諾基亞 (NOK) 2004 Q2 法說會逐字稿

Thank you for participating in Nokia's 2004 second quarter 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 2004 second quarter conference call with our host, Ms. Ulla James, Vice President of 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 withdraw your question, you may do so by pressing the pound key.

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, Ms. Ulla James.

Ms. James, you may begin.

Thank you.

Ladies and gentlemen, welcome to Nokia's second quarter 2004 conference call.

I'm Ulla James, Vice President Investor Relations.

Jorma Ollila, Chairman and CEO of Nokia, and Rick Simonson, CFO of Nokia, are with me today.

During the call we'll be making forward-looking statements regarding the 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 12 to 21 in our 2003 Form 20-F and also in our press release issued today.

We aim 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/investor.

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 'till Friday, midnight.

We will begin the call by Jorma Ollila covering the market dynamics and the performance of Nokia business groups.

Rick Simonson will cover the key financials, and Jorma will close with business outlook and guidance.

With this, it is my pleasure to pass the call over to Jorma Ollila.

Jorma, please.

Ladies and gentlemen, during the second quarter, the overall mobile device industry maintained its strong year-on-year growth while the industry volumes grew slightly from the first quarter level.

The earlier market drivers continued.

Emerging markets and prepaid campaigns in western European markets drove the volume growth, and color and camera phones propelled the upgrade market.

We started to see our mobile device market share stabilizing during the quarter.

While April and May were still relatively weak, mid-May marked a turn of momentum, and June was clearly the best month in the quarter.

This momentum shift was driven by selected pricing modes, as well as an improvement in our mid-range portfolio following shipments of new products.

Nokia Networks had an excellent quarter as it secured -- as it secured several GSM/ EDGE contracts and expanded market share, particularly in India and Russia.

In the wideband CDMA market we won four new customers, Vodaphone in Australia and New Zealand, Cellcom in Israel, and Polkomtel in Poland.

We also signed a firm agreement with TIM in Italy and received our first wideband CDMA expansion contract with M1 in Singapore.

Our preliminary second quarter mobile device market estimate indicates a global sell-through market of approximately 148 million units, being slightly higher than our first quarter market estimate of 141 million units.

We also estimate the number of global subscriptions exceeded 1.5 billion during the second quarter, representing a worldwide cellular penetration of 24%.

The Latin American mobile device market grew sequentially by 30% to 16 million units, almost doubling from last year's levels.

The Asian market, including China, remained approximately at first quarter level of 51 million units.

The Europe-Africa market size grew slightly from first quarter to 52 million units, and the North American market expanded from 27 million to 28 million.

GSM represented 65% of the total device market, and volumes grew to 97 million units, a slight increase from first quarter level.

CDMA volumes, at 29 million, and TDMA volumes, at 5 million units, remained at the first quarter level.

Wideband CDMA achieved a quarterly volume of 4 million, with the majority of the volume still coming from Japan.

This was also reflected in PDC volumes which continued to decline to 8 million.

Nokia total device volume during second quarter was 45.4 million.

Units grew 2% sequentially and 11% year-on-year.

In light of our preliminary market estimate of 148 million units, this represents a market share of 31%, a slight decline from the first quarter market share of 32%.

This overall slight decline reflects a significant selling market share decline in Europe.

However, because of positive sales momentum throughout the second quarter, we were able to reduce the Nokia channel inventory in Europe by 3.5 million units.

In a market of 52 million units, this adds another 7% to the market share in Europe measured in terms of sell-out.

In Latin America and Asia, Nokia's mobile device market share went up sequentially.

Before I will go into business group details, I'd like to take an opportunity to make a comment about Symbian During the quarter we were delighted to see that Symbian received a vote of confidence from its shareholders who increased their level of investment in this joint venture.

This outcome was exactly as we expected, and now the backing from the major handset vendors puts Symbian on a solid ground to continue as the leading smart phone software platform developer.

Now I would like to cover the four business groups somewhat in more detail.

First of all Mobile Phones.

The sales of mobile phones in the second quarter reached 4.2 billion euros, declining 13% year-on-year but remaining almost on the first quarter level.

Mobile Phones' operating margin was 19.1%.

In the second quarter, 44% of mobile phone sales came from Europe-Africa area, 28% from Asia, including China, 15% from North America, and 13% from Latin America.

In Latin America, mobile phones volumes grew over 100%, and net sales doubled.

Volume development in Asia, including China, was strong as well, but price cuts, together with a 6% year-on-year decline in the U.S. dollar, meant sales growth was only moderate.

