諾基亞 (NOK) 2009 Q3 法說會逐字稿

Good morning, my name is Regina and I will be your conference operator today.

At this time I would like to welcome everyone to the Nokia third-quarter 2009 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.

Thank you.

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

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

Olli-Pekka Kallasvuo, our President and CEO of Nokia, and Rick Simonson, CFO of Nokia, are with me in Espo 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 20F and in the press release issued today.

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

To review the supporting slides while listening to the call, please go to the IR website.

Please note that today's press release and this 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 and as well as a reconciliation between the two.

I would like to remind you that we will host our annual capital markets day in Espo, Finland on Wednesday, December 2.

This event will start with keynote presentations in the afternoon and in the evening you will be invited to Nokia's main offices where you will be able to attend interactive breakout sessions on key topics as well as engage in open conversations with senior members of our executive team.

We will also feature an experience launch where you will be able to interact hands-on with our latest devices and solutions.

You can find more information by going to CMD.Nokia.com.

We hope to see you here in Espo.

With that Olli-Pekka, please go ahead.

Thank you, Kristian.

Good morning and good afternoon.

Q3 was a solid quarter for Nokia Devices & Services business, and I expect Q4 to be the best quarter of the year in terms of net sales volumes and margins.

In Q3 the demand environment for mobile handsets improved faster than anticipated in many markets.

In this environment I was pleased with our net sales performance given the component constraints we encountered.

We did a very good job controlling our operating expenses which helped us to deliver solid earnings.

We are experiencing a relative stability in the overall economic environment and it is encouraging to see some signs of recovery in our markets.

But let's be clear, uncertainty in end consumer demand remains.

On the last earnings call we provided new details on our solution strategy, but one of the big unanswered questions was who will be directly responsible, besides me of course.

In Q3 we officially formed our new solutions unit headed by Alberto Torres and we have recruited new executives that will have leadership roles in that unit.

The solutions unit is working together with our Devices & Services and go-to-market teams.

You could say the solutions unit is a catalyst for better and faster collaboration.

This is an important structural change that will improve our ability to execute as well as our ability to innovate as well.

Our ambition is nothing less than to create the biggest delivery platform for services on the mobile.

We can shape the industry and capture significant opportunities for growth by creating solutions that meet new consumer demands.

Through our solutions operational mode we deliver services -- we deliver devices and relevant services that are designed to provide effortless and inspiring user experiences.

In addition, we should not forget that the product focused operational mode continues to be appropriate for a significant portion of our business.

We currently operate at the world leading level in this part of our business, leveraging our low cost unmatched scale, brand and distribution, but we can and we will improve.

Innovation is very important here as well.

We are not complacent as the competition just keeps coming.

In our product operational mode we continue to drive for cost efficiencies and product-based differentiation of devices and relevant services.

Now let me take you through our performance in Q3.

According to our estimates the mobile device market was 288 million units in the quarter, up 7% sequentially and down 7% year on year.

The sequential increase was due to seasonality and improved consumer demand.

The year-on-year decline was attributable to the weaker macroeconomic environment.

According to our estimates, our device market share was 38%, flat compared to Q2.

Our smartphone volumes declined to 16.4 million compared to 16.9 million in Q2.

This was due to component constraints.

Also, it is worth noting that the sequential decline in our smartphone volumes was primarily due to our older models, while the new higher priced N97 did very well.

So actually the absolute level of gross margins from our smartphones increased from Q2 to Q3.

The nature of the enterprise competition in Q3 was similar to what we saw in Q2, very robust as we highlighted it would be.

Moving to Devices & Services highlights, we were very pleased with the strong demand for our flagship Nokia N97.

In Q3 we shipped 1.8 million N97's and the N97 was our highest net sales and gross margin generating product.

Also in Q3 the 5800 continued its strong performance and was our second highest net sales and gross margin generating product.

Overall we are beginning to effectively segment the touchscreen market with a range of offerings at a variety of price points.

In Q3 we had three touchscreen devices -- the N97, the 5800 and the 5530 XpressMusic.

In total these three products shipped 5.7 million units and on a sequential basis our touchscreen devices delivered 35% unit growth and 42% net sales growth.

We expect to start shipping four additional touchscreen products in Q4 -- the MIMO-based N900 mobile computer, the streamlined N97 mini, the capacitive touch X6 and the 5230 which is launching at the unsubsidized retail price of EUR149.

There is something for almost everybody and still more to come.

