諾基亞 (NOK) 2013 Q4 法說會逐字稿

Good day.

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

At this time, I would like to welcome everyone to the Nokia fourth-quarter 2013 and full-year 2013 conference call.

(Operator Instructions)

Thank you.

I will now turn the conference over to Matt Shimao, Head of Investor Relations.

Please go ahead.

Ladies and gentlemen, welcome to Nokia's fourth-quarter and full-year 2013 conference call.

I am Matt Shimao, Head of Nokia Investor Relations.

Timo Ihamuotila, CFO and interim President of Nokia, and Rajeev Suri, CEO of NSN, 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 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 results report issued today.

Please note that our 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 results report with tables, available on our website, includes a detailed explanation of the content of non-IFRS information and a reconciliation between the non-IFRS and the reported information.

With that Timo, over to you.

Thank you, Matt.

Before I hand over to Rajeev who will update you on NSN, I will briefly comment on our reporting structure this quarter and provide some high-level remarks about the performance of our continuing operations in Q4.

After receiving approval at our extraordinary general meeting for the proposed transaction with Microsoft, we have present the [closed] transferring at discontinued operations.

In order to help you with your models and to provide more historical context, we have also disclosed the performance of the continuing operations over the previous four quarters and for the full years of 2012 and 2013.

We continue to expect the transaction with Microsoft to close during Q1 subject to receiving the remaining regulatory approvals.

We have already received a majority of the approvals during Q4 and are working with the remaining regulatory bodies as part of the overall deal closing process.

Please note that since the transaction has not closed, we're not announcing any proposals for this year's annual general meeting of shareholders today.

In previous years, proposals for matters such as Board composition and dividend recommendations would have typically been announced in conjunction with our Q4 and full-year results.

The Board continues to plan to make its approved proposals for the AGM after the transaction has closed and the study to review has been completed.

We have today confirmed that the AGM is scheduled to be held on June 17.

Turning to the continuing operations in Q4, in the fourth quarter, Nokia's continuing operations generated net sales of EUR3.5 billion and a non-IFRS operating margin of 11.7%.

The 18% sequential increase in net sales was primarily driven by NSN and to a lesser degree from HERE.

Continuing operations non-IFRS operating margin was flat sequentially.

NSN had another solid quarter in Q4 and its recent deal momentum is encouraging for its long-term position in its focus areas.

With that I will hand over the call to Rajeev to discuss NSN's Q4 performance.

Thank you, Timo, and hello to everyone on the line.

In many ways, NSN's performance for the fourth quarter reflected a continuation of recent trends, excellent profitability and cash flow with weaker year-on-year top line.

In the fourth quarter of 2013, we delivered our highest ever reported net profit, the second highest non-IFRS gross margin in our history, a strong non-IFRS operating margin, and our ninth consecutive quarter of positive free cash flow.

In my remarks today, I will take you through our Q4 numbers and share some highlights of our business performance including the progress we're making in Mobile Broadband within the areas of TD-LTE and telco cloud, our excellent results in Global Services, and how the real world performance of our offerings is becoming a differentiator for NSN.

Our net sales in the quarter were EUR3.1 billion representing a year-on-year decline of 22% with a sequential increase of 20%, consistent with strong industry seasonality.

Approximately half of the year-on-year decline resulted from divestments, the negative effect from foreign-exchange fluctuations, and customer contract and country exits.

We are not satisfied with our top line results, and as I noted on the third quarter call, we are taking steps to improve our performance in this area.

I will talk more about this topic shortly.

To give some regional perspective, we are seeing excellent momentum in greater China where we believe we are on track to become the leading foreign vendor.

Europe remained challenging in Q4 but we are seeing some early signs of increased CapEx spending from certain customers in Western Europe and Russia.

APAC saw good performance in Korea, Indonesia, and Australia with strong deal momentum in India.

Middle East and Africa, an area that was heavily affected by country exits during our restructuring, delivered very good sequential growth.

With our business now stabilized in this region, we see it as an area with considerable future opportunity.

Latin America continues to face CapEx constraints.

And finally in Q4, North America saw declines as our large rollout at T-Mobile tapered down but we are optimistic that our large win with Sprint will help balance our revenue trend in the region in future quarters.

Our non-IFRS gross margin for the quarter was 37.6%.

This compares to 36% one year ago and 36.6% last quarter.

Our recent gross margin trend underlines the strength of the foundation we have built at NSN.

The year-on-year increase was driven by a higher gross margin in Global Services due to significant efficiency improvements as well as a higher proportion of Mobile Broadband in the overall sales mix.

This was partially offset by a slightly lower gross margin in Mobile Broadband due to lower net sales in the higher-margin markets of Japan and North America, costs related to the start of several large new network deployments in China, and the absence of nonrecurring IPR income which benefited Q4 2012 by approximately EUR30 million.

NSN's non-IFRS operating margin in Q4 was 11.2%.

Note that other expenses in the fourth quarter were at elevated levels reflecting nonrecurring charges and higher than normal costs related to doubtful accounts and asset retirements.

