諾基亞 (NOK) 2009 Q2 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the second quarter Nokia earnings conference call.

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

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

(Operator Instructions) I will now turn the call over to Mr.

Kristian Pullola, Vice President, Head of Treasury and Investor Relations.

Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's second quarter -- so let's try again.

Ladies and gentlemen, welcome to Nokia's second quarter 2009 conference call.

I'm Kristian Pullola, Head of Nokia Investor Relations.

Olli-Pekka Kallasvuo, President and CEO of Nokia and Rick Simonson, CFO of Nokia, are here with me today.

During this briefing and call, we will be making forward-looking statements regarding the future business and financial performance of Nokia and its 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 11 to 28 in our 2008 20- F and in our press release issued today.

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

To view the supporting slides while listening into the call, please log onto the IR website.

Please note that today's press release and the presentation include non-IFRS results information, in addition to the reported results information.

Our quarterly results release includes a detailed explanation of the content of the non-IFRS information, as well as a reconciliation between the two.

With that, Olli-Pekka, please go ahead.

Thanks, Kristian.

Good morning, and good afternoon.

Q2 was a continuation of Q1 in terms of the demand environment.

And against this backdrop, I was quite pleased with our operational performance.

In Q2, Nokia delivered improved operating margins in each of our three reportable segments.

Q2 was a solid quarter because Nokia performed well in areas such as supply chain management and operating expense execution.

Our strengths in these areas are well known.

However, we cannot only rely on our traditional advantages to carry us through the evolving competitive environment.

Going forward, our intent is to create significant sale to value and accomplishing this requires Nokia to develop new skill sets because the mobile handset industry is undergoing a fundamental transformation.

It is clear that Nokia must accelerate the pace of our strategic transformation into a solutions Company and I would like to take you through five key points before I get into the second quarter.

And I will get there.

But I think this point's also important, bearing in mind some metrics discussion Rick will have later in this call.

So first, the mobile industry is undergoing the biggest change in its 20-year history.

A new industry is emerging and available to be shaped by Nokia.

It being formed from elements of the mobile handset industry, the internet, the PC world and media and content.

Advancements in mobile handsets and the internet are the principal capitalists in my opinion.

As such, competition has been increasing in the SmartPhone market, as many players rush into one of the few growing consumer markets.

It is, however, a two-way street.

More people have a mobile device than a PC and the next billion users will access the internet from a mobile device, not a PC.

This is why I believe so strongly that Nokia now has a tremendous opportunity to drive growth.

We are entering a new era.

Being connected to the internet while on the move is changing the way we communicate.

Our mobile solutions will be available social networks and location and will help us connect to people, places and information that are uniquely relevant to us.

And that brings me to my second point -- accelerating the pace of change towards a solutions modem operation.

Historically, our mode of operation has been based on our brand, scale and distribution advantages -- a volume and efficiency focus.

This products-oriented mode remains appropriate for a significant portion of our business and we intend to continue leading this global business in a profitable manner.

However, consumers will increasingly expect devices and services designed as integrated solutions that deliver seamless and intuitive user experiences.

To really drive growth, we are developing a solutions-oriented mode of operation that is optimized for speed, flexibility and innovation.

And this transformation started in 2008 when we created the devices and services business and now we are accelerating the pace of change.

In our solutions mode, we start with a consumer experience and user interface first and then integrate R&D processes for devices and services.

Our sales and marketing approach is also evolving from advertising to channel incentives.

It is about focusing on the consumer.

Crystallizing and reinforcing the value that mobile solutions bring to their everyday lives.

The importance of vibrant partner ecosystems to our solutions mode is my third point.

This is a big competitive differentiator for Nokia.

We have a strong and fast growing community of partners, including developers, operators, content companies and other industry players, with strategic, as well as finals or objectives that are closely aligned.

The Symbian foundation is a cornerstone of this vibrant and growing ecosystem.

You will hear more from them today on a new and innovative application publishing program.

For Nokia, combining Symbian and [acute will kit] allows developers to build innovative applications that leverage the capabilities of our Ovi services platform.

Together, this will allow Nokia to profitably differentiate for -- the user experience.

Equally important to the attractiveness of this ecosystem is the fact we are sharing the newly created value with developers and operators.

Working together, we will accelerate the adoption of innovative solutions much more quickly than companies that work alone.

Fourth, inherent in our solutions mode is our commitment to build [dark] and continuous consumer relationships.

This is important because greater consumer understanding will enable future innovations including the delivery of new and more relevant content.

Our solutions will learn from consumers and adapt to their needs.

Consumers will always be in control, able to modify, engage, or stop these features at will.

And finally, how do we make sure we stay on track?

We will measure our progress and link employee incentives to clear targets like active users.

We are setting six-month targets that will take us to 300 million active Nokia users by the end of 2011.