In Q3 we shipped 4.4 million E series devices, down 6% sequentially from last quarter's record performance, but up 49% year on year.

The sequence of decline was primarily due to lower E71 volumes.

However, the E71 remained a top five net sales and gross margin product and we plan to begin shipping the next generation E72 in Q4.

The Nokia E63, our lowest-priced QWERTY device, continued to gain momentum in the third quarter particularly in the emerging markets.

In the high-volume mid-range category we made good progress in Q3 transitioning to the new 6700 which launched at the original price point of our highly successful 6300.

And at the low end we saw very solid demand in Q3 for the 5130, our most affordable XpressMusic phone.

The strong contributions of the Nokia 6700 and 5130 in Q3 reinforce the importance of having a range of products that meet requirements of different people in different markets across the globe.

In services we saw considerable progress in Q3.

At Nokia World in September, we took a meaningful step forward as we helped our developer and operator partners to see how we can together create a sustainable and mutually beneficial services ecosystem.

Our Ovi partnership with Facebook and our launch of Ovi API's and our Ovi SDK Beta are good examples of how we are championing openness to help our partners bring innovation to market.

Unlike some of our competitors, Nokia believes that open innovation creates greater opportunities for everybody.

This is an increasingly important distinction for our partners and we are looking forward to collaborating more and more.

To accelerate the delivery of Ovi services and bring additional Internet services talent to the services unit we acquired three companies during the third quarter.

Cellity, a mobile software company which has developed a solution for aggregating address book data.

Plum Ventures, which develops and operates a cloud-based social media sharing and messaging service for private groups.

And Doppler, a mobile service provider for international travelers.

Now for some key operational metrics.

Ovi Mail reached the 2 million user milestone and it took half the time to sign up the second million as compared to the first million.

By providing a reliable free e-mail service Nokia is laying the groundwork for a broad range of solutions for billions of people.

Nokia Messaging now has signed an agreement with 35 operators, more than doubling in just three months.

Developers from 65 countries are participating in the Ovi store ecosystem, good evidence of our global scope.

The Nokia music store is available in 22 countries and comes with music -- is now live in 12 countries.

And in maps we now offer guided navigation for drivers and pedestrians in more than 70 countries with 6,000 3D landmarks for more than 200 cities.

Maps and navigation will be at the heart of how Nokia will connect people to the world around them.

We have a lot of work to do, but we are making good progress creating a broad range of innovative location-based services.

And then on to Nokia Siemens Networks.

In Q3 NSN slipped back to a modest operating loss on a non-IFRS basis in the seasonally weak third quarter.

The challenging competitive factors and market conditions in the infrastructure and related services business necessitated a substantial impairment charge at NSN.

Today we updated the guidance for NSN.

Our view now is that the decline in total infrastructure market in 2009 compared to 2008 will be approximately 5% smaller than the approximately 10% decline previously expected.

However, at the same time it is clear that NSN has lost market share.

The top priority for NSN is restoring growth to the Company's top line and reversing the market share dynamic in a manner that has discipline and, as always, with shareholder value creation as the guiding principle.

Progress continues in many critical areas, for instance -- NSN has added a further 11 3G customers in the quarter taking its 3G references to an industry leading 160 customers.

And as of the end of Q3, NSN has delivered LTE compatible Flexi base station hardware to over 100 customers.

In summary let me be very clear, we continue to support NSN's actions to improve its performance.

Both shareholders have continued to make the necessary capital available to NSN so that NSN can execute its strategy to meet the products and service needs of the leading operators in the world.

In this way we also progressed the goal of shareholder value for Nokia and Siemens shareholders.

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

Thanks, Olli-Pekka.

I'll begin by providing some color on our devices and services, OpEx performance and our overall tax position.

In both of these areas our Q3 results were good and somewhat better than expected.

In the quarter Devices & Services non-IFRS OpEx was EUR1.36 billion on a sequential basis down EUR77 million in absolute terms and 210 basis points as a percentage of net sales.

This was achieved through a combination of continuing to contain discretionary expenses and reducing structural cost.

Year to date the headcount impact of measures we have announced totals approximately 4,000 people in Devices & Services and of these approximately 3,500 have already left the Company.

Taxes.

In Q3 Nokia's taxes benefited from favorable country profit mix as well as net credits related to prior years.

If Nokia's long-term estimated tax rate of 26% had been applied, non-IFRS earnings-per-share would have been EUR0.02 lower.

