諾基亞 (NOK) 2005 Q2 法說會逐字稿

Thank you for participating in Nokia's 2005 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 2005 second quarter conference call with our host, Miss Ulla James, Vice President of Investor Relations. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to our host, Miss Ulla James. Miss James, you may now begin.

Thank you. Ladies and gentlemen, welcome to the Nokia second quarter 2005 conference call. I am Ulla James from Nokia Investor Relations and Jorma Ollila, Chairman and CEO of Nokia, and Rick Simonson, CFO of Nokia are with me today.

A couple of housekeeping matters before we kick off. 2004 revised IFRS numbers for quarters 3 and 4 for comparison purposes have now been posted on our web pages, Nokia.com.

In addition, on August 25 we will host a focus on India event in Delhi. In addition to India, the program will cover APAC and China markets as well. If you are interested in attending the event, please get in touch with Nokia Investor Relations, either in Helsinki or in New York. The registration will close tomorrow in order to allow time for visas and other travel arrangements. For those unable to travel, we will be providing a live webcast hosted on Nokia.com.

During the call 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 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 practice. We have identified these in more detail on pages 12 to 22 in our 2004 form 20-F and also in our press release issued today.

Our aim is to finish the call in approximately 1 hour. To view the supporting slides while listening to the call, please log onto Nokia.com/investor. For your convenience, a replay of the call will be available at least 2 hours after the call ends until Saturday noon. The call will also be archived on our website.

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

Ladies and gentlemen, growth of the mobile device industry exceeded market consensus as well as our own earlier forecasts. Latin America showed excellent growth year on year and made up over 70% of the sequential volume growth of the global market.

Based on the second-quarter development, we now have upgraded our year 2005 mobile device industry volume estimates to 760m units, representing an annual growth of 18%.

According to our preliminary market estimates, our second quarter device market share reached a strong 33%, sequentially up almost 2 percentage points and up close to 3 percentage points year on year.

Nokia continued to show good execution in the second quarter, during which our net sales reached €8.1b. This represents a year-on-year revenue growth of 25%, our highest sales growth in almost 5 years.

We shipped 60.8m mobile devices, representing a year-on-year volume growth of 34%. Sequentially, our mobile device volume grew by 13%. Almost all of this growth came from the Americas, with two-thirds of the growth coming from Latin America and the rest from North America.

The share of volume from the Americas climbed from 16% in the first quarter to 25% in the second quarter. This mix shift to the emerging markets, a lower price -- and lower price markets in general drove our ASPs down and also affected our margins negatively.

As said, the second quarter mobile device market, at 183m units, was slightly stronger than expected. Year-on-year volume growth was 24%, and sequential 8%.

On a sequential basis, the North American market was up slightly. Latin America was up 53% sequentially, after a steep seasonal decline in the first quarter and a huge 55% year on year.

Increased competition and operator promotions were reflected in very strong growth in markets like Columbia and Ecuador. Growth in China was in line with industry growth year on year, while down sequentially after a strong Chinese new year. The APAC market was almost flat sequentially, and up only 8% year on year. This weaker growth was driven by Japan, where the market was up only 4% year on year. And the Korea market was down by 25%.

The market in EMEA, Europe and Middle East and Africa, was up 7% sequentially, and 27% year on year. The growth was driven mostly by new subscribers in Eastern Europe, Middle East and Africa, while Western Europe was flat sequentially, and up low double-digit year on year.

At just over 9m units in the second quarter, wideband CDMA market was up 1m units sequentially. Wideband CDMA market was rather flat in APAC and up strongly in EMEA. We estimate that the wideband CDMA market in 2005 will be broadly in line, or perhaps slightly lower, than our previous estimate of close to 50m units. The share of EMEA is expected to be approximately 40% of the global wideband CDMA market in 2005.

Our second quarter mobile device market share increased to a solid strong 33%, up 160 basis points sequentially and 260 basis points year on year.

Share gains were most pronounced in the fastest growing markets, which solidified our number 1 position in Latin America and we are now number 1 also in Russia. In China we extended our clear lead where, on a year-on-year basis, we grew market share by 10 percentage points, from 15 to 25%.