At normalized other expenses levels, our non-IFRS operating margin would have been slightly above the 12% midpoint of the non-IFRS operating margin outlook that we have provided for Q4.

Reported net profit for the quarter was EUR171 million, giving us a reported net profit for the full year, another milestone achievement for NSN.

And our gross and net cash balance increased sequentially reflecting strong profitability and good working capital management.

Timo will share more cash flow details in a few minutes.

Before I take you through our business segments, I would like to spend a few additional minutes on our net sales trend.

As I shared on the third quarter call, our strategic choices over the past two years, divestments, country and contract exits, focus on profitability and cash, have all had an impact on our net sales, and we have taken steps over recent quarters to strengthen our performance in this area.

To be clear, however, we expect top line performance to remain challenging, particularly in the first half of the year when our year-on-year comparisons will continue to be impacted by divestments and exits such as our [BSS] and optical networks businesses until the anniversary of their sales in Q2 2014.

During the first quarter of 2014, we also expect some pressure on profitability given lower seasonal net sales as well as lower margins during the initial phases of several strategic new network deployments.

Given this, we expect Q1 2014 non-IFRS operating margin to be in the range of approximately 5% plus or minus 4 percentage points.

Consistent with our increasing focus on top line, we saw good deal momentum in Q4 and this is continued into Q1.

Recent customer wins include Sprint in the USA, China Mobile in China, Telecom in China, VimpelCom in Russia, Telkomsel in Indonesia, Chunghwa Telecom in Taiwan, Oi in Brazil, Vodacom in Tanzania, and an entry into Myanmar with Ooredoo.

I am also proud that we are the sole supplier for Elisa's nationwide LTE network carrier in Finland as announced earlier today.

It's always nice to win in your home country.

Thus looking more broadly at the year ahead, we believe we are well-positioned for another solid year in 2014.

We are targeting to deliver full-year non-IFRS operating margin towards the higher end of our longer-term 5% to 10% range, consistent with our efforts to improve year-on-year net sales trends in the second half of the year.

Then, let me turn to a discussion of our business segments starting with Mobile Broadband.

Net sales for Mobile Broadband saw a year-on-year decline largely driven by a decrease in revenues in maturing technologies in both radio and core.

Contribution margin for the quarter was 7.5%, reflecting lower year-on-year net sales in North America and Japan as well as a head winds from the strategic new network deployment projects that I already mentioned.

Our Q4 LTE sales were strong, particularly in TD-LTE.

Some of our competitors initially dismissed TD-LTE as a China only technology that might even struggle in China.

We took the view that not only would TD be critical for success in China but that it would also become a global technology given that 50% or more of the spectrum available to operators globally will be for TD-LTE.

As a result, we have a leading position in TD-LTE with considerable commonality between our FD and TD hardware and software being a significant differentiator.

While the majority of LTE deployments to date have been based on FD technology, that will start to change with upcoming deployments.

This should serve NSN well given our wins with customers including China Mobile, China Telecom, and Sprint.

Also in LTE, I would note that all three of the LTE advanced networks in commercial operation today use NSN radio technology, a clear sign of our technological strength.

We have also recorded notable innovations in developing telco grade cloud technology and in software defined networks, which are essential for our customers to control costs, increase business agility, and enable new services.

We are focused on being a leader in the emerging telco cloud space moving to a fully virtualized network core offering in 2014 based on our liquid core technology.

In Q4 we announced a network function virtualization proof of concept with SK Telecom in Korea and of one other deals including being selected by a major operator as partner of choice for core virtualization.

Then, moving to Global Services.

While net sales were down year-on-year reflecting contract exits and lower network implementation activities, contribution margin reached a very strong 15.2%.

This was a third consecutive quarter of double-digit contribution margin in Global Services.

We are being selective in deals to ensure that we can add value that our customers will pay for, increase the proportion of our services that are delivered to our efficient global delivery centers, and focused heavily on centralization, standardization, and automation.

I'm extremely pleased with the excellent execution in Global Services and believe that we have a very strong base for future profitable growth.

During Q4, we saw a good example of how the real-world performance of our networks is becoming a strong differentiator for NSN.

As we look at the market today, we are increasingly seeing what we call spec sheet competition where every vendor wants to show that they have an endless list of features even if those features are not used or have no real impact on actual network and business performance.

That is not a path that we will go down and our focus will remain on technology that will deliver the best operational and business KPIs.

Technology that is judged on business case rather than hype.

Technology that delivers performance in the real world.

When we focus on features, we will do so but those requiring specific customization in order to meet the unique needs of individual major operators.

We have an increasing number of examples that illustrate the real-world performance that we deliver.

But for this call, let me focus on a single specific example.

The Busan Fireworks Festival in Korea is a massive event.

One of the world's largest in 2013, it had more than 1.5 million people participating.

More than half of them on LTE networks with LTE data traffic well over three times that of the previous year.

NSN was the provider of one of the three LTE networks during the festival and the network we delivered performed superbly, while the other two were simply unavailable for significant parts of the event.

Even when their networks were up and running, it was still not much of a contest.

Our average uplink data rate was nine times faster than one competitor, our average downlink rate was up to eight times faster than the others, and we had 23% better latency or responsiveness performance than one and 85% better than the other.

In summary, NSN has come a long way, and the end of 2013 marked a significant milestone.

When we announced our new strategy and restructuring at the end of 2011, we said that we would reduce costs by EUR1 billion by the end of 2013.

In July of last year, we increased our target to more than EUR1.5 billion, and I'm extremely pleased to say that we achieved this goal.

Over the course of the past two years, we have made a wide range of structural changes that will continue to deliver long-term benefits in terms of management systems, pricing processes, quality, innovation, and more.

Having achieved this milestone, we are able to put the restructuring phase announced in 2011 largely behind us.

We will certainly remain focused in ensuring our Company is efficient and disciplined and that we make continuous improvements in the business.

At the same time, we are now well-positioned to be increasingly assertive in the marketplace, leading in the technologies that matter.

We are relentlessly focused on helping customers address the trends that will shape our world going forward.

With that, Timo, back to you.

Thank you, Rajeev, and now to an overview of the performance of HERE, Advanced Technologies, and discontinued operations in Q4.

Reported net sales of HERE were EUR254 million, down 9% year-on-year at an increase of 20% compared to Q3.

The year-on-year decline was due to significant lower internal net sales partially offset by a 10% increase in external net sales.

On a sequential basis, HERE's net sales increased primarily due to higher seasonal sales to vehicle and PND customers which drove a 28% increase in HERE's external net sales in the fourth quarter.

In Q4, HERE had sales of new vehicle licensees of 3.2 million units, up from 2.6 million in the third quarter, an increase of 23% sequentially and representing well over 50% of external net sales in the quarter.

HERE's non-IFRS gross margin in Q4 was 75.6%, down 640 basis points compared to the year ago quarter and 690 basis points sequentially.

Both year-on-year and sequentially, this was primarily due to a nonrecurring licensing expense as well as higher sales of upgrade units to vehicle customers which carry lower margins.

In Q4, HERE's non-IFRS operating margin was 9.8%.

As I commented last quarter, we believe HERE has strong long-term prospects most visible in the automotive segment but we are also targeting further transformation of growth opportunities in multiple industries.

Building on HERE's industry-leading position, as well as it's highest quality and freshest map [app], we intend to accelerate our investments during 2014 in areas such as the connected car, autonomous driving, and next-generation maps in order to capitalize on these attractive long-term growth opportunities.

Earlier this month at CES in Las Vegas, one of the most discussed market segments was smart cars with a number of leading automotive manufacturers in attendance.

For HERE, we view this as an opening of new value chain and it aims to capitalize on new licensing prospects and the potential to increase its ASPs.

While we expect to see some progress in 2014, the more transformational revenue and profit opportunities are expected to have a greater impact in the years to come.

And now, a few words on Advanced Technologies.

As you can see from today's press release, we have presented Advanced Technologies as a reportable segment for the first time.

Q4 net sales of EUR121 million compared to EUR151 million in the year ago quarter and EUR140 million in Q3.

The year-on-year decline was primarily due to lower intellectual property licensing income from certain licensees that experienced lower levels of business activity.

In Q4, Advanced Technologies' non-IFRS operating margin was 67.8%, an increase of 160 basis points year-on-year and 780 basis points sequentially.

The higher year-on-year and sequential margin was driven by lower operating expenses which more than offset the lower level of net sales.

As I commented last quarter, our IPR licensing business is an area where we already have a proven track record and a successful business strategy that we will continue to implement going forward.

As example of this, during the fourth quarter we announced that Samsung had extended our patent license agreement with Nokia for five years.

As part of this, Samsung will pay additional compensation to Nokia for the period commencing from January 1, 2014 onwards and the amount of compensation shall be finally settled in a binding arbitration which is expected to be concluded during 2015.

During the quarter, we also made good progress in our efforts to start broader licensing of our implementation patent.

Looking ahead, we expect Advanced Technologies' annualized net sales run rate to increase to approximately EUR600 million during 2014 after Microsoft becomes a more significant intellectual property licensee in conjunction with the sale of our devices business.

This compares to Advanced Technologies' current annualized net sales run rate of approximately EUR500 million.

Then turning to discontinued operations.

Discontinued operations' net sales of EUR2.6 billion declined 29% year-on-year and 5% compared to Q3.

On a sequential basis, the decline in net sales was primary due to lower smart devices net sales.

Mobile phone net sales were approximately flat.

Discontinued operations non-IFRS gross margin of 20.3% declined 60 basis points year-on-year but increased 90 basis points compared to Q3.

The sequential increase was primarily due to higher mobile phones gross margin partially offset by lower smart devices gross margin.

Please note that smart devices non-IFRS gross margin in Q4 was negatively affected by approximately EUR50 million of inventory net allowances.

Discontinued operations non-IFRS operating margin of negative 7.3% worsened by 600 basis points year-on-year and 260 basis points compared to Q3.

On a sequential basis, this was primarily due to lower smart devices contribution margin partially offset by higher mobile phones contribution margin.

Even though the business being transferred to Microsoft are classified as discontinued operations in Q4 for accounting purposes, we remain highly focused on continuing to deliver innovation across the portfolio, as well as managing the cash performance of the business in the most optimal manner.

And now a few words on some of the below the line and cash flow items which I hope will help you with your models.

As you recall, last quarter we disclosed that after performing an assessment of the potential recoverability of Finnish deferred tax assets currently subject to validation allowance, we have the ability to shield approximately EUR11 [billion] of future profits made in Finland.

We expect this to benefit our potential cash tax liabilities in the years to come.

Nevertheless, as a Company with significant operations and activities outside Finland, we continue to expect to incur quarterly tax expenses going forward.

On a non-IFRS basis, and until a pattern of tax profitability is reestablished in Finland, we expect to record annualized tax expense for continuing operations of approximately EUR250 million which corresponds to the total anticipated cash tax obligations outside Finland for NSN, HERE, and Advanced Technologies.

With regards to CapEx, we currently expect capital expenditure for the continuing business to be approximately EUR200 million in 2014 with NSN comprising the bulk of this total.

And quickly, a couple of words on financial income and expense.

In Q4, this was an expense of EUR50 million compared to EUR63 million in Q3.

On a sequential basis, the decrease was primarily due to the recognition of income related to one of our investments and lower investment paid expenses partially offset by higher FX related losses.

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

On the sequential basis, Nokia gross cash decreased by approximately EUR160 million in Q4 with a quarter ending balance of EUR9 billion.

Net cash and other liquid assets decreased by approximately EUR100 million sequentially with a quarter ending balance of EUR2.3 billion.

The sequential decline was driven by negative cash flow from discontinued operations which more than offset the positive continuing operations cash flow from operating activities.

The increase in continuing operations cash flow from operating activities was primarily driven by the increase in NSN's profitability.

Excluding approximately EUR150 million of restructuring related cash outflows, NSN generated approximately EUR80 million of cash from working capital.

At the end of Q4, NSN's contribution to the Nokia group gross cash was proximately EUR2.8 billion and its contribution to the group net cash was approximately EUR1.7 billion, a sequential increase of around EUR110 million and EUR140 million respectively.

In conclusion, I'm pleased with the progress we have made in all three of our continuing businesses during Q4.

NSN delivered another solid quarter with good gross margin development and execution relative to its strategy and roadmaps.

I'm also very pleased with NSN's more recent deal momentum, particularly in TD-LTE, as Rajeev said.

Having successfully achieved its cost saving target, NSN is well-positioned going into 2014.

HERE delivered solid year-on-year growth in its external revenues and we are accelerating our investments to capture longer-term value from the transformation of growth opportunities in the automotive and other industries.

And for Advanced Technologies, we are focused on continuing to invest in innovation and on implementing our successful business strategy of licensing our industry-leading intellectual property.

We have three strong businesses and a solid financial foundation.

We look forward to sharing more with you about how we plan to build the next chapter for Nokia after the closing of the transaction with Microsoft, which we continue to expect in the first quarter of 2014.

And now, I will turn the call back to Matt for Q&A.

Thank you, Timo.

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

Carmen, please go ahead.

(Operator Instructions)

Gareth Jenkins from UBS.

The intellectual property where you're targeting EUR600 million.

Timo, can you say what that would be excluding Microsoft during the course of this year?

I know it's obviously subject to what Microsoft closes or maybe could give us a sense of what the underlying run rate of this EUR500 million will look like by the year end.

Thank you.

As we said today, we expect revenue run rate from Advanced Technologies to be EUR600 million after the Microsoft transaction closes up from the EUR500 million earlier.

I really don't think I can give more color on the topics of -- we are again expecting to move to that run rate after the Microsoft transaction closes.

Thank you, Gareth.

Operator, next question, please.

Mike Walkley with Canaccord.

Thank you, Rajeev.

As we enter 2014, which reasons do you see the best growth opportunities and are you still focused on some cost-cutting areas, and basically just trying to get a feel for what opportunities do you see driving year-over-year growth returning in the second half of 2014?

Thank you.

Thanks, Mike.

We have not given specific guidance on the market as such for 2014.

We have said that NSN's addressable market may only show flat to modest growth in the coming years.

In terms of regions where we see growth of China due to the acceleration of LTE, and possibly Middle East and Africa as they are moving into new technologies as well.

So I hope that gives you some color, but overall I think we are well-positioned a number of operators in those regions and Europe will also possibly accelerate LTE, but it will do so at the cost of reductions in CapEx in the legacy technology.

So that is going to be a little bit balanced.

Now, from our perspective, you should also remember that our year-on-year top line comparison will be impacted in the first half of the -- from these divestments, exits in some countries -- some contract exits as well.

We know that the Optical and BSS anniversaries only in Q2 of 2014.

So that's why we've said the first half is a bit more challenging.

Thank you, Mike.

Carmen, next question please.

Pierre Ferragu with Bernstein.

Good morning, and thank you for taking my question.

Timo, I would like to get back to the run rates you are getting for on Advanced Technologies, and the comments you made about the lower number you reported in Q4 that is due to some of [share ha] licenses generating like a small amount of business.

My question is about how much more downside risk there is in this revenue stream that could come from people who are paying you today and on preferences that maybe doesn't correspond anymore to the importance they have in the industry.

And I assume you get pretty high visibility on when these contracts would be renewed, so my first question would be where such deadlines to expect in 2014, being consumed, of course.

And then my second question is how do you -- in your planning assumptions, do you handle these potential downside was of these negotiations.

Okay, Pierre.

Thanks for the question.

First of all regarding the EUR600 million run rate, so clearly we have taken into account all the relevant factors in the run rate estimate after the Microsoft transaction closes, and that is the run rate what we expect after the closing of the Microsoft transaction and of course then in later, if there is new information we will share that, but that encompasses all the relevant information we have now there.

And what comes then to the opportunities.

We feel that we have opportunities both regarding our essential patents portfolio regarding mainly the current mobile phone space, and then we also feel that we have opportunities regarding our implementation patent portfolio and that can be both in the mobile space but also broader because that is some of the innovation which we will no longer utilize in our own productization in the handsets after the transaction closes.

That is really where we see the opportunity space, but the EUR600 million encompasses as we see the situation after the deal closes.

Thank you, Pierre.

Carmen, next question please.

Andrew Gardiner with Barclays.

Good afternoon.

Thank you for taking the question.

I had one for Rajeev on NSN.

You have highlighted the aim to get back to year-on-year revenue growth in the second half.

I'm just wondering if you can give us a bit more color whether how much of that is going to be driven by what you're seeing for the industry or your market share gains, and perhaps more pointedly, do you have sufficient contracts in the bag today to ensure that you can get to that year-on-year revenue growth?

Or are you looking for further contract wins over the coming couple of quarters to make sure that you can hit that target?

Thanks, Andrew.

We have seen some good deal momentum in Q4 and also coming into Q1.

I would say both on road map competitiveness and deal momentum, we are coming back in Europe.

And I think we are looking to do well out of the whole China LTE development.

And then of course we have Sprint.

There are elements there that give us confidence that we can drive efforts to grow the top line in the second half.

Thank you, Andrew.

Carmen, next question please.

Kulbinder Garcha with Credit Suisse.

My question is really on margins and the profitability outlook for the overall new Nokia as we go through this year.

It's kind of split into two parts.

For Rajeev, you guys had high single-digit margins this year and I guess you are still going to have some negative impact as we ramp up from China.

You are going to have to pursue contracts and there will be some negative impact I imagine from things like Sprint on new network rollouts.

Normally, when main productive vendors go through this period, the margin pressure can be really quite meaningful so year-to-year from 2014 to 2013, is this something that you are also doing with your cost base to make sure you get to the high single-digit margin for the year?

And then my question for Timo on the margins is, you are going to spend more money on HERE, it sounds like.

I'm want kind of confused about HERE has a R&D to sales ratio of 47%.

Shouldn't you be repositioning how you spend that money as opposed to spending even more or am I missing something?

Let me start.

First yes, some of the network deployments will result because they're coverage related, will result in some margin dilution and that is why we have said the guidance that we have about Q1.

Having said that, there are other projects that also are moving into the capacity phase in some of the more advanced markets.

And again, we are being quite selective and strategic about where we are looking for a trade-off, if any, between growth and profit.

This is not an across-the-board thing.

We are very disciplined in terms of our pricing processes and so on.

I believe if we execute well, we can end up at the high end of the range that we have given in guidance.

In terms of cost, as we said, we are largely done with our restructuring program that we announced in 2011 but we will continue to be a prudent company, lean.

We think that's a strength and continuous improvement is just going to be part of our discipline going forward.

Regarding HERE, I think your question is absolutely valid but of course, we simultaneously drive efficiency in the basic map but we also have to and think that it makes sense to invest in the future opportunities in HERE and this would be in areas like, for example, 3D and visuals where we have done the earthmine acquisition in the areas of connected car and if we look a little bit further forward, it is really real-time analytics because if we think about the future map, it will become more and more real time which we will need to all the time get information from the cloud and these are really the investment areas.

So of course, we are simultaneously efficient in the core map -- basic map area but we feel that this is the right time to increase investments.

Thank you, Kulbinder.

Carmen, next question please.

Francois Meunier with Morgan Stanley.

Yes.

Thanks for take my question.

I'm afraid I'm going to ask a question again about the patents and your EUR600 million guidance.

It includes Samsung and I think everyone was expecting something to be quite significant, so how cautious have you been in the accounting of what Samsung could pay?

Is it something which is less than EUR100 million or is it more than EUR100 million over the EUR600 million guidance?

Thanks, Francois.

