諾基亞 (NOK) 2014 Q1 法說會逐字稿

(Operator Instructions)

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

Mr. Shimao, you may begin.

Welcome to Nokia's first-quarter 2014 conference call.

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

Rajeev Suri, President and CEO, effective May 1, and Timo Ihamuotila, EVP and CFO, are here in Espoo with me today.

During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry.

These statements are predictions that involve risk and uncertainties.

Actual results may 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've identified these in more detail in the risk factors section of our most recent 20-F, and in our interim 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, include a detailed explanation of the content of the non-IFRS information, and a reconciliation between the non-IFRS and the reported information.

With that, Rajeev, over to you.

Thanks, Matt, and thanks to all of you for joining.

As you might imagine, we have a lot to cover today, and I want to ensure that we have time to take some questions.

Thus, I will try to be concise and to focus my remarks on two key topics: A recap of today's announcement, and a brief review of Nokia's first-quarter performance.

First, however, a quick personal note.

I am honored to have been named President and Chief Executive Officer of Nokia, and I'm excited by what lies in our future.

I have been with the Company for almost 20 years, and the opportunities in front of us are as great as I have ever seen.

When I look at how we believe technology will change in the coming years, I firmly believe that Nokia is in an excellent position to benefit from those changes.

We can establish leadership in new areas, while still maintaining the strong foundation that we have today.

To be very clear, that foundation is strong.

We start this new journey with an unparalleled IP licensing and creation engine that has new potential in a Company without devices.

A location and mapping business that is already an industry leader, and that has strong growth opportunities.

A networks business that is performing well, and on a path to better top line performance, and a deep innovation capability across all parts of the Company.

We start with excellent growth prospects in emerging technologies, and a strong customer base in more mature areas, with a leadership team that combines disciplined execution with the ability to respond quickly to market opportunities.

And I believe we have the most innovative, most experienced, and most capable employees in any company, anywhere.

We also start with a much stronger financial position.

The Q1 numbers that we announced today, and that Timo will talk about in more detail, show a very different Nokia from the past.

Our earnings profile is strong.

Our financial foundation is robust.

And we have a clear plan to return excess capital to shareholders in a way that will still give us the capability to invest when and where we see the right opportunities.

When we take a step back and consider the future of technology, it is clear that there are opportunities for a strong Nokia.

All of the changes in technology that we have seen in recent years from lower-cost computing and connectivity to better networks, cloud-based data and processing power, the increasing ubiquity of sensor-laden smart phones and other devices are starting to come together and create something much greater than the sum of the parts.

That something has been called the programmable world by sum, and we like that term.

It is a world where physical objects of all kinds, cars, TVs, medical devices, wrist bands, and more, will have built-in computing powers, sensors and connectivity.

These objects will become bound together with intelligence built on vast amounts of data that is processed in the cloud, and used to automate and simplify, to create new services and to improve people's lives in many areas.

Lots of things will be required to enable this world, including connectivity capable of handling massive numbers of devices, and exponential increases in data traffic.

The ability to link the real and virtual worlds with location intelligence, as well as new innovation in areas such as sensing, radio and low power technologies.

For Nokia, this means opportunities for all three of our businesses.

It is now up to us to tap that potential.

To do that, we will focus on developing our three businesses.

Networks, HERE, and technologies in order to create long-term shareholder value.

We intend to optimize the Company so that each business is best enabled to meet its goals.

Where it makes sense to do so, we will pursue shared opportunities between the businesses, but not at the expense of innovation and focus image.

Given this, we have designed the structure of the Company in a very pragmatic way, with a priority of keeping things lean, and limiting layers in the organization.

While this means that the leaders of the network's organization will report directly to me, no one should take away the notion that I will be less involved in our other two businesses.

My focus will be on those areas where the greatest value can be created.

Nokia has appointed a strong group of proven leaders that is diverse in many ways, but similar in their commitment to innovation and superior execution.

Among the group will be Timo, who has done a terrific job in both managing the purchase of 50% of NSN from Siemens, as well as bringing the Microsoft deal to closure.

And [Samuel Hodge], who has been an important part of the turnaround in our networks business.

Here in technologies, we also have Michael Halbherr, and Henry Tirri, both of whom bring deep expertise in their respective areas.

These appointments are effective from May 1.

In the near term, this team and I see five clear priorities.

First, engaging and understanding so we have the right knowledge about each of our three businesses and where there are gaps or new opportunities.

Second, moving rapidly from the high level strategy and vision that we are announcing today to bold and detailed execution plans.

Third, developing and implementing key systems across our business, including performance management, operational governance, talent development and rotation, focused growth practices, cost management models, and more.

Fourth, culture.

Where we will build on best practices across Nokia, and ensure that each of our businesses is enabled for success.

Finally, ongoing performance.

While it is true that we are currently going through significant changes, we will remain focused on our operational performance and meeting the needs of our customers.

