諾基亞 (NOK) 2003 Q2 法說會逐字稿

Thank you for participating in the 2003 earnings conference call.

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

At this time I would like to welcome everyone to Nokia's second quarter 2003 earnings conference call with our host, Ms. Ulla James, Vice President of Investor Relations.

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

There will be a question-and-answer period after speakers remarks.

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

If you would like to withdraw your question, you may do so by pressing the pound key.

As a remainder, if you are on the speaker phone, pick up your hand set before presenting your question.

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

Thank you to I am Ulla James James, Vice President of Investor Relations and with me is the Chairman and CEO of Nokia Jorma Ollila.

During the conference call today we will be making forward looking statements regarding the future business and financial performance of Nokia and the mobile communications industry.

These statements are predictions of risks and uncertainties.

Actual results may therefore differ materially from the results currently expected.

Factors that could cause such differences can be both external external, such as general economic and industry conditions conditions, as well as internal operating factors.

We have identified these in more detail on pages 11 to 18 in our 2002 form 20F and also in our press release issued today.

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

For your convenience, we are running a supporting slide presentation and the conference call on www.nokia.com.

A replay together with a slide 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, 2003, Nokia net sales increased by 1% to 7 billion euro, generating operating profit of $900 million Euro and a performing operating margin of 12.2%.

Diluted pro forma earnings per share decreased to 14 euro cents to 19 euro cents a year ago.

Sales growth was strongest in Europe while sales in America declined.

The Europe and Africa region accounted for 56% of sales.

The Asian Pacific region 23% and Americas, 21% of net sales.

Sales of Nokia phones grew by 2% reaching 5.5 billion Euro with a operating margin of 23.1%.

Nokia network sales are 1.5 billion Euro were at the same level of second quarter last year.

Pro forma operating loss of 33 334 million euro, included a re restructuring charge of 399 million Euro.

The impact of the restructuring charge on the EPS was 6 euro cents.

Excluding the charge, Nokia diluted pro forma EPS had been 20 euro cents versus 19 euro cents in the second quarter a year ago.

Sales in Nokia Ventures Organization increased by 23% to 82 million euro, generating a pro forma operating loss of 36 million euro.

The common group expenses consisting of Nokia head office and research center generated a pro forma operating loss of 48 million euro.

As a result of the continued profitability and efficient working capital management, Nokia generated a strong net operating cash flow of 1.3 billion euro.

Due to the dividend payment and share buyback, the total net depreciation decreased slightly to 9.9 b euro and the net debt to equity ratio was minus 65% at the end of June.

With this it is my pleasure to turn the call over.

Thanks, Ulla.

Ladies and gentleman I would like to begin my review with a few words about the different business groups, starting first with Nokia Mobile Phones.

During the second quarter, Nokia Mobile Phones continued to grow faster than the market.

With our Volume of 41 million, we gained market share both sequentially and year on year.

Our preliminary estimate indicates a sell sell-through market of 105 million units, representing 11% year on year growth and also 5% sequential growth from the first quarter industry volume of 10 million units. 100 million units, excuse me.

Nokia's volume grew by 14% year on year and 8% sequentially.

In the second quarter, our estimated market share stood at 39% and the gap between us and the number two in the industry was bigger than ever before.

Nokia started to ship 13 new mobile phone models during the quarter and 22 for the first half of 2003.

We expect to launch a record number of more than 35 new mobile phone models this year.

The second quarter marks the 5th consecutive quarter of healthy industry growth.

The mobile phone market growth was strongest in Europe, Middle East and Africa region, while the Americas, Asia Pacific regions grew both slightly less.

Of the various technologies, CDMA grew strongest closely by GSM while CDMA volumes continued to decline.

During second quarter, Nokia achieve significant market share gains in the U.S. and Latin America, driven by improvements in our product portfolio, across all technologies.

We believe that these gains of several percentage points put us back in clear market lead in the Americas region.

The competitiveness of the portfolio is enhanced by the 17 new products introduced during the first half of the year, put us in a favorable position with operator promotions which I expected to continue in the third quarter, with back to school programs.

We have also started to see progress in our CDMA market share with new products rolling out in the Americas and India, where we already have a clear number one over all market position.

A product boost is expected in the second half as we will begin shipments of CDMA products also to china.

In china, our market share has stabilized and in the first half after the new distribution strategy and further product localization were put in place.

