Nokia Corporation Q2 2009 Earnings Call Transcript

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Nokia Corporation (NYSE:NOK) Q2 2009 Earnings Call July 16, 2009 8:00 AM ET


Olli-Pekka Kallasvuo - President & Chief Executive Officer

Rick Simonson - Chief Financial Officer

Kristian Pullola - Vice President, Head of Treasury & Investor Relations


Mike Walkley - Piper Jaffray

Kulbinder Garcha - Credit Suisse

Mark Sue - RBC Capital Markets

Stuart Jeffrey - Nomura

Jeff Kvaal - Barclays Capital

Rod Hall - JP Morgan

Gareth Jenkins - UBS

Richard Kramer - Arete Research


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 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

I would now turn the call over to Mr. Kristian Pullola, Vice President, Head of Treasury and Investor Relations. Sir, you may begin.

Kristian Pullola

Ladies and gentlemen, welcome to Nokia’s second quarter 2009 conference call. I’m Kristian Pullola, Head of Nokia Investor Relations. Olli-Pekka Kallasvuo, President and CEO of Nokia and Rick Simonson, CFO of Nokia are here 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 detail on pages 11 to 28 in our 2008 20-F and in our press release issued today. Our aim is to finish this call in approximately one hour. To view the supporting slides while listening in to the call, please log into the IR website.

Please note that today’s press release and the presentation includes non-IFRS results information, in addition to the reported result information. Our quarterly results release includes a detailed explanation of the content of the non-IFRS information, as well as a reconciliation between the two.

With that, Ollie-Pekka, please go ahead.

Olli-Pekka Kallasvuo

Thanks Kristian. Good morning and good afternoon. Q2 was a continuation of Q1 in terms of the demand environment, and against this backdrop, I was quite pleased with our operational performance. In Q2, Nokia delivered improved operating margins in each of our three reportable segments.

Q2 was a solid quarter, because Nokia performed well in areas such as supply chain management and operating expense execution. Our strength in these areas are well known; however, we cannot only rely on our traditional advantages to carry us through the evolving competitive environment.

Going forward, our intent is to create significant sale to value and accomplishing this requires Nokia to develop new skill sets, because the mobile handset industry in undergoing a fundamental transformation, although a strategic transformation into a solutions company. I would like to take you through five key points before I get into the second quarter and I will get there, but I think this point’s also important bearing in mind some metrics discussions which we’ll have later in this call.

So first, the mobile industry is undergoing the biggest change in its 20 year history; a new industry is emerging and available to be shaped by Nokia. It is being formed from elements of the mobile handset industry to internet, to PC World, and media and content.

Advancements in mobile handset of the internet are the principal capitalists in my opinion. As such, competition has been increasing in smartphone market, as many players rush into one of the few growing consumer markets. It is however a two way street. More people have a mobile device than a PC and the next billion users will access the internet from a mobile device not a PC. This is why I believe so strongly that Nokia now has a tremendous opportunity to drive growth. We are entering a new era.

Being connecting to the internet while on the move is changing the way we communicate. Our mobile solutions will be aware of our social networks and location and will help us connect to people, places and information, that is uniquely relevant to us and that brings me to my second point.

Accelerating the pace of change towards a solutions modem operation. Historically, our modem operation has been based on our brand scale and distribution advantages, with volume and efficiency focus. This product oriented mode remains appropriate for a significant portion of our business and we intent to continue leading this global business in a profitable manner.

However, consumers will increasingly expect devices and services designed as integrated solutions that delivers seamless and intuitive user experiences. To really try growth, we are developing a solutions oriented mode of operation that is optimized for speed, flexibility and innovation. This transformation started in 2008, when we created the devices and services business, and now we are accelerating the pace of change.

In our solutions mode, we start with a consumer experience and user interfaces first; and then integrate R&D processes for devices and services. Our sales and marketing approach is also evolving from advertising to channel intensives, it is about focusing on the consumer. Crystallizing and reinforcing the value that mobile solutions bring to their everyday lives.

The importance of vibrant partner ecosystems to our solutions mode is my third point. This is a big competitive differentiator for Nokia. We have a strong and fast growing community of partners, including developers, operators, content companies, and other industry players. With strategic as well as financial objectives that are closely aligned, the Symbian foundation is a cornerstone of this vibrant and growing ecosystem. You will hear more from then today on a new and innovative application publishing program.

For Nokia, combining Symbian and acute, will allow us developers to builders to build. Together, this will allow Nokia to profitable differentiate for the user experience. Equally important to the attractiveness of this ecosystem is the fact we are sharing the newly created value with developers and person operators. Working together, we will accelerate the adoption of innovative solutions much more quickly than company’s that work alone.

