諾基亞 (NOK) 2001 Q3 法說會逐字稿

NOKIA THIRD QUARTER 2001 EARNINGS RESULTS CONFERENCE CALL

Ladies and gentlemen, thank you for standing by. Welcome to Nokia's third quarter 2001 earnings results conference call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question and have dialed the North American phone number, you will need to press the '1' followed by the '4'. If you have dialed the European phone number, you will need to press the '*' followed by the '1' on your telephone. As a reminder, this conference is being recorded today Friday, October 19th, 2001. I would now like to turn the conference over to Ulla James, Vice President of Investor Relations. Please go ahead.

Thank you. Ladies and gentlemen welcome to Nokia's third quarter conference call. My name is Ulla James, Vice President, Investor Relations, and with me today is Jorma Ollila, Chairman and CEO of Nokia, and Olli-Pekka Kallasvuo, CFO of Nokia. During the conference call, we will be making forward-looking statements regarding future business and financial performance of Nokia and the mobile communications 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 16 in Nokia's most recent Form 20-F for the year 2000 and also in our press release issued today. Although this conference call has been made publicly available, we have reserved the opportunity to ask questions to the financial community only. In order to allow for as many as possible to present their questions, we encourage you to limit yourselves to one question only. The aim is to finish this call in approximately one hour. For your convenience, we are running a supporting slide presentation for the conference call on nokia.com. A replay, together with the slides, will be available on the web 2 hours after the call ends today. A telephone replay number will also be available until Monday, next week. Nokia net sales during the third quarter decreased by 7% to 7.1 billion euros generating a pro forma operating profit of 1.1 billion euros and a pro forma operating margin of 15.2%. Diluted pro forma earnings per share were 16 eurocents compared to 19 eurocents a year ago.

The Europe and Africa region represented approximately 47%, Asia-Pacific 27%, and the Americas 26% of Nokia's net sales in the third quarter. Growth in Asia-Pacific and the US was offset by a sale decline in Europe and Latin America. Sales in Nokia Networks declined by 14% to 1.7 billion euros with a pro forma operating margin of 9.3%. Nokia Mobile Phones' sales decreased by 3%, to 5.3 billion euros, with a pro forma operating margin of 19%. Sales in Nokia Ventures Organization decreased by 33%, to 140 million euros, generating a pro forma operating loss of 72 million euros. The group common expenses consisting of Nokia Head Office and Research Center totaled to 14 million euros. During the first 9 months of the year, Nokia generated a positive net operating cash flow of 3.9 billion euros. The net debt-to-equity ratio, i.e., gearing was -28% at the end of the quarter. With this, it is my pleasure to hand over to Jorma Ollila. Jorma, please go ahead.

Thank you Ulla. Ladies and gentlemen we have in the past described the year 2001 as a difficult and a challenging year for the telecommunications industry. The uncertainty caused by the technology transition and the turbulent economic environment was further heightened by the September 11th event. On that note, I would like to take this opportunity to add our sincere condolences to our colleagues, business associates, friends, and families who have been touched by the tragedies. While we are all too familiar with the immediate impact of these recent events, the long-term impact on consumer confidence and global economic growth is difficult to predict. As an individual company, we must focus on our business commitments and obligations to our customers, employees, partners, and shareholders, to the best of our ability. We must put steadfast emphasis on our core strengths in order to be the best prepared for the market's inevitable return to growth by being the most flexible, the leanest, and the financially strongest company. Looking at the development during the third quarter, in spite of the attacks market effect on our growth, we exceeded our initial expectations in terms of profitability, working capital management, as well as cash flow. Let me now briefly turn to the different business groups, starting with Nokia Mobile Phones.

Looking back at the Nokia Mobile Phones performance during the third quarter, I have to say that I am very, very pleased to see how our long-term strategy of relentless focus on flexibility and efficiency have enabled us to maintain the leading marketing position with improving profitability. Based on the preliminary market estimates, we believe that the global sell through of mobile phone market in the third quarter was about 94 million units which represents a decline of 10% compared to the same period last year, but an increase from the second quarter market volume of about 91 million units. Our calculations also indicate that there were roughly 880 million cellular subscribers at the end of the third quarter. The economic slowdown and ongoing review of operator strategies and trends towards the removal of subsidies continued to negatively impact the replacement cycle and overall demand in many high penetration markets. That being said, we expect the demand to strengthen in the fourth quarter to approximately 110 million units yielding year 2001 full-year industry volumes of approximately 390 million units. In the third quarter, approximately 45% of Nokia Mobile Phones' revenue was generated in the Europe and Africa region, 30% in the Americas, and the remaining 24% in the Asia-Pacific regions. Nokia Mobile Phones sales grew in Asia-Pacific and the US, while the growth was more than offset by the decline of the European and to a lesser extent the Latin American markets. We believe that for the first 9 months of the year, Nokia Mobile Phones commanded a global market share in excess of 35%. Due to aggressive discounting by some of our competitors, our market share has been trending down slightly, very slightly, and was estimated to be about 34% in the third quarter.