Our market share developed positively in high growth Middle East, Africa region, while being stable in Western Europe. Building on our excellent wideband CDMA momentum in the first quarter, our shipment and market share in wideband CDMA were strongly up.

On the back of the slightly -- sorry, on the back of the highly successful Nokia 6630, which is a leading product today in the wideband CDMA, and new hit product, Nokia 6680, we doubled our wideband CDMA shipments and practically doubled also our sequential market share. We have gained a clear number 1 position in wideband CDMA, as indicated by our 40% wideband CDMA market share in Europe.

The overall Nokia channel inventories remained within normal range. We believe that industry channel inventories are also within normal range, with China and the U.S. in the high end of that range.

Nokia's second quarter device ASP, at €105, was down less than 5% sequentially, and 3% year on year. ASPs were primarily driven down by volume shift to lower ASP markets and also somewhat by current price competition in the entry level.

A robust 89% year-on-year growth in multimedia increased its sequential share from 19% of our mobile device revenue, to 21%. Sales were driven by high demand of imaging products and supported by the broadening imaging portfolio.

Enterprise Solutions performance continues to depend on a relatively narrow portfolio. Increasing sales momentum of Nokia 9300 was offset by the price declines in the messaging category.

The importance of a full range product portfolio continues to be paramount. Despite the mix shift experienced in the second quarter, the top 5 revenue contributors continued to be from diverse price points, with 3 products having clearly higher-than-average Nokia ASP.

The combined sales of Nokia 6230i and Nokia 6230 provided the highest revenue contribution, which was followed by the Nokia 1100 family. The Nokia 6680, which started ramping up only in the second quarter, was already in the third highest revenue contributor. Together with the Nokia 2600 and Nokia 6610i, these 5 products represented approximately 35% of the total device revenue. On the other hand, due to the emerging marketing impact, the top 5 volume sellers were below corporate ASP.

We continued to make steady progress in product renewals. In the second quarter we announced 17 new products and started to ship 9. The transition from the mid-range 6230 to the new 6230i progressed very well. And the combined volume was easily more than the 6230 in the first quarter.

The Nokia 6680 wideband CDMA smartphone did very well, capturing almost 50% of our 3G volume after only 3 months of shipment. Also of note is the important mid-range clam-shell Nokia 6101 and the premium Nokia 8800 started shipping in the second quarter. We expect both to continue the good momentum into the third quarter.

Share of camera phones increased slightly to 38% of volume. Share of color was stable at approximately 70% of volume. Smartphones accounted for 10% of volume and 25% of device revenue.

The second quarter infrastructure market reflected normal seasonality. And Nokia Networks revenue of €1.6b was up from year on year and up strongly sequentially. Network sales practically doubled year on year with Latin America, were up strongly in Asia Pacific, flat in EMEA, down slightly in China area and down significantly in North America.

Network's operating margin in the second quarter was 12.9%, down over 2 percentage points sequentially. Gross margins were impacted by a product mix and greater share coming from imaging markets.

Wideband CDMA sales were approximately 20% of total Network sales in the second quarter. The overall gross margins in wideband CDMA continue to improve and are currently close to those of 2G.

Meanwhile, growth shifting to emerging markets, increased share of services business and our decisive competitive actions added further pressure on the margins.

Rick will now cover the key financials in somewhat more detail.

Thank you Jorma. Ladies and gentlemen, second quarter results again speak highly for Nokia's execution capability. Year-on-year sales growth was the best in almost 5 years. Mobile device volumes were very strong, both sequentially and year over year.

Nokia gross margin reduced to 35.8% and the decline was as a result of lower gross margins in mobile phones and Networks. Lower gross margins in mobile phones were driven primarily by the shift to lower ASP markets, ensuring price competition in the entry level. Gross margins for multimedia and enterprise solutions were strong and stable. And Jorma already discussed the drivers behind the lower gross margins in Networks.

OpEx was up approximately 150 basis points sequentially as a percentage of sales. R&D was down as a percentage of sales and up only 1% year on year in absolute terms. We exited the first half of 2005 having reduced our R&D run rates in devices nearly by 5%, on target. We will continue our previous stated R&D efficiency drive, while ensuring long-term benefit from industry leading R&D.