We now feel that the gap between us and the number one player in the market has significantly narrowed.

According to independent research, five out of the top ten products in china are Nokia handsets.

Our portfolio in china will continue to strengthen with the introduction of CDMA hand sets in the second half and with new products like Chinese language supported Nokia 6108.

All in all, our plan is to introduce 14 new products in china this year.

In the rest of the Asia Pacific region, as well as western Europe, our market share has been stable.

Faster than market volume growth, Nokia Mobile Phones net sales grew only by a modest 2%, with strong profit profitability of 23.1%.

The slower sales growth was predominantly due to adverse currency movements, based on constant currencies.

The second quarter 2003, year-on-year sales growth would have been 11%, indicating a sales level of 6 billion Euros your rows and resulting in practically flat year-on-year development on the average selling prices or ASP.

The development was driven by a number of factors, most significantly, the depreciation of dollar as well as Sterling, had a negative impact on translation of revenue.

In Europe, the low consumer confidence in some Western European markets like Germany and a growing share of emerging markets like Eastern Europe and the gulf led to a bigger propulsion of entry level product sales.

In the Asia Pacific region in some of the mover developed markets, outbreak of SARS led to some what subdued replacement market and simultaneously, share of emerging markets grew strongly.

As an example, India was the number two market for us in the region.

China, had at number one, had stable ASBs.

Despite the overall trend of ASB decline, we're seeing increased evidence of true upgrade in many of the developed western European markets and in the United States, where subscribers are moving to more feature-rich devices.

In the second quarter, share of color in our product mix grew each month, with the Nokia 7250, 3510I, 6610, and 3650 now being amongst the top six contributors in value terms.

Hand sets with color and multimedia functionality now represent close to one-third of our total volume.

The mobile phone channel inventories in the Americas and Europe have remained at normal level.

In china, the mobile phone channel inventories continue to be clearly above historical levels, deteriorating further during the second quarter, due to the adverse market conditions caused by SARS.

Meanwhile, Nokia's channel in inventories have been at normal levels in all markets, and in china, during the second quarter quarter, they are also stable and stable at normal levels, normal and have clearly actually declined throughout the second quarter.

In the second half, we expect healthy mobile home market growth of approximately 10% with a third quarter market volumes up both sequentially and year-on-year, and with normal seasonality in the fourth quarter.

For 2003, we currently expect the global mobile phone market to grow by approximately 10% from the 405 million units a year ago.

Given our extremely competitive product portfolio and strong brand I see good opportunities for us to strengthen market share further and also to enter into new areas.

In light of the opportunity, we feel the enterprise arena, we have decided to establish a new Nokia wide business group, Nokia enterprise solutions.

The unit will have a dedicated and focused approach with the aim of providing an enterprise grade mobile hand set range together with mobile security and connectivity solutions to the corporate sector.

Nokia enterprise solutions will combine the strength of the existing Nokia Internet Communications as well as the business applications unit, formally reporting to Nokia Mobile Phones, as with all of the other business groups, Nokia enterprise solution also report to me.

The final reporting of the business group will begin in January of 2004.

And now a few words on Nokia Networks.

Despite the relatively high level of net sales in Nokia Networks in the second quarter, we do not see any signs of improvements in infrastructures market this year.

Operator investments have decreased to exceptionally low levels and network rollouts continue slowly.

We expect the overall infrastructure market to contract by 15% or more this year.

The second quarter sales in Nokia Networks of 1.5 billion Euros remained on last year's level.

The sales growth was strong in the America's region but practically flat in Europe and Africa and declined during the Asia Pacific region.

During second quarter our market share developed positively..

We believe our total market share currently in the 15-20% range and the CDMA to be over 30%.

During the second quarter, we were able to successfully carry out the restructuring methods announced in the first quarter.

Of the total restructuring costs of 399 million Euros rows, a total of 304 million Euros in non-cash projects related to product closures while 95 million Euros were cash charges relating to personnel reductions.

At the end of 2002, Nokia Networks headcount was slightly over 17,000, and we target a total headcount by year-end this year of approximately 15,000 employees.

We believe with these measures, we are realigning Nokia Networks to current realities of the marketplace.

Excluding the 399 million euro restructuring charge, not Nokia Networks was able to achieve positive operating results.

This was a reflection of higher than estimated volumes and efficiency improvement in rollouts.

