諾基亞 (NOK) 2013 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Nokia Q2 earnings conference call.

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

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

(Operator Instructions)

I would now like to turn the call over to Matt Shimao, Head of Investor Relations.

Please go ahead.

Ladies and gentlemen, welcome to Nokia's second quarter 2013 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 risks 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 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 for joining us today.

For Nokia and our industry, the second quarter of 2013 was dynamic.

Thus, at, the highest level we are pleased to report that Nokia Group achieved an underlying operating profit for the fourth consecutive quarter.

Further, we are pleased that Nokia Group ended Q2 2013 with a strong balance sheet and solid cash position with gross cash of EUR9.5 billion and net cash of EUR4.1 billion.

In the second quarter, our Lumia volumes grew to 7.4 million, the highest for any quarter so far, demonstrating momentum for the ecosystem.

Our mobile phones business unit started to show signs of recovery in the latter part of the second quarter, following a difficult start to the year.

Our HERE business exceeded expectations and benefited from its leadership in the automotive industry and most notably, we benefited from another strong performance at Nokia Siemens Networks, which continue to deliver well against its focus strategy.

While the market conditions are well documented as challenging, we are focused on delivering differentiated products.

In the last six months, we have introduced new hardware and software with the launch of the very affordable Asha 105, the highly social Asha 210, the competitively priced Lumia 520, a range of flagship Lumia smartphones including the 925 and 928, and of course, the game-changing Lumia 1020.

Given the market conditions, we remain focused on executing our strategy, improving the competitiveness of our products, effectively managing our costs and moving with urgency.

Today, I will take time to provide more insight into each of our key business areas and share my perspective on how we believe we can continue to drive more value for shareholders.

First, in Devices & Services, we achieved a Q2 non-IFRS operating margin of negative 1.2%, which was consistent with the earlier expectation for approximately negative 2% plus or minus 4 percentage points.

In our Smart Devices business unit, we continue to focus on delivering meaningful differentiation to consumers around the world.

The Lumia 520, our most affordable Windows Phone 8 product, has enjoyed a strong start in markets like China, France, India, Thailand, the UK, the US, and Vietnam.

The Lumia 620 and 720 are capturing peoples' attention in markets like Thailand and Vietnam.

The Lumia 920, 925 and 928 are establishing a flagship position in key markets like the US and the UK, where operator exclusivity is important.

Last week, we were very proud to introduce the next generation of smartphone imaging with the Lumia 1020.

The response from operators and developers has been very positive to the new software and hardware innovation.

With the Lumia 1020, we will help people see things they've never seen before with a 41-megapixel sensor.

People will get closer than ever before because we've reinvented zoom.

People will discover and rediscover new stories with endless reframing, plus our new imaging innovation is attracting third party developers, and I was pleased to announce new applications from Vine, Hipstamatic, Vyclone, Yelp, Flipboard, Foursquare and others.

In short, when we start shipping the Nokia Lumia 1020, which is planned for later this month, we believe it will change how people shoot, create and share pictures forever.

We are glad to report a positive trajectory for Lumia quarterly volumes from 2.9 million to 4.4 million to 5.6 million to 7.4 million devices in Q2, showing momentum for the ecosystem.

Our Q2 Lumia volumes were the highest for any quarter so far and reflect a 32% growth quarter-on-quarter, putting our Lumia trajectory into perspective.

For the full year of 2012, we sold 13 million Lumia devices.

In just the first half of 2013, we sold 13 million Lumia devices, establishing a stronger and more well-rounded base, from which we can build.

Also worth noting, because we started our ramp-up of our higher-end Lumia products at the end of the quarter, we saw limited sales impact from these devices in Q2.

We expect more impact from these devices in Q3, while recognizing that the industry environment is getting more competitive at the higher end of the market.

Even with a broad range of devices available across numerous markets, we expect that during the third quarter, it will be the new Lumia products that will drive a significant part of our Smart Devices revenue.

Our growth in Lumia volumes continues to be supported by our deep partnership with Microsoft.

Together, we continue to discuss how we can bring more value to the Lumia range and the Windows Phone ecosystem.

As always, Nokia continues to consider various ways to maximize the performance of our Devices & Services business.

Thus, we recognize that we must focus on improving the retail experience, providing more applications to customers in the Windows Phone ecosystem and increasing awareness of our devices.

With this focus, we believe we can continue to increase our innovation and provide more momentum for the Windows Phone ecosystem.

Moving now to our Mobile Phones business, which continues to operate in a market with intense pricing and competitive pressure.

Our Mobile Phones Q2 volumes decreased 4% quarter-on-quarter to 53.7 million units.

However, during Q2, we reduced channel inventories significantly and our Mobile Phones business demonstrated some signs of recovery in the latter part of the quarter.

Towards the end of the second quarter, we started to ship the Asha 501, which brings a new design and user experience to the highly competitive sub-$100 market.

The early response to the Asha 501 is encouraging as we started delivering the new device in India, Thailand and Vietnam.

At the same time, we are continuing to innovate in a very affordable market.

This month, we introduced the Nokia 207 and the Nokia 208, which are less than $70 and provide fast internet access.

In Q2, we started rolling out the Nokia 105, which has generated a lot of consumer excitement in China, India and Nigeria.