This call reflects the first step towards success as a leading mobile solutions Company.

It measures our success in acquiring, retaining and deepening consumer relationships, which is the new battleground in this evolving industry.

At the beginning of Q3, we had approximately 46 million active users and by the end of 2009, our goal is to have 80 million active users.

So in summary, a new industry is emerging as the mobile handset, PC, internet and media industries converge.

We believe Nokia can create and capture significant value.

We are accelerating the pace of change towards a solutions mode of operations that maximizes speed, flexibility and innovation.

Nokia is taking an open approach, working together with developers, operators, content companies and other industry players, creating large sustainable ecosystems that will drive a mutual success.

We are building and deepening relationships with consumers, which enables us to continuously improve our services platform and we have a clear target -- 300 million active users by the end of 2011.

This is the right target.

It will drive to us make the right changes in how we work both internally and externally.

And now let me turn to Q2.

According to our estimates, the mobile device market was 268 million units in the quarter, up 5% sequentially and down 12% year on year.

The sequence of increase was a seasonal uptick.

The year on year decline was attributable to global macro weakness.

According to our estimates, our device market sale was 38%, up from 37% in Q1.

Our SmartPhone volumes were 16.9 million and we estimate that our share increased to 41%.

In addition, growth in our services business did meet our expectations.

Comparing market sale by geography Q1 to Q2, remember that the market sale figures in Q1 were distorted by channel inventory destocking.

Also, gross borrowing -- gross borrow trading related to currency volatility had an impact benefiting the Middle East and Africa and negatively impacting Europe in Q2.

The nature of the industry price competition in Q2 were similar to what we saw in Q1 -- very robust.

We will continue to respond in a tactical manner [deprising] activities by our competitors with the aim of growing our markets in a sustainable way while maximizing our longer term profits.

And moving then to device and services highlights, in Q2, we set a record 4.7 million Eseries devices, up 41% sequentially and 148% year on year.

E71 volumes increased 26% sequentially, the fourth consecutive quarter of growth.

It was encouraging to see the E71X receive a solid reception at AT&T, but it was not only the E71.

The range of products from high to low all contributed to the strong Eseries performance.

Our Nokia messaging service is also seeing great traction with operators and consumers.

We have now signed agreements for Nokia messaging with over 10 operators and we are in discussion with many more.

In fact, we have technically rolled out Nokia messaging in over 40 countries so we are prepared to ramp up quickly.

Last week, we announced our collaboration with America Mobile to offer Nokia messaging across Latin America.

In the messaging space, I believe we are just beginning to show our potential.

Nokia messaging offers a truly great experience for consumers and the economics are very compelling to operators.

Also in the second quarter, we shipped 3.7 million Nokia 5800 devices.

The 5800 has already achieved cumulative net sales of nearly EUR1.5 billion and was our highest revenue and gross margin generating product again in Q2.

In the second half of the year, we plan to broaden our range of touch screen devices as we ramp up new devices at multiple price points, including the 5530, XpressMusic and the N97.

Our flagship N97 got off for a solid start.

We manufactured and shaped 0.5 million units in the month of June.

Indeed, it was a very fast ramp up.

In May, we launched the Ovi Store which is evolving rapidly with continuous improvements.

Our focus on localized content and pro device support makes the Ovi Store a unique way for developers and quote on companies to access the unmatched global Nokia consumer base and we are making it much easier and more lucrative for developers to create innovative new apps.

In addition, our alignment with operators to support revenue share and operator billing makes the Ovi Store ecosystem highly scalable and operator friendly.

The early response from consumers, developers, operators and content companies has been encouraging.

And then onto Nokia Siemens Networks.

In Q2, NSN delivered a small operating profit -- well, it was a break-even on a non-IFRS basis and solid cash flow from operations, reflecting the cost reduction efforts over the past two years and the growth and strength of our services business on a sequential basis.

Conditions in the infrastructure sector remain challenging in Q2 and it appears that NSN lost some markets on the product side.

But sequential growth was strong in the services portion of the business, which now represents approximately 45% of NSN's net sales.

The [paracom] infrastructure market is evolving and the most attractive growth opportunities are now in services.

In particular, managed services, consulting assistance integration and care services.

With a strong global delivery model, NSN is well positioned for [sales gains] and margin expansion in services.

And on the product side, we have addressed the road map issues related to the integration and harmonization of the Nokia Siemens portfolios.

This is now behind us.

We feel confident about NSN's position as the wireless infrastructure market continues on the consolidation path towards essentially three players.

Additionally in Q2, NSN agreed to acquire Nortel's profitable cash positive CDMA business and LTE R&D expertise.

If successfully closed, this will improve NSN's position and prospects in the North America market.

