諾基亞 (NOK) 2015 Q1 法說會逐字稿

Good day, my name is Stephanie and I will be a conference operator today.

At this point I want to welcome you to the Nokia first quarter 2015 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 first quarter 2015 conference call.

I am Matt Shimao, Head of Nokia Investor Relations.

Rajeev Suri, President and CEO of Nokia and Timo Ihamuotila, EVP and Group CFO of Nokia, are here in Espoo with me today.

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

These statements are predictions that involve risks and uncertainties.

Actual results may therefore differ materially from the results we currently expect.

Factors that could cause such differences can be both external, such as general economic and industry conditions, as well as internal operating factors.

We have identified such risks in more detail on pages 74 through 89 of our 2014 annual report on Form 20-F, our interim report for Q1 2015 issued today, as well as our other filings with the US Securities and Exchange Commission.

Please note that our results 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.

Nokia delivered strong year on year sales in the first quarter with weak Nokia Networks profitability compensated by very good performances from Nokia Technologies and HERE.

I will come back to the results of the quarter but I would first like to take to take a moment to comment on two recent announcements: the proposed acquisition of Alcatel-Lucent and the strategic review of HERE.

As I want to focus my time on these topics, I've asked Timo to cover most of the quarterly details related to HERE and Nokia Technologies.

Let me start with Alcatel-Lucent.

Given that Timo and I have talked with many of you when we announced the transaction and in the days since, I won't repeat the deal details or our strategic rationale here.

Rather let me share thoughts about what we have learned since the agreement.

First, I've met with many customers over the last two weeks and every single one has expressed their support.

They see it as a way to ensure three strong global competitors and not as a reduction in competition.

They see it as a way to protect their investments of the past while enabling the needed innovation in future technologies and services.

They see the portfolio mix of the two companies as compelling and well suited to meeting their future requirements.

Second, we've had initial conversations with key government officials in many countries and while it is still early, the tone has been quite positive.

So some reason for optimism.

Additionally, as you may have seen a number of our competitors in both Europe and China have expressed support for the transaction.

Third, we've heard concerns about execution risk given the issues associated with similar transactions in the past.

That was a very fair concern, but I do believe that this time can be different.

The transaction is not structured as a joint venture, it is an acquisition by Nokia with clarity in terms of leadership and governance.

This will allow us to move fast, to avoid politics and to show that history does not have to repeat itself.

Both companies, Nokia and Alcatel-Lucent, have been through significant recent transformation and restructurings and both have learned from those experiences.

On the Nokia side, we have focused on creating a disciplined operating model that will serve us well as we proceed with integration planning and eventual integration execution.

We've already appointed an integrated leader and are moving fast to get detailed planning underway.

As we do so we will ensure the integration planning work is separated from our day-to-day business operations in order to minimize the risk of any disruption.

In addition technology has changed.

As the telecom world has transitioned away from customized hardware and more to software and as open interfaces become more prevalent, the pain of disruptive and expensive swaps can be mitigated.

Fourth, we've also heard questions from some of you on the call today, about why now?

And in my view the answer to that lies in the technology transitions that are underway and the progress that has been made at both Nokia and Alcatel-Lucent that I just noted.

We are now in a cycle between 4G and 5G.

And the timing of this deal will allow us to accelerate spending on 5G immediately upon closing.

In addition the combined portfolio will put the Company in an excellent position as the transition to the Cloud accelerates.

Finally, we've heard some concerns about the commitments we have proposed to make to the French government in order to ensure their support for the deal.

We believe those commitments are manageable within the business case of the transaction and they include sufficient flexibility to align with our business needs.

Also, R&D capabilities that we will gain in France will make strong contributions to enhance the future of the combined Company.

Now, let me turn to HERE and the strategic review that we have announced.

We embarked on that process in the context of two developments.

The first is that location services are becoming of even greater strategic importance to automotive companies and others.

Second, it is clear that Nokia's portfolio will become increasingly network focused once the Alcatel-Lucent transaction closes.

In light of these two things we wanted to take a step back and at least ask the question of whether owning HERE still made sense.

Following our review, we could choose to sell HERE in full or in part or we could decide to keep it unchanged from today.

No one should assume that there is a predetermined outcome.

We are looking for the best solution for Nokia and its shareholders for HERE and its employees and customers.

We're in no rush, under no pressure to sell, and regardless of the option we choose I have no doubt that the future of HERE is bright.

With that, on to the quarter, where at the Group level we delivered good results with sales of EUR3.2 billion, up 20% year on year and non-IFRS diluted EPS up 25%.

Non-IFRS operating profit of EUR265 million or 8.3% of sales was down 13% year on year.

HERE and Nokia technologies both performed very well in the quarter while good growth at Nokia Networks was offset by unsatisfactory profitability.

Despite the slow start at Networks, however, I'm confident that we remain on track to meet our targets for the full year.

Let me now turn to Networks in more detail.

As I noted, Networks delivered good year on year growth in the quarter of 15%.

When you exclude the currency impact, net sales were up by 5%.

Still a healthy number and the early signs are that we grew faster than the market in the quarter.

Our mobile broadband and global services business units both grew, with a particularly strong showing by the services team which delivered year on year growth of 21%.

Our business mix during the quarter was 52% mobile broadband versus 48% for global services.

For the same quarter one year ago, mobile broadband was at 54%, although on a sequential basis the mix between segments has not changed.