We see the competitive landscape normalizing as our competition is running out of so called end-of-lifecycle product and channel inventories are back to normal. In addition, our new products further enhanced the competitiveness of our product portfolio. Due to these factors, we are targeting a fourth quarter market share well above the current levels. The market volume growth was strongest in PDC and CDMA while GSM and TDMA market volumes actually declined in comparison to third quarter last year. Nokia Mobile Phones saw the strongest growth in CDMA as our market position improved tremendously due to a very strong demand for our product offering, particularly in the US. We believe our current global market share in CDMA is well into the double digits. The shipments of Nokia 8310 our first GPRS phone began at the end of September as planned. So far, the product has been delivered for testing to 90 operators in Europe and to 36 operators in Asia-Pacific. The feedback received so far on the phone performance has been very positive. The shipments of the Nokia 6310 and the Nokia 8390 designed for the Americas market are scheduled to start during the fourth quarter. We are currently in the middle of a fast volume ramp up and expect our overall GPRS shipment volumes to be in the millions during the current quarter. We estimate that our market share in GPRS in the fourth quarter will be roughly equivalent to our total global market share. We believe that the drivers for the next growth phase will be packet data.

The always-on connectivity together with higher data rate and multimedia messaging will enable completely new kind of product and categories together with relevant applications and services. We believe that 2002 will be the year of multimedia messaging, color screens, and packet data services. These new technology introductions create tremendous new business opportunities for the industry players. We believe that the future mobile phone growth will be heavily dependant on the rate of new product introductions, properly designed new phone models that appeal to user passion and also stimulate the growth of the service market, and in turn, the new services will increase demand for new further enhanced, differently optimized devices such as imaging phones, for instance. A very recent example of this positive cycle is the introduction of Nokia 5510 last week. The launch marks the creation of a totally new product category Mobile Entertainment Phones. The Nokia 5510 is the first model functioning as a platform for mobile content to have fun with, fully integrating a full keyboard for enhanced messaging, gaming, and MP3 for music. The Nokia 5510 takes advantage of powerful market trends and combines into one device what is in the heart of many young persons lives, staying connected, gaming, messaging, and music. Messaging alone is a big business today already. Over 1 billion text messages sent daily generating a business of US$19 billion this year. The shipments of the Nokia 5510 are targeted to start within the next few weeks and to be available in the distribution channels in volume for the holiday season.

I would also like to remind you of what we said in our announcement, September 4th. During the course of the next 12 months, Nokia will be introducing a wide array of new products including completely new concepts based on various combinations of key evolving technologies. The launch of 5510 was only the first delivery of that promise. There is more to come. We believe R&D and planned investments are key to the long-term competitiveness in mobile phones. They enable us to build the most appealing premium product offering in the end users mind and also allow us to maintain long-term faster than market growth with sustainable pricing and margins. I think it is because of these elements that we, also in the third quarter, have maintained steady mobile phones ASP's on both sequential, as well as year-over-year, basis. A third important factor for sustainable leadership together with product offering and brand is the operational excellence in the form of demand-supply management. During the course of several years, our mobile phone operation has been honed to the point that it now operates with negative working capital. This means that our inventory levels are very minimal. In normal circumstances this works to our advantage as it minimizes the capital requirements and the risk of obsolescence, while also enabling us to benefit from the most recent component pricing levels with a minimum delay. The grounding of cargo traffic in the US for five days in September left us somewhat short of certain key fulfillments, and hence prevented us from entirely meeting the demand for Nokia products.

