諾基亞 (NOK) 2014 Q2 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 Q2 2014 earnings conference call. (Operator Instructions).

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

Ladies and gentlemen, welcome to Nokia's second quarter 2014 conference call. I'm Matt Shimao, Head of Nokia Investor Relations. Rajeev Suri, President and CEO, 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 have identified these in more detail in the risk factors section of our most recent 20-F for 2013 and in our interim report issued today.

Please note that our press -- 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 the non-IFRS information and a reconciliation between the non-IFRS and the reported information.

With that, Rajeev, over to you.

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

It is a pleasure to speak to you today after my first quarter as CEO and after what was a very positive quarter for the Company.

Before I go into the details of our performance, however, I thought I would provide an update on the five priorities I set for my first 100 days and which I outlined on the call last quarter.

The first of those priorities was engaging and understanding. Since being appointment, I have met with senior customers, including the CEOs of Deutsche Telekom, Vodafone, China Mobile, and SoftBank. I have talked to more than 15,000 employees in town hall meetings on three continents. I have spent time with government leaders, including the Premier of China and the Prime Minister of Finland. And I've engaged with many of our largest investors in San Francisco, Helsinki, London, and New York, representing about 30% of our shareholder base.

These meetings have helped give me a perspective on how we are viewed today, our strengths and weaknesses, and the hopes and concerns people have for our future.

The second priority was to move rapidly from the high-level strategy and vision that we announced last quarter to bold and detailed execution plans.

We will share more about the work that we are doing in this area at the Capital Markets Day that we are planning for November. But, I am confident that we are heading in the right direction.

Of course, we are not waiting to act. To take just one example, we have recently announced five acquisitions, Medio and Desti for HERE and Mesaplexx SSE Wireless and a 3D geolocation solution from NICE Systems for networks.

These are the kind of deals we like, modest in size, relatively easy to integrate, and providing access to new technology that we can scale up, or execution capabilities that bring us closer to key customers.

My third priority was to develop and implement a number of key systems across our business. I am pleased that we have already begun to implement a new operational governance model, including a Companywide performance management process.

These steps will be codified into what we are calling the Nokia Business System, which is designed to ensure that we have best practices based upon common processes, spanning the whole Company in a number of areas that include talent development, M&A integration, cost management, and LEAN methodologies.

The fourth priority was culture. Today, we are taking the important step of sharing our new company values with almost 2,000 of our senior leaders, who will then help cascade those values to all employees.

By September, we expect to be well on track with our overall cultural transformation, where we will focus on a common culture across the entire organization with some differences between the businesses that reflect their unique circumstances.

Finally, I said we could not and would not lose sight of our operational performance. And I think the results of the second quarter show that we have kept our focus and discipline, even during a time of significant change.

So, let me now turn to those results. At the Group level, we delivered net sales from continuing operations of EUR2.9 billion, a 44% non-IFRS gross margin, and a non-IFRS operating profit of EUR347 million or 11.8%.

Of course, the Group-level results reflect the performance of our three distinct businesses. And I will cover each of those today.

I will spend most of my time on networks, as I know some of you have questions about its strong margins and what they imply for the future.

Networks, which comprises our mobile broadband and global services business units had what was in my view an excellent quarter. We showed very clearly that we could improve our top-line performance while still delivering strong profitability.

This is, as I think you know, no small achievement in our sector. And we believe that we continue to outperform the competition on a number of metrics.

While Timo will cover cash performance, let me provide some perspective on other key areas.

Second quarter net sales for networks at EUR2.6 billion were down year on year. But, when you adjust for currency fluctuations as well as divestments and country and contract exits consistent with our strategic focus, the business would've actually grown by 1%.

Pleasingly, net sales in our mobile broadband business unit were up 6% year on year. This performance was driven by strong sales not just in LTE, but also by double-digit growth in core sales, which typically are more profitable than radio.

In recent quarters, we have seen our core solutions, including those in fixed mobile convergence, gain increased traction in the market.

We still have work to do to get global services back to growth after our many contract exits during the last two years. That said, I am confident we are making progress.

Take the example of managed services. We can now say that Nokia Networks is very much back in the managed services businesses. We have won 10 new managed services deals this year. And while that is less than at least one of our competitors, we remain disciplined about limiting our efforts to those contracts where we can generate significant value for our customers and an adequate return for ourselves.

We like managed services and can operate very effectively in this business with our excellent global delivery centers but are happy to leave to others those deals that do not make sense to us.

On a regional level, two out of our six regions, Asia-Pacific and Greater China, were back to year-on-year growth. And all regions grew sequentially.

The large LTE rollouts in China are proceeding well for us. And we believe we have won the largest share of those rollouts of any foreign vendor.

Europe, which has been a difficult region for us, declined year on year. That said, we believe that momentum is coming back. The value of new deals won this year was well above that for the same time last year. Our customer satisfaction scores have improved. And our technology is strong, as shown by our recent delivery of telco Cloud-based voiceover LTE services to three major customers in the region.

North America was largely between major rollouts, although Sprint deployment activities are likely to accelerate in coming quarters.

As we transformed our business in the Middle East and Africa, we saw a decline in net sales on a year-on-year basis. But, in recent quarters, our deal momentum in the region has strengthened significantly.