In North America, despite volume growth, net sales declined slightly as a result of targeted price reductions, technology shift from CDMA to GSM, and U.S. dollar depreciation.

In Europe net sales and volumes declined.

However, selective price reductions and new product introductions were able to break the negative share trend in the end of the quarter, and the product mix started to improve.

During the second quarter, the product portfolio, as well as product mix, have improved as mobile phones have been transitioning into the Nokia 1100, 2100, and the 3100 in the high volume segments.

In the mid range, the Nokia 6230 and Nokia 6310i have proven extremely popular as the volumes have been ramping up.

Multimedia sales grew by 24% to 739 million euros, and the business group made an operating loss of 74 million euros.

Slightly over 66% of multimedia sales came from Europe, 28% from Asia, including China, and the rest from the Americas.

Multimedia performance was mainly driven by imaging business unit and the performance of the Nokia 6600.

The Nokia 7610 started to shift in the end of May, and the reviews have been very positive.

Its 1 megapixel resolution gives us an opportunity to showcase the capabilities of the Nokia imaging echo system.

A key target for this business unit is to broaden its portfolio in order to smoothen the fluctuation of individual product life cycles.

The new N-Gage QD started to shift, both in Europe and Asia in May as planned.

The U.S. version is currently going through operator approvals, and is estimated to be available in the third quarter.

The new device is regarded as greatly improved, and additional game titles released during the second half are expected to improve the competitiveness of the platform.

The Networks second quarter grew year-on-year by 6% to 1.6 billion euros.

Operating profit was 255 million euros, and operating margin an excellent 16.2%.

The Europe-Africa area accounted for close to 50% of the network sales, while approximately 30% came from Asia, including China, and the rest from the Americas.

Nokia Networks reached excellent profitability with gross margin above the first quarter levels.

The increasing maturity of our wideband CDMA solution, together with higher volumes, were the main drivers for profitability improvement.

In the second quarter, Nokia Networks took major steps in strengthening its market position, both in terms of GSM/EDGE, particularly in India, but also in wideband CDMA.

This might, in fact, put some pressure on network profitability in the short term, as is typical when we roll out project in new geographies and swap out competitors equipment.

Operators are also preparing for push-to-talk services in GSM networks.

As of now, we have a total of 15 commercial push-to-talk contracts over cellular contracts in place, with well over 30 trials ongoing.

The competitiveness of our end-to-end solution was further boosted as we started to ship the Nokia 5140, world's first push-to-talk GSM handset, in June.

Enterprise Solutions net sales remained on first quarter level at 189 million euros, and the business group made an operating loss of 59 million euros. 53% of Enterprise Solution sales came from Europe-Africa area, 18% from Asia, 27% from North America, and the remaining 2% from Latin America.

Rick, please take us now through the key financials.

Thank you, Jorma.

Ladies and gentlemen, Nokia's second quarter net sales were 6.6 billion euros, down 5% compared to second quarter 2003.

At constant currency, sales were up 1%.

Potential sales development was essential flat.

Nokia Network's gross margins in Q2 were strong, and they have improved, due in part to the increasing maturity of our WCDMA solution.

However, this has not been enough to offset the cost pressure coming from the device side.

Gross margins for the Nokia Group were 38.4%, declining from Q1 level of 40.5%.

For clarity of comparisons, let me point out that in the second quarter Nokia Networks had a restructuring charge of 399 million euro. 304 million of the charge was booked in R&D, and 95 million was booked in SG&A.

If you exclude these charges, the second quarter 2003 adjusted R&D would have been 12% versus a reported 16.3, and SG&A 11.3% versus a reported 4%.

And let me come back as I didn't clarify, apparently, these charges were the second quarter 2003, not as I said.

The total impact of the net restructuring in quarter 2, 2003, was 6 euro cents on the EPS.

Now, in Quarter 2 2004 our OpEx increased both sequentially, as well as year-on-year.

Obviously, this is an issue we need to address and take action with emphasis on effective R&D spending.

Let me come to a couple of one-time special items in our Q2 2004 financials.

The first one is insurance premium return of 90 million euros.

This return relates to a multi-year insurance facility expiring this year and is due to our low claims experience during the policy period.

As the initial insurance premium charges were booked in our operating expenses, so is the return.

This 90 million euro credit is reported as other operating income in common group functions.

Secondly, we also had a gain of 71 million euro as a result of the sale of approximately 50% of the France Telecom bonds we've held.

The bond has been recorded in current assets as available for sale investment since the end of last year.

As you may remember, this is the -- these are the proceeds of the former Mobile Com receivables.

The overall telecom operator bond and equity capital markets have rallied since the end of last year, and we decided to liquidate half of this asset when we could realize full price and there were no longer sales restrictions.

