

We expect to deliver improved product portfolio execution in the second half of the year with exciting new products in the low-end, mid-range, and importantly the high-end as well. As Kai said, customer reaction to many of the new devices has been very positive.

In Q2 on a sequential basis, Device and Services OpEx, excluding special items, was down in absolute terms and down 130 basis points as a percentage of sales. Our solid operating expense performance mitigated the decline in gross margin, resulting in only one point sequential decline in Device and Services operating margin to 20.1% for Q2 from 21.2% in quarter one.

Last quarter, we further emphasized the importance of cost management. Clearly, our execution in Q2, especially in OpEx management, was very good. Of course, as we launch a significant number of new products in the second half, we would expect our sales and marketing to increase sequentially in quarter three.

But I’m pleased with the improvements we’re making in terms of the OpEx disciple in Nokia as well as our continued ability to manage product costs.

A few comments on Nokia Siemens Networks and the financials: In the seasonally strong quarter two, Nokia Siemens Networks generated strong net sales growth. Net sales were up 20% sequentially and up 18% year-on-year.

The company saw broad strength across major geographic regions in product categories including radio access, transport, core, and services. Just as a reminder, Q2 and Q4 are the seasonally stronger periods for the infrastructure market, and quarter one and quarter three are typically the seasonally weaker quarters.

In quarter two, Nokia Siemens Networks’ gross margin excluding special items was 31.4%, up approximately 100 basis points compared to Q1. In a tough industry environment, NSN delivered improved gross margins due to better product mix and cost of goods sold related to synergies.

NSN’s operating margin excluding special items and PPA related to the formation of NSN was 6.7%, up from 2.4% in quarter one. This improvement was driven by good net sales growth, gross margin performance, as well as improvements made in operational efficiency.

Nokia Siemens Networks’ quarter two results are encouraging. However, NSN continues to operate in an aggressive pricing environment and the geographic mix continues to shift towards emerging markets. Those dynamics have not changed. Therefore, it is appropriate for NSN to remain focused on executing its cost synergy targets. Nothing comes easy in this business.

NSN’s cash flow in quarter two was somewhat improved, but improving the consistency of NSN’s cash flow and working capital management is very important. This is now where we need to stay focused; more work ahead in this point.

For your reference, we put a slide in the appendix of the presentation that lays out how the special items and the formation PPA hit NSN’s profit and loss statement.

In terms of the synergy and integration process for Nokia Siemens Networks, let me just reiterate that NSN remains on track to deliver its €2 billion annual cost synergy target. The total special items for Nokia in the second quarter added up to a negative €460 million. All the special items are outlined on the slide and in the press release.

So, at the total Nokia level, excluding these special items, the second quarter operating margin was 14.7%. Diluted earnings per share was €0.37, excluding both the special items and the NSN formation PPA items.

Now let’s look at some of the Nokia’s balance sheet and cash flow metrics. Our cash and other liquid assets totaled €8 billion at the end of the second quarter. When it comes to working capital, inventory was down slightly sequentially in the second quarter; accounts receivables up sequentially in the second quarter, but only slightly as a percentage of sales.

The increase primarily reflected a greater proportion of sales in countries with typically longer payment times. Accounts payable was up sequentially, basically in line with sales.

Total operating cash flow in the quarter was €1.5 billion. Operating cash flow improved from the first quarter level of €757 million, but I think we can do more to improve our working capital management in both Devices and Services and Nokia Siemens Networks.

As always, let me give you an update on the share buyback. During the second quarter, we used €1.5 billion to repurchase 84 million shares or over 3% of the company. This was significantly higher than the average over the last four quarters, which was €1.1 billion or 49 million shares per quarter.

We believe that buying back the stock is a good way to return capital to shareholders, especially at recent price levels. Since 2004, Nokia has reduced its share count by more than 22%. That’s more than 1 billion shares.

On May 8 at our Annual General Meeting, we received shareholder approval to buy back up to 370 million shares until the end of Q2 2009. The new buyback mandate from our Board is for €4 billion until the end of Q1 2009.

To help you calibrate what’s left in the authorization since the Annual General Meeting in May, we’ve used €1 billion of the €4 billion so far to buy back stock under that authorization.

Onto currencies: On a reported basis, quarter two year-on-year Nokia net sales were up 4%; on a constant currency basis, net sales up 11%. Sequentially, net sales were up 4%; on a constant currency basis, net sales up sequentially 7%.