While we are very encouraged by the consumer response to our new innovations in this price category, our Mobile Phones business unit is planning to take actions to focus its product offering and improve product competitiveness.

For Devices & Services as a whole, looking ahead to Q3, considering demand trends as well as the wider availability of a recently announced Lumia and Mobile Phone products, we expect to drive net sales growth for our Devices & Services business on a sequential basis.

Shifting now to our HERE business.

We are very pleased that our HERE business exceeded expectations, with 3.4% underlying profitability as a result of stronger-than-expected performance in our automotive business and better cost performance.

HERE Q2 net sales increased 8% quarter-on-quarter to EUR233 million.

This progress was mostly driven by the success in the automotive industry through partnerships with leading car manufacturers like Honda, Nissan and Ford.

Additionally, HERE continues to advance its platform technology and released a new augmented reality technology, which we call LiveSight.

Broadly, the industry continues to recognize HERE as the leader in navigation with companies like SAP and the US Federal Highway Administration turning to HERE for location-based services.

We are pleased with the progress by the HERE team.

I'd like to now spend some time discussing Nokia Siemens Networks.

Most notably, we are very proud of the work that the NSN team has done to improve its operational and financial performance.

Through focus, we have been able to establish a clear leadership position in LTE which has won the support of customers around the globe.

In Q2 of 2013, NSN again made remarkable progress.

NSN achieved underlying profitability for the fifth consecutive quarter with a Q2 non-IFRS operating margin of 11.8%, reflecting record non-IFRS gross margins and continued progress relative to its strategy, contributing to the overall profitability for the group.

NSN's Q2 net sales performance on a year-on-year basis was partially due to divestments of businesses not consistent with NSN's strategic focus as well as the exiting of certain customer contracts and countries.

In addition, NSN had lower cyclical sales in Japan, following high levels of spending a year ago and lower year-on-year sales in Europe related to network modernization and constrained operator spending.

In China the year-on-year decline was due to constrained operator spending in anticipation of a technology shift to TD-LTE.

On a sequential basis, excluding business divestments and the exiting of certain customer contracts in countries, NSN's net sales actually increased.

Compared to the first quarter, NSN benefited from stronger seasonal sales in Latin America, Europe and China.

In Japan and North America, net sales declined sequentially due to the cyclical nature of carrier spending.

Importantly, we believe that much of NSN's net sales declines have been related to deliberate decisions to focus the business.

In LTE, which is a growth area, NSN continues to be a market leader, with high levels of investment in R&D.

Now what was impressive in Q2 was NSN's gross margin improvement in Global Services which resulted from strong execution under their strategic transformation program.

Timo will take you through this in more detail in just a moment.

As you're aware, earlier this month we signed a definitive agreement to acquire Siemens' 50% stake in Nokia Siemens Networks.

Subject to the closing of this transaction, Nokia Siemens Networks would become a wholly-owned subsidiary of Nokia.

If the acquisition is completed, we aim to continue to strengthen NSN as a more independent entity and support its current management plan.

We expect that there will be very little impact to our day-to-day operations at Nokia and Nokia Siemens Networks as a result of this transaction.

Furthermore, reflecting on the continued achievements in Q2 of 2013, we believe that at this juncture and at the valuation of EUR1.7 billion, the purchase price and the NSN transaction will bring more value to Nokia shareholders.

In summary, Nokia continues to operate in an exciting and remarkable industry.

We recognize that in this environment, we must operate with urgency and continue to differentiate our products with new innovations and designs that capture consumers' attention.

In Q2, our focus on our strategy has resulted in continued growth for our Lumia smartphones, signs of stabilization and the highly competitive lower price ranges and remarkable strides for Nokia Siemens Networks.

That said, the entire Nokia team recognizes we have lots of hard work ahead.

Each and every member of the team remains focused on delivering great products to our customers and more value to our shareholders.

With that, I'll turn it 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 Q2 before providing an operational overview of the quarter.

So let me start with cash, which 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 & 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 Nokia Group level, we have prudently managed our cash to ensure we maintain a solid financial position while investing appropriately for the future.

In Devices & Services, we recognize that it is taking longer than envisioned to return to sustainable cash generation.

In Q2, our operating expenses declined on a sequential basis.

Note, however, that in Q2, we invested more on a sequential basis in sales and marketing to support the early sales momentum of our newly launched Lumia and Asha products.

As I commented last quarter, we believe the best path to sustainable cash generation is to create the best possible opportunities to establish our ecosystem and we intend to continue to invest in growth and innovation to support this.

In summary, managing our Device and Services business with a focus on cash continues to be a dynamic equation, with a willingness to take tactical actions to control costs and manage working capital tightly, combined with commitment to sustain strategic investments in core sales and marketing and R&D activities.

Turning to NSN.

Following the successful issuance of its EUR800 million bundle offering in Q1, NSN is already, for all practical purposes, self-funding in all aspects of its operations.

On July 1, we announced a definitive agreement to acquire Siemens' entire 50% stake in NSN.

We expect this transaction to close in the coming weeks.

Becoming the full owner of NSN would enable Nokia Group to optimally utilize NSN's cash flow stream and strong capital structure.

At the same time, we fully understand that NSN is involved in many long-term projects and maintaining strong liquidity is a key requirement of NSN's customers.

Plus, going forward, in addition to ensuring that NSN is self-funding, we will focus on ensuring that NSN continues to be a financially strong and highly innovative Company that is well-positioned to serve its customers.