The component situation is now back to normal, and we are looking very excitedly towards the fourth quarter. We believe our strategy of winning market share on the strength of our product offering instead of buying it with pricing will serve us really well. We feel very good about our long-term market share target of 40%. And now a few comments on Nokia Networks. Three months ago, we indicated that we expected modest growth in our infrastructure business for the balance of the year, but the reduced investment by some operators left us short of our third quarter sales and profitability targets. The improvement of the Americas market was more than offset by the significant slowdown in Europe and softness in Asia-Pacific, excluding China, where we continued to see strong development. In the third quarter, Europe made up almost half of the business in Nokia Networks Asia-Pacific, close to 40%, and the share of Americas has now grown to somewhat over 10%. The commercial Wideband CDMA volume deliveries started this last month. We are currently shipping to well over 20 customers, and expect to ship close to 4000 base stations by the end of the year. We are very happy about the technical readiness of our 3G-network equipment, and our delivery and product introduction timetables support the operators' the service launch schedule for second half of the year 2002. We have also seen some regulators take a very pragmatic approach reflecting the changed market conditions in the way licensing fees are set.

This was demonstrated by the French regulators decision earlier this week, which we naturally welcome as a positive step. As mentioned earlier, the actual revenue recognition for Wideband CDMA and 3G will begin in mid 2002. This will mean that until then the deliveries will appear as increased work-in-process inventory in Nokia Networks. During this year, we have seen the network policy deteriorating in many countries, driven by the operators' efforts to preserve cash and per capital expenditure. Due to the subscriber growth, the growth of usage, and the launch of GPRS services, we see an increased need for capacity investments in the current, second, and 2.5G networks. Since the second quarter last year, we have been delivering EDGE-capable UltraSite radio base stations. Next month, we will start transceiver deliveries, which will make the networks ready for EDGE software. EDGE is an integrated technology enhancement for GSM and GPRS networks. It offers a compelling and a cost efficient way for operators to significantly increase capacity and coverage for both voice and data in the existing spectra. EDGE technology can deliver data speech of up to 400 kilobits per second and triples the bandwidth efficiency compared with GSM capabilities. We expect commercial EDGE networks to be operational during the next year in the Americas and during 2003 in Europe. As a reference to earlier vendor financing commitments, I would like to give the following update. At the end of September, our total vendor financing commitments were 4.2 billion euro.

A total of 900 million euro was drawn on these commitments, out of which approximately 800 million euro was outstanding in our balance sheet as long-term low receivables, and another 100 million euro were off balance sheet as loan guarantees and other collateral on behalf of our customers. As described in our 20-F filing in detail, we have an outstanding payment of 835 million euro with a Turkish GSM operator Telsim. A portion of this exposure has been provided for in the past. We have now decided to increase the provision to 100% by accruing an incremental charge of 669 million euros. Dolphin Telecommunications, a TETRA operator in the UK, also declared insolvency. We had an outstanding balance of 45 million euros with Dolphin, and this receivable has not been provided for in full as well. Needless to say, in spite of these charges we will continue our legal proceedings with these customers vigorously in order to collect to the maximum amount possible. During the third quarter, we continued to add customers to our 3G reference book, by signing 8 3G-network agreements. As stated earlier, our target is to achieve 35% market share in 3G. We continue to record this as a very good and realistic medium-term target. As the visibility for the wireless infrastructure market remains hazy and the market is experiencing a short-term decline, it is important to understand the role of technology conversion and its impact on Nokia. Primarily, due to the convergence between TDMA and GSM technologies in the Americas, we expect Nokia's accessible market to decline much less than the wireless infrastructure market in general.

The substantial R&D efforts required in order to build credible future product roadmaps is essential in the networks business as well. Despite continuous seek for cost efficiency, we maintained and have been able to expand our mobility networks development plans. Some competitors have reverted to various alliances. Some have decided to exit certain technologies or certain geographical areas altogether. Being known for our strong track record has given us an excellent chance to capitalize on these incremental opportunities. Before the closing remarks, I would like to mention a few words about our balance sheet and cash flow. As Ulla mentioned, our cash flow from operations in the third quarter was 1.4 billion euros, providing the cumulative cash flow of 3.9 billion euros for the first nine months of the year. During the third quarter, our net debt-to-equity ratio, or gearing, improved from earlier -25% to -28%. This translates to a very strong net capitalization of 3.2 billion euros, consisting of 4.3 billion euro in cash and short-term investments and 1.1 billion euro in mostly short-term debt, and shareholder equity and minority interests of 11.7 billion euro.