Fourth; inherent in our solutions mode is our commitment to build direct and continuous consumer relationships. This is important, because greater consumer understanding enable feature innovations, including the delivery of new and more relevant content. Our solutions will learn from consumers and adapt to their needs. Consumers will always be in control, able to modify, engage or stop these features at will

Finally, “How do we make sure we stay on track?” We will measure our progress and link employee incentives to clear targets like active users. We are setting six month targets that will take us to 300 million active Nokia users by the end of 2011.

This call reflects the first step towards a success as a leading mobile solutions company. It measures our success in acquiring, retaining and deepening consumer relationships, which is the new battle crowned in this evolving industry. At the beginning of Q3, we had approximately 4 million to 6 million active users and by the end of 2009 our goal is to have 80 million active users.

So in summary, a new industry is emerging as the mobile handset, PC, internet and media industries converge. We believe, Nokia can create and capture significant value. We are accelerating the pace of change towards a solutions mode of operations that maximizes speed, flexibility and innovation.

Nokia is taking an open approach, working together with developers, operators, content companies and other industry players, creating lots sustainable ecosystems that will drive our mutual success. We are building and deepening relationships with consumers, which enables us to continuously improve our services platform and we have a clear target, 300 million active users by the end of 2011. This is the right target; it will drive us to make the right changes in how we work both internally and externally.

Now, let me turn to Q2. According to our estimates, the mobile device market was 268 million units in the quarter, up 5% sequentially and down 12% year-on-year. The sequential increase was a seasonal up-tick. The year-on-year decline was at the durable to global macro weakness. According to our estimates, our device market sale was 38%, up from 37% in Q1. Our Smartphone volumes were 16.9 million and we estimate that our share increased to 41%. In addition, growth in our services business did meet our expectations.

Comparing market share by geography, Q1 to Q2, remember that the market share figures in Q1 were distorted by channel inventory de-stocking. Also, gross borrow trading related to currency volatility had an impact, benefiting the Middle East and Africa and negatively impacting Europe in Q2.

The nature of the industry price competition in Q2 was similar to what we saw in Q1, very robust. We will continue to respond in a practical manner, to pricing activities by our competitors, with the aim of growing our markets in a sustainable way, while maximizing our longer term profits.

Moving then to device and services highlights. In Q2, we shipped a record $4.7 million Eseries devices, up 41% sequentially and 148% year-over-year. E71 volumes increased 26% sequentially, the fourth consecutive quarter of growth. It was encouraging to see the E71x receive a solid reception at AT&T, but it was not only the E71. The range of products from high to low, all contributed to the strong Eseries performance.

Our Nokia Messaging service is also seeing great traction with operators and consumers. We have now signed agreements for Nokia Messaging with over 10 operators and we are in discussion with many more. In fact, we have technically rolled out Nokia Messaging in over 40 countries, so we are prepared to ramp up quickly.

Last week we announced our collaboration with America Movil to offer Nokia Messaging across Latin America. In the messaging space, I believe we are just beginning to show our potential. Nokia Messaging offers a truly great experience for consumers and the economics are very compelling to operators.

Also in the second quarter, we shipped a 3.7 million Nokia 5800 devices. The N5800 has already achieved cumulative net sales of nearly EUR 1.5 billion and was our highest revenue and gross margin generating product again in Q2.

In the second half of the year, we plan to broaden our range of touch-screen devices as we ramp up new devices at multiple price points, including the 5530 XpressMusic and the N97. Our flagship N97 got off for a solid start. We manufactured and shipped 0.5 million units in the month of June; indeed it was a very fast ramp up.

In May, we launched the Ovi Store, which is evolving rapidly with continues improvements. Our focus on localized content and Pro device support makes the Ovi Store a unique way for developers and content companies to access the unmatched global Nokia consumer base, and we are making it much easier and more active for developers to create innovative new apps.

In addition, our alignment with operators to support revenue share and operator billing makes the Ovi Store ecosystem highly scalable and operate friendly. The early response from consumers, developers, operators and content companies has been encouraging.

Then onto Nokia Siemens Networks. In Q2, NSN delivered a small operating profit; well it was a breakeven on a non-IFRS basis and solid cash flow from operations, reflecting the cost reduction efforts over the past two year and the growth and strength of our services business on a sequential basis.

Conditions in the infrastructure sector remain challenging in Q2 and it appears that NSN lost some markets on the product side, but sequential growth was strong in the services portion of the business, which now represents approximately 45% of NSN’s net sales.

The telecom infrastructure market is evolving and the most attractive growth opportunities are now in services. In particular, manage services, consulting systems integration and cash services. With a strong global delivery model, NSN is well positioned for sale gains and margin expansion in services.

On the product side, we have addressed the road map pieces related to the integration and harmonization of the Nokia and Siemens portfolios, this is now behind us. We feel confident about NSN’s position as the wireless infrastructure market continues under consolidation path towards essentially three players.

