諾基亞 (NOK) 2015 Q2 法說會逐字稿

My name is Stephanie.

I will be your conference operator today.

At this time, I'd like to welcome everyone to the Nokia second-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you.

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 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 Q2 2015 issued today, as well as our 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 results information and a reconciliation between the non-IFRS and the reported information.

With that, Rajeev, over to you.

Thank you, Matt.

Thanks to all of you for joining.

Nokia delivered strong results in the second quarter, underpinned by excellent performance across all three of our businesses.

This outcome positions us well to meet our full-year objectives for the Company.

At the Group level, we delivered net sales of EUR3.2 billion, up 9% year-on-year, although down 1% on a constant currency basis.

Non-IFRS operating profit of EUR521 million or 16.2% of sales was up 51% year-on-year.

We delivered a non-IFRS gross margin of 46.7%.

Non-IFRS diluted earnings per share was at EUR0.09 partially reflecting a gain of approximately EUR110 million related to investments made through our venture fund.

Timo will cover this in a few minutes but even if you exclude that gain, I think it is apparent that these are very good results.

I am particularly pleased by Nokia Networks, which rebounded dramatically from its tough start to the year.

HERE and Nokia Technologies also maintained their excellent momentum, with both delivering year-on-year sales and profit growth.

I will turn to the details of the results in a moment, focusing mainly on Networks.

Like last quarter, Timo will cover the quarterly numbers for HERE and Technologies.

Before that, however, I wanted to give you an update on the Alcatel-Lucent deal, as well as a brief update on our plans for HERE.

First, Alcatel-Lucent.

We're making clear progress with the regulatory approval processes and last week took a major step forward with approval from the European Union.

This breakthrough followed the approval of the US authorities.

In addition to these approvals, we have obtained antitrust clearances in Brazil, Canada and Russia with a total of 11 countries now agreeing to the transaction.

We continue to have good constructive engagement with regulators in China and are cooperating with all other authorities to close the reviews as quickly as possible.

Additionally, efforts are moving well on the integration planning front.

Work streams are fully resourced and project plan development for those work streams have been kicked off, with key milestones identified and day one readiness checklists in place.

Considerable effort has been invested in identifying the target operating model for the Company given that Nokia and Alcatel-Lucent have different approaches today.

Good progress has been made.

We will continue to focus on organizational design and the designation of future leaders within that design planning.

In general, we plan to take an evolutionary approach, as we want to limit disruption to our business and not provide any room for competitors to attack.

Then HERE.

I know you have been seeing a lot of rumors in the press about what might happen and when it might happen.

That is unfortunate, but should not distract attention from why we are doing what we are doing.

On our last call, I said that we had embarked on the strategic review of HERE in the context of two important developments.

First, that location services are becoming of even greater strategic importance to automotive companies and others.

Second, that Nokia's portfolio will become increasingly Network-focused once the Alcatel-Lucent transaction closes.

I also said at the time that we think HERE is an excellent asset and that our goal is to find the best possible solution for Nokia and its shareholders and for HERE and its employees and customers.

None of that has changed.

What has changed is where we are in the process.

We are now in an advanced stage of our strategic review and expect to have more definitive information to share shortly.

Beyond that, there is really nothing more I can say other than, we will communicate more as soon as we can.

With that, I will turn to Networks, which had a terrific rebound from weak profitability in the first quarter to deliver an excellent second quarter.

You will recall that when we announced our Q1 results, I noted that while growth was good, profitability was impacted by five factors: one, weak software sales; two, strategic entry deals, particularly in China; three, challenging market conditions; four, operating expenses that partly reflected negative ForEx impacts; and five, a mix shift in global services.

At the time, I said that we had actions to improve in these areas.

I am pleased to say that in Q2, those actions delivered.

First, software sales were up significantly and co-network sales improved as well.

While we do not disclose full details about software sales, I would note that software share in our sales was up both sequentially and year-on-year by approximately 500 basis points and 400 basis points respectively.

We've been very focused on software sales and on putting the systemic improvements in place to ensure that we are able to price and sell software in the right way, as the industry continues its hardware to software migration.

Despite these underlying improvements, I would caution against any assumptions that software share will be at a similar level in coming quarters.

We are starting to see more difficult seasonality patterns, with stronger quarters in Q2 and Q4 offset by weaker first and third quarters.

Second, strategic entry deals.

On our last call, I said that we expected the impact of these deals to ease in the second half of the year.

Given that we were able to successfully reduce their impact in Q2, we no longer expect to see further significant easing in the second half of the year.

The third factor is the competitive environment.

Last quarter, I said that market conditions were challenging and that there was evidence of a near-term shift in market behavior.

I continue to believe that to be true.

We intend to remain disciplined in the deals that we take, but we also cannot ignore market reality.

Thus we will continue to take out costs and drive operational improvements wherever and whenever we can.

Unlike others who have yet to acknowledge that market conditions have changed, we are already working to mitigate the situation.

As the second quarter shows, our disciplined operating model positions us well in this environment.