Latin America remains our most challenging region, partly a result of regulatory changes in Mexico, but also partly due to our earlier overreliance on services in the region and high impact of exits from those projects during our transformation.

We are working hard to turn the situation around, but no one should expect an immediate rebound there.

We believe that demand for our networks, products, and services were slightly higher than we were able to deliver as we continue to face some component shortages in the second quarter.

While I recognize that some of our customers are not yet satisfied, we are making progress. And the trend improved from the first quarter to the second.

If you look at the progress in networks over the last three quarters, we have shown a consistently better top-line trend, have slowed the rate of decline, and now expect to return to growth.

Non-IFRS gross margin was a very strong 38%. Operating expenses remained well under control with a 10% year-on-year decline. And non-IFRS operating profit margin was an excellent 11%.

In addition, we had positive operating profits on a reported basis for the eighth consecutive quarter. This performance bodes well for the future. And as you will have seen from our press release today, we expect the full-year 2014 non-IFRS operating margin for networks to be at or slightly above the high end of the targeted long-term non-IFRS operating margin range of 5% to 10%.

While this shows optimism, we continue to take a balanced view for the second half of 2014, given that some of the expected sales increase will come from the strategic but margin-dilutive deals that we have mentioned previously.

Overall, it is my view that these results, showing a good balance between growth and profitability, are being driven by our unique operating model and strong emphasis on execution excellence and continuous improvement.

Part of this includes an ongoing focus on our cost position, which we believe gives us flexibility in the market.

Even if the major restructuring in networks was completed at the end of 2013, we continue to be relentless -- .

-- Okay. Now, we're hearing some feedback in the room. Hello, operator? We're hearing bad feedback in the room. It's hard for us to continue.

Your line is breaking up. (Operator Instructions).

Whoa, whoa, whoa, we're not done with the comments.

Your line is breaking up, sir.

Can we start the -- can you call us back?

Yes, I can call you right back. One moment.

Please continue, sir.

Can you hear us okay?

Everything sounds good.

Okay. (inaudible).

Where left off? Even if major restructuring in networks was completed at the end of 2013, we continue to be relentless in driving waste from the system so that every euro we spend is invested as efficiently as possible.

We have specific programs underway in a number of areas, including deploying lean and kaizen methodologies across the Company and increasing automation.

We believe that our cost effectiveness is one of our most powerful competitive advantages in networks. And we will not lose sight of that in the future.

Let me now turn to HERE, which is also making progress, consistent with the goals for the business that we have discussed in the past.

Net sales of EUR232 million were roughly flat year on year, partly reflecting lower revenue from the former devices and services business. Non-IFRS operating profitability was at the breakeven level, reflecting our continued investment in future growth opportunities.

In the second quarter, we saw some positive signs. HERE's leadership in the connected car space continued, with automotive-related sales up year on year.

In the market for embedded navigation systems -- .

-- I'm sorry, Rajeev. We need to stop because we're getting e-mails in fact that call is still not working. So, I think we'll try to have the operator call us again (inaudible).

Yes, Mr. Shimao. One moment, and I'll dial back out to you. If you'll go ahead and disconnect this line, I'll dial back out. Participants, please hold from one moment as we are experiencing technical difficulties.

Please continue.

Ladies and gentlemen, this is the operator. Today's conference is scheduled to resume momentarily. Until that time, your lines will remain on silent hold. Please do not disconnect. Again, your lines will remain on silent hold. Please do not disconnect. The call will resume momentarily.

Ladies and gentlemen, this is the operator. Today's conference will resume momentarily. Until that time, your lines will remain on silent hold. Please do not disconnect. Again, today's call will resume momentarily. Until that time, your lines will remain on silent hold. Please do not disconnect. Thank you for your patience.

Ladies and gentlemen, this is the operator. Today's conference call will resume momentarily. Until that time, your lines will remain on silent hold. Please do not disconnect. Thank you for your patience.

Okay. Please continue.

Okay. So, we're back. Our apologies. It seems it's super-hot here in Finland, and we might have had a temporary electricity breakdown. So, it took us a while to get back.

So, let me continue from the guidance section that I was talking about in networks so nothing's been missed.

So, as I said, this performance bodes well for the future. And as you all have seen from our press release today, we expect the full-year 2014 non-IFRS operating margin for networks to be at or slightly above the high end of the targeted long-term non-IFRS operating margin range of 5% to 10%.

While this shows optimism, we continue to take a balanced view for the second half of 2014, given that some of the expected sales increase will come from the strategic but margin-dilutive deals that we have mentioned previously.

Overall, it is my view that these results, showing a good balance between growth and profitability, are being driven by our unique operating model and strong emphasis on execution excellence and continuous improvement.

Part of this includes an ongoing focus on our cost position, which we believe gives us flexibility in the market.

Now, even if the major restructuring in networks was completed at the end of 2013, we continue to be relentless in driving waste from the system so that every euro we spend is invested as efficiently as possible.

We have specific programs underway in a number of areas, including deploying lean and kaizen methodologies across the Company and increasing automation.

We believe that our cost effectiveness is one of our most powerful competitive advantages in networks. And we will not lose sight of that in the future.