This will include moving fast to capitalize on new opportunities, particularly in IP licensing.

While I am sure that you will have questions on these topics, for the sake of time, let me now turn to the first quarter.

From a continuing operations perspective, it was a good quarter, particularly given the fact that Q1 is typically a seasonally weak quarter for the networks and HERE businesses.

Although sales were down both year-on-year and sequentially, non-IFRS operating margins was a healthy 11.4%.

Where the rubber really hits the road, however, is with our three businesses, so let me provide highlights for each of them.

First, networks, where we had a good quarter.

Particularly in terms of profitability.

While net sales were down year-on-year by 17%, when you adjust for negative currency fluctuations, divestments, and customer contract exits, the decline was approximately 6%.

This was a significant improvement when compared to the year-on-year decline of approximately 12% in Q4 2013, with the same adjustments.

While we're not yet satisfied with where we are, I believe this is a clear signal that we are starting to turn the corner on the top line challenges we have seen in previous quarters.

Based on the demand for our products, we believe top line performance could have been modestly higher than we delivered, but we experienced some component shortages in the quarter.

We expect those shortages to continue in the second quarter, and are working aggressively with suppliers to address the issue.

Fortunately, we believe that most of what we did not capture in Q1 will still be available to us in future quarters.

Wins in the quarter included a five-year contract with Vodafone, as part of their Project Spring network upgrade, LTE contracts with Everything Everywhere in the UK, VimpelCom in Russia, Taiwan Mobile, TELE Greenland, and Avantel in Colombia.

Our efforts to improve top line performance did not come at the expense of weaker gross margin and overall profitability in Q1.

As we have said in the past, we will continue to invest selectively in strategic deals that have the right long-term profitability profile, even if they are margin-dilutive in the near term.

Networks' non-IFRS gross margin in Q1 of 39.6% was up 560 basis points from the same quarter last year, supported by a higher proportional of software sales, significant efficiency improvement in global services, and a higher proportion of mobile broadband sales.

As a result, we were able to deliver the strongest gross margin in our history, despite the impact of these strategic deals.

From a segment perspective, our mobile broadband unit continued to show robust growth in LTE sales on a year-on-year basis, and we are now seeing renewed momentum in our core business, driven by demand for mainstream products, as well as our new cutting-edge next generation and virtualized products.

We are also seeing the small cells market begin to move, and we have a number of wins here, as well.

In mobile services, we continue to focus on delivering profitable growth and are expanding our portfolio to cover new areas, but we will not take deals at any cost.

As I have said before, our focus will be on areas where we can add significant value, and be adequately compensated for that value.

While a relatively small business, system integration delivered a year-on-year growth in Q1 of almost 60%, important progress, given the importance of system integration in supporting customers with complex cloud and virtualized solutions.

From a regional perspective, net sales were down in all regions except Greater China.

Europe and Latin America remain particularly challenging, although we have a number of unannounced contract wins in Europe that should help to stabilize our sales in Europe later this year.

The progress is slow, but our win rate is high and we are building back in Europe.

North America remains a priority, although our Q1 sales decline reflected the transition period between a very large roll-out at one customer and an expected large roll-out at another.

Given some of our innovation in the area of virtualization and telco cloud, we are also seeing early interest from some of the region's largest customers.

Finally, our business in Asia and the Middle East have been performing well, with good deal momentum.

Overall, we see a significant lowering of the rate of sales decline across most regions.

This progress makes us optimistic that we can return to growth in the second half of the year.

Our order pipeline and recent deal wins also give us increasing confidence.

HERE had a solid quarter, with net sales of EUR209 million, and a non-IFRS operating margin of 5%.

External sales were up by 13% on a year-on-year basis, reflecting the continuation of encouraging trends in the automotive market.

In particular, HERE benefited from strong European auto sales, as well as from the conversion of a contract to a perpetual license.

We have a very strong position in the automotive market, and we see continued opportunities to grow our business as the market evolves towards assisted driving, and ultimately to automated driving.

HERE is differentiated in two clear ways: First, we are the industry leader in advanced telematics delivered to the cloud.

This is a critical building block for the next generation of location services, and thus, a strategic focus area for our customers.

Second, unlike our main competitor, HERE has a very flexible business model, which enables HERE to bring the benefits of location intelligence to multiple customers in multiple industries across different operating systems, platforms and extremes.

Over the course of 2014, our focus will be on making the right near-term investments to capture the longer-term transformational growth opportunities we see.

We already have the world's best map, and we will invest to build further strength in technologies for smart connected cars, cloud-based services for personal mobility, and a wide range of device types, and location-based analytics for enterprises.

While growth is our absolute priority for HERE, we intend to manage our R&D extremely effectively.

For example, we are leveraging automation in our map creation process to improve our R&D efficiency, but to be very clear, we will not manage the business with the top priority on near-term profitability, as we believe building for future growth is a better path to shareholder value.

The opportunity to create further value for Nokia shareholders through technologies is both significant and an absolute priority for us.