Finally, we continue to pragmatically monetize our non-core assets, such as real estate, which in Q2, generated cash proceeds of approximately EUR60 million.

Moving to my quarterly review of our cash position and cash flow.

On a sequential basis, Nokia Group gross cash decreased by approximately EUR650 million in Q2, with a Q2 ending balance of EUR9.5 billion.

Nokia Group net cash and other liquid assets decreased by approximately EUR410 million sequentially, with a Q2 ending balance of EUR4.1 billion.

Starting from the top of our cash flow statement, the major items impacting the net cash balance are approximately EUR410 million sequential decrease during the quarter where first, Nokia Group level net profit adjusted for non-cash items of positive EUR382 million; second, a negative impact from the Nokia Group level net working capital-related outflows of approximately EUR500 million, which included approximately EUR230 million of restructuring related cash outflows; third, a negative impact from Nokia Group level and net financial outflow of approximately EUR10 million; fourth, Nokia Group level net cash tax outflow of approximately EUR70 million; fifth, Nokia Group level CapEx of approximately EUR140 million; sixth, proceeds from the sale of fixed assets of approximately EUR60 million; seventh, net outflows of approximately EUR60 million related to business divestments; and finally, approximately EUR70 million negative FX impact from translation of net cash.

Excluding the restructuring-related cash outflows, Nokia Group [consumed] a total of approximately EUR270 million of cash from net working capital in Q2 primarily driven by Nokia excluding NSN.

After excluding these restructuring cash outflows of approximately EUR40 million, Nokia excluding NSN had a cash outflow from net working capital of approximately EUR230 million.

This was primarily due to reduction of interest free short-term liabilities, which more than offset lower receivables, both driven by lower business activity.

After excluding restructuring cash flows of approximately EUR190 million, NSN consumed approximately EUR40 million of cash from net working capital.

This was, again, primarily due to a reduction of interest free short-term liabilities, which more than offset lower receivables.

At the end of Q2, NSN's contribution to the Nokia Group gross cash was approximately EUR2.5 billion and its contribution to Group net cash was approximately EUR1.4 billion, a sequential decrease of around EUR230 million and EUR40 million, respectively.

Now on to a review of our Q2 operational performance.

In Q2, Devices & Services net sales of EUR2.7 billion were down 6% sequentially and down 32% year over year.

Our Smart Devices net sales were flat sequentially, as higher Lumia net sales were offset by the decline in Symbian volumes.

Looking at our Lumia volumes in a bit more detail, we saw sequential increase in shipments to 7.4 million units, primarily driven by sales of the Lumia 520 and 720, with growth in all regions except for Middle East and Africa.

During the second quarter, we continued our ramp of -- ramp down of Symbian shipping a few tens of thousands of Symbian devices during the quarter, which was down significantly from the approximately 0.5 million shipped in Q1.

Smart Devices ASP of EUR157 and 18% sequential decline was primarily due to a higher mix of our lower-priced Lumia devices, particularly the Lumia 520 as well as our own pricing actions.

In Mobile Phones, net sales decreased 12% sequentially primarily due to lower ASPs.

In Q2, our Mobile Phones ASP was negatively impacted by a higher proportion of sub-EUR30 year mobile phones, such as the Nokia 105, as well as some tactical price actions taken at the start of the quarter for certain products.

Although mobile phones volumes declined by 4% sequentially, we did start to see some signs of volume recovery toward the latter part of the quarter, particularly in the sub-EUR50 category.

In addition, we proactively took actions to continue to reduce our overall level of channel inventories, which was slightly above the high end of our normal four to six week range at the end of Q1 and we ended Q2 at approximately the midpoint of the range.

On an absolute unit basis, channel inventories decreased sequentially.

Then turning to gross margin.

Devices & Services non-IFRS gross margin in Q2 was 24.4%, down 70 basis points sequentially.

The decrease was primarily due to lower gross margin in Mobile Phones, partially offset by higher royalty income recognized in Devices & Services, other, and to a lesser extent, a higher gross margin in Smart Devices.

On Q2, on a sequential basis, Smart Devices gross margin increased from 20.7% to 21.1%.

This was primarily due to a positive mix shift towards Windows Phone 8-based Lumia devices, partially offset by lower reversals related to inventory-related allowances.

In Q2, Smart Devices gross margin benefited from the reversal of approximately EUR20 million of previously recognized allowances related to our Lumia devices compared to approximately EUR50 million benefit in the first quarter 2013.

I.e., there was approximately a EUR30 million sequential headwind related to this factor.

Excluding this, Smart Devices gross margin improved by approximately 300 basis points sequentially.

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.

As is our practice, we would continue to call out significant changes each quarter.

Mobile Phones gross margin decreased 340 basis points sequentially to 19.5% primarily due to higher warranty costs following lower-than-normal warranty costs in Q1 and to a lesser extent, from foreign currency fluctuations.

In Q2, Devices & Services overall non-IFRS gross margin was negatively impacted by approximately 120 basis points related to foreign currency hedging compared to the guidance I provided last quarter of approximately 100 basis points negative impact.

At the present time, we expect the impact to Q3 gross margin related to hedging activities to be approximately zero assuming static foreign currency rates at the end of Q2 levels.