In spite of that 3G inventory buildup mentioned earlier, we expect our operating cash flow to continue to be positive not only in the next quarter but long term as well. Nokia Mobile Phones' cash generation capability has continued in excess of its medium-term profits. And as the last item for this conference call, I'd like to discuss the Nokia guidance for the fourth quarter. In spite of the continuing difficult economic and industry conditions, we currently anticipate the fourth quarter sales to be sequentially up by approximately 20%. We expect Nokia Networks sales to be up sequentially, but to show a 20% decline in comparison to the very strong fourth quarter last year. Nokia Mobile Phones sales are expected to be up 25% sequentially and close to the levels of the fourth quarter last year. And Nokia Ventures Organization is expected to remain on the same level as in the third quarter, both in terms of revenue and profitability. The fourth quarter diluted pro forma EPS is predicted to range between 18 to 20 eurocents, which is an improvement from the previous quarter. Net operating cash flow is expected to continue strongly positive also in the last quarter of the year. In the fourth quarter, we also expect the common group expenses approximately to be 40 million euro, share of results of associated companies to be a charge of 10 million euro, financial income to be about 10 million euro, and minority interests are expected to remain on the same level as in the Q3, and finally the pro forma based tax rate is expected to be in the region of 30%.

Based on our current expectations with respect to product rollouts and deliveries for next year, we continue to believe revenue growth should pick up again, some time during 2002, a return to the level of 25% to 35%, as we have indicated earlier. Ladies and gentlemen in conclusion I'd like to emphasize a couple of things. While our industry has experienced a rapid deceleration in growth and deteriorating fundamentals, Nokia has really buckled down. We have emphasized efficiency and productivity in our drive to protect profitability and cash flow. We have been able to strengthen our market position and maintain our profitability even while our competitors have been selling products below component costs. We have remained absolutely focused on our core businesses where we can best leverage our greatest trends, and we have not sacrificed our future by continuing to invest heavily in R&D and brand. Even while some personnel redundancies have been inevitable, we have done our best to keep our core employees and have not had to resort to massive layoffs. Our market position is stronger than ever. We have a very healthy balance sheet and a strong cash flow. Now as we see industry conditions normalizing, we will become more aggressive in our pursuit for growth and market share. We plan to capitalize on our industry leading capabilities to deliver the most innovative and cost efficient network equipment, expanding customer base, and we plan to improve our market position in mobile phones by introducing a host of new existing products and product concepts, thereby continuing to raise the bar for the industry.

Thank you Jorma, and before the operator repeats the instructions for conference call, let me again remind you to limit yourselves to one question each. Please go ahead.

Ladies and gentlemen we will now begin the question and answer session. If you have a question and dial in on a North American phone number, you will need to press the '1' followed by the '4'. If you have dialed a European phone number, you will need to press the '*' followed by the '1' on your telephone. You will hear a 3-tone prompt to acknowledge your request. If you are using a speakerphone, please lift your handset before entering your request. One moment please for your first question. Your first question is from Ian Burgess of Credit Suisse First Boston. Please proceed.

Good afternoon Jorma. My question really concerns the outlook for the fourth quarter, and obviously, having seen a difficult market in Q2 and Q3, you're now looking to see exceptionally strong pickup in Q4. I just want to see what lies behind your confidence in that pickup, and also some of the economic factors that you're bearing in mind coming to the way you're building your business for the next 9 months or so?

I think there are a number of factors there. First of all there is the seasonality factor, which is obviously there, and up on that obviously, there is already an indication in the 3 weeks that we have seen in October to that effect that we will in fact see seasonality to play a role. Secondly, there will be a number of new products. We have introduced 2 or 3 very interesting new products. We see the demand not only on indication but a clear approval from the operators, from the marketplace, the distribution chain. So that will play a role. And finally, the industry is in a healthier shape with not the same kind of inventory buildup that many of our competitors had. Our inventory situation, we have been in a little different situation, but many of our competitors have had a difficult inventory situation, which was impacting it. Also you might have noticed that the third quarter market was already a lot bigger than the second quarter. So there are a number of indications, which are solid indications and not wishful thinking, and there are several of them. We look with a fair amount of positive expectation for the fourth quarter.

If you then look at, I think your latter part of the question was about what sort of economy you are looking into, if you look at our situation as a company, we took a lot of measures already starting summer of last year in terms of how can we be ready and flexible if the worse comes to worst, and we have implemented a number of measures so that it wasn't sort of in the middle of this year that we would have woken up to new realities, not at all. So the flexibility, the agility that our organization has demonstrated is born from the fact that we were kind of prepared for either a burst of growth or a slowdown. And I think you have seen that when you look at the balance sheet items and the way we have been able to control costs. So there are still a number of items in the area of cost, particularly in the infrastructure of Nokia Networks which will be really starting to bite properly only in the fourth quarter, and it's also partly because of that that we are expecting to see the margins of the infrastructure business, Nokia Networks, to improve in the fourth quarter from the level of the third quarter which seems very low to us, but wouldn't be so low to many of our competitors.