The combined impact of these two items on our EPS was 3 euro cents.

Looking at some of the balance sheet and cash flow metrics, we saw positive development in both inventories and accounts receivable, inventories declining 2% and accounts receivable 11% improvement from Quarter 1.

Quarter 2 net operating cash flow was a strong 1.4 billion euro.

Our capital expenditure of 90 million was slightly up from Q1 level.

Recent volume increases may require some additional production capacity and some additional CapEx in second half.

We're practically debt free, resulting in a gearing ratio of negative 78%.

Our cash position strengthened further to 11.5 billion euro even after accounting for the strong distribution of 2.2 billion euro to our shareholders, 1.4 billion in dividends, and 758 million euros in buybacks.

With this, it's my pleasure to hand back to you, Jorma.

Jorma, please.

Thank you, Rick.

I'd now like to discuss the third quarter guidance and outlook in a bit more detail.

For the third quarter 2004, we currently expect Nokia net sales to range between 6.6 to 6.8 billion euros, and our diluted EPS to range between 8 to 10 euro cents.

We expect the third quarter mobile device market volumes to be approximately on the second quarter level, and we expect the 2004 device market to surpass 600 million units.

The mobile infrastructure market is expected to be up slightly in euros.

The market growth in dollar terms would be greater due to the depreciation of U.S. dollar from last year.

All the same, Nokia Networks' intention is to continue to take share and grow faster than the market.

Looking at the mobile devices market, it is obvious that, from our guidance today, that the sales and profitability we currently expect are lower than anticipated.

In the current competitive environment, we have managed to break the negative market share trend, but only to a limited extent, with the new product introductions.

Most of it has been achieved using selected price discounts, and we have seen -- and we will see the impact of this in our profitability.

I think the current situation very clearly illustrates the importance of having the best portfolio.

It is only through the product portfolio we can expect to achieve industry-leading shares -- share and margins.

As I've always said, we want to win rather than buy market share.

While we're not nearly where we need to be, during the quarter we started to see clear improvement in our product mix and portfolio.

The Nokia 6230, which started to ship in March, very rapidly ramped up to volumes and was the high-value product already in the second quarter.

In other words, it looks like it is becoming one of the great products.

Also, the share of color and integrated camera phones, the area where we have been weak, has been increasing.

Color now represents half of our volume, and the share of camera phones in the mix is approximately 20%.

We now believe we have gained the leading position in color and camera phone market in Europe.

The improvement in the product mix was witnessed worldwide.

Despite the targeted price cuts, regional ASPs measured in local currency have remained in the first quarter levels and even increased in some cases.

While our product portfolio is gradually improving, we are still not in where we want to be, therefore we have taken certain specific actions.

First, we have spent a great deal of time and energy in owning our product road maps.

The product portfolio will continue to gradually improve throughout this year, and I strongly feel, based on what we have in the pipeline, that we will make a huge improvement starting in the fourth quarter.

Secondly, we have heightened our ambitions in the technology road maps and product specifications, which means greater emphasis on best-in-class technology implementations like wideband CDMA, displays, and cameras.

We're also paying special attention to our ability to support the operators in their differentiation needs.

We believe Nokia's software competence and our service platforms can be a real asset for our customer relations.

Fourthly, I also believe that a higher degree of platforms and modularity will enable us to respond quicker to evolving customer tastes, as well as to drive customization.

Even as the actions to improve the competitiveness of our portfolio are taking effect, they will not be enough to meet the expectations of our investors.

During the next few months, we will continue to focus on R&D spend.

Our goal is to achieve the right investment level and priorities, resulting in high value-added products.

At the same time, we will also need to ensure the important investments in the renewal of the Nokia brand.

I also want to make sure that the organization remains energized and highly motivated, because in the end, it is the people that make the difference.

Thank you, Jorma.

And we are now ready to continue with the Q and A question session.

In order to -- for us to be able to remember and ask the questions properly, please, could you limit yourself to one question only.

Operator, please go ahead.

Thank you, Ms. James.

[OPERATOR INSTRUCTIONS]

Your first question comes from Tim Boddy with Goldman Sachs.

Yes, thank you very much.

I just wanted to ask a little about the mobile handset groups, if we view them collectively.

It appears that your guidance seems to imply something around an 8 to 10% margin for these -- the three groups.

What do you now see as the right level of margin for mobile handset industry leader, what actions are required to achieve this, and in what time frame do you see those margin levels being reached?

Thank you .

I don't think I would be ready to give an exact number, hang my hat on the number.

I don't think we ever did.

