諾基亞 (NOK) 2002 Q2 法說會逐字稿

Thank you for participating in Nokia's 2002 second-quarter earnings conference call.

My name is Anissa, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to Nokia's 2002 second-quarter earnings conference call with our host, miss Ulla James, Vice President Investor Relations.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad, and questions will be taken in the order they are received.

If you would like to with withdraw your question, press the pound key.

If are you located in the U.K., please press star to withdraw your question, followed by the number 2.

As a reminder, if you're on a speaker phone, please pick up your handset before presenting your question.

I would now like to turn the call over to our host, Miss Ulla James.

Miss James, you may again.

Thank you.

Ladies and gentlemen, welcome to Nokia's second 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 call today we'll be making forward-looking statements regarding the future business and financial performance of Nokia and the mobile communications industry.

The 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 17 in Nokia's most recent form 20-F for the year 2001, and also in our press release issued today.

Our aim is to finish this call in approximately one hour.

For your convenience, we are running a supporting slide presentation of the conference call on Nokia.com.

A replay together with the slides will be available on the web, two hours after the call ends today.

A telephone replay number will also be available until Friday night.

During the second quarter 2002, Nokia net sales declined by 6% to 6.9 billion Euro.

The pro forma operating profit increased by 11% to 1.3 billion Euro, resulting in a pro forma operating margin of 18.2%.

Diluted pro forma earnings per share increased by 12% to 19 Euro cent.

The share of Europe and Africa regions at 50% or less sales. remained the same as a year ago.

The share of Asia-Pacific regions declined by 4 percentage points to 26%, and the America's region increased its share by 4 percentage points to 24 from a year ago.

Sales in Nokia mobile phones grew by 1% to 5.4 billion Euro, with a pro forma operating margin of 21.7%.

Nokia network sales declined by 22%, to 1.5 billion Euro, with a pro forma operating margin of 11.6%.

Sales in Nokia ventures organization decreased by 20%, to 106 million Euro, generating a pro forma operating loss of 63 million.

The group common expenses consisting of Nokia head office and research center, totaled to 19 million Euro.

As a result of continuing good profitability and excellent working capital management, Nokia generated a positive net operating cash flow of 1.4 billion Euro during the second quarter 2002.

Due to the dividend payment of 1.3 billion Euro in the second quarter, the net debt to equity ratio, i.e. [inaudible], was minus 42%, in comparison to minus 48% at quarter before.

In the end of June, our net cash position was 5.4 billion Euro.

I would also like to point out that at this point in time that we have a lot of new products coming up and what we have started to do is provide you with a catalog of Nokia products, so in the end of this live presentation, you'll have a four-page summary with the most recent updates to our product range.

And at this point in time, I would like to pass this on to Jorma.

So Jorma, please go ahead.

Ladies and gentlemen, in the second quarter, the industry wireless handset industry experienced positive volume growth for the first time in a year, so there's clearly life again in this market.

While encouraged by the positive development, I still do not see this as an end of the difficulties in the marketplace, but perhaps it is the very beginning of the end of the downturn.

Much of the so-called 3G service potential is becoming reality with the commercial deployment of new technologies during the second half of this year.

GPRS, multi-media messaging service, java and XHT are now enhanced further by color, will be the key building blocks of the new services, and will be delivered in significant volumes in a number of different time sets.

Additionally, cooperation between the industry players has intensified.

In order to facilitate a faster adoption of mobile services and the market growth for the entire mobile industry.

We have actively promoted the cooperation as an orchestrator of the open mobile architecture initiative, we started November last year.

As a natural evolution, the open mobile alliance was formed in June by total of 183 companies, representing the world's leading mobile operators, device and network suppliers, IT companies and content providers.

The open mobile alliance will drive the standup specifications and the architectural framework for more [inaudible] and services based on open standards to ensure a multi-vendor environment.

Healthy competition, and service level inter-operability, even in a multi-standard environment.

I'd like to spend a few minutes discussing some key points of each business group, beginning with Nokia mobile phones.

As announced in the mid-quarter update, Nokia mobile phones experienced a shift in its product mix, which led to a relatively high share of low end models, which resulted in lower than average selling price.

That being said, during the first six months of 2002 we have announced altogether 20 new mobile phone models.

As these new, more value added handsets reach volume deliveries, we expect to start seeing an increase in the ASP during the second half of the year.