Marketing expenditure was up close to 50% sequentially, with multimedia doubling their spend. The increase in multimedia was driven primarily by the N series [indiscernible] launch as well as point of sales training for multimedia products.

Admin and other general expenses had a relatively good year-on-year difference, but in the comparisons we had a €9m insurance premium cover in the second year last year -- second quarter last year, so I think that explains that one.

Looking over a couple of special items in quarter 2, 2005, we recorded a €37m gain in operating income. That's located in the common Group expenses. That was from earlier-announced real estate sale in Finland.

We took a further gain of €17m from the sale proceeds of the final portion of our holdings in the France Telecom bond. The gain, as usual, was booked in financial income and expenses.

The net impact of these items on EPS was approximately a positive $0.01. As a reference point, I've also included special items for the second quarter last year when the impact of special items on EPS was a positive $0.03.

I will make a few comments on currency impact on Nokia sales and margins. During the second quarter, the U.S. dollar strengthened by 7% against the euro. The U.S. dollar continues to represent the biggest share of our foreign currency basket. It's about half of our sales are in U.S. dollar or dollar-related currencies.

In mobile devices, the share of the U.S. dollar is slightly less. And in Networks it is somewhat higher. Also, approximately half of our component costs are in U.S. dollar-related currencies.

The second quarter plan was based on a euro/USD rate of 1.3226. The actual average for the quarter turned out to be slightly better at 1.2934, which was also 1.7% lower than the average Nokia euro/dollar rate for Q1.

Due to hedging and only a modest move in the average exchange rate, the net impact of currency move on revenue and the margin in the second quarter was not material. In the second quarter reported sales growth was 25%. On a constant currency basis, sales growth was 27%. Going forward, our current third-quarter plan is based on a euro/dollar rate of 1.216.

We're going to cover now how and what of our hedging looks in detail. Again, as a reminder, first we hedge transaction exposure. We hedged the estimated Nokia sales and cost of goods sold on a rolling basis, 9 to 12 months forward, and therefore the foreign exchange fluctuations do not immediate affect our sales and operating profits. The results of hedging are released to the business group P&Ls on a monthly basis.

Concerning translation exposure, balance sheet items and major items such as accounts payable, accounts receivable are fully hedged. We do not hedge P&L translation exposure and therefore some effect of the currency moves show up in the P&L. However, there is approximately a 1-month delay due to the way we set up the Nokia P&L exchange rates.

In summary, currency moves in the short term do not overly affect our sales and profitability. And for more details on hedging, have a look at our 20-F where we cover our hedging practices very extensively.

Looking back to some of the balance sheet cash flow metrics, inventory increased in anticipation of the ramp ups of second half volumes. Accounts receivables increased as a result of stronger revenue growth in Latin America and other areas where payment patterns tend to be somewhat longer than average. Sales were also particularly strong at the end of the quarters.

Capital expenditure was €156m, up slightly from €112m in the first quarter. For the full year we continue to estimate CapEx at €600m, pretty much at last year's levels.

We have several ongoing projects to increase our production capacity in India, Hungary and Latin America.

During the quarter we paid €1.5b in dividends and bought back €41m Nokia shares for a total of €549m. Our intention is to execute as much as possible of the buyback program authorized by the last annual general meeting.

The second quarter net operating cash flow was down at €510m, primarily as a result of higher networking capital. We expect to improve in our Q3 operating cash flow.

Gearing was minus 8% and our cash and other liquid assets decreased to €11.5b from €12.6b a quarter ago, after the distributions of €2b to the shareholders.

With this, I would like to now hand it over to Jorma. Please?

Thanks very much Rick. Rick has covered the balance sheet assets in detail. Let me now make a few comments about intangible assets, the intellectual property rights.

The role of IPR in our business environment is increasingly important. And we believe IPR will play a critical role in the future. Companies with strong IPR position will have a competitive advantage in a converging industry and in the increasingly competitive marketplace.

In addition, we also believe that a healthy business environment requires that fair compensation must be available for R&D investment. Having said that, IPR cannot become a hindrance for innovation and further development of the technology and the industry, hence adhering to fair and reasonable licensing is a must.

Nokia has been building its IPR portfolio over the last 10 years. And today our portfolio consists of over 9500 patent families. We believe we have now one of the industry's strongest IPR positions in major cellular technologies as well as in mobile applications, wireless implementation and product technologies.

