諾基亞 (NOK) 2016 Q3 法說會逐字稿

Hello, and welcome to the Nokia third quarter 2016 earnings conference call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin.

Ladies and gentlemen, welcome to Nokia's third-quarter 2016 conference call. I'm Matt Shimao, Head of Nokia's Investor Relations. Rajeev Suri, President and CEO of Nokia, and Timo Ihamuotila, 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 risk and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external, such as general economic and industry conditions, as well as internal operating factors. We have identified such risks in more detail on pages 69 through 87 of our 2015 annual report on Form 20-F, our interim report for Q3 2016 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. A complete result reports with tables, available on our website include a detailed explanation of the content of the non-IFRS information, and a reconciliation between the non-IFRS and the reported information. With that, Rajeev over to you.

Thank you, Matt, and thanks to all of you for joining our Q3 results call. Before I turn to the quarter, I want to acknowledge another other announcement that we made today, that Timo Ihamuotila, our Chief Financial Officer will be leaving Nokia to join ABB in Switzerland as Chief Financial Officer, and a member of it's executive committee. Timo will continue in his current role as Nokia's CFO, and as a member of the Company's Group leadership team until December 31, 2016, and will remain as an advisor to the Company until February 28, 2017. I think all of you know Timo, and know how important he has been to Nokia over the years, and to the recent transformation of the Company, in particular.

From the sale of the devices and services business, and the divestment of HERE, our former mapping business, to the purchase of Siemens' share of Nokia Siemens Networks, from the acquisition Alcatel-Lucent, to being a close partner in driving Nokia's strong performance in recent years, Timo has left his mark on Nokia for many years to come. Even if he will be missed, I absolutely support his desire for a new challenge at this point in his career.

We also announced, as you saw that Nokia's Senior Vice President and Corporate Controller, Kristian Pullola will succeed Timo effective from January 1, 2017. Kristian has been a strong contributor to the Nokia team since he joined us in 1999. He has expertise in all aspects of the CFO function, deep knowledge across our business in critical areas such as patent licensing, and he has been heavily involved in all key aspects of the Nokia transformation. His track record, plus his close collaboration with Timo over many years makes me confident that his transition into the role will be smooth and effective. We are very excited to have Kristian joined the Group leadership team as Timo's successor.

And with that, on to the quarter. And despite market conditions that were softer than expected, Nokia again delivered a solid quarterly result. At a Group level, we reported net sales of EUR5.95 billion, down 7% year-on-year, and 6% lower on a constant currency basis.

Gross margin was 39.7%, up 200 basis points year-on-year, while operating margin was 9.3% or 140 basis points lower year-on-year. We reported diluted non-IFRS EPS of EUR0.04. Within those results, Nokia Technologies performed extremely well, with net sales up more than 100% on catch-up patent licensing revenue, and operating profit up nearly 170% year-on-year.

Even when you exclude the impact of the large nonrecurring licensing gain sales and operating profit, were both up by approximately 50%. So quite pleasing results there. On the network side, you will remember that in Q2 we said that we expected to see slight sequential improvement in net sales and operating margin for Q3. We delivered in both of those areas. I was particularly pleased with the profitability in networks. Despite their 12% year-on-year decline in net sales, our gross margin was up by 20 basis points, and our operating margin landed at a solid 8.1%. With this performance, we are confident that we will deliver an operating margin within the 7% to 9% range for the full-year. And as I noted last quarter, if we execute well, we could clearly land about the midpoint of that range.

I think this performance reflects two things. First, that Nokia's disciplined operating model, relentless focus on cost control, and constant industrialization of best practices across the Company give us a competitive advantage. From centralized pricing to common methodology for reducing product and service costs, from ongoing performance management processes that are deeply embedded into our mode of operations, to our structured approach to integration and synergy capture, and our optimization of our R&D spend through a favorable high cost/low cost ratio, increased automation, I think it is safe to say that we simply run our Company differently than others. And in a way, that we think is ideally suited to both our sector, and to challenging market conditions. With this systematic approach, we are able to spend what is needed to remain competitive, and there should be no doubt, that we continue to make the right investments in our focus areas to drive long-term value creation.

Second, our performance reflects the broad portfolio we gained with the acquisition of Alcatel-Lucent. We now extend well beyond the mobile market, and we are benefiting from growth in our fixed networks and optical networks businesses. Additionally, while most of our revenue still comes from communication service providers, we saw growth in both revenue and orders in the quarter from other customers, including large internet companies that we call [web-scale] companies, plus other extra-large enterprise customer segments like railway and government. But as you know well, the communication service provider market is difficult, and has been for some time, particularly in mobile infrastructure, as large LTE roll outs slow.