Basically, what we have said about the Samsung transaction is that the final amount will be settled in arbitration in 2015.

And that settlement will include payments, of course, from 2014 -- or beginning of 2014 onwards because that is when the previous deal with Samsung expired.

And we have, of course, taken a normal prudent approach on looking through that in our accounts and as we do not know what the final amount will be, so we have needed to take a prudent approach.

I don't think I can shed much more color into that.

Again, the arbitration in 2015 will really define the final outcome.

Thank you, Francois.

Carmen, we'll take the next question.

Simon Schafer with Goldman Sachs.

Yes, thanks so much.

Just a question for Rajeev.

Rajeev, you sort of outlined, of course, you have been very successful in getting you significant commercial deals specifically in China and Sprint, of course, you highlighted and you also talk about prudent investment.

But more broadly on a multi-year point of view, do you think this business now has sufficient scale in the long run to compete against significant -- you know, the significant players at the top of the three, if you will, in terms of the real scale guidance.

I am just wondering if whether you think going forward you may actually have to reinvest a significant amount of the excess profitability that you have been earning or whether you think that for now as you call it, you can be very prudent in the amount of reallocation of that profit or cost.

Thanks, Simon.

We are clearly a scale player in the mobile broadband addressable market that we play in and of course, the attached services.

And I think market forces are determining preferences such that the top three players are getting a bigger part of the pie.

Our cost structure is such that we have good operating leverage as we grow our top line that we can continue to benefit from the profitability that we have sort of demonstrated and hence the target of 5% to 10% longer term, and for 2014, if we execute well we can end up in a higher end of the range.

Of course, we will continue to be efficient as well.

But when I look at R&D investments, we are spending comparatively.

We are increasing our investments to next generation core, telco cloud, and areas such as those.

We are increasing our investments in LTE and all of the new generation technology, including small cells.

We have a very robust portfolio coming out in small cells and other such areas.

I am confident that we are a scale player.

I am confident that we are dressing appropriately for what is required to be competitive in R&D.

Thank you, Simon.

Carmen, next question please.

Didier Scemama with Merrill Lynch.

Thanks very much for taking my questions, everyone.

Just to go back to a patent from Q4, one of the elements you mentioned on the press release is maybe some issues related to revenue recognition.

So I was just wondering whether that EUR30 million or EUR40 million-ish on Q4 is going to snap back at some point, whether it's Q1 or Q2 in 2014.

That would be great If you could answer that, thanks.

Okay, Didier, I don't think we had any sort of specific revenue recognition things during the Q4, so really as we said in the release, a little bit lower number was mainly driven by lower business volume with some of our customers.

And on the other hand, as we have said we expect now the run rate to increase to approximately EUR600 million and after the Microsoft deal closes and for the full year, we were slightly above the EUR500 million in AT, so those are really the numbers in question.

Thank you, Didier.

Carmen, next question please.

Sandeep Deshpande with JPMorgan.

Can I revisit the AT -- the Advanced Technologies question?

Can we understand, Timo, regarding within Advanced Technologies, two things?

One is cost.

Now once the handset business goes away, will you have to increase R&D cost within Advanced Technologies to be able to continue IP development into the -- for the future for Nokia, and secondly with regards to the earlier questions regarding Samsung, et cetera, this movement from this EUR530 million to EUR600 million is taking into account Microsoft -- in the main delta, is Microsoft less whatever Microsoft, et cetera, was already in the numbers or is it there are some other pluses and minuses from there?

Thank you.

Thanks, Sandeep, for the question.

First, on the cost side.

We have had, as you can see from the releases, what we have given during the last couple of days that the cost run rate has been overall somewhere around EUR200 million and maybe EUR150 million or EUR160 million of that has been R&D.

If we look at the patent creation during last year, we made about 900 patent applications and two thirds of that came from Advanced Technologies organization and HERE if we look at the overall sort of Nokia excluding NSN.

The innovation proportion to whole Nokia is very good.

I don't think we want to rule out possible investment in AT as long as we can see good return prospects for that so clearly.

That's an area as we have said where we see good opportunities, essential patents and implementation patents and as we have spoken about earlier, also in the future possibly in technology licensing because especially on the implementation innovation where it is used by Nokia devices business, we can also see technology licensing as an opportunity.

And then what comes to the EUR600 million run rate?

So again, as I said earlier, it clearly includes a component we are saying that that would be the run rate after the Microsoft transaction closes, so it includes the Microsoft delta, as you call it, but it can also include other positives and negatives as is customary of course in business.

Thank you, Sandeep.

Carmen, next question please.

Stuart Jeffrey with Nomura.

Thanks, everyone.

Question on the US.

You have managed to break from T-Mobile and to a bit of Sprint, as well.

But I guess I'm a little bit concerned as you go into a market where your market share is significantly below the incumbents, that maybe it's hard to scale the fixed costs to be really profitable.

So I'm trying to understand whether the US business for you is a profitable one, whether you are having to make significant investments to scale up, and whether the current footprint is enough for you to generate good long-term profits or whether you think you need to do some other actions to try and break into the top two carriers, in particular, and what opportunities you see for that over the next year or two.