It seems from your comment on seasonality that the lack of handset subsidies in Europe this year doesn't concern you in the run up to the Christmas market.

Sorry, that's the lack of...

In prior Christmases, you had big handset subsidies, so it was an ideal gift for Christmas. This year in Europe could be a little bit more difficult, but it sounds like that doesn't worry you a great deal.

Well, you are not happy with same probably not the same kind of burst over seasonality factor in Europe as you have seen in some of the best Christmases, so we are not looking at that. Europe will be sluggish, but better than the third quarter. Yes, seasonality will come in, but it's not the same kind of rush as it sometimes was. But Asia-Pacific will be pretty healthy and also US improving towards the year-end as we have already seen for us in the last couple of months or 6 weeks or so.

That's very helpful. Thanks very much.

Your next question is from Richard Kramer of Arete. Please proceed.

Thanks very much, two very quick questions. First of all why do you need all the cash on your balance sheet, especially given that three-quarters of your business is negative networking capital? Would you consider share buyback or some other use of that cash? And second, why wouldn't, if packet data is a big driver, all of the Nokia phones be GPRS phones next year in much the same way that all of the phones today in the GSM world are dual-band phones?

First of all the cash, I think the questions about cash were here sort of 2 or 3 years ago really, after that we dominating any discussion, and I think we sort of stayed put with our strategy that we think it is prudent in the world we are living in to have a reasonably strong balance sheet, and I think we were proven right with what we have seen happening now. We are very pleased that we have this low earning asset in the balance sheet. It just gives a lot of comfort and less sleepless nights. Having said that, obviously we are not counting out a possibility of looking at a share buyback or something, which works to the same effect. We have an authorization from the AGM, so obviously we have looked into that, and we will be open to that. Your second question was relating to if packet data is important why aren't all our phones. Well, it is important but not to everything we segment. So we will be looking at very pragmatically on how we can make sure that the cost is optimized and that the different segments are getting the phones at the optimal price. So it's, if you want, some prudent planning going on here. I think that would be my answer.

And does that mean GPRS for the coming year will largely be something for premium subscribers that are only confined to the high end of the markets?

By the end of 2002, we will have half of our phones equipped with GPRS. So we will, when we are entering 2003, we will have the real image portion of our mobile phones in the GPRS.

Thanks.

Your next question is from Richard Walker of DKW. Please proceed.

Yeah, hi. Just so I make sure I understand in terms of the Telsim and Dolphin, is it the provisions that have, has the charge being taken to provisions in the quarter?

The quick answer is yes. Thank you first of all, and it's a growing concern. It's adding subscribers. It's doing business. But as you know, the Turkish economy is in a very difficult shape, and the situation has changed in the industry, so there is an increased possibility that company will have more financial problems than it has now, so we have been very prudent. We have prepared for the worst possibility to happen, and we have reserved for the possibility that our receivables could not be collected. We don't think that will happen, and we are obviously working with the customer to make sure that it won't happen, so it's simply a reserve. Secondly, on Dolphin, it's a slightly different situation in the handset receivers, and there is this minor amount, which we have reserved, so we are totally covered. We don't know the outcome of the negotiations. Probably we can collect an amount, but we cannot put our finger on a figure, so we were very prudent also in this respect.

Sorry, does that mean that you have released some other provisions from the balance sheet because the provisions only seem to have risen by 119 million, or I have missed something?

Why don't I have Olli-Pekka Kallasvuo to answer this.

Sorry I didn't touch that.

Olli-Pekka Kallasvuo, our CFO, will plunge into the balance sheet items now.

Well, in fact, the items Jorma was discussing here with Richard Walker, the wrong view as to what provision we have. We have taken a charge in through our P&L in the report in the earnings, and correspondingly, you don't see that much of provision in the balance sheet at all. So it's a charge, a write-off.

So you have written the full amount off to equity as opposed to taking a provision?

Yes.

Sorry, was that a yes. I have a bad line.

Okay. It was a yes.

Right, okay, so it's being written off to equity. Okay, thanks for clarifying that.

Your next question is from [_______________] Goldman Sachs. Please proceed.