So there is approximately 120 basis points sequential gross margin tailwind going into the third quarter.

Moving on to OpEx.

In Q2, Devices & Services non-IFRS OpEx was EUR696 million, down 2% on a sequential basis and 36% year over year.

On a sequential basis, the decline in OpEx was primarily due to lower R&D spend, specifically related to lower accrued incentive expenses consistent with Devices & Services business performance.

Sales and marketing spend increased 5% sequentially due to higher marketing spend in support of newly launched Lumia and Asha products.

On a year-on-year basis, Q2 Devices & Services OpEx, particularly sales and marketing, also benefited from the divestment of Vertu.

Although we are continuing to make very good progress on our Devices & Services cost reductions, you should not expect the sequential OpEx trajectory to continue going forward, given the investments we plan to make in our differentiators as well as efforts to support our top line over the longer term.

To be clear, we currently expect Devices & Services non-IFRS OpEx to increase in Q3.

On page 9 of today's press release, we have updated our forward-looking expectations for restructuring charges and related cash outflows for Devices & Services.

In total, we now expect cumulative restructuring-related charges of approximately EUR1.5 billion before the end of 2013 compared to the previous estimate of approximately EUR1.6 billion.

In addition, we now expect cumulative related cash outflows of approximately EUR1.35 billion before the end of 2013 compared to our previous estimate of approximately EUR1.4 billion.

At the end of Q2, Devices & Services and Corporate Common had approximately 31,400 employees, a reduction of approximately 12,200 compared to the year-ago quarter and approximately 200 compared to Q1.

Devices & Services non-IFRS operating margin was negative 1.2% in Q2, down sequentially from 0.1% in Q1.

The decline was primarily due to negative OpEx leverage as well as a lower gross margin.

And now on to HERE.

Reported net sales of HERE were EUR233 million, up 8% sequentially.

This was due to higher external net sales, which were up 19% sequentially and more than offset lower internal net sales.

The higher external net sales were primarily driven by an increase in sales to our vehicle customers whereas the lower internal net sales were driven in part by the lower recognition of deferred revenues as well as lower sales to our Smart Devices unit.

In Q2, HERE's non-IFRS gross margin was 76.1%, up 60 basis points sequentially.

This was primarily due to higher sales to our vehicle and personal navigation device customers which carry a higher gross margin, partially offset by lower gross margin related to internal net sales.

HERE's non-IFRS operating margin was 3.4% in Q2, up from negative 2.3% last quarter, primarily due to higher net sales and OpEx leverage.

And then on to Nokia Siemens Networks.

NSN had another strong quarter, delivering a record non-IFRS gross margin in Q2 and a solid deal momentum in its focus areas.

In the second quarter, NSN reported net sales were EUR2.8 billion, down 1% on a sequential basis.

Global Services represented approximately 52% of NSN's Q2 net sales compared to approximately 51% in Q1.

Mobile Broadband represented approximately 46% of NSN's Q1 net sales compared to around 44% in Q1.

On a year-on-year basis, NSN's net sales declined 16.8%, excluding divestments of businesses not consistent with NSN's strategic focus as well as the exiting of certain customer contracts and countries.

NSN's year-on-year net sales declined by 11% due to lower sales of both Global Services and Mobile Broadband.

On a sequential basis, the decline in NSN's net sales was driven by the divestment of businesses not consistent with NSN's strategic focus and the exiting of certain customer contracts and countries.

Excluding this, NSN's net sales increased 4% sequentially, driven by growth in both Global Services and Mobile Broadband.

NSN's non-IFRS gross margin in Q2 was 38.3%, up 430 basis points sequentially due to significantly higher gross margin in Global Services as well as approximately EUR20 million of non-recurring IPR income, partially offset by slightly sequential decline in Mobile Broadband gross margin.

The higher gross margin in Global Services was primarily driven by a strong performance in professional services and care, supported by the strong execution relative to NSN's restructuring program.

In addition, Global Services non-IFRS gross margin in Q2 benefited from a greater sequential revenue recognition triggered by certain project acceptances.

NSN does not expect its gross margin to benefit from this dynamic in Q3.

NSN's non-IFRS OpEx was flat sequentially but declined 8% year-on-year reflecting good cost control and focus, consistent with its strategy.

On both a year-on-year and a sequential basis, NSN increased R&D investments in focus areas, particularly in LTE.

NSN's Q2 non-IFRS operating margin was 11.8%, up 480 basis points sequentially, primarily due to a higher gross margin.

At the end of Q2, NSN had approximately 50,500 employees, a reduction of approximately 12,900 compared to the year-ago quarter and approximately 6,200 compared to Q1.

In today's press release we have updated NSN's restructuring-related cost savings target and are now targeting to reduce NSN's non-IFRS annualized operating expenses and production overheads by more than EUR1.5 billion by the end of 2013 compared to the end of 2011.

This compares to its previous target of more than EUR1 billion.

Related to this, we have also increased the expected cumulative restructuring charges and related cash outflows.

NSN now expects cumulative restructuring charges of approximately EUR1.8 billion compared to its previous estimate of approximately EUR1.4 billion.

In addition, NSN expects cumulative restructuring related cash outflows of approximately EUR1.6 billion compared to its previous estimate of approximately EUR1.4 billion.

Lastly, on NSN, a couple of words related to the proposed acquisition of Siemens' stake.