I see the strong patent position as 1 indicator of our technology and innovation leadership. We are currently a party to a number of patent license agreements for a number of standards, with varying terms, conditions and expiration dates. The terms and conditions of the individual agreements are confidential.

As of today, based on the current licensing agreements, we are a net payer. But once the existing payment obligations expire within the next 2 years, we believe our negotiating position will be stronger than in the past.

I would now like to conclude by commenting on the third quarter outlook. Nokia's third quarter net sales is expected to range between €7.9 to €8.2b. We expect the third quarter mobile device market volume to be slightly up sequentially. We expect Nokia mobile device volumes to grow broadly in line with the market.

We are projecting a further decline in both industry and Nokia ASPs, given that the emerging market growth continues to outpace the market. Western European growth being below average, current intense competition in the low end, and muted European 3G uptake.

In the device business the mix shift towards the low end, combined with the current heightening competition puts some pressure on gross margins. Drivers for lower gross margin in Networks are mix shift towards emerging markets, fast service growth and Nokia decisive actions in current competitive market environment.

Marketing and R&D are expected to be down from the second quarter as a percentage of sales and also in absolute terms.

Administrative, general and other expenses are expected to be up from the second quarter level, which was positively impacted by property divestment.

Nokia's third quarter EPS is expected to range between €0.14 to €0.17.

We are now raising our 2005 forecast for the overall mobile device market volume, as we expect the industry volume to reach approximately 760m units, representing approximately 18% growth. We expect the value growth to be somewhat less due to lower industry ASPs.

In 2005, the mobile infrastructure market is expected to grow slightly in euro terms. Our target is to grow faster than the market and gain share in both mobile devices and in infrastructure in 2005.

I would now like to finish this call with a few reflections on Nokia and the industry. The handset market volume this year has continued to exceed the market expectations as well as ours. The upside has come from strong growth in emerging markets. In fact, we now expect that subscriber additions will be roughly flat, with what we -- with what was supposed to be the peak last year.

Nokia is in a unique position in emerging markets, where we are totally committed to maintaining our clear leadership. These markets are a powerful tool for us to grow market share, to maintain our volume advantage and to generate excellent cash flow. Actions are already underway that we believe will enable us to even further extend our leadership.

First of all, we are bringing to market 2 new handsets this quarter that are based on our new low-cost platform. Secondly, we are implementing a new low-cost sim or chip solution in our entry-level products later next year. We are putting more emphasis also on using low-cost manufacturing to support the entry-level market, like our new plant in India.

In addition to these actions in the entry level, we continue to improve our position in mid range and high end of the market where our portfolio continues to improve. Multimedia business group has gained a good momentum and is making a very meaningful contribution to both our sales and bottom line.

We believe the industry's consolidating around the few players with the tools to succeed in the market. We continue to leverage on our core strengths in product portfolio, operational efficiency, logistics and cost control, and brand, and customer knowledge, in order to extend our number 1 position. We believe the actions we are taking to improve our leadership will ensure that we can maximize our long-term profitability and cash flow and continue to deliver value to our shareholders.

Thank you Jorma. And we are now to come to you for Q&A session. In order for us to be able to remember and answer the questions properly, please limit yourselves to only 1 question only. Operator, please go ahead.

[OPERATOR INSTRUCTIONS]. Your first question comes from Inge Heydorn with Deutsche Bank.

My question really is related to the U.S. market. Volumes were up quite dramatically for you guys in the U.S. from 4.3m to 6m in North America from Q1 to Q2. Did you do a strong push in the U.S. on marketing or -- because as I see it you haven't brought out so many new handsets in the North America market. My question is really what can we expect for the second half of the year in the U.S.? As you highlighted before, do you think the recovery in the U.S. for Nokia would come by the end of the year or 2006. But sequentially the numbers looked very, very impressive.

Yes. They are Inge. The U.S. market's recovery, obviously, was very welcome. And I think we have started to get back on track there. In fact, some of our product introductions have been already there, have made an impact. But it's a gradual improvement and I would still stick to saying that towards the year end, particularly in the first half of next year, we will be in very different shape than what has been the case in the recent past.