Additionally in Q2, NSN agreed to acquire, Nortel’s profitable cash positive CDMA business and LTE, R&D expertise. If successfully closed, this will improve NSN’s position and prospects in the North American market. NSN also improved its capital structure substantially in Q2, with the completion of an over subscribed EUR 2 billion, three year syndicated loan agreement.

Now, I will pass over to Rick for more on the financials.

Rick Simonson

Thanks Olli-Pekka. I’ll begin with an overview of our continuing actions to reduce our devices and services operating expenses. We’ve made quick progress in the cost savings we’ve achieved our sustainable with the revenue levels we expect in the near term.

Regarding the macroeconomic downturn, we do not expect a quick or strong recovery, nothing new there, thus as a management team we will continuously assess our cost structure and take action to strike the right balance between near term cost controls and investing for the future growth and profitability.

We are continuing to take coordinated action across the company. In quarter two we announced and commenced measures, including adjustments to our services business, which opened up greater opportunities for third party partner services, cost efficiency improvement in logistics, production management and production support operations, and a voluntary resignation package for employees and one of our mobile device manufacturing facilities.

Year-to-date the headcount impact of measures we have announced, including voluntary programs totals about 4000 people, reflection an increase of 1000 people during quarter two. This figure does not include temporarily layoffs, also affecting approximately 2500 people on a rotational basis at our Salo mobile device manufacturing facility. In Q2, we took charges of EUR 83 million related to these and other cost reduction actions.

So, let’s look at devices and services performance in Q2 in a bit more detail. On a reported and constant currency basis, devices and services net sales were up 7% sequentially and down 28% year-on-year. The sequential increase was attributable to higher volumes, offset partially by lower ASPs.

As we expected, the market environment was more stable in Q2, compared to Q1, due primarily to lower channel inventory volatility. At an industry level, as expected it appears the vast maturity of the channel inventory de-stocking happen, by the end of Q1. The level of channel inventories for the industry are at a fairly sustainable levels. We believe given the current demand environment. Nokia ended Q2 with four to five weeks of channel inventory approximately flat sequentially and at a comfortable level.

In Q2, services net sales were EUR 140 million; that’s down 7% sequentially and up 17% year-on-year. Billings however were EUR 207 million, up 25% and up 70% year-on-year. Reminder -- these results were impacted also by the sale of our security appliance business to checkpoint, which was completed in April. From Q1 ’08 through Q1 ’09, the security appliance business had average quarterly net sales of approximately EUR 45 million.

In Q2, services billings were much higher net sales. We are building momentum, but we need to move even faster towards tightly integrated services and devices. That’s what our solutions transformation is about, that Olli-Pekka mentioned earlier. We are refining our financial reporting to better capture and communicate our product mode versus our solutions mode of performance and operation, and we will expand our disclosure financial metrics going forward.

Defining solutions is Smartphones and related services, well above one-third, however less than half of our devices and services net sales in Q2 were of solutions. The company’s slide, lists the additional metrics and definitions will disclose beginning in quarter three and going forward.

Nokia’s device average selling price in the second quarter was EUR 62 compared to EUR 65 in the first quarter, down 3% on a reported and constant currency basis. In Q2, units increased the most in absolute terms at the lower end. The downward pressure on ASPs however was moderated by the launch of new products, increase in Smartphones and including the N97

Devices and services gross margin in Q2 was 34%, up 20 basis points compared to quarter one. We benefited in Q2 from a mix shift towards higher margin products; with both new and continuing products we achieved cost of sales improvements that more than offset the overall ASP declines.

At the end of Q2, we sourced approximately 20% of our device components based in Japanese Yen, compared to approximately 25% at the end of 2008, and as a reminder we will no longer benefit from the earlier Yen hedges in Q3. This will impact sequentially gross margins negatively.

On a sequential basis in quarter two, devices and services non-IFRS OpEx was up EUR 12 million in absolute terms and down 130 basis points as a percentage of net sales. In quarter two, we made solid progress reducing structural costs and discretionary expenses. Devices and services non-IFRS operating margin increased 180 basis points sequentially to 12.2% in Q2, driven primarily by higher net sales and good OpEx management.

Earlier today, we revised our operating margin guidance for the second half. In addition to the impact from our Yen hedges rolling off, which we had communicated previously, competition remains intense and broad-based and we do have some short-term component constraints in Q3. We believe our revised operating margin guidance incorporates pragmatic expectations regarding the overall market demand, the potential pricing environment and our delivery capabilities.

While we are targeting an improved product portfolio, a few of our higher end products face Q3 component constraints. A few components unique to Nokia or experience isolated short term supply issues that may constrain our ability to meet end demand by some 100s of 1000s of units. We just have to manage through this Q3 disruption and put it behind us.