As earlier indicated, we started the ship of Nokia 7615 at the end of June, to various markets in Europe and Asia-Pacific, and we are now in a volume delivery phase.

The initial feedback from both the operator and end-user customers has been extremely positive.

The introduction of new products will continue through the balance of the year, and our plan is to start shipping record number of new phones during the year 2002, altogether more than 30.

The introductions will positively impact our product mix and increase the share of new product revenue.

By the year end, we expect to be shipping at least 11 phones supporting Java, six with MMS, three supporting XHTML, 13 with GPRS, and 10 with color screens.

During the second quarter, we saw further focus in mobile software licensing and announced series 60 licensing agreements with both Siemens and Matsushita.

We also agreed to closely cooperate with Siemens in addressing their requirements of the developer community and to work together in developing application markets.

Now, a few words about the global handset market development.

Our preliminary market research indicates that second-quarter global mobile phone sales through market volume to be in the region of 93 million units.

This is approximately 4% higher, both sequentially and year on year, and as mentioned represents a first positive growth quarter for the industry in a year.

Our calculations also indicate that the industry passed, the one billion subscriber landmark during the quarter.

The strongest year on year market growth was seen in the Americas, Europe also experienced encouraging signs of recovery with a positive growth.

The Asia-Pacific market declined slightly, a lot due to slow replacement sales in Japan as well as a decline in Korea.

Channel inventory development has maintained -- has remained stable during the quarter.

And we said -- estimate the industry channel inventory to be on a normal, healthy one-month level.

For the full year we estimate the sell through market to be at about 400 million units worldwide.

All the regions are estimated to show growth, at approximately 5%, led by the Americas and followed by Asia-Pacific and Europe.

The cellular market growth will depend on the development of the replacement markets, stimulated by new service and product introductions, together with a continued economic recovery in the key market, a subscriber growth momentum in developing markets.

During the second quarter, Nokia experienced a year on year volume growth of 12%, with its handset volume at about 36 million.

Once again, our volume growth clearly outpaced the overall market growth of 4%.

Our sales volumes grew in all geographical regions, resulting in clear, year on year market share gains, particularly in the Asia-Pacific region.

Our market position continued to strengthen in GSM and even more so in GDMA.

We estimate our global mobile phone market share in the second quarter to be up both year on year and sequentially, to over 38%.

We also expect our full year 2002 market share to show an increase on last year's 37%.

Which encourages our confidence in reaching our targeted 40% long-term market share growth rate.

We believe that the replacement market will account for over 50% of the global handset market in 2002.

Tracking and understanding the consumer behavior, driving the replacement cycle will therefore continue to be vitally important.

Translating this knowledge into compelling products is a competitive advantage that we will continue to try to sustain.

And now Nokia Networks.

Based on the first half development, we expect the overall wireless infrastructure market to decline by approximately 10% in 2002.

However, our [inaudible] market including GSM and WCDMA is expected to experience somewhat milder decline.

The second half of the year is expected to be stronger than the third -- stronger than the first one.

Mainly due to the announcement of the WCDMA revenue.

The commencement of the WCDMA revenue recognition.

This initial phase of the revenue recognition will start by single WCDMA networks followed later with implementation of roaming between GSM and WCDMA networks in the dual mode environment.

The WCDMA revenue is expected to represent slightly over 25% of Nokia network's sales in the second half of the year.

Mobile industry is currently at an early phase of mobile data service reduction.

Currently, 15 to 20% of revenue in advanced markets is derived from SMS and by extending users to entertainment, downloading and office applications, operators clearly believe that the share of data revenue is destined to grow.

During the second quarter, we reinforced our position in the leading -- as the leading provider of the end-to-end internet solutions by closing several major MMX server deals with multiple operators, including TIM, Telefonica Moviles Group, MMO 2, across its European markets, and M1 in Singapore.

Operators recognize the strategic importance of multi-media messaging service, as building blocks in the network architecture, evolving to 3G.

And clearly, appreciate our ability to offer an optimum end-to-end solution in the area.

We expect to see [inaudible] of major operators in Europe and Asia, deploying MMS services by late September.

Currently, the operators are getting ready by working on inter-operability and roaming agreements.

The multi-media messaging service launch is gathering positive momentum and the initial pricing announcement -- announced by the operators indicates that a reasonable level of approximately 50 Euro cents per message will be applied.

We also expect to see increased marketing activities around MMS, by both Nokia and the operators during the second half of the year.