After the strong order intake we saw in Q2 across many businesses, it is fair to say that in Q3, we did not see quite the same level of spend. And more broadly, we now believe that our overall addressable market will show a decline for full-year 2016, rather than being flattish as previously expected. As we look forward, we expect market conditions to stabilize somewhat in 2017, with the primary addressable market in which Nokia competes likely to decline in the low single-digits for that year. Timo will comment more on our outlook in his remarks.

Challenging network markets, however, are nothing new to Nokia, and I believe that Nokia remains well-positioned for the reasons I just mentioned. We have tight control over the business, and should conditions change, we have additional operating levers that we can pull in order to maximize our profitability. We'll be prepared to do just that, if necessary. For now, however, we remain well on track to deliver EUR1.2 billion of total annual cost savings in full-year 2018.

With that, let me turn to our three reportable segments, ultra broadband networks, IP networks and applications, and Nokia technologies. In ultra broadband n, Q3 net sales were down 13% a year-on-year basis. Within this, mobile networks revenue fell 15% year-on-year. Gross margin for ultra broadband networks was about 1 percentage point higher year-on-year, reflecting our operational discipline, and our cost savings efforts starting to bear fruit.

Fixed networks had another solid quarter, posting a 3% rise in net sales year-on-year and healthy profitability. The team had an important win in the UK with British Telecom's broadband infrastructure unit, Openreach. Nokia will support Openreach ultra-fast broadband rollout with our G.fast solution which delivers fiber-like throughput speeds over existing copper infrastructure.

I also want to highlight the progress we're making in the cable operator space, another growth area where we are well-positioned. As you know, we closed our acquisition of Gainspeed in late [Q2], in a deal that accelerates our work with cable operators. In Q3, fixed networks wasted no time, and quickly delivered a new Gainspeed product portfolio which gives cable operators a faster, more cost-effective way to increase capacity of their existing hybrid fiber coax or HSC networks, in order to meet growing customer bandwidth demand.

Major customers in the cable space have expressed solid interest in this new portfolio. We have multiple trials ongoing around the world, and we see the opportunity to drive new revenue in the medium-term. We see Gainspeed as an example of best practices on multiple levels. It's speed of acquisition and speed of portfolio launch, and it's speed of engagement with large new customers, that we aim to replicate in other parts of the Company.

Now I want to turn to mobile networks, which accounted for about 80% of the overall year-on-year sales decrease in the networks business. Slowing LTE rollouts as I mentioned, fewer mega deals, macro economic challenges in places like Latin America, Russia, and Ukraine, and sluggish overall demand in Europe all took their toll. The mobile market in China has also slowed as expected, but we continue to have a strong presence there, a fact that you can see in some of the deals we signed in the quarter, such as with China Telecom to expand 4G technology deployment in 19 provinces, including in the mega-city Shanghai.

We also took steps to increase demand for our products prior to the launch of 5G, announcing 4.5G Pro, and our plans for the future deployment of 4.9G. These technologies provide not just the superior performance and capability needed to meet high network demand today, but a smooth upgrade path to 5G in the future. You may have seen an agreement we announced this week, that Nokia will help Globe Telecom in the Philippines move to cloud and IoT ready networks using our 4.5G Pro solution.

I would also like to point out that, as challenging as the market is for mobile networks, there clear bright spots within it, with small cells once again delivering an excellent quarter just like in Q2. We sold a record number of small cells underscoring how this fast-growing category is becoming a meaningful business. Our Flexi Zone portfolio is we believe, the best in the market, a position that was recently substantiated by both IHS, which named Nokia as the top small cell equipment manufacturer in it's latest survey of operators. And by Gartner which recognized Nokia in the leaders quadrant of it's 2016 Magic Quadrant for small cell equipment report.

Now onto IP networks and applications, which is made up of our IP optical networks and our applications and analytics business groups. Net sales for this segment were 9% lower year-on-year. Within this, IP optical networks was down 7% year-on-year, driven largely by our decision to reduce the sale of third-party products. Applications and analytics net sales fell 12% on a year-on-year basis. Gross margin for IP network and applications was 170 basis points lower, and operating margin was down [540] basis points year-on-year.