The more we are able to act now, the better prepared we will be to limit the impact on our profitability down the road.

This brings me to the fourth factor, costs overall and not just operating expenses.

I have mentioned our smarter program on previous calls.

That program has eight underlying initiatives that when combined address the clear majority of the Company's cost base.

I will not go through each initiative here but just highlight two.

First, R&D transformation, which is focused on improving R&D productivity, efficiency and cost intensity with no negative impacts to product roadmap.

We delivered clear R&D improvements in 2014 and continue to work hard to maintain that momentum.

Second, regional services productivity improvement, which ensures we have the most efficient delivery model across all the business lines in global services.

This effort has already delivered a strong pipeline of improvement areas, which we track rigorously to ensure effective implementation with financial impacts linked directly to our P&L.

Other topics include site strategy and consolidation, supply chain transformation, focused improvement of underperforming customer accounts, IT modernization and more.

All of these are monitored through our business transformation board in order to ensure delivery of the target cost reductions along with assessment of potential headcount implications.

Additionally, to ensure effective control of headcount, we have a headcount steering board, which serves both as a management body as well as a challenger to the various units on their headcount plans.

In short, we continue to have a laser-like focus on costs and operational improvements.

We will not relax that focus in the coming quarters.

Finally, the mix in global services.

Last quarter, we pointed to more Network implementation and less systems integration; while in Q2, we saw a tilt back in favor of systems integration, which also saw much better profitability in the quarter.

Care services and network planning and implementation -- network planning and optimization also performed quite well, both on a sequential and year-on-year basis.

Now to the quarterly details.

Networks delivered year-on-year net sales growth of 6% in the quarter; however, when you exclude the currency impact, sales were down 4%.

Underlying gross margin were very strong, in fact, the best ever in the history of Nokia Networks at 40%, up 190 basis points year-on-year versus the decline at the market leader.

Underlying operating margin was 11.5%, a 50 basis point increase from the same quarter last year.

Our mobile broadband and global services business segments both grew in the second quarter, albeit helped by currency tailwinds.

The business mix in the quarter was 51% mobile broadband versus 49% for global services.

A significant shift from the 53/46 mix one year ago.

Global services had one of its best quarters ever.

Year-on-year growth of 12.4% including in five out of six regions and four out of five business lines and a roughly 12% increase in absolute operating profit given an operating margin essentially flat from one year ago.

Overall, we are seeing very good progress in professional services that are not always attached to mobile broadband, but actually have the potential to pull through software and hardware sales.

Mobile broadband saw a significant shift from its small operating loss in Q1, with an operating margin of 8.8%, a 110 basis point improvement compared to last year.

As I noted earlier, we saw strong software sales, which was a clear driver of this performance.

Interestingly, while still a relatively small business, our small cell offering is starting to get traction in the market.

During the quarter, we demonstrated excellent small cell performance with China mobile.

We are also seeing growing customer interest in LTE-based public safety, which we identified in our strategy as an area of future opportunity.

Turning to the regions, I will provide a bit more color than usual, given some of the shifts that are underway.

Overall, we saw year-on-year sales growth in five of our six regions, with only Asia-Pacific weaker as a result of market declines in Japan and South Korea.

Greater China led the way in growth, up 24% year-on-year given the ongoing LTE rollouts.

Our current expectation is that market momentum in China will remain strong until year end.

China also has a big impact on the go-to global market, while our view of the market being flattish at constant currency remains unchanged, much of the growth is in China, where foreign vendors have a smaller share than the global average.

Middle East and Africa grew very well at 22% year-on-year.

We see ongoing opportunity in the region, particularly in Iran, following the latest news about the future relief of trade sanctions.

We are excited about reestablishing and building relationships with our customers in the country and contributing telecommunications solutions for the people of Iran.

Then North America, where we saw a particular strength in the network implantation business line, partly coming from the acquisition of SAC Wireless, which we had completed in 2014.

As I said on our Q4 results call, we are working with Google on the possibilities of opening up the ecosystem around 3.5 gigahertz spectrum for mobile broadband in the United States.

I would also note that we slowly continue to gain traction in earning the trust and business of North America's largest operators.

In Asia-Pacific, we felt the impact of the overall decline in the Japan and South Korea markets, but India is performing extremely well in terms of both growth and profitability.

Southeast Asia, which in our structure, does not include Indonesia, is also going well, roughly doubling sales compared to last year.

We do not see any near-term catalysts for either Japan or South Korea to snapback to earlier levels of spending, although we remain very well-positioned in both markets.

Europe is a mixed story for us, parts of the region are very challenging.

Russia for example is seeing aggressive actions from the Chinese companies as they seek to leverage current political trends.

Southeast Europe on the other hand, which includes countries like Portugal, Italy and Turkey is very solid for us, with modest growth despite the underlying macroeconomic issues.

Finally, Latin America.

As you know from previous calls, this has been a challenging area for us.

But we are starting to finally see some stabilization.

Sales were up by 5% year-on-year and the team there is delivering at a more consistent and predictable manner.

That said, the challenges remain and we do not yet have the diversified customer base that we need for the long term.

In short, progress, but work in Latin America is still underway as results are not yet satisfactory.

Just two other comments on Networks.

First, during the quarter, we launched the innovative AirFrame Data Center Solution for telecom operators to implement cloud services.

There are plenty of vendors selling cloud technology but very few who can offer cloud technology that is both telco grade and cost effective.

We have something we believe that is quite unique and initial customer interest has been very good.

Second, we signed an agreement to acquire Eden Rock Communications, LLC to boost our multi-vendor self-organizing network radio optimization capabilities, so SON.

Customer feedback on this asset has been extremely positive.

We are moving fast to bring these capabilities to a wider market.

In summary, a very good quarter for Networks after a tough start to the year.

With some of the puts and takes that I mentioned and with the impact of seasonal trends, we could see a lower operating margin in Q3 than in Q2, but still be in a position to deliver on our full-year targets.

Now to HERE, which delivered another quarter of excellent results, showing significant improvement in both year-on-year sales and profitability.

Given the distraction of the strategic review, I have to say that the HERE team has been doing some excellent work.

These results are not the sign of a business that has taken its eye off the ball.

Highlights in the quarter included HERE expanding its real-time traffic service to 50 countries from 44, while adding innovative features that allow drivers to make more intelligent routing choices.

HERE was also selected by Finnish traffic agencies to lead a pilot project to help vehicles communicate safety hazards to others on the road.

The pilot, which will start in 2016, will assess the capability of current and emerging mobile network and location cloud technologies to support the timely communication of critical safety information like black ice, sudden traffic build-up or an accident.

Finally, on to Nokia Technologies, which also had a terrific quarter.

Highlights included LG Electronics becoming the latest of more than 80 licensees for our standard essential patents.

Importantly, the first major smartphone manufacturer to join the licensing program since we divested devices and services.

This was a great confirmation of this trend of our IPR portfolio.

The Technologies' team took further steps to focus the business on projects that present the most interesting opportunities.

We got a taste of that with the launch on Tuesday of OZO, the first commercial virtual reality camera for professionals.

It is an incredible tool to creative amazing virtual-reality experiences for people around the world and puts us at the heart of the coming virtual reality revolution.

Also it is a truly innovative product offering, a fully-3D, 360 degree camera for recording and playback across the spectrum of virtual reality devices.

It also is not just a gorgeous design, but also truly differentiating technology with unique algorithms that remove today's time-consuming step of assembling ascetical image.

We think, it will have a wide range of applications: film studios, marketing firms, travel agencies and many others.

Early feedback from potential customers and ecosystem players has been very positive.

It is a clear proof point that we are delivering on our strategy, which includes a focus on digital media and digital help.

During the quarter, we also reiterated our position about what we might do in the future related to smart phones.

Although some of the press coverage misses the point, we have consistently said that if we returned to that market, it would be via a brand licensing model.

As you know, the soonest this could happen is the fourth quarter of 2016.

We do not have any intention to try to recreate the full in-house mobile phone business that we once had.

With that, let me now hand the call over to Timo for some more details.

Then we 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, as well as our venture fund investments before turning to my customer discussion and our cash performance.

Finally, I will say a few words on our outlook.

Starting with Nokia Technologies, net sales of EUR193 million in the second quarter increased by 31% year-on-year or 24% on a constant currency basis.

This was primarily due to two factors: first, approximately 50% of that year-on-year growth in Nokia Technologies net sales in Q2 was related to higher intellectual property licensing income from existing and new licensees; and second, approximately 50% of the growth was related to non-recurring net sales.

Taking all of the moving parts into consideration, Nokia Technologies underlying quarterly net sales run rate was approximately EUR25 million lower than the EUR193 million of net sales reported in the quarter.

When compared to the year-ago quarter, this still represent solid underlying top line growth.

However, as we have said earlier, this can be an inherently large business particularly when viewed through a quarterly lens.

On an annualized basis, the quarter exiting run rate of the Nokia Technologies net sales is approximately EUR670 million.

As I commented last quarter, we are continuing to make very good progress in our licensing activities, for example, adding LG Electronics during Q2 as the latest company to license our standard essential package.

Finally, from Nokia Technologies, I wanted to briefly comment on the OpEx turns and drivers for the business.

If you recall, in conjunction with our Q4 2014 earnings earlier this year, we provided guidance for Technologies quarterly non-IFRS OpEx run rate to be approximately in line with the fourth quarter 2014 level of EUR69 million.

In Q2, Nokia Technologies non-IFRS OpEx was EUR79 million, an increase of EUR30 million compared to the year ago quarter, partially driven by foreign exchange movements.

Given the significant long-term growth opportunities that we continue to see for Nokia Technologies, these investments are well aligned with our plans to capture the value that lies ahead.

Additionally, I believe that we are already starting to see some of the early proofs as we execute our strategy.

For example, as Rajeev highlighted, we announced the revolutionary virtual reality OZO camera earlier this week.