During the second quarter, we saw strong improvements in product quality, making us confident that we now rank among the few top CDMA vendors in terms of product and network quality.

We currently estimate that there are 20 operators that will launch the CDMA networks this year with Nokia as supplier to approximately half of them.

Before closing, I'd like to mention a few words about Nokia balance sheet and cash flow.

During the second quarter, we managed to release a further 194 million Euros from our working capital.

The main driver was improvement in Nokia mobile home networking capital rotation.

Capital expenditure continued at a low level of 93 million Euros, which was lower both sequentially and year on year.

We do not expect any dramatic changes in capital expenditure from these levels.

At the end of June, the out outstanding balance sheet long-term customer loans totaled approximately 558 million Euros and the off balance sheet financial guarantees were 78 million Euros .

The additional financing commitments totaled approximately 700 m Euros at the end of the second quarter, resulting in total out standing and committed customer financing of $1.3 b Euros.

Net operating cash flow driven by good profitability and working capital management was 1.3 billion Euros in the second quarter.

Our net cash position at the end of the quarter was 9.9 billion Euros and the net debt to equity ratio was minus 65%.

During the second quarter, we initiated the share buyback program based on the annual general meet ago approval in March.

During the quarter, we re repurchased 20 million shares for 301 m Euros at an average price of 15.06 Euros.

In addition to the 300 million Euros spent on the share buyback program, we returned another 1.4 billion Euros to the shareholders via dividend payment.

As the last item for this conference call, I would like to discuss the guidance for the third quarter of 2003.

For the third quarter, we currently expect, Nokia Mobile Phones calls volumes to grow over 10%, but sales to be flat or slightly down year-on-year, mostly due to major depreciation of U.S. dollar.

Nokia network sales are expected to Kline between 15-20%.

The third quarter diluted pro forma EPS is estimated to range between 15 to 17 euro cents.

In the third quarter, we also expect shareholders shareholder results of associated companies minority interests to remain on the same level as in Q2.

Financial income is expected to be at first quarter level, and the tax rate on reported earnings to be slightly over 30%.

Based on the solid competitive position, we expect strong profitability, Nokia Mobile Phones to continue also in the third quarter.

Nokia Networks is expected to generate a small pro forma operating loss due to a lower sales level than in the second quarter.

Thank you Jorma Ollila .

And before the operator gives in instructions for the conference call, let me remind you to limit yourself to one question only.

Please, go ahead.

Thank you, Ms. Ms. James.

I would like to remind everyone, in order to ask a question, please press the star and then the number one 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.

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

We'll pause for a moment to compile the Q and A roster.

Your first question is from Wojtek Uzdelewicz with Bear Stern.

Good morning, your [Inaudible] question unlike other vendors seems like you've very realistic assumptions on Q3 for the demand for hand sets.

But the one area that I was kind of a little surprised maybe is it seems like you're bringing down assumptions for operating margins for handsets for Q3 by 200, 300 basis points.

I was curious, are you leaving yourself room to be more aggressive to go after the CDMA or other markets who use this conservative assumptions to give more flexibility?

Can you give us a sense what would impact?

What do you think could bring down the operating margin that much on the sequential basis?

Well, there are two things, really, that are affecting that somewhat.

First of all, you have on a cost side, you have the marketing and R&D, relating to the new business areas, new segments, where we will be pushing new concepts.

So that will have some impact.

Also, generally, in terms of direct costs, the increasing complexity of the product does have an impact.

Also, even as we have always said, we have healthy margins in all segments.

If you look at the weight of the third world, emerging markets, that brings also perhaps a bigger portion of the revenues in the past and that slightly lower margin.

CDMA, yes, a bit, but not dramatic, so that's a little bit of an addition.

I think the fact remains that we are -- we're the implied margin, which you have calculated, we're well within the normal variation that we have had during the last three or four years.

And we, you know, we are just looking at normal excellent margins to continue and not to be outside that band which has been typical to us in the hands of business.

Thank you.

We'll take the next question, please.

Your next question is from Alec Shutze (ph) of Goldman Sachs.

My question is [Inaudible] terms of the third quarter of the year in margins going down, now, the new marketing and R&D concepts you are talking about would be for things like the engage or the game player or music player.

How current do you think this will be?

Is this a short-term marketing and R&D push and therefore we could go back up to, you know, 24% margin in Q4?

Are you always going to be pushing new product therefore margins will consistently be under pressure?