Previously, our mobile devices business shipped a large amount of products, and we utilized our industry-leading intellectual property rights, primarily to obtain favorable net licensing fees, which benefited our cost of sales.

Now that we no longer have a mobile device business, we no longer need to obtain licensing for mobile devices.

But mobile industry participants still require licenses to our standard central patents, thus, we see a significant opportunity to grow our technology business, as existing license agreements with mobile industry participants are renegotiated, and as we seek to enter into new agreements with new licensees.

In addition, we will move to expand our licensing efforts to cover customers and areas beyond mobile devices.

Within the next few weeks, we expect to adjust our licensing offers in several ongoing negotiations to reflect the new situation, and will intensify our ongoing efforts, as well as expand reach to new companies who need licenses under our patents.

Overall, we are in the early stages of properly licensing our intellectual property rights under the new Nokia structure without the mobile devices business, and we will make the needed investments to build, strengthen and continuously renew our technologies business.

While I'm sure that all of you will want to know more specifics about the size of this opportunity, we are not in a position today to provide that.

Other than noting that we are on track to meet our guidance for technologies.

I would also emphasize that in the regulatory process related to the recent Microsoft transaction, there were no concessions made that limit our ability to monetize our intellectual property rights.

We have a world-class licensing team, and we will ensure the team has the resources it needs to realize our ambitions.

Importantly, our licensing opportunities are not limited to our technologies business.

In addition to the approximately 10,000 patent families originating from Nokia, networks is also a significant owner of intellectual property rights with approximately 4,000 patent families and its own independent licensing program.

Beyond licensing of our existing intellectual property rights, we will also continue research and development into new areas that could lead to future products and services, or new licensing opportunities.

The technologies team includes hundreds of world-class scientists and engineers who have driven more half of Nokia's recent patent filings, and many are recognized as leading experts in fields that are essential for enabling the future.

One of my top priorities in the near term is to appoint a permanent Head of the Technologies business who has both technical depth, and the business skills needed to focus the organization on the right areas to best create long-term value.

Before I turn to Timo, I just want to reiterate our starting position.

Yes, we have a lot to do, but that's the opportunity in front of us, but we start on this new journey with many powerful assets.

Among them, three excellent businesses, networks, HERE, and technologies, deep customer relationships, a stellar intellectual property position, a strong financial foundation, a position as one of the world's largest software companies, a proven leadership team, the most innovative employees anywhere, and much more.

As I said, these are exciting times, and I look forward to engaging with all of you in the months and years to come.

With that, Timo, over to you.

Thank you, Rajeev.

Before I briefly take you through some of the highlights for the quarter, I would like to spend a few minutes discussing the main purchase price adjustments related to the sale of the devices business to Microsoft, as well as today's announcement reflecting the planned capital structure program.

So turning to the purchase price adjustments related to the Microsoft transaction, last September, when we announced the transaction with Microsoft, we stated that the EUR5.44 billion total consideration was subject to potential purchase price adjustments to protect both Nokia and Microsoft.

At closing, the transaction price was increased by approximately EUR170 million, as a result of the estimated adjustments made for net working capital and cash earnings.

However, it is important to note that these adjustments are based on estimates which will be finalized when the final cash earnings and net working numbers are available, during the second quarter of 2014.

Over the course of 2014, our focus will be on making the right near-term investments to capture -- Based on this and other adjustments, the gain on sale of closing is expected to be approximately EUR3 billion, of which approximately EUR1 billion is expected to relate to taxable income [pin up].

As a result of the gain, we expect to record tax expenses of approximately EUR180 million, and utilize approximately EUR200 million of Nokia's unrecognized and deferred tax assets in Finland.

In accordance with the agreement with Microsoft, the proceeds from the transaction have been partially offset by the repayment of EUR1.5 billion related to the Microsoft convertible bond.

Related to this redemption, the accounting treatment of the equity component of the convertible bonds negatively affects Nokia's net cash by approximately EUR150 million.

Additionally, we expect to make a payment to Microsoft of approximately EUR250 million in Q2, relating to the timing of platform support payments received, as part of the previous agreement between the two companies.

Even after this adjustment, the platform support payments related to received would still be higher than the minimum royalty commitments paid over the life cycle of the previous agreement.

Taking into account all of the elements I have discussed, we currently expect the proceeds from the sale to add approximately EUR5 billion to Nokia's net cash.

Adjusting for the repayment of the EUR1.5 billion convertible bond, we expect the proceeds to add approximately EUR3.5 billion to Nokia's gross cash.

Therefore, if the transaction had closed before the end of Q1, Nokia would have ended the quarter with gross cash of approximately EUR10.5 billion and net cash of EUR7.1 billion, compared to the reported gross cash of EUR6.9 billion, and net cash of EUR2.1 billion at the end of Q1.

Now turning to the capital structure program announced today.