I just want to be clear as to the amount that we benefited from lower taxes in the quarter so that you can also see that we delivered underlying operating profits somewhat above the market expectations.

Now let me take you through the Q3 results for Devices & Services.

On a reported basis Devices & Services net sales of EUR6.9 billion were up 5% sequentially and down 20% year on year.

On a constant currency basis Devices & Services net sales were up 6% sequentially and down 20% year on year.

These sequential increase was attributable to higher volumes particularly at the low end and at the high-end of our product range.

Nokia's device average selling price, or ASP, in the third quarter was EUR62, flat sequentially on a reported and constant currency basis.

Nokia ended quarter three with four to five weeks of channel inventories, approximately flat sequentially, and we believe these levels are sustainable given the current demand environment.

In the quarter services net sales were EUR148 million, up 6% sequentially and up 29% year on year.

Billings were EUR172 million, down 17% sequentially and up 23% year on year.

In Q3 we implemented more aggressive pricing on our messaging offering.

In addition, the year-on-year results were impacted 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 has averaged quarterly net sales of approximately EUR49 million.

This quarter we're rolling out additional financial metrics that will help you track our solutions mode versus our product mode and the progress there.

The first category, mobile computer solutions and smartphones, it's based on our MIMO and Symbian platforms.

Here we offer complete seamlessly integrated services and experience.

The second category, mobile phones and embedded solutions, is based on our Series 40 and Series 30 platforms.

Here the value is created primarily through the product itself with targeted services that deliver previously unavailable solutions to the mass markets.

For example, Nokia Life Tools can be embedded in a modular fashion across many of our devices.

In Q3 mobile computer solutions and smartphones delivered net sales of EUR3.1 billion and an ASP of EUR190.

This compares to EUR3.1 billion and an ASP of EUR182 in quarter two.

Mobile phones and embedded solutions delivered net sales of EUR3.8 billion and an ASP of EUR41 in Q3 compared to EUR3.5 billion and an ASP of EUR41 in quarter two.

Devices & Services gross margin in Q3 was 30.9%, down 310 basis points compared to Q2.

As expected gross margin declined on a sequential basis, negatively impacted by our net currency hedging results as earlier discussed with you.

However, I want to emphasize the underlying gross margins improved sequentially driven by a mix shift towards higher margin products and cost of goods sales improvements.

What do I mean by underlying gross margins?

I mean gross margins if we would have had no hedges in any currencies in place during Q3 and earlier.

Devices & Services non-IFRS operating margin decreased 80 basis points sequentially to a level of 11.4% in quarter three.

In the upcoming quarter, quarter four, we expect Devices & Services non-IFRS operating margin to be up by 100 basis points, or more, sequentially.

This is driven by improving gross margins and continued OpEx discipline.

On to NAVTEQ.

Net sales in Q3 were EUR166 million, an increase of 12% sequentially.

NAVTEQ's net sales were up sequentially primarily due to seasonal strength in the P&D market.

Non-IFRS operating margins were 25.9% compared with 12.8% in Q2.

This was attributable to the higher net sales as well as tight OpEx management.

And for Nokia Siemens Networks, overall net sales were EUR2.8 billion in quarter three, down 14% sequentially and 21% year on year.

Services net sales were EUR1.3 billion.

Sustainable earnings growth in this industry is increasingly driven by professional services which includes managed services, consulting and systems integration and care services.

And in this area we are well-positioned and continue to see an improving pipeline.

In Q3 NSN's non-IFRS gross margin was 28.8%, up 80 basis points sequentially, driven primarily by continued improvements in services gross margins.

NSN continued to show excellent discipline and cost control with OpEx of EUR846 million, down 7% on a sequential basis.

It will be important to continue these efforts while simultaneously working to improve top-line growth.

NSN's non-IFRS operating margin in Q3 was a negative 1.9%, down 200 basis points sequentially.

On a reported IFRS basis you will have noted a large charge that we've taken in Q3 in order to reflect our current view of the ongoing value of the NSN business based on industry and NSN dynamics.

This is a non-cash charge, no operational impact.

The non-cash charge reflects impairments in two areas -- reduction of goodwill of EUR908 million and a reduction of a deferred tax asset of EUR432 million.

Nokia has no goodwill from the formation of NSN remaining on its books after these impairments.

NSN's contribution to Nokia cash flow from operations was slightly negative in Q3, minus EUR13 million.

At the end of quarter three NSN's contribution to Nokia gross cash was positive EUR745 million.

Respectively the contribution to Nokia net cash was negative EUR527 million as we have borrowings at NSN.