Let me now turn to HERE, which is also making progress, consistent with the goals for the business that we have discussed in the past.

Net sales of EUR232 million were roughly flat year on year, partly reflecting lower revenue from the former devices and services business. Non-IFRS operating margin was at the breakeven level, reflecting our continued investment in future growth opportunities.

In the second quarter, we saw some positive signs. HERE's leadership in the connected car space continued, with automotive-related sales up year on year.

In the market for embedded navigation systems, HERE grew unit sales of new vehicle licenses by 22%. Quite simply, more new cars are driving out of the showroom with HERE maps onboard.

Enterprise sales remain small, but we see potential in this area and added some new deals in the quarter, including with companies such as Accenture and Telia Sonera.

The HERE location platform is also being used to power the recently announced Amazon Fire Phone, which we think is an exciting development.

As I said on the last call, our focus when it comes to HERE is on making the right near-term investments to capture longer-term growth opportunities. As I have immersed myself in the HERE business over the last 100 days, my view on the importance of these investments has not changed.

I do believe, however, that HERE could benefit from some further operational efficiency improvements that could expand overall R&D capacity and enable investment in new areas.

As we take steps in this direction, we will do so prudently to ensure we maintain our focus on growth.

Then onto technologies, where the biggest news is the announcement we made earlier today that Ramzi Haidamus will join Nokia as the President of Nokia Technologies.

Ramzi is the right person for this business. In various roles at Dolby, his previous employer, he built very strong intellectual property and technology licensing activities while also playing a key role in incubating and growing new businesses.

He will join us in early September, and I'm looking forward to his contribution to taking the performance of our technologies business to the next level. Paul Melin, who runs our IP licensing activities, remains in place. And he will report to Ramzi.

While we have a strong intellectual property business today, we continue to believe it can be better now that we are no longer in the devices business. This is a belief that is strengthened when we see at least one major competitor generate more IP revenues, even if our view is that our industry-leading portfolio is the result of both broader and deeper investments in mobile and adjacent technologies.

I know there are a number of questions about what we will do in technologies in the future beyond the licensing business. Some of you may have seen us experimenting with a publicly available beta of what we called the Z Launcher, which provides a constantly learning predictive interface for Android phones.

While we continue to look at many options, we do so in a methodical way and will not be rushed into providing a definitive answer in any direction. Ramzi will continue the assessment process as well as ensuring we maintain our venture-capital-like funding model. That way, we can minimize risk while also keeping the spirit of innovation alive.

Before turning to Timo, I will just close by saying that my first 100 days have strengthened my confidence in our future. We have shown that we can balance top line and profitability well in networks. There are opportunities for both growth and efficiency improvements in HERE. We can license our intellectual property to new customers and expand agreements with existing ones over time and more.

With that, Timo, over to you.

Thank you, Rajeev. I would like to start by spending the next few minutes taking you through our cash performance during Q2 as there were quite a number of significant drivers that impacted our cash flow and quarter-ending cash balance.

On the Microsoft transaction, last quarter, I provided an initial estimate of the purchase price adjustment relative to the original EUR5.44 billion total consideration as well as estimates for other transaction-related items.

It total, we estimated that the net proceeds from the transaction would add approximately EUR5 billion to Nokia's net cash.

While we confirm this estimate in today's release, due to the timing of certain payments, the net proceeds received in Q2 added approximately EUR4.8 billion to Nokia's net cash with the remaining balance expected to be received during the second half of 2014.

On a sequential basis, Nokia's gross cash increased by approximately EUR2.2 billion with a quarter-ending balance for EUR9 billion. Net cash and other liquid assets increased by approximately EUR4.4 billion sequentially with a quarter-ending balance of EUR6.5 billion.

Compared to Q1, the primary driver of the increase in our net cash balance was the EUR4.8 billion benefit from the Microsoft transaction, partially offset by approximately EUR400 million of cash outflows, of which approximately EUR300 million related to continuing operations, and EUR100 million related to discontinued operations.

Looking at the approximately EUR300 million cash outflow from continuing operations, this was primarily driven by two factors. Approximately EUR400 million of cash outflows related to net financial income and expenses, which included cash outflows related to the early redemption of Nokia Networks' borrrowings as well as net cash tax outflows and capital expenditure, and approximately EUR100 million of cash generated from operations, primarily related to Nokia Networks, where strong underlying profitability was partially offset by cash outflows related to net working capital.

The cash outflows related to net working capital were primarily due to incentive payments related to a strong performance in 2013, an increase in inventories, and approximately EUR90 million of restructuring-related cash outflows, partially offset by an increase in deferred revenues and payables.

The discontinued operations cash outflows of approximately EUR100 million were related to the period between the end of Q1 2014 and the closing of the Microsoft transaction on April 25th.

In addition to the factors affecting Nokia's overall net cash in Q2, gross cash was impacted on a sequential basis by the repayment of the Microsoft convertible bond as well as the redemption of materially all of Nokia Networks' [debt] (inaudible) during Q2.

Then a few words on OpEx. Continuing operations non-IFRS OpEx of EUR940 million in Q2 declined by 7% year on year and was up 2% sequentially.

Nokia Networks benefited from continuous improvement in its cost structure with a strong focus on quality and efficiency.