As the users change their communication behavior and adopt the new technology to communicate, operators will want to find new revenue streams in addition to person to person messaging.

Many of these services, such as corporate Internet access, MMS based entertainment, and realtime services in particular, will demand greater capacity and quality of service. 3G will eventually provide higher bid rates and support different quality of service categories.

The service categories are divided into subgroups based on the maximum acceptable time delay, ranging from realtime conversational mode to streaming, interactive and background modes.

The various service classes will enable commercial differentiation and segmentation and give operators the opportunity to take advantage [inaudible].

The deployment of Nokia's WCDMA networks continued on schedule, based on our customer [inaudible] strategies.

In WCDMA network infrastructure we are delivering 3G equipment in 23 countries, to 42 operators, of which 26 are in full commercial volume delivery.

Our market position in 3G has remained strong.

During the quarter, we were selected as a significant 3G radio network supplier to MMO2 in the U.K., Germany and Ireland.

We also signed contracts with Hutchison 3G Austria, for the supply of their 3G core network, as well as with Radiolinja Finland for both 2 and 3G radio networks.

We believe we are at the forefront in terms of our timing of 3G infrastructure and handset development.

We believe the first Nokia delivered WCDMA network will be taken for pre-commercial operation in September.

Supported by the introductions of our first -- [ NOT UNDERSTANDABLE ] WCDMA/GSM phone, on September 26th.

Initial terminals will be delivered to an operator-controlled, friendly and user environment.

We believe that a period of inter-operability testing and network optimization of live networks will need to precede mass volume rollout of WCDMA [inaudible].

We anticipate that by the early part of 2003, the 3G [inaudible] system will be mature enough for full-scale WCDMA terminal shipments.

As a natural progression of an implementation plan for the Nokia all I.P. strategy, we announced a strategic cooperation with [inaudible] networks, and the purchase of a 10% minority stake in the company.

This cooperation will broaden our intelligent edge product portfolio and enable greater access to the leading edge carriers and service providers.

Therefore, we continue to believe we are well on track to achieve our 35% market share target.

In the overall mobile infrastructure market.

And now a few words about customer financing.

At the end of the second quarter, our outstanding on-balance, sheet long-term customer loans totaled 1,555 million Euros and the off-balance sheet, customer guarantees were 121 million Euros.

In addition, we had undrawn financing commitments totaling 2.5 billion Euros at the end of June.

Of the total committed and outstanding, 3.6 billion Euros related to 3G networks.

As we explained in the press release today, the discussions of MobilCom, 752 Euros [inaudible] have refinancing on going.

We expect by the time of a final agreement is being reached, to be in a position to reassess the value of the receivables and and the possible alternative securities.

We do expect this to lead into a material charge in the third quarter.

This charge will be excluded from the pro forma earnings.

And before closing, I'd like to mention a few words about our balance sheet and cash flow.

We continue to release cash from our working capital in spite of the WCDMA infrastructure work in progress in [inaudible], which reads as 686 million Euros in the end of June.

Our cash flow from operations was 1.4 billion Euros in the second quarter.

Our net debt to equity ratio or [inaudible] was minus 42%, in the end of June.

Which was slightly worse than the 48% in the end of first-quarter due to the dividend payment.

As of the end of June, our net cash position was 5.4 billion Euros.

And as the last item for this conference call, I'd like to discuss the Nokia guidance for the third quarter.

And for the full year 2002.

For the third quarter, we currently expect that the Nokia sales are going to be between 7.2 and 7.6 billion Euros, representing a growth of 2 to 8% year over year.

And our diluted pro forma EPS to range between 15 to 17 Euro cents.

In the third quarter, we also expect as our common group expenses, going to be -- approximately 40 million Euros.

Share of results of associate companies to be a charge of 5 million Euros, and financial income to be 30 million Euros.

With minority interest expected to remain at the same level as in Q2 and the pro forma based tax rate expected to be in the region of 30%.

Based on our current outlook, we are cautiously optimistic and expect the market conditions to improve during the second half of 2002.

As a result, Nokia is expected to show sales growth of 3 to 10% for the second half of 2002.

The profitability outlook remains solid.

Pro forma operating margins for Nokia mobile phones are expected to remain around 20%.

With a fourth quarter profitability being stronger than the third.

Nokia Networks pro forma operating margins are expected to remain about 10% for the balance of the year.

For Nokia Ventures organization, we project a pro forma operating loss of 150 million Euros for the year 2002.