Having conducted a thorough analysis of the capital structure required to support our strategy, the Board has announced a planned comprehensive EUR5 billion capital structure optimization program, which focuses on recommencing ordinary dividends, distributing excess cash to shareholders, and reducing interest-bearing debt.

I believe this plan will significantly improve our balance sheet efficiently, while simultaneously reinforcing my commitment to continue to effectively deploy capital for future value creation.

Taking you through the proposed program in more detail, there are essentially four parts to highlight, of which EUR3 billion will be cash returned to shareholders, and naturally subject to shareholder approval.

First, the plans announced for the recommencement of ordinary dividend payments for 2013 and 2014, totaling at least EUR800 million.

For 2013, the planned ordinary dividend proposal is EUR0.11 per share, or approximately EUR400 million.

For 2014, the planned ordinary dividend is at least EUR0.11 per share.

Second, a planned special dividend of EUR0.26 per share, of approximately EUR1 billion.

Third, a planned EUR1.25 billion share repurchase program, and finally, plans for debt reduction of approximately EUR2 billion by the end of Q2, 2016.

Once complete, the debt reduction would be expected to result in an annual run rate savings of at least EUR100 million, related to recurring interest costs.

Together with our continued focus on solid business execution, these capital structure enhancements put us on course to return to an investment-grade credit rating, which would further affirm our long-term competitive strength, and support our strategic objectives.

Now, turning back to the quarter, and first some words on our cash performance in Q1.

On a sequential basis, Nokia's gross cash decreased by approximately EUR2.1 billion in Q1, with a quarter-ending balance of EUR6.9 billion.

Net cash and other liquid assets decreased by approximately EUR230 million sequentially, with a quarter-ending balance of EUR2.1 billion.

The sequential decline in gross cash was primarily due to repayment of certain debt facilities, totalling approximately EUR1.8 billion during Q1.

The sequential decline in net cash and other liquid assets was primarily due to cash outflows from discontinued operations, which more than offset the cash inflows from continuing operations.

The cash inflows from continuing operations were primarily driven by networks.

Excluding approximately EUR110 million of restructuring-related cash outflows at networks, continuing operations had cash inflows of approximately EUR260 million.

Discontinued operations cash outflow totaled approximately EUR380 million in Q1.

Then turning to continued operations in Q1.

In the first quarter, Nokia's continuing operations generated net sales of EUR2.7 billion, a decline of 15% year-on-year, primarily driven by networks, and to a lesser degree, from HERE.

Nokia's continuing operations non-IFRS operating margin of 11.4% increased by 330 basis points compared to the year-ago quarter, primarily due to networks, and to a lesser extent, HERE and technologies.

Networks had a good quarter, with a non-IFRS operating margin of 9.3%, up 230 basis points year-on-year, supported by continuous progress in the areas of focus and significant efficiency improvements, as a result of its transformation program.

As Rajeev highlighted, networks' gross margin in Q1 benefited from a higher-than-normal proportion of software sales, which we currently do not expect to repeat in Q2.

Cost control remains very much in place, with non-IFRS operating expense down 8% year-on-year, despite ongoing increases to our total capacity in R&D.

Turning to the segments, mobile broadband showed year-on-year growth for the first time since the first quarter of 2013.

While the growth was small, it is important to note that in Q1 of 2013, mobile broadband had a very large roll out in the US and Japan.

Mobile broadband net sales in the first quarter were adversely affected by shortages of certain components, which we expect to continue to impact our business at least through the end of Q2.

Global services had its best-ever first-quarter non-IFRS operating margin, although net sales were down approximately 25% year-on-year, reflecting fewer large-scale networks rollouts, and the continued impact from customer contracts and country exits.

Turning to HERE and technologies, reported net sales of HERE were EUR209 million, down 3% year-on-year.

The year-on-year decline was due to significantly lower sales to our discontinued operations, partially offset by a 13% increase in external net sales.

In Q1, HERE had sales of new vehicle licenses of 2.8 million units, up from 2.2 million in the year-ago quarter, an increase of 27% year-on-year, and representing well over 50% of external net sales in the quarter.

HERE's non-IFRS gross margin in Q1 was 77.5%, up 700 basis points, compared to the year-ago quarter.

The year-on-year improvement was primarily due to a benefit related to the conversion of a contract to a perpetual license, and an overall positive mix shift towards sales to vehicle customers.

In Q1, HERE's non-IFRS operating margin was 4.8% up from negative 2.3% in Q1 2013.

We are increasing our investments during 2014 in growth areas such as the connected car, autonomous driving, and next-generation maps, in order to build on HERE's industry-leading position.

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 technologies.

Q1 net sales were EUR131 million compared to EUR123 million in the year-ago quarter.

The year-on-year increase was primarily due to higher intellectual property licensing income from certain licensees, primarily related to new agreements.

This increase was partially offset by the absence of an intellectual property rights divestment transaction that benefited the first quarter in 2013, and declines in licensing income from certain licensees, that experienced lower levels of business activities.