In this kind of standards-driven technology market, quality and efficiency are as important differentiators as innovation, and we think we have the right formula.

Although Nokia Networks non-IFRS research and development expenses declined by 9% year on year, spending in growth areas such as LTE, small cells, and liquid core increased by 9% compared to the year-ago quarter. To be clear, we are investing and will continue to invest in R&D in these focus areas.

With regards to HERE, as we have said over the last couple of quarters, we are investing to capture long-term transformational growth opportunities. We believe that the automotive market has strong underlying growth trends that we can capitalize on as penetration of navigation systems continues to increase and cars become connected to the Cloud.

We believe that these trends coupled with our industry-leading assets, deep customer relationships, and next-generation investments position us well for growth, which is a priority for us.

In addition, the revenue headwind related to our former devices and services business will continue lessen for HERE compared to recent quarters.

Turning to the OpEx trends in Nokia Technologies, where we are investing in both patent creation as well as supporting our licensing efforts. On a quarterly basis, OpEx is predominantly impacted by the timing of R&D projects as well as certain costs related to our licensing activities. These can fluctuate as we invest in new projects and negotiate new license agreements.

Completing our OpEx picture, we also have costs related to Group common functions. On a non-IFRS basis, these totaled EUR33 million of SG&A in Q2. Note that, in Group common functions, the SG&A is generally stable, but the other income and expense can fluctuate.

And now, a few words on capital deployment. During Q2, we received shareholder approval to pay both the ordinary and special dividends totally EUR0.37 per share or approximately EUR1.4 billion.

As a reminder, these payments were made in early July. So, please take this into account in your Q3 models.

In addition, the Board also received approval to commence repurchasing shares after Q2 results. It is our intension to commence the two-year EUR1.25 billion share buyback program during the current quarter.

Finally, on the capital optimization program, as part of our plans to reduce debt by approximately EUR2 billion, we redeemed approximately EUR950 million of debt instruments during Q2 related to Nokia Networks.

As previously stated, the debt reduction related to our capital optimization program is expected to result in annualized run rate interest savings or at least EUR100 million. And we are on track to achieve this.

Looking ahead, as we stated in the outlook section of today's press release, we currently expect our quarterly net financial expense to be approximately EUR40 million per quarter, subject to changes in foreign exchange rates, which are difficult to predict, and the amount of debt we have on the balance sheet.

After taking the actions during Q2, Nokia no longer has material financial covenants in any of its financing instruments or activities.

Now, a few words on the acquisitions we announced during Q2. As part of our efforts to effectively deploy capital, we look at acquisitions primarily in two ways, first, as a way to add certain specific technologies or expertise to gain speed versus our own internal development; second, as a way to bring in products which we can leverage more broadly in the rest of our businesses and sales channels.

We continue to have a very pragmatic and rational approach as it relates to value creation through strategic transactions, a process we have applied to the benefit of our shareholders in recent times.

Earlier, Rajeev mentioned the acquisitions we announced in Q2. We believe all of these announcements are consistent with our M&A approach and our commitment to effectively deploy capital.

In closing, I'm pleased with the progress we have made in Q2. Having closed the transaction with Microsoft at the end of April, we delivered a strong quarter, particularly in networks, and are highly focused on capitalizing on the value creation opportunities we see ahead of us across all of our three businesses.

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

Thank you, Timo. For the Q&A session, we'll expand the time a bit. Thank you for bearing with the technical difficulties, but please limit yourself to one question only. Carmen, please go ahead.

Gareth Jenkins, UBS.

Thank you. Rajeev, if I could, I'd be grateful if you could just give us a bit more detail around some of the -- .

-- Gareth, your line is open.

Yes, can you hear me? Hello? Can you hear me?

If you have your line on mute, Gareth, please unmute your line. Hold one moment.

Hello? Can you hear me? Okay. I think there's a -- I think everyone else can hear me on the line.

We will go to the next question. Sandeep Deshpande, JPMorgan.

Yes, hi. Can you hear me? Hello? Hello?

One moment.

Can you hear me?

Yes, we can hear you now, sir.

Yes, okay. Thanks for letting me on. My first question, Rajeev, is you clearly seem to be indicating that you're going to grow in the second half of the year. Do you have the contracts already in terms of growing in the second half of the year?

And given that, historically, it's been a problem in this segment that, when companies grow, their margin comes down, can you make a comment on both the revenue growth and the margin trends, please?

Thanks, Sandeep. So, the way we do it is we have a methodical way of following our funnel that converts to our order backlog. And then you look at, what are the high-probability orders in play? And then, of course, some of the software businesses and some smaller deals you win all the time during the quarter. So, we have a very methodical way of looking at that funnel analysis.

So, yes, some orders we have in play, already in play. Some others are constantly being won. But, I think what gives us confidence and why we said that we expect second half growth is because of the deal momentum. We have China that has been robust already in the first couple quarters. We see significant deal momentum, as I already commented, in the business of Europe and other places that are going into capacity.

Now, we've also said that we see a new raft of network deployment projects coming through in the second half as well. Overall, on the question of balancing growth and profitability, our track record recently suggests that we've been able to reduce the rate of decline or revenue whilst balancing profitability as well.

