諾基亞 (NOK) 2011 Q3 法說會逐字稿

Good Morning, my name is Denis and I will be your conference operator today.

At this time I would like to welcome everyone to the Nokia third-quarter 2011 earnings 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.

Matt Shimao, Head of Investor Relations.

Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's third-quarter 2011 conference call.

I'm Matt Shimao, Head of Nokia Investor Relations.

Stephen Elop, President and CEO of Nokia, and Timo Ihamuotila, CFO of Nokia, are here in Espoo with me today.

During this 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 risk and uncertainties.

Actual results may, therefore, differ materially from the results we currently expect.

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

We have identified these in more detail on pages 12 to 39 in our 2010 20-F and in our quarterly results press release issued today.

Please note that our quarterly results press release, the complete interim report with tables and the presentation on our website include non-IFRS results information in addition to the reported results information.

A complete interim report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and the reconciliation between the non-IFRS and the reported information.

With that, Stephen, over to you.

Welcome, ladies and gentlemen, and thank you for joining us on today's earnings call.

Overall, I am pleased with Nokia's results this quarter.

That being said, it is important to emphasize that we are on a journey during which we are systematically transforming our Company for long-term success and improved financial performance.

With each step of that journey you will see us methodically implement our strategy, pursuing steady improvement through a period that has known transition risks while also dealing with the various unexpected ups and downs that typify the dynamic nature of our industry.

Let me remind you about what the nature of this journey is.

On February 11 we announced a new strategy for Nokia with the fundamental intent of creating great mobile products.

This strategy comprises; first, the transition of our primary smartphone platform to Windows Phone; second, increased investment in our lower-price mobile phone products as we seek to connect the next billion people to the Internet; and, third, investments in areas of potential future disruption.

Additionally, across these three pillars we will use our iconic design capabilities, location and commerce assets and various unpolished gems as sources of competitive differentiation.

And, finally, we will change the way we work to better adapt to the disruptive forces around us.

As a result of this strategy we intend to grow longer term Devices & Services' net sales faster than the market while delivering a Devices & Services' non-IFRS operating margin of 10% or more.

During this very busy quarter I have focused my attention on operative improvements, meeting with teams around the Company and around the world to gauge the progress we are making, to identify areas where we need additional concentration and to assess our early results.

Most notably this quarter I visited China to review the business status of the region, to meet with the operators and to engage with a number of our go-to-market partners.

It is evident that the team in China has made significant progress in correcting the situation that led to the problems in Q2.

Channel inventories are at normal levels, channel structure has been streamlined and we believe our channel partners are seeing increased profits from the resulting normalized pricing and from the sales support provided by the Nokia team.

In parallel, the operators are looking forward to bringing their consumers our new smart devices and mobile phones.

Yes, there's still a lot of work to do in China, but there are very clear signs of progress.

I also had the opportunity to visit India, where we continue to see a positive trend after the launch of our dual-SIM devices earlier this year.

In the dual-SIM price bands in which we launched these products we have gone from essentially a standing start to 18m devices in Q3.

Additionally, our internal estimates indicate continued momentum.

In addition to capturing share with our dual-SIM devices we also are seeing a halo effect, whereby, the success of our dual-SIM devices is driving increased traffic around and correspondingly-higher sales for our other devices in India.

For example, shipments of the Nokia 1616, a EUR15 device that we first shipped in Q2 of last year, grew 24% sequentially and had its highest volume performance since Q4 of last year.

This may suggest that the power of the Nokia brand in our traditional strongholds, combined with great new products and execution by our team, can have an immediate impact on our business results.

The results in India may also begin to tell another story, somewhat contrary to conventional wisdom.

Again, through the combination of a strong brand, great products with Nokia innovation and execution, it is clear that we are able to take share away from smaller Chinese and local manufacturers.

It is my belief that we need to attack these low-end markets with vigor and innovation and that is what we are doing in India and will continue to do in relevant markets around the world.

I also visited a number of key Nokia facilities around the world, including Ulm, Germany, which is one of our principle sites for mobile phones' research and development.

As just one example of the progress we are making, the team in Ulm has clearly moved from absorbing and understanding our new strategy to aggressively pursuing its implementation.

In doing so there is a lot of excitement around the product work this team is delivering and it is encouraging to see R&D teams moving past their period of transition into heads-down execution.

We are pursuing a strategy that concentrates our mobile phones' R&D in three locations and our smart devices' R&D in four locations.

As a result, we're seeing better execution because the co-location of people fosters easier conversations and faster problem resolution, leading to shorter product cycles.

During the Q1 earning call I mentioned that Q2 would be a point of product family transition for mobile phones with the introduction of the dual-SIM products and we are now beginning to see the results.

Of course, we are at a similar moment in our smart devices.

First, Q3 was a quarter of significant progress in and around Symbian.

This included the launch of Symbian Belle, the latest in a series of operating system enhancements which includes significant user experience improvements, NFC capabilities, a broader range of Microsoft Office productivity applications and modernized navigation features.

We have announced a variety of new products that use Symbian Belle.

This includes our loudest smartphone, which is oriented towards music and entertainment buffs.

It also includes our most colorful smartphone, which is available in a wide range of vibrant colors, and our smallest smartphone, with an incredibly powerful experience packed into a very compact form factor and, finally, our brightest smartphone, with a large, clear-black display and stainless steel finish.

The feedback from reviewers and analysts on the Symbian Belle experience has been excellent, They have remarked that Belle is a huge step forward and represents Nokia's most competitive Symbian experience to date.

During the course of Q3 we also completed the development of the Nokia N9, a bold, all-screen phone that's incredibly fast and simple to use.

It brings with it a breathtaking new industrial design and some real innovation around its swipe user interface.