So it is -- we are building a very solid foundation. There will be some really interesting products towards the year end, towards the early part of next year, both in the mass market segments as well as in the UMTS segment and the high end, otherwise when the new services will be rolled out because that's what's going to happen in the U.S. increasingly in the next 12 months.

So I think U.S. is one of the areas where you'll be -- where you'll be expecting good development.

Jorma, sorry, can I ask you a question on that. The development in Q2 or Q1 was so good, can we expect or are we going to be -- us quite aggressive in Q3, Q4 also in the U.S. to keep your market share before you get your products out? Or what's the strategy really in the U.S.?

Yes, we have increased the marketing spend in the U.S., just as elsewhere. But it always goes along with product introductions. So you can expect acceleration towards the year end and then in the first half.

Okay. Thanks very much.

We will take the next question please.

Your next question comes from Mike Walkley with Piper Jaffray.

Thanks. I was wondering if you could talk a little bit about the seasonality in your business as you go to fourth quarter. I know you've talked about faster growth in emerging markets in the second half of the year. But with the -- all these things, is there any kind of replacement cycle in the mature markets that improved you shipped more towards mid to high end that you've seen over in the past? Thanks.

The rate of replacement obviously differs from 1 mature or developed market to another and then there are certain -- certain seasonal factors. If you look at the total replacement number, the replacement is expected to be about 60% of -- 60% in 2005 out of the total base, which is slightly up from the somewhat below 60% level last year. 50 was [growth] the year before.

So if you look at the number of new subscriptions, they are expected to be -- to be overall, as I said in my introductory remarks, this is going to be the peak here, higher than -- somewhat higher than last year.

When we're looking at -- will there be any particular patterns towards the year end? Obviously the big question is the 3G push in Europe by the operators. When one analyzes the market now, our wideband CDMA strength in Europe has evolved during the second quarter dramatically. So we now have over 40% of the European and Middle East area. The market share is just very strong and we are doing very well with 6630 and 6680.

The market has really not taken off. It will be around the 50m or slightly lower, as I said earlier. It's all dependent on how the operators will be campaigning on the services and how the 3G devices will fit with their campaigning profile.

The discussion of the operators is ongoing, as we speak, and has been ongoing during the last 3 weeks. And we don't have a full picture on how strongly they will push the campaign button here. It remains to be seen in September, October.

And also I think we are, ourselves, a little at fault here because our logistics is so dramatically good, better than anybody else, that we often get in late September or late October period large chunks of orders from operators who have suddenly realized what is the campaign theme that will stick. And then they know that they will get us the millions of volumes that they happen to need for the particular campaign that is a good one.

So, yes, basically we're seeing now that the 3G campaigning will start seriously in the third quarter -- in the end of the third quarter, towards the end of the fourth quarter. But the strength of that remains to be seen. It's really up to the operators. So that is a key decider in the mature markets on what sort of replacement items we will be seeing.

If we look at the camera phones, the share of camera phones has increased somewhat this year from what it was last year or first quarter. But not dramatically. So there is an increase which continues. So the replacement driven by the imaging devices does have a user.

And another point, if you look at the 760m forecast that we have made, it indicates a slightly lower seasonality this year than what was the case last year. So even that gives more, you might say that gives more scope for growth. But that depends really on the replacement demand more than anything else. So I hope this discussion, which has been a discussion rather than 1 or 2 bullet points is helpful to you.

Thank you very much.

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

The next question comes from Stuart Jeffrey with Lehman Brothers.

Thank you. I've got a question on your sales and marketing expenses. In the last few quarters you've guided for a reasonable increase in sales and marketing and then found that you didn't need to use it. And I guess this time you have chosen to use it and you've used -- you've highlighted the DN series and some training and the point of presence was a key driver to that.

Should we think about the new sales and marketing levels being a new structuring level, a new higher level, or as that training unwinds and perhaps less sophisticated products than the N series get launched should we expect that perhaps the sales and marketing spend starts to ease off a little bit? And how much flexibility do you have around that? Thanks.