First of all, a note that it's both R&D investment and particularly in software as well as the marketing.

And secondly, I think we're -- generally we're feeling that perhaps Warren Buffet is right, this quarter is tough.

We should go into longer term thinking.

Certainly this is not a quarterly thing.

You know, we are building here in Engage and a lot of other new value domain, something that will really make major impact and Chang the way we are as a company and what kind of products we will ship in 2004, ' '4 '5 and '6.

So we're at the beginning of a long-term -- this is not a couple of weeks in August/September and then a few weeks in October.

It will be different.

This is a very much long-term thinking.

We're at an early stage of the digital convergence markets and we are -- you know, we're seeing some necessary marketing as well as R&D efforts there.

So that would be my brief answer.

But I think we are well within the -- I would like to stress, we will be within the typical good margin levels that we are used to, and that obviously is very much how I'll go.

Thank you, we'll take the next question please.

Your next question is from Paul Sagawa of Bernstein.

I'm glad we're going in the same direction with regard to this quarterly announcement.

In some sense the guidance of the third quarter reminds me of little bit of 2001 all over again when margins briefly dipped below 20% as you are investing in developing the GPRS and the WCDMA product, as well as being much more aggressive in the marketplace to take market share in 2001, you took 400 basis points of market share.

To what extent do the projections incorporate a more aggressive competitive stance vis- 'a -vis the new products being introduced by your numerous competitors in this time frame?

Can they expect, you know, a marginally more aggressive pricing environment from yourselves in that context and does that play in somewhat to the projected ASP declines and margin tightening in the third quarter?

And also, can you sort of quantify the sort of the marketing impact of launching the new concepts from a percent of overall sales standpoint?

Yes, obviously, there is a long-term component to launching new concepts, but you know, how much of the margin impact would be a sort of a program to get Engage in the market in the initial phase and to get the 3300 to the market in the initial phase versus longer term investment?

You made a couple of comments, Paul, let me make couple of comments here.

First of all, yes, we will be competitive.

We will be very competitive in terms of gaming share, so that does play a little bit of a role role, but, what I would like to stress is that -- and I think this is kind of what your long question was trying to get into, you know, this is the beginning of a big trend which will then escalate, no.

We -- we don't see a Change in the overall profitability range that we are talking about here.

The product complexity, the R&D, particularly in the software and marketing expense will mean that when we're launching some of those new value domains and really changing the marketplace and getting the early benefit as a player who has something unique to offer.

You know, obviously that makes an impact, but, you know, it's not a near paradigm which will Change the world overnight.

This is not the beginning of all of that.

And I think if you look at things like gaining market share in the U.S. with some new products, as we have done, surely that means that there have been marketing programs as thereafter there have been in the second quarter when we got, you know, really good market share gains in the U.S. and Latin America.

So that has an impact.

But that, again, builds a position which will benefit in the future.

So I don't think there is the drama that's perhaps been paint painted there.

Okay.

We'll take the next question, please.

Your next question is from Jeffrey Schlesinger of UBS.

Thank you.

Jorma Ollila , can you give us a sense of what the core product is?

You looked like you are down mid-single digits.

Is that accurate?

And then what's your expectation given the emerging markets you address and how the mix is changing in replacement as you outlined recently.

When do you think we'll start to see that excluding currency level out and lastly what's your expectation for currency in your mobile phone revenue guidance in the third quarter, thank you.

Okay.

I mean, I don't think I got all of those five questions, but the impact of currencies is year-on-year in the second quarter, the range 9%.

So, the 2% revenue growth in constant currencies would have meant a 11% revenue growth in a world with no currency changes from the second quarter of 2002.

The second -- sorry, the third quarter guidance then, we do not -- we are not taking a view on currency.

The currencies -- the way we work is that as if the currencies would be in the third quarter, the same as they were in the second quarter.

So, if you look at the developments of the last week and then you ask, you know, do we have a conservative view on the third quarter, you might come to the conclusion that yes, we have a conservative view on the currency because of what happened in the last week.

So I hope that covers that one.

Then you had the emerging markets question, and -- sorry, on the currency, I think you had one more question on third quarter.

What was the impact of currencies.

Yeah, I think I did answer that already.

You'll get the picture now if you look at the third quarter of last year.

Then that gives you the answer.

I think the math is pretty straightforward.