As the CFO, I believe this transaction demonstrates sound capital allocation as we continue to look at NSN in a prudent and pragmatic way with the aim of maximizing value for our shareholders.

Turning back to Nokia as a whole, in Q2, financial income and expected net was negative EUR57 million, the lower expense on a sequential basis was primarily due to lower net foreign exchange-related losses.

Now, turning 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 & Services and Nokia Siemens Networks.

For Devices & Services, we expect the Q3 non-IFRS operating margin to be negative 2% plus or minus 4 percentage points.

In addition, supported by the wider availability of recently announced Lumia products as well as recently announced Mobile Phones product, we expect higher sequential Devices & Services net sales in Q3.

For NSN, we expect the Q3 non-IFRS operating margin to be positive 7% plus minus 4 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 reiterate my focus on cash and on ensuring strong liquidity.

In Devices & Services, we are investing to create the best possible opportunities to drive growth and establish our ecosystem, because we believe this is the best path to sustainable cash generation.

Regarding NSN, we are also clearly focused on strong liquidity and cash generation which would provide Nokia Group with further stability and more optionality to maximize value for our shareholders.

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

Thank you.

Thank you, Timo.

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

Carmen, please go ahead.

Stuart Jeffrey with Nomura.

I had a question on Nokia Siemens.

You continue to say that you tried to strengthen the Company as a more independent entity, but you've just stated that it's being used as a source of cash now for Devices & Services.

So from a cash perspective, what it seems early independent and the independent comment suggests that a disposal is still on the cards.

So I was hoping you could just expand on why you wouldn't say at this point that it's something you'd aim to keep and what the issues are that you're juggling in making a decision either way.

Thanks.

Okay, Timo here.

So thanks for that question.

First of all, we did not want to, in any way, give an impression that we are somehow utilizing the NSN cash for other purposes.

We are simply saying that we can optimize the position if and when the acquisition closes.

We very well recognize that NSN is a business where it is in having long-term customer contracts and needs to support investment into innovation in both Mobile Broadband as well as the related Managed Services in accordance with its strategy.

Thank you, Stuart.

Operator, next question please?

Mike Walkley with Canaccord Genuity.

Stephen, congratulations on the Lumia sales momentum in the June quarter.

Could you share with us just maybe some sell-through trends for the 520?

Obviously with the new high-end phones ramping in Q3, should have some better ASPs, but do you think your Lumia volume will increase again sequentially?

Could you just touch on maybe your pricing strategy on high end given the tough competition in the high end?

And it already seems like Samsung, it seems like they've already had materially cut some prices of the Galaxy S-4 post that launch.

Thank you.

Yes, thanks for that question and actually, they are all somewhat intertwined in terms of the dynamics we're seeing in the marketplace.

Certainly starting with the 520, this product has gotten off to a very nice start in many markets around the world.

You'll see us continue to broaden distribution of the product.

There's more steps ahead in, for example, the United States and elsewhere, so we're very pleased with that but we are in an interesting situation where, as we go into Q3, we have a number of new products at the high end of the range which are either just now entering or will soon enter full distribution.

So for example, the 925 is just really getting into full distribution and of course, we launched the Lumia 1020 last week which we'll begin shipping later this very month.

In terms of the pricing dynamics and this is why we actually have not provided a comment on Lumia volumes.

There's a bunch of dynamics going on where indeed we do have to think carefully about the pricing strategies because as much as we have some good support for strong pricing, for example, with the Lumia 1020 where it's so differentiated, it's such a wonderful product.

We don't sense pricing pressure or anything around that in the earlier periods, but at the same time, and you correctly called this out, certain of our competitors, I'll just use as an example, I saw in the newspaper in the United Kingdom just a couple days ago where, throw in a Galaxy phone, a Galaxy tablet, a free smartphone and who knows what else they had in inventory, bundle it all together and put it out there for GBP21 per month.

So we are sensitive to the fact that there are pricing pressures and we're going to have to manage that very, very carefully.

So that, in some ways, explains why as our guidance for going forward, we gave the broader guidance of overall Devices & Services net sales growth expected going into Q3 from Q2 but we didn't want to get too specific on volumes because so much of our revenue in Q3 will be based on new products.

We just have to balance that very carefully.

Thank you, Mike.

Operator, next question please?

Andrew Gardiner with Barclays.

I had a question on NSN as well.

You've highlighted in the release here the increased restructuring that you're aiming for at NSN going from the EUR1 billion at cost savings to EUR1.5 billion.

I was just wondering if you could shed a little further light on the need for additional restructuring there particularly given that NSN has been solidly reporting very nice gross margins, high single-digit, low double-digit margins, better than peers who are significantly larger than you.

Are you planning on making cuts here ahead of a potential for decreased revenue opportunity in future periods?

Just any additional color would be helpful.

Thank you.

Let me take that.

I think the way to think about this; this is something we all see and learn as we go through restructuring cycles and that is you tend to take the big first steps to really restructure the Company, get it focused on its core business, make the structural changes organizationally, to the sales organization, what have you.

As you get through that, what you begin to see are new opportunities for fine-tuning, for tightening things down in certain areas so I wouldn't interpret this at all as any forward-looking indicator of what we anticipate.