The impact on operating profitability from the weaker dollar was clearly smaller as a significant portion of our costs are transacted in dollars or dollar-linked currencies. Our outlook for Nokia, NSN, and the industry is attached in the slide in the appendix. Please refer to that.

Finally, I’d like to brief you on two additional items: our acquisition of NAVTEQ and the revenue recognition as applied to some of our new services. Regarding NAVTEQ, very pleased; we closed this on a timely basis and without conditions.

Beginning in quarter three, NAVTEQ will be a Nokia reportable segment. The acquisition was funded using half cash/half debt. The debt was raised in the U.S. commercial paper market.

We expect NAVTEQ to be slightly dilutive to EPS in 2008 and approximately neutral in 2009 and accretive thereafter, excluding purchase price accounting related items arising from the NAVTEQ acquisition. Then on a reported basis, Nokia expects NAVTEQ to be slightly dilutive to EPS the remainder of 2008, in the years 2009 and 2010; accretive thereafter.

Nokia currently expects to recognize approximately €2 billion of intangibles related primarily to the navigable map database and customer relationships. We expect these intangibles to be amortized over approximately five years. So net of deferred taxes, we expect the impact on our consolidated profit and loss account of the purchase price accounting related items arising from the NAVTEQ acquisition to be approximately €250 million on an annual basis.

Switching gears to revenue recognition for certain services. We’ve clearly seen early success and good growth in our Software and Services business. Increasingly, this business involves selling services, which are delivered over time. So we will have an increasing proportion of our revenues which are deferred and then recognized over time. This effect will be noticeable beginning in Q3.

We will of course give you clarity as the business develops and as increasing amounts of revenue are expected to be deferred related to certain services.

Now back to Olli-Pekka.

Olli-Pekka Kallasvuo

Thanks very much, Rick. In summary, and this will be a very short summary in fact, I am pleased with the financial performance of our Device business and Nokia Siemens Networks. We were able to deliver good margins in large part due to very good operational discipline.

As we look to the rest of this year, we have a lot of new products coming in all product segments, which we are really excited about.

And with that, thank you very much.

William Seymour

Thanks, Olli-Pekka. We will now continue with the Q&A session. Please limit yourself to one question only.


Question-and-Answer Session



(Operator Instructions) Your first question will be from the line of Stuart Jeffrey -Lehman Brothers.

Stuart Jeffrey - Lehman Brothers.

Thank you. A quick question on your margin structure. I think, Rick, you mentioned in the start of your presentation that gross margins, you expect to do better during the course of this year, or that’s how it sounded, anyway.

You’ve got a lot of new products coming through, so your product portfolio refreshes nicely as we go into Q3 and Q4, so that all points towards a margin improvement as we continue through Q3 and into Q4.

Could you just talk around anything that might stop that from happening, especially as in your ASP commentary? You’re no longer talking about competition driving ASP declines as if the competitive environment has eased slightly.

Olli-Pekka Kallasvuo

Okay, thanks for the question. You’re almost putting words in my mouth but I’ll give my own answer here. In that way, this gross margin question of course comes up quite often and I repeatedly answer it in the same way.

We don’t try to maximize gross margins every month or even quarter. We manage our business in order to maximize the bottom line. We manage our business in order to take market share in a way that is sustainable. Of course, we have given operating profit indications.

As we started the year, we said 20 plus or minus, and that’s what we delivered in the second quarter. I’m referring of course to the Devices business only. That thinking I think will continue here and we will manage our business bearing in mind those targets I was referring to.

I think that strategy and that way of managing the business will ultimately benefit the shareholders in the best possible manner.


Your next question will be from the line of Michael Walkley - Piper Jaffray.

Michael Walkley - Piper Jaffray


Great, thank you. Just a little different put to that question. In the past, you’ve indicated you would shoot for revenue mix in your Device business of around 35% of revenue in a given quarter.

Can you help us, what maybe Q2 was and how we should think about that mix in the second half of 2008? Also, while low-end’s still growing, how should we think about the new mix of high-end products as it relates to ASPs and maybe cost and currency for the back half of the year?

Richard Simonson

I think you’re referring to new product revenue. As we talked a lot, if you could dial this in, constant every single quarter, you’d probably wish to run that somewhere in the 30s, low to mid 30s. This quarter, we were closer to 20.