Only to say that the -- the margin level for the mobile handset leader, having 30% plus market share and having a strength of product line, is clearly higher than anything we are -- anything that you indicated in your calculation based on our guidance.

Clearly higher than what we are talking here.

What actions do we need?

We need, first of all, to have a product line which is of the kind of caliber, vis-a-vis our competition, that we had until -- towards the second half of last year, in relative terms.

And that we need to have a competitive product in all the major price brackets.

That -- that obviously is something which we are very much working with the kind of prioritization, as well as the filling in of the gaps kind of actions that we have set out to do and which are underway.

Secondly, we need to have a look at the -- both the efficiency and the level of the R&D spending.

I think the amount of software that one has needed to be prepared to spend for, or be ready to develop in order to be there with competitive product in 2005 and 2006, has warranted a significantly higher R&D spend during the last two years than perhaps would immediately be easy to figure out from what we are doing, vis-a-vis the kind of revenue that we are, at this point of time, being able to generate in the marketplace.

So that is one point.

And clearly, short term we will have to look at this prioritization.

However, I'm really convinced that the spending on software that we have been doing, which is high when we look at the revenues of today, will put us in an excellent position in the future, 2005, 2006, and is well justified.

Secondly, we are working, and we will be doing some more work later this year, in making sure that the R&D productivity is top notch.

So we need to improve our R&D productivity as we go forward.

With these actions the way we are, we will be getting into clearly higher margin level than what the Q3 level, which we are obviously are very disappointed with, would mean.

Thank you.

And we'll take the next question, please.

Your next question comes from Paul Sagawa with Sanford C. Bernstein.

Two quick items, and then a more expansive question.

What are the FX assumptions for the second quarter, or what were the translations then, in terms of currency?

How much remains of your buyback authority for shares bought back?

And then, the more expansive question, right now it would appear that your mix of products is unusually skewed towards older products from a Nokia perspective.

How long, in terms of the phones coming through, how long will it take you to get to kind of a more traditional Nokia balance of all the new phones, you know, in your overall product portfolio?

I mean, does that take sometime into mid 2005?

Because clearly you've got product introduction plans, but we've had a little bit of a gap here in terms of introduction.

If you could just talk a little bit about that.

Thanks.

Okay.

Rick will cover the first two questions, and then I'll comment on the mix.

As always, when we set our plans, we use the current FX level, and if you're referring to the U.S. dollar, that was in the 123 range.

In terms of our stock buyback authorization, if you remember, we were authorized to buy up to 5% of our outstanding shares, or 230 million shares.

We used in the first quarter 758.2 million, so we have a balance of that up to 3 billion to spend through the following three periods.

Yeah.

On the mix, Paul, the -- we will be moving towards a better mix starting in the first -- starting in the final quarter of this year.

And I think in the first quarter we should be in pretty good shape in terms of historical good balance, so -- so that's the kind of timeline I'm looking at here.

Thank you.

And we'll take the next question, please.

Your next question comes from Richard Windsor from Nomura.

Hi, good afternoon.

I was just wondering if you could explain the assumptions behind your 6 points -- your revenue guidance range.

Because the implication is from price cuts that you would have lower ASPs, but then this 6.6 revenue guidance would actually imply flat ASPs and a market share increase in the third quarter.

So I'm kind of wondering where is the real impact on profitability coming from?

Is it possible there may be a huge restructuring charge in the pipe that you haven't told us about?

Hello, Richard.

First of all, unless we specify -- unless we specify we do not -- we never include any restructuring charges in the -- in our guidance, so there's no hidden agenda there.

The -- I think the mix will change already in the third quarter somewhat, so that even if there will be selective price cuts, and, you know, you should look at that time wording, selective price cuts, because that's what it is.

The selective price cuts will be counterweighed by the -- by some healthy mix change, driven by some of the product which you have actually already seen in the market and which have done well in this -- towards the end of the second quarter, particularly in June.

So we do not expect a dramatic drop in -- in the ASP.

And the -- there will be -- we will be looking at share gains, but when we -- when we look at the cost of R&D, as well as particularly the increased marketing expense, which will be sort of a slightly different element from what we saw in the second quarter, all together that will mean that it is realistic to look at an impact on our profitability, which indicates the kind of levels that we're looking at here.

Okay.

Thank you.

Thank you.

And we'll take the next question.

Your next question comes from Tim Luke with Lehman Brothers.

Thank you.

I was wondering, just in terms of a regional framework going forward, should one anticipate that you would expect Europe to be an area where you'd continue to see some stabilization in emerging markets, somewhat stronger, and then the North America being the area of most significant challenge in terms of handsets?