It's more there's an opportunity there to continue to manage the business tightly, make sure we're keeping OpEx at the right levels while still ensuring, particularly important that there's heavy R&D investments available to us to continue to compete effectively.

So I wouldn't interpret anything other than there's opportunity there that gets uncovered as we've gone through the major rounds of restructuring we saw over the last year.

Thank you, Andrew.

Operator, next question please?

Gareth Jenkins with UBS.

Hopefully, you can hear me this time.

Yes, we can.

Good, so two-part question on NSN.

Firstly, I just wondered if you could give us a sense in light of the TD-LTE tender in China, whether NSN's longer-term targets are focused around margin or market share?

And then secondly, I just wondered if Timo, you could call out in the quarter what the impact from the recognition of certain project acceptances was in terms of margin in the quarter; is it meaningful or not?

Thank you.

Okay, thanks, Gareth.

So first of all, on the TD-LTE, China and longer-term target so clearly, we are not giving any revenue target.

We have said that our longer term target for operating margin has been 5% and 10% and we are not in any ways changing that.

We're of course extremely happy with our execution in NSN regarding the margin but we want to be properly positioned for top line as well.

But we are not changing any of these targets at this point in time.

And then can you please repeat your second question?

It was on the project, yes.

So on the Global Services, we simply have a situation where some of the revenue recognition depends on some acceptances.

And we had a couple of these during Q2 and we are not expecting to have a similar amount of it.

We called it out, so clearly, because of that, it is meaningful but I don't think I can shed much more light on that one.

Thank you, Gareth.

Carmen, we'll take our next question please?

Pierre Ferragu with Bernstein.

I have actually two.

The first one would be on Mobile Phones.

So you've seen a weakness in Q1 where you've continued to mention into this quarter and some recovery towards at the end of the quarter.

But I'm wondering if something has chance to turning or if we're going to see again like last year and the year before some temporary recovery in your shipments because the channel situation is getting better.

But in the end, it will end in six months from now.

Again, with the volume that we have frank quite a good deal compared to where we are today.

And then my second question is on the Smartphone front.

So you mentioned that a bulk of your sales in Q3 will come from new phones so I'm balancing between two ways I can interpret that.

On one hand, I can think that maybe this means you don't have a lot of visibility into Q3, that the success of your quarter is going to depend a lot on the launch of new products.

And on the other hand, I'm also thinking maybe it means that your gross margin profile is going to improve because with more new products in the mix, you should have a better gross margin.

So which of the two is the most important, do you think, I should keep in mind?

Okay thanks, Pierre.

First of all on the Mobile Phone side, the situation in Q1 and Q2 clearly, a difficult start to the year and we did take very significant action during those quarters and certainly in Q2 to bring inventory levels down.

So some of what you see in the decline is us taking deliberate steps to improve the health of the channel.

So as you look with the benefit of hindsight backwards and say what could that curve have looked like or how should we have managed that, it might have been a bit less choppy if we had, had better forward visibility at the time.

Now, As we look forward for Mobile Phones, we're entering into Q3 on the back of the launch of Asha 501 which represents the next generation of innovation for that marketplace.

We are absolutely continuing to invest in innovation in those price bands.

So you can anticipate, as we go Q3, Q4, Q1 into the next year, that we have more work ahead, more launches ahead, more innovation and significant advances in what we're planning to do in that marketplace.

So clearly, we're not managing it as a -- just continue to see decline or go through Q4 and drop in Q1 again.

We don't like that pattern.

We're very much making investments to work against that pattern that took place in the last year.

With respect to Smart Devices, actually, I'll respond to the first point about visibility.

I think Timo will comment on gross margins.

As it relates to visibility, that is part of what we were trying to signal is that given that the expectation for Q3 has a larger percentage than normal of new product launches, it's with less confidence that we can predict the volumes and so forth.

So you saw us, if you just look historically, we didn't predict volumes in Q1, but we felt better about predicting volumes in Q2 because we had more of a track record with the newer first generation Windows Phone 8 products.

The 925, the 1020, products like that, we don't have any practical experience with at this point or enough at least to say what Q3 will look like, so that's deliberately part of what we were trying to signal and then Timo will comment on --

So Pierre, let me take the opportunity to talk a little bit about our Q3 operating margin guidance.

And then also of course, including the gross margin and how we see that.

So clearly, as we said, we are expecting a higher top line going into Q3 and that's really driven by the ramp up of these recently announced products.

And then from gross margin perspective overall, I mentioned the expected sequential downwind from the hedging activities.

But at the same time, please remember that Smart Devices gross margin benefited from about EUR20 million or approximately EUR20 million from the inventory-related reversals in Q2.

And in addition, we highlighted the competitive industry dynamics impacting both Smart Devices and Mobile Phones.

So yes, the new product introductions should be a positive on the gross margin but simultaneously, the competitive industry dynamics impacting both Smart Devices and Mobile Phones will be a negative.

Thank you, Pierre.

Operator, next question please?

Mark McKechnie with Evercore.

Timo, I'd like -- can you give us an update on where we are at with the Microsoft payments, the back and forth, about [EUR1 billion] a year?

Is it a -- are you a net payer to Microsoft now or -- and how do you expect that to play out going forward?

Yes, thanks, Mark.

Happy to talk about that a bit, so we have said that overall, during the lifetime of the contract, we expect to be a net receiver slightly, but that in the beginning of the contract period, we actually benefited for this -- the ramp-up of the Lumia and the transition we needed to go through and are still going through.