NSN also improved its capital structure substantially in Q2, with the completion of an oversubscribed EUR2 billion, three-year syndicated loan agreement.

Now I'll pass over to Rick for more on the finances.

Thanks, Olli-Pekka.

I'll begin with an overview of our continuing actions to reduce our devices and services operating expenses.

We've made quick progress and the cost savings we've achieved are sustainable with the revenue levels we expect in the near term.

Regarding the macroeconomic downturn, we do not expect a quick or strong recovery, nothing new there.

Thus, as a management team, we will continuously assess our cost structure and take action to strike the right balance between near-term cost controls and investing for the future growth and profitability.

We are continuing to take coordinated action across the Company.

In quarter two, we announced and commenced measures including adjustments to our services business, which opened up greater opportunities for third party partner services, cost efficiency improvements in logistics, production management and production support operations and a voluntary resignation package for employees at one of our mobile device manufacturing facilities.

Year to date, the head count impact of measures we have announced including voluntary programs totals about 4000 people, reflecting an increase of 1000 people during quarter two.

This figure does not include temporary layoffs also effecting approximately 2500 people on a rotational basis at our Salo mobile device manufacturing facility.

In Q2, we took charges of EUR83 million related to these and other cost reduction actions.

So let's look at devices and services performance in Q2 in a bit more detail.

On a reported and constant currency basis, devices and services net sales were up 7% sequentially and down 28% year on year.

The sequential increase was attributable to higher volumes, offset partially by lower ASPs.

As we expected, the market environment was more stable in Q2 compared to Q1, due primarily to lower channel inventory volatility.

At an industry level, as expected, it appears the vast maturity of the channel inventory destocking happened in the -- by the end of Q1.

The level of channel inventories for the industry are at a fairly sustainable levels.

We believe given the current demand environment.

Nokia ended Q2 with four to five weeks of channel inventory, approximately flat sequentially and at a comfortable level.

In Q2, services net sales were EUR140 million.

That's down 7% sequentially and up 17% year on year.

Billings however were EUR207 million up 25% sequentially and up 70% year on year.

Reminder -- these results were impacted also by the sale of our security appliance business to Check Point which was completed in April.

From Q1 '08 through Q1 '09 the security appliance business had average quarterly net sales of approximately EUR45 million.

In Q2, services billings were much higher than net sales.

We are building momentum, but we need to move even faster towards tightly integrated services and devices.

That's what our solutions transformation is about that Olli-Pekka mentioned earlier.

We are refining our financial reporting to better capture and communicate our product mode versus our solutions mode of performance and operation and we will expand our disclosure financial metrics going forward.

Defining solutions as SmartPhones and related services well above one third, however, less than half of our devices and services net sales in Q2 were of solutions.

The Company slide lists the additional metrics and definitions we'll disclose beginning in quarter three and going forward.

Nokia's device average selling price in the second quarter was EUR62 compared to EUR65 in the first quarter, down 3% on a reported and constant currency basis.

In Q2, units increased the most in absolute terms at the low end.

The downward pressure on ASPs, however, was moderated by the launch of new products, increase in SmartPhones and including the N97.

Devices and services gross margin in Q2 was 34%, up 20 basis points compared to quarter one.

We benefited in Q2 from a mix shift towards higher margin products.

With both new and continuing products we achieved cost of sales improvements that offset -- more than offset -- the overall ASP declines.

At the end of Q2, we sourced approximately 20% of our device components based in Japanese Yen compared to approximately 25% at the end of 2008 and as a reminder, we will no longer benefit from the earlier Yen hedges in Q3.

This will impact sequentially gross margins negatively.

On a sequential basis in quarter two, devices and services non-IFRS OpEx was up EUR12 million in absolute terms and down 130 basis points as a percentage of net sales.

In quarter two, we made solid progress reducing structural costs and discretionary expenses.

Devices and services non-IFRS operating margin increased 180 basis points sequentially to 12.2% in Q2, driven primarily by higher net sales and good OpEx management.

Earlier today, we revised our operating margin guidance for the second half.

In addition to the impact from our Yen hedges rolling off, which we had communicated previously, competition remains intense and broad-based and we do have some short-term component constraints in Q3.

We believe our revised operating margin guidance incorporates pragmatic expectations regarding the overall market demand, the potential pricing environment, and our delivery capabilities.

While we are targeting an improved product portfolio, a few of our higher end products face Q3 component constraints.

A few components unique to Nokia are experience isolated short-term supply issues that may constrain our ability to meet end demand by some hundreds of thousands of units.

We just have to manage through this Q3 disruption and put it behind us.

Turning to NAVTEQ, net sales were EUR147 million, an increase of 11% sequentially.

NAVTEQ's net sales were up primarily due to a slight pickup in auto navigation systems.

From a geographic perspective, the increase was primarily driven in Europe.

Non-IFRS operating margins were 12.8%, up 910 basis points sequentially.

This was attributable to higher net sales, as well as tight and good OpEx management.

Now, Nokia Siemens Networks, net sales were EUR3.2 billion in Q2, up 7% sequentially and down 21% year on year.

Each of the five major categories grew on a sequential basis.

Radio access, broadband connectivity solutions, converged core, operations and business software, and services.

The largest sequential increase -- the largest sequential increases in absolute terms were in services and in radio access.

In Q2, NSN's non-IFRS gross margin was 28%, up 240 basis points sequentially.

This is primarily attributable to mix improvements in services and radio access.

In quarter two, services gross margins improved significantly as the two areas with the highest growth, managed services and consulting and systems integration, also delivered the most gross margin expansion.

Radio access gross margins were up in quarter two due to continued strength in higher margin software sales.

Nokia's non-IFRS operating profit was 0.1% of net sales.

So essentially break-even, as Olli-Pekka said, up 420 basis points sequentially.

In addition to the sequential increase in net sales and gross margin, OpEx management was good and the focus continues as necessary in Q2 and going forward.

NSN's cash flow from operations returned to solid performance in Q2.

On a sequential basis, networking capital decreased, despite the increase in net sales.

This was driven primarily by better receivables and inventory management compared to Q1.

Nokia and Nokia Siemens Networks continues to expect the mobile infrastructure and fixed infrastructure related services markets to decline approximately 10% in Euro terms in 2009 from 2008 levels.

At this point, however, we expect that NSN will see a moderate market share decline in 2009 due to the declines in certain product businesses, offset by strong sales and market share growth in services.

It is great to be able to underscore the services momentum at NSN by highlighting today the EUR1.1 billion, five-year managed services deal announced today with Oi Brazil.

With this contract, NSN will be the sole provider of operations and maintenance for all of Oi's international plant operations for both fixed and wireless across 17 Brazilian states.

It really establishes NSN as the largest telecom managed services provider by far in Latin America.

So now turning to Nokia as a whole, Nokia's financial income and expense in quarter two was an expense of EUR61 million compared to an expense of EUR77million in Q1.

The sequential improvement was due in part to less volatile FX environment.

We experienced significant FX losses in Q1 as we were not able to hedge some accounts receivable exposure to the Russian rouble during parts of Q1 given the extreme market volatility.

This benefit was moderated -- excuse me -- the benefit here in the quarter was moderated by higher expenses related to the new debt transactions that Nokia and NSN entered into.

On this slide, we show both the Q2 reported and non-IFRS income statements.

We layout the items that are excluded from reported to get to the non-IFRS numbers, as in our press release.

Now, next, let's look at some of Nokia's financial position and cash flow items.

Our cash flow from operations was EUR716 million for the quarter, up strongly from EUR276 million in Q1.

The overall net sequential improvement was attributed to four major drivers.

First, all three of our reportable segments delivered improved profitability in Q2.

Second, FX volatility moderated somewhat in Q2 and our net outflows related to cash settlement of foreign currency hedging contracts decreased significantly in the quarter.

Third, the sequential decline in networking capital was greater in Q1 than in Q2, but working capital efficiency improved in quarter two with both devices and services and NSN delivering solid performances.

We freed up approximately EUR250 million of networking capital in the second quarter.

And finally, we had higher cash outflows related to taxes in Q2.

We ended the quarter with total cash and other liquid assets of EUR7 billion and net cash of EUR1.5 billion.

Let me quickly summarize the components of our interest bearing debt.

First, Nokia, excluding NSN and then NSN.

So excluding NSN, we ended quarter two with EUR4 billion of interest bearing debt.

During the quarter, we successfully launched our bond transaction in the US with a dual tranche 10 and 30-year transaction, we raised EUR1.1 billion in total and used those proceeds to repay outstanding commercial paper.

NSN ended the second quarter with EUR1.6 billion of interest bearing debt.

In the quarter, NSN completed a EUR2 billion, three-year revolving credit facility with a syndicate of 21 banks.

Under this facility, NSN utilized EUR470 million to repay uncommitted loan facilities.

NSN also secured, but did not utilize a EUR250 million loan facility from the European investment bank.

Moving to the next slide, this covers the currency situation and constant currency reconciliations.

With that, back to Olli-Pekka.

Okay.

Thanks very much, Rick.

Q2 was a quarter where Nokia managed through a very tough market environment.

It is clear now that the level of stability has returned to the industry.

The channel inventory situation is a good evidence of that.

But it is equally clear to me that the industry as a whole is at the early stages of a truly remarkable transformation, like I discussed.

The line between mobile handset and PCs will no longer exist and in fact they are and will be new classes of devices.

We have said that one size does not fit all.

That remains true.