Turning to NAVTEQ; net sales were EUR 147 million, an increase of 11% sequentially. NAVTEQ’s net sales were up primarily due to a slight pickup in auto navigation systems and from a geographic perspective, the increase was primarily driven in Europe. Non-IFRS operating margins were 12.8%, up 910 basis points sequentially. This was attributable to higher net sales, as well as tight and good OpEx management.

Now Nokia Siemens Networks; net sales were EUR 3.2 billion in Q2, up 7% sequentially and down 21% year-on-year. Each of the five major categories grew on a sequential basis, radio access, broadband connectivity solutions, converged core, operations and business software and services. The largest sequential increases in absolute terms were in services and in radio access.

In Q2, NSN’s non-IFRS gross margin was 28%, up 240 basis points sequentially. This was primarily attributable to mix improvements in services and radio access. In quarter two, services gross margins improved significantly as the two areas with the highest growth, managed services and consulting and systems integration, also delivered the most gross margin expansion. Radio access gross margins were up in quarter two due to continued strength in higher margin software sales.

Nokia’s non-IFRS operating profit was 0.1% of net sales, so essentially breakeven as Olli-Pekka said, up 420 basis points sequentially. In addition to the sequential increase in net sales and gross margin, OpEx management was good and the focus continues as necessary in Q2 and going forward.

NSN’s cash flow from operations returned to solid performance in Q2. On a sequential basis, networking capital decreased despite the increase in net sales. This was driven primarily by better receivables and inventory management compared to Q1.

Nokia and Nokia Siemens Networks continues to expect the mobile infrastructure and fixed infrastructure related services markets, to decline approximately 10% in Euro terms in 2009 from 2008 levels. At this point, however we expect that NSN will see a moderate market share decline in 2009, due to the declines in certain product businesses, offset by strong sales and market share growth in services.

It is great to be able to underscore the services momentum at NSN by highlighting today the EUR 1.1 billion, five year managed services deal announced today with Oi Brazil. With this contract, NSN will be the sole provider of operations and maintenance for all of Oi’s international plant operations, for both fixed and wireless across 17 Brazilian states. It really establishes NSN as the largest telecom infrastructure managed services provider by far in Latin America.

So now turning to Nokia as a whole; Nokia’s financial income and expense in quarter two was an expense of EUR 61 million compared to an expense of EUR 77 million in Q1. The sequential improvement was due in-part to less voluble FX environment. We experienced significant FX losses in Q1 as we were not able to hedge some accounts receivable exposure to the Russian ruble during parts of Q1, given the extreme market volatility.

The benefit here in the quarter was moderated by higher expenses related to the new debt transactions that Nokia and NSN entered into. On this slide, we show both the Q2 reported and non-IFRS income statements. We lay out the items that are excluded from reported to get to the non-IFRS numbers, as in our press release.

Now next, let’s look at some of Nokia’s financial position and cash flow items. Our cash flow from operations was EUR 716 million for the quarter, up strongly from EUR 276 million in Q1. The overall net sequential improvement was attributed to four major drivers.

First, all three of our reportable segments delivered improved profitability in Q2. Second, FX volatility moderated somewhat in Q2 and our net out flows related to cash settlement of foreign currency hedging contracts decreased significantly in the quarter. Third, the sequential decline in networking capital was greater in Q1 than in Q2, but working capital efficiency improved in quarter two, with both devices and services and NSN delivering solid performances.

We freed up approximately EUR 250 million of networking capital in the second quarter. Finally, we had higher cash outflows related to taxes in Q2. We ended the quarter with total cash and other liquid assets of EUR 7 billion and net cash of EUR 1.5 billion. Let me quickly summarize the components of our interest bearing debt.

First, Nokia excluding NSN and then NSN. So excluding NSN, we ended quarter two with EUR 4 billion of interest bearing debt. During the quarter we successfully launched our bond transaction in the US. With the dual trench 10 year and 30year transaction we raised EUR 1.1 billion in total and used those proceeds to repay outstanding commercial paper.

NSN ended the second quarter with EUR 1.6 billion of interest bearing debt. In the quarter, NSN completed a EUR 2 billion, three year revolving credit facility with the syndicate of 21 banks. Under this facility, NSN utilized EUR 470 million to repay uncommitted loan facilities. NSN also secured, but did not utilize the EUR 250 million loan facility from the European investment bank.

Moving to the next slide, this covers the currency situation and constant currency reconciliations. With that, back to Olli-Pekka.

Olli-Pekka Kallasvuo

Okay, thanks very much, Rick. Q2 was a quarter, where Nokia managed through a very tough market environment. It is clear now that the level of stability has returned to the industry. The channel inventory situation is a good evidence of that, but it is equally clear to me that the industry as a whole is at the early stages of a truly remarkable transformation.