I continue to be a believer in a standards-based industry that lean, your lean cost structure is a huge advantage, and the fact that our operating model, how we mitigate risks, how we managed pricing, how we have our pricing volumes in place, the bidding processes and so on.

So, this operating model and how we manage the business together with the cost structure gives us the benefit of being able to get some more flexibility in the market as well to drive for these strategic deals that we might've not taken in the past.

That might have dilutive impact in the near term, but certainly have long-term better profitability profile.

So, based on that, we have the guidance out there that we expect to have growth in the second half whilst improving the guidance full year for the margins as well.

Thank you, Sandeep. Carmen, we'll take our next question, please.

Gareth Jenkins, UBS.

Yes, thanks for taking the question. Sorry you couldn't hear me on the first time round. So, I guess just a quick one on the detail around the networks and the products business. I wonder if you could give us a sense of the splits along software capacity expansion network rollout business in the last quarter just gone and what your expectations are going into the second half of this year and really into next year.

Are we into kind of optimization mode where we'll see margins continue to be robust over a multiyear period, or should we expect network rollout to come back? Thank you.

Thanks, Gareth. I think this -- the thing is that I think that the split between capacity and coverage and software and rollout is -- there's no global answer to this. It would be a -- kind of like a huge oversimplification to give one global answer to that.

So, as just one example, like in LTE, we're in the capacity mode right now in Korea and Japan. In wideband CDMA 3G, we have been in the capacity mode in Korea and Japan for quite some time.

In North America, we're in capacity in some customer segments, but other customers are actually going into coverage because, like I said, Sprint has yet to rollout. China is in coverage mode in LTE, but there's been capacity for a long time on GSM and in fact on wideband CDMA with one other customer.

So, it's a hard global answer to give except to say that there's always a balance. And that's actually the unique advantage of playing the capacity cycle while you have the coverage cycle that can drive revenue in the medium term.

So, I can't give you a global answer on that. And we don't break out our revenues in that manner. We follow the methodology in a detailed way on the regional basis. But, there's no one single answer to that.

Thank you, Gareth. Carmen, next question, please?

Francois Meunier, Morgan Stanley.

Yes, thanks for taking my question. I've got two question about the comment you made about the margins during the quarter. You said that the margins were high because you had more core sales than wireless [ran]. So, can you explain if it's evolved packet core, if it's software, and in what type of region it was?

And the second question relates to the patents business, where you've hired a new guy there. Does that mean that you're going to be investing more in R&D so that this business is more sustainable long term? Thank you.

Thank you, Francois. So, yes, we -- first of all, it's important to remember that we were within what we guided for Q2. So, we said that there'll be lower software sales. We said that MBB was lower margin sequentially compared to the first quarter, and global services was higher margin. So, you -- we had more coming from network implementation improvement in margins and also [care].

On the question within mobile broadband, yes, we had greater traction in market and more deal momentum on core. And core sort of typically depends, again, on the regions. But, I would say, some regions, it was third-generation core, and some regions, it was next-generation core, what we call -- it's an evolved packet core IMS and some of the telco Cloud over -- voiceover LTDs.

On the question on technologies, Ramzi's a great addition to the team, comes with a unique blend of licensing experience, which has to do with technology licensing as well as standards implement -- standard-essential patent licensing in that industry, but also driving a startup and incubator experience.

So, I think what we're saying through that appointment is that we have a strong business leader in place. We'll drive licensing. Like I said, I see more opportunities in licensing. I also see more opportunities in moving to implementation patent licensing, but also means that we will be investing in some of the incubation of new products.

We're not specifically pointing to any OpEx increases, but we have a good run of patents being generated this year as well. So, so far, we've done hundreds of patents. And we're very pleased with the ability to continue to sustain our portfolio and generate patents all the time.

Thank you, Francois. Carmen, we'll take our next question, please.

Stuart Jeffrey, Nomura.

Okay. Thank you very much. I got a question again on the margins and business mix. Historically, I've always thought in the industry that contracts signed in the last 18 months, obviously much lower margin than the ones on historic sort of older contracts. And certainly some of your competitors have spoken about their normal mix being 30% of revenues from recently signed contracts and 70% from longer-term ones.

So, I guess, over last couple of years, I'm assuming that your mix has been much more focused on longer-term contracts. It's swinging towards newer contracts as we go through the second half. But, could you comment on where you see that balance relative to what you think is a normalized level of new versus older contracts? Were you 90% older contracts over the last couple of years, and are you going to a normalized level now, or do you think the next couple of quarters will see you go to a much higher-than-normal level of new contracts, and what you think is sustainable long term? Thanks.

Thanks, Stuart. Again, I have to come back to that comment I made on -- again, a global view of this can be somewhat of an oversimplification because you take managed services. They're typically annuity revenue contracts for five years. Care is a contract for at least one year, sometimes greater because that's a maintenance business. That's annuity. Then you look at system projects. They are long term. Core projects are typically shorter term be they're driven by system integration.

So, again, there's no one global answer to this. We have a mix of longer term, and we have some new contracts all the time, which is, again, going back to my analysis of the funnel, you never start the year with 100% long term or 90-10 or anything like that. You have a mix. You win some through the year. You already have some from the previous year.