In Q1, technologies' non-IFRS operating margin was 65.6%, an increase of 630 basis points year-on-year.

The higher year-on-year non-IFRS operating margin was driven by higher net sales and lower operating expenses.

As Rajeev commented, our IP licensing business is an area where we already have a proven track record and a successful business strategy that we will continue to build on.

As an example of this, during the first quarter, we entered into a patent and technology collaboration agreement with HTC.

HTC is making payments to Nokia, and the collaboration involves HTC's LTE patent portfolio, further strengthening Nokia's licensing offering.

We believe this agreement validates our implementation patents, and enables us to focus on further revenue-generating licensing opportunities.

Going forward, as our needs to cross-license our patents will significantly lessen, our preference will be to reach agreements on a running royalty basis through negotiated agreements or arbitration, rather than lump sum payments through more complicated and expensive litigation processes.

Finally, now that Microsoft has become a more significant intellectual property licensee, we continue to expect technologies' annualized net sales run rate to increase to approximately EUR600 million during 2014.

And then quickly a couple words on financial income and expense.

In Q1, this was an expense of EUR74 million compared to EUR111 million in Q1 2013.

On a year-on-year basis, the improvement was primarily due to lower net foreign exchange-related losses, partially offset by higher interest expenses.

In conclusion, I'm pleased with the financial progress we have made in all three of our continuing businesses during Q1.

We have three strong businesses, and a solid financial foundation.

In addition, the announced plans for a EUR5 billion capital structure optimization program is expected to significantly improve our balance sheet efficiency, while simultaneously reinforcing my commitment to continue to effectively deploy capital.

And finally, on a more personal note, I am committed to Nokia, and think we have good opportunities to create further shareholder value with the asset base we have.

Now I will turn the call back to Matt for Q&A.

Thank you, Timo.

Just very quickly, I wanted to say for the transcript that HERE gross margins year-over-year increased by 200 basis points.

With that, so now for the Q&A session, Carmen -- the analysts, let's limit yourself to one question only, please.

Carmen, please go ahead.

(Operator Instructions)

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

Congratulations for the conclusion of the deal, and good results, overall.

I would just like to ask a little bit about the geographic pattern of the recovery at NSN.

You mentioned Europe being a little bit better into the second half.

Do you see generally a more constructive approach if you'd been operative towards the investment?

And does the contract with Sprint also play a role in the recovery in the second half?

Thanks a lot.

Thanks, Alexander.

We see our win rate and deal momentum in Europe totally point to one of the drivers of this potential growth in the second half, China being the other, and Sprint, you accurately pointed out is the third as well.

Great.

Thank you, Alexander.

Carmen, we will take the next question.

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

Rajeev, congratulations from me for your appointment to the CEO position.

I wanted to follow up on the networks business.

For the second quarter with supply constraints, should we expect below-normal seasonal patterns?

And can you discuss what the greater coverage mix, would operating margins fall below your target of 5% to 10% in Q2, and recover in the back half of the year, given stronger growth expected later in the year?

Thank you.

Thank you, Mike.

And thank you also for the personal congratulations.

I appreciate it.

No, I think we have not given any guidance specifically to Q2.

So I wouldn't necessarily conclude on the fact that it would fall below 5%.

That's all I can say for Q2.

Yes.

Maybe for the Q2, we simply said we are expecting to have a bit less proportion of software sales compared to Q1.

We expect that, all other things equal, to be a negative driver.

We are definitely not seeing any particular level of profitability with that.

Thank you, Mike.

Carmen, next question, please.

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

I would like to add my congratulations to Timo and Rajeev.

My question really is how you came to the conclusion that this was the right level of distribution?

The reason why I'm asking the question is that by my math, probably in a year's time, you will still have about EUR5 billion of net cash in your balance sheet, which is ballpark about 25% of your market cap.

Why is that the right number?

I understand that some comments this morning about being of a crisis mode, and looking what other companies have done, but Nokia don't seem to be in a crisis mode.

You are now highly profitable.

As Rajeev said, you've have got some very strong assets.

You've got -- your dividend policy actually suggests you have confidence in the future.

So why not distribute more?

Will you be revisiting it on annual basis?

How should we think about that?

Many thanks.

Okay.

Thanks, Kulbinder.

First of all, I have said earlier as well so the Board has conducted a very, very thorough analysis on capital structure optimization program, which consists of both returns to equity holders but also on reduction of credit.

And we really have gone through this in four ways.

So we have a [capacity] for Microsoft, we have a capacity for industry (technical difficulties).

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

Congratulations, Rajeev.

I have a quick question on the networks business itself.

You talked about the abstract growth that you're going to have in network, and clearly second half, you're talking about growth in networks.

Can you talk about the non-organic growth in networks in the sense are you looking at investing in particular areas of networks in terms of M&A because what you have at this point is mainly a radio business?

Hello?

One moment.