Within the segments, however, there was some mix shift in Q1.

With more network implementation and less systems integration in services and more LTE and less core networking revenues in mobile broadband.

These shifts were part of the reason for the first quarter's weak profitability.

On a regional basis, we saw year on year growth in four of our six regions, with particular strength in North America, greater China, and the Middle East and Africa.

India in particular was a standout performer both on the mobile broadband and global services sides.

Overall, however, growth was not the issue for Networks in Q1.

The issue as you've seen was profitability.

We saw a non-IFRS gross margin and operating margin in the quarter of 33.7% and 3.2%, respectively.

We've done an intensive analysis to ensure that we understand what happened during the quarter and more importantly what we need to do to improve going forward.

In today's press release we called out a number of drivers for the profit decline and I would like to take the next few minutes to give you some additional color.

First, software sales were down by approximately 5 percentage points of the same quarter one year ago.

This was driven largely by lower core networking revenue and lower software sales in Japan and North America.

We do not see any evidence that this decline represents a structural change in our market, but we continue to watch the situation closely and are taking actions to get software sales back on track.

Second, strategic entry deals, particularly in China, had a more significant effect in Q1 of this year than the same quarter last year.

While we continue to require that such deals have the right long-term profitability profile, the short-term impact can be sizable.

That said, we expect the situation to ease as we head towards the second half of the year.

Third, as I think you will have seen from the results of other companies in our sector, market conditions are challenging.

While we believe that with our lean cost structure and disciplined operating model we are well-positioned in this environment, there is evidence of a near-term shift in market behavior.

Fourth, operating expenses.

As I'm sure you understand a large portion of the OpEx increase reflected negative ForEx impacts.

Some of the increase also reflected increased investment in growth technology areas including 4G, 5G and Cloud core.

Given the market environment that I just mentioned, we will continue to manage OpEx extremely prudently.

Finally, global services where we saw 350 basis point decline in operating margin.

This was a result of a mix shift in the quarter which was heavier than normal in network implementation and lighter in systems integration.

Systems integration had a challenging quarter although it's a relatively small part of our overall services business.

In particular, systems integration was impacted by significantly lower very high-margin business from one customer compared to the previous year.

At the same time, our systems integration pipeline has continued to increase since the start of the year and to give just one example, we won a very large new customer in Q1 that should benefit the business in quarters to come.

Overall, I believe that our global services organization remains strong and its performance compares quite favorably to others in our sector.

So despite the slow start we remain confident in our ability to deliver on our commitments for the full year.

Let me just share a few of the point that support the conference.

First, on the on the revenue side, our funnel of opportunities remain strong and our win rate remains high.

Second, we are launching several margin improvement actions including an expanded software upsell program and a sharper focus on earlier than planned recovery of entry and other low-margin projects.

Third, we continue to be very aggressive in driving cost and efficiency improvements to our business transformation board.

We have active projects with clear targets and tracking mechanisms spanning a wide range of areas.

Discretionary and overhead spending, improving cost of sales in both products and services, and further R&D transformation, just to name a few.

Finally, when we look at the strategic entry deals we have taken on, we see margin starting to improve as we head to the second half of the year, driven by contractual terms and ongoing cost and execution improvements.

To sum up, we clearly cannot be satisfied with the Networks numbers we announced today, but feel there are good reasons to have confidence the full year.

The Networks team has shown that they can deliver consistently strong results and I know they are motivated to deliver better performance in quarters to come.

Then to HERE.

HERE delivered excellent results with significant improvement in both year on year sales and profitability.

The automotive segment continues to go to from strength to strength and shortly after the end of the quarter I was particularly pleased to see that Jaguar Land Rover has decided to be the first car maker to implement HERE auto, the industry's leading connected navigation suite, inside its cars.

We look forward to seeing how that will be received by drivers this summer.

This was a groundbreaking win for HERE and the team is working very hard to follow that up with more.

Other notable activities in the quarter included HERE launching its Map app for iPhone users making it available for free download from App Store.

To date the reception has been excellent with the app downloaded a combined 6 million times for both iOS and Android and getting glowing reviews in the process.

Finally, on to Nokia Technologies which also had a very strong quarter with sales and operating margin up sharply both year on year and sequentially.

I am more confident than ever that licensing activities are tracking well and that there is a robust pipeline of potential new licensees.

This is a business with a unique operating model, excellent assets and a world-class team and work is progressing well.

Costs were higher in Technologies on a year on year basis due to investments in business infrastructure and new innovation but roughly flat on a sequential basis.

While we will continue to invest where we believe there are compelling opportunities, we're also taking steps to focus the work of the Technologies team on projects that present the most interesting opportunities.

In short, more disciplined management of the licensing pipeline and a sharper strategic focus to future investments.

Let me hand the call over to Timo for some more details and then we will can turn to your questions.

So Timo, the floor is yours.

Thank you, Rajeev.

I would like to spend the next few minutes taking you through the performance of Nokia Technologies and HERE in the quarter before turning to foreign exchange movements, my customary discussion on cash performance and, finally a few a few words on our outlook.

Starting with Nokia Technologies, net sales of EUR266 million in the first quarter increased by 103% year on year.

We continued to make very good progress in our broader licensing activities and remain confident in the long-term monetization opportunity for Nokia Technologies.