Turning back to Nokia as a whole, Nokia's financial income and expenses in quarter three were an expense of EUR48 million compared to an expense of EUR61 million in Q2.

The sequential improvement was due to lower interest expenses offset somewhat by lower interest income.

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

In quarter three our cash flow from operations was EUR720 million, approximately the same as in quarter two.

The solid performance in Q3 was attributable to two areas where we improved, offset somewhat by two areas where our performance was a little weaker as compared to the second quarter.

On the positive side we delivered improved profitability in Devices & Services and in NAVTEQ in quarter three and we had lower cash outflow related to taxes.

On the negative side the sequential decline in net working capital was lower in Q3 than in Q2.

Nevertheless we freed up approximately EUR90 million of net working capital in the third quarter.

In addition, in quarter three our net outflows related to financial income and expenses increased.

We ended quarter three with total cash and other liquid assets of EUR7.4 billion and net cash of EUR2.1 billion.

With that back to Olli-Pekka.

Thank you, Rick.

In the third quarter we saw a better demand environment in the mobile handset industry and Nokia in fact did execute well.

Our new products, which span across a range of price points, did very well in Q3 and we expect that our Devices & Services portfolio will continue to improve further in Q4.

More importantly, Q3 was a quarter where we made very encouraging progress in areas that are critical to our future success.

We grew our active users from 46 million to 61 million.

Focusing on active users is proving to be a very effective way to motivate our employees and accelerate the cultural change that is necessary within Nokia.

We're also invigorating our executive team and employee base with talented new additions.

I emphasized last quarter that Nokia must accelerate the base of our strategic transformation.

It is clear that we are doing so.

With the formation of our new solutions unit we are taking the next logical step.

Naturally, we will also remain focused on our product mode of operation.

Here we already are best in class, but there is a potential to improve and capture new opportunities as well.

Thank you very much.

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).

Tim Boddy, Goldman Sachs.

Yes, thank you.

I wondered if you could quantify the component impact on your smartphone shipments and whether that actually also impacted the gross margin during the quarter.

I also noticed that in Europe, despite very strong growth overall, you did see pressure on ASPs which was surprising given the sale of N97.

I wondered if you could comment on that.

Thank you.

Okay, it's Olli-Pekka here, so I will take this one.

So definitely we were referring to the component constraints that we experienced in the third quarter and the background here is basically the fact that a lot of sort of capacity was taken down in the electronics components industry during the end of -- latter half of last year and the first part of this year when the crisis hit.

And now many of the suppliers are basically taking that capacity into use again and that has caused at times constraints for us as well as to other industry players.

So let me make it very clear, we would have sold more devices and smartphones in the third quarter without the capacity constraints.

The constraints, in fact, did hit the smartphones part of the business more than the rest of the devices.

As an example, a good example of our constraint component is the camera module which typically of course is more used in the higher end of the portfolio as opposed to the low-end -- as an example.

Now -- looking at the situation where we are now, like I said, it's been a situation where capacity has been taken and will be taken into reuse and in that way the situation seems to be improving and has improved.

Also this is really a situation where I feel our experience in managing this business comes to play.

We have really paid a lot of attention since June/July on this topic and, including senior management of course here.

And I'm pretty confident that we can manage this situation in the way that there is also upside -- upside in the component availability.

But you know that needs to be done on a daily basis and that's what we are doing here.

In fact, this is not the first nor the last time we and the industry have been in this situation.

In fact, it's been something that has been a challenge almost every year on the fourth quarter and so far we have been able to manage the situation as it comes.

So hence my confidence here.

And I really would like to emphasize, don't read in between the lines when I'm talking about the component constraints.

We are simply stating a fact here, but we are not trying in any way to make that bigger than life and it's really the way this business is to be managed and that's what we are doing as we speak.

Then the latter part of the other question related to ASP pressure in the European market.

It's -- I really do not call that in that way.

The competitive situation in Europe has remained robust, that is very clear.

There is of course more competition in the smartphones in Europe than in some other markets because that segment is bigger in Europe than in Latin America or India or China in fact.

But you know, this is a normal competitive environment.

And if you look at our -- if you look at our market share in Europe, we in fact did increase our market share during Q3 in Europe.

And bearing in mind the nature of the European market, that has to reflect also the competitive process and we do have in smartphones in this market.

So I would call it business as usual in fact, without trying in any way to downplay your comment.

Okay, that's very clear.

Thanks.

Can we have the next question please?

Mike Walkley, Piper Jaffray.

Great, thank you very much.

Based on my calculations your macro handset guidance for Q4 implies a 7% to 8% sequential growth for the industry.

What factors do you see that lead to maybe less than normal seasonality?

Is there inventory in certain markets from your competitors or is it your belief that channel is unlikely to build inventory for the holiday season and [also] might have better seasonal trends for the March quarter?

Or is it just that China and India are such a large part of the market and don't have big seasonal trends that this is kind of the new normal seasonality we should expect for the handset market?

Hey Mike, Rick.

Let me hit on that last one.

I'm not sure what the new normal seasonality is given that we've gone from years of booming seasonality that were double-digit Q3 to Q4 to the drop-off with the collapse of the world economy at the last turn of the calendar and now here I think we're somewhere in between.

And as you said, given our update here with the numbers that we've printed through three quarters and then our guidance for the total year, remember that was a rounded numbers and so it could be a little bit higher than that if you work your numbers.

And though I think maybe the market was thinking, well gee, shouldn't we expect maybe 9% or 10% sequential growth, maybe we will.

And as Olli-Pekka pointed out too, we have some pretty good experience if there is more growth there of how do you play well into that with how we manage flexibility in our factories and the supply chain.

So I think really we are somewhere between last year's really abnormal economic crisis seasonality and then the previous growth years were kind of -- feel right in the middle of that to me.

The inventory in the industry is in good shape in the channel industry, as we commented in the call.

Our inventory is good so we don't think that there's -- we think it's sustainable given the end-user demand and we don't see that there's any kind of problem with channel inventory that would prevent good ship-ins and that will match up well with user demand.

So we're really seeing sell-in and sell-out having equaled out here and that phenomenon from the beginning of the year I think you can say is history.

And you mentioned China and India.

Increasingly of course China and India are having a bigger impact to mute what used to be considered the Christmas holiday seasonality at Q3/Q4 as they become bigger parts of the market.

So yes, I'd agree with your statement.

Thank you very much.

Thank you.

The next question, please.

Mark Sue, RBC.

Thank you.

Rick, the sequential rebound in devices operating margins in the fourth quarter, is that something sustainable into 2010 or do you feel Nokia still needs to ramp spending to defend against Apple and RIM implying big fluctuations in operating margins?

And separately, Olli-Pekka, will Nokia ever consider a new operating system such as Android or something else?

Okay, Mark, Rick; I'll take the first.

Again as we emphasized here, we expect our operating margin in Devices & Services to be up 100 basis points or more in the fourth quarter and we -- that's a [factor] of improved product portfolio, a better mix because we have more devices coming in that end, and, as Olli-Pekka pointed out, the increase in the number of touch and QWERTY devices for instance.

Of course, then with the sequential growth will pick up in the low end as well, but we really think that those two things drive increasing gross margin, absolutely, in the quarter compared to Q3 and this better performance with the upside in the operating profit will continue to manage the OpEx in a very prudent way.

In terms of Devices & Services, of course you would expect the absolute OpEx in quarter four to be somewhat higher than Q3 because we've got the volumes, the ramp-ups and all that.

But as a percentage of net sales you should expect it to be pretty flat as you look quarter on quarter and of course that helps give us leverage into the operating margin and that is the dynamic in Devices & Services.

If we're looking out into 2010 of course we're going to give you a much deeper dive on that at the capital markets and really would hold it to that.

But to emphasize here, improvements in the product portfolio overall are coming, we're driving these two modes of operation so that we have the speed and flexibility and innovation on one hand, the low cost lead, scale and volume on the other and we're showing here that we're bringing down our OpEx both structurally and in discretionary items in a way that is ahead of the guidelines I gave you earlier.

So that's kind of the setup for 2010 and we'll put meat on the bone at capital markets days there.

Okay.

and I will continue on to operating system.

So in fact if you look at our offering right now, so we don't believe in only one operating system.

We will be sort of launching the N900 based on Linux or MIMO in the fourth quarter.

We of course continue to invest in Symbian and definitely we'll see that as our (inaudible) smartphone platform.

We are investing in Series 40 in the product side of the business.

And in fact quite interestingly we did launch our -- are at the moment launching a booklet, a mini laptop using Windows 7 and this is really a mobile device if you look at the sort of functionality and the features set there.

So we are pragmatic as well.

At the same time the thinking here really is based on openness as well.

And really Symbian and Linux or MIMO here we believe will benefit from the openness and from the ability to drive the ecosystem in that way.

And it's quite interesting that if you look at Symbian here, we did announce in the summer a sort of major significant cooperation agreement with Microsoft where in fact Microsoft Office Solutions will be co-created and ported on the Symbian.

It's definitely something that in my mind gives a lot of credibility to Symbian as well.

Would we consider Android?

We really don't have that thinking right now and the basic thinking here is go for the openness, go for where you can add value and that's what we believe we can do.

There's a lot of work remaining of course with Symbian, that's very clear.

Make no mistake, we understand that.

The user experience needs to improve, but we've got so much in the pipeline, there is so much in the pipeline there, where we basically come in the right way -- and this is a positive statement when I talk about legacy -- where we in the right way can combine the telecommunication legacy, the power consumption, the language version, the operator variant and openness working with Symbian.

And you know, that combination of the positive telecom legacy and the openness and innovation on top of that, you know that will be extremely competitive in the future.

But having said that I understand there's a lot that needs to be done there going forward and there's so much that we have in the pipeline.

Good.

Thank you.

Could we have the next question please?

Stuart Jeffrey, Nomura.

Hi there, thank you very much.

A question on Nokia Siemens.

Your comments saying that you're really having to prioritize the top line and market share.

That sounds a little bit like an aggressive statement in that we should perhaps be expecting quite a bit lower margins going forward.

And I guess you can't be introducing products that quickly, so I'm assuming the pricing and contract terms are the way that you have to go to try and turn around that market share.

Could you just give us a bit more detail on that, if that is the right way to think about it, and perhaps an update on how the strategy overall is changing now that you've got a format of services heading (inaudible)?

Thanks.

Hey, Stuart, Rick.

There's nothing ominous about that statement.

I mean we're going to walk the right balance here.

We need to do more in terms of picking back up some of the market share that we've recently lost on the product side and that's what we're referring to here.

On the services side we actually continue to grow, we continue our lead and with the new CEO, Rajeev Suri, coming from the services side I'm confident and absolutely certain that we're going to continue to do that.

But he started in the product side too earlier in his career in infrastructure, so he knows both and he knows how they link to one another.

And right now in this industry, you really do best by having both there and leveraging one off of the other.

What we've got to do is we've just got to make sure that with the right kinds of terms and conditions we start to fight back and pick up a bit more market share on the product side.

And particularly 3G now, as Olli-Pekka said, you know we've got the industry-leading number of deployments and references in there.

We have Flexi Base Stations that we're shipping that has a remote upgradeable to LTE.

And so we've got a lot of the pieces in place to now start to have this market share recovery so it's not just about going out there and competing on price and having that hit the gross margin in that ominous way as you referred to, Stewart, it's a balance.

Thank you.

Could we have the next question please?

Kulbinder Garcha, Credit Suisse.

Thanks.

Just a clarification and a question.

My clarification is for Rick.

On the operating margin expansion in Q4 should we assume that OpEx will grow in absolute terms a lot less than it previously had in recent years just given the more muted seasonality and the cost-cutting?

Or do you actually believe that gross margins can meaningfully expand as well?

And the second question, the question I really have is more about the size of the industry.

Given the amount of volume that you see that MediaTek is selling, and I appreciate that's sell-in to handset vendors and not sell through and so there can be some adjustment there -- just the aggregate size of what they're selling, does that not tell us perhaps that the entire handset industry is much larger than the sell side Gartner, Nokia, most of the observers have probably reported and maybe that your share is low?

And how do you take into account just that very sizable branded OEM and gray market that seems to be existing in Asia right now?

Thanks very much.

Okay, let me step through this.

On your first question you asked is the seasonal absolute uptick in OpEx in Devices & Services going to be less than what has been historic, the answer is yes.

You also asked or is it possible that there's actually underlying improvement in the gross margins because we're getting paid for the value that we're delivering given the mix that we have.

The answer there is yes as well.

So it's both.

But on the OpEx your clear question, the clear answer yes.

Then you come to MediaTek and it's kind of a question of how do we take MediaTek into account in our numbers and the market share estimates and all of that?

And like you, I think who has written on this, there are a lot of claims out there and there's also quite a bit of confusion.

It's not only sell-in versus sell-out, but it's also you have to understand with MediaTek, they make a lot more chips than ever end up in actual devices that get in consumer hands because they have high failure rates, they have high quality problems and you have to do numerous subtractions from the number that are the chips that are supposedly made in MediaTek to get in to the actual devices that are out on the street.

And of course you have to look at the original number and the claim on that -- is that even valid.

So there is a pretty big gap there.

But having said that, in our market estimates we take into account everything that we can quantifiably and reliably estimate from the market and we've probably got -- well, not probably, we do have the most extensive global data network to capture that and we think we capture it pretty well.

And I think what you're seeing though is the whole industry is realizing that these OEM productions that from literally hundreds of small little shops and many of them are copycat devices -- many of them are outright you know fakes or forgeries and some of them or most of them also are using IPR that's not being paid for -- are going a lot into what I'd call the tier 5 and 6 distribution levels in China and a little bit some of the other emerging markets.

And those are hard to count precisely, but we make estimates as others do.

And the important thing there is the devices that are actually going in in those tiers that might not be accounted for 100% in yours and mine and other people's market estimates in the past are ultra-low-end devices.

So the value impact is, I would argue, much less even than the volume impact even if there is some millions that had previously been unaccounted for.

Thank you.

Would Nokia address that market then, Rick?

(multiple speakers) ultra low end market, don't we?

Yes and I trust in (inaudible).

Of course we are addressing that market as we speak.

But we worry more about getting them in the hand and getting paid for than accounting some of these other things, but we are doing our estimates on that, we're paying attention to that and hopefully -- your question in this discussion and the research that you and others are doing are hoping to clear up and shed some good light on this and some facts about what is happening and what's not happening.

But we are beyond competitive, we are -- ultra low end is where we intend to continue to profit and grow.

Thank you.

Could we have the next question please?

Itai Kidron, Oppenheimer.

Thank you.

Rick I wanted to dig a little bit into the gross margin.

Can you give us a sense of magnitude on the operating margin side?

Can you possibly try and do the same on the gross margin, how much up the hedging is impacting still the next quarter or not?

And with the change in mix what sort of the magnitude we should expect gross margin to improve.

And also if you can clarify on the component shortages -- maybe I missed it, but it wasn't clear to me whether you expect that to also impact your fourth quarter or you think that at this point you have it under control?

Let me take the first and Olli-Pekka the second since he talked about components earlier.

In terms of the gross margin, as I've mentioned here, we expect improvement there for the reasons I discussed previously and we expect underlying improvement and basically what we're doing in the fourth quarter is we're going to offset some of the impact that we had in the third quarter from the net hedging effects which we've talked about for a few quarters.

We've talked to you how this would develop and that's why the third quarter was what it was, was the gross margins.

But our underlying margins are absolutely improved, as I said, in the third quarter and they'll get better in the fourth quarter with the mix as we've talked previously.

So in terms of the -- I think quantifying that, as we've said, we've had a negative impact from the cost and FX position in the hundreds of basis points and what we're seeing is that's history.

We're starting to make that up and we're going to have improvement in the fourth quarter.

We've taken down our sourcing of components as a percentage of our cost of sales to somewhat just above 15% here as we exit this quarter to where it was approximately closer to 25% or more at the end of 2008.

That's one of the big changes that we've made and we, of course, have negotiated price reductions there and we're working with those suppliers to make sure that they are able to take the efforts that they need to continue to supply competitively with us.

And I would say they're actually doing quite well in that regard.

You also have to look at there are major fluctuations in the euro/dollar rate as well and we source most of our components there.

So it's not just a question of yen, but -- let me be clear again -- underlying gross margins for the Devices & Services improved in Q3 versus Q2.

They'll get better in Q4 and we'll see that reflected in our estimate of 100 basis points or more improvement in the operating profit for Devices & Services in Q4.

And components I think (multiple speakers).

Components, I spoke at length about components.

So just very briefly -- so our sales were impacted somewhat by component constraints in Q3.

That somewhat did continue somewhat in Q4, but what I said, basically the bottom line was I believe we can manage that situation.

Thank you.

Next question, please.

Gareth Jenkins, UBS.

Yes, thanks.

A couple of quick ones if I can.

Just going back to the margin issue, Rick.

You gave us good detail on the revenues and ASPs for the two new divisions.

I just wondered whether you could give us a sense of margins.

And related to that and earlier questions, it seems that the volume kicker alone in Q4 in terms of your guidance should give you 100 basis points of margin improvement on gross margins.

So would you classify your guidance as overly prudent?

And then just secondly on solutions and the kind of overall view generally.

It seems historically that you had some problems bringing through devices that have been coupled together with services and I just wonder whether that poses a threat or a challenge going forward?

Let me take the first and ask Olli-Pekka to take the second.

While overly prudent -- I don't think our legal guys would let me comment on that adjective, but I think the point here is Devices & Services, as we said, will boil down to our expectation is 100 basis points or more improvement and I gave you a very clear view, as you said, on what we think is happening with net sales and OpEx there.

In terms of NAVTEQ, as you've seen, we're actually with NAVTEQ at the top end, we're back to slight top-line growth even after the collapse of the economy as we look at Q3 year on year here, and I think that's quite encouraging.

You saw good gross margins with NAVTEQ in the quarter and of course quarter four actually has very large seasonality in their business from Q3 to Q4.

So there -- of course absolute spend will be up there in terms of OpEx a little bit, percentage of net sales up a little bit.

But again, you're going to get very good seasonality improvement in sales, gross margin and operating profit in NAVTEQ based on the historical seasonality there.

And NSN we've talked about.

Fourth quarter is a seasonally strong quarter.

It really goes fourth quarter is the best, second quarter is usually the next strongest, and then you have seasonally weak first and third quarters in the industry.

So Q4 we see shaping up as seasonally the normal expected kind of relative strength.

There of course you would have your absolute amount of OpEx going up a little bit.

But as a percentage of net sales it should go down materially as that's the area where you really get leverage when the top line moves in the NSN business even much more than you get in Devices & Services.

So maybe Olli-Pekka then on the other (multiple speakers) question.

Yes (multiple speakers) and that of course is a very important question and that's exactly what we have been working on for the last two years in order to get better here.

Because of course it's quite clear you're not combining hardware only in different constellations, but you're adding services in order to sell a solution the complexity increases.

And you rightly pointed out that we have struggled in the past a couple of times with that complexity.

Now -- looking at where we are now, of course we have been working on this topic when it comes to model [variety], when it comes to architecture, common planning and so forth very intensely.

And I really feel that we've got a good grip on this one now.

And every sort of product launch that we announce and the timings of those, of course that's done bearing in mind what is the services combination and what is the service integration to that part.

So if we are saying that we will launch a product in Q4, that definitely includes the services component.

And in that way that's the operating mode that will be even enhanced by the solutions unit.

But I really think we are in control of this one and can really reap the benefit of the new strategy by doing so.

Can I just follow up?

I think my first part was slightly misunderstood.

Rick, thanks for the color on NAVTEQ and NSN, but I rather meant the mix within the solutions business between the S30, S40 portion and the S60 MIMO portion.

Yes, there I think given the revenues that we did we're getting more operational metrics.

I want to leave it at that and we'll start building on that as we go forward in the future quarters.

Thanks.

Thank you.

And operator, could we have our final question please?

Sherief Bakr, Citi.

Thank you very much.

Rick, I wonder if you could maybe tell us what the actual underlying gross margin is and what the improvement has been.

I think it's kind of a very sensitive area and one of the reasons why we've seen a negative reaction to your stock today.

I think it would be very helpful as people are trying to kind of benchmark what is a temporary or structural gross margin level moving forward.

And just sort of a quick follow-up for Olli-Pekka, in making this transition to solutions could you maybe sort of help us understand how far along the way you are in making that transition and at what point do you think you'll be delivering a user experience and solution that you think will be best in class assuming that is the actual objective?

Thank you.

200 basis points plus or minus.

And that's of course about the most relevant question we can have here, so in that way that's very good to have that as a final question, as the final question.

So of course here it's almost always a question about this is not like you either are there or then you are not there, but it is evolution.

And that's how things happen in business and we will see a lot of that evolution happening in the fourth quarter with some of the new devices that we will be launching.

The music integration comes with music with X6 is a great example of a new user experience, the N97 mini will improve on the N97 even more and so forth and so forth.

And I really look at -- I've got a pretty good picture now on the roadmap here when it comes to solutions and the way we can integrate the devices and services as one seamless user experience.

We've got new management here, we've got new executives and I've got a pretty good picture of that one ahead of me.

And I really believe we can evolve during the latter part of this year and we can continue to evolve next year as well.

But we will -- and nobody will never get there because there are always things that you can do better.

Ladies and gentlemen, that concludes our 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 therefore differ materially from the results currently expected.

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

We have identified these in more detail on pages 11 and to 28 in our 2008 20F and in our press release today.

Thank you.

Ladies and gentlemen, this now concludes today's conference.

Thank you all for participating.

You may now disconnect.