For the full year, 2002, diluted pro forma EPS guidance we feel it appropriate to provide a range of 79 to 84 Euro cents.

Our net operating cash flow was 2.3 billion Euros during the first half of the year, and thanks to the continuing strong profitable position of operation efficiency we expect the robust cash flow to continue.

Ladies and gentlemen, I'd like to conclude by saying that Nokia definitely is in the leading position to take advantage of the coming days of revolution ahead of us.

First of all, we are financially stronger than we were ever before.

Secondly, our product pipeline covers customer segments more extensive than ever before.

Thirdly, our new [inaudible] organization will enable us to be more sensitive and respond more quickly to various product category needs.

Fourthly and finally, the great brand supported by the highly flexible manufacturing logistics network enable us to deliver cost efficiency in high volumes.

Thank you, Jorma.

And before the operator repeats the instructions for the conference call, let me just remind you to limit yourselves to one question each.

All of this conference call has been made publicly available, we have also reserved the opportunity to ask questions to the financial community only.

So please go ahead.

Thank you Miss James.

I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad at this time.

If your question has already been asked and answered, you may withdraw your question by pressing the pound key.

If you are located in the UK, please press star then the number 2 to withdraw.

As a reminder, if you are on a speaker phone, please pick up your handset before presenting your question.

We will pause for just a moment to compile the Q & A roster.

Your first question comes from Shawn Faumon of CSFB.

Hello, good afternoon Jorma.

I wanted to ask you a question on the issue of 3G revenue recognition.

Are there any significant risks do you believe in the second half that you might not recognize as much revenue as we forecast?

Or as you forecast?

There have been some indications from operators that the testing of networks is not gone as smoothly as they expected, and some hints of delays in that regard.

Would that have an impact on your ability to recognize your 3G revenue?

Yeah.

Shawn.

I think one can obviously say that when we're talking about technology risks, of this type, when you have new technology, you know, obviously there's always a possibility that either we are a little ahead, or we are on stock, or we are a little delayed.

Obviously there's a question mark on how that is.

What we have done is that we have two milestones which we have identified, and which will then determine on how we will recognize revenue.

First, we will look at how we are achieving testing a single mode capability, and then secondly the dual mode capability, and so we sort of go forward testwise.

A stepwise with those tests.

I did indicate to you the 25% of our revenue being -- being of the third generation equipment.

I do not foresee today significant worry to be there that is -- that the obvious risks would materialize.

The risks we all know that could be there.

So we feel confident that we can start recognizing revenue based on the experience on the milestones and how we are going ahead.

Just in that regard, is there any possibility that MobilCom come and your issues about equipment deliveries there could upset that figure you've just given?

Well, we have been very conservative in accounting for that, Shawn.

So that will not be issue on whatever happens there.

Thank you.

So that will not put in jeopardy the timetable we have.

So we have been on that score as well as otherwise conservative, in judging on what it might be.

Thank you very much.

We'll go to the next question please.

Your next question comes from Angela Dean from Morgan Stanley.

Please proceed with your question Maam.

Thanks.

If we just look at your second quarter versus the first, we can see there was a big improvement in your gross margin, but an increase in both R&D and SG&A as a percentage of sales.

Can you say what the drivers were behind those changes and what you think the trends will be both for the rest of the year, maybe on into next year too?

Yeah.

You know, really, you had something that we did expect to happen, and during the -- as an evolution between the quarters, in the first and -- first and second quarter.

It really is the mobile -- mobile phones R&D, which is up, particularly in the area of mobile software, where we have [inaudible] quite significantly and that meant that the R&D was up and also marketing was up somewhat, which means that the SG&A was up.

And that's really what you're going to see also going towards the second half.

And which also does explain a lot on -- a lot of the dynamics in the second half.

You know, similar trends will continue.

We will have -- we will have healthy gross margin, but because the volume falls -- coming to the market and the -- seasonality means that the revenue in the fourth quarter is significantly higher than in the third quarter, as it was last year, where there was a 25% difference between the two quarters, it might be even stronger the seasonality this year.

And we still have significant costs, particularly in the third quarter, sort of continuing on the second line in line with the second quarter.

And reaching into the third quarter.

Both from marketing as well as R&D, as well as ramp down and ramp ups, when so many new products are coming into the picture and many going out.

So that sort of -- that same analogy even stronger in terms of cost carries to the third and fourth quarter, and with the sales dynamics of the fourth quarter, then -- sort of putting the margin picture into how we have communicated to you.