Then, on the impact of the emerging markets, yes, there is impact, but I think the currencies are the major factor in this formula, and it doesn't pay off.

You get into the wrong part if you think that there was some other big factor which was not mentioned.

Not correct.

Everything has been mentioned and the currency is major-major.

That is the explanatory factor on the top line, and there is some impact on the bottom line, but much less.

It's really minor.

So, we're not going to start moaning about that one, but everybody has to understand the top line impact, because that's mathematics.

That's not trying to explain anything.

The emerging market is an impact.

There is a bigger portion in countries like eastern Europe, Russia, Latin America, India.

Was that impact bigger than we forecast?

It was bigger than we forecasted in India, as relates to India, but otherwise, it was on plan.

India was our number two country in Asia Pacific now in terms of volume, right after china, very close to china, and we certainly did not forecast that, because 18 months ago, it was nowhere on the map in terms of monthly or quarterly volumes.

So, yes, ifs it has an impact out of it.

I hope that helps you, Jeff.

Thank you.

Thank you.

We'll take the next question, please.

Your next question is from Angela Dean of Morgan Stanley.

Thanks, just to go back to AS ASPs, if we assume constant currency for the third quarter versus the second, your guidance does imply that ASPs will essentially be flat at best.

Could you explain what's behind that assumption and is there going to be a point where we do begin to see sequentially rising ASPs as a result of the color phones, things like that or is the way to the emerging markets going to off set that?

Well, I think Angela, there is one factor which I don't think has been getting enough attention here, and that is that Europe and -- European economies today are dead.

There is no growth.

The consumer confidence is low.

There is no not much happening there.

And usually it needs for this kind of new things like behavioral changes of young people who then drive the consumer behavior in new segments like MMS or phones or color phones or camera phones and you need a bit of optimism.

You need people going forward being ready to try out something new, and you're not really seeing that, other than signs of it in some well-developed, more mature markets like UK and [Scanned Naefia].

In my book, we need economic growth.

We need optimism, we need consumer confidence.

The demand is there.

It's in the background.

It's held up a bit now in this economic environment, which is very, very slow, and we see it particularly slow in Germany, so that sort of supports my general point.

And [scanned Naefia] and the UK are economically positive and optimistic than the rest of Europe.

So in different ways, we get evidence that the market will be there.

It has just been slower than expected and the economy plays a major role.

So, yes, we do see a situation where the ASPs will be up, particularly if you take out the currency impact, which I think in all fairness, you have to do when you do this kind of an analysis closing of the books is another matter.

They are what they are.

So, yes, we do have a situation where on a global scene you get that because the replacement sales will be such major part in the next few years and I think we all have permission to think that Europe will get out of this .5% growth or close to no growth situation.

And just let me quickly follow-up.

Despite the European economy as being dead, you still describe Europe as seeing strong sales growth for phones, the best sales growth regionally.

Is that because it's been driven more by Eastern Europe than Western Europe and therefore you are still not seeing the impact of these higher ASP phones?

Okay, it's more coming from our real good performance in the Middle East, Eastern Europe and Russia, but also a bit from the signs of some good replacement countries.

But that positive picture and the volume development that I'm referring to here is really more on the Middle East, Eastern Europe and Russia, but there are also bright spots on the replacement arena.

If you look at the ASPs in Finland, Sweden, Norway, Denmark and UK, it was up.

Okay, thanks so much.

Thank you.

We'll take the next question.

Your next question is from Tim long of CSFB.

Thank you.

A few questions on CDMA, if I could.

Jorma Ollila , I think we saw that you are currently shipping to Reliance in India.

Can you give us a sense on the timing of volume shipments to Reliance, and then moving over to china, could you also be a little bit more specific on the timing and where you are?

Are you fairly satisfied with china Unicom and when can we expect volume shipments?

Is that a Q3 event or maybe a Q4 event?

Thank you.

Okay, we started shipping to Reliance in the Q2 and we are getting some serious volumes now now.

And that's really nicely and well supported by our leading market positioning in GSM, which has built our strong brand preference in India.

In china, we're working on our product, and the customer is very, very keen.

So it really is dependent on getting a completed product program which is well on our way way, and probably, we should be starting in the third quarter and then getting into real volumes in the Q4.

Just following on India , is your view, despite the late start in CDMA, that you can get similar type CDMA market share as GSM in that country?

Yes, we can.

Thank you.

We'll take the next question, please.