We were pretty low in what’s defined as new product revenue. But remember as I talked before, we’d just come off two quarters where we were at 40% or above. So, that doesn’t mean that you have a portfolio that was stale or old. Quite the opposite, it was well refreshed and that’s why you can do what Olli-Pekka said. As we went into the quarter, we can take sustainable market share and we can also then deliver 21% operating margin off Devices and Services.

That’s going to come up obviously. We expect that the new product revenue to come up in quarter three and quarter four compared to quarter two for the reasons that Kai articulated with the number of new products that are shipping.

But, we will continue to see the low-end grow as we did in Q1 and Q2. All things else equal, that obviously has ASP pressure is down, but as we said before, that’s a good thing with Nokia because we can make profits there. So, that’s the dynamic that’s going on around new product revenue.

Michael Walkley - Piper Jaffray

Thank you.


Your next question will be from the line of Gareth Jenkins - UBS.

Gareth Jenkins - UBS

Thank you. And on that same question, that was a very strong performance in margins, Rick, and it sounds like you’re saying that’s actually more seasonal. Can you just give us a sense when you talk about improving mix, how structural that improvement in mix is? Is it increased Software and Services or what’s going on there? Is it regional?

Just secondly, which is related, could you just confirm whether NSN was actually breakeven or positive in terms of operating free cash flow and what you think you can do more on in terms of net working capital from here? Thank you.

Olli-Pekka Kallasvuo

I will start and I’ll let Rick cover the latter part of the second question in fact. Of course if you look at cyclicality in the NSN business and you are referring to the business mix, so there is some fluctuation there of course on a quarterly basis when it comes to the business mix; when it comes to the product lines in that business, and then of course when it comes to the distribution of sales between different markets.

That type of fluctuation will continue to be there. Rapid changes in the mix will not happen, simply because of the nature of the business; and in that way, I would not emphasize that aspect here too much at this point of time.

It’s very clear that we do have quite a lot of ambition when it comes to the services business in NSN and that’s been one of the focus areas, but that’s more like a longer-term progress question.

Richard Simonson

Gareth, to my favorite, cash flow. Yes, we did have an operating profit cash flow on a clean basis with NSN in the quarter and that’s great; it’s fantastic. But we’re not satisfied. Simon and his team are not satisfied; Eric and the CFO is not satisfied there.

We still need to improve on overall net working capital management. We’ve got the eye on the ball there. We’ve got the metrics. We’ve got the teams operating that way. I do think we can do better there.

Of course now, we’re still executing the cost synergies and that costs cash. We did a couple of acquisitions in the first half as well. But we think that’s a good use of cash. But on operating cash flow, we snuck into the black in the quarter.

Gareth Jenkins - UBS



Your next question will be from Timothy Long - Banc of America.

Timothy Long - Banc of America


Thank you. Just a question on China and the emerging markets, if I could. I know you mentioned some share loss in the quarter. I’m assuming that’s related to the bundling at the low-end. But looking at the overall market in China, there’s obviously a lot of events going on there now.

What’s your view on the overall market and how long we might see some impact from the restructurings and maybe the earthquake and the economy? In your view, has any of the weakness in the overall Chinese market showed signs in India or any of the other emerging markets at this point?

Not really evident in your numbers overall, but I’m just curious if any countries stood out as a maybe a little bit more of an issue. Thank you.

Olli-Pekka Kallasvuo

I think that’s a very, very important question. We were referring to some loss of market share in China, but I think we need to put that into the context as well. We’ve gone from a level of 20% market share in China to approximately 40% of the market in a matter of three years plus.

In that way, it’s been very, very good progress and it’s very clear that quarterly seasonal fluctuation can happen and of course a lot of that is related to the China Mobile super-low-end deal. I almost would like to use the expression, if I may, that we decided not to participate in that way. That’s a decision that we have to make on an ongoing basis, trying to look at the best interests of our shareholders and the bottom line here.

I think it’s an important question, when it comes to the overall situation in China, the earthquake and so forth. I think the overall China continues to be solid. I think we had some impact from the earthquake, the market at one point of time. But China is a huge, huge market. In that way, I think the severity or significance of that I think was quite often completely exaggerated in some commentary. I think that topic as such can be put to bed now as we speak.

I read some interesting data on China. Today I think they announced their growth numbers and inflation numbers today. When it comes to the month of June, I think the growth was a bit down and so was inflation. In that way, I think it’s nothing fundamental to report and I cannot add anything to this party.

I’m an observer here of the economy, but nothing fundamental to report. I think we just need to pay a lot of attention as a company now on China and make sure that we can continue to see positive development of our market position in that market. I think that’s definitely something that is on the agenda here.