We have beefed up our licensing resources, which allows us to run multiple concurrent licensing processes.

We have a very structured and disciplined approach to these investments and are focused on activities that we believe have a clearly identified path to value creation.

Accordingly, we have increased our quarterly non-IFRS OpEx run rate for the remainder of 2015 to now be in line with the Q2 2015 level of approximately EUR79 million.

We continue to believe that there is significant operating leverage and cash flow generation potential in the Technologies business should we successfully drive revenue growth over the long term.

Turning to HERE, which delivered another solid quarter.

In Q2, HERE delivered year-on-year net sales growth of 25% or 12% on a constant currency basis.

New vehicle licensees of 4.1 million units in the quarter compared to 3.3 million units in the second quarter of 2014 or 24% year-on-year growth.

HERE's second-quarter non-IFRS operating margin was 9.3% compared to a breakeven in the year-ago quarter.

This was primarily driven by operating leveraged from the higher net sales, which more than offset higher non-IFRS operating expenses.

Now a few words on our venture fund investments.

Last quarter, I spent some time highlighting our strong track record of growth states investing through the Nokia Growth Partners and BlueRun Ventures entities.

In addition, I commented that after the end of Q1, Nokia Growth Partners had sold its holdings in Ganji.com, a major online local services market platform in China to 58.com, its competitor in the same field.

BlueRun Ventures also invested in Ganji.com and participated in the transaction, which valued Nokia's total indirect holdings in Ganji.com at approximately EUR200 million.

In Q2, we recognized EUR110 million of Group common functions other income, primarily related to the transaction.

The final amount and timing of additional income or expense is dependent on the value and the date at which the venture funds liquidate the 58.com shares.

At the end of the second quarter, the fair value of our venture fund investments was approximately EUR1 billion.

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

Turning to our cash performance during Q2.

On a sequential basis, Nokia's gross cash declined by approximately EUR900 million, with a quarter ending balance of approximately EUR6.6 billion.

Net cash and other liquid assets declined by approximately EUR840 million, with a quarter ending balance of approximately EUR3.8 billion.

It is important to highlight that there were two primary negative drivers of the sequential change in net cash.

The payment of the annual dividend and the annual incentive payments relating to 2014 at Nokia Networks.

Excluding these two factors, Nokia's net cash would have increased sequentially.

Taking a step back and working down the cash flow statement, the primary drivers of the movements in our net cash balance in Q2 were the following.

Nokia's adjusted net profit before changes in net working capital was EUR530 million in the second quarter, primarily driven by Nokia Networks and Nokia Technologies.

Nokia's net cash from operations was EUR258 million outflow, primarily driven by cash outflows related to net working capital.

In Q2, Nokia had net working capital cash outflows of approximately EUR760 million, which included approximately EUR30 million of restructuring related cash outflows at Nokia Networks.

Excluding this, cash outflows from net working capital was approximately EUR730 million, primarily driven by decreases in short-term liabilities and to a lesser extent increases in receivables.

The sequential decrease in short-term liabilities was brought primarily due to the incentive payments I mentioned earlier related to Nokia Networks' strong business performance in 2014, as well as a decrease in accounts payable.

Nokia had cash outflows of approximately EUR30 million related to net finance on income and expenses on approximately EUR80 million of inflows recorded in other financial income and expenses related to foreign exchange hedging and forecasted cash flows.

The hedging of Nokia's non-euro cash and cash equivalents balance as well as the timing mismatch between foreign exchange cash flow impact on other non-euro denominated balance sheet items.

Completing the net cash from operations picture, Nokia had cash outflows of approximately EUR70 million related to taxes.

Discontinued operations have cash outflows related to net working capital and taxes totalling approximately EUR10 million in Q2.

From an investing cash flow perspective, cash outflows of approximately EUR90 million related to continuing operations, capital expenditures and cash inflows of approximately EUR30 million related to the proceeds from the sale of investments.

Additionally, Nokia had cash inflows related to the sale of businesses and discontinued operations of approximately EUR50 million in Q2.

From a financing cash flow perspective, outflows of approximately EUR330 million were primarily due to the payment of the ordinary dividend of approximately EUR510 million in Q2.

Finally, foreign exchange rate had an approximately EUR40 million negative translation impact on net cash.

Then before I close, a few comments on our guidance.

I wanted to highlight that in conjunction with Nokia's 150-year anniversary, we will be changing the ticker symbol for our Helsinki stock.

Effective from August 10, our ticker will change from NOK1V to NOKIA.

Related to this you will see a press release from us as well as a notice from NASDAQ Helsinki in the coming days.

So then turning to our guidance.

I already covered Technologies non-IFRS OpEx update in my earlier remarks.

For Nokia Networks, we have redirected our full-year non-IFRS operating margin to be about the midpoint of our long-term 8% to 11% margin range.

This reflects Networks first-half performance as well as our expectation for the rest of the year.