And any color there will be very helpful.

Also, just separately, I seem to get the impression that you're suggesting that in some ways the margin structure that we're looking at for third quarter may be somewhat similar for the fourth quarter and then see an improvement in the first quarter of next year.

Is that the right kind of context?

Thank you.

Okay.

If we look at the regions, I think you had a pretty good picture, Tim, on where we are there.

We see a good order book in Europe, and we look at gaining share in Europe in the third quarter, as well as continuing to do well in the emerging markets, with the U.S. being a bit of a challenge.

We did quite okay in the second quarter in the U.S., but I think the dynamics, the seasonal dynamics that we seem to have there in the third quarter is not playing into too much to our favor, so we have a more challenge there.

But that's more or less the regional picture.

With the stabilization of Europe and gaining -- in every respect and gaining share, you know, being really the good news.

Thank you.

And we'll take the next question, please.

Your next question comes from Richard Edwards with Citigroup.

Good afternoon.

Could you please specify any actions you've taken that will really bring your products, or your new products specifically, faster to market?

So things around some of the R&D restructuring, the modularization you talked about earlier.

Can you give us a little bit more color on that issue, please?

That's really, you know, things that are very much a work in progress.

We -- it's really a question of two things: Getting more focus in the R&D, and getting efficiency so that you don't do -- you don't do repeated things parallel in different parts of your organization.

So we have cut some products, we have reviewed road maps, and have taken actions in terms of what is the ambition level in some of the key products.

Is it high enough, is it, perhaps, too high, so that we are reaching too ambitiously in some areas and compromising time to market?

We have taken significant -- or done significant amount of work and taken some quite subtle positions in the design area.

So you will see an impact of that.

That's obviously not overnight, but it's in 6 to 9 months, already there'll be visible progress there so that the design language is not only uniform, but perhaps more up to date than what we have seen in the last 9 months of product introductions.

And there's also, looking at a little bit more long term, going to 18 months time horizon, there's a lot of work into look at some of those hero product which really would reference product on where we would be in 2005, 2006, when we move to new paradigms and how you get to use your ability really to a level -- to a new level which will correspond to the expectations of -- higher expectations which come with 3G and the software that will be coupled in those phones to enable the services, which will all be -- many of them will be fresh.

And we'll take the next question, please.

Your next question comes from Mike Walkley with Piper Jaffray.

Great, thank you.

I was wondering if you could just give us a little more color on your outlook for the infrastructure market for the second half of the year?

And you talked about some margin pressure for the mix of WCDMA, should we think more like the Q1 type level of margins, off of what you just posted?

Thank you.

I think you -- I think of -- I must be speaking -- must have been speaking a bit fast, because I don't think it was a reference on the wideband CDMA margin.

I was just being a bit cautious on the fact that there -- you know, when we have had a fair number of new contracts, particularly in India, but a couple of others, a couple of other areas where in 2G, in fact, where we have -- where we are swapping out competitors and it's a new entry.

So the margin in the initial contract has held quite at the same level as it -- in a very stable way seems to be otherwise in 2G, globally, so -- so there, you know, it's a slight word of caution overall for that -- for the 3G, because there's some -- you know, there are some -- some more weight on that type of contract coming on stream in the 3G.

But we are still talking about very clearly double-digit numbers, so it's not -- it's not that we would be moving away.

I think it is quite interesting, you remember me a year ago, or 5 quarters ago, sitting here in a conference call and saying that the 50% plus operating margins in the network business would be very challenging to achieve, and here we are.

We -- I think we have really demonstrated what can be done, and our organization has done an excellent job.

We essentially are fit for a, you know, this kind of level on a going concern basis.

If we operate smoothly, do everything well, have a stable profile of the different type of contracts, so that sort of 15% or even higher is not abnormal at all.

So there might be slight deviations from that, and I just want to be -- give you a heads up that perhaps there's a little bit of weight on this kind of -- this other type of 2G deals which might lead into a little variation, which should not, on the other hand, be a cause for concern.

But I think we have shown that we can get back into some levels of profitability, which I did call excellent four quarters ago when I discussed the margin level.

So I think this has to be noted.

And we'll take the next question, please.

Your next question comes from Angela Dean with Morgan Stanley.

Yes, thank you.

I'd just like to sort of clarify what's driving this clearly lower EPS guidance third quarter than we saw for the second, and excluding the one-off.

Because it seems that your mix is already beginning to improve.

It doesn't sound as if networks is going to have a particularly visible negative impact, so what is it?

Is it higher SG&A that we should be looking at?

If you don't expect much of a change in ASPs, you know, what are the mechanics of how you get there?