Ladies and gentlemen, please hold for one moment.

We are experiencing technical difficulties.

Please go ahead.

So it's Matt Shimao.

We're just going to resume answering Kulbinder's question.

Thanks for the question.

And as I said, the Board has conducted a thorough analysis on the capital structure optimization program.

And as part of that analysis we have looked at possible industry shocks, also possible micro shocks.

You can compare this to maybe what happened in the industry in the early 2000s, or what happened in the market 2008-2009 time frame.

We have built in some room for M&A.

As we have said earlier, we have also taken into account the credit rating and our aspiration to return to an investment-grade rating.

With of these parameters, we think for this point in time, the capital structure optimization program strikes the right balance, and that's why we are going ahead with it, or proposing it to the shareholders.

Great.

Thank you, Kulbinder.

Carmen, next question please.

The next question is from the line of Sandeep Deshpande.

Congratulations, Rajeev on your appointment.

A quick question on the networks business itself.

The majority of the business you have in networks today is a radio business.

You have talked about growth overall.

In terms of the non-organic growth, can you make comments on where you think that Nokia has its own capabilities, or may have external capabilities in growing outside radio?

Yes.

Thanks, Sandeep.

Of course we have the radio business.

We also have the core business, including the next generation core, and of course, we have the [services] business to clarify that point.

We haven't yet pinpointed when we would look at M&A and at what point we would tap inorganic opportunities.

We look at probably small things that would be disruptive, and could add -- find revenue synergies to the scale of our channels.

That's what our thinking is, I wouldn't pinpoint yet, because our thoughts are not firm on that.

Thanks.

Thank you, Sandeep.

Operator, next question, please.

Next question comes from the line of Pierre Ferragu with Bernstein.

I have a follow-up on the previous questions on growth in equipment.

I thought, if I remember, Rajeev, hearing you talking about an addressable market in mobile that is more or less ex-growth -- that doesn't grow much.

I was wondering beyond this year, if you think you are able, with your position in the markets, to actually gain market share in a flat market, and that's where you would see the multiplying growth coming from.

I'm not talking about this year.

I'm more talking about on the three to five-year horizon, or whether it's more about actually expanding your addressable market?

Or lastly if you think you are better exposed to higher growth drivers than your peers.

And then maybe an additional question on your -- on your core business.

We hear a divergent strategy between you and your main competitor today, where they seem to be spending much more on research and development, trying to expand the product where you kept your growth in new areas.

Could you please maybe give us your perspective on how you have made choices in terms of where you invest, where you don't invest, in terms of R&D, because today you have a much lower R&D budget than your main competitor.

Thank you.

Thanks.

Just to the R&D, I will answer that one quickly.

I think we had 16% of the networks business as percentage of net sales.

That, we believe that is competitive.

We have a higher ratio of low cost sites in the world that have been transitioned to some three years ago, and are quite productive, now.

That gives us more capacity.

We have had a higher focus on automation and expanding to Agile R&D development, to get more productivity and capacity.

So I think when you look at the man hours that we get, we believe that we are quite competitive.

That is really the metric to be focused on.

For growth, yes, we have said flat to modest growth is how we see the market for the net growth in CapEx.

But we think that we have the required scale.

And I think Q1 proved that again.

Even in a seasonally weak low quarter, with the fact from dilutive deals that we deliberately chose to go for, we could absorb that and yet produce a good growth margin as well as good operating margin.

We have that operating leverage and we have the scale.

As I have pointed to in the past, radio is the biggest driver of mobile broadband.

That is the most sticky piece, and that brings in core, and rest of situation services with that.

And if we look at the market, the top three players hold a commanding share of the market.

I believe the answer is yes, that we can continue to get share even in a low-growth market.

If I point to just a couple of things, the rate of decline is slowing, as we have seen in the current quarter.

And we believe that works, the mobile broadband business, even though it shows out on the trend.

We have a strong win rate, which will not just impact the second half but the longer term as well, and we have an improving pipeline of opportunities.

Thank you very much, Pierre.

Carmen, we will take our next question, please.

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

Congratulations to everyone.

On IPR, I know Rajeev, you said, you have limited scope to talk about numbers, and things like that.

I was wondering if perhaps you could just shed a little bit of light on implementation patents.

I think we all assume that most of the revenues come from standard to essential patents.

On the implementation side, I assume it's the large consumer electronics companies that you would chase after.

I think my initial reaction would be, I would struggle to see an Apple or a Samsung materially license some of those implementation patents.

Perhaps you could give us a sense of the addressable market, and perhaps the timeline around when you might be in a position to sign material contracts, and how that might work for you on the financials, even if you can't quantify it?

Thanks.

Thanks, Stuart.

We will rapidly seize new opportunities for increasing licensing deals, particularly now that the devices and services business is not with us.

So there is no need for these cross licensing deals.

We will do so both on standard essential patents and implementation patents.

This HTC deal is one example off that.