And this year basically, we have still said that we are a slight positive, a higher slight [receiver] but we are talking about a small amount at this point in time so they pretty well net each other out at the moment.

Thank you Mark.

Operator, next question please?

Richard Kramer, Arete Research.

Stephen, you've now had about eight straight quarters of about 0.5 million units or so in North America.

Can you just layout for shareholders and investors balancing the signaling value of the US market whether you can justify the costs of continuing to pursue market share there?

And what might happen if that doesn't improve?

And Timo, can you walk us through the cash picture for second half?

I think you mentioned that NSN would remain independent with its cash.

Nokia has to pay for NSN.

You have restructuring and working capital and then I suppose longer term, the commitment to minimum royalties for Microsoft?

Can you walk us through maybe what your year-end target for cash might be and how we should think about the cash balances for Nokia through the rest of the year?

Thanks, Richard.

With respect to North America, particularly the US market, we believe quite strongly that the signaling value of that market is high.

We measure this quite carefully by studying the influencers on purchases around the world and the extent to which, for example, a powerful launch of the Lumia 1020 in the United States is reflected around the world and how that gets picked up and everything from press coverage to blogger coverage to the encouragement of developers to build apps for Windows Phone and so on and so forth.

And there's an amazing amount of influence coming out of the US market.

Now it is a hard market.

At the same time, if you look sequentially, we saw improvements in North America which we're pleased to see in large part in the back of the 928 going into Verizon and the 520 in T-Mobile and also a number of retail markets.

And of course, we have some very exciting products just coming in or a product in particular with the Lumia 1020 which will, for the first time since November, put some freshness into AT&T as well.

So we think that, that's really important.

Also the standard of care that the US operators put towards quality of products is something that helps us going through an AT&T Lab approval cycle early on is something that helps us a great deal on a worldwide basis, so we still believe strongly in that signaling value.

It is a big investment.

We have to do better.

We have to breakthrough so we know there's a lot of hard work ahead but we remain committed to the Americas.

Okay and then Timo here for the -- on the cash picture.

So let me first clarify one thing.

So clearly, when NSN is becoming part of Nokia, its cash cannot be totally dependent.

That's not what we are saying.

We are saying simply that we understand that NSN is operating in an industry where strong balance sheet and financial positions are very important, both from customer perspective as well as from ability to invest into new innovation in its core strategic area.

But I want to highlight and be very specific, I did not say that we would keep it absolutely independent.

We are simply, of course, optimizing for the Group and shareholders in this regard, and then what comes to kind of like GAAP cash flow, the second part of the year so we're really not giving any guidance on cash.

So maybe I'll try to just give some color on this regarding Q3 based on the information that we have in our release.

So first if you would just take the -- or use the -- our guidance midpoint for NSN and Devices & Services, so then if you take the NSN Q3 non-IFRS operating margin guidance midpoint, that 7%, you would approximately come to a similar relationship result as NSN expected restructuring cash flows.

And then if you look at for Devices & Services in Q3, the non-IFRS operating profit midpoint combined with the Devices & Services expected restructuring outflows would be a negative, but if we achieve sequential net sales growth as we guided, this would normally result in a cash generation from working capital in Devices & Services.

And secondly, you will have to factor in financial expenses, tax, CapEx and depreciation and then finally on CapEx in Q2, our CapEx was a bit higher on a sequential basis related to ramp up of our Hanoi factory and so this could come down a bit in Q3.

Thank you, Richard.

Operator, next question please?

Alexandre Peterc with BNP Paribas.

Just a question on NSN.

I know you have reiterated your guidance for margins within NSN between 5% and 10% but I'm wondering if your anticipated lower cost base and better year from restructuring will actually -- should actually lead us to expect something at the higher end of the range that you were indicating or is it all as before?

Thanks.

So we are in no way updating that guidance.

We feel that, that's proper guidance for NSN on its industry and it's clearly still going through the restructuring phase.

And in that sense, visibility into NSN as well continues to be limited as we have said.

So we have nothing further to add-on to the guidance at this point.

Thank you, Alexander.

Carmen, we'll take the next question please?

Francois Meunier with Morgan Stanley.

I've got a question about the Asha actually.

I think in the press release, you were talking about the improvement at the end of Q2.

Maybe you could give us what the run rate is now for the Asha range and also what do you think about Asha volume for this year?

I think TSMC this morning is talking about low-end smartphone volume, which should be up 70% compared to last year, so is it something that you think you could achieve as well with Asha range?

So with respect to the 501 and early -- it's just too early to tell.

I mean we're just getting it in the channel.

It's just beginning to sell in various places so we don't have a good read because it takes time for the sell-through and sell-out data to flow around so we don't have a good read on that.

I don't think we can provide any more forward guidance on volumes for Asha or Mobile Phones but we like the fact that we're going into a period where we have new product offerings just landing in the channel in customers' hands.

Maybe to complement here, Timo here, so clearly, the Asha 501 is also bringing a total new user experience to the market, so we really do not have experience.

But of course, we think that, that is a clear improvement and it is a clear improvement having used the product to the previous one.

So we think that we have definitely some tools to work with HERE.

Okay.

So maybe Timo, while you're here, I've got a question on NSN cash, if I may.