As the leading provider of devices, Nokia will continue to address all price possibilities and all markets globally, but we believe that there is much more for us to achieve.

Our ambition is to become the leading provider of not just devices, but integrated mobile solutions as well.

Nokia envisions a world where connecting people to what matters empowers them to make the most of every moment.

The companies that will win in this new world are yet to be determined.

With that, thanks very much, and we'll -- and back to you, Kristian.

Thank you, Olli-Pekka.

We will now continue with the Q&A session.

Please limit yourself to one question only.

Operator, please go ahead.

(Operator Instructions) Your first question comes from the line of Mike Walkley with Piper Jaffray.

Great, thank you very much.

Wonder if I could dig in a little bit more to the updated margin guidance leading it to stall in terms of improving in the second half of the year.

One, how do we interpret it down Q3 and should we expect seasonal impact to lift it in Q4 and perhaps maybe for Q3, you can rank order the impact between the change in the Yen hedges, the overall industry price competition and perhaps the relative strength of your high end portfolio to your competition.

Hi Mike, this is Rick.

Yes, we made a refinement here clearly, but there isn't a whole lot new there and what we've said is we expect the second half in terms of operating margin performance to be a lot like how we develop in the first half.

Remember, we did better in the first half than what we said we thought we could do as a minimum.

We improved on that.

Yes, there should be seasonality between Q3 and Q4.

So Q4 should be stronger than Q3 -- much like you saw in the first half.

And, what I wanted to point out with the comments on the Yen is, we talked about this a few quarters ago.

We've been very out front with this, but it's worth reminding people that the fact is now we're hitting, starting in Q3 -- where the very cheap and beneficial hedges that we put on sometime ago run out.

But the fact is the Yen hasn't weakened against the Euro and the dollar and in fact, over the last couple weeks, it's actually strengthen a bit.

So we are going to realize that impact.

We mitigated some of that, but that's a headwind.

But there isn't anything new there.

That's really just a reminder of that fact.

In terms of pricing and competitiveness, as Olli-Pekka said, it continues to be robust, nothing new there.

And we've seen, though, importantly, our product portfolio offering improve -- important metric that we were obviously getting criticism for and concern about in the back half of 2008 was our SmartPhone market share was declining.

We said we had to stop the decline and that we would work to improve.

So now we have two quarters in a row of improvement in our market share in SmartPhones and we're going to democratize the SmartPhone market.

We said that.

We're doing it.

And there's proof of that.

That's going to help us offset some of these other headwinds in the second half.

So I think it's prudent.

I think it's rational in this environment to try to refine our guidance a bit.

It has to be said that while we think our industry demand picture is bottoming out, we remain in a fragile and volatile overall global economic environment and so that's why I use the terms it's prudent and rational in this environment to do this refinement.

Of course we'll work to try to do better and deliver better than that.

But, that's our view.

Thank you.

Next question, please.

Your next question comes from Kulbinder Garcha with Credit Suisse.

I just want to come back to the margin guidance again and be very clear Rick.

So, the [will reduction] incrementally because you would have known about the Yen impact, as you said, for a number of quarters is just the component constraints of the high end or [partly dial lease] along with pragmatism, as you said.

So on that component issue, how long is that going to last?

Are you expecting that to hinder you for the second half of the year, or is it just a temporary Q3 type phenomena and what type of components just roughly speaking is the increase?

Thanks.

Yes, Kulbinder, thanks for that, because I didn't address the component question and I should have.

But as I meant to make clear in my commentary, this is a quarter three event and it's contained to quarter three, so, no, it doesn't continue on, but it is incremental.

It is new and different in that way to the Yen impact, as you rightly point out.

There's a few components.

It's unique to Nokia.

It's not -- it's just one of those things that happened.

The problem is it impacts some of the higher end devices, so you get a little bit more proportional hit there and it's with some of our suppliers.

This is something, though, that is solved.

It's known.

So it isn't an open-ended issue.

It's a very tightly constrained in Q3, but of course it is incremental and of course that does have an impact.

That's why with that it fits into -- as I say -- the adjustment being incremental, prudent and rational.

Yes, it's Olli-Pekka, if I might add to that component part here, of course component challenges are something that we experience day to day.

That's normal here.

We wanted to highlight at this time, but of course we are working extremely actively to mitigate as much as possible here and in fact, our track record here is pretty good, as happened in the past.

So we want to flag that one right now, but working extremely active as possible.

Yes.

And just want to follow up.

On the higher end phones, on the N97 Olli-Pekka, do you see any reason why that product couldn't volume-wise -- or I should say revenue-wise -- replicate the same success of the N95 platform, however, are we in a different world now economically, competition-wise in that segment of the market, given the initial feedback you must have to carry --

It's of course very clear that there's more competition in the marketplace than at the time we need to launch the N95.