The third area of course is to utilize our strong brand, to extend that to a reach of certain devices, that might be possible as well.

So much of it is going to be longer term, cash flow to be realized, the guidance that we have given, that we continue to expect technologies annualized net sales run to increase to approximately EUR600 million during 2014 remains.

Maybe if I could make a quick comment here.

Basically, the majority of the patents what we have come from innovation, which we are building for our own devices business, and which we now know more, we'll need to utilize for differentiation.

Of course we will try to make strides in the consumer electronics as well.

But I think it would be incorrect to assume that these implementation patents would not be valuable, possibly for companies like Samsung and Apple as well.

There are of course, other products.

We think that the HTC deal which we announced during this quarter really validates the value of our implementation patents, and we will, of course, have a licensing program available for essentials, but also for implementation patents.

Thank you, Stewart.

Carmen, next question, please.

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

You called out some software sales in Q1, and I just wondered whether you could talk about the sustainability of gross margins through the year for networks, in light of that.

Maybe you could give us a sense of how much software was as a percentage of your revenues in Q1, and what you expect for the rest of the year?

Thank you.

Gareth, we weren't able to make out much of that.

Can you please repeat your question?

Can you hear me now, Matt?

It's better, yes.

So my question is on the software and on the sustainability of gross margins.

I think in Q1, you called out that software was very strong.

I just wondered whether you could give us a sense of how much software was in the mix, and how much you expect it to be in the mix, going forward?

Thank you.

Yes.

Thanks, Gareth.

Q1 had benefited from unusually high Japan software sales with excellent margins.

Even without that, it was better than the run rate.

And we have seen also the impact of some [diving] deals from China.

And we might see an impact of a handful other strategic and, again, selective valuative deals to come, that may have some cumulative impact in future quarters.

As I have said before, we go for those in a very targeted way.

We must have good long-term profitability profile.

We seek to manage those very carefully, to limit the impact of profitability.

And if we take a few handfuls, the rest of the machinery around our pricing controls will work more efficiently, because that's what we continue to be focused on.

So with those factors in mind, we have given the guidance that we think that we feel that profitability towards the higher end of the rate of the long-term target of 5% to 10% is achievable.

Thank you, Gareth.

Carmen, next question, please?

Your next question comes from the line of Chris Hogg with Merrill Lynch.

Congratulations again to Rajeev.

So just sticking with gross margins.

I sense that these were obviously very strong, as despite strong year-over-year growth in China, you benefited from the strong software sales in Japan and better gross margins in services.

So whilst you've guided to a lower proportion of software sales impacting margins in the second quarter, to what extent do you see cost efficiencies in services as a structural fair wind for your gross margin profile?

Yes.

Thanks, Chris.

As I said, we have seen some impact from directly through China and we might see an impact from a handful of other strategic deals, but we have taken that impact in future quarters, but of course, we will seek the manage price erosion in the rest of the world.

And to your point on services, we see continuous improvement there as well that might support us.

Such as in expanding the scope of what we do remotely on the percentage share of growth activity in our services operations.

Thank you, Chris.

Carmen, next question, please?

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

I would like to follow up on Pierre's very good question about the long-term strategy vision for NSN.

It looks like really the market is really moving more towards software, software-defined networks, IMS, applications, more IP.

It's true that you have a partnership with Juniper, but you don't really own it.

And also I think in your introduction, Rajeev, you were talking about the Internet of Things driving growth for data, which probably is not driving growth [opposes if you do it right].

I think do you have enough -- do you have enough R&D budget?

Do you have enough scale to invest in all those new things?

And also, if the Internet of Things really take off (inaudible), maybe it's going to be more about 5G which is going to cost a lot as well to develop for use.

Do you have the same -- I mean, you don't have the same budget as [UPS] and Ericsson, or Huawei.

So what can you do really to compete?

I understand you want to be in the top three.

But is there room for a number three player in this market, really?

Thanks, Francois.

Yes, there is room for three players, and again, I'll reemphasize the percentage of our low-cost R&D as a percentage of total R&D.

I think in terms of the man hours, that is a significant number.

It's over 50% of our R&D, and actually below that, that we have a low cost site.

So we have always been focused on capacity rather than sheer R&D dollars because we knew we had to compete differently, and I think that's worked out well for us.

On then on your specific comment on spending and virtualization, in fact, if you look at our R&D budget, we are increasing our spending in LTE, small cells, virtualized core, IMS, customer experience management, new areas of OSS, liquid applications, and all of that, whilst reducing the total legacy budget, and that's a very decent offset to do all of the time.

We are not budget constrained.

We're not even capacity restrained, as such, in that market.

I would just give you one example.

IMS, in fact, we have the world's biggest IMS installation in the US with a lot of capacity on it that nobody even comes close to.

We have invested there, and it works very well.

So then there are other areas of the portfolio that we could partner for.

And we will do so, as I said in my remarks back in Barcelona.