However, it is important to reiterate that this can be an inherently [long] business particularly when viewed through quarterly lens and this was the case in Q1.

Approximately two-thirds of the year on year growth in Nokia Technologies net sales in Q1 related to nonrecurring adjustments to accrued net sales from existing agreements as well as revenue shares related to previously divested IPR and IPR divested during the quarter.

Approximately one-third of the growth related to higher intellectual property licensing, income from existing licensees, including Microsoft becoming a more significant licensee.

While we did see underlying growth in Nokia Technologies quarterly net sales run rate in the first quarter, you should not simply extrapolate the whole Q1 net sales level to level going forward.

Nokia Technologies net sales in Q1 included revenue from all of Technologies licensing negotiations, litigations, and arbitrations to the extent that we believe is currently required, but this is not the full cost of the likely future outcome of ongoing licensing projects.

Turning on to HERE, which delivered a strong topline growth and continued improvement in profitability.

As I've commented on previous calls, we believe HERE has strong long-term growth prospect and is capitalizing on the trends we see, particularly in the automotive segment.

This is really key to driving operating leverage and cash flow generation.

In Q1, HERE delivered year on year net sales growth of 25% or 17% on a constant currency basis.

New vehicle licensees of 3.6 million units in the quarter compared to 2.8 million units in the first quarter of 2014 or 29% year on year growth.

HERE's non-IFRS operating margin of 7.3%, up 250 basis points year on year, was primarily driven by operating leverage from the higher net sales, which more than offset higher non-IFRS operating expenses.

Taking into account HERE's performance in Q1, its leading market position, as well as positive industry trends, we have narrowed HERE's 2015 non-IFRS operating margin outlook from between 7% and 12% to between 9% and 12%.

Then turning onto foreign exchange.

We've included a new table in our Q1 press release on page 28, which provides a quarterly analysis of our revenue and cost exposure by major currency.

At the high level and as I commented last quarter, we are well balanced in terms of our net sales and cost exposures against the euro.

In Q1 approximately 30% of our net sales and total cost were euro denominated.

Therefore everything else being equal, a weakening euro relative to all of our other currency exposures has a positive impact on our overall net sales, but negative on our operating costs, with the overall impact on our non-IFRS operating profit being relatively small.

In terms of the US dollar, approximately 35% of our net sales in Q1 were US dollar denominated compared to about 30% in our costs.

Turning back to our Q1 2015 year on year net sales growth of 20%, approximately 9 percentage points of this growth resulted from foreign exchange movements, primarily due to stronger dollar.

Sequentially, foreign exchange movements benefited Nokia's reported net sales by approximately 5%, driven by general euro weakness, relative to our non euro-denominated sales.

Then turning onto our cash performance during Q1.

On a sequential basis, Nokia's gross cash declined by approximately EUR200 million with a quarter ending balance of approximately EUR7.5 billion.

Net cash and other liquid assets declined by approximately EUR350 million, with a quarter ending balance of approximately EUR4.7 billion.

Looking at the primary drivers of the movements in our net cash balance in Q1.

Nokia's adjusted net profit before changes in networking capital was EUR368 million in the first quarter, primarily driven by Nokia Technologies and Nokia Networks.

Nokia's net cash from operations was EUR199 million outflow, primarily driven by cash outflows related to other financial income and expense and I will come back to this in a few moments.

In Q1 Nokia's continuing operations had networking capital cash outflows of approximately EUR100 million, which included approximately EUR50 million of restructuring related cash outflows at Nokia Networks.

Excluding this, cash outflows from networking capital was approximately EUR50 million as the negative cash impact from decreases in short-term liabilities was partially offset by the positive impact from a decrease in receivables.

Continuing operations had cash inflows of approximately EUR30 million related to net financial income and expenses.

But approximately EUR400 million of outflows recorded in other financial income and expense and approximately EUR100 million related to taxes.

Looking at approximately EUR400 million of outflows related to other financial income and expense in bit more detail.

Approximately half or around EUR200 million of the outflows related to foreign exchange hedging on forecasted cash flows and hedging of Nokia's non-euro cash and cash [accrual balance].

The other half of the outflows mainly relate to the timing mismatch between foreign exchange cash flow, impact on other non-euro denominated balance sheet items such as trade payables and receivables, as well as internal and external financial items other than cash and cash accrual balance and the corresponding hedges for the net exposures.

Assuming static FX rates compared to the end of Q1, we currently expect that the approximately EUR200 million of the Q1 cash outflows will be largely offset by benefits to Nokia's cash performance related to these items in the next two quarters, partially in other financial income and expense line and partially and other lines of operating cash flow.

Discontinued operations had cash inflows related to networking capital and taxes totaling approximately EUR10 million in Q1.

From a financing cash flow perspective, outflows were primarily due to share buybacks which totaled approximately EUR160 million in Q1.

During the first quarter we repurchased approximately 25 million shares.

As I highlighted on our call on April 15, 2015 following the announcement of the proposed of Alcatel-Lucent, we have suspended our capital structure optimization program, including suspending the share repurchase program execution until the closing of the transaction.

From an investing cash flow perspective, cash outflows of approximately EUR70 million related to continuing operations, capital expenditures, and approximately EUR50 million related to the acquisitions which we completed in the quarter.

Finally, foreign exchange rate had approximately EUR150 million positive translation impact on our net cash.

And now a few words on our venture fund investments.