Note that Nokia Networks' non-IFRS operating margin benefited from an elevated level of software sales in Q2 and that we expect seasonal factors to influence the non-IFRS operating margin performance in Q3 and Q4 of this year.

Overall, we were pleased with the strong operating performance of Nokia Networks, HERE and Nokia Technologies in Q2.

Equally, it was good to see that our systematic long-term investment strategy in Nokia Growth Partners is bearing fruit.

Although our cash performance in Q2 was unsatisfactory, this was primarily driven by the annual payments of the ordinary dividend and the Nokia Networks 2014 incentives, which will naturally not repeat themselves in the second half of the year.

As Rajeev said, I think we are well-positioned to achieve our targets for 2015.

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

Thank you, Timo.

Just a quick one.

Financing cash outflows were EUR330 million in Q2 -- just wanted to make sure that came across.

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

Operator, please go ahead.

Gareth Jenkins, UBS.

Just a quick one on networks, if I could.

You had very strong margins in the quarter.

It sounds from your commentary like there was some abnormally high software sales in Q2 after some abnormally low in Q1.

So for the rest of the year you're basically saying down in Q3 then up again in Q4.

That's the way we should be modeling it.

But what about top line?

Can you give us any help on how the top line progresses through the course of this year?

Are you expecting a recovery in certain markets to drive good top line growth in the second half on a constant currency basis?

Thank you.

Thanks, Gareth.

So let me start with the seasonality point.

We are seeing a more normal seasonality this year.

Last year was not so much the case for us because in Q1 last year, we had elevated levels of software sales coming from Japan.

In Q3 last year, we had a big North American project starting to rollout a lot of equipment.

If you take out that abnormality, Q1 is usually the weakest quarter of the year, Q2 a bit stronger, Q3 again seasonally weak and Q4 usually the strongest quarter of the year.

That's the seasonality we look at from a market standpoint.

Now when you look at software sales, I think it's important to reflect on what were the level of software sales that we had in the first half of this year and then compare that with first half of last year.

Because that becomes a bit more prudent way to look at software.

Then it's in line.

So we see overall that it is in line.

So there is no change in software per se, it is in line when you look at it longer period.

Then of course we have confirmed our guidance, which Timo just outlined on profitability, which of course takes into account our software outlook for the rest of the year.

Yes.

Regarding specific top line topics, we're not giving any top line guidance, as you know.

Besides the fact that we have just -- we expect to grow overall this year in all the three businesses.

So I don't think I can add much more color there.

Thank you, Gareth.

Let me try one more time on financing cash outflows in Q2: EUR530 million.

Okay?

Kai Korschelt, Merrill Lynch.

Just a quick question on Alcatel.

On the previous call, they said that they had seen already some customer hesitation, I guess, in wireless and IP platforms, where customers are -- where you do overlap.

Just wondering, have seen something similar?

Do you expect something similar in the second half?

Thank you.

Thanks, Kai.

No, actually, we have not seen a similar -- in fact, or hesitation from customers because of platforms in the future.

So, it's business as usual from that perspective.

Thank you, Kai.

Sandeep Deshpande, JPMorgan.

Rajeev, you had very strong gross margin in Networks in the second quarter, possibly the strongest Nokia's had.

There are some -- you talked about some of the puts and takes associated with the mix.

How should we look at this gross margin trending into the second half of the year?

It really does come back to how we look at the year.

This is more seasonally trending in a typical -- more like a typical year.

So, the way I'd look at it is that, Q3 will be -- can be expected to be a bit weaker and Q4 can be expected to be stronger.

Just as we saw a weak Q1 and a stronger Q2.

So again in line with us confirming the full-year guidance and expecting, let's say, normal seasonal factors to impact the second half of the year.

Thank you, Sandeep.

Richard Kramer, Arete Research.

A couple questions, if I may.

One simple one and one more complicated one.

For Rajeev, if you look at the underlying growth in Technologies and remove the one-off patent sale that happened and also clearly this is going to be the last quarter where you are including a year-on-year Microsoft with a new improvement.

The underlying growth rate seems to be tracking the growth rate roughly in the smartphones.

When should we expect some of these wider technology and brand licensing efforts to be material to sales?

Then a simple one for Timo, if we look at working capital, sort of very crudely looked at on the balance sheet, it's up about EUR1 billion from where it was second quarter last year.

Is this something to do with customer financing?

With the business model?

It's something that had been drawn down quite substantially in previous years.

Now it seems to be rising again quite sharply.

Can you comment on that?

Thanks.

Okay.

Thanks, Richard.

Let me start with the IP -- the Technologies question.

I think when you step back and look at it, I think the team's doing a great job in building this robust pipeline of licensees, right?

So we also are investing in that, so you saw a -- somewhat of an increase in OpEx on account of the majority of it is going to count of IP and licensing activities.

In accordance with that, we found -- LG joined the program, so that's good progress.

I think I am trying to sort of get the team to focus on multiple negotiations at the same time.

That really needs to be our operating model, have a pipeline and you have arbitration, negotiations or litigations, all have to happen at the same time.