Early demand for the N9 in the days since it launched in certain target markets has been strong.

For example, in Russia, which is probably one of our largest markets, we had the highest pre-order numbers ever in the country and the first shipments at our flagship store in Moscow sold out during the opening sales event.

We look forward to extending elements of the N9's industrial design, user experience and developments environment to various future Nokia products.

I must also say that I am incredibly proud of, and grateful to, the Nokia teams that brought the N9 to market under what are, obviously, very difficult circumstances, given our transition.

Perseverance has long been a trait of Nokia and, combined with loyalty and a passion for our products and consumers, is a remarkable force.

Looking ahead for our smart devices, the largest reason for marking this moment as a point of transition is the impending introduction of the first Nokia experience on Windows Phone that we expect in Q4.

While the launch itself will be an important milestone, it is just one more step in our journey of transformation.

We will be launching in select countries later this quarter and then we plan to systematically increase the number of countries, launch partners and products during the course of 2012.

To say that Nokians around the world are excited to share our work in the weeks ahead is, to say the least, an understatement.

As part of our transformation we also continued to make necessary structural changes to our business which are focused on putting us on course for long-term success.

Timo will provide more information related to the financial implications of these changes, but I did want to share my perspective.

At the highest level we plan to make these structural changes to support the execution of our Company's strategy, to achieve the Devices & Services savings target we announced earlier this year and to bring efficiency and speed to the organization.

Earlier this year we focused our restructuring work on primarily the R&D teams to ensure that we correctly allocated resources against the new strategy at appropriate cost levels.

The progress we are making with our products is early evidence that we have addressed some of the previous challenges, although we still have work ahead us.

Thus, in Q3 we announced that we are now accelerating structural change in other parts of the organization in order to ensure we are responsive to the changing dynamics in our industry.

This included three things.

First, we plan to adjust our manufacturing capacity and renew our manufacturing strategy to reflect how our global networks of customers, partners and suppliers have evolved, including the closure of our facility in Cluj, Romania.

Second, in our Location & Commerce business we plan to capture potential synergies and increase effectiveness through automation arising from consolidation -- consolidating location assets, including NAVTEQ and Nokia's social location services operations that was in Devices & Services.

And, finally, we plan to align our markets team and other supporting functions.

For sales, this includes a move to simplify our model to now be based around four regions, 20 areas and additional local offices that serve individual countries or territories.

Since we outlined our new strategy we have announced the planned reduction of approximately 7,500 employees and the transfer of approximately 2,300 employees to Accenture.

Changes of this size are never easy because of the personal impact on our employees, their families and their communities.

As we have done in the past, Nokia will ensure that we meet our social responsibility obligations in supporting our affected employees.

So, in summary, in Q3 we started to see signs of early progress in many areas.

We made some difficult decisions, but we also celebrated some early moment of success.

As we head into the fourth quarter we are looking forward to generating more success as a result of delivering against our new strategy.

But, more importantly, we are focused on providing continued, calculated progress so that we can move Nokia through the transformation process and deliver superior results to our shareholders while we deliver great mobile devices to people all around the world.

Thank you and, now, over to Timo.

Okay, thank you, Stephen.

According to our preliminary estimates in terms of unit volumes the overall handset market in Q3 grew around 10%, both year over year and sequentially.

In Q3 our Devices & Services volumes declined 3% year over year but grew 20% sequentially, as we recovered after taking decisive actions in Q2 to correct our overall channel inventory situation.

In Q3 we continued to improve our retail sales execution and we ended Q3 within our normal four-to-six week range.

On a reported basis Devices & Services net sales of EUR5.4b were down 1% sequentially and down 25% year over year.

In Q3 Devices & Services net sales benefited from the recognition of approximately EUR70m of non-recurring IPR royalty income, which was recognized in Devices & Services other net sales.

In Q2 Devices & Services benefited from approximately EUR430m of IPR royalty income from new contracts related to the second-quarter 2011 and earlier periods.

Thus, if you adjust for the royalty amounts I just mentioned, Devices & Services net sales actually grew 6% sequentially in the third quarter.

Our Smart Devices net sales in Q3 continued to be impacted by highly-competitive market dynamics.

On sequential basis Smart Devices net sales declined 7%, as unit volumes were approximately flat but ASPs declined.

Smart Devices sales in Q3 were led by the Nokia 5230, the C5 family, N9 and C7, covering a broad price range from EUR75 to EUR230.

Since the Q2 earnings call we launched four new Symbian Belle devices, which have received very positive reviews.

These Symbian Belle devices, which are expected to ramp up in Q4, bring a meaningful improvement to the competitiveness of our overall Smart Devices portfolio.

In Q3 our Mobile Phones net sales delivered a solid performance and we believe we took share from competitive offerings.

On the sequential basis net sales grew 14% as strong growth in unit volumes more than offset ASP declines.

Mobile Phone sales in Q3 were led by the Nokia C3, C2, C1, 1616 and X1, covering a broad price range of EUR15 to EUR65.

Our dual-SIM portfolio expanded from one device that did 2.6m units in Q2 to four devices that did total of 17.9m units in Q3.

It is important to note that the overall Mobile Phones portfolio delivered sequential growth in Q3, with non-dual SIM Mobile Phones volumes growing a solid 4%.

For both Smart Devices and Mobile Phones in Q3 the impact of our pricing actions on ASPs was mainly driven by the larger pricing decisions what we made during Q2, which impacted Q2 ASPs partially and impacted Q3 ASPs for the full quarter.

On an overall Devices & Services basis the sequential decline in ASPs was primarily due to a product mix shift towards lower ASP devices as well as the lower IPR royalty income and price erosion I previously mentioned.