And I guess the related point is, just to clarify what you're saying about R&D.

Is that going to rise?

I'm confused whether that's putting pressure on margins, increased pressure on margins, or whether you're trying to, as you said you've looked at it, you need to focus on it in the short term.

So I'm confused whether that is actually going to go up or down in absolute terms .

Okay, Angela.

If I start from the bottom of your list, long list, of possibilities, so -- so the R&D expense, we are obviously having a close look.

And I think I did note that it is on the highest level compared to the revenues we're generating at this point of time, overall, if you look at the fixed costs side, and -- .

But well justified when we look at what's in store for this industry and what we hear from operators and everybody in terms of their expectations and what we need to have in our product in 2005, 2006.

So obviously that element is there, and even if we have a close look at and cut and prioritize and get more productivity in the R&D, I think it's very difficult not to see R&D fixed number to go up a bit.

It will most likely go up somewhat.

So that's the first comment.

Secondly, on the -- we start from the other end, the ASP, we are cautious on -- slightly cautious on the ASP, but only -- but also indicating that we don't expect a dramatic drop.

It might be down a bit, might be close to current levels, but the -- clearly the selective pricing moves are having an impact.

If we then look at the mix of product, what you are seeing affecting gross margin is the higher new product impacting on the component costs, the higher specs, et cetera, so that will then impact the cost.

And then finally there is the marketing.

We have been on a reasonable marketing cost level, but on the low side.

So I don't think there we -- there would be any point in looking at the lower marketing cost level.

Rather, increasing a bit, making sure we build the brand also going forward.

So -- and also lots of new stuff coming, so, you know, we need to make sure that we are up to speed with the marketing spend.

And with this whole thing, that leads us to be, you know, to feel that the guidance is a realistic one.

Okay.

That's very helpful.

Thanks.

Thank you.

And we'll take the next question, please.

Your next question comes from Wojtek Uzdelewicz with Bear, Stearns.

Thank you.

Just one clarification question.

If any of the gains -- are they in any way allocated to the operating margins reported by this segment?

I dont' know if, Rick, maybe you can clarify that.

But then, the main question I actually had, Jorma, I was just curious, there's been a little bit more of a buzz recently.

I know you guys are replacing some competitors, and so your infrastructure business is doing better.

But are you seeing any slow down coming out of China currently?

Any kind of thoughts on the situation?

Overall, there's been talk about carriers merging from 3G light.

Any thoughts what's -- how's China playing out in the second half of this year?

If I take this one first, and then Rick will look at this, your financial question .

First of all, there is no official announcement, so we have no more information than what you would have on the -- on the possibility of mergers.

The way we see the China evolving in the second half is good and stable.

We have not seen any disturbance or any discontinuation of contract flow, so it's a continuing healthy growth.

We have grown very nicely in the first half compared to previous year in our infrastructure delivery.

So that's on good footing, Wojtek.

But now, Rick, on some of the numbers.

Yeah, on the R&D expenses, Wojtek, I think you asked if any of the gains R&D expense was in the common numbers.

It's important to point out that our total R&D in the quarter of 945 million, i.e. 14.2% of the net sales, includes all R&D.

All of that that is in each of the business groups, including in multimedia from games, and it includes common R&D that is in the technology platform.

It also includes the NRC, which is the very long-term research that we do to build the future.

So the numbers are all there and included in that.

Rick, sorry.

What I meant is, if you look at it, you reported operating margins by different segment, and then there's separate -- and there was, as you mentioned, some of those is gains.

Is there any way to kind of allocate, or say, okay, here, you know, if you look at infrastructure, it was 16%, but was there any of the gains in that 16% by segment?

That's what I meant.

No, absolutely not.

Okay.

Alright.

That's what I just wanted to know.

The other operating income was where we took that exceptional 90 million credit.

Okay, great.

Thanks a lot.

It's common group expenses.

Thank you.

And we'll take the next question, please.

Your next question comes from Inge Heydorn with Deutsche Bank.

Ms. Heydorn, your line is open.

Hello, can you hear me?

Yes, we can now.

Okay.

Sorry about that.

Yes, my question comes into the network side and on the guidance on the marketplace you were giving on networks.

You're starting to get in Q1 and Q2, you leave networks growing by around 11% year-over-year in Euro Telefonica, but you're still guiding for the market just being slightly up in euro terms for the full year.

Is that indicating that you think the second half will slow down quite dramatically or -- ?

That's the key question.

No, not dramatically, but there could be somewhat slower growth, so it's slightly more cautious than the first quarter, but that's all.

Okay.

Thank you very much.

Thank you.

And we'll take the next question, please.