Then in terms of implementation patents, they are somewhat tied with standard essential patents, it depends on the individual teams.

When it comes to technology licensing and brand licensing, I would say brand licensing is something that will only begin in earnest from Q4 of next year, as I said, because primarily on account of it's not devices.

Technology licensing will also take a bit longer.

When it comes to the working capital characteristic.

So I think that what you are referring on the Group level is mostly dependent by the fact that the Technologies business earnings on profitability and cash flows can have quite a big mismatch.

That runs through our working capital.

So as we said in the case of margin for example, there was clearly a prepayment on licensing, which then later runs through.

Then there are some other situations where basically the revenue can come through profitability first, and then the cash flow might follow later.

It's more driven by those dynamics than anything unusual for example, going on in the [net purchases].

Thank you, Richard.

Alexander Peterc, Exane BNP Paribas.

I'd just like to dwell a little bit on the OpEx hike in Technologies.

If you could maybe share your thoughts on how this business is going to develop into longer-term.

Are we going to see economies of scale coming through because the business is very high fixed costs and also obviously high gross margin.

So I would just like to understand, will you be able to growth there without hiking OpEx in step with revenue.

Then just very quickly in terms of the calendar of your Al-Lu offer.

Do you agree with the statements that illuminates that this could be now achieved as quicker than initially expected?

Thanks.

Okay.

Thanks, Alex.

Why don't I start with Technologies OpEx.

I think first of all, when we look at the Technologies OpEx development -- So we're up about EUR30 million year-over-year and then up some EUR8 million quarter on quarter.

So the EUR30 million from a year ago is not really comparable as we've said earlier because that is when Nokia Technologies was still part of the Group.

That was just when the Microsoft transaction was closing.

Thereafter, it has been made a separate business which has required investments in IP and so forth.

So it's kind of like we should more compare that run rate change quarter on quarter.

Of that, clear majority, is actually coming from Technologies licensing business related OpEx investment.

Actually, if you look at our release today and look at the Technologies headcount, Technologies headcount went down from end of Q1 to end of Q2.

I am simply saying this because it demonstrates that we really are very disciplined in how we look at our investments into these new activities.

So, no, it is not directly correlated to the top line.

Because basically in this business, the top line can be inherently lumpy.

If we would get a top line uptick from one of these lumpy things, we would not invest one penny more than we think is reasonable to do to get (inaudible) out of this business.

Thanks, Alex, for the question on timeline.

So the bonus is good.

We have got 11 countries as I said, the UN, US, being two of them.

China is the next one we're absolutely focused on working with the regulators there.

Good progress and discussions.

I believe our standards are very much still first half of 2016.

We continue to focus with all the remaining countries that we can meet again.

Thank you Alex.

Kulbinder Garcha, Credit Suisse.

Two very quick questions.

Rajeev, on the NSM sales performance year to date, has that met your expectations?

The reason why I'm asking is that constant currency didn't grow or end this quarter.

I would have though, given the market share gains that you have or the contracts you've (inaudible) over the 12 to 18 months, I would have thought (inaudible) in the end markets in the region worse than you would have thought 6 to 9 months ago?

Then Timo, could you (inaudible) Samsung IP arbitration on track, have timeline 650 still expected to settle in London in the second half of this year.

Many thanks.

Okay, Kulbinder, let me start with the market question.

First, I want to just step back and say how's the market looking.

We said, it is the flat market at constant currency.

We also say that it is the significant part of growth overall in the global market is coming from China because of the massive MT rollouts with the three customers there.

So one can conclude that the global market outside of China could even be declining this year.

That is the background, and of course the European suppliers in China have a lower than average share, right?

Compared to the (inaudible) Chinese.

So when I look at our performance, 4% down in constant currency and also what we did in Q1 relative to the other peers that have reported, I think we are in good shape.

Market by market if you were to look at our market share, we are holding steady.

It's all good.

But just because China is a bigger part of the growth of the market and actually it has mechanically an implication that the European peers will have lesser share.

Yes, then the Samsung arbitration.

So basically, we have said in our regulatory filings that we expect the Samsung arbitration to conclude during 2015.

Furthermore, we have also said that due to the nature of the arbitration -- the arbitration proceedings, there cannot be an assurance as to the timing of the final decision.

Okay, thank you, Kulbinder.

Mark Sue, RBC Capital Markets.

If I net out the software mix benefits are there remaining things Nokia can do to improve the operational product margins, R&D transformation for example.

Does it get harder for Marc Rouanne and his team to tighten the screws?

Or are we getting to the point of diminishing returns?

On the market, Rajeev, how do you feel about rationality starting to prevail in the industry with consolidation?

Can we actually start to think about a lift in industry wide profits for Networks?

Yes, good.

Thanks, Mark.

The first question is really on cost structure.

No, I absolutely think that we have more room to continue to find efficiency.

There is more room in R&D transformation.

I give a few pointers in my prepared remarks.

We got good efficiency last year and there's more to go for.