But having said that, if I look at the traction the N97 is having in the marketplace, it's been, it's been received very well and we have to remember here that the world is big.

There are many markets here looking at the realities in one market only is not the way to do it and there is a lot of traction here and like I said, product was ramping up very quickly both in terms of the capacity we do have and in terms of the demand in the marketplace and in fact the momentum has continued in, also during, at the July month.

So I've got a lot of expectations there, but of course having said that, there is more competition in the marketplace than N95 did have.

Thanks very much.

Next question, please.

Your next question comes from the line of Mark Sue with RBC Capital Markets.

Thank you.

Olli-Pekka, if the industry is changing and Nokia is accelerating development to catch up to new-era competitors, aren't there structural things as it relates to different and additional customer -- competitors -- which implies that the new level of operating margins are something that will stay with us for a while beyond the second half and into the next several years as the industry dynamics change, if you could help us there?

Yes, I'll start and I believe Rick may want to complement.

So the whole point here when I talk about the transformation and Rick spoke about the metrics here, is the fact we are more and more having here two modes of operation and in fact, when you try -- when you take that a bit further -- two different businesses.

And it's quite clearly that the product business that we are -- that we have a lot of experience and then they see solutions business where we have increasingly more experience and have invested a lot in that.

And if this market, the solutions market here -- in the way we believe it will ramp up, in the way we believe we have a possibility there if that continues to take place, of course we have a possibility to enter and be in a business that the margin dynamics are not the same as in the product business because we are introducing the element of our services solutions software here.

And the market dynamics are simply different.

And how these two will -- how these two will play outgoing forward, it of course depends on how successful we are in these two businesses.

But like we said ambitions on the solutions side, the 300 million users and so forth are quite high.

As I talked it's like a business mix matter going forward a bit longer term.

Yes, Mark, Rick here.

To amplify if this opportunity exists like I think all of us believe -- and there's proof points of that -- and we drive it, we exploit it, other people nourish it as well, as Olli-Pekka said, it's not the same margin profile.

To be clear, we expect it to be better -- higher and better.

Thank you, thank you.

And we want to get our fair share.

You understand when we say fair share, that's a fairly large share.

So that's what we have to do.

And on the product mode side, what we really want to reiterate to everyone, nobody is losing track of how important that is to Nokia.

We have our eye on the ball.

The point is you need to do some bifurcation of those ways so the people who need to stay focused and take us to continuing new levels of productivity, product innovation in the product mode and as sure that we continue to have the best brand, the best distribution, the lowest costs, but sell for a higher price we continue to do that and we have some great track record.

We're not going to forget about that.

But we need to add on then and we need to operate in a more innovative, flexible, fast way on the solutions mode.

We know that.

We recognize that, and we know we have more to go there.

We aren't there.

We aren't declaring that we are.

We understand what we need to do and where the gaps are, but I think importantly, how we're approaching it with the wider partner ecosystem is an important distinction and remembering that not all markets are the same in the world where we play globally.

So that's why we think there is an opportunity for additional value at better margin profile in that side of the business.

But right now I'm not going to give you then margin targets for 2010.

We'll address that at Capital Markets day.

Okay, thank you.

Next question, please.

Your next question comes from Stuart Jeffrey with Nomura.

Thanks very much.

I wanted to go back to the solutions issue.

You obviously made a big point of it in this call.

I think the second bullet you mentioned was you are accelerating the pace of change towards solutions.

And while I can completely understand the direction you're going, I guess the thing I'm still slightly confused or uncertain about is -- what it is that you've actually accelerated and maybe you can give us tangible examples of what you're doing that's suddenly much quicker and much faster than before and whether that comes with any higher investment costs on the back of it as well.

Yes, the investment level we have maintained here has been I would say adequate, so I don't really see a need to increase investment.

What we have been doing -- this is not something we're starting today.

What we have been doing, we have been hiring a lot of new people.

We have been making changes internally when it comes to incentive -- I mentioned that.

We've got to monitor in the internet and in the lobby here -- in the Nokia house highlighting what is the number of the active users today, so we are communicating to the organization here and we are changing the operating mode here as well, meaning that this will have impact on the pace of working internally and have some new responsibilities there as well.

So in that way, it's -- as always in business, it's many things, it's recognizing that you need to turn the operating mode in the way that you start from the consumer experience and then turn that into R&D as opposed to the other way around and this transformation in an engineering organization is now well advanced.

But I will claim it has not been easy.

Maybe, Stuart, this is Rick here.

I can advance.

And, I think you and others have asked rightfully of us over the last year since we've -- and beginning in 2008, but can you make certain of this change?

You guys have so conditioned an organization that's focused on scale and cost and you've done well, but how do you drive this change?

And that was part of how we started changing the way we work, Olli-Pekka's highlighting the acceleration of that and importantly now with the metrics in getting people aligned around that, it really is powerful.