Your next question comes from Tim Long with Banc of America.

Thank you.

If I could just go at the handset margin question in a different way.

At the analyst day, I think it was Ala Pekka that highlighted some of the benefits that led to a 25% cost to manage, inventory carrying costs, warranties, fill failure rates, etc.

Could you just update on -- are all those metrics still in place?

Has there been any change there that's led to the lower margin?

And have you seen that cost advantage narrow as competitors have come up the scale?

And also does that mean there's a different view on outsourcing potentially in the handset market?

Thank you.

The first one is really very easy to tackle, because the -- all those factors which you mentioned are working well spot on, so they continue to be there.

I think with the only exception of quality where we are in better shape than what we would have indicated in November.

So we have made great progress there.

So all the others are stable, and there's -- at least stable or in the same shape, and quality even improved.

The whole issue is about product competitiveness and the breadth and the coverage of the product portfolio.

So that's, I think, your case in point.

Then, would we be looking at outsourcing more in the handsets?

If it makes sense, if there's an opportunity.

We have been reviewing this.

And with Ala Pekka looking at the mobile phones business from -- with his fresh eye, the -- I think the first comments coming from there would be that no immediate dramatic opportunities would say that we will have to rush into the door and go into more outsourcing.

But, yes, we will visit an area which we obviously are looking into.

And, you know, we'll be looking at every dollar we can save.

But it is not -- there's no -- there's no concrete case which we'd adjust and say, that gee, we're going to get the big benefit here, so let's do more than the 20% that we are doing today in order to -- and the 20% is there as a buffer and to give us flexibility.

So no real new -- new stuff there.

And if you look at our competition, what they have been doing, they have been increasing insourcing.

They have been taking back from their outsource capacity.

That, during the last 2 years, has been very clear on a quarterly base.

There's an increasing insourcing trend, rather than the other way.

Not dramatic, but clear.

Okay.

Jorma, do you think that narrowed that cost advantage because they've done a better job, not necessarily that Nokia has slipped?

Well, I -- they -- I don't know exactly, and it would not be an issue to -- to look at.

You know, our issues are relating to product portfolio.

I don't think there's a change in terms of the manufacturing and the logistics on the other area.

Okay, thank you.

Thank you.

And we'll take the next question.

Your next question comes from James Crawshaw with Commerzbank.

Oh, thanks very much.

Thanks for taking my question.

I had originally understood that you were thinking of cutting back on R&D, but did I understand correctly you're actually saying now that R&D will increase going forwards?

There were -- there were a couple of questions, which were addressing very different things.

What we are doing in order to be competitive longer term, and what's our guidance for third quarter.

And I think those were pretty clearly separating.

Right.

Separating the two.

So, all I'm saying is that this is not a dramatic, get rid of couple of thousand people, and then we'll have a big charge and then a lower R&D short term.

No, that you cannot expect.

The -- it's really short term more trying to make sure it will not grow, but that we get productivity gains and we get through prioritization and other things we get more out in its short term.

But clearly we will have to make sure that longer term our R&D as a percentage of sales will be lower, say 12 months from now or 18 months from now, than it is today.

Okay, thanks.

That's clear.

Just to help, what proportion of your R&D is wages and salaries, head count?

And what proportion of it is other costs, perhaps costs outsourced to other companies doing R&D development for you?

Yeah, the same applies outsource, the same calculation model that applies to the other item.

Of course, there are -- personnel cost is a part of it all, a major part.

I don't have a figure, yeah, I don't have a figure on that, but it is a major part.

Okay.

Thank you very much.

Thank you.

And we'll take the next question, please.

Your next question comes from Kulbinder Garcha with CSFB.

Yeah, just two very quick questions from me.

First of all, it did seem as if you're going to raise OpEx to make sure your portfolio is more competitive in the medium term.

That's what I've taken from this call so far.

My question is, how long do you think this structurally higher OpEx level will last?

Is it Q3, Q4 going into next year issue?

Is it just a second half of this year, or is it just the third quarter?

I just want to get a sense for how long you have to take this higher OpEx level.

Then my second question, just on the handset market.

The market today is obviously very buoyant, growing 30%, or around about 30% year-on-year in the first half, if we believe some numbers.

My question is, how do you feel about sustainability of that growth going into the second half of this year and going into 2005?

Thanks.

Okay, I mean, you know, clearly when we're addressing the R&D and the percentage of revenue, we need to look at being ready in the first half of 2005 already at the lower level.

That's for sure.

So that we have a positive impact from a lower R&D level in the first half of 2005.