The same as in other parts of the business and as we just saw there's this productivity improvement program, which goes country by country, looks at upsell, this is delivery and focusing on improving costs there.

Same goes for looking at upsell by real software and many such initiatives, so I think we have something like 8 such initiatives ongoing.

We will continue to find those.

Another example is global deliveries sent and how much more can we increase up our share of delivery, which is remotely managed at the lower cost base.

A lot of this future efficiency driver will come from automating the way we do business.

So more analytics, more automation.

But we're not done here with costs.

This is an efficiency industry and we are the masters of how to play this game.

Your second question was on the rationality in the market on competitive intensity.

Again, remember I said that flat market at consisting currency a significant part of growth from China.

So that of course does mean that there are fewer deals chased by competitors which naturally raises the competitive intensity.

Then there are some deals that in my view don't merit the strategic deal qualification but they get that kind of treatment sometimes by competitors.

So having said that, in all of this, I believe our operating model is best equipped to continue with the lean operating model and so on.

So I think we're in good shape in terms of managing business deal and our lean operating model.

Mark and Rajeev, just add a numerical anecdote to the first part of the business.

So I think it's good to know that even if our OpEx is up year on year, where FX is a significant driver, quarter on quarter Networks OpEx when now the euro-dollar relate has actually been pretty flat for the first part of the year or after the Q1 closed, we're actually sequentially down in OpEx from EUR803 million to EUR789 million.

So we are really working on this hard.

This is also in line with what we said about no expectations after Q1.

Thank you Mark.

Francois Meunier, Morgan Stanley.

Rajeev, in your opening remarks, you said something about having different approach today between Nokia and Alcatel ahead of the merger.

So maybe you can explain what are those different approaches you are relating to?

The second question is about the pricing in the industry.

I think everyone got scared in Q1 about your comments about pricing getting really tough.

Now it sounds from your comments that the margin is getting a bit better or not worse from what we heard from you in Q1.

What has changed exactly?

Is it because you're less aggressive on pricing?

Or someone is less aggressive on pricing?

Thank you.

Yes.

Thank you, Francois.

On the operational model question, there are some differences in terms of the way we manage our regions, which have execution within.

Our regions are not just sales entities, they have execution driven regions.

In the case of Alcatel-Lucent it's slightly different.

It is more view-centric execution.

So they are those kinds of differences.

Not huge, but ones that we have to understand how each other -- how each Company works and what is the best (inaudible) future again, our principle would be to reduce integration to the extent possible.

So we will only really integrate where it is necessary.

G&A and sourcing and wireless, R&D and so on.

But otherwise we want to be very prudent and pragmatic about how we will set up the operational model.

It makes no differences in services execution rate.

Yes.

We have those in a separate segment and services in their case is part of the overall BUs -- the BUs that they have.

So we are working through that.

Then on the price rationality, I think the competitive intensity is still there.

That is not necessarily changed from Q1 to Q2.

What has changed is how we are managing to equip our sales for even more competitiveness in the future.

I will tell you that this is not based on some sort of hunch.

This is based on -- I'm involved in a lot of the difficult deals that the Company -- I'm personally approving those deals.

I'm in the detail on those deals, so I know what I'm talking about when it comes to intensity.

But equally, we need to be able to manage well.

We are doing that.

It is good to know what is not good enough in the market place and act on it.

So that's where we like to leave the Company, no denial is permissible.

Thank you, Francois.

Tim Long, BMO Capital Markets.

Rajeev, I just wanted to get back to the competitive environment and pricing.

It sounds like it remains challenging out there and you guys are managing through it.

Just curious, how severe is the pricing environment?

Secondly, how do you think about the growth to margin trade-off?

You are benefiting from some good currency tailwinds now.

So it doesn't really show up in the reported results, but when that anniversaries -- how should we think about having to participating in some deals with the industry reality compared to margins?

Thank you.

Yes, thanks Tim.

This is, yes, an important question.

So the balance between profit and growth is always one that we have to maintain.

So the way we run the Company and manage our regions is very much driven by performance relative to planning currencies.

So we look at constant currency and how we planned our numbers rather than letting regions get away with the ForEx driven increase.

So that way we're quite pragmatic in how we run the regions.

Your question on the trade-off, you can't of course completely ignore market reality.

If some deals are tough, you'll -- we'll be disciplined.

We walk away from many.

So we continue to retain our pricing discipline.

We have pricing committee here.

We analyze price erosion looking backwards.

We focus on what it will be going forwards based on the decisions we make in our different limits of party approval bodies of deals.

So we're very much clued into the whole thing.

So I think the balance is at a regional level.

You only take those deals that are strategic.

For me that has long-term good strong profitability profile, that doesn't go away.

So we are not still going to take any deals that -- well, they're just aggressive.

They'll be aggressive forever, so let's participate.

So while I don't think we can (inaudible) market reality, whenever there is a trade-off, we will choose profit better than just sales for the sake of it, or growth for the sake of it.

Having said that, we also want to balance our scale.

Scale is important in this business so we are prudently managing both those.

Maybe a quick comment on the currency, as you referred to the currency as well.