Thanks.

We've got business with T-Mobile, both on the radio and core.

We have Sprint, of course, we've broken through into now.

We also have Verizon, remember sort of with IMS, which is next generation core and then we have AT&T, as well.

Although, it's largely legacy invariably.

So yes, we have the required scale and the only investments you need to make really are in the services business that frankly comes with the territory and it's part of your gross margin, in any event.

We have the required scale to be profitable.

And we want to continue to grow that market.

it is a breakthrough market for us.

We do not give profitable figures by market or guidance.

But it adds to the overall top line margin for the Company.

Thank you, Stuart.

Carmen, next question please.

Mark Sue with RBC Capital Markets.

Thank you.

Good morning.

Just on the licensing, is the broad sense the intent to expand the base or drive collection from those that might not be paying or might not be paying the appropriate rate?

How should we think but the cost related to the collection of that?

And just as the new Nokia takes form, how should we think about the framework for the appropriate capital structure perhaps an early sense of your thinking of returns of cash -- excess cash to shareholders?

Thanks, Mark, for the question.

On the licensing, again, this goes back to the both essential patents and implementation patents.

Yes, we think that particularly regarding the implementation patents, we would have possibility to expand the base as well, as you call it, but of course these are long-term efforts and not something which would happen immediately and as we have said earlier, we expect that essential patents would continue to form the bulk of the licensing revenues also short to medium term.

Those are exactly the areas which we look at investing into both regarding the business model and on then on the technology side as we are no longer needing that differentiation in our devices business.

And then regarding paying for the capital structures or again, just a reminder that as we have said, the Board is conducting the overall strategy evaluation which encompasses strategy, corporate structure, and also capital structure considerations, and after the Microsoft deal closes, we hope to be in position to talk more about that in detail.

And what we have said earlier regarding the capital structure is that we aim to become an investment-grade company through time.

It's not like that is a first priority at any cost on a really short period of time.

Through time by, of course, business execution and then working towards a call it more suitable capital structure for these businesses because if you, for example, look at how much debt the Company -- the continuing Company will have, it is clearly somewhat more than we would optimally like to have.

You know that we have done the Nokia convert a little over a year ago.

We have done two [bums] in NSN.

After the Microsoft transaction closes, maybe it would not have been necessary but it was, I think, effective.

The right thing to do at the time, the right financials for the Company in a prudent way.

And in that sense, we will be talking more about this topic when we come up with our -- when we talk more about our share valuation at or slightly after the Microsoft transaction closes.

Thank you, Mark.

Carmen, well take our next question please.

Kai Korschelt with Deutsche Bank.

Yes, hi.

Thanks for taking my question.

I apologize but another question on the Advanced Technologies.

I just wanted to make sure I understand the math right.

My understanding is you are expecting something like EUR150 million in income from Microsoft this year.

And so your guidance essentially implies that ex-Microsoft, your revenues will be around EUR450 million in terms of run rate and that would seem to be a 10% decline versus last year.

I'm just wondering is there a like a flushing out of maybe less profitable licensees, or I'm just wondering why such volatility in the business.

And then my second question was also in terms of the margin run rate we should be expecting, should it be more in the 50%s or the 60%s?

Thank you.

Thanks, Kai, for the question.

That's a very important thing to clarify.

So, again when we close the deal with Microsoft, Microsoft will become a more significant licensee on Nokia's intellectual portfolio.

Microsoft has already been a licensee and it's really a net impact one needs to look at and not the full EUR150 million.

That is something with we have not exactly quantified but it is really a net impact and in that you cannot draw the conclusion what you said that call it ex-Microsoft run rate would have gone to 450.

That is not the way this thing works.

Then we are really not giving any margin guidance for the business at the moment but as you can see from the historicals, at least on the gross margin level, it's been fairly stable.

Thank you, Kai.

Carmen, we'll take our next question.

Ehud Gelblum with Citi.

I don't want to beat a dead horse too much, but I do have a clarification I wanted to understand about Advanced Technologies and then a question for you, Rajeev, more on strategy and NSN.

First off, was Samsung -- any Samsung Advanced Technology revenue in the Q4 number that you reported or not?

And then when Samsung finally -- I'm assuming that there is a some run rate number that for Samsung that you put into your 2014 estimate and once the arbitration is completed in 2015, whatever that number might be, my guess is it will be higher because you were probably being conservative for 2014.

The we start seeing that run rate in 2015 and beyond and I'm wondering, do they actually pay you maybe a lump sum for the amount of the new rate for 2014, so do we see that come back?

I'm just trying to understand that.

And then whatever delta team that you are talking about for Microsoft, I'm wondering what are the assumptions that you're putting into that in terms of the unit level that Microsoft actually will be generating this year, and it's just safe to assume that if Microsoft can grow the Lumia base in 2015 and beyond, it should go proportionally relatively with that as that base grows.

And then Rajeev, on the NSN side, you used the word assertive when describing how you're going to be approaching the top line going forward.