Devices & Services non-IFRS gross margin in Q3 was 26.1%, down 500 basis points sequentially.

The decrease was primarily driven by the lower IPR royalty income.

The positive gross margin impact related to IPR royalty income previously mentioned was approximately 100 basis points in Q3 and 590 basis points in Q2.

Thus, adjusting for these IPR royalty items Devices & Services non-IFRS gross margin was approximately flat sequentially.

In Q3 we experienced sequential gross margin declines in both Smart Devices and Mobile Phones.

The high level of competition in our industry puts pressure on gross margins, making it important to capture the benefits of scale.

In Q3 Devices & Services non-IFRS gross margin was negatively impacted by 20 basis points related to foreign currency hedging.

At present time we expect a 50 basis points' positive impact to Q4 gross margins related to hedging activities assuming static foreign currency rates at the end of Q3 levels, but this could change due to intra-quarter fluctuations in rates.

In Q3 Devices & Services non-IFRS OpEx was EUR1.2b, down approximately EUR140m on sequential basis and down approximately 230 basis points as a percentage of net sales.

We will continue to manage our OpEx tightly, with a focus on continuing to increase our R&D efficiency as well as the effectiveness of our marketing initiatives to support our Smart Devices and Mobile Phones net sales.

Sequentially in Q4 we expect the seasonal increase in OpEx to be greater than normal, mainly driven by launch of our new products with go-to-market market activities and marketing campaigns.

Devices & Services non-IFRS operating margin was 4.1% in Q3, down 260 basis points sequentially.

The positive operating margin impact related to IPR royalty income previously mentioned was approximately 120 basis points in Q3 and 800 basis points in Q2.

Thus, on an adjusted basis Devices & Service non-IFRS operating margin was 2.9% in Q3.

And now a few comments and an update on our OpEx reduction plans.

A quarter ago we announced that we would accelerate our efforts and increase our Devices & Services non-IFRS operating expenses reduction target to more than EUR1b for the full year of 2013, compared to the full-year 2010 Devices and Services non-IFRS operating expenses of EUR5.65b.

The most significant restructuring actions relate to aligning our R&D operations to support our new strategy.

In addition, during Q3 we announced actions intended to drive capacity optimization and operational agility, as Stephen explained.

Also in Q3 we identified potential synergies that we intend to achieve by combining our location assets, including NAVTEQ, and the social location services operations from Devices & Services into a new Location & Commerce business.

Location & Commerce represents an attractive growth and differentiation opportunity and will benefit from reinforcement as new opportunities are identified.

During the third quarter Devices & Services recognized net charges of EUR89m related to restructuring activities, which include restructuring charges, associated impairments and on Accenture-related deal closing adjustment.

As of the end of Q3 we have recognized cumulative charges of EUR661m.

While the total extent of the restructuring activities is still to be determined, we currently anticipate cumulative charges in Devices & Services of around EUR900m before the end of 2012.

We also believe total cash outflows related to our Devices & Services restructuring activities will be below the cumulative charges related to these restructuring activities.

And then onto Nokia Siemens Networks and NAVTEQ.

In Q3 NSN delivered another solid quarter.

Reported net sales were EUR3.4b, a 6% sequential decrease, reflecting typical seasonality as well as a full quarter's contribution from the acquired Motorola Solutions Networks assets.

Excluding the acquired Motorola business NSN's net sales would have been down 12% sequentially, but up 3% year over year.

Although NSN has diversified its geographic and customer base over the last couple of years, NSN's net sales were impacted in Q3 due to the current macro uncertainty, as some operators' core customers placed a greater focus on how they are spending.

Global services represented approximately 50% of NSN's net sales during Q3.

In mobile broadband NSN continued to make good progress, both in 3G and LTE.

NSN now has 44 commercial LTE contracts.

NSN's non-IFRS gross margin in Q3 was 26.8%, up 20 basis points sequentially, due to a greater focus on operational discipline, which offset an unfavorable sales mix towards global services.

In Q3 NSN's non-IFRS operating margin was 0.2%, down 90 basis points sequentially, reflecting the dollar net sales.

NSN remains focused on driving further efficiencies while continuing to invest in its key strategic areas of mobile broadband and customer experience.

During Q3 Nokia and Siemens each provided capital of EUR500m to NSN to strengthen NSN's financial position and set the stage for strategic flexibility, productivity and innovation.

The concurrent appointment of Jesper Ovesen as Executive Chairman is expected to help NSN strengthen its position as an industry leader and become a more independent entity.

NSN's contribution to Nokia's cash flow from operations was slightly positive in Q3.

At the end of Q3 NSN's contribution to Nokia's gross cash was EUR1.7b and NSN's contribution to Nokia's net cash was negative EUR400m.

And then, on NAVTEQ, reported net sales in Q3 were EUR241m, down 2% sequentially and down 4% year over year.

On a sequential basis NAVTEQ's decrease in reported net sales was primarily due to lower sales of map licenses to mobile device customers and typical seasonality in the vehicle segment, partially offset by higher sales to PND customers.

NAVTEQ's non-IFRS gross margin was 86.3%, up 340 basis points sequentially, primarily due to favorable revenue mix.

NAVTEQ's non-IFRS operating margin was 28.2%, up 670 basis points sequentially.

And then, turning back to Nokia as whole, financial income and expenses was less negative on a sequential basis primarily due to specific exceptional hedging and investment gains recognized in Q3.

On taxes, if Nokia's estimated long-term tax rate of 26% had been applied, non-IFRS Nokia EPS would have been approximately EUR0.015 higher in Q3 to 2011.

And before I move on I want to spend one minute on how I would encourage you to model taxes, since this is driving some variation in sell-side models.

As expected, in Q3 our taxes was again negatively impacted by NSN as we are not currently recognizing tax benefits for NSN's Finnish tax losses.

We expect NSN taxes of approximately EUR50m each quarter until NSN achieves a sufficient level of profitability, at which point you can go back to using Nokia's overall long-term tax rate of 26%.

Until then I would encourage you to model NSN taxes at EUR50m per quarter and use 26% rate for the rest of Nokia ex-NSN.

Then, turning into the very important topic of cash, we ended the third quarter with a net cash balance of EUR5.1b.

We have a clear -- clean balance sheet, conservative capital structure and strong liquidity profile.

Sequentially, net cash and other liquid assets increased by EUR1.2b primarily due to strong net cash from operating activities in Devices & Services, which was supported by positive net working capital improvements and net cash inflows from hedging activities.

This was partially offset by capital expenditures.

Net cash also benefited by a EUR500m equity investment in Nokia by -- in Nokia Siemens Networks by Siemens.

Our Devices & Services cash conversion cycle, which measures our working capital performance, is back to a negative number of days.

This was supported by a decrease in receivables due to a move in the geographic mix of our net sales back towards regions with shorter payment terms.

And now, turning to our guidance, in the press release you will find the full details of our guidance.

But I just wanted to highlight that we continue to operate with limited near-term visibility in our Devices & Services business.

Although we have improved some of the fundamentals of our sales execution and our channel inventories are now at healthy levels, the business transformation we are in the midst of makes the top line difficult to predict, particularly for our Smart Devices unit.

However, we do expect Devices & Services net sales to be up sequentially in Q4 and we expect to end the year with a strong net cash position.

Finally, some additional modeling considerations related to Q4.

Beginning in Q4 we plan to report results for our new Location & Commerce business as a new reportable segment, taking the place of our NAVTEQ reportable segment.

This involves regrouping some historical numbers which we expect to provide you in advance of the Q4 earnings release.

Also in Q4 we plan to start shipping our first Nokia experience on Windows Phone, thus, from a balance sheet perspective we expect to start receiving cash in Q4 related to quarterly platform support payments from Microsoft.

From a P&L perspective in Q4 we will begin recording Windows Phone-related royalty expenses in our Smart Devices cost of goods sold.

In Q4 we also will begin to -- recognizing a portion of the platform support payments as a benefit to our Smart Devices cost of goods sold.

This has been factored into our Q4 guidance for Devices & Services.

And, with that, I will hand over to Matt for Q&A.

Thank you, Timo.

For the Q&A session please limit yourself to one question only.

Operator, please go ahead.

(Operator Instructions).

And the first question comes from the line of Kulbinder Garcha with Credit Suisse.

Thanks, I have a question and a clarification for Timo.

Just on the clarification, just what you mentioned there on the impact of the Windows agreement -- or the Microsoft agreement.

So, just to be clear, is a positive impact in gross margin of Smart Devices for Windows because Microsoft are giving you some cash payments, but you start paying the license fee?

What is the net of those two, do you think, in the fourth quarter?

I'm trying to understand whether that would at least help your gross margin in Smart Devices expand.

And then the question really more fundamentally for Stephen is regarding Windows.

You're talking about only launching this product in a few markets and my questions is, I guess, why.

Because if this is going to be a flagship product with other Windows going through it, why wouldn't Nokia do the global launches we've historically seen where you ramp it very successfully and very quickly?

Is it because of components?

Is it concerns around the experience?

Is it because of carrier reluctance?

What is the thinking I guess behind that and how quickly could Nokia, based upon your best estimation now, ramp this Windows platform into the mass market of smartphones?

Is that still a 12 to 18 month horizon, do you think?

Thanks.

Okay, thanks.

So, first, on the Microsoft payments dynamic, so what I simply wanted to highlight to you is how the accounting here works from two perspectives.

First, the Windows Phone-related royalty expenses will be booked in our Smart Devices cost of goods sold and we will be recognizing a portion of the platform support payments as benefit to our Smart Devices cost of goods sold.

And I wanted to highlight that the cash flow dynamics in this case can be different from the accounting dynamics.

But we are not giving any exact number or gross margin guidance here regarding the Windows Phone margin.

We are not giving product-specific margins regarding our guidance.

Regarding the ramp-up plans, first of all, we're very pleased with the degree of operator support, with the early signs of commitment and all of those other factors.

It's very positive, so we're encouraged by that.

But we are being very deliberate in the sequence in which we role things out because it is a significant shift for the organization in how we sell, how we manufacture, all of those different elements.

So whether it is the need to introduce new language variants, to establish marketplace capabilities in new countries to support Windows Phone, whether it is activating operator billing, on and on and on, there's quite a long list of things we have to do to ensure we have robust launches in each country in which we operate.

As well, various countries have different requirements for different radio variants, be it TD-SCDMA requirements in China, CDMA in China or the US, LTE initially in the US and elsewhere, so there's quite a range of things we have to do to shift to a complete rollout.

So we're being very deliberate, starting in certain markets, expanding again, continuing to expand and really having it blossom through the course of 2012.

And then I think the second part of your second question that you had there related to moving down the price bands and so forth and how we estimate that.

First of all, we aren't providing specific timing guidance on that.

But what you should expect to see is a repeatable pattern of cascading series of devices that increasingly span the price bands, and that's both up and down, and so there's an opportunity to do that over time.

That also requires engineering work and planning and sequencing with the other products that we have moving very successfully in various markets.

Because, of course, we're very thoughtful about where and how we first launch Windows Phone relative to where Symbian is strong and so forth so we get the right balance and the right transition dynamics as we go through that process.

(Multiple speakers).

Operator, next question, please.

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

Yes, thank you very much, gentlemen.

Obviously, given your statement that OpEx is going to be up sequentially and that the margin structure should be about plus or minus flattish, it does seem as though there's some uptick associated with your Mobile Phone revenues in the fourth quarter.

Would you mind helping us a little bit understand if I'm drawing that implication correctly and, if so, what is that incremental OpEx going forward?

Is that for Symbian Belle?

Is that for Windows Phone?

How should think about that?

Well, maybe -- Timo here.

If I start here, so, basically, first of all, we are not giving guidance on gross margin and if we look at the gross margin dynamics of the two businesses they were actually quite similar during Q3, so I would not directly draw that conclusion.

Then what comes to the OpEx, so, we expect a holiday season with launches of quite a few new products.

We have just started the launch and shipping of our [announced] smartphone, clearly, we are expecting to launch the first Nokia experience on Windows Phone and we expect quite a large part on marketing activity related to those launches.

I think it's also -- just to add to that to help you understand the quarterly dynamics of OpEx, I'm just reinforcing this point.

There was some marketing activity when we were estimating when the various spends would land.

There was some that we had thought would land in Q3 actually landing in Q4, so that artificially lowers Q3 a bit and artificially increases Q4 a bit just related to the timing of discretionary marketing spend.

Thanks, Geoff.

Operator, next question, please.

Your next question comes from the line of Gareth Jenkins with UBS.

Thanks very much for taking my question.

Just I wanted one clarification on something that's been mentioned earlier again.

Just so that I'm absolutely crystal clear with this, the 1% to 5% margin target for Devices & Services includes some inflow from Microsoft.

Can you just tell us what the target would be excluding any potential inflow?

And then I guess the more structural question.

I just wondered if you could give us a sense on Nokia Siemens Networks and your ownership there and what sort of timetable and what milestones you're looking at in terms of whether it's a successful investment for you from this point.

Thank you.

Okay, so, thanks.

So, first, on the guidance on 1% to 5%, so we have built in, as I said, the dynamics of both the platform payment as well as our royalty payments to Microsoft.

However, I want to highlight that we are not calling out any non-recurring IPR at this point regarding the guidance.

And then what comes to NSN, so NSN is really focusing its strategy around mobile broadband and related services.

On that business it is really a long-term business where you absolutely have to demonstrate long-term innovation leadership towards the mobile operator customers.

And we aim to really improve NSN's performance long term and, when we do that, that will also give us more options regarding moving NSN towards a more independent company.

Okay.

So I'm just -- if I may, I am just going to add onto the -- I know there is questions about the Microsoft payments and how to think about how they balance and all that type of thing.

Let me suggest this.

Certainly the way I think about this is, by far the most significant things to consider as it relates to gross margin and, ultimately, operating margin are, first, our ability to differentiate, because through differentiation comes the opportunity to drive higher gross margins.

Second, by the approach that we take to how we price and, in particular, introduce the Windows Phone devices, I would point out that we believe it's very important to establish the Windows Phone ecosystem, to begin to build volume, to develop operating leverage from that volume and, from that, to drive overall scale efficiencies as we introduce these products.

So that's a significant factor as we think about gross margin.

And then, third, of course, is how we manage the cost of goods sold, how well we do on driving cost savings into our manufacturing process, into the components and so forth.

Those are the significant factors to consider as it relates to gross margin as we move through this transition.

Thanks, Gareth.

Operator, next question, please.

Your next question comes from the line of Tim Long with Bank of Montreal.

Thank you.

Just a two parter (sic) on pricing, if I could, in this interim period before we get to the Windows Phone.

How long do you think the tactical pricing moves are going to last?

And the second part, if I look particularly at the September quarter here, the pricing moves really worked a lot for volumes in mobile phones, but really hasn't driven any volume uptake in the Smart Device business.

So is it worth continuing the tactical price moves there when it's not driving any volume, or how should we think about that?

Thanks.

Thank you.

First of all, the significant tactical pricing moves that we made were principally in Q2, as we were essentially dealing with an inventory situation and also dealing with the fact that we had kept prices higher than we would have otherwise because of anticipated supply shortages arising out the Japanese Tsunami situation.

So that was something that, as we looked at, we said we need to make some moves during the course of Q2, and we did.

What you see in the Q3 numbers, of course, is a full quarter's impact of the moves that we made in Q2.

So essentially our sense is -- not our sense, but the reality is on -- in Q3 we were on a more traditional price decay curve across the board as it related to our products.

And so in terms of how we think going forward, anticipating traditional price decay curves and so forth is the way we are looking at it going forward.

As it relates to Smart Devices it may not have driven a significant uptick per se, but in terms of the trend and so forth we are quite pleased that from Q2 to Q3 we saw relative stability in the Symbian volumes.

Now, I also want to just refer back to some comments that I made in my prepared remarks as it relates to what we saw in India, because it's an interesting phenomena.

And that is -- the reason I mentioned the Nokia 1616, no, it's not our most strategic product out there on the market, as you know, and yet it was one of many examples where, because of the increased interest in positive reviews about and general buzz on Nokia, combined with the recency (sic) of strong brand and everything else, what we saw was a halo effect.

And I cannot predict how that's going to play out in other markets, in markets where our brand is very strong or where it has recently been very strong.

So even -- although we tend to focus on just the immediate numbers in a particular geography, there are geographies that have a very large population of dedicated Nokia consumers using large numbers of Nokia devices today.

And so one of our elements of uncertainty is the degree to which this halo effect applies as we launch Windows Phone around our other products.

Now, I'm going to give you the balancing side of it as well.

That's, if you like, a bit of a bull case.

There is also bear case, which is, as there is so much excitement around Windows Phone, does that have a negative impact on the attractiveness of Symbian brand.

And, of course, all of these things will play out in different ways around the world.

And when we say we have limited near-term visibility it's principally because of factors like that, that it's hard to call right now, quite frankly.

Okay, maybe a quick addition to hear.

So we are a Company in transition and we are working with limited forward visibility, as we said.

We did not call the tactical pricing out this quarter, totally in line with what Stephen said.

But of course markets -- competitive nature in the markets can change and we have to have that tool in our toolbox as well.

Yes.

Okay.

Tim, thanks for the question.

Operator, next question, please.

Your next question comes from the line of Tim Boddy with Goldman Sachs.

Yes, thanks.

I had a clarification and a question.

Just to clarify, we saw quite weak, I guess you might call them, product gross margins in the Smart Device and Mobile Phone businesses.

Gross margins were down materially sequentially, but obviously we saw continued strength in revenue in the other part of the Device & Services business.

Can you clarify is that other revenue strength a sign of a typical IPR type of royalty stream, or is there anything exceptional in that?

I know you talked to this in your prepared remarks and I just -- I didn't quite catch what's sustainable and what's one time.

And then my question really is just around you using the phrase 'delivering a Nokia experience on a Windows Phone'.

What exactly does that mean?

And how will it help you differentiate?

Thank you.

Okay, so, Timo here, so maybe I'll start with the Devices & Services other topic.

So, first of all, as a reminder, the Device & Services other, there, we record the IPR income as well as Vertu and spare parts.

And, as I mentioned, last quarter we did see a slight increase in our recurring IPR income following the new contracts, what we have announced earlier in the year.

However, also, this recurring IPR income is still somewhat lumpy and hard to predict.

And in addition this quarter we actually saw also sequential increase in Vertu net sales.

And with respect to the Nokia experience on Windows Phone, clearly, it is our intent to take advantage of Nokia's strengths and assets as it relates to what we deliver from Nokia.

So as you see our first products launch you will see the first signs of differentiation, the first signs of differentiation relative to android and iPhone and also relative to your other players within the Windows Phone ecosystem, although the former is more important than the latter to us in the near term.

Those forms of differentiation, what you should expect to see, is clearly we have strengths in design, in hardware and mechanics and a variety of other things and we are going to be quite proud to show our work in that area.

But also we continue to build on the Windows Phone platform.

It is a platform, so you will see unique Nokia capabilities in the form of applications and services available from us.

Now, this, it's important to note is our first entre into the Windows Phone space.

You'll see our first signs of differentiation and our ability to differentiate clearly increases with time, as we can more directly impact the software release cycles and so forth with our partners at Microsoft.

Thanks, Tim.

Operator, next question, please.

Your next question comes from the line of Stuart Jeffrey with Nomura.

Hi, there.

Thank you very much.

I've a question on the -- for the Mobile Device business feature phone market.

You'd spoken before about the Koreans in particular having had a big impact on the margin contraction there and we are seeing Samsung and LG and others starting to move away.

So I was wondering if you could perhaps refresh us on how you see the pricing environment.

Margins have jumped up nicely to, perhaps, where you might hope to see them longer term.

So should we really be expecting any significant changes in your profitability from Mobile Phones, and just a quick update on how things have changed in the last couple of quarters?

Thanks.

Okay.

So, regarding Mobile Phones margins, I presume that you refer to the approximately 10% operating margin in the Mobile Phones business.

Now, we are not giving guidance by the -- by these segments, so in that sense I can talk generally about the market and the margin pressure.

As was discussed already earlier in the call, so, the margins have been impacted on MP by two items.

First of all, on the dual-SIM products we actually are driving slightly higher than average margins.

Simultaneously, as Stephen said, we had a higher proportion also of the lower-end products like the 1616, which impacts the margin negatively.

And then, in addition to that, we had the tactical pricing move mainly in Q2 which came into full force now in Q3.

So that market continues to be competitive.

It is clear that the competitive dynamics have somewhat changed.

But Samsung continues to be a very formidable competitor on the Mobile Phones feature phone space and, of course, in addition to that, we have the various local competitors there.

And if I may just add to that, as you formed your question you used the word the feature phone market or the feature phone segment and so forth.

And I want to just spend a second and comment on that to align our thinking on how we perceive this.

The Mobile Phoned business sometimes is characterized as a feature phone business being squeezed out by the Smartphone business, or a smarter phone business or whatever the case may be.

And while it's the case that today's feature phones will be displaced by smarter and smarter devices over time, the market for those smarter devices at low price points continues to represent a robust business opportunity.

So in the same way that today's feature phones displace yesterday's feature phones, there's new products ahead from ourselves, and I'm sure from our competition, that are going after that marketplace over time.

So we hear some commentary at times saying there's a market in contraction and so forth, but there's a lot of people with limited economic means who aspire to the same things as do we in terms of an experience.

They may have less money, they may be in an emerging market, but there is a very good opportunity there for us that, as we indicated on February 11, is an area of investment for us.

The dual-SIM products are a good example of innovation that helps us to capture share and improve the situation in that market for us.

Thanks, Stuart.

Operator, next question, please.

Your next question comes from the line of Mike Walkley with Canaccord Genuity.

Michael Walkley; Thank you very much.

Congratulations on the strong operating cost management.

I was hoping to understand better the sales and marketing mechanics longer term as you ramp Windows Phone and the support you receive from Microsoft.

So I understand how sales and marketing go up next quarter as you support the new Smartphone launches, but longer term how should we think about sales and marketing as Windows also helps support the ecosystem?

Thank you.

Yes, so, we can't disclose specific details, but clearly Microsoft has an interest in supporting the Windows Phone ecosystem overall.

That will take many forms.

Clearly, it will include both above- and below-the-line marketing activities to support the ecosystem, a very substantial effort as it relates to the developer ecosystem in encouraging the development of applications for Windows Phone and also the moves their making more broadly as it relates to Windows 8 and taking the Windows Phone user experience to big Windows, where we will, over time, see that experience on hundreds of millions of PCs and tablets.

That clearly accrues to the overall power of the message that Microsoft will have in the marketplace that supports our efforts as it relates to Windows Phone.

There are certain aspects of that that are done collectively for the ecosystem and some that will be done specifically for ourselves as a lead vendor, and I'm sure for other vendors as well who are in the Windows Phone ecosystem.

Thanks, Mike.

Operator, next question, please.

Your next question comes from the line of Alexandre Peterc with Exane BNP Paribas.

Hi, thanks for taking my question.

Microsoft just announced that Qualcomm is to remain the sole supplier for Windows Phone chipsets.

Does that mean that Nokia will also follow this roadmap?

They also said they are working on lower-cost solutions.

How competitive do you think Nokia can be with the Windows Phone, particularly at sub-$100 price points that the android Neo Tech ecosystem is attacking emerging markets as of 2012?

Thanks.

So, first of all, we won't make a specific comment on chipset selection and so forth.

As we've said, our opportunity to differentiate in the Windows ecosystem is quite strong and we intend to take advantage of whatever opportunity to differentiate makes sense.

The second question -- go ahead, repeat your second question, please.

Yes.

It was essentially how are you going to tackle the price points (multiple speakers)?

Price points, okay, yes.

I'm sorry, thank you.

And clearly one of our critical considerations before we made the decision to go in this direction was the ability to drive price points down to compete with the other ecosystems at all relevant price points.

We have clear engineering line of sight to do that.

We know how to do it.

It's part of the engineering plan to pursue it.

We are not specifying timeframes for that, but it is very much a part of the plans and something that will be forthcoming.

Thank you, Alexandre.

Operator, next question, please.

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

Thank you.

When we look at historical launches by Palm, RIM and others there's usually a lot of commentary on differentiation and big operator system supports, but we also get limited sell through.

What are consumers saying about Windows so that we could see some healthy sell through?

Do you think there is some pent-up demand and some open mindedness from the consumers for Windows?

Do you think consumers will wait outside stores, or do you think it will take a lot of stimulation to drive the Windows when it's launched?

Well, a couple of things.

First of all, as it relates to how the most recent release of Windows Phone is being received, the so-called Mango release, what I focus on most deliberately is something called the NPS scores, the net promoter scores, where we do some very detailed research.

And, indeed, many of the operators have done the same research for validation as to how Smartphone users who compare Windows Phone and the competing environments essentially rate or who would be willing to recommend Windows Phone to their friends and family.

Those scores for a Windows Phone are very high.

And so fundamentally we have a belief that if we can introduce them to that experience, help them understand it and get them to taste it, if you like, then we can be quite successful.

Now as it relates to pent-up demand or how people perceive it, one of the things that I think is really important to note is that we are delivering the first Nokia experience on Windows Phone.

And when you think about the brand equity and the demand and the interest and so forth, in some markets it may be a Microsoft brand like Microsoft, or Windows or what have you that has greater brand equity.

But in many of the markets in which we are operating the Nokia brand, by any measurement, is far more significant in terms of people's Smartphone purchasing decisions.

And that's something clearly we'll be taking a great deal of advantage of as we go through our launch cycles.

Thanks, Mark.

Operator, next question, please.

Your next question comes from the line of Francois Meunier with Morgan Stanley.

Hello, yes, it's Francois.

Thanks for taking my call.

You've been mentioning big Windows and Windows 8, which is coming for tablets next year.

I was wondering, tablets are more like big smartphones, more than small PCs and we've seen HP saying maybe they could exit the PC manufacturing business.

Does it make sense, and to me it does make sense, that actually Nokia could be a big player in tablets with Windows 8 next year and, basically, fill the factories which might have been left empty in terms of smartphones, as you've lost market share in the past year?

So, we have not announced any specific plans as it relates to tablets.

It is the case that we recognize from an ecosystem perspective that there are benefits and synergies that exist between Windows, Windows Phone, ultimately, other platforms as well, where people are looking for complete digital experiences across the Smartphone, the PC, the tablet, the television set, the automobile and so forth.

And, without saying that we are doing all of those things, it is the case that we see that opportunity.

And as a major player in the Smartphone space in and around the Windows Phone platform we'll certainly consider any of those opportunities as we go forward.

Thank you, Francois.

Operator, next question, please.

Your next question is from the line of Ittai Kidron with Oppenheimer.

Thanks, and congratulations, gentlemen, on a good quarter.

I had a couple of questions.

First, Timo, with regards to your market commentary you mentioned that the market grew, correct me if I'm wrong, 10% quarter over quarter.

That's fairly strong.

Can you tell us any more insights into that?

And is -- because of this strong growth do you expect also still normal seasonal fourth quarter, or do you think part of that volume has now been moved into the third quarter?

And the second relates to your performance in China and Asia Pacific.

Clearly, you've done very well over there, but can you give us a little bit more color on how much of this progress was just pure underlying strong demand in that region versus real share gains there?

Okay.

So, thanks, Ittai.

I'll start with -- first of all, these were volume market growth comments and, if I recall correctly, it was about 10% both sequentially and year over year.

The value according to our estimate would be maybe slightly lower, actually, and it really is driven in this case by strong demand on -- because this is volume mainly, on the developing markets in places like Asia.

Regarding the Q4 seasonality, the only thing we are saying here is that we expect our top line to be seasonally higher going into Q4, but we are not making any comment on the market at the moment.

And I must admit that the visibility is limited, as we have said.

Thanks, Ittai.

Operator, next question, please.

Your next question comes from the line of Zahid Hussein with Citi.

Hi, guys, thanks very much.

Just really the last one on gross margin for me, in terms of Windows Phone devices that are coming out, particularly the first couple that you plan to launch, can you just confirm whether gross margins will be higher than current smartphones or will they actually be lower given all the puts and takes around OS payments as well as cash receipts from Microsoft?

And, secondly, in terms of ASP your current Smartphone ASP is obviously 130.

We expect Windows Phone devices will be, obviously, a lot higher than that.

Can you give us a range of what we should be thinking about for that?

Thanks.

Okay, so, Timo here.

So the ASP expansion, as you correctly point out, is an easier equation and, there, given the low ASP at the moment in our smartphone business, we would expect somewhat higher ASP into the portfolio from the new Nokia smartphones on Windows Phone.

Then what comes to gross margin, so we have also said that we will price these products in a way that will support the ecosystem getting into the volume, and that is what we will do.

So it will be a dynamic equation where we will need to balance the consumer interest and appeal vis a vis getting the ecosystem into the volume.

Thanks, Zahid.

Operator, next question, please.

Your next question comes from the line of Richard Kramer with Arete Research.

Thanks very much.

I'd like to ask a slightly longer-term question about the 10% margin target.

Right now if you look at your OpEx run rate it's fairly close to the EUR1b reduction on the EUR5.65b starting point and yet the margins are just 2% excluding IPR.

Maybe Timo or Stephen if you could talk a little longer term about what bridges the gap to a 10% operating margin?

Is it going to be substantially higher sales?

Could it be substantially lower operating costs than the EUR1b target that you've given us, just trying to understand the dynamics around that.

And then I guess the other question is, given the fairly low and long-term persistent low margins at NSN, should we expect substantially more restructuring to come at NSN now that you have new management taking reins and you've recapitalized the business?

Thanks.

Okay.

So, first, on the 10% margin target, so there are, I would say, two longer-term main drivers we need to work on.

First one is the operating leverage.

And it needs to be a combination of both the growth side of the equation as well as the cost side of the equation.

And again here I would use the words 'this is a dynamic equation'.

That's partly the reason why we said, actually, that the OpEx reduction target for the Company is more than EUR1b.

And then longer term, of course, we are working very hard to differentiate our offering, drive innovation through that mechanism and also, there, longer term look to bring to the market products which can allow for gross margin expansion.

Regarding NSN, I'll just comment on the hiring of Jesper Ovesen.

We specifically selected him because he has some -- a very good track record on taking companies through the necessary changes, for example, most recently the effort he undertook to take a company through the privatization and then getting it back out on the market in a very successful way.

In that case it required additional restructuring.

We are not forecasting what's required specifically at NSN, but we are certainly glad we've brought someone on with his skills to make sure we are considering all options and all approaches to that.

And again here I think it's important to add that the business of innovation is really -- the NSN business is really driven by investment into innovation in the core R&D in mobile networks and -- or mobile broadband and in related managed services.

And any action we would take here needs to be in line in supporting NSN becoming a real global leader on this area, where it partly already is.

Thanks, Richard.

Operator, we'll now take our last question.

Today's final question will come from the line of Kai Korschelt with Deutsche Bank.

Yes, thank you for taking my question.

My first one was just on the low end.

The sequential unit growth, I think, were north of EUR15m.

If we go back to the second quarter I think we were down EUR12m.

And there was obviously a lot of de-stocking and potentially restocking going on.

Would it be possible to maybe just break out the level or element of inventory change rather than real end demand and new products?

And then my other question was just on NSN, just a quick question on the Q4 revenue guidance.

It looks slightly below typical seasonality.

I'm just wondering if there is any reason for that, if you are really seeing any macro weakness affecting the spending behavior of the carriers.

Thank you.

Okay, thanks, so, Timo here.

So, first, on the inventory dynamics what you asked about, so maybe I can give some color on that.

In a way that we actually ended -- or if you look at the inventory correction and what we said regarding that was that basically we had a general inventory which was slightly above our normal four-to-six weeks' range.

And then last quarter we said we had brought it into approximately middle and that's about one week of inventory.

And then if you work that through the numbers and say approximately 100m units, you will come to a unit number of some 7m or something.

So that would be, I would say, a reasonable approximation, give and take some volume -- some units.

And then on NSN guidance regarding Q4, so, yes, we have to take into account the current economic environment where we operate in and that is partly factored into the guidance, simultaneously also noting that NSN has had some very strong growth in some other areas outside Europe and US, like Asia Pacific and, in particular, in Japan.

Now for some closing remarks I'll turn the call back over to Stephen.

Very good, thank you, everybody.

And thank you for the good questions today.

Just, in closing, again I want to reiterate that we are pleased with Nokia's results this quarter.

But we are on a journey.

We have to continue to execute well, one step at a time in the implementation of our new strategy, one country, one carrier, one radio technology at a time.

We've got to work through that so that we can bring great mobile products to people all around the world.

Next week we have Nokia World.

I think it's going to be pretty exciting.

I know for everyone at Nokia it's going to be a very proud moment.

So we look forward to seeing as many of you as we can at that event.

Thank you for your attention and support.

Ladies and gentlemen, this concludes our conference call.

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

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

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

We have identified these in more detail on pages 12 to 39 in our 2010 20-F and in our press release issued today.

Thank you.

Ladies and gentlemen, this does conclude the Nokia third-quarter 2011 earnings conference call.

You may now disconnect.