We will do so to make sure that we play the ecosystem game in places like telco cloud and virtualized core.

Thank you, Francois.

Carmen, we will take the next question, please.

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

Maybe just on advanced technologies, the EUR600 million.

I guess the thought is that there's some non-payment or under-payment.

So how should we think the ramp of legal expenses on a going-forward basis to enforce collection?

And likewise, if there are a lot of patents which are not being used, which you want to monetize, for example the NSN patents, should we think of a ramp in R&D to drive this business going forward?

And then conceptually, how we should think about cash flow overall for the business?

Thank you.

Okay.

So on technologies, so first on the legal expenses.

I mean, it's true that the OpEx was down year-on-year in technologies.

That was driven both by actually legal as well as timing of certain R&D projects.

Clearly, as Rajeev says, we are willing and able to invest more to drive higher value from the technologies licensing business, and we are planning to expand the team accordingly.

Then when it comes to cash flow, in this business it is quite typical that are payments when you make a deal from the past, and in that sense, cash flow can be lumpy from that perspective.

I don't think I have much more color to give on that.

On the actual patent portfolio, yes, it is correct that we actually have three portfolios.

We have the, let's call it, Nokia portfolio coming from professional services.

We have NSN portfolio, but HERE has also a patent portfolio, and we will, of course, do our best to optimally utilize these three.

And one example, for example, is that there can be a situation where networks would require a cross license but one would definitely not require cross license against the Nokia portfolio.

Just to give you an example.

Thank you, Mark.

Carmen, we will take our next question, please.

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

I have a couple of questions.

First, Rajeev, you talked about some -- that you're gaining share in the marketplace.

Maybe you can talk a little bit from a competitive standpoint, where you're seeing more vulnerable right now, or a little bit on the weaker side in the marketplace, against which you're having success.

A question to Timo on the interest expenses.

You now clearly have paid down debt, and you have the Microsoft cash coming in.

And your hedging activity, I assume, will have to significantly decline, now that you don't have handset business.

What is the best way to model going forward interest expense income?

First, the network question.

We're bouncing back in Europe, based on our deal momentum and win rate that we have.

And in China, of course, in terms of autos doing better than what we expected, in terms of the LTE share.

And of course, rent, as we already commented, is a meaningful driver for us in the second half.

As we build on some of the share opportunities that we are building back on.

Okay.

And then on the interest expenses, first of all, right, we paid down debt about -- not about, but exactly EUR1.75 billion during Q1.

And then in addition, we said that we are expecting to reduce our gross debt by about EUR2 billion during the coming two years on this capital structure optimization program.

That will be approximately EUR100 million down on interest costs.

And then if we look at this from hedging, so if we have less hedging happening, but we will still have hedging both against our balance sheet items, as well as mainly against NSN business and there will be some volatility on the income and expense hedging.

But I would expect that to go down a bit.

Another way to look at it, if we reduce with this EUR2 billion, we now have about EUR3.5 billion -- yes, about EUR3.5 billion left.

So we would have about EUR1.5 billion after that, and then you can model interest costs somewhere around that final amount, after we complete the debt reduction on the capital structure optimization program.

Thanks, Ittai.

Carmen, we will take our next question.

Your next question comes from the line of Ehud Gelblum with Citi Investments.

So just quickly on the advanced technology and IPR side, aside from adding in Microsoft which happens now as we go forward, are there any other large ins or outs that happen this year?

If you can comment on, was HTC unusually large for some sort of catch-up or something in the first quarter?

Was that already at run rate?

I'm looking for, aside from Microsoft, any large ins or out that's we should be looking for, for the rest of this year?

As well as next year, aside from Samsung again, which is a separate issue that we seem to have our arms around.

On the network side, Rajeev, you were talking about share gain opportunities.

Do those in your mind require to you have a larger presence at the two largest wireless carriers in North America down the road, or are you looking at share gain opportunities that you can do, without necessarily having to crack into those two?

And then finally, again, on the network side, I have one more that I thought was interesting, but I can't think of it now.

I think we're going to go with your two.

Yes.

Thanks.

On the technology side, on IPR, we can't give any exact guidance on certain deals happening or not happening.

But what I can say is that now when we have exited the device and services business, we will plan to go more after variable rate deals, and we will try to do this more by being able to agree, a call it Nokia friend rate with maybe certain kind of volume adjustments.

So it will be a cleaner business model, in that sense.

And that is what we are aiming to do with the new licensees, which will come to either renegotiation or through negotiation with the companies with whom we would not yet have a license.

Yes.

Thanks for the [debt growth] question.

Indeed, if we can return to growth in the second half of the year, then that would come with share gains.

And it would be achievable, even without a stronger presence of the two carrier deals, specifically mentioned.

Thank you.

We have used our time for this quarter for the Q&A session.

So ladies and gentlemen, this concludes our conference call.

I would like to remind you 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 in the risk factor section of our most recent 20-F and in our interim report issued today.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.