Yes, hello, good afternoon. It's [_______________] here from Goldman Sachs. Jorma, I would just like to talk you a little bit about your new investment opportunities. First, with Nokia Ventures, when at this point are you looking for breakeven and are you still confident that these guys can return a cost of capital? And secondly, with regards to Club Nokia, we recently held a mobile conference in Rome at which one of the major operators, when asked about club Nokia, said look we have been asking Nokia for last 2 years. Are you guys a partner to us or are you a supplier? And he said so far we haven't heard an answer from Nokia. What is your answer to the operators? How should they view Club Nokia? Hello?

Yeah, I am here. Sorry. We are looking at during the next 2 years to get the breakeven, and the return of the capital will be there, that's fine, that's certainly the case particularly through the Internet communications business. Then on the Club Nokia, we have well over 30 operators with whom we have an arrangement to launch the service with 2 or 3 operators already launched and more to come in the next weeks. All these operators see us as their partners, and that has been the answer to a question, which you have indicated, so I think there has been a lot of question mark on how delayed the services, the different kind of data services, will be. I think we have brought in some services which are related to the phone, and we are very happy, and so are our customers that, actually, we have shown a little bit of the way on what could be done, and the operators, as is very clear, they will carry the ball, and they will do the billing, they will develop the services. We have a minor role through Club Nokia, which we are doing with good corporation with the operators, so the 30 plus operators we're working is more than a good start. As to the impact on our P&L, we will be more specific in the capital market statement. Thanks Shaun.

Terrific, could I just ask on that, should we view Club Nokia as primarily a support to the handset business or does Nokia view it as a separate business with its own strategy going forward?

Well, I think we have said earlier on it's not a portal, but it is a service that will enhance the value of the phone, and a specific list of services, not something, which is separate service or a business unit. Thanks [_______________].

Thank you Jorma.

Your next question is form Jan Dworksy of Cheuvreux. Please proceed.

Yes. Good afternoon. Could you comment on how you see the wireless infrastructure market developing next year, your addressable market and the total market?

What you have is obviously a very mixed picture because of the number of different types of technology transitions underway. You have the 2G, you have the 2.5G and 3G all impacting next year's revenue, and you have a transition from all conversions of TDMA into GSM. When you take the overall impact of all these factors into consideration, the 4 factors really, the market from our point of view will clearly increase. So our acceptable market will be higher than this year's market, and that comes both from 3G, as well as from the convergence of TDMA to GSM, GPRS, allocate from what we expect to be further investments in GPRS. Obviously, the 2G GSM will be slower because we are towards the end of the last cycle, and it's really capacity enhancing investments maybe. Obviously, the picture then has to be added with comments about timing, because when you look at first quarter, possibly somewhat extending to the second quarter, it continues to be challenging in terms of the revenue growth figures. Whereas on the second half of next year you will already see very healthy growth levels with all these factors simultaneously giving the positive on the revenue side.

Okay, thank you.

Your next question is from Mark McKechnie of Banc of America Securities. Please proceed.

We'll take the next caller.

Hello?

Mr. McKechnie, please go ahead with your question sir.

Yes, thank you. Can you hear me now? Hello? This is Mark.

Yeah, we can hear. We are waiting for you. Can we have the next question?

Please go ahead Mr. McKechnie your line is open.

Can you hear?

We can hear you.

Right, okay. I am going to ask again, on 3G-infrastructure business, you said you shipped 4000 base stations to date. What has to happen to recognize revenue on those base stations? And in the meantime, are you actually getting paid by the carriers for that?

Okay, so this is Olli-Pekka Kallasvuo again. So it's tough to clarify the number of 4000s, so it's not today. It's our estimate until the end of this year and then when it comes to revenue recognition, so we have repeatedly stated we will be able to recognize revenue when it comes to this type of deliveries that generates from mid next year onwards, and really this is normal revenue recognition accounting rules, i.e., this is new technology. So the maturity of the technology needs to be vested, i.e., the network needs to be technologically or technically capable of working as a network. New technology revenue recognition happens after the maturity of the technology is vested, and this is something that we have repeatedly we estimate will happen from mid-next year onwards. Okay?

Thank you.

Your next question is from Wojtek Uzdelewicz of Bear Stearns. Please proceed with your question.

Jorma, I wanted to clarify something on when you talk about these handsets units being up sequentially, I'm just curious, how do you get the, looking at Motorola, the 2 vendors that have reported so far it's you and Motorola, and looking at your revenues and Motorola commentary on the unit shipments, it does appear that they were down sequentially somewhere between 3% to 5%, and you guys represent well over half of the market, and...