I think we have a unique long-term corporate venturing business model and we have built strong track record of growth stage investing through the Nokia Growth Partners and BlueRun Ventures entities.

After the end of Q1, Nokia Growth Partners sold its holdings, holdings in Ganji.com, a major online local services marketplace platform in China to 58.com.

Under the terms of the transaction both Nokia Growth Partners and BlueRun Ventures will receive a combination of 58.com shares and cash, valuing Nokia's indirect holdings at approximately EUR200 million.

We expect to record benefits from the transaction when cash distributions are made.

The final amount and timing of the benefits will, of course, depend on the value and date at which the Venture funds liquidate the shares, and is expected to have a positive impact on our EPS accordingly.

At the end of the first quarter, the fair value of our Venture fund investments was approximately EUR1 billion as compared to approximately EUR800 million at the end of 2014.

This amount is included in available for sale investments under non-current assets in Nokia's balance sheet.

Overall, I believe that both Nokia Growth Partners and BlueRun Ventures will continue to serve as sources of value creation for Nokia shareholders.

Finally, I would like to spend a few moments on our guidance.

First, for Nokia Networks we've upgraded -- updated our full-year non-IFRS operating margin and now expect it to be around the midpoint of our long-term 8% to 11%% margin range.

This update reflects the weaker Q1 performance, as well as our expectations for the rest of the year.

More specifically we expect some of the negative factors that impacted Q1 profitability to ease, particularly in the second half of 2015.

For the longer-term on a standalone basis, Nokia Networks non-IFRS operating margin guidance continues to be 8% to 11%.

And for the new combined entity with Alcatel-Lucent, we have said that we expect to achieve approximately EUR900 million of cost synergies in 2019.

For HERE, we are encouraged with the improvement in profitability and its ability to capitalize on strong industry trends, particularly in the automotive sector.

This has resulted in the upward revision to the full-year outlook.

For Nokia Technologies the quarter was impacted by some nonrecurring items, however, we did see underlying growth in the quarterly net sales run rate and we have a robust pipeline going forward.

Thus overall, we think we are well-positioned to achieve our targets for 2015.

With that, I will hand over to Matt for Q&A.

Thank you, Timo.

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

Stephanie, please go ahead.

Gareth Jenkins, UBS.

Just one question on China if I may.

I think there's been a clear impact in the call through on margins from the ramp [perch on a telecom in China unicom on the FTLT] spectrum and I just wondered whether we're at the maximum point of pain in terms of recognizing OpEx?

But not necessarily recognizing revenue giving that those licensees were already only issued in the middle of the quarter.

Thank you.

Yes.

In China, thanks, Gareth, there are three operators, of course, and they all have different schedule with different intensity of deployment.

What we have said is the impact of strategic entries and notably some in China require an upfront component of cost and that's why it has seen its impact in the quarter.

Overall, if I step back from the equation and say how do I look at the second half of the year, not just China, but overall as a business I see the impact of strategic entries to ease in the second half of the year.

Thank you, Gareth.

Stephanie our next question, please.

Kulbider Garcha, Credit Suisse.

For Rajeev, I guess.

I understand the explanations you're giving on the lower margins in Networks, but my basic question, Rajeev is, the last two years you've given quite a clear message and how you run the business in terms of predictability.

In terms of you forecast forward all the contracts, you allocate them to the P&L therefore we wouldn't typically [see] the variability.

So my question is just that visibility you have into your business each quarter, is what [edison] had managed to do is not have the volatility of your peers, whereas today we're seeing that.

So, on just that visibility you have into it, I'd appreciate your perspective on perhaps what went wrong and why this wouldn't be repeated in terms of your ability to anticipate this volatility quarter to quarter.

Thanks.

Thanks, Kulbinder.

So I've always been saying that there are four broad drivers in the business.

One is a competitive dynamics, second is business mix, the third is regional mix, and the fourth is something that we fully impact, which is operational excellence.

So we've seen the competitive dynamics intensify and I've always been consistent in trying to call it out when I see a change in trend, so I want to do so again today.

The business mix, yes we've seen lower software, lower core, and lower margin activity on systems integration.

And a high component of Network implementation which is structurally a lower margin business compared to SI.

Then we've seen the impact of strategic deals and the sort of cost upfront that I commented on.

Fundamentally this is a project business.

And typically in some quarters the activity is actually determines the visibility close to the end of the quarter.

And those are acceptances which then drive your revenue and also software revenue.

In terms of acceptances notably on higher NI and lower SI and software revenue we have seen that impact at the tail end of the quarter.

Again as I have said I look at a lot of these things easing in the second half of the year.

If I may add quickly so of course we are absolutely not pleased with Q1.

But we of course need to recognize that Q1 is seasonally the weakest quarter in this business.

And last year, i.e.

2014, we had some, I'll call them, abnormally high software sales during the quarter, which may be sort of change those dynamics for 2014 a bit.

Thank you Kulbinder, Stephanie we will take our next question.

Andrew Gardiner, Barclays.

You have both given us a better sense as to the moving parts within the different units but I'm just wondering if you can help with how you are seeing the group as a whole after the first quarter?

And for example if I take your guidance for networks In the midpoint of the range 9.5% margin that's roughly EUR120 million reduction in Networks profits for the full year relative to prior market expectations.