So, I'm afraid I can't give any more color than that except that I actually don't think it's a good idea to try to model this on a global basis. One has to go much more in detail region by region.

Thank you, Stuart. Carmen, next question, please?

Alexander Peterc, Exane BNP Paribas.

Yes, hi. Thanks for taking my question. I'd just like to know, what is the reason for what is suddenly now your customary caution in networks guidance? What's holding your predictions back actually well below numbers that you print quarter after quarter? And which part of your business of the past six quarters in particular do you feel is not recurrent, which would help understand your very large and conservative long-term margin guidance for networks? Thanks.

Okay. Timo here. Thanks, Alex, for the question. So, again, I don't think we can split it that way. And of course, we try our best to give the right guidance to the market. But, if we look at the longer-term guidance, so, first of all, it's worth noting that we have not given any annual margin guidance beyond 2014.

We believe, though, that we have created sustainable improvements to our operating model in the networks business. But, however, this business has not yet turned to growth, as Rajeev was talking about. We are expecting it to grow year on year during the second half of 2014. And we need to continue to assess the right balance between our growth ambitions and profitability. So, we have not changed our long-term non-IFRS profitability target of 5% to 10%.

Thank you, Alexander. Carmen, next question, please?

Tim Long, BMO Capital Markets.

Thank you. Just a question on the technologies business. Understanding there's a change in leadership there, we've been running at this EUR600 million run rate, and I guess it was EUR500 million before, but you had the Microsoft benefit for this year.

Could you just talk a little bit about the timing of when you think that line could start to show some growth to it? And related to royalties, can you just give us a sense in that revenue stream, how important are the Chinese OEMs, and do you foresee any potential collections issues with your Chinese partners on the licensing side? Thank you.

So, let me -- thanks, Tim. Let me start with the China one. And then I'll get -- Timo will answer the first part of your question. So, China can be a difficult market for IP in general and IP compliance. And we work with the government to address issues when and where we see them.

But, I think I know where you might be coming from. So, I just note that, unlike some other companies, our licensing practices are not under investigation in China. So, Timo?

Yes, and basically, that means that this China thing, which is not being discussed quite broadly, is not having an impact to this EUR600 million run rate number, what we have given to the market.

And as we have said earlier, we are working hard to drive more value on all of these areas, what we have been discussing in IP business, i.e. new agreements with existing licenses and standard-essential patents, getting new licenses to our standard-essential patents program, and also driving value from our implementation patents.

But, you also need to respect the fact that these negotiations take some time and also the fact that, if you don't come to a resolution, let's say, in a negotiated manner before getting to a -- some kind of revenue situation, it can easily take a year after that.

So, yes, we're working hard on -- in these areas. But, we have no update to give to the EUR600 million run rate.

Thank you, Tim. Carmen, next question, please?

Andrew Gardiner, Barclays.

Hi, thanks very much. I was wondering if you could provide a little bit more detail around some of the regional trends you mentioned in networks. Firstly, on China, clearly a good start to the year, given what we're seeing in 4G, but there's been some talk by others in the supply chain that there's a pause in the 4G deployment in the back half of the year. You conversely sound very confident in where things are going. So, I'm just wondering if you can help shed any light on the disconnect and what others may be seeing that you're not.

Also, on Middle East, you're highlighting some new network deployments there. Is that something you've got visibility into continuing through the back half of the year, just in the Middle East? Thanks very much.

Thanks, Andrew. So, first, on China, first, I'm pleased that we've won the largest foreign vendor share in the LTE rollouts. So, we have good momentum there.

And second on Middle East and Africa, altogether, we are -- we've been -- you remember we've transformed this business. We used to be in many countries. We then shrank. We decided to focus only on specific countries during our transformation phase. Now, we're extending ourselves into some other countries where deals might be lucrative and so on because we've really fixed the cost base and the team and the dynamics there. And so, we're now experiencing good deal momentum in Middle East and Africa as I commented also in my opening remarks.

I didn't really get your question on the issue to supply. But, my sense is it might be something to do with component shortages. And if that's the question, then yes, we also experienced some component shortages with regard to especially some gating factors on some particular components that delay some modules.

And if you see an industry-wide perspective, that of course came from the fact that China demand went up during the beginning of the year, which was not forecast until at the end of last year as an industry. And we're working through that. We had some impact in Q2. But, it seems that we're getting back on track steadily.

Thank you, Andrew. Carmen, next question, please?

Richard Kramer, Areta Research.

Thanks very much. Rajeev, the current management of HERE has been promising growth now for a number of years during this transition from internal to external sales. Can you talk through some of the ways you see Nokia growing here and monetizing its maps assets without having a scale Internet advertising business? And would you look at monetizing the extensive IPR that's sitting within maps?

And then maybe a quick one for Timo. Given the EUR6.5 billion base of net cash with the dividend outpayment and some adjustments coming from Microsoft, should we expect that Nokia's going to have a large positive operating and net cash inflow in the second half of the year to cover the buyback and to set you up for the 2014 dividend payment? Thank you.

Thanks, Richard. So, for HERE, one, we see that the growth opportunity comes from, first of all, extending our position in automotive. So, the in-dash navigation system penetration will grow globally moving up the stack to capture more of the connected car space, also, therefore, taking advantage of the ASPs rising, then moving steadily into the enterprise. And we've had a few good wins in the enterprise business, and then also going to the consumer business again in the licensing-driven approach, in some ways going up the stack and sometimes just doing content, depends upon the particular business model.