And believe me, we're seeing different behavior day by day in the organization and you do get what you measure.

And this active users, if we have to single it down to one target is the one that we think is most important and most captures that change and how people will then change the way they operate in the Company around that to drive the solutions mode.

In fact there is a lot of positive [bias] in the Company.

It's easy to -- it's palpable.

I can feel that.

We can feel that.

Now of course I need to emphasize that we will continue to invest, so it's not talk only.

It's -- we need to be able to continue to invest in this area, but what I said, we have been investing and we will maintain an adequate level of investment here.

In terms --.

Next question.

Your next question comes from the line of Jeff Kvaal with Barclays Capital.

Yes, could I shift gears a little bit and talk about how we should expect the trajectory of ASPs in the second half of the year, given the increasing mix of SmartPhones.

Yes, Jeff, Rick here.

In terms of ASPs, I think it's interesting to look at development from Q1 to Q2.

We were down about EUR3 and based on everything we can see, we must be down less than what the market is because we've taken value share and by the way we look at it and we see our SmartPhone market share go up smartly, if you will, from Q1 to Q2.

And out in the second half, we're going to try to make it work the same way.

Of course the industry should expect that the ASP goes down overall because there still is more volume coming from the lower end and people are trading down to a certain extent.

We can capture them as they trade down, unlike some others who might lose them as they move from one category down to others.

And so I think you should think about the dynamic in the second half much like how it went Q1 to Q2.

Yes, and I just want to add to that, I think this is so relevant, so important.

So that is -- these are the numbers I'm looking at personally.

What is the value market share?

So it's not volume only, but value market share and then what -- to some extent coincides with that, but not fully.

What is the SmartPhone market share?

Because these are things where we need to make progress and we did take quite a bit based on what we can understand, quite a bit of value market share in Q2.

And I personally feel that is very encouraging.

Next question, please.

Your next question comes from Rod Hall with JPMorgan.

Yes, thanks for taking my question.

The first question I've got is on the active user definition.

I wonder if you guys could talk about -- (technical difficulty)

Rod, you got cut off there.

Operator, could you--

One moment, sir.

Let us answer the question.

I think we heard enough of it.

Olli-Pekka, please.

Maybe, maybe.

I think it was about the definition of the active users.

And of course the whole point here is when we are talking about the users here, it's the point that the business model is changing in the way that you don't sell a device or hardware to a consumer at the point of sale and then lose contact.

The whole point here is the fact that we have been able to maintain meaningful interaction with the consumer here on an ongoing basis, build up the user base and then monetize on that.

And hence we have included a time element here, what is an active user.

If somebody is there once, but does not use the service, he or she will drop off from the user base and so that, that active there is to highlight that fact, that it's been an ongoing relationship.

And Rick, I might want to add here in terms of active user, that's of Nokia services and our third party partner services and those are both paid services and free services, and this idea that it has to be active over time or drops off, as Olli-Pekka mentioned, is very consistent with the industries that have developed similar active users.

So I think we're in harmony there and maybe now we can ask the operator if we have the queue back and invite Rod to ask his second question, given he got cut off midstream.

Yes, hi.

Can you hear me now?

We can, yes.

Okay.

The second question was just going back to the product and solutions discussion and the specific question is how hard are the organizational differentiations within Nokia between product and solutions?

Is this just -- is it a matrix level definition in the organization, or are there actual hard reporting structures that go along with those two definitions?

And then adding to that, is there somebody on the board that's acting as a champion for the solutions business?

Can you just talk to us a little bit about how senior management's going to back that effort?

Yes, yes, that definitely is somebody on the board who is the champion.

And I would like to mention my name here.

It's simply -- this needs to be driven by myself and of course the senior team.

And when it comes to your question when it comes to the operating mode, yes, we have been strengthening the horizontal layers here when it comes to the organizational thinking.

So it's not devices plus services make a solution, but it's rather a solutions road map that is divided into what is needed on the devices side, what is needed in the services side.

That starts from the solutions experience of the consumer and that is converted into what is needed on the devices and services as opposed to thinking about, okay, we are making devices and services and then we on a modular basis combine the two.

That's not enough.

So we need to turn this around.

That's what we have been doing here and this has been championed by many, many transformation leaders in this Company.

Okay, thank you.

Next question, please.

Your next question comes from Gareth Jenkins with UBS.

Just wonder what your percentage of new products in Q2 was and how that compared to Q1.

I'm somewhat surprised that given -- I suspect there were more new products in Q2 versus Q1 -- and your volumes in SmartPhones rose Q over Q so strongly that you didn't see more operational leverage at the gross margin level in device and services.

And then secondly, in terms of sellout market share, given the stocking effectively came to an end, I suspect that helped your sell-in/sell-out issues in terms of market share.