And conversely on HERE, your upgrade to guidance is worth about EUR20 million and the Technologies was about EUR100 million ahead of the normal run rate in the first quarter.

So if I take those moving parts together then I'm not seeing much change in terms of the full-year profit expectations.

I just want to make sure I'm understanding your guidance correctly if there is any other moving parts you can point to?

Timo here.

Thank you, Andrew for the question.

Of course I can't take stance on where you started to move from regarding your getting to 9.5% but of course recognize the math that you are describing here.

And I would say the only other thing we have mentioned today besides the barometers what you mentioned was the NGP, where we said that we expect to have some positive impact from that to EPS, but we did not quantify exactly when that would come.

Thank you, Andrew.

Stephanie, next, next question please.

Alexander Peterc, Exane BNP Paribas.

I would just like you to elaborate a little bit on the Network's gross margin situation.

You've got 600 basis points contraction year on year which is quite a lot.

And you do say that you have some currency benefits there, so could you quantify that for us?

And also if could you tell us how much of your gross margin contraction is attributable to lower capacity sales, i.e.

software?

In other words what is down to the mix and what is down to the footprint acquisition that you also a flagged?

Thank you so much.

Thanks, Alex.

I will start then and maybe Rajeev can talk a bit more about the software.

Basically FX as such when we look at the gross margin is not a big driver because on absolute gross margin it is more of a driver but on the actual percentage point it is not that big.

Clearly the biggest of the drivers of what you mentioned is the software sales spot, which we actually described as 5% on year over year.

And we did say that a year ago we had this somewhat abnormal situation with higher software sales.

But again we see a core Networks coming to more sort of normalized levels during the year.

And we also see that software will come to normalized levels and we see also on this point we've made about system integration coming to more normalized levels and so on.

So those are the drivers that we are executing to.

Thank you, Alex.

Stephanie, next question, please.

Pierre Ferragu, Bernstein.

Thank you.

Rajeev you mentioned a couple of times the change in competitive dynamics which didn't really [terry] with recent comments from some of your competitors.

I was just wondering if you've seen in the quarter some softer increase in pricing pressure around these?

And is that something that you just saw in the quarter and impacted your number for this quarter?

Because that sounds like a very, very quick turnaround -- turnout usually and these are negotiated on a long period of time and impact the P&L a little bit later.

And then maybe on your comments about efficiency throughout the year and how to think about OpEx in Networks through your run rate, quarterly run rate is EUR850 million for this quarter, is it reasonable to expect that this number is going to come down a bit during the year, or should we consider that as a reasonable run rate for the full year?

Thank you.

Yes.

Pierre, thanks for that.

I would like to its point out that we see a change in trend with regard to competitive intensity, but you have to give it a period of observation to know that it's not tactical, but it is a bit of a trend.

At this point in time based on what I see, I think it is worth pointing out that the competitive intensity has increased.

Now there are reasons for it.

There are some markets that offer significant large footprint for the long-term and so they are hotly contested.

And China is an example of that.

And of course they do offer long-term footprint opportunities.

And then there are other things that have changed competitive intensity like perhaps one of the reasons is that we have seen growth in the last three quarters if I include the current one, Q1, there's a comparative response to some of that as well.

Finally I think when you look at overall there are challenging market conditions when it comes to CapEx because there are markets that are more slow and there are other markets that have momentum.

I think Middle East and Africa, Southern Europe, China, India have momentum, recognizing that China is somewhat dilutive at this point in time.

At the same time North America, Asia-Pacific, Europe, and Eastern Europe don't have enough momentum.

And particularly in APAC countries like Indonesia, Korea, Thailand, and Japan which have been somewhat more robust in the past and Europe is characterized by both the macro economic situation, particularly in Eastern Europe, but also generally.

And the fact that this consolidation of the operative landscape is underway and it's really happening.

And that does mean that it puts pauses in terms of CapEx spend so there are fewer deals to go for and the competitive intensity increases.

So I'm not sure this is a structural tend yet, but it is worth pointing out that this has change.

And maybe I will comment on the OpEx side, Pierre.

We had EUR99 million up about 14%, 15% year on year OpEx in Nokia Networks and we do not expect similar kind of optic rate to continue during the year.

We actually expect that these call it optic in OpEx year on year basis to ease towards the latter part of the year.

Thank you, Pierre.

Stephanie, next question please.

Mark Sue, RBC Capital Markets.

The working presumption was that the consolidation in the Network equipment space would improve profits over the longer term.

However we are moving the other way.

And with the change in trend and three dominant players to remain, can we still get to the EUR900 million?

And if so, will that actually hamper Nokia's ability to grow market share in the future?

Does it have to be one or the other?

Maybe I will take the EUR900 million question and you can discuss a little bit about the market situation.

No, we expect no change in our ability to execute our EUR900 million planned cost reductions in the Alcatel-Lucent planned transaction.

We are actually confident that we can execute this as we have discussed during the last weeks or so.

We have a very robust and detailed model through which we have worked where we expect the synergy benefits to come on the cost side and we think that's prudent and very executable.

On the market conditions the consolidation and what we have seen this be more rational over the last couple of years.

And this year there have been markets that offer this long-term footprint that has driven the intensity.

But apart from that, there are markets on balanced that generally a slow start to the year from a CapEx standpoint.

And therefore there has been more competitive intensity to go after those smaller deals, sort of lesser amount of deals and more players are active on that.