...as I used to. So I don't think I would call 110 million a bullish forecast for the fourth quarter. That is really what I am saying.

Okay, thank you.

Next question please.

Your next question is from Jeffery Schlesinger of UBS Warburg. Please proceed.

Thank you, two questions. One is on the declining gross margin that's 100 basis points sequentially, is that primarily due to the mix shift, networks versus phones, and for the decline in the capacity absorption in the networks business or was there some deterioration in gross margin in NMP? And second question, Jorma, with respect to the new phones, you've mentioned these new concepts that you will be showing at the end of this year, when will those phones go into volume production, and will those support multimedia messaging and specifically image messaging? And when do you expect them to be material with respect to overall production? Thank you.

Okay, so if you look at the margin in the Nokia Networks, there were two factors. Obviously there was the volume factor and then there was a decline in the gross margin because there was an unfavorable a little bit of an exceptional weak product mix within Nokia Networks, and that then resulted in a lower margin. Also as I mentioned earlier, some of the cost cutting activities that we have, didn't really have a bite yet, but they will more so in the fourth quarter and obviously towards the first quarter of next year. Then the second question was about some of those products that I did refer to, new products to be introduced. There will be a few of them that we will introduce later this year and more to be introduced early part of next year. They will come into production, some of them in the first quarter, some of them in the second quarter. It is throughout the first half when we will really have a flurry of new products coming on stream from the factory and having a significant impact on the revenue, starting in Q1 and continuing all the way to Q2. Multimedia messaging and imaging will both be features, which are supported during the first half.

So they will have an impact already in the first half significantly in what we will be doing next year. I think that more or less covers your question.

Thank you.

Next question please.

Your next question is from Paul Sagawa of Sanford Bernstein. Please proceed with your question.

Yes, your infrastructure margins for Nokia Networks dropped below 10% this quarter. You mentioned cost reductions along with the volume increase in the fourth quarter ought to show significant improvement from that. Would you expect in the normally seasonally weaker first quarter or the beginning part of 2002, when you've talked about demand being weaker, that we could have some backsliding in margins relative to the fourth quarter, or do you think this is sort of, at least for the foreseeable future, the lowest you anticipate them going?

We are prepared for some decrease from the Q4 level in the Q1 2002 margin, but I think it is fair to say that we don't want to get used to the kind of margins that we saw in the third quarter of this year. We have no intention to get used to them, and I think we are very, very determined to see that that is an exception, that is a part of history.

And then a quick one, the component availability issue you mentioned in the back part as a result of September 11th, was that a very small impact on your unit shipments or was it material say in the 5% to 10% shipment range?

Not massive, it was smallish.

Thank you.

Next question please.

Your next question is from Ed Snyder of JP Morgan. Please proceed with your question.

Yeah, in terms of the two and a half weeks that you have already got in the current quarter that gives you some visibility on the seasonally strong fourth quarter, does this suggest that you are not seeing any decline in consumer confidence due to the events that have happened here in the US and more importantly the general economy?

Oh well, I mean, I think it is very clear that there is a decline in consumer confidence, otherwise the number, both based on seasonality factors, as well as new products, etc., the number for the fourth quarter total volume would be much higher than 110 million, and we need to look at it. Sure there is a slowdown in the marketplace, and there is uncertainty about consumer confidence, but I think we have enough evidence, strong evidence, number of different factors playing towards us, giving us comfort that we can put our finger on 110 million global volume.

So, if we see continuous slide in the consumer confidence number based on say the general economy weakening, we could expect that perhaps guidance or sales in 2002 may weaken further?

Yeah, if it happens, then we will have to think of what this means. I mean it is obviously very difficult to say. As it seems today, the best information we have, the indication we have given you is a valid one. If things deteriorate significantly then obviously from the forecasts of consumer demand and the general economy then obviously those would have to be adjusted. That goes without saying. But I think we have been also cautious. We have not put in any wishful thinking into this picture.

And on the base stations, the 4000 3G base station that will ship by the end of the year, clearly this is a new technology, and there is apparently some risk involved with the deployment. To date, have these operators deployed any portion of these networks, obviously in some of test systems for you, technical tests or marketing tests, that will build their confidence that when the networks are deployed that they will be commercially viable or are some of these networks the first deployments for these carriers, and then once they are deployed, they take a look at what the business model is for the 3G setup?