Your next question is from Keith Westhead of Deutsche Bank.

Thanks very much.

First of all, I wondered if you could elaborate on the gross margin strength that you saw in the second quarter and what you see in for the outlook in Q3.

You talked about the impact of currency on the top line, I wondered if you could talk about how it affects margins, particularly in percentage terms terms.

The gross margins were strong, particularly it was, in fact strong in the networks with that -- we'll deal with that one first.

There were a number of one-time costs, you know, relating to the early deliveries of the 3G networks that we charged above the growth margin levels in the direct costs in the Nokia Networks in the first quarter, and the second quarter was getting to a normal good level, and that was all obviously reflected in the reasonably good operating earnings level if you take out the one-time write-off of 399 million, which I'm sure you saw.

And if we look at the growth margin level in Nokia Networks, the -- one has to look at the mix was typical of what we will be seeing in 2G and 3G later this year and going on wards, and at the same time, it gives an indication that with volumes somewhat higher, we hope that in this business, we feel that in this business, we can -- we can get decent profitability in this business, but it is volume-driven, and therefore, the recovery of the operator investments is needed.

It just gives an indication that our restructuring which affects both the cost as well as direct costs is well underway and many of the things are starting to impact already including the reflection on the gross margin in the second quarter, in the networks.

On the mobile phone side, I think the -- there was also somewhat exceptional -- somewhat higher than what you would norm normally see certainly in a business like this, and in MMP in the past quarters.

The real good quality development that we have had during the last 12 months is starting to show and Doss show in the -- in the gross margin and at the same time, when we are going forward with the new kinds of products, there is increasing complexity, particularly in the software side which might be impacting that exceptionally high gross margin in the MMP.

It will remain on a very high level, so we're not plugging here anything, just making a note of that.

Thank you.

We'll take the next question, please.

Your next question is from Tim Luke of Lehman Brothers.

Thank you.

With respect to the guidance for the hand set division, I think he's suggesting 10% and that's in the first two quarters, the unit growth was 15% and 14%, and if you would go forward to assume the market up 10% with some share gains, I was wondering what factors might have contributed to it not being a little higher than the 10% if you were to continue to assume share gains.

I was also wondering if you could give a sense of which regions might be stronger than the 10%, for example, India, and which regions might be below the 10% growth due to general market conditions.

Thank you.

I think we have said very clearly, you know, not 10%, but well over 10%, so we're talking about a similar volumes volume growths than we have seen, but you know, well over 10%.

This is what we're seeing, around we expect to continue with market share gains and the volumes are foreseen to be particular strong in the Asia Pacific and U.S. and the American region, U.S. included.

Europe strong but I think we have more potential in the American region, and in China region, and perhaps the product new product launches will support that potential very well in APEC and the Americas.

Europe is continuing to be solid solid, so it will certainly support that well over 10% forecast.

No drama there in terms of looking for a difference.

Uh-huh.

Thank you.

Thank you.

We'll go for the next question, please.

Your next question is from Richard Windsor.

I'd like to come back to Angela's question, if I may.

I mean, I was just wondering whether or not in the next quarter, one of the reasons why the margin is going to come down is because the fact that the new products that you have in the market are going to be taking up much more slowly than expected and therefore money one might think that the average age of the portfolio goes up and older phones have low margins than newer phones.

Is that a possible impact and if show, what sort of impact might is have?

No, that's not the right assumption, and so we will have very high new product revenue also in the third quarter and that sort of a mix issue there is not.

The high R&D, high marketing which are particularly to look into as the prime reasons.

Okay, so very much on the expenses side rather than the gross margin side would be the right assumption?

Yes.

Thank you.

Thank you.

And we'll go for the next question.

Your next question is from Sam May of Piper Jaffrey.

Good afternoon.

I want to go back to infrastructure for just a minute minute, Jorma Ollila , please.

Are you satisfied with the networks restructuring given your continued outlook for down 15% least this year, and what do you think will happen in '04 for the overall market for you in edge and WCDMA?

Thank you.

The restructuring program, I feel is going very well.

We are on schedule in terms of getting the cost reductions and the impact on the course that we are looking for.

So, obviously, that's running against a fast-moving target because there is 15-20% re reduction in revenue for this year is very much happening.

So, we feel good with the forecast as we made it, you know know, we feel good that we made the right forecast, not good that it was so low.