Fundamentally, there's a huge barrier to entry of this business. You need to spend a lot of money cumulatively. You need to maintain the investments in mapping and so on. I feel good about the asset. I feel, therefore, that, if you're spending this amount of R&D, the best way to get operating leverage is to get more revenue in adjacencies. And hence, we're moving to the enterprise and to the consumer space. And so far, so good.

And we're also improving the platform by way of getting more predictive. So, we've made an acquisition in that space. If you look at a lot of the industry analyst reports, we learned that our mapping solution is most complete, most fresh, fairly accurate, and we have some areas to develop, such as in semantic and local search, which we did through also the Desti acquisition.

Some of this [was true of] the devices/services-driven revenue will start to kind of normalize over time. And of course, the good news is that external sales during Q1 and then automotive sales were up in this quarter as well, Q2 as well.

Okay. And on the cash question, so, basically, what does the cash look for the second half? So, clearly, we have not given any cash guidance as such. But, I can talk about some of the drivers impacting the cash during the second half.

So, first of all, we have the EUR1.4 billion on dividends. We have also said that we will start the buyback program during the half. We have some restructuring-related outflows, about EUR150 million we said in the release, related to networks restructuring. We also have the positive EUR200 million we are expecting still relating to the Microsoft transaction. Rajeev mentioned that we have done or announced five acquisitions. There are some acquisition-related cash outflows. And then of course, there is the operative performance. And basically, those are really the drivers of the cash.

Regarding possible future dividends, we are now just in the beginning of executing our program regarding the capital structure. And in that sense, the only thing we have said about the dividend is that the Board is proposing same level at least as this year.

Thank you, Richard. As a reminder, we have a lot of analysts in the queue. So, please limit yourself to one question only. Carmen, we'll take our next question, please.

Mike Walkley, Canaccord.

Great. Thank you. A question on the licensing business. I imagined that we might learn more about longer-term licensing business at the Capital Markets Day, but just wanted a question on the -- a lot of your deals are cross-licensing deals. And it's my understanding that some of the top-10 handset OEMs you haven't entered an initial license with. Have you already started to contact some of these potential handset OEMs to start the process, given it will take time to negotiate, or is it more you're waiting to -- for the hire here, and you're going to let Ramzi and his team create a strategy before you start contacting unlicensed OEMs? Thank you.

No, Timo here. So, thanks for the question, Mike. So, no, we are absolutely not sitting still. We are absolutely, both on the people who are not licensees in our standard-essential patents, we have definitely contacted and have actually been in contact with (inaudible). Now, of course, the dynamics of the negotiations might be slightly different.

But, on top of that, we are in constant negotiations of also smaller people and also people who are not necessarily on the mobile space, on some other licensing activities as well. So, we do not announce every single deal, what we make on the licensing side either if it's not material. So, we are, of course, working this hard.

Thank you, Mike. Carmen, we'll take our next single question, please.

Ehud Gelblum, Citigroup.

Hey, Rajeev. Thanks. It's Ehud. So, first question on the operating margin guidance, now, you've beat it soundly in the network side for two straight quarters. At what point in the quarter did you realize that the core was going to be stronger and the operating margin was going to beat by as much? I guess something happened late in the quarter. Why didn't you have the visibility? I'm just trying to understand what changed in the quarter that didn't give you the visibility heading into either Q1 or Q2 that ended up coming in the way it did.

And so, give some visibility on what changed. And is that -- was there some pull-forward of core revenue perhaps, which is why you're a little more cautious on the second half? That's one.

And then on the HERE business, to -- I understand that it -- all the opportunities that are going there, and it's exciting. But, can you go over again what the synergies are between HERE and the rest of the business, and/or is it kind of viewed more as a standalone business that you're kind of looking at from a venture perspective? And would you consider floating a percent of it out in the market so there's a minority interest out there so that people can actually understand it a little bit more and perhaps help you assign some sort of a value based on just understanding it as an actual traded instrument rather than keeping it wholly owned inside? Thank you.

Okay. So, thanks, Ehud. On -- first, on the operating margin guidance for networks for Q2, so, we did not have any other guidance outstanding for Q2 than the software sales proportion that -- guidance. And that clearly came through. And as Rajeev said earlier, we actually sequentially had lower margin in mobile broadband. And then we had higher margin in global services. So, it was really looking at that equation than more on the global services side, which came through better. But, I don't really have a comment on this visibility question. Again, I think we were in line with the guidance, what we gave to the market regarding Q2.

Yes, and thanks, Ehud. Just on the HERE question, we see opportunities to create shareholder value. I think we're a good owner of HERE. We have the ability to make the right long-term investments. And we're also able to address multiple players in multiple markets with our flexible business model. We're agnostic on the operating system. We're more flexible with our approach. We can sell the platform, the contents, the services, depending upon the customer.

And the automotive sector, we're strong. And trends are clearly towards greater adoption of embedded solutions for intelligent cars. And in the future, we also have the potential to expand ASPs. And as I said, we can move into the enterprise and also in the consumer selectively.