I was just wondering if you could give us a sense of what your sell-out market share was in Q2.

Thank you.

I'll take that.

Yes.

So the new revenue -- new product revenue was up a bit, almost the same, in fact as in Q1.

We have to remember that like, for instance, in N97 started like I said only in the month of June and did not hit -- hit that metrics in -- for the full, for the full quarter.

And then there was--

Yes, the operational leverage, Gareth, I think, sure, but we did have sequential improvement in the gross margin.

And I think if you look at operational leverage, you got to look down at the operating profit and EPS as well and operating profit up strongly compared to Q1 and then EPS up 50%.

So that's how I would step you through that.

Yes, and in fact, I would complement a bit on the new product revenues.

If you look at the products that we, we count -- that we did launch in Q2 -- N97, N86, E75, E55, 6800 and -- sorry, 6700 -- and 6303.

Most of these were only ramping up towards the end of the quarter and in that way did not really hit for the full quarter.

Can you restate what your question regarding channel inventory was?

Yes, so I guess given that your channel inventory was sort of flat Q over Q and the way that you report your sell-in volumes over sell-out total industry volumes, I suspect that had a beneficial impact in terms of headline market share.

I guess what I'm driving at is what your view of your sell-out market share is rather than sell-in over sell-out?

Well, Gareth, what's been -- what we said was the sell-out market share would start to converge with the sell-in market share where our reported sell-out market share not reported by us, but speculated by others, had in the previous quarters gone down.

We said in actuality it, has stayed pretty well there and we've improved and the two will come together when you start to not give market share to the channel or take market share from the channel.

And we think that's where we are in Q2.

And if we are right, that the market demand has bottomed out, the two should be largely equal here going forward in Q3 and Q4.

So we feel good about that.

Sure, there's a little bit of that element as you mentioned, but we think we picked up some real sustainable market share, but most importantly, the market share value is the one, and as we look forward here, we can work the levers for value at a volume market share, whether it's 37, 38, or 39 frankly.

Yes.

So with that, one final question, please.

Your last question will come from Richard Kramer with Arete Research.

Hi, guys.

Thanks very much.

Couple of quick questions, please.

One, no one seems to have asked about NSN, and given that the sales were down 21% year on year in this quarter and looking forward with Olli-Pekka's comments about thriving growth, seems like NSN is not going to participate in that near-term.

Is there any way in which you could envision some sort of separation of NSN from the Nokia P&L so the Nokia P&L can more directly reflect this solutions growth initiative that you've laid out.

Just second, I'm still a bit confused about your comments about value market share.

Could you walk us through if the, if your own sales were down 28%, what do you think industry value was so that we can look at the numbers that come out from all of your competitors in the next couple of weeks and try to verify that?

Thanks.

Yes, I'll take the first one here while Rick is preparing for the second one.

So it's quite interesting, NSN, if you look at the dynamics there.

There is the product business and then there's the services business, which is of course not the same services business as we are talking about when it comes to Nokia.

And then dynamics there in the second quarter were, as I mentioned pretty different.

So we lost a bit of market share in the product business it looks like that now, but at the same time, the services part really -- really there was a lot of traction here and a relative share of the services part did increase.

So one needs to understand these dynamics also going forward when it comes to your -- I mean I cannot hear -- other than it's simply we are fully focused on improving the operational performance in NSN.

That's the only thing that I've got in my mind right now.

Okay.

Yes, and, Richard, on market value, we haven't ever given precise values before because it's a more difficult and more debatable thing to track, but obviously internally we track it with as much precision as we can.

But I think what I can tell you, what the industry had been doing up until we hit the financial crisis, which precipitated the economic free fall and downturn -- volumes were growing.

Value was growing less than that in the market, and then we hit the downturn here so both volumes were down and values went down.

And we think Q1 to Q2 that overall in the industry value probably only went down in the single digits rather than the volume going down in doubles perhaps.

And maybe that points to some of the reasons why we say there might also be some bottoming out coming here.

So it's a combination of both of those.

But mostly the way you look for ours is right now the best measurement is this improvement of the SmartPhone market, which while it now covers certainly the mid range and the high end, not just the high end in gaining there is pretty easy I think to see a proof point of our increase.

But we haven't figured out a good way to reliably give estimates and agree in the industry on what the value share is.

I wish I could help you more there.

It is -- our value share is up sequentially.

That's what we were focused on talking here.

Year on year we would have to take a closer look.

Okay.

Thanks very much.

Thank you.

So with that, ladies and gentlemen, we will conclude the conference call.

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

Actual results may differ materially from these 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 11 to 28 in our 2020 -- 2028 -- in our press release issued today.

Thank you very much.

This concludes today's conference.

Thank you for participating.

You may now disconnect.