Like I discussed, the line between mobile handset and PCs no longer exists and in fact they are and will be new classes of devices. We have said that one size does not fit all that remains true. As the leading provide of devices, Nokia will continue to address all price points and all markets globally, but we believe that there is much more for us to achieve.

Our ambition is to become the leading provider of Nokia’s devices, but integrated mobile solutions as well. Nokia invests in a world where connecting people to what matters, powers them to make the most of every moment. The companies that will win in this new world are yet to be determined.

With that, thanks very much and back to you Kristian.

Kristian Pullola

Thank you, Olli-Pekka. We will now continue with the Q-and-A session. Please limit yourself to one question only. Operator, please go ahead.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mike Walkley - Piper Jaffray.

Mike Walkley - Piper Jaffray

Just wondering if I could dig in a little bit more to the updated margin guidance, leaving it in terms of improving in the second half of the year. How do we interpret it, it’s down Q3 and should we expect the seasonal impact to lift it in Q4 and perhaps maybe for Q3 you can rank all of the impacts between the change in the Yen hedges, the overall industry price competition and perhaps the relative strength of your high end portfolio to your competition?

Rick Simonson

Yes, we made a refinement here clearly, but there isn’t a whole lot new there and what we said is that we expect the second half in terms of operating margin performance to be a lot like how we develop in the first half. Remember, we did better in the first half and what we said we thought we could do as a minimum, we improved on that. Yes, there should be seasonality between Q3 and Q4, so Q4 should be stronger than Q3, much like you saw in the first half.

What I wanted to point out with the comments on the Yen is, we talked about this a few quarters ago; we’ve been very out front with this, but it’s worth reminding people that the fact is now we’re hitting, starting in Q3 where the very cheap and beneficial hedges that we put on sometime ago run out, but the fact is the Yen hasn’t weakened against the Euro and the dollar and in fact over the last couple weeks it’s actually strengthen add bit. So, we are going to realize that impact. We mitigated some of that, but that’s a headwind, but there isn’t anything new there, that’s really just a reminder of that fact.

In terms of pricing and competitiveness, as Olli-Pekka said, it continues to be robust, nothing new there and we’ve seen though importantly, our product portfolio offering improve important metrics that we were obviously getting criticism for and concerning about the back half of 2008, because our Smartphone market share was declining. We said we had to stop the decline and then we would work to improve.

So, now we have two quarters in a row of improvement in our market share in Smartphones and we’re going to democratize the Smartphone market. We said that, we’re doing it and there’s proof of that and so that’s going to help us offset to some of these other headwinds in the second half.

So I just think it’s prudent. I think it’s rational in this environment to try to refine our guidance a bit. It has to be said that, while we think our industry demand picture is bottoming out, we remain at a fragile and kind of volatile overall global economic environment and so that’s why I used the terms it’s prudent and rational in this environment to do this refinement. Of course, we’ll work to try to do better and deliver better than that, but that’s our view.


Your next question comes from Kulbinder Garcha - Credit Suisse.

Kulbinder Garcha - Credit Suisse

I just wanted to go back to the margin guidance again and just to be very clear Rick, so the real reduction incrementally, because you would have known about the Yen impact as you said for as number of quarters. It’s just this component constrains of the high end or partly their lease along with pragmatisms as you said.

So on that component issue, how long is that going to last? Is that what you’re expecting to hinder you for the second half of the year or is it just a temporary Q3 type phenomena and what kind of components just roughly speaking is the increase?

Rick Simonson

Yes Kulbinder, thanks for that, because I didn’t address the component question, I should have. As I meant to make clear in my commentary, this is a quarter three event and it’s contained to quarter three. So no, it doesn’t continue on; but it is incremental, it is new and different in that way than to the Yen impact as you rightly pointed out. There’s a few components. It’s unique to Nokia. It’s just one of those things that would happen.

The problem is it impacts some of the higher end devices, so you get a little bit more proportional hit there and it’s with some of our suppliers. This is something though that is solved, it’s known. So it isn’t an open ended issue, it’s very tightly constrained in Q3, but it is incremental and of course that does have the impact and that’s why, with that it fits in as I say the adjustment being incremental, prudent and rational.

Olli-Pekka Kallasvuo

If I might add to that component part here; so of course component challenges are something that we experience day-to-day, that’s normal here. We wanted to highlight that this time, but of course we are working extremely actively to mitigate as much as possible here and in fact, our track record here is pretty good, it as happened in the past. So, we want to flack that one right now, but working extremely active as they’re askig.

Kulbinder Garcha - Credit Suisse

Just one follow-up, on the higher end phones, on the N97 Ollie-Pekka, is there any reason why that product couldn’t volume wise or lets say revenue wise replicate the same success of the N95 platform. Are we in a different world now, economically competition wise in that segment of the market, given the initial feedback you must have had from carries.