When we look at '04, the -- our indication earlier has been that it's down a bit on this year's level, perhaps we would have a little bit of a different emphasis now and we would say that it's flattish, you know, close to being flat either way, and we clearly are looking at seeking to gain share next year.

We feel our products [Inaudible] and edge are in good shape now.

There is good stability.

There is good customer acceptance, good response now in the last six weeks or so from so many of those customers which have either opened networks recently commercially or are in the process of planning to do so in the next five months.

So, we look into having a good position in what is happening in '04.

So you feel incrementally better about '04 overall market?

Yeah.

Great, thank you.

Thank you.

We'll take the next question, please.

Your next question is from Richard Kraemer (ph) of [Inaudible] Research.

Thank you.

Just to follow on Nokia Networks Networks, given your long-term 10% growth objectives and if this business is flat next year, could you describe whether you'd be considering some other business model, moving to software business or an IPR business there or is there anything else you can do?

If not, could you give us a sense of what the break-even point is as many of your competitors have in that business, and whether, for example, WCDMA will be a profitable business for you in ' '04, and then one other simple question, if you could break out if there were any hedging or financial gains in this set of results which might have impacted either negatively or positively the results.

Thanks.

You know, obviously we are spending a fair bit of time looking at new opportunities.

That's, I think the responsibility of every management team, be it good times or somewhat tighter times and so surely we are looking at at -- a good example of how we're looking at it is certainly what we announced today that Nokia enterprise solutions, which we feel that in the area of where we feel that in the area of mobility, the corporate segment or the enterprise segment is in need of re-thinking in terms of what the mobility solutions are and how they will be order to the enterprises.

We feel we're in good position to get the key elements so that we not only are getting security solution and shipping a box in the form of a phone to corporate corporate, but that we actually build a solution long-term for the corporate CIOs to then build on their mobile solutions for their sales force or executive teams or whatever.

So that's a typical one, and there are others.

On the 3G profitability, the -- it's really a question of getting the volume up and there there by getting the cost of sales down that is happening as we speak, and we're pleased with how that is going, and the profitability improvement is obviously a key goal, but it will happen gradually as it did happen in GSM in '91, '92 were horribly twice priced and once we get into '93, '95, it was all very different when we started to know what we were doing and it was sort of getting to be a more industrial effort.

So this is the same that's happening in 3G and that's where we are working hard to get the cost of sales down and that is happening.

Thank you.

We'll take one more question, please.

Your final question is from Adnaan Ahmad of Merrill Lynch.

Hi.

Can you just take us through what's happened with your rebate program in the U.S. and how is the rebates impacted on volumes as well as ASPs and to follow onto that, how do you account for the rebate from the P&L, is it an offset against sales or is it in the OPEX line?

Thanks.

First of all, on the account accounting, it is marketing money, so it's OPEX.

That's how we account for it.

Because most of those rebates are done by the operators, so the operators are carrying the cost, which we are covering, so we're told by marketing dollars.

And in different forms, but that's how it works.

So I think that gives you an idea of how it's impacting the ASPs or the pricing picture.

The share gains I see coming mostly from are driven mostly by the portfolio, the new products, which are being well received.

You know, without new products here, you don't get anywhere.

What sort of rebates, whatever kind of rebates you give, you know, this is not a business where you send identical stuff from A, B and C providers and the one who gives the best rebate gets the business.

It doesn't work that way in this business.

We're far away from that, and so it is the product portfolio which is driving it.

Jorma just a follow-up to that.

What's your view with respect to the introduction of the wireless important ability in the states and post November and the impact that's going to have on the U.S. marketplace in general and your position within the U.S. marketplace?

One tends to get the initial positive impact for our revenue and sales and revenue, which then sort of tape us off.

So you can, you know, reasonably quickly into normalized levels, but initially there is a positive impact.

I would like to amplify that because it's sort of part of a transition, and we expect that to happen in late November.

Okay.

Thank you.

And ladies and gentlemen, this concludes our conference call today.

I would like to remind that you during the conference call today we have made a number of forward forward-looking statements that will involve risks and uncertainties and actual results may differ materially from the results currently expected.

Factors that could cause such differences have been identified in more detail on pages 11 to 18 in our form 20F and also in our press release issued today.

Thank you very much and have a nice day.

Thank you for joining us for today's Nokia second quarter, 2003 earnings conference call.

You may disconnect at this time.