In terms of synergies, no, it's a standalone operation. And we believe the Nokia Business System that I articulated is the one that will be the glue amongst the three businesses, where we have a set of industrialized best practices that we will leverage across the Group. And in terms of our vision, I think, if you look at the future, the HERE business will be more converging with the rest of the businesses than diverging in the next few years.

Thank you, Ehud. Carmen, next question, please?

Kulbinder Garcha, Credit Suisse.

Thanks. A question for Rajeev, just on the guidance or the indication that margins will go down in NSN in the back half, I guess I'm thinking about it this way that you had China ramp up quite meaningfully over the last few quarters without any noticeable significant impact on your margin. So, is the indication that declines on the back half, there's just so many strategics happening at the same time?

And then what's kind of linked to that is that, okay, if there is this impact of dilution maybe on margins in the back half, how long is it typically that we should assume before [these ramped] them [less than the average the NSN] are enjoying today?

Or, will that not happen [because the] concern the investors have, Rajeev, is that, as you go from revenue declines to revenue growth that margins structurally come down, not just temporarily but structurally. So, any comments around that context would be very helpful.

Thanks, Kulbinder. I'll give a quick note before Rajeev takes over this one. But, I think, basically, if you look at our first half, I think the margin on the average comes to just slightly above 10, so maybe 10.2, something like that. And if you look at our guidance, I don't think you can directly read from that guidance anything about it being below the first half or something like that. So, we're simply saying at or slightly above our long-term guidance range of 5% to 10%.

Yes, thank you. And that's an important point.

Your second part of the question, as I noted in my remarks, I think it's important to understand that we are believers in what we call disciplined expansion, right? And we will continue to work to minimize the impacts of these margin-dilutive deals. And we only take these deals if and when they have long-term good profitability profiles.

And how do we mitigate? We have ongoing cost [reductions]. We have upsells. And we also have overall for the rest of the deals a very disciplined approach to the bidding process. Again, I pride ourselves on the ability to drive these pricing volumes. And we can sort of control pretty much all the deals in the company goal through pricing volumes, where we utilize our global understanding and benchmark pricing through specific pricing volumes designed regionally for this purpose.

So, you combine the pricing, our volume approach, the unique operating model, the way we mitigate risks, and the disciplined expansion, and I think we can continue to balance this growth and profit thing.

Thank you, Kulbinder. Carmen, we'll take our next question.

Mark Sue, RBC Capital Markets.

Thank you. Gentlemen, historically, the focus on the business has always been in terms of operating margins. But, overall, if you think about it, you don't have the volatility of the smartphones. Should we now think about OpEx in absolute terms since you have scale in networks? And remember, networks used to be at 0% of where -- means that's improvement since then. And you do have a lot of cost coming out. And you're redirecting some investments in HERE and advanced technology.

So, should we start thinking about the business from steady operating expenses in absolute euros working capital requirements and just also better cash conversion? Thank you.

Thanks, Mark. I think that's, first of all, a good point. And I think one point, what Rajeev has made and also I made that, basically, really finding this right balance between growth and profitability of course leads to your managing the absolute euros and not percentages, which is the key in business because it really is ultimately the cash, what we want to generate.

And in that sense, of course, now, we have less volatility overall in the business situation. And that will allow us to put even more focus on the cash side. Of course, we have been very focused on that going forward as well, particularly I would say in the networks business.

Thank you, Mark. Carmen, next question, please?

Pierre Ferragu, Bernstein.

Hi, good afternoon. Thanks for taking my question. This is (inaudible) for Pierre. I had a question on service gross margins that improved sequentially this quarter.

My question was, how much of this improvement was driven by efficiency improvements? Was this a better mix as you have been reducing activity in that business? And then I would like to understand, how does that evolve for the rest of the year, and finally, if you could make a quick comment of -- on where the service gross margins are today versus they were two years ago? So, are they up 5 points? Are they up 10 points? Thank you.

Thanks, Pierre. So, global services in the quarter was driven by better margins coming from network implementation and care. But, you brought a question on global services. I think it's a business that's now run very efficiently. Yes, there's some effect from contract exits. But, that effect has been coming through now for the last several quarter. And for a number of quarters now, we've had reasonably good, almost best-in-class levels of operating margins for global services.

So, that efficiency will continue, as I commented in my remarks, that we will focus on automation, and through that lean kaizen programs, we will continue to focus on driving more of our services activity through global delivery centers, which are standards driven, process driven, and they're offshore and lower cost centers. So, that for me is just a given for the global services business.

So, I think we've -- again, as Timo has said, we found the formula in terms of how you run a global services business for efficiency whilst still driving for growth. And now that the mobile broadband equipment business has come to growth, the attached part of the business, of course, follows the mobile broadband business at some point with a certain lag also starting to grow. I -- was there any other thing that, Timo, you wanted to answer to that question in particular?

No, I think that's just -- this is okay.

Okay. Thanks, Pierre.

Very good. Thank you, (inaudible). We have now 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 that, during the conference call today, we've made a number of forward-looking statements that involve risks and uncertainties. Our 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 factors section of our 20-F for 2013 and in our interim report issued today. Thank you.

Thank you for participating in today's conference call. You may now disconnect.