Just to confirmation you can access the cash without having to refinance any of the debt which is currently within NSN; is that correct?

So again, the transaction itself doesn't trigger anything within the existing debt.

But of course, there are and should be limitations on what can be done given that NSN has its own bonds outstanding and we, of course, totally respect that and that is exactly part of what I said that we are really looking at this as something what we -- that we'll optimize, of course, for NSN and NSN's business and then also for the Nokia shareholders.

Thanks, Francois.

Operator, we'll take our next question please?

Mark Sue with RBC Capital Markets.

Stephen, if I look over the past three years, in [hindsight], it's been more blocking and tackling, trying to get new designs taken out.

And we're still trying to see a [building up] of a ramp and since the big focus is just how much cash will end up eventually and right now, your partner Microsoft seems to be pretty occupied with the [Devices & Services].

Should we expect any big steps talking about improvement, just really accelerating and developing the Smartphone or do you really think about narrowing your scope over time?

So your voice was a little broken up there but let me try.

I think I got the essence of the question.

At the heart of it, it is a hard challenge to build this third ecosystem but you see a pattern forming in terms of the volumes that we're producing and certainly in terms of the accolades that are coming for differentiated products at a time where some of our principal competitors seem to be rinsing and reusing previous products and not exciting customers as much as I think we are with some of our most recent offerings.

You mentioned our partner Microsoft, part of what they're preoccupied with is in fact increasing the emphasis on a Devices & Services strategy.

And they clearly recognize the importance of having a strong partner in Nokia in order to fulfill that strategy, so we look at the work that they're doing.

For example, the clear direction of bringing Windows and Windows Phone together under consistent leadership which, of course, will translate into a better developer experience, which means more applications for Lumia devices.

We see a number of those things as very positive indicators.

I think the other thing that's been important and that we're pleased with, you'll see this, for example, in the days and weeks ahead with the Lumia 1020 launch, is the amount of alignment between ourselves, Microsoft, and the operator, in this case, AT&T, on a very, very consistent, aligned, optimized set of marketing messages is much, much better than it was a year ago.

If you go back a year, you can see a bunch of stuff out there about, it's about Windows Phone, and it's about the fastest 4G LTE network and it's about Lumia, but we've worked through that to the point where it's going to be, this is what this product is capable of and here's why you should buy it.

I think that's going to help us as we go forward.

Thank you Mark.

Operator, we'll take our next question please?

Didier Scemama with Merrill Lynch.

Two quick ones in fact.

First of all, can you explain exactly what Nokia Group is all about going forward?

Is it D&S?

Is it NSN or is it both?

It's a very simple question but I think we need to understand that a bit better?

And second Timo, can you clarify what the restrictions are with regards to extracting a bit of cash out of NSN vis-a-vis the obligations of NSN on hold?

Thank you.

Thanks for your question.

First of all on strategy.

We wanted to be very clear that the acquisition of the Siemens' 50% share of NSN is not any shift in strategy for us.

Its been an important part of the Nokia Group for quite awhile since it was formed obviously and even before then.

And now at this point, having complete ownership of it doesn't change our strategic balance or intent.

And that's why we've gone to great lengths to talk about continuing to strengthen as an independent entity keeping options broadly open in terms of how that plays out.

Within Devices & Services, clearly, principal Smartphone strategy continues to be focused on Windows phone.

And in the lower-end bands, you see us continuing to innovate to support the opportunities that exist in those price points, particularly those price points that are below the reach of Windows phone so far as we push the price point of cap Windows Phone Devices further down.

Final comment on strategy that we've been clear about over the last particularly eight months is the importance of HERE, not only in supporting the differentiation of our mobile products but also as a broader horizontal play attracting the interest of companies like SAP, Oracle, Firefox, Amazon and others as the obvious balance to Google in this space.

So really no change in strategy, no change in emphasis, but clearly on the NSN side, there was a wonderful opportunity to establish a structure that could provide more value to our shareholders.

Okay, and then Timo here on restrictions regarding NSN cash.

So we have some normal components which are related to a high yield bond.

I would say that they are not like super tight when you could compare to some other issues out there, but if you look at the NSN's cash position which is EUR1.4 billion of net cash and EUR2.5 billion of gross cash, yes, there should be some maneuvering room there.

But again, our primary target, of course, is to take it into account in a way that NSN has a strong financial position and balance sheet to execute the strategy and then of course, optimize for Nokia shareholders.

Thank you, Didier, for your question and thank you all for your questions.

We've run out of time for questions today, so I will turn the call back over to Stephen for a closing.

Thanks, Matt.

At the highest level, we're pleased Lumia volumes grew to 7.4 million and our Mobile Phones business started to show signs of recovery.

Thus, we expect that in Q3, the Devices & Services net sales will increase.

We are also pleased that our HERE business exceeded expectations and benefited from its leadership in the automotive industry.

And most notably in Q2, we benefited from another strong performance at Nokia Siemens Networks, which continue to deliver well against its focus strategy.

As we head into the second half of the year, we all must remain focused on executing our strategy, improving the competitiveness of our products, managing our costs and moving with urgency.

With this focus, we can continue to drive more value for shareholders and our customers around the globe.

Thanks for joining us, everyone.

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

Thank you.

Thanks for participating in today's conference call.

You may now disconnect.