Timothy Long - Banc of America

Okay, and impact on other regions?

Olli-Pekka Kallasvuo

I think China is one market, and very much a market on its own right. So I don’t think you can extrapolate anything as such in that way. But this is more like a general comment here.

Richard Simonson

I think, Tim, we called out in the press release the growth in some of the other areas and I think India and other is a big market and we had our best period ever in the month of June in terms of selling the most we’ve ever sold in India. They’re putting on 7 million more or so subs in a month. They’re faced with all the same sort of economic reality that we’re all aware of.

But they’ve got a deep, growing entry level. They’ve got a strong middle range and as we’ve talked many times, don’t forget about India in terms of high-end and high-priced devices. I think it’s a very representative market in that way. Brazil’s clicking along well as well.

Timothy Long - Banc of America

Okay, thank you.


The next question will be from Andrew Griffin - Merrill Lynch.

Andrew Griffin - Merrill Lynch


Thank you. Just again on the market, you’ve moved your market outlook from 10% to 10% or more. I wondered if you could give any more granularity on what in particular made you more confident about the market this year?

Richard Simonson

In 10% or more, it really is just as we said at this point in the year, with everything factored in, we feel good about 10% or more. We had said approximately 10% previously. The drivers that we outlined at the beginning of the year remain firmly in place to get us there.

You’re going to have higher unit growth in the emerging markets and that’s continuing and we just talked about a couple of the biggest markets there: China, India, Brazil. I should mention Russia has a big element of that market as well as the high-end and others.

Europe’s developing like we thought at the beginning of the year, in that sense, not a big change. So there is nothing new in how you get to 10% or more. We just had better visibility and good confidence as we look out from here to the end of the year.

Andrew Griffin - Merrill Lynch

I just wondered if given you’ve got half a year under your belt now whether there are any particular surprises either positive or negative regionally in the data you collected?

Richard Simonson

No, as I say, there isn’t anything to write home about that.

Andrew Griffin - Merrill Lynch

Okay, thank you very much.


Your next question will be from Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets


Thank you. Rick, maybe if you could help us understand the trajectory of Devices operating margin improvements; what part is variable and what’s fixed in sales and marketing and how should we think about the incremental spend per unit of new device?

What I am trying to get to is if we should see a flattish Devices operating margins near term and a sharp ramp in the fourth quarter or more gradual build?

Richard Simonson

As we said and I think we demonstrated pretty well here over the last couple of years, quarter by quarter, that we have a pretty good amount of flexibility to work the variable parts of the OpEx in sales and marketing in a way that assures that we have a good chance of reaching that 20% plus/minus target that we set out, and so there’s a fair amount of that.

Of course what you have to watch for is you’ve got to make sure that you are spending enough to maintain through the mid and the long term. I think we’re doing that and that’s another reason why in Q3, of course, we are going to bring the sales and marketing spend up, particularly the marketing spend, and that’s consistent with the new product launches.

But we’ve seen our brand improve. We’re the number one brand of any consumer brand in many parts of the world. We’re in the top three to five by any measure globally. Our customer response in terms of preferences to purchase, preferences return, have been good, and in many cases we’ve seen some improvement over the last two years.

All of those say that I think we’re getting that balance right of what to do in a short-term quarter to adjust accordingly to hit that 20% plus and minus, but also really not just sustain the brand, but build the brand.

R&D is a different thing. You don’t have a whole lot of flexibility within a quarter on R&D and you wouldn’t want to jeopardize the platform development, the product developments that are so critical to exploit our scale and our innovation that’s coming, to jerk those around too much in the quarter. We don’t do a whole lot of that.

But we improved our R&D as a percentage of net sales. We reached that target that we had set out some time ago of getting around the 8% level in the devices some time ago. We are continuing to work to improve there.

Mark Sue - RBC Capital Markets

As a percentage, maybe flattish or slightly down and then a bounce?

Richard Simonson

As I said before in terms of OpEx, we expect sequentially an increase in the amount in Q3 versus Q2, both absolute and as a percentage of sales. We don’t give operating margin targets quarterly, but we are working within the guidance that we gave in December Capital Markets in terms of 20% plus/minus. That remains; there’s nothing new to update there.

Mark Sue - RBC Capital Markets

Okay, thanks.


Your next question will be from the line of Tim Boddy - Goldman Sachs.