With the Sprint and China Mobile deals behind you and a bunch of others that you mentioned, can you just define what you mean by assertive?

Should we be looking for more lower margin deals as you try and build the business or define -- thankfully you didn't use the word aggressive, I like assertive better, but if you can define what assertive means.

Okay, we will try to address the plethora of questions.

Thank you.

I will actually start with the Lumia question because that is an important one clarify.

So we said that as part of the Microsoft transactions there is the IP licensing and that is for 10 years.

And if I recall correctly, that is EUR1.65 billion and EUR100 million of that is an option to continue the licensing into perpetuity but only, of course, for the patents which have been valid 10 years prior.

And that's why the value of the option is kind of like low if you want to call it that at EUR100 million.

It is then basically that EUR1.55 billion for the full period and that means that if the Lumia volumes would grow significantly then at back years proportionate to the volume, it would be lower and, of course, on the front years then it would be higher if you want to use that kind of methodology, to look at the based on volumes but one has to remember there are many different ways to put together these licensing structures.

They can be more volume based, they can have sort of a fixed component and on top of that some volume elements and so forth.

This is not really an exact science but that's anyhow what we disclosed regarding the Microsoft contract.

And then what comes to Samsung numbers in this exact numbers that I really cannot comment further what I have said.

As I said, we have been prudent into the Samsung contract, and in that 600 run rate we have all the relevant information including the net impact from Microsoft.

And what would then come to whatever comes out from the arbitration, then we would need to treat that at the time, of course, regarding whatever the result would then be.

Let me define assertive.

When we talk about being creating any sort of margin for top line, it is extremely selective.

It is only on those strategic deals.

Long-term profitability profile being in the right ballpark is a must and I also meant to say that our technology is much more competitive than before.

So we want to be assertive in the marketplace from that perspective and I think we are clearly seeing that we are coming back in Europe with the deal momentum.

Thank you, Ehud.

Carmen, next question please.

Tim Long with BMO Capital Markets.

Thank you.

Just related to that, I wanted to talk a little bit about some of the new wins that you have highlighted.

There's been a lot in the press about the deals in China and the deal at Sprint being very cost competitive.

Could you talk a little bit about what we should expect from gross margins as some of these big high-profile wins start rolling out and would this be the standard type of thing where it's a little but lower margin initially and then over time they improve?

Thank you.

Thanks for the question.

I don't think we should conclude that we are going in that direction on a bigger scale kind of way.

As I said, selective, strategic long-term profitability profile, but I just want to come back to what we said with regard to guidance.

Short term we see challenging in the first half of the year, and second-half we are driving efforts to return to -- to come to growth but also if we execute well we can end up at the higher end of our long-term 5% to 10% operating margin growth notwithstanding all of these things we have talked about.

Thank you, Tim.

Carmen, for today we will take our final question.

Maynard Um with Wells Fargo.

Hi.

Thank you.

I wanted to follow up on Advanced Technologies and the potential opportunities or the potential and the opportunities you talk about both for the essential and implementation portfolio.

Can you just talk about a little bit more about how you plan to monetize that?

Historically, if you look, competitors haven't exactly been forthcoming in paying out royalties without being forced to.

Can you just talk about the cost of modernization for that patent portfolio?

And you did talk about it being a little bit further away in terms of the thought process of how long it might take to monetize and then the costs associated with that, that would be great.

Thank you.

Thanks for the questions.

On the essential patents as you will note these are patents which one needs to license in so-called friend rates.

And then the question is more how do you define the proportionate friend rates between different companies and that is clearly dependent on the strength of the essential patent portfolio overall, volume of business, where that business has been conducted, and so forth.

There are multiple things impacting that, but again, you need to license with the friend rates and then the discussion is really about what is the balance regarding that portfolio.

Then on the implementation patent, these work in a way that you actually do not have to license.

And of course, many of the implementation patents earlier we have utilized in Nokia's own devices, for example, camera would be a typical thing where you could say okay, this is a such a competitive advantage, we do not want to license it at all.

And in that sense, if then somebody infringes, then you just say no.

No licensing at any cost.

I think that is maybe the way, for example, somebody like Apple would look at some of these things at the moment, not knowing, of course, what they do but that seems to be a bit more the case.

And in our case now regarding the implementation patents, we of course can look at either licensing the intellectual property or then as I said longer term if we create technology which is interesting to other companies and it could either give those other companies possibility to differentiate in the market, would give them time-to-market advantage or cost advantage, then we could also license the actual technology and not necessarily only the intellectual property which would then be, of course, different business model and maybe less to the direction what you indicated, ie, that people wouldn't just want to pay.

Those are the things what we look into and sort of that's the, I would say, overall direction on the AT, but of course it is early days.

Thank you very much, Maynard.

Ladies and gentlemen, this concludes our conference call.

I like to remind you that during the conference call today, we have made a number of forward-looking statements that involve risk 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 results report issued today.

Thank you.

Thank you for participating in today's conference.

You may now disconnect.