I think obviously marketing is a key issue here in terms of OpEx and the R&D, but let's leave that to a separate discussion. If we look at the marketing, we consider that the shake-out which is underway in the industry with almost half a dozen visible players either sitting on a fence or already having decided to go and do something else than mobile phones, is a very meaningful trend and will continue. So it's a consolidation or shake-out which we are seeing here.

And, as this happens, it will clearly lead, and has already led into 2 or 3 strong players to really be the winners. And therefore the marketing spend is a crucial one. And clearly when we went on to do some well-focused marketing campaigns in the second quarter, we very much had that in mind. It's a long-term market position, not only in the developed, but also in the emerging markets that we have in mind.

We will continue that, but obviously -- and that's partly why we are not -- looking at the short term margin, or the impact of those marketing investments and R&D, is not a very fruitful way of looking at it all. When the industry is under restructuring or turmoil or consolidation, you have to look at long term. And what you do has to be directed to things that are meaningful longer term, and the marketing is clearly very meaningful here. We also have a lot of new product introductions, as you know.

So I think we have come to a -- closer to a new level. It could be a little lower in the third quarter. Could be a little lower in the third quarter, but clearly this is not a one-off that we saw on the second quarter, and the reasons should be clear. Thanks very much.

Thank you.

Thank you, Stuart. We'll go to the next question, please.

Your next question comes from Wojtek Uzdelewicz with Bear Stearns.

Thank you. Jorma, I just want to ask - or maybe Rick as well - when you look at your marketing -- because that was the big swing factor, because if the marketing dollars were slightly lower, it would probably have had more of an upside to the earnings last quarter.

When you decide to spend the dollars, what metrics would you use? Do you try to look at some return on that marketing dollars, or how financially you approach -- or if you could give us some metrics or the way of thinking when you allocate this big jump in the marketing dollars on that. And somewhat, just very quickly -- related somewhat to that, with [indiscernible] recently saying more emphasis on the low end on the market, that they're focusing. Do you expect the competition on the low end to increase dramatically? They've been really highlighting that market and will you focus on that.

I'll tackle that 1 first, Wojtek, and then come back to the marketing. So first of all, there was no way we would have gained market share in the way we did, pretty significantly in the second quarter, if we had been somehow hit, in the major emerging markets, in terms of our market share in those crucial China, India, Latin America, Russia. No way. We continue to be strong. We have gained overall in those markets, in terms of our share.

Yes, there has been currently some price pressure in the low end, but we have been able to respond really well. Our margins are clearly superior to anybody in the industry and that is going to continue. So no, there is no dramatic change in dynamics. I think that's -- going forward or long term, that's really my message.

Secondly, on your first point, Wojtek, on the marketing spend. Clearly, we have metrics and we follow in each of our divisions and we follow in terms of our local -- regional and local spend. And it's clearly monetary - what sort of gross margin are you going to get, both short as well as long term, from the marketing spend? And we have that metrics for -- both geographically as well as business wide.

So, if you look at the metrics, it is there and it's clearly followed. And if we are -- and I want to clarify a little bit on the overall Q3. When we look together, the marketing and the R&D, my guidance for you is that we will have lower OpEx vis a vis our sales in Q3 but, clearly, what I said about the marketing spend does hold.

Rick, I think, wants to add something, so --

Wojtek, if I may, you asked the question about how do you measure marketing spend return. And, obviously, with the strength that we've displayed for years in our direct sourcing, that is the component becoming the products - we're unparalleled in being efficient there and having the highest return.

Also, though, we have an indirect sourcing group that does just what you're speaking about. That group reports to me and they have stepped up [indeed] their focus on working on how do we measure the marketing spend, get the efficiency there, how do we get volume benefits there, just as we do it in the direct business. And we picked up our efforts on that, ahead of this planned increase in marketing. So it goes hand in hand.

So the answer to your question is yes. Do we look at it on the return? We do. We look at the return from a monetary measure. And then also, as always, we look for the effectiveness of the campaign, in terms of share of voice, in terms of preference and visibility in the marketplace.

Very helpful. I appreciate that.

Thanks, and we'll go to the next question, please.

Your next question comes from Tim Boddy with Goldman Sachs.