Do I see this as a defining trend?

One quarter should not necessarily define a trend however we have seen that this has changed.

Now going back to our transaction at Alcatel-Lucent, this is why I think it's different and it makes a lot of sense in strategic rationale because that's more about scope then about scale.

I absolutely believe that the winning providers of the future will be stronger, full scope providers with the necessary scale in the individual businesses that they operated in.

That transaction with Alcatel-Lucent gives us that platform.

And with the operating model that we have think it allows us to benefit much more over the longer term.

Thank you, Mark.

Stephanie, our next question, please?

Sandeep Deshpande, JPMorgan.

My question is regarding that one-off which occurred because of the acquisition of new customers.

You identified 5% was because of -- 5% was because of the lack of software in the first quarter.

How would you place this additional cost of requiring these new customers?

And secondly also I have a question on your IPR that even excluding the one-off associated with some past deals that you have recognized in the quarter, you saw upside year on year because of some volume increases or something with existing customers.

Could you please give some details on that?

Thanks.

Thanks, Sandeep.

So allow me here to step back a little bit and give a more elaborate response, but of course this question has come in multiple ways, so I think it merit a better response as to why do I feel confident about the remainder of the year?

First of all, and I'll bucket this into two.

What are the structural things and what are the actions we're taking?

One our funnel of sales opportunities remain strong.

We have a high win rate, that matters.

Second I see the impact of strategic entry deal to ease in the second half most of which you get these deals you take the cost somewhat upfront.

So I see that easing.

I see momentum in some regions overall improving the mix for us in a way that more core Networks will be there in the mix relative to radio.

I see systems integration coming back to normalized levels and also software coming back to normalized levels.

Then what of the actions we're taking?

We're taking sales exhilaration actions, particularly software sales, expanded software upsell program for the top 100 customers with a sharper focus on earlier and on recovery of some of these entry and other low-margin projects.

Then you will recall the programs that we have, that's not change but we'll accelerate them.

We've have had programs for cost through our business transformation board reducing discretionary spending, overhead spending, improving cost of sales in both products and services, and some of the R&D efficiency programs.

Then headcount control.

That is something we will do as well and then there are these smarter transformation program we spoke about, which is all but eliminating waste from Lean and Kaizen, automation and tools, but also driving a higher share of global delivery i.e.

remote delivery to improve margins relative to onsite delivery.

So that is kind of the actions that we will take and some of the trends that I will be changing.

And maybe a quick comment, Sandeep on the 5% software.

That is of course the year-over-year delta is that delta has elements of being abnormally high last year as well as elements of being abnormally low this year.

So it's not like everything will be sort of normal level to down.

So I think that is just an important thing to note.

Then on IPR, and the year on year and sequential increase in Nokia Technologies net sales includes revenue from all of Technologies licensing negotiations, litigations and arbitrations to the extent that we believe is currently required.

But they are not a forecast of the likely future of ongoing licensing projects.

Now when you look at these numbers sequentially and you look at the sequential increase from the EUR149 million to the EUR266 million and we said that about 80% of that would be classified as nonrecurring and about 20% would be classified as recurring.

So that leads to a number between EUR20 million and EUR25 million, which we have and as we described as recurring.

Thank you, Sandeep.

Stephanie, next question please.

Andrew Humphrey, Morgan Stanley.

Hello it is actually Francois.

In terms of the R&D spending, I am very, very, very surprised about you indicating more spending on 4G and 5G.

I think we discussed this intensively last year, especially at the analyst day that actually you had the right budget and everything for the future.

So what is changed basically since analyst day.

Did you have any pressure from your customers to spend more?

What has changed basically.

Thank you.

Thanks, Francois.

Of course it's a dynamic market, so number one I believe the industry requires more investments in LTE, particularly in driving LTE advance, carrier aggregation, three carrier aggregation and so on, 5G and Cloud.

And some of these LTE are driven by competitive feature requirements.

Now I can sit there and just wait to lose competitiveness or I can take action and say we want to be actually at the forefront of competitiveness and we want to meet and get ahead of some of the customer needs.

So that is what's driving those investments.

And again as we explained before there are headwinds from Forex that negatively impact both OpEx and cost of sales.

As we said there are tailwinds to revenue.

So there's also that thing that you have to keep in perspective.

But again as we discussed earlier today, so this year on year increase in OpEx so if we call that the pressure than that pressure we clearly expect to ease towards the later part of the year.

Thank you, Francois.

Stephanie, next question.

Richard Kramer, Arete Research.

Thanks very much.

Rajeev since you mentioned you'd gone and spoken to a number of customers, what are they telling you about their installed basis of relative Nokia and Alcatel-Lucent equipment?

And what has that told you about how you might be able to reduce costs and roadmaps?

And other simple question maybe for Timo, within Technologies it seems like the time is running fairly short in which you might want to conclude a larger brand licensing deal.

Do you feel that is something that might contribute materially to income in 2015?

Or is that something that you are going to take your time doing and sort of feel your way into the market as you were with the N1 tablet?

Thank you.

Thanks, Richard.

Let me start with the roadmap question.

I would characterize the discussion operatives as being quite pragmatic.

We've talked about these open interfaces and the fact that there is the [sipree] interface between the radio frequency and the base band unit in a base station.

There would be similar open interfaces in IMS, VoLTE and many of co-Network platforms.