The testing is starting with each customer on the day the equipment will land on the premises. That's obviously the case. So the testing, which is a long process, will start this quarter, this month, and will take until the first half of next year, which then enables judgment to be made when the revenue recognition can stop. And in this testing, we are using test phones from different suppliers, etc. So it's the same process that has always been the case with any new introduction of technology be it analog, GSM, DDMA, CDMA, nothing dramatic, nothing very different, just a little more complicated specs than ever before, but that's how life is. Thank you.

Thank you.

Thank you, and we'll take two more questions.

Your next question is from Adnaan Ahmad of Merrill Lynch. Please proceed.

Yeah, hi guys. First of all, could you just take me through your vendor financing exposure to the Latin American marketplace? And then secondly, could you just give me some color on developments within China from both a handset perspective moving forward and what you believe the infrastructure marketplace in China is going to be doing moving forward from a volume and pricing perspective? Thanks.

Can you please repeat the second part? The Latin America was clear, but then the second part, I missed that. I am sorry.

Okay, with respect to the Chinese marketplace, could you just give us some color on what you are expecting over the next 12 months with respect to the infrastructure marketplace from a mobility perspective in China, both in terms of volumes, as well as pricing, in the marketplace, as well as with respect to the handset marketplace in China, and what are you seeing there in respect to pricing at this moment in time?

Okay, that's kind of a lot more than one question. Okay, the Latin American exposure in vendor financing is Telemar. I think we have disclosed that so you will get that from our announcements. On the China situation, China continues to be healthy in both infrastructure, as well as in the handsets. On the infrastructure side, there is continuing capacity increases on the GSM. There is continuing rollouts of GPRS, which is early phase, later than the European phase, a very active phase, the GPRS, and we are pleased with the volume. Our China business is contributing to the growth of the infrastructure business, as I said earlier in my presentation. So with pricing, it's giving a contribution to us, and we are not seeing any change in that. The question is really how can you operate effectively in China, and I think we have a good modus operandi in the country. In the handsets, we are very pleased because we see that our market share has continued to evolve well, particularly in the last couple of months, and the brand recognition figures are developing very favorably. So we have been able to handle very well the changing situation of the competitive space.

So one has to be very pleased with our business recently in the handsets. Going forward, the market continues to be healthy, and there will be growth also in the next 9 to 12 months in a fashion.

Thank you.

Then I think we're going to have the last question please.

Your last question is from Angela Dean of Morgan Stanley. Please proceed.

The final is just on your R&D spend. If I look at what happened sequentially, there was about a 15% cut in absolute terms for your R&D in the third quarter versus the second. What should we assume the trend is going forward for that? Will we continue to see absolute declines if we look through the next quarter and on into next year or will that stabilize or start growing again?

Thanks Angela for the question. This was a little bit sort of an off the mark quarter because there has been a very clear trend, and right now, there are some exceptional factors. It is really coming from the Nokia Networks. First of all, the fact that we have outsourced some of the non-core research and development from the Nokia Networks, and we have done some operational cost cutting, traveling, things like that, really looking at how can we streamline on what we have done, then also in the NVO, Nokia Ventures. And I just should underline that the decline is not related in any way to the capitalization of R&D issues. So we have followed exactly the same earlier principles, and there is no change in the way we have capitalized. Now going forward, you can expect that we will not compromise on our R&D. We do not see any pressure in doing that other than making sure we are very effective and our productivity is at a good level. So we will continue our good spending levels and you will see a fourth quarter to be at a high level, somewhat higher than the second quarter overall for Nokia. And that sort of leaves the third quarter into a little bit off the track for some of these factors.

And I think you can expect a slight increase on a quarterly basis going forward, as the business evolves and as we expect to continue to invest for the future.

So that's sequentially quarter-to-quarter it should increase, are saying?

Well, making a trend. I mean there can be variations, but I'm not just to talk about the trends.

Okay. Thanks very much.

Does that answer your question?

Thanks.

Thank you Jorma, and thank you ladies and gentlemen. Before we finish, I would like to remind you about our Capital Market Day in New York on November 26th and 27th. The invitations including the web registration details were actually sent to you on Friday last week, and the deadline for the registration is October 26th, which is actually Friday next week, so please hurry up. If you have not by any chance received the invitation as of yet, please send your contact details to investor.relations@nokia.com, as soon as possible. So this concludes our conference call today. I would like to remind you that during the conference call 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 have been identified in more detail in Nokia 20-F, also in our press release issued today. Thank you very much and have a nice day.

Ladies and gentlemen that does conclude your conference call for today. We thank you for participating and ask that you please disconnect your lines.