Thank you very much. I wanted to ask, really, how you're feeling about your 17 to 18% margin target in handsets. How confident are you in this? And I guess the context in which this seems important is that it seems very difficult, whilst ASPs keep declining, to get the revenue growth over the long term which would allow you to get operating leverage on these higher marketing costs and, I guess, reduced R&D. So could you perhaps help us with those 2 questions of how you're feeling, how confident are you in the device margin targets and secondly, can you get there if ASPs keep declining? Many thanks.

Well, first of all, this device target is a good target. We feel good about being able to get there, particularly with multimedia just starting to kick in. You have seen what can happen, what sort of market shares we are getting in some key segments, and there are a couple of examples which I've highlighted. So it's the right kind of target and that is reachable. So we will continue there. If somebody gets there it will be up and it will be us.

The -- your point about the ASPs. Obviously, the key thing here is that we have to have all cylinders working well - the low end, the mid range and the high end. And therefore, the work that we are doing in multimedia, as well as in Enterprise Solutions, is extremely important in getting the whole range there and contributing. But I think in terms of the overall business as such, the ASP declining somewhat is not a hindrance, if we get all these elements right that I did explain.

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

The next question comes from Ittai Kidron with CIBC.

Hey, guys. Just a quick question on the ASP decline. Could you give us a little bit more color on in what specific markets you saw more ASP pressures? And what was the specific competitive landscape in that market? And was it mostly carrier driven, was it mostly other OEMs operating in the area disrupting prices? Any more color you can provide on that will be greatly appreciated.

It's over all the emerging markets and really the question of market mix on how the emerging markets are so much more dominant in terms of the total picture now. So it really comes through the mix, and also the fact that the U.S. market is a bigger share of our total, as we highlighted in our introductory remarks. So it is not 1 competitor, it is not an operator arena or 1 OEM or ODM player, whoever, coming in.

I think the industry shakeout or consolidation which we have in hand has something to do with it, in the emerging markets, here and there, because obviously you see desperate moves short term. But it's really the market mix which is the most important single thing when you are looking to that.

Okay. And when you look at margins on those type of low price handsets, how would you characterize them compared to your corporate average? How far or -- How low are they relative to your average?

Not dramatic. They are somewhat lower, but not dramatic.

Okay. Thank you very much. Good luck.

Thank you and we will take the next question, please.

Your next question comes from Jeffrey Schlesinger with UBS.

2 questions. 1, Rick, with more of the growth coming from the emerging markets, do you expect a change in your working capital efficiency, as you mentioned the receivables are a bit longer in some of these markets? Is that a fundamental change you see going forward, that you experienced somewhat this quarter?

And then, Jorma, your comments on intellectual property, thinking that you should become more advantaged as you go forward and renegotiate some deals, does that account for the fact that a lot of your new products incorporate, obviously, intellectual property from other industries, whether it be music, imaging and things like that? Does that take into account, perhaps, also paying a bit more for these other technologies over time? Thank you.

Yes, Jeffrey, on the first question, did highlight there that -- I mean, obviously we had a significant increase in the working capital used in Q2. But again, those -- that move is consistent with the very dramatic rise that we had in volumes, in the markets where the payment behavior does tend to be longer than average. But you can be assured, with my credit [back down] and our long term historical focus on working capital excellence, we [indiscernible] on this.

And once we start making big contracts and deals in these markets, yes, you see a bit the exaggerated hit here from Q1, where we had stellar working capital management to Q2. So I see that absolutely moderating. But in fact, in these -- some of these markets, they are typically a bit longer paying than what has been the historical average in some of the more mature, developed markets.

Okay, on the IPR. Clearly, we have taken into account, in our comments that I highlighted earlier, the fact that, when the convergence -- when we go ahead to convergence products, there will be an increasing amount of IPR exposure in areas of media, music etc. So that's an area which -- where some of the -- many of the IPR work that we have done in applications gives us some opportunity to get really into that. But obviously we are entering into a new arena, which has an impact.

So yes, that has an impact, but it's taken into account. And, if you look at the overall picture, we are clearly in a better position as we see ourselves going through the next couple of years when we will -- after we have renegotiated the contracts.

Thank you. And move on to the next question, please.

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

Thank you. Jorma, if you could, I'd like to touch on the investment in marketing and R&D, more on a longer term and strategic basis. Could you just give us a sense for what you think you'll be looking at, as far as a timing or a means to start to reap some of the benefits from the move that you're making now and that you're going to make over the next few years? Is it going to be based on market share, or a certain number of legitimate competitors?