Olli-Pekka Kallasvuo

It’s of course very clear that there is more competition in the marketplace than at the time ready to launch the N95, but having said that, if I look at the traction the N97 is having in the marketplace, it’s been received very well and we have to remember here that the world is big. There are many markets here; looking at the realities in one market only is not the way to do it.

There is a lot of traction here and like I said, the product was ramping up very quickly, both in terms of the capacity we do have and in terms of the demand in the plum marketplace and in fact the momentum has continued also during at the July month. So, I’ve got a lot of expectations there, but of course having said that that there is more competition in the marketplace than N95 did have.


Your next question comes from Mark Sue - RBC Capital Markets

Mark Sue - RBC Capital Markets

Olli-Pekka, if the industry is changing and Nokia is accelerating development to catch up to new competitors, aren’t there structural things as it relates to different and additional competitors which implies that the new level of operating margins are something that will stay with us for a while, beyond the second half and into the next several years as the industry dynamics change, if you could help us there?

Olli-Pekka Kallasvuo

Yes, I’ll start and I believe Rick may want to complement. So the whole point here and when I did talk about the transformation and then Rick spoke about the metrics here, is the fact that we are more and more having here like sort of a two modes of operation and in fact, when you take that a bit further to different businesses, it’s quite clear because the product business that we have a lot of experience and then there is the solutions business where we have increasingly more experience and have invested a lot in that.

If this market, the solutions market here in the way we believe it will ramp up, in the way we believe we have a possibility there, if that continues to take place, of course we have a possibility to enter and be in a business that the margin dynamics are not the same as in the product business, because we are introducing the element of our services solutions software and the market dynamics are simply different.

How these two will play outgoing forward, it of course depends on how successful we are in these two businesses, but like we said, ambitions on the solutions side, the 300 million users and so forth are quite high. As I thought so like a business mix matter going forward, a bit longer term.

Rick Simonson

Yes Mark, Rick here. To amplify, if this opportunity exists like I think all of us believe and there’s proof points for that and we drive it, we exploit it, other people nourish it as well, as Olli-Pekka said it’s not the same margin profile to be clear, we expect it to be better and higher and we want to get our fair share. You understand when we say fair share, that’s a fairly large share, so that’s what we have to do.

On the product mode side, what we really want to reiterate to everybody, nobody is losing track of how important that is to Nokia. We have our eye on the ball. The point is you need to do some bifurcation of those ways, so that the people that need to stay focused and take us to continuing new levels of productivity, product innovation in the product mode and assure that we continue to have the best brand, the best distribution, the lowest costs, but sell for a higher price.

We continue to do that and we have some great track record. We’re not going to forget about that, but we need to add on then and we need to operate in a more innovative, flexible, fast way on the solutions mode; we know that, we recognize that, and we know we have more to go there.

We aren’t there and we aren’t declaring that we are. We understand what we need to do and where the gaps are, but I think importantly, how we’re approaching it with the wider partner ecosystem is an important distinction and remembering that not all markets are the same in the world where we play globally. So, that’s why we think there is an opportunity for additional value at better margin profile in that side of the business, but right now I’m not going to give you margin targets for 2010. We’ll address that at the capital markets day.


Your next question comes from Stuart Jeffrey - Nomura

Stuart Jeffrey - Nomura

I just wanted to go over back on to the solutions issue. Obviously you made a big point of it on this call. I think the second bullet you mentioned was your accelerating the pace of change towards solutions, and while I can completely understand the direction you’re going, I guess the thing I’m still slightly confused or uncertain about is “What it is that you’ve actually accelerated, and maybe you can give us intangible examples of what you’re doing? That’s certainly much quicker and much faster than before and whether that comes with any higher investment costs on the back of it as well.

Olli-Pekka Kallasvuo

Yes, the investment level we have maintained here has been I would say adequate, so in that way I don’t really see a need to increase our investment, but what we have been doing and so this is not something that we’re starting today.

What we have been doing, we have been hiring a lot of new people. We have been sort of making changes internally when it comes to incentive talk to us, I mentioned that. We’ve got a monitor in the internet and in the lobby here, in the Nokia house, highlighting what is the number of the active users today, so we are communicating to the organization here and we will change the operating mode here as well, meaning that this will have an impact on their ways of working internally and I have some new responsibilities there as well.

So in that way, it’s as always in business; it’s many things; it’s recognizing that you need to turn the operating mode in the way that you start from the consumer experience and then turn that into R&D as opposed to the other way around and this transformation in an engineering organization is now well advanced, but I would claim, it has not been easy.

Rick Simonson

Maybe Stuart, this is Rick here. I can advance and I think you and others have asked rightfully of us over the last year beginning in 2008, but can you make of this change? You guys have so conditioned an organization that’s focused on scale, on cost right and that you’ve done well, but how do you make to drive this change and that was part of how we started changing the way we work.