And just on the gross margin, the improvement there, was that largely volume driven or in the second quarter versus the first, or were there other --

Both, volume driven -- not particularly volume driven because --.

Because it was more medium and low end, a little bit than it was before.

And that will change a bit going towards the year end, where we have more classic and high-end weight in the product mix.

So it was more volume driven, the gross margin benefit.

Than it would have been on the price.

Okay.

Thanks.

Go for the next question.

Your next question comes Voytek Istolevich with Bear Stearns.

Please proceed with your question sir.

Thank you.

One other -- you mentioned in the press release that Americas were a little bit soft sequentially, at the same time one of your competitors had a very strong TDMA sale sequentially and CDMA.

How do you see -- in items of your focus on the North America over the next six months, if you could give us some sense what's your strategy, how are going to go more aggressively?

Or are you seeing competitive landscape changing, dramatically?

Just a general, kind of, efforts in that space.

And then third, just quickly, if just from pure clarification, on your 3G, you already have some revenues that you booked so far.

How much of that do you expect to reverse in the second half of the year, versus, sort of the organic growth from 3G?

I'll start with the second one, then go to the first after that.

We have not recognized a penny, not a penny of the 3G revenues.

So that will start towards the -- in the third quarter and then accelerate to the fourth quarter.

So no reversals because nothing has been recognized -- and we have given you the number that's in the inventory.

The -- then on the first one, I think there is -- we have in the North America -- a difficult situation where our product life cycles are slightly different and our product mix is different from some of our competitors.

So we have been -- so far in the first half very, very medium and low-end oriented, and that will continue in the third quarter, and change when we move September -- to September, October, towards the fourth quarter, where we will have a significant set of new high-end and classical segments phones, which will change the picture in the marketing programs and our visibility and how we have.

So we are in a transition which will take until September, October.

And we'll change our mix as well in the U.S. and that will -- that will apply both to TDMA as well as to the TDMA where we also have new products that will impact where we will stand visibly our competition.

So I'll say that the third quarter is plain sailing, nothing really dramatic in the U.S. happening.

But then [inaudible] starting in September, going towards the fourth quarter.

I think that will be -- the best I can do here.

Thank you.

Thank you and we'll go for the next question.

Operator: Your next question comes from Jeffrey Schlesinger with UBS Warburg.

Please proceed with your question sir.

Thank you.

Jorma, there's two elements of risks associated with your product transition as we see it.

One is your ability to execute and ship these new products, and the second being the operators willingness to promote and sell and distribute these products, in -- certainly starting in the third quarter, which is seasonally weak -- at least in the first part of the quarter.

What givers you confidence that the operator part of the equation is on track, they're ready to promote aggressively these products starting in the third quarter?

And does your third quarter guidance, the range you've given, does that somewhat reflect that perhaps [inaudible] a bit to the fourth quarter?

Thank you.

Sorry, I didn't get the last sentence.

You know, -- I think.

Does the guidance for the third quarter, the 15 to 17 cents, does that somewhat reflect the cushion that perhaps the transition can slip a bit to the fourth quarter versus the third in terms of the operator's ability to ramp these new products?

Thank you.

I mean, you mentioned too our ability to execute.

And then the operator actions.

And the first one is the ability to execute.

I mean, being around for 12, 13 years in the business, so I -- I sort of kicked the tires on a weekly basis in making sure that we have the ability to execute.

So that you should rest assured will happen.

And we are in good shape.

I think the software ability that we have on the new phones will be particular strong point and you see it on the 7660 when you -- when you use one.

And you will have similar type of experiences, which is a key part of how you execute because so much of the quality complexity -- quality and complexity issues, really come from software.

So, Jeff, I really feel good about your -- where we stand in terms of the first risk.

And your second point about the operator, you know, are we seeing the operators missing?

I think that you certainly have a point.

If the operators were eagerly promoting [inaudible] 500 million sold this year.

If the promotion was the similar one than it was in year 2000.

So surely, that very much factored into all of this.

And that's very much an issue.

And relating to both the replacement sales, as well as the entry phones.

And I think the operator's will have slightly different -- you know, since there's a culture different, from U.S. to Europe, and Asia has its own ways of doing.

I think the seasonality as I indicated earlier, in the current financial environment and the way the operators are looking at their cash flow and how much they invest, the seasonality might just well be even more pronounced than it was earlier.