And secondly, if you could touch on that -- also discussing how the industry is transitioning, but it's also transitioning where competitors like Alcatel and Siemens are turning into competitors like CCL and BenQ. And does that change the metrics at all, the timeline for you to start to reap some benefits from the strategic investment moves?

Okay. I mean, obviously, this is gradual. And it doesn't happen overnight. You can't say a particular quarter. But if you look at the brand preference impact of some of the marketing activities which we have already, this year, made, you see a very clear impact, short term. You see the impact in a matter of 3 months. That is an interesting thing, even when we are talking about the high kind of preference numbers like the ones that we have in different parts of the world.

So therefore, no need to look at any big jumps, because we have a good base on which we are building a consistent step of marketing actions. So you will be already seeing benefits towards the end of this year, following then next year, in terms of that marketing approach. It's particularly the broadly based approach to what's used in emerging as well as in developed markets, and then developing the receptiveness and the understanding about what we can offer in the multimedia area. So it's really both of those 2 in mind.

Jorma, do you think the game changes at all with Asian competitors buying up assets that were traditionally European?

I don't think so. I think it will probably make it simpler, because there are fewer players. And the Asian players will have -- the new players entering the market will have a hill to climb. So the consistent base that we have built gives us an edge when going forward. And I think we have a pretty good handle on where we get the return, in terms of a spend in certain regions, vis a vis the brand awareness and the brand preference that is coming from that.

So we feel we have a pretty good handle there. And also, I mean let's face it, we can also move downwards the marketing spend, which is always an option which we have used and will use, if we feel that we need to use that option in order to secure short term profitability, for 1 reason or the other.

Thank you.

Thank you, Tim. And we'll move into a last question, please, operator.

Okay. Your final question comes from Kulbinder Garcha with CSFB.

Hi. Could you just please give us an update - a question probably more for Rick - on your R&D and what you're doing there? Because it seems you have the long term R&D targets, I think, in the high single digits for the overall business. And I'm just thinking, in the context of the margins you've just produced, you are a long way away from your long term targets. Are there any specific actions that we should expect there in the next 2, 3, 6 months or so?

Yes, Kulbinder, as I mentioned in the remarks, on the devices business, we have set out, at the end of 2004, that we were going to take down from 12 to 8%, as a percentage of net sales, by the end of 2006. Now, we are well on our way on that, as you see. We said we weren't going to unduly rely on just growth in the top line. We have that good growth in the top line. But, as I mentioned, we also, exiting the first half here, reached our target of reducing the run rate on first half of this year vis a vis the second half of last year. And what we're doing now is looking at are those the right -- what are the targets now and energizing everybody in the organization, in our technology platform and in the business groups, to redouble the efforts there to make that happen.

So I feel good about where we're moving. We said it would accelerate if we get to the back of that, as we kick in on some of the efficiency gains that can be gotten. It isn't just cutting in R&D, but it's efficiency in the process. Pertti Korhonen has talked to you about that a lot in our capital market events.

On networks, we've mentioned before that the target of getting to the 14% level by the end of 2006 was going to be a bit back loaded. It could be sticky. It could be lumpy in the interim. And what we want to make sure we do is spend appropriately there (as we're seeing good momentum in Asia's BPA, in our trials which are going on there) and really make sure that we're there for the next generation.

And also investing -- you have to realize, in networks, investment in the R&D is to bring down the cost base, particularly in the radio side. And I think you've seen there there's increasingly a volume gain and price and scale are important there.

So that's how we see that working. And the targets that we have for '06 are still in place. We have actions and incentives to widen it. Thank you.

Thank you, Kulbinder. Thank you, Rick. Ladies and gentlemen, this concludes our call today.

I would just like to remind you that, during the conference call, we have made a number of forward looking statements that involve risks and uncertainties, and actual results may therefore differ materially from the results currently expected. Factors that could cause such differences have been identified in more detail on pages 12 to 22 in our 2004 form 20-F, and also in our press release issued today.

Thank you, and have a nice day.

This concludes today's conference call. You may disconnect at this time.