While the overall routing market was soft in the quarter, the underlying driver of customer demand in this segment, network traffic, remained solid. Pleasingly, not only did optical's net sales rise in the quarter, but it is also seeing increased traction with Tier 1 service providers and web-scale customers in North America and China. Transformation continues in our applications and analytics business, which is still being impacted by a large number of software licenses sold in North America at the end of 2015. In the medium and long-term, our confidence in A&A is high, but it will take time to enable our sales organization, move to a common software platform, and drive other actions to put the right foundation in place.

It is certainly encouraging that A&A has been winning IOT-related deals, and over the past six months, we have sold our IMPACT IoT platform to some of the largest North American sales providers, a European provider in a public safety provider in Asia. In short, we continue to believe in A&A's longer-term potential to be an important top and bottom line contributor to Nokia. As I noted last quarter, we will maintain our typical discipline as we move forward, constantly assessing whether we are meeting the right performance levels, before adding incremental investment.

Before moving on to our regional performance, I would like to note that we have been implementing an internal methodology across the Company to help us better focus pricing in the regions, given the differing levels of erosion per country and per business. Our expanded product portfolio, for example, in fixed networks now means that we are exposed to markets where the price erosion is less marked than in mobile networks, thus bringing greater stability. And our work on this methodology will continue, as we take it across every business in the Company.

Then to China, where sales fell [13]% on a year-on-year basis. I would reiterate what I said in Q2, that despite the contraction we have seen in the market after a strong 2015, we continue to believe that contraction is less severe than we had originally expected. In North America, net sales dropped 6% year-on-year. We see pockets of growth in North America like small cells, but as you are aware, North American carriers have modernized on a number of equipment fronts in the past several years, and are not spending at the levels seen previously. In Europe, sales fell 18% year-on-year, reflecting the weakness that I mentioned earlier in Russia and Ukraine, and a macro economic environment that remains sluggish, with no near-term growth catalysts. Latin America was our weakest region on a percentage basis, dropping 22% year-on-year due to economic pressures in countries like Brazil, that are eating into CapEx spending.

Now onto Nokia technologies, our third reportable segment. Net sales rose 109% year-on-year, reflecting the increased revenue from our expanded licensing agreement with Samsung, covering additional patent portfolios. As you will remember, when we announced that expanded agreement in July, we said we expected a positive impact both on revenue starting in Q3, and on our annualized patent and brand licensing sales, which we expect to grow to a run rate of around EUR950 million by the end of 2016.

On the licensing front, we had productive discussions with a number of mobile device companies. Progress in these discussions remains a big priority for me, and others in my senior management team. Nokia technologies continues to drive sales and marketing investments in it's digital health and digital media businesses to deepen our market footprint in these growth areas. During the quarter, our OZO virtual reality camera for professionals was launched in China, a promising market for VR, adding to the camera's availability in the US and Europe. In digital health, after closing our acquisition of Withings in Q2, we introduced the Withings Steel HR, a connected health watch with fully featured activity tracking, heart rate monitoring, and smart phone notification.

With that, let me update you on our integration. As you saw earlier this week, we announced that following a delay, we now expect the public buyout offer for all remaining Alcatel-Lucent securities to happen in early Q4. Timo will have more to say on this matter shortly, but I would like to underscore, that while the delay has been unfortunate, we continue to advance our work on all levels. After all, we've been working as a combined company since January, and have executed our integration much faster than in previous combinations.

Overall, our integration is going extremely well, and the key projects that we put in place to ensure that the two companies came together fast and effectively are now largely ending, aside from a small number of long-tail programs. With this progress, we can start to shift our attention to optimization, from simply ensuring that things work, to ensuring that they work efficiently at the lowest possible cost. Regarding personnel, we reduced headcount in the quarter by 2% from Q2. Year-to-date net personnel reductions started at about 4,000 or 4% of our total staff. Of course, personnel reductions are just one aspect of our restructuring and integration work, and we continue to make progress in various other areas.

We have over 800 efficiency actions identified with Nokia [stock] suppliers, about 330 more compared to Q1. Roughly 275 of these are completed, 400 more will be implemented by the end of this year, and the remainder will be done in 2017. We also continued right-sizing our real estate footprint globally in the quarter, and expect for full-year 2016 to have a total of 100 sites closed by the end of the year.

Similar to how we governed the earlier transformation of Nokia Siemens Networks, we have an integration and transformation board in place, where we are constantly reviewing progress on multiple programