諾基亞 (NOK) 2013 Q1 法說會逐字稿

Good morning and good afternoon.

My name is Carmen, and I will be your conference operator today.

At this time I would like to welcome everyone to the Nokia First Quarter 2013 Earnings Conference.

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 conference over to Matt Shimao, Head of Investor Relations.

Please go ahead, sir.

Thank you.

Ladies and gentlemen, welcome to Nokia's First Quarter 2013 Conference Call.

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

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

During this call, we'll 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 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 through 47 of our 2012 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.

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

With that, Stephen, over to you.

Thank you, Matt.

And thank you, everyone, for joining us today.

At the highest level, I am pleased that in Q1 2013, Nokia group achieved underlying operating profitability for the third quarter in a row.

In a moment, I will share my perspective on Nokia's Q1 performance; however, I wanted to first note that we believe this quarter further underscored that Nokia and other industry participants continue to operate in one of the most exciting and fast-moving business environments in the world today.

Compared to a year ago, a lot has changed in our industry and I wanted to share some of the trends we're seeing.

For example, the distance between the various Android participants seems starker than ever before, as the dominance of one hardware vendor becomes more visible.

Additionally, unbranded Android and forked Android players continue to emerge from China and India, creating new dynamics, both within and increasingly outside of Asia.

With this growth in low-priced fragmented versions of Android, the Android experience is becoming inconsistent across the lower-end price range.

In February, Mobile World Congress highlighted the growth in start-up alternative platforms, with many new entrants placing bets on next-generation technologies like HTML5.

While we have not yet seen one of these alternative platforms gain broad scale, we should not underestimate what could happen if a dominant Android provider shifts some of its focus to an alternative platform.

We also saw new attempts to disrupt existing business models.

Whether it is the new Facebook Home forking the Android experience, or Amazon providing a differentiated tablet that ports the Android stack, we see leading technology companies take deliberate steps to change Android and possibly disrupt our industry.

There are some patterns of change that seem inevitable.

For example, consumers are expecting their digital lives to be more and more mobile, as evidenced by the recent statistics about the shift towards mobility at the expense of less-mobile PC experiences.

Consumers are also increasingly discerning about the capabilities and new experiences that attract their attention.

They are less trusted in counting cores and pixel density, and more interested experiences that are truly innovative.

This constant pattern of change in our industry is an opportunity.

We believe we can move through the industry fragmentation and churn with an unrelenting focus on executing our strategy.

Thus, we remain focused on improving the competitiveness of our products, effectively managing our costs, and moving with urgency.

In Q1 we continued that focus, which resulted in us recognizing areas where we are very pleased with our progress, and areas where we obviously need to turn up the focus.

Thus today, I will provide a perspective on how we are developing each of our key businesses while highlighting the adjustments we are taking to ultimately increase the value we deliver to our shareholders.

First of all, we are pleased with the improvements in our smart devices business, and are optimistic about Lumia's direction.

In Q1, our Lumia volumes increased quarter on quarter to 5.6 million units, and approximately two-thirds of our Lumia volumes were of Windows Phone 8-based devices.

With a broad portfolio of Lumia devices covering a wide range of price points, we are seeing our Lumia momentum accelerate as we exit Q1.

Thus, supported by the wider availability of recently announced Lumia products and the easing of supply constraints, we expect sequential volume growth in Q2 to be even higher than the 27% sequential growth we saw in Q1.

In Q2, we expect that the vast majority of our smart devices volumes and net sales will be from Lumia devices based on Windows Phone 8.

During Q1, we announced new smart devices products, including the Nokia Lumia 520 and the Nokia Lumia 720, which expand our Smartphone offering.

The 520 is our most affordable Lumia to date, and the 720 is designed specifically for non-LTE Markets.

We have just started shipping the new devices in China, India, Indonesia, Mexico, France, and many other markets, where the immediate receptions from customers is enthusiastic.

People are responding positively to the new innovation throughout the Lumia portfolio.

Imaging, design, and navigation are capturing attention among reviewers, operators, retail associates, and ultimately, consumers.

We believe we have increased the competitiveness of our smart devices.

As a result, Lumia is clearly making progress.

We're pleased that today Lumia is even out-shipping the iPhone in countries like Argentina, India, Poland, Ukraine, and of course, in our home country of Finland.

Importantly, the positive consumer reaction to the innovation and differentiation in Lumia is starting to come through in our numbers.

We are encouraged by the financial performance of our newer Lumia devises based on Windows Phone 8, which generated not only solid growth, but also a gross margin in Q1 that was somewhat above the smart devices average.

At the same time, we recognize that we must continue to increase our sales and improve our retail execution for Lumia.

For example, in the United States, securing what operators call hero status or the top spot at the point of sale, is critically important because it attracts premium subsidies and additional marketing investment.

Later this quarter, a new Lumia device is anticipated to have hero status with a leading US operator, an event which will mark the beginning of a season of new product introductions.

Additionally, Nokia, Microsoft, and operators have committed to increase the global Windows Phone marketing dollars towards Lumia.

Together with Microsoft, we are working on major marketing campaigns, training more retail associates, improving how we leverage operator marketing that is available to us, and seeding more live devices to create a more engaging point of sale experience.

Overall, we are very pleased with our progress around Lumia.

Shifting to our mobile phones business and Asha.

In Q1, our mobile phones business had a difficult quarter.

Our mobile phones Q1 volumes decreased 30% quarter-on-quarter to 55.8 million units.

We believe that the decline in our mobile phones business was primarily due to competitive industry dynamics, as well as an estimated higher-than-normal seasonal decline in the market addressed by our mobile phones products.

Thus, with the benefit of hindsight, we started Q1 with higher channel inventory in mobile phones than would have been optimal, and we reduced the absolute level of mobile phone channel inventory during the quarter, which significantly impacted our sales volumes.

In response, we have taken actions to address the situation.

Specifically, we are focused on insuring price competitiveness of our key mobile phones products.

We are increasing our marketing efforts for certain mobile phones products in Q2.

We are aiming to manage our channel inventories to end Q2 within our normal four-to-six-week range, and we are continuing to renew our portfolio, which includes plans to announce new innovation and new products in the coming months.

While it was a difficult quarter for our mobile phones business, the team is focused on driving the execution and innovation required to ensure the ongoing competitiveness of our mobile phones products.

Moving to our Here business.

In the first quarter of 2013, Here continued to strengthen our mapping and location offering on Lumia and on other Windows Phone 8 devices.

Here also continues to broaden access to its map content and platform through several new partnerships, including with Mozilla and Toyota.

Mozilla is collaborating with our Here team to develop an HTML 5-based Here maps for the new Firefox OS.

Toyota selected Here to power its next-generation Touch and Go navigation and infotainment systems.

In Q1, the Here business also continued to strengthen its long-standing relationships within the automotive industry.

Companies like Kia Europe, Mitsubishi, Nissan Mexico, Subaru Canada, and Volkswagen Europe announced that they will continue to rely on our high-quality maps by selecting Here as their partner.

Lastly moving to NSN.

NSN had another strong quarter.

Their impressive results have exceeded expectations, and we are delighted with NSN's competitiveness in the key markets and geographies on which they are focused.

This is the fourth quarter in a row of underlying profitability for NSN, demonstrating that NSN is a strong partner for its customers.

External market share data continues to reinforce that NSN has become one of the top vendors in LTE, which is where we believe the attractive growth in margin will be in the coming years.

Furthermore, during Q1, NSN successfully placed an EUR800-million bond with no recourse to its parents, solidifying its liquidity profile, and demonstrating progress towards becoming a more independent entity.

In summary, Nokia continues to operate in a highly competitive environment, but we are executing our strategy with urgency and managing our costs very well.

I am personally very proud that our team is creating the momentum and growth in Q2 that we have been pursuing with our Lumia strategy.

As always, all of Nokia remains focused on delivering great products to our customers and more value to our shareholders.

With that, over to Timo.

Thank you, Stephen.

First I would like to spend a bit of time taking you through the factors which impacted our cash in Q1 before providing an operational overview of the quarter, so let me start with cash.

This remains an area of focus as we execute our strategy.

On cash, I have been emphasizing that my three key areas of focus are -- first, returning devices and services to positive operating cash flow as soon as possible; second, that NSN continues to be self-funding in all aspects of its operations; and third, continuing to pragmatically monetize non-core assets.

At the group level, I am pleased that we were able to increase our net cash balance sequentially, despite a significant top-line decline and the restructuring-related cash outflows that we paid.

Nevertheless we still have work to do, particularly on the devices and services operating performance, and this is something we are very much focused on achieving.

On a sequential basis, Nokia Group gross cash increased by approximately EUR200 million in Q1.

Nokia Group net cash and other liquid assets increased by approximately EUR120 million sequentially, with Q1 ending balance of EUR4.5 billion.

Starting from the top of our cash flow statement, the major items impacting the net cash balance, i.e., the approximately EUR120-million sequential increase during the quarter, were -- first, Nokia Group level net profit adjusted for non-cash items of positive EUR320 million; second, a negative impact from the Nokia Group-level networking-capital-related outflows of approximately EUR170 million, which included approximately EUR250 million of restructuring-related cash outflows; third, a positive impact from Nokia Group-level net financial inflow of approximately EUR80 million; fourth, Nokia Group-level net cash tax out-flow of approximately EUR30 million; fifth, Nokia Group-level CapEx of approximately EUR120 million; sixth, proceeds from the sale of fixed assets of approximately EUR40 million.

Finally, we also have the settlement of an intra-group balance of approximately EUR170 million, which impacted the contribution balances between NSN and the rest of Nokia.

Although the net impact was zero at Nokia Group level, this negatively impacted NSN's networking capital and benefited Nokia Group ex-NSN's networking capital in Q1.

Excluding the restructuring-related cash outflows, Nokia Group generated a total of approximately EUR80 million of cash from networking capital in Q1, driven by another strong performance from NSN.

After excluding restructuring cash outflows of approximately EUR130 million, NSN generated approximately EUR270 million of cash from networking capital.

This was primarily due to lower receivables, which more than offset lower payables.

After excluding restructuring cash outflows of approximately EUR120 million, Nokia, excluding NSN, had a cash outflow from networking capital of approximately EUR180 million.

This was primarily due to lower payables, which more than offset lower receivables.

At the end of Q1, NSN's contribution to the Nokia Group gross cash was approximately EUR2.8 billion, and NSN's contribution to the Nokia Group net cash was approximately EUR1.5 billion Euros, a sequential increase of approximately EUR330 million and EUR210 million, respectively.

Now, on to a review of our Q1 operational performance.

In Q1, devises and services net sales of EUR2.9 billion were down 25% sequentially, and down 32% year over year.

Our smart devises net sales decreased 5% sequentially, as higher Lumia net sales were more than offset by the decline in Symbian volumes.

Looking at our Lumia volumes, we saw a sequential increase in shipments to 5.6 million units, with growth in all regions except for North America.

During the first quarter, we shipped approximately half a million Symbian devises, down significantly from Q4, and in line with the comments I made last quarter.

In mobile phones, net sales decreased 36% sequentially, primarily due to competitive industry dynamics across our mobile phones portfolio, as well as an estimated higher-than-estimated normal seasonal decline in its addressable market.

The decline in volume was across our mobile phones portfolio, most notably lower sales of our sub-EUR30 mobile phones.

Then turning back to devices and services overall.

Devices and services non-IFRS gross margin in Q1 was 25.1%, up 120 basis points sequentially.

The increase was primarily due to gross margin improvements in smart devices, and to a lesser extent mobile phones, which more than offset lower IPR royalty income.

In Q4 2012, devices and services net sales and gross margin benefited from non-recurring IPR income of approximately EUR50 million, recognized in Devices and Services, Other.

In Q1, on a sequential basis smart devices gross margin increased from 18% to 20.7%.

This was primarily due to a positive mix shift towards Windows Phone 8-based Lumia devices, which carried a somewhat higher gross margin than our smart devices average.

In addition, smart devices gross margin benefited from the reversal of approximately EUR50 million of previously-recognized allowances.

If you recall, we recognized allowances during the second and third quarters of 2012 related to excess component inventory, future purchase commitments, and an inventory revaluation of our Windows Phone 7-based Lumia products.

At that time, we identified components on our books, as well as components that we have committed to purchase that we believed would be not used.

However, due to better-than-expected demand for our Windows Phone 7-based Lumia products, supported by the pricing actions we implemented, we were able to utilize some of these components, and therefore were able to reverse approximately EUR50 million of the allowances taken, which had a positive impact on our smart devices and overall devices and services gross margin in the first quarter of 2013.

Going forward, increases or decreases to smart devices inventory-related allowances may be required, depending on several factors, including future consumer demand for our Lumia products.

Mobile phones gross margin increased 70 basis points to 22.9%, primarily due to lower warranty costs, partially offset by higher price erosion than cost erosion.

In Q1, devices and services overall non-IFRS gross margin was negatively impacted by approximately 100 basis points related to foreign currency hedging, compared to the guidance I provided last quarter of approximately 30 basis points negative impact.

At the present time, we expect approximately 100 basis points negative impact to Q2 gross margin related to hedging activities, assuming static foreign currency rates at the end of Q1 levels -- i.e., the same level as in Q1.

Then moving on to OpEx.

In Q1, devices and services non-IFRS OpEx was EUR711 million, down 19% on a sequential basis, and 37% year over year.

On a sequential basis, the decline in OpEx was primarily due to lower marketing spend, following seasonally higher spend in Q4, which included our initial Windows Phone 8-based Lumia launch campaigns.

On a year-on-year basis, Q1 devices and services OpEx also benefited from the divestment of Vertu.

Although we are continuing to make very good progress on our devices and services cost reductions, you should not expect a sequential OpEx trajectory to continue going forward.

During Q1 we were able to realize greater-than-expected cost savings that we don't expect to be sustainable as we invest in our differentiators and upcoming launches.

On a sequential basis, we currently expect devices and services non-IFRS OpEx to increase in Q1 -- in Q2.

At the end of Q1, devices and services and corporate common had approximately 31,600 employees, a reduction of approximately 15,500 compared to the year-ago quarter, and approximately 1,600 compared to Q4.

Devises and services non-IFRS operating margin was 0.1% in Q1, down sequentially from 1% in Q4.

The decline was primarily due to negative OpEx leverage, which more than offset the improvement in gross margin.

And now on to Here.

Reported net sales of Here were EUR216 million, down 22% sequentially.

This was primarily due to lower internal and external net sales.

The lower internal net sales reflect lower sales to our smart devices unit, driven in part by the lower recognition of deferred revenues that I explained last quarter.

The lower external net sales were driven by seasonally lower sales to personal navigation and vehicle customers.

In Q1, Here non-IFRS gross margin was 75.5%, down 650 basis points sequentially.

This was primarily due to lower seasonal sales to our personal navigation device customers, which carry a higher gross margin, as well as the lower recognition of deferred revenues related to our smart devices unit.

Here non-IFRS operating margin was negative 2.3% in Q1, down from 14.4% last quarter, primarily due to negative OpEx leverage and lower gross margin.

Then on to Nokia Siemens Networks.

NSN had another solid quarter, continuing to execute well its focused strategy and restructuring program, delivering healthy non-IFRS operating margin in a seasonally low first quarter, as well as positive cash flow generation for the sixth consecutive quarter.

In Q1, NSN-reported net sales were EUR2.8 billion, a 30% sequential decline.

Global services represented approximately 51% of NSN's Q1 net sales, compared to approximately 50% in Q4.

Mobile broadband represented approximately 44% of NSN's Q1 net sales, compared to approximately 45% in Q4.

On a year-on-year basis, NSN's net sales declined by 4.8%, primarily due to divestments of businesses not consistent with Nokia Siemens Networks' strategic focus, as well as the exiting of certain customer contracts.

Excluding these two factors, Nokia Siemens networks net sales in the first quarter 2013 declined by approximately 1%, as lower net sales of global services were almost entirely offset by higher sales in mobile broadband.

NSN's non-IFRS gross margin in Q1 was 34%, down 200 basis points sequentially, due to lower gross margin in global services, as well as the absence of non-recurring IPR income of approximately EUR30 million that was recognized in the fourth quarter of 2012.

This was partially offset by a sequential improvement in mobile broadband gross margin.

NSN demonstrated a continuation of its progress relative to their restructuring program, resulting in significant structural savings both in cost of sales as well as in OpEx during the quarter.

NSN's non-IFRS OpEx decreased by 8% sequentially and 16% year on year, reflecting good cost controls and focus consistent with this strategy.

NSN's Q1 non-IFRS operating margin was 7%, down 740 basis points sequentially, primarily due to negative OpEx leverage and to a lesser degree, lower gross margin.

At the end of Q1, NSN had approximately 56,700 employees, a reduction of approximately 11,900 compared to the year-ago quarter, and approximately 1,700 compared to Q4.

On page 15 of today's press release we have updated the charges and related cash outflows already taken by NSN, as well as its forward-looking expectations.

In total, NSN now expects cumulative restructuring-related cash outflows of approximately EUR1.4 billion before end of 2013.

This is approximately EUR100 million more than were previously estimated.

By the end of Q1, NSN had expensed approximately EUR800 million related to this.

Regarding NSN, it is worth noting that as disclosed in the Nokia 20F filing and NSN Annual Report, certain restrictions on the transfer of Nokia's and Siemens' interests in NSN expired, and certain other provisions relating to the transfer of such interest came into effect.

Otherwise, the arrangements between Nokia and Siemens as shareholders in NSN remains in effect as originally agreed.

We will continue to look at NSN in a prudent and pragmatic way, with the aim of maximizing value for our shareholders.

Then turning back to Nokia as a whole.

In Q1, financial income and expenses net was negative EUR106 million.

The higher expense on a sequential basis was primarily due to the absence of income received to one of our investments which benefited the last quarter's results.

Then a quick comment on tax and our tax situation in India.

In Q1, we received a claim from Indian tax authorities relating to withholding tax amounting to EUR225 million plus applicable interest.

We have reiterated our position that our operations are in compliance with local laws, as well as the bilaterally negotiated tax treaty between the governments of India and Finland, and that we will defend ourselves vigorously against the claim.

Now turning on to our guidance.

In the press release you will find the full details of our guidance, but I just wanted to remind you that we are continuing to operate with limited near-term visibility in both devices and services and Nokia Siemens Networks.

For devices and services, we expect the Q2 non-IFRS operating margin to be negative 2% plus or minus four percentage points.

For NSN we expect the Q2 non-IFRS operating margin to be positive 5% plus or minus four percentage points.

These outlooks are based on expectations regarding a number of factors, including those listed in the press release.

In closing, I would like to mention two important things.

First, I am very pleased that NSN has been able to deliver on one of my key cash focus areas, namely to be self-financing in all aspects of its operations.

Following the successful issuance of its EUR800-million bond offering, and ending the quarter with net cash balance of approximately EUR1.5 billion, I now believe that this goal has been substantially accomplished, and thus NSN is now for all practical purposes self-funding in all aspects of its operations.

This is an important part of NSN's progress towards becoming a more independent entity.

Second, regarding the other key cash goal, bringing our devises and services business to positive operating cash flow as soon as possible, we now need to support the early sales momentum that we have in Lumia with further investment in go-to-market and marketing activities.

Higher Lumia sales is the most important driver for improved operating margin in our devices and services business.

With that, I will hand it 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.

Your first question comes from the line of Jim Suva with Citigroup.

Congratulations to you and your team there.

When we start thinking about the Lumia traction and a fall-off of the prior units, and you think about the traction going forward, can you help us better understand about -- is it the competitive environment of the white box and Android market that's really causing your non-Lumia emerging markets or lower-end products to see the headwinds there?

If so, the new products launched, do you have a full SKU of price points that you think you can aggressively compete in that more aggressive market, or should we kind of look for more product launches as the year progresses?

Great, thanks, Jim.

Let me sort of tease that apart into some different elements.

In the -- if you like -- the very lowest-price Smartphone space, where we compete with the Asha full-touch products, very strong competitive forces there.

Some of it, of course, is the white box manufacturers and so forth.

Some of it is also pricing action and competitive moves that various other companies have taken when they saw the early success of the Asha product line competing in that space.

So there's a number of factors like that, that have contributed to it.

But overall the performance in addition to that was affected by lower-than-expected seasonality relative to what we had planned, and therefore the necessary moves that we made in inventory management.

Essentially when you have that declining environment, it's very prudent to make strong inventory moves, bringing inventory levels lower, which has a double or compounding effect on the results for that part of the business.

Now at the same time, of course, you see the growing traction with the Lumia products -- the lowest priced one of which, the Lumia 520, is -- if you like -- a step above the Asha product range in terms of its price points.

But the Lumia 520 is very significant, and it demonstrates again our intention of driving lower and lower with Lumia products as well.

So part of, of course, what we look forward to as we have provided some forward indication of growing traction with the Lumia products is anticipation of the 520, based on what we've seen in the market already with that product, so there's a number of factors going on here simultaneously.

Thank you, Jim.

Operator next question please?

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

Thank you.

Just following up on the feature phone business.

Is it my understanding that the inventory levels are still high in June, so would we expect the mobile phone business to improve sequentially during the June quarter?

Also, as you talked about with Lumia prices coming down tier, and new products coming to the feature phone business, do you think the feature phone business could continue to grow in the second half of the year from first-half levels, or is this an area where maybe you need to cut more cost to maintain overall profitability targets for the business?

Okay, thanks, Mike.

Timo here.

So first on the inventory situation, I think we said in the release that starting first quarter we were at the higher end of the range; ending the quarter we were slightly above the range; so a slight increase during the quarter, and that's why, of course, what Stephen said about working the inventory down very important during first quarter.

Let me also just make a comparison point, a reminder, when we look at Q1 against Q2.

Last year, 2012, we had reduction sequentially in volumes from Q4 to Q1 of 25%, and also then our volumes actually went up 4% from Q1 to Q2.

So first 25% down then 4% up, and simultaneously during Q2 last year we also worked down our inventory and came within the normal range, so I just wanted to highlight that performance from 2012.

Then what comes to the second half, I mean we can't really give any further guidance on the second half performance of the mobile phones business.

We are really giving guidance only on an operating margin level for the second quarter.

But just to confirm a point that you made, Mike, and that is indeed we plan a refresh of elements of our mobile phones portfolio, some of which has been announced and is just landing in the market.

For example, at the very lowest price points, the Nokia 105 -- which when you look at the volumes for Q1, some of the significant movement in volume levels were at the end of the predecessor to the 105 product line, that space, and now we're just entering the market with new product there.

Of course, we've also signaled that in the very near term you should expect to see a freshening in the Asha product line.

If you note, we're roughly nine months or so into the Asha full-touch line relative to when we began shipping it, so reasonable to expect that it's due for freshening, and we're looking forward to that in the near term.

Thank you, Mike.

Operator, next question please?

Next question comes from the line of Stuart Jeffrey with Nomura.

I was hoping you could give a bit of geographical update on Lumia.

How much of the growth is being driven by Europe in particular.

I think China looked like it was quite strong.

Perhaps you could give an update on how you're driving that traction in China, and then in Asia Pacific in particular?

Thanks.

Thank you.

Indeed, in a number of Asian countries -- China being a good example, India just really coming on line with the lower price points like the 520, just some of the feedback we've had in the last week or so in terms of activity there -- we're seeing some very strong signals as we push the price points of Lumia products lower in those markets.

But we're also seeing, even with some of these lower price point devices, some very good performance in the early weeks.

For example in France, where the country was well supplied, but we have already the opportunity to move more stock into the country because it's moving very quickly.

We're seeing a lot of positive signs with that, so Europe there's been a lot of strength.

Asia, quite a bit of strength.

But I'll balance my comments with the United States, as well, which also shows up in the numbers, where what we're seeing is this pattern of getting into hero status, getting a good push, getting some things going, but then as everyone's attention shifts to the next hero product and so forth, we still clearly have a lot of work to do to get the sustainability level higher and higher.

So of course our focus is very much on first of all ensuring that we're delivering the innovation that commands a hero slot in one or the other of the lead US operators.

We did that first with AT&T with the Lumia 920, and as I indicated in my prepared remarks, in the quarter that we're in right now you should expect to see another hero move.

I also want to emphasize this talking in generally that the next hero move in the US kicks off a season of new product introduction, so we have a lot of work to launch and a lot of good things that we've done that are still ahead.

That's part of what contributes to our bullishness on the momentum that we're developing around Lumia.

I think there's been some analysis that says okay there is the portfolio for the year, the 920 down through the 520, and whether it's pushing more hero products whether it's in the US or around the world, whether it's pushing down on price point, and/or whether it's expanding that effort to broader form factors and different things that we can do, we have a lot of juice ahead as it relates to the Lumia product line, so we're very excited about that.

Thank you, Stuart.

Operator, next question please?

Your next question comes from the line of Kulbinder Garcha with Credit Suisse.

Thanks for the question.

My question is kind of all linked around cash flows and restructuring.

For Timo, I guess, I want to focus on the cash flow ex-Nokia Siemens.

It looks like that was about -- free cash flow was about EUR100 million negative, and then it benefited from a EUR170 million transfer from NSN, which I assume on time, and probably the asset sales.

Probably you also had a net payment from Microsoft, it looks like I think this quarter.

So underlying cash burn seems quite higher core Nokia, as in ex-Nokia Siemens, maybe as much as EUR400 million, Timo.

Am I thinking about this the right way?

I guess for Stephen, linked to this going forward, the concern I would have is that it looks like you're still not making significant returns in mobile devices.

Your OpEx run rate actually surprisingly quicker than we expected, so do you have to do the deep restructuring to make way for these investments going forward, or are you going to count on a major sales ramp for the organization quite soon, to get to some positive profitability and cash flow?

Thank you.

Okay, thanks Kulbinder, so Timo here.

Maybe I'll start around the cash.

Basically, yes, we are actually very proud about the fact that on a significant top-line decline quarter, Nokia excluding NSN on net cash basis went down little less than EUR100 million, and we now have excluding NSN net cash position of EUR3 billion Euros.

Then if you look at the networking capital dynamics you are absolutely correct with your math, we had a one-time item between NSN and excluding NSN, about EUR170 million, and we had EUR120 million restructuring, so excluding restructuring networking capital in Nokia excluding NSN went down about EUR350 million.

We have a small negative also from the platform payment, but that is not in any way significant any more as we disclosed after Q4.

But then I would still go back to the comment what I made earlier that if you compare to year-ago Q1, we had significantly higher negative cash flow in the mobile devices business.

Then we went down sequentially 25%, and then we went -- actually, I'm talking mobile phones now -- we went down sequentially in mobile phone 25% from Q4 '11 to Q1 '12, and then from Q1 '12 to Q2 '12 we went up 4%.

That has had a significant impact on the cash flow, because mobile phone sales happens in the areas or the markets where the cash cycle is short; and when you have a strong sequential top line decline, then it is natural that the networking capital dynamics on the device and services business is such that you will have a down cash flow.

Again I just wanted to remind that a similar impact was there last year, and last year it reversed itself.

Let me just add-on, Kulbinder, in terms of expense levels and so forth.

We do think that the EUR3 billion run rate that we're targeting to exit the year at is the right level.

When we balance the anticipated ramp in Lumia sales, as we anticipate how the mobile phones business evolves and so forth, we think that's the right level.

I also just want to reinforce what Timo included in his prepared remarks about the patterns where Q1 was a bit lower, Q2 -- and I match this up now with my statement about multiple product launches ahead.

Clearly we're going to be spending some marketing money and so forth, and that's part of our calculation there as well.

But we remain with our overall sense that that level of expense is the right pattern for us.

But as we have said earlier, this is a dynamic equation on the OpEx side.

Of course, we need to have both the willingness and as well as ability to react if that would be needed.

Thank you, Kulbinder.

Operator, next question please?

Your next question comes from the line of Andrew Gardner with Barclays.

Thank you very much.

I was wondering if we could switch gears to NSN.

Just, you highlighted in your prepared comments the down 5% year-on-year revenue trend, partly due to the sale of various units last year.

Also, I think you're going to have difficult comps as we come through 2013, given such strong spending by some of your customers in Asia last year.

So can you help us understand why we wouldn't continue to see at least sort of mid-single-digit percentage declines in revenue as we move through the year?

Is there anything, whether it be certain products or upgrade or regional trends that you can see that would offset that type of pressure?

Timo here.

Thanks for the question.

First of all, during Q1, yes we were 5% down, but if you look at strategically comparable basis, we were down 1%.

If you further look at that on constant currency, we actually were flat, so I would again highlight that on comparable basis, NSN's year-over-year top-line decline Q1 was approximately flat.

We're not giving guidance on top line.

You're right that there are some projects rolling off in Asia.

Simultaneously, NSN has improved its position in North America, which is a growing market, and we feel that that is an opportunity for NSN and also at the moment, NSN's mix by contract is actually looking better than it was at the latter part of last year.

Again, I think that's as much color as I can give on the top line.

Just on contract mix to expand on what Timo said, if you look specifically at the diversity of large customers, the range of large customer, it's a healthier position than it was 12 months ago.

That's something we look at closely.

So as their success with LTE with multiple large customers expands, the manageability of the revenue level and the risk of a single customer drying up is reduced.

Thank you, Andrew.

Operator, next question please?

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

Yes, thank you.

It's Francois from Morgan Stanley.

If I look at your reserves and I step back a bit, it looks like the move from mobile phones to Smartphones is accelerating quite dramatically in the market, and I was wondering if you had a view of when the ramp in Lumia would offset the decline in the cash cow you still have in the mobile devices market?

Again, I don't think we can, Francois, give like an exact answer to that, so we have said that we expect that the Lumia volumes would continue to grow at 27% rate or higher during Q2, so that guidance is regarding Q2 only, we have really not said anything about MP top line.

I think I earlier described some of the things what happened last year on MP, on the sequential dynamics of the market, but I don't think I can really give more color on that.

Of course, that is a trend what we are watching closely and we are trying to drive as high Lumia sales as possible; and of course we have no issues seeing that trend happen.

Thank you, Francois.

Operator, next question please?

Your next question comes from the line of Sandeep Deshpande with JPMorgan.

My question is on the Smartphone devises.

You talked about over the 20.7% margin in the Windows 8, but the mix on -- clearly the margin or the gross margin on the older devices is possibly closer 10%.

As you go forward, are we going to see -- clearly Windows 8 is going to be the majority over the next couple of quarters, but then there will be another OS transition at some point.

Will we continue to see these very low margins in these older devices which hold down the overall smart devises margin, which prevents this return to profitability; or is it that your OpEx is going to change substantially by Q4 based on that EUR3 billion OpEx plan which will allow the smart devices to come to profitability?

A corollary to this would be, how are you allocating the OpEx between the mobile phone and the Smartphone business, because if the mobile phone business continues to decline at these levels, will that EUR3 billion cost structure be the appropriate one?

Thanks.

Okay, so quite a few questions there, Sandeep.

I'll try to do my best on going at it.

First of all on the smart devices gross margin question, so the most important driver for smart devices profitabilities that we will be able to grow the top line, so we are quite pleased with the Windows Phone 8 gross margin performance now becoming to healthy levels, but we will focus more on gaining share and growing top line than on the gross margin percentage.

Of course that needs to be in a reasonable and healthy level to support the business, but still we need to be able to grow that business, and that will be our most priority.

That's why I'm saying as well that on the OpEx side, and as Stephen said earlier, we are looking to invest somewhat more from Q1 to Q2, maybe particularly in the go-to-market and marketing operations to drive that Lumia momentum which we now have.

Then on the question of OpEx allocation, so we operate as I think any big Company does.

We fix the allocations once a year based on certain keys.

They can be sales keys or they can be gross margin keys, and then they have to be fixed so the people know if they are reaching their targets or not.

I don't think there is more size on that than the EUR3 billion level we of course need to assess against the whole devices and services business.

Thank you.

Operator, next question please?

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

Hi, thanks for taking my question.

I would just like to come back a little bit on the sequential strength in Q2 of the Lumia portfolio.

If you could, give us some color on the actual underlying mix.

Do you see strength coming from the low end with the 520, or is it going to be through the hero product, just in terms of the direction of the ASPs.

Also, if you have any high-level thoughts on Windows 8, which didn't work out so well for the PC, do you think that could rub off on to the Lumia range on Windows phones in general, as well?

Thanks.

Good, Alexander.

Thanks for your question.

With respect to the Lumia portfolio going into Q2, some of the principal drivers of additional volume relate to the newer products that are entering the market.

The 720 and the 520 are important in this, particularly the 520.

520's obviously at a lower price point and moving into markets where that's far more competitive than some of the hero products could be, except for the people willing to pay top dollar for a device.

So that will tend to be the mix balance to that, but all of those products are obviously new in their life cycle and everything; and therefore, from a (inaudible - background noise) perspective we provided some information about that.

With respect to Windows 8, what I would say is that to the extent that Windows 8 advertising or experiences and so forth are exposing more and more people to the fundamental premise of live tiles in that user experience, that's a net positive for us and so there's substantial expenditure going into the representation of that user experience, training people, showing it on television, all of those things and that we see as positive halo entirely.

There's a lot of effort going into that.

At the same time there's been some challenges, and I think there's been some commentary in the market place about -- to enjoy a Windows 8 experience just like Windows Phone 8, you want a touch device.

I there's been a lot of attention to the fact it will be helpful when there are more touch devices in the market place to support that.

Thank you Alexander, Operator next question please?

Your next question comes from the line of Pierre Ferragu with Bernstein.

Thank you for taking the question.

I'm sorry if I ask almost a question some question, and it's always about Lumia in trying to compare where you are today to where you were about a year ago.

Shipments are about twice higher.

I was wondering if you take exactly the footprint that you had in terms of distribution of last year, how much of the growth comes from the same footprint and how much of the growth comes just from the fact that you've been going much wider in terms of distribution, in terms of geography or distribution channels?

Well thanks, Pierre.

I think the way I think about it is it's not about breadth and distribution or that we're in an extra country or three or 10 or whatever that's making the difference.

It's very much about the fact that we have a broader portfolio that broadens our reach across customer base, and so fundamentally what that says is we're getting a broader perspective, a broader reach with our products.

Interesting, I was reading a report actually that came out just a little while ago.

Actually it turns out that you wrote it, and I wanted to quote something from it, as you look at the numbers and what we're forecasting I think you said that the numbers are intriguing because we struggle to understand how this number is possible without either the beginning of consumer traction or a massive channel inventory stuffing.

Since we don't do channel inventory stuffing, I hope you come to the conclusion that you're seeing the beginning of consumer traction, so thank you for writing that.

Thank you, Pierre, for your question and your notes.

Operator, next question please?

Your next question comes from the line of Tim Long with BMO Capital Markets.

Thank you.

A question, if I could, related to China and the emerging market players.

Just looking, you did have a good ASP bump in China it looks like in the quarter, but the trajectory of units continues to be pretty negative.

I imagine some lower in Lumia could help offset that.

Just curious if because in that market you have a lot of the Chinese OEMs, and I marry that together with what's happened with Asha this quarter and the more feature -- the mobile phones division.

Are you seeing a lot more of these Chinese low-end players in the other market?

Is this quarter potentially the first sign there, or would you attribute it more maybe to the Samsung Rex line when you're talking about increased competition on that piece of the market?

Thank you.

Good question.

Thank you, just to break down that competitive pressure.

The way I would characterize it is yes, there's a portion of low-end white box or Chinese semi-branded players in some of these markets, so you're seeing some of those trends.

That is definitely part of it.

Some of it is aggressiveness in pricing, positioning, bundling, and things like that from a certain very large hardware OEM that you mentioned.

But the third factor in this as well is not Rex.

We have not seen that.

The Asha full-touch products compete very effectively against that product line.

So early read just based on -- and this is very qualitative in terms of what I've seen in the market, what others have seen in the market -- it's more about pricing and that type of competition and some of the Chinese and related players really pushing hard, as opposed to the Rex effort.

Thank you, Tim.

Operator, next question please?

Your next question comes from the line of Simon Schafer with Goldman Sachs.

Yes, thanks so much.

I just wanted to follow up on Timo's comment about NSN.

I think you said you're looking to -- you're looking for prudent and pragmatic ways to maximize shareholder value; but in the same time, you really emphasized that this is now self-funding and that is a very important milestone towards becoming an independent entity.

I'm just trying to understand what you really mean by that.

Does that mean on a net basis you're looking to exit the joint venture, or how should we think about the strategic objectives that Nokia is trying to have for this business now?

Okay, so thank you for the question.

So first of all, being in a situation where it's financially independent in all aspects of its operations clearly gives more options to the shareholders in general.

The most important thing, however, is that we continue to support the NSN Management in the very good execution, what they are doing, better profitability and cash flow, and NSN will clearly improve shareholder value for Nokia and for both NSN shareholders.

But we are really saying that having NSN which is financially strong will give us more options going forward.

Thank you, Simon.

Operator, next question please?

Your next question comes from the line of Kai Korshelt with Deutsche Bank.

Yes, hi.

Thanks for taking my question.

I had a couple.

The first one was again on NSN.

Just on the Japan exposure, I think it's in the mid-teens revenue wise.

Is the weakening currency a concern, maybe, as we head into the second half?

Then my second question is really on the IP business, and I think Ericsson suggested that Samsung has not really been paying royalties to them for quite some time.

You obviously have the Apple deal.

Not sure if you want to talk about Samsung specifically, but just wondering if from your perspective all of the larger Smartphone vendors are paying you yet for your IP, or whether you still expect to see significant new licensing opportunities?

Thank you.

Okay, thank you for the question.

If I'll take the Japan part, Timo here.

Clearly, the weakening of the Yen longer term could have an impact, but we tried to hedge the cash flows to the extent we have knowledge into the contract.

When the contracts are longer, we hedge a longer part, so we should be at least for a reasonable period of time well covered on that front.

But everybody knows that if the currency move stays there for a long period of time, it will have a business impact, and then you will have time to adjust to that.

Are you, Stephen, taking the IPR?

I'll comment on the IPR side.

The IP business for us is obviously very important, both from a ability to protect what we're doing, as well as to ensure people are paying their fair share for inventions they may be taking advantage of.

I can't comment on specific deals with specific vendors, but let me make a general comment.

That is when there are significant shifts in market share over some period of time -- Apple is a good example of that, that is in the public domain that we did do a new deal with them just over a year ago.

When you see significant shifts, that tends to create significant opportunities; and so we're constantly watching where -- for situations where there are shifts and opportunities for us to take advantage of that; and so we'll be watching for that closely.

Thank you, Kai.

Operator, next question please?

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

Thanks for taking my questions.

Just got a couple of quick ones, if I could.

NSN, you have very strong profitability in Q1.

I just wondered given typical seasonality for Q2's margins to be up rather than down, I just wondered whether you're perhaps staying quite prudent, or whether there was some factors in Q1 that led to the high margins?

Secondly, just to follow up from what Kai mentioned, I just wondered if you could give us the run rate of your intellectual property revenues in terms of royalties, and what the run rate in the quarter was?

I guess finally, maybe a bit longer question but is there such a thing as a hero product these days, given maybe the high end market's more mature than we've seen previously, and the kind of cycle rates seem to be running down as low as a quarter on hero products?

Thanks.

Okay, thanks, Gareth.

Timo here, so I will start with the NSN profitability and guidance.

Yes, it is fair to say NSN had very good profitability during Q1, and particularly I think the gross margin at 34% was a clear positive.

We said that in mobile broadband, the gross margin actually was higher in Q1 than Q4, and thus when you then look from Q1 to Q2, we need to look at both the product mix as well as the regional mix of the business, and those are really the drivers for the guidance as we have said in our release.

Then what comes to the IP royalty question, so we have said that we expect to have approximately EUR500 million of annual IPR income on our devices and services business, so that is really what we have said on the topic, and I have nothing further to add on that.

With respect to your third question, on hero product, actually when I was using it in the prepared remarks, I was using it definitionally as a product that, for example, an AT&T would significantly focus on, drive better subsidies, increase marketing, and so forth.

So in that context, there will be more hero product moments, as measured by significantly increased marketing and focus by a particular vendor.

But your point is well taken in terms of what does it mean to have a hero product broadly, and what does it mean around the world and how to think about that?

What we're trying to do is really make sure that we're shifting the focus towards hero experiences.

You hear us talking a lot about imaging, and so you should watch, for example, in the imaging area for us to both continue to advance the state-of-the-art -- like what is the best, what is the best experience in imaging on devices.

But the pattern you should also watch for from us is taking that experience and delivering appropriate levels of that experience on lower-price-point devices through the range.

So it's quite deliberate that through the full range of devices -- even at the lowest price points -- there's some form of differentiated imaging story.

It's not an optically image stabilized high megapixel lens or sensor, but nonetheless it's something that sets it apart.

So hero devices, you're right.

Different devices, different times from that perspective.

You'll still see special emphasis on certain devices from particularly US operators, but you'll see more hero experiences developing over time, and that's where we're focusing our efforts and differentiation.

So we're at the top of the hour, so I will now turn it to Stephen for a closing statement.

We'll end the Q&A session for this quarter now.

Great.

Thank you, Matt, and thank you, everyone.

In summary, our mobile phones business did have a difficult quarter, and the team is driving for great innovation to constantly renew that portfolio.

I'm also personally very proud of the team's relentless focus on executing our Lumia strategy, which has enabled us to share good news about Lumia's Q2 trajectory.

It's this passion and energy that we believe will help all of Nokia progress in one of the most exciting and fast-moving business environments in the world today.

Ladies and gentlemen, this 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 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 through 47 of our 2012 20-F and in our quarterly results press release issued today.

Thank you.

Thank you again for participating in today's conference.

You may now disconnect.