So the currency has a bigger positive impact on the top line, but a bigger negative impact on the OpEx line.

In that sense, they balance out, so it's actually big of a driver in the profit availability line.

Thank you, Tim.

Ittai Kidron, Oppenheimer.

I wanted to talk about the venture gain.

Timo, I think you mentioned there's another EUR1 billion of available for sale assets there.

Can you give us a sense of timing?

How do you think that -- what's the timing of this flowing into the P&L?

Also what is the built in gain in that EUR1 billion available for sale asset?

Thanks for the question.

So first of all, it's important to note that we have been investing for this for a long period of time.

So this is not like a new activity.

BlueRun Ventures was originally something we started already in the late 1990s, early 2000.

Then we moved from BlueRun Ventures to Nokia Growth Partners, where basically Nokia is actually the sole limited partner -- the sole limited partner investor into the fund.

So it's a long history, I'm simply saying it because this is an activity where you have to be again, very disciplined and think very long-term.

So these are not big annual flows running necessarily into that investment pool.

Now, I can't comment on the mark to market situation of the EUR1 billion.

Of course, as is typical in this kind of business, it's very difficult to estimate when they would flow through P&L because each exit situation is different be it drape sale, possible IPO and so forth, so I don't think I can give you that much more there.

Thanks, Ittai.

Simon Leopold, Raymond James.

Looking at the HERE business.

It's interesting in that you've shown great leverage, sales growth without tremendous operating expense growth.

I want to get a better understanding of the operating expense trends here, whether we should think about the operating expense levels as relatively stable at current levels?

Or you've talked about being in investment mode, should we expect declines?

Or are there activities that should drive growth as revenue continues to grow?

Thank you.

Thanks, Simon.

Timo here.

So if we look at the HERE business, what we have said earlier as well is that we think that business can benefit from further operating leverage with top line growth.

That is what we have said.

Simultaneously of course there is quite a bit going on in this market, when people talk about move from the current model op map to these HD maps which are needed then for driver-less cars into the future and so forth.

So I am not saying that there couldn't be an increase in the OpEx related to that, then of course we have simultaneously like in any transition then trying to drive down the current technology OpEx into more of an efficiency mode.

Then investing into the new, but yes, we expect that business could continue to benefit from further operating leverage.

Thank you, Simon.

Fredrik Lithell, Danske Bank.

Rajeev, could you please elaborate a little bit on what you expect from the North American market in the second half?

It has been a topic in several of these conference calls.

It's interesting to hear your view on if operators in the North American market have resumed activity levels or will resume activity levels to more normal levels starting from now and onwards.

Thank you.

Thanks, Frederick.

Yes, we've seen in the first half a bit more muted cautious CapEx.

(inaudible) but we think in the second half that the market could get a slight uptick.

But that is more in the medium to longer term, there would be a stronger uptick if you like.

Now, you know from our perspective that we are exposed to two out of the four major customers, so we don't have a direct correlation where the market was.

It was set to EUR70 million simply because we're not present in the other two in the same meaningful way.

Thank you, Fredrik.

Vincent Maulay, ODDO.

A specific question on the LG, I remember some patents.

You tried to say, it will boost growth margin as soon as Q3.

It could reach roughly EUR100 million annual incremental sales.

I'm sorry, Vincent.

Could you please repeat the question?

It was regarding LG.

But I was quite able to follow --

Yes.

It was on LG.

Just to know, is it fair to say it will boost growth margin as soon as Q3?

If it could reach roughly EUR100 million annual in incremental sales.

I am sorry, but we have not given any exact view on any of the licensing agreements, what we have.

In that sense, I would just like to remind that the net sales in Nokia Technologies includes revenue from all of the technologies, licensing negotiations litigations and arbitrations to the extent that we believe is currently required.

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

Thank you, Vincent.

With that, I would like to turn the call back over to Rajeev, for some closing remarks.

Thanks, Matt.

Thanks, Timo.

Thanks again to all of you for joining.

I would like to close with a couple of thoughts.

First, the developments that we have seen in the market further validate the strategic logic of the Alcatel-Lucent transaction.

Scope, the target new, more attractive markets and scale to give us the ability to deliver adequate profitability in tough market conditions.

Absolutely the right step forward for Nokia.

We believe for Alcatel-Lucent as well.

Second, the performance of Nokia Networks showed that Q1 was not the start of a new normal.

While I do not excuse our performance in that quarter, I believe that Q2 shows the power of our operating model, lean cost structure, strong execution capabilities, and resilient (inaudible) focused culture.

As I suggested in my remarks, we do not see totally smooth sailing ahead, but we are well positioned today and are working to ensure that we are well prepared for tomorrow.

Overall, a very good quarter, no doubt about it.

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 have identified these in more detail on pages 74 through 89 of our 2014 annual report on Form 20-F.

Our interim report for Q2 2015 issued today, as well as our other filings with the US Securities and Exchange Commission.

Thank you.

This concludes today's conference call.

You may now disconnect.