Tim Boddy - Goldman Sachs


Yes, I wanted to ask about component costs. Obviously as we see inflation increase in the emerging markets, which is where a lot of your supply chain is located, there is some concern about not only from the raw materials side, but of course also the wages side, not in your own business, but obviously in the indirect suppliers to your business.

Can you just comment on what trends you are seeing there and the extent to which at what point we may see any increased cost pressures surface, if at all? Thank you.

Richard Simonson

When you first said a lot of the sourcing located in emerging markets, I didn’t quite understand the connection, but then you went to wages. But remember wages is a very, very small component of our cost component and what we look to do is maximize the quality, the flexibility, and minimize the total cost. I think the way we’ve got our production sites and our sourcing set has shown to be doing that in a pretty good way.

The other thing to remember is that market share, more than 2.5 times bigger than our closest competitor and 5 times greater than each of the next 3; we’ve got a lot more ability I think to manage through these situations than anybody else. So again, wages in certain markets isn’t something that I would call attention to.

Tim Boddy - Goldman Sachs

But just to follow up in that if we look at the totality of costs whether it would be raw materials, oil price related costs in you distribution chain; when you look at the whole picture, are you seeing some upward pressure; and if so, at what point would we see it come through to your business or it’s just not a big enough thing to worry about?

Richard Simonson

Oh no, we worry about costs, but prudently. We’re paranoid enough on costs. But yes, we talked about this in last quarter. I called that out and I shouldn’t say upward pressure; I should say it’s less ability to drive down at the rate that we had over the previous two years. We got a lot of benefit there of not even meeting our targets, but actually beating that.

What I said was this year was going to be a different one, where you’ve got to work hard to reach your targets, but you aren’t going to get upside benefit from driving prices even lower. So sure, there is some pressure there, but that’s what we talked about in Q1. We delivered in Q2 in spite of that and we’ve got the levers better than anybody else in any environment for Q3 and Q4; but yes, there are pressures.

Tim Boddy - Goldman Sachs

Okay, thanks very much.


Your next question will be from Richard Kramer - Arete Research.

Richard Kramer - Arete Research


Thanks very much. Olli-Pekka, a couple of quarters ago you mentioned specifically RIM and Apple as new competitors. This quarter, you mentioned that there was some share loss in smart phones. Can you talk us through the competitive dynamics as the new product portfolios roll out? What are the targets and the drivers in terms of taking back market share?

If it’s going to be music, maybe you can touch on some of the costs related there. If it’s going to be e-mail, maybe you could fill us in as to when you will have a full competitive enterprise offering, a not- based offering versus RIM. Can you really talk through how it is that smart phone share will rise and when we might see that start to happen? Thanks.

Olli-Pekka Kallasvuo

So tough; very good questions but since we have Kai available here at this time, so I’ll let him to take it.

Kai Oistamo

Yes, so first of all on the competitive dynamics, of course we acknowledge that there are new competitors in the marketplace. When you look at our range going to the second half, as I said in my part, we feel very good about the new products that we have coming.

We have launched newer smart phones that we’ll be selling in the second half and there will be more to come, which we’ll be selling also before the end of the year. I think that will help our competitiveness compared to the situation where we had in the second quarter, pretty much the same portfolio as we had in the first quarter.

I want to really emphasize the solution part, which Olli-Pekka talked about, in terms of music, in terms of e-mail, in terms of navigation, starting with products like I talked about, the Nokia 6210 Navigator. As the name says, it is about navigation. It is about the consumer promise with the product and the navigation service seamlessly integrated to the consumer.

I think we have clearly an opportunity to drive the market into the direction. Again the results that we have seen now in the bundling, as Olli-Pekka said during the second quarter, I think are quite promising. We see GPS enabled devices shipped in the second quarter be bundled with the navigation service as an example.

Richard Kramer - Arete Research

When you think about your core market, which is Europe, where high-end smart phones is more important to profitability, we’ve seen now a couple of quarters where the market has been flat. Has something structurally changed or is that where we should look for this rebound or improvement in market share in smart phones?

Kai Oistamo

There is no big structural change in Europe. There is some decline in terms of smart phone growth, but it is the fastest growing part of the market on an ongoing basis.

Richard Simonson

The smart phone market, it isn’t Europe only our stronghold. As I pointed out after the quarter one at a conference that only about 20% of our volume is in Western Europe. We are globally important in smart phones not just Western Europe.