Olli-Pekka’s highlighting the acceleration of that and importantly now with the metrics in getting people aligned around that, it really is powerful and believe me, we’re seeing different behavior day-by-day in the organization and you do get what you measure. These active users, if we have to single it down to one target; is the one that we think is most important and most captures that change and how people will then change the way they operate in the company around that to drive the solutions mode.

Olli-Pekka Kallasvuo

In fact there is a lot of positive buzz here in the company. It’s easy, it’s palpable. I can feel that, Rick can feel that. Then of course, I need to emphasize also that we will continue to invest, so it’s not talk only. It’s of course if we need to be able to continue to invest in this area, but what I said, we have been investing and we have an adequate level of investment here.


Your next question comes from Jeff Kvaal - Barclays Capital.

Jeff Kvaal - Barclays Capital

Yes, could I shift gears a little bit and talk about how we should expect the trajectory of ASPs in the second half of the year, given the increasing mix of Smartphones.

Rick Simonson

Yes Jeff, Rick here. In terms of ASPs, I think today if you look at development from Q1 to Q2, we were down about EUR 3 and based on everything we can see, we must be down less than what the market is, because we’ve taken value share and by the way we look at it and we see our smartphone market share go up that smartly if you will from Q1 to Q2.

Out in the second half, we’re going to try to make it work the same way. Of course the industry should expect that the ASP goes down overall, because there still is more volume coming from the lower end and people are trading down to a certain extent. We can capture them as they trade down, unlike some others who might lose them as they move from one category down to others. So I think you should think about the dynamic in the second half much like, how it went Q1 to Q2?

Olli-Pekka Kallasvuo

Yes, and I just want to add to that, because I think this is so relevant, so important. So these are the numbers I’m looking at personally. What is the value market share? So it’s not volume only, but value market share and then to some extent coincides with that, but not fully; what is the smartphone Market share? Because these are things where we need to make progress and we did take quite a bit based on what we can understand, quite a bit of value market share in Q2 and I personally feel that is very encouraging.


Your next question comes from Rod Hall - JP Morgan

Rod Hall - JP Morgan

The first question I’ve got is on the active user definition. I wonder if you guys could talk about it.

Rick Simonson

So, let us answer the question. I think we heard enough of it, so Olli-Pekka, please.

Olli-Pekka Kallasvuo

I think it was about the definition of the active users. Of course, the whole point here is when we are talking about the users here, it’s the point that business model is changing in the way that you don’t sell a device or hardware to a consumer at the point of sale and then lose contact, but the whole point here is the fact that we have been able to maintain meaningful interaction with the consumer here on an ongoing basis and build up the user base and then monetize on that. Hence, we have included a time element here, what is an active user.

If somebody is there once, but does not use the service, he or she will drop off from the user base and so that active there is to highlight that fact, but it’s been an ongoing relationship.

Rick Simonson

I might want to add here in terms of active users, that’s Nokia services and are third party partner services and those are both paid services and free services and this idea that it has to be active overtime or drops off as Ollie-Pekka mentioned is very consistent with the industries that have developed similar active users, so I think we’re in harmony there. Maybe now we can ask the operator if we have the queue back and invite Rod to ask his second question, given he got cut off midstream.

Rod Hall - JP Morgan

The second question was just going back to the product and solutions discussion. The specific question is how hard are the organizational differentiations within Nokia, between product and solutions? Is it kind of a matrix level definition in the organization or they are actual hard reporting structures that go along with those due definitions? Adding to that, is there somebody on the board that’s acting as a champion for the solutions business? Can you just talk to us a little bit about how senior management’s going to back that effort?

Olli-Pekka Kallasvuo

Yes, there definitely is somebody on the board who is the champion. I would sort of like to mention my name. This needs to be driven by myself and of course the senior team and when it comes to your question, when it comes to the operating mode, yes, we have been strengthening the horizontal layers here when it comes to the organizational thinking. So, it’s not devices plus services make a solution, but it’s rather there is a solutions road map that is divided into what is needed on the devices side, what is needed in the services side.

That starts from the solutions experience of the consumer and that is converted then in what is needed on the devices and services, as opposed to thinking about, “Okay, we are making devices and services and then on a modular basis combine the two,” that’s not enough. So we need to turn this around, that’s what we have been doing here and this has been championed by many, many sort of transformation leaders in this company.


Your next question comes from Gareth Jenkins - UBS.

Gareth Jenkins - UBS

Just wondered what your percentage of new products in Q2 was and how that compared to Q1? I’m somewhat surprised that given I suspect there were more new products in Q2 versus Q1 and your volumes in Smartphones rose, you have achieved so strongly that you didn’t see more operational leverage at the gross margin level in device and services?

Secondly, in terms of sellout market share, given the stocking effectively came to an end, I suspect that helped your sell-in/sell-out issues in terms of market challenge. I wonder if you could give us a sense of what your sell-out market share was in Q2. Thank you.

Olli-Pekka Kallasvuo

So, the new product revenue was up a bit, almost the same in fact as in Q1. We have to remember that. Like for instance, the 97 started like I said only in the month of June and it did not hit that metrics for the full quarter.

Rick Simonson

Yes, the operational leverage Gareth, I think sure, but we did have sequential improvement in the gross margin and I think if you look at operational leverage, you got to look down at the operating profit and EPS as well and operating profit up strongly compared to Q1 and then EPS up 50%. So, that’s how I would step you through that

Rick Simonson

In fact I would complement a bit on the new product revenues. If you look at the products that we did launch in Q2, N97, N86, E75, E55, 6700 and 6303; most of these were only ramping up towards the end of the quarter and in that way did not really hit for the full quarter.

Olli-Pekka Kallasvuo

Could you restate what your question regarding channel inventory was?

Gareth Jenkins - UBS

Yes, I guess given that your channel inventory was sort of flat Q-over-Q and the way that you report your sell-in volumes over sell-out total industry volumes, I suspect that had a beneficial impact in terms of headline market share. I guess what I’m driving at is what your view of your sell-out market share is rather than sell-in over sell-out.

Olli-Pekka Kallasvuo

What’s been what we said was, the sell-out market share would start to converge with the sell-in market share where our reported sell out market share not reported by us, but speculated by others, had in the previous quarters gone down. We said in actuality, it has stayed pretty well there and we’ve improved and the two will come together when you start to not give market share to the channel or take market share from the channel and we think that’s where we are in Q2.

If we are right, the market demand has bottomed out, the two should be largely equal here going forward in Q3 and Q4. So we feel good about that. Sure, there’s a little bit of that element as you mentioned, but we think we picked up some real, sustainable market share, but most importantly, the market share value is the one and as we look forward here, we can work the levers for value at a volume market share, whether it’s 37, 38, or 39, frankly.

Kristian Pullola

So with that, one final question, please.


Your last question will come from Richard Kramer - Arete Research.

Richard Kramer - Arete Research

A couple of quick questions please. One, no one seems to have asked about NSN, and given that the sales were down sort of 21% year-on-year on this quarter and you looking forward with Olli-Pekka’s comments about driving growth, it seems like NSN is not going to participate in that near term.

Is there anyway in which you could envision some sort of separation of NSN from the Nokia P&L, so the Nokia P&L can more directly reflect this solutions growth initiative that you’ve laid out.

Just second, I’m still a bit confused about your comments about value market share. Could you walk us through if your own sales were down sort of 28%. What do you think industry value was so that we can sort of look at the numbers that come out from all of your competitors in the next couple of weeks and try to verify that? Thanks.

Olli-Pekka Kallasvuo

Yes, I’ll take the first one here, while Rick is preparing for the second one. So it’s quite interesting, I understand if you look at the dynamics there. There is the product business and then there’s the services business, which is of course not the same services business as we are talking about when it comes to Nokia.

Then dynamics in the second quarter where as I mentioned is pretty different. So we lost a bit of market share in the product business. It looks like that now, but at the same time the services part, really there was a lot of traction here and a relative share of the services part did increased. So one needs to understand this dynamics also going forward when it comes to -- I mean other than it’s simply we are fully focused on improving the operational performance in NSN. That’s the only thing that I’ve got in my mind right now.

Rick Simonson

Yes and Richard, on market value, we haven’t ever given precise values before, because it’s a more difficult and more debatable thing to track, but obviously internally we track it with as much precision as we can, but I think what I can tell you is again, what the industry had been doing up until we hit the financial crisis, which precipitated the economic free fall and downturn, volumes were growing, value was growing less than that in the market and then we hit the downturn here, so both volumes were down and values went down.

We think Q1 to Q2, that overall in the industry, value probably only went down in the single digits rather than the volume going down in doubles perhaps and maybe that points to some of the reasons why we say there might also be some bottoming out coming here.

So, it’s a combination of both of those, but most of the way you look for ours is right now that the best measurement is this improvement of the Smartphone market, which, while it now covers certainly the mid range and the high end, not just the high end and gaining there is pretty easy I thing to see improve point of our increase, but we haven’t figure out good way to revive and give estimates and agree in the industry on what the value share is. I wish I can help you more there. It is our value share. Sequentially that’s what we were focused on talking here. Year-on-year we’d have to take a closer look.

Kristian Pullola

So with that ladies and gentlemen, we will conclude the 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 11 to 28 in our 2008 20-F and our press release issued today. Thank you very much.


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

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