And I think the reception is positive for that kind of thinking.

It's positive to the fact that operatives don't want large scale swaps when it's not necessary.

And particularly because technology has evolved to a point.

What I expected has played out well in the discussions.

But of course it's early days because, we're not at the point that we've made any portfolio decisions in that will only have been towards closing.

But remarkably positive discussion so far.

And then regarding the brand licensing.

Clearly as you say we have tested the brand licensing business model on the market with the N1 tablet and this is a learning exercise for us.

And I want to remind that we invested over EUR20 billion into brand marketing during the time when we were in the devices business.

This is really a brand which is recognized for four billion or some people on the planet and is pretty soon going to be without the product.

We think it's a vacuum which we need to try to fill with a very smart business model i.e.

a licensing business model which is capital light and follows the licensing business models of the other businesses in our Technologies unit.

Then when it comes to 2015, as this licensing business unit -- brand licensing business is different from IPR licensing in Technologies because it does not have in the same way these kind of lumpy dynamics necessarily or at least how we understand it currently.

And for that to be a meaningful contributor to bottom line, we of course need to ramp up a lot of volume.

Because business volume -- this business model is really volume based and in that sense I would say that it would be unrealistic to expect that would have a significant impact on Nokia's 2015 numbers.

On the other hand, I think it's very interesting business opportunity long-term for the Technologies business unit, particularly when in latter part of 2016 the brand does not have any of these limitations anymore and we can also consider licensing it for smart phones.

Thank you, Richard.

Stephanie, next question please.

Johannes Schaller, Deutsche Bank.

I was just wondering with the increase from Microsoft in Technologies, is it fair to assume that Microsoft currently accounts for roughly pretty close to one-third of your Technologies revenues?

And maybe in that context, what would happen if one of your smartphone licensees decides to exit the smartphone business?

Can you give us some details about how such a deal would then work, how the contracts are currently structured?

Would the licensing revenue drop off pretty quickly over would that phase out during a longer period of time?

That would be great to understand.

Thank you.

Thanks for the question, Johannes.

First on the Microsoft.

The example that I gave earlier in the call, i.e.

comparing the EUR149 million to EUR266 million, i.e.

the sequential example, Microsoft was already in those numbers.

When we were talking about the year on year example then in that comparison Microsoft plays a role.

Just to be very clear on that.

We have not discussed exactly -- why you're kind of like what was the Microsoft deal that we just went through in the actual Microsoft transaction, what was the new license.

Sorry, I can't give you more color there than if we look at any of these licensing deals.

So they take different forms.

Some have a fixed payment and fixed annual schedule.

And some are more based on volumes and percentual numbers on those volumes.

And then there is a mix in between so I really can't give you one answer to what would happen if suddenly somebody would decide to exit the handset business.

So it really depends on the contract structure.

But I just want to remind that typically these contracts are fairly long in nature so people generally don't want to make short-term licensing and contracts.

Because you utilize a technology in your devices for long-term or whatever consumer electronics or other devices you would be making.

And in that sense it doesn't make sense to try to negotiate this for a very short period.

Thank you, Johannes.

Stephanie, next question.

Vincent [Mellet, Auto].

Question on the rationale of R&D acceleration in 5G Cloud.

Alcatel-Lucent merger, how do you know that it's not overlapping Alcatel-Lucent R&D to be sure to have a full synergy?

Thanks, Vincent.

Of course we are competitors at this point and we continue to behave like that.

So 5G if you think about the complementarity, we are stronger in 5G or in radio overall so it would make sense for us to be beneficiary of the fact that we are sort of driving all of the investments in that space.

Cloud again I step back and say is it complementary?

Yes.

We have a lot of the virtualization elements that NFV elements on our side and actually they bring software defined networking, they bring IP routing, they bring orchestration.

So I don't know what they will do but if they continue to do well in those areas it's completely complementary Delco Cloud core portfolio.

Clearly as we said earlier we continue to be competitors on the market and it is of course natural that both companies will need to continue to invest in areas to stay competitive on the market until the transaction closes.

I think it's typical in these kinds of situations and is unavoidable and of course that can be taken out when the transaction closes.

Thank you, Vincent.

Stephanie, next, next question please.

Tim Long, BMO Capital.

Just a two-parter back on the Technologies business.

First, could you give us a sense, you talked about some good visibility into new licensees, so could you just give us a sense, were there any new licensees added in the quarter and how does that look for the rest of the year?

And have you gotten a chance yet to give a look at what adding Alcatel-Lucent -- they had there own programs where they were trying to increase their monetization of patents.

Do have a view of what you'll be able to do with the combined portfolios?

Will that be pretty additive to what Nokia's currently doing?

Thank you.

So first on the overall Technologies really the situation is that the year on year and sequential increases in Nokia Technologies net sales include revenue from all the Technologies licensing, negotiations, litigations, and arbitrations.

Do they extent that we believe is currently required.

But again remind they are not the forecast of the likely future of ongoing licensing projects.

So that's really as far as we can go there.

And then when it comes to our portfolio, you are absolutely correct that [Alcatel] has a broad IP portfolio.

Of course there -- it's our understanding because we have not been able to look deeply into the portfolio, has been slightly in different areas.

We of course have had a lot more investment in the handset related IPR, so that's the difference in the portfolios.