The viability of the 20 to 30% volume growth, 30% or so volume growth in the second half, I don't think I have seen any figures or any analysts who, other than very extreme, who would really say that second half would be on the same level as in the first half.

They are all lower, so I think it's a question of how -- how much lower.

Somewhat lower level of growth in the second half than what we have had in the first half.

And you also have to make a note that SARS had an impact, leading into a lower competitive level in the first half of 2003.

So good growth levels in the second half of this year, Q3, Q4, leading into a volume which will be in excess of 600 million, but lower growth level than what we had in the first half.

Okay.

That's very helpful.

Thanks.

And we'll take -- we have time for two more short questions, please.

So next one, please.

Your next one comes from Greg Teets with A.G. Edwards.

Thanks, and good afternoon, Jorma.

Is there anything that's really structurally changed in your business that would impact your ability to reach -- to kind of recover historic operating margin levels for the mobile phone unit?

The -- what has clearly happened is that -- and this is where we have been trying to tackle with our organizational dynamics, organization change and the way we focus, is that, you know, there is a clearer segmentation of the marketplace to low end, middle end, high end, and that differentiation will increase.

And how one effectively covers all of those segments is a key issue on where you want to and where you will end up with your margin levels.

And I think -- I think this is the issue where we -- all the vendors will have to take divisions and take a point of view and formulate a strategy.

And I think we are all in the process of doing exactly that.

Thank you.

We'll take the last question, please.

Our final question comes from Richard Kramer with Arete.

Thank you very much.

Very quickly, Jorma, I think we need to go back to the first half of 2001 to see double-digit growth, sales growth for the group.

And I guess we're wondering what is it, and when will it be, that we will start to see Nokia inch back up towards this longstanding target of double digit sales growth?

It's hard to see perhaps the margin improvement without the sales growth.

And a quick question for Rick.

If we assume the rest of the share buyback that's done as you laid out, Nokia will still be left with roughly 10 billion euros of cash.

Is there anything else you can do to the benefit of shareholders with that large cash pile?

What's the point of holding on to that, and especially given the cash flow that we keep seeing every quarter?

Thank you.

Okay.

Richard, if I start, first of all, clearly the first part has to be that we will have to take some actions, looking at making sure that our cost base is viable going forward.

But, the real answer is that obviously in 2001 when the growth of the industry changed and there was some change in the dynamics of the industry leading into our growth levels to be different ever since, we looked at what we can do in the area of software building value into the phones, into the new type of segmentation of phones, which there will be.

And now we are in a situation where we are clearly seeing a bigger software spend, which will pay off.

I am not going to be able to, quite honestly, to give you a date.

Is that 1st of May, 2005, or is it some other date?

Probably it is some other date, but I don't know whether it's earlier or later.

But that software spending will pay off.

And it was actually in 2001 when we started that.

That is the -- that is the paradigm, and without -- with all of that software effort that we have had, having a major impact -- you know, obviously, you know, dramatic new gear cannot be put into effect.

What can be done with some prioritization of the hard worked that we have talked here in terms of different actions, both in marketing, as well as during the operational excellence well, as well as the general cost of R&D, but, it really comes from where the industry will go next.

And I think we are in good position.

Yes, it might make this year pretty hard.

You know, this is not fun to look at this, but we know we are pretty confident we are on the right track, Richard.

And now I'm glad I've got somebody else on my staff answering this cash pile question.

It was great having Rick here.

Rick, you have a go, huh.

Richard, gladly, the cash pile.

I think -- you know, the strong balance sheet has served us well for many, many years at Nokia.

And you have to look back to what we said last year when we had this same question, and both Jorma and I said we thought we could do better in our distribution to the shareholders.

Well, we increased the dividend, and we increased our authorization on share buybacks from 2 billion to 3 billion, pretty sizable increase.

And we will do the same this year.

We'll look where we are, and then we'll determine what kind of distributions are right to distribute a good amount to our shareholders, maintain the financial strength and the flexibility that comes along with that.

And, you know, inevitably I think in your question was the question about acquisitions.

Well, of course, we always look at possible acquisitions, but it has to pass a number of criteria, the first and most important being, will it add value to the shareholders.

And we have the ability to do that if and when we find those acquisitions, but it's not burning a hole in my pocket.

Thank you, Rick.

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

I would just like to remind you that during the call we've been making a number of forward-looking statements that involve risks and uncertainty and, therefore, actual results may materially differ from what's currently expected.

Factors that could cause such difference have been identified in more detail on pages 12 to 21 in Nokia Form 20-F and also in our press release issued today.

Thank you and have a nice day.

This concludes Nokia's 2004 second quarter conference call.

You may disconnect at this time.