Olli-Pekka Kallasvuo

I’ll just add one more point there. So we have done quite extensive segmentation work now during the first half of the year. Looking at how the consumer segment pace really is developing, and what consumers do going forward; what they will prefer and what type of solutions they will be asking and the segmentation work that has been extremely extensive.

It was one of biggest segmentation works ever done by a company on the consumer space. It’s clearly illustrating or demonstrating that the market is moving up in terms of the engagement of the consumers. In that way, we are really seeing quite rapid progress in the engagement; technology engagement, solutions engagement in all markets, by the way including the U.S. quite interestingly because they have been relatively low in this respect earlier.

I think this is extremely encouraging when it comes to the implementation of our strategy, meaning combining devices to services and in that way delivering solutions. There will be increasing consumer demand for this and it clearly supports our thinking, and I think this is very, very noteworthy.

Richard Kramer - Arete Research

Okay, thank you.


Your next question will be from Sherief Bakr - Citi.

Sherief Bakr - Citi

Thank you very much, just a question relating to the U.S., where clearly you’ve made some progress this quarter. I just wanted to get a sense as to where do you feel that is, you’re now seeing much more positive momentum that will continue into the second half.

Relating to that, what the margin structure maybe looks like in the U.S.; what impact that could have given a very competitive environment, you talk about lack of economies of scale given you only having four customers, and what potentially could be the likely impact of having to spend maybe more sales and marketing ahead of new product launches?

Really relating to that, if you really are expecting to gain share in the U.S., what types of products; are you expecting to launch a lot more smart phones into the U.S. market through the back half of the year or is it going to continue to be more low and mid-range products? Thanks.

Kai Oistamo

If you look at the second quarter, our market share in North America was 5%; 5 percentage points up and it was really driven by the 5310 XpressMusic with T-Mobile and 6555 with AT&T. It’s also noteworthy that we got the first CDMA product now approved by Verizon, thus giving us confidence on our CDMA strategy, and that of course is an essential part on the share gains going forward.

Richard Simonson

Sherief, to your question about margin structure, cost structure U.S., let’s remind ourselves of a couple things. The U.S. market for all vendors is one where the margin structure is lower. But also putting into perspective Nokia historically, we’ve been for some years having a very low presence there and we’ve been in the very low-end. We’ve had low ASP there.

I think it would be crazy not to move up the stack, which is exactly what Kai’s strategy is that he just talked about and gain more value there. So for us, there is upside even in a market that all of us know is not a market that has a great a cost -margin structure as some of the other regions; so in that sense, yes, but we are going to be working up through the mid and the high range to complement the low-end as we try to execute our strategy successfully there.

William Seymour

Thanks. Operator, this will be the final question.


Your last question will be from Mark McKechnie – American Technology Research.

Mark McKechnie – American Technology Research

Great, thanks. Just a quick one, your charges in the quarter, did you break them out on the income statement, how they fall through on gross margin, R&D, and SG&A?

Richard Simonson

Yes, Mark, we did. The Bochum charges for the site closure in Germany, as we said in the press release, impacts Devices and Services operating profit. All of that is at the operating expense and other expense line.

Mark McKechnie – American Technology Research

Okay. And then since that was already answered, on NAVTEQ, have you seen any change in fundamentals since you bought them relative to their forecasts? Also, would the layering in of that, is that going to be reported in Devices and Services? Would that be accretive or dilutive to the margins for that relative to that 20%?

Richard Simonson

Mark, on NAVTEQ, we said it will be a reportable segment. So Nokia in Q3 will have Devices and Services reported as a reportable segment, and full visibility through the P&L; Nokia Siemens Networks full visibility through the P&L, and NAVTEQ full visibility through the P&L, so you’ll get to see plenty there and we can see how it develops.

To tell you the truth, I haven’t done an operational financial review yet. We just bought them a couple days ago, so give me little time there. You have seen what their operating margins have been in the recent 1 year-18 months, and they are higher operating profit than our Devices and Services.

Of course we broke out, as I did in the call very detailed what we think overall the accretion and dilution. So hopefully that helps you, but we’re going to give you plenty of visibility into the NAVTEQ segment as we start reporting in Q3 and Q4, so give us a couple of weeks.

Mark McKechnie – American Technology Research

Thanks and a good quarter, gents.

William Seymour

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 10 to 25 in our 2007 20-F and in our press release issued today. Thank you and have a nice day.


This concludes today’s conference call. Thank you for participating. You may now disconnect.

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