The way we think about it, and this is what we have said during the last couple weeks as well, is that we think we have a unique structural operating model where we have some IPR in the Technologies unit and that is simply something that people need to license if they want to do certain businesses.

And particularly in the mobile has it's space and then we have some IPR is Nokia Networks, which has been generated during the [innocent] times, that's a separate unencumbered portfolio which the Networks business is willing to cross license, if it so needs.

Our thinking here would be, and again this requires more restructuring, is that our portfolio likely wouldn't end up being merged into the Technologies business so that - sorry - end up being merged into the Networks business so that the business model in Technology stays intact.

And that way we can then see what in the end would be the optimal utilization of the combined Company [piping] and of course the utilization possibilities are licensing or then maybe selling some IP depending on how that would pan out.

I would also make another very important point there for longer-term this new Company would be investing EUR4 billion to EUR5 billion into R&D annually and of course the machinery which we will create new IPR will also be significantly enhanced.

Thank you, Tim.

Stephanie, we will take a last question for today.

Ehud Gelblum, Citigroup.

I'm going to make this a good one.

Timo, a couple of clarifications and then a broader question for Rajeev.

First of all IPR, Timo, I was always under the understanding and other companies do this as well so it's collected in dollars and so it would've -- FX would've had a bigger impact on transaction to euros.

But clearly, that's probably not the case, so if you can let us know how is IPR stated in contracts?

The second clarification is networks IPR seemed to jump drop EUR25 million this quarter and that you didn't callout but certainly has an impact on your margin in Networks.

Give us a sense as to why that happened and how much more IPR is there in Networks that could fall off as the year goes on?

So what kind of headwinds are you facing on the margin side there versus could you get some of that back and can that actually help restore some of the Networks margin as we go through the year?

The broader question, Rajeev is I'm still trying to square the circle on how your funnel can remain strong and yet the market conditions seem to be more challenging now then they seemed to be in January and even a couple of weeks ago when you announced the Alcatel purchase.

And trying to understand who the price aggressor is?

Because it's clearly not the guy you are purchasing.

So it must come out of China and why they would suddenly be doing this after a couple of years of seeming to have a more calm outlook on the pricing environment?

Thank you.

Maybe I will start with IPR.

Actually in our case and maybe you can look at this as a long-term - I don't know -- many the majority of our IPR is an euros and that is because when we negotiated much of this at the time we were in a position where we could demand that and it made sense for the situation at the time.

You have to remember that a big part of our IPR which is contributing to current revenues has been negotiated before the planned change or happening change in the business model.

We have fairly little FX impact on top line at moment in our IPR revenues.

And then regarding Networks IPR, so yes we called out in Q4 that EUR25 million in Networks and that of course is a sequential change towards year one and not year on year change.

And that's why we have not been discussing that earlier in the call.

And Networks has generated like I said a significant IPR pool which sits in our Networks business.

And of course we look to opportunities to continue to monetize that portfolio as well.

But of course majority of that is there for Networks cross licensing but there can be further monetization opportunities.

I was a couple a couple things quickly.

One just on IPR Technologies.

I want to just say that the sale funnel is strong.

We have a robust pipeline.

There's a strong discipline on driving that.

I've been reviewing this with Ramzi Haidamus who runs the unit and clearly we have a capacity to run multiple cases in parallel compared to the old Nokia.

And we would need to run it in the balance of negotiation, litigation, arbitration.

So that's what I wanted to add and the question on sales funnel being strong.

Yes, market conditions offer volatility in terms of CapEx.

Our win rate is stronger, our portfolio has gotten stronger and that has allowed for a more healthier sales funnel, including our qualification of criteria.

The ones we go after is stronger than before.

In terms of who the aggressor might be I think I would not want to go there.

Thank you for your question and I actually with that I would like to turn the call over to Rajeev for some closing remarks.

Thanks Matt, thanks Timo for your comments.

Thanks again to all of you for joining.

We've had a lot of discussion today about Q1 performance but I want to reiterate our strong belief that the purchase of Alcatel-Lucent offers the best direction for Nokia to ensure long-term growth as well as to create long-term value.

I said when we announced the transaction that I firmly believe that it was the right deal, with the light logic, at the right time.

Everything I've heard since then has strengthened that view.

The second comment is simply to acknowledge that while we are displeased with Networks financial results in Q1, I am confident that we have built an organization and culture that is resilient and strong.

In more challenging times the exceptional execution capabilities of the Networks team will be even more important as we implement detailed plans to deliver on our financial targets for the full year.

Of course we also need to maintain the momentum in both Technologies and HERE.

We approach those challenges with optimism, with a strong desire to meet our commitments, and with a team that has a strong aversion to missing goals.

We are realistic about the risks that lie ahead, but also see opportunities and we are intent on mitigating the risks and seizing the opportunities.

With that thank you very much for your time and attention, Matt back to you.

Ladies and gentlemen this concludes our conference call.

I would like to remind you that during the conference call today we have made a number of forward-looking statements that involve risks and uncertainties.

Actual results may therefore differ materially from the results currently expected.

Factors that could cause such differences can be both external, such as general economic and industry conditions as well as internal operating factors.

We've identified these in more detail on pages 74 through 89 of our of our 2014 annual report on Form 20-F, our interim report for Q1 2014 issued today, as well as our other filings with US Securities and Exchange Commission.

Thank you.

This concludes today's conference call.

You may now disconnect.