And that was really the point I was referring to earlier, and I see that being a reasonable possibility.

What then comes to our 15 to 17 cents guidance is -- which might sound cautious, it has obviously this seasonality element is a strong one there.

Secondly, there is the cost element as I referred to earlier, on how we are in very much in the investment phase and also getting sort of ready in the product cycle.

And that requires fixed costs, when you are transitioning so many products with volumes of the kind we are -- when we ship in the second quarter, 36 million and will be sort of significantly more in the fourth quarter.

And third quarter there -- there about somewhere inbetween.

So you know, you might say slippage, but I call it seasonality.

And the way our cycle works.

So I think that's where is comes from.

And obviously, being cautious about what the world is, that we -- I think have learned a bit, during the last 18 months.

Thank you.

And we'll go for the next question.

Your next question comes from Richard Kramer with Arrese.

Please proceed with your question sir.

Thanks very much.

In a month ago, you mentioned a balance sheet restructuring, which would perhaps resolve or address the issue of the cash the you got and cover some of the vendor financing contingencies you mentioned.

Can you give us an update on how that developed and also could you shed a little bit more light on your previous guidance of mid-teens margins in the Nokia Networks business, which has now been scaled back to something approximating 10%, and some of the reasons around that?

Thanks.

Yeah.

I think the -- starting with the second one, then I'll go back to the balance sheet Richard.

So on the guidance being brought down since April, from 15 to 10%, it's -- I think it's very clear for all of us that when have you the [inaudible] transition and the fixed costs, that's major portion, so the margin is very sensitive to volumes.

And what we really have seen is that the 2G market has declined somewhat from what we forecasted it to be in April, when we -- when we gave you that 15% guidance.

The pricing environment has remained stable and is not a reason, so there is definitely under pricing.

We feel good about the 10% guidance, towards the year end, you know obviously the 2G we expect to roll at this level that is somewhat lower than expected, and we expect the 3G revenue to be recognized, with the kind of comments that I made earlier.

To an earlier question.

Then on the balance sheet, I don't think, Richard, we have anything to add to what we said in June.

In the investor update.

Because you obviously have different factors there, and the current environment is such that it seems everybody, investors including, not only credit rating agencies, everybody appreciates a strong balance sheet -- everybody appreciates a strong balance sheet.

And I think we just want to make sure that we have an exceptional balance sheet because -- because, you know, the times, even if they're slowly improve, I think will continue to be pretty challenging.

We do have a healthy balance sheet, a healthy cash position.

As we indicated to you earlier, in June, the buybacks are in the toolbox but we have not taken any position.

And it's in our toolbox with the same kind of ways of thinking that it was a month ago.

There's no change in that.

Thank you.

We'll go for the next question.

Your next question comes from Sophia Gachum with UBS Warburg.

Plead proceed with your question maam.

Thank you.

Jorma, the 3Q guidance of 15 to 17 cents, if we could just go back to this for a second, please.

If you hit the low end of 15 cents, that implies round about an 18 to 19% margin, operating margin in handsets.

And I'm wondering if you could give us a little bit more clarity on this issue?

Is it an investment issue, i.e., more marketing expenditure, ramping up the new product cycle, higher component costs maybe leading to lower gross margin?

Or is it more of a volume mix issue, where we don't get the new products on mass until the fourth quarter and we see two consecutive quarters of old products mix and maybe ASPs collapsing, leading to an 18% margin?

And then, related to that, if you hit 15 cents, we have a 26 cent fourth quarter, which implies a 22% operating margin in handsets, which you've done before many times, but we commend you for that, but is it going to be harder to do when you're ramping up a very different and exciting new product cycle, and maybe there might be higher component costs and also more marketing expenditure associated with that.

Yeah.

There are a number of issues here which -- most of which I have kind of at least touched upon, many of them elaborated.

But if you -- let's start from where have -- we have had such a wonderfully strong margin, an amazingly stable margin, compared to most industries, compared to any of our competitors in this industry, and, you know, you can take whatever.

What I mean by that stability is that we have -- we have I call it a stable, strong amazing margin, which has been between 18 and 23%.

In the last three or four years.

So if you look at that quarterly figures, that's what it's been.

And then another way of looking at it is to look at an -- I feel can feel comfortable with that range.

I suppose you do your modeling it might be a little wild stand, but for me, you know, this is wonderful.

If you look at another example, last year we had 19% in the third quarter, and about 22% in the fourth your.

And with a situation where we had 25% higher revenue in the fourth quarter than we had on the third And as I said earlier, it could be -- could be that it's even more pronounced, the revenue, in terms of the revenue difference between the two quarters because of not only seasonality but also might be because of our product as well as the operators pushing more in this funny environment towards the fourth quarter.

So that is kind of I hope gives you a picture on what can happen on the revenue side.

Then there's the cost issue, where really I would say that might be even that this time it's more of a cost issue than -- than looking at the kick from the revenues side.

Because we are seeing an increasing R&D and SG&A picture, which will then obviously have more pronounced effect on the third quarter, where the -- where the naturally the revenue is lower for the above reasons.

So -- and you don't have a big sequential growth from the second quarter to the third quarter, because of the seasonality.

So you get -- so this cost does impact.

So remind -- if I remind you again on what other costs is related, it's the increase in the software costs, in the mobile software generally, it's the increasing ramp up and and ramp down costs, leading towards the fourth quarter, and it's increasing marketing costs, which we take always aggressively up front in our accounting, so they -- we already start in the third quarter, whereas the much of the revenue obviously comes in the fourth quarter.

So these are some of the factors and I think it's -- if you might say that, okay, this is three-quarters, three months away.

How can he be so confident?

My answer is, you know, being -- having done it for 12, 13 years, you know, you kind of get into the pattern.

And this has happened in every single year throughout the 90s, in a similar way, and our own product plan, product cycles, just take a particular shape this year and then fit into this picture.

But if I could just follow up, very good answer -- thank you -- given your experience, which we appreciate, how would you see a worst case scenario ASP trend into the third quarter, and then the fourth quarter?

Because on the number that we just talked about, the 15 cents and the 26 cents, that implies probably flat ASPs into 3Q from where we are today, and then ASPs going up sharply to first quarter levels in the fourth quarter.

Is that worst case scenario, or --?

I wouldn't speculate.

I think we're very comfortable with our guidance.

I think that's all I would really like to comment.

Thank you.

And we'll move on to the next question please.

Your next question comes from Tim Luke with Lehman Brothers.

Please proceed with your question sir.

Thank you.

The clarification, this is if you look forward for the September quarter, should we expect the ASPs on the phones to be flat or to move slightly lower, and is there -- if you could also give some sense on the third quarter for the units?

What level of increase one might expect?

Yeah.

No, I mean, I think the ASPs really the comment is that we will get back on our slight upward trend in ASPs towards the year end.

And when you -- and I think that's really something which I think is quite clear from how the product lineup is going now, and I wouldn't like to speculate any further than that.

And on the units seasonally we should see a flatish summer quarter?

Well, the -- the -- I think we should have been seeing lower, we will be up for both markets as well as for Nokia, and so -- so it's -- it will be a reasonable quarter, but it will not represent such a dramatic growth than what we might have seen on some previous years.

Thank you.

Thank you.

And we'll have the next question, please.

Operator: Your next question comes from Paul Sagala with Sanford Bernstein.

Please proceed with your question sir.

Yes, hi.

It's actually Matthew Nagle on behalf of Paul Sagala.

Just taking a look at your 3G work in process inventory bookings, looks like it increased about 200 million Euro this quarter, which is exactly what you said it would do at the end of last quarter.

Just a little curious, given that you expect to recognize the 3G inventory as revenue in the second half of the year, why wouldn't we get a corresponding boost to margins given that a lot of the R&D costs have already been expensed as incurred?

Yeah.

A lot of the R&D costs have been expensed, some of it has been -- has been -- has been capitalized as we have given, you know, exact information.

In line with IAS accounting as we are required, so that will then -- obviously starting with the deliveries, those capitalization will be then charged through the P&L.

So yes, a lot of the R&D has been expensed, but there's some which -- a part of it which has been capitalized -- a part of which has been capitalized and will be then taken through the P&L, while the deliveries will be underway.

So I think that -- it's a pretty logical picture.

Which we've been able to -- to draw on that then results in the revenue and margin picture that we have painted to you.

Won't the 3G equipment have higher margin than the 2G equipment?

The gross margins in the first year, in the 3G, will be lower than the 2G equipment, and with time they will then converge.

Thank you.

We'll move on to the next question, please.

Your next question comes from Richard Winthrop with Numera.

Please proceed with your question sir.

Hi, good afternoon.

More of a long-term question really.

Given those 10% long-term growth targets and I was wondering to what degree are those targets contingent on revitalization of your CDMA handset portfolio, and a possible breakthrough into Japan?

The -- I think the way the world is evolving during the last month, I thought about it obviously somewhat, I think I've given out the guidance that only given good confidence that the 10% target, and to do better than that is -- was exactly the right one.

Considering the CDMA -- the role of CDMA in Japan, it has a certain role to play.

The CDMA has a certain role to play and we feel very good about the products we have in pipeline, coming already in the next three months, on stream.

In -- about Japan, we have -- we have initial contracts with Japanese operators for our 3G phones, and all with our goal was to break into Japan in the face of the 3G launch, and then what we have done so far has been just a preparation on getting to know the market.

And the players involved.

So yes, some role -- that we need to see there, but it's not make or break.

But yes, we have certainly factored in a role for both of them, more so through CDMA than through Japan.

Thank you very much.

And we'll take the next question, please.

Your next question comes from Pare Lindberg with Dresner.

Please proceed with your question sir.

Yes, thank you.

If you had recognized your 3G base station shipments in the first six months of this year, I mean, if we would have treated your WCDMA equipment as GSM, what would that have entailed for your sales level?

And could you also perhaps, that's my second question, give more granularity on how you would split your sales guidance second half in your core business areas, mobile phones and handsets?

How would the 3 to 10% sales growth range approximately be, within networks and mobile phones?

Thank you.

Yeah.

I mean, it's really a bit of speculation to say that.

If you say that the-- you know, how -- what it would have meant.

It would have meant that our sales would have been healthier and our operating earnings up.

If I had asked -- how -- which proportion of your base stations deliveries, in the first six months, were attributable to WDCMA, in relation to GSM, if we had GSM at hundred, did have you 20 of that being WDCMA?

Okay, we have given you the numbers, and then there's the some capitalization of R&D so we'll -- I think we'll leave it for you to make the estimates.

But sure, there's -- there would have been a healthy impact, with this way.

On the second half then, and how do we -- you know, there is growth on both businesses for the second half forecast.

I think that's best that I'm willing to say.

And that's -- that's how we look at the second half.

And the both of the businesses.

Shaping up.

And approximately similar than the quarter, we make a simple translation, your second half guidance, the 3%, would entail that the second half being 17% stronger than the first six months, in the upper end of the range, the 10%, 25% stronger H2 over H1, is it fair to assume that networks and mobile phones would approximately behave similarly in that percentage range?

Again, both businesses are expected to grow roughly at the same rate during the second half.

Thank you very much.

So I think you are -- you are spot on that.

Thank you.

Thank you.

And we'll have one more question.

Your final question comes from Edward Schneider with J.P. Morgan.

Please proceed with your question sir.

Replacing market giving you reduction on handset guidance, and you had mentioned that the economy had caused a decline in the short-term rate for replacement, but that you didn't think it was it was a long-term trend, how do you feel now?

Do you think replacement sales or replacement rate has dropped permanently?

Is it an economic feature?

Or is it just everybody waiting for higher feature-rich phones, which then suggests that handset demand rebound will precede carriers roll off the service aggressively?

I think the replacement rates really somewhat below 50% in the first half, going up in the second half, so that we will be at or tiny bit above 50% for the full year.

And I think we have been a little bit more -- we have had a little bit higher figure in our mind, for this year, before.

Obviously, where do we see the -- where do we see the slowing down of the rate?

It's really -- really a question of -- of the customers being pretty happy with the capabilities of the phones in terms of the use of the -- use for the voice and some simple messaging.

But they have been, in the current environment with a lack of marketing aggressiveness from the operators.

They have been holding and not getting into the first trial phase of the more advanced phones with advanced features.

The -- obviously the economy plays a bit of a role, but it's more a question of the really user-friendly phones with features that people enjoy using, like we believe the [inaudible] phone will be.

Those have not yet been in the market and the operators have not been subsidizing and marketing otherwise the phones in the last 18 months the way they used to before.

So those factors have in more ways than the general economy, which obviously has some weight.

Thank you.

And ladies and gentlemen, this concludes our call today.

I would like to remind you that during the conference call we have made a number forward-looking statements that involve risks and uncertainties.

And therefore actual results may differ materially from the results currently expected.

Factors that could cause such differences have been identified in detail on pages 10 to 17 in our 20-F, and also in the press release issued today.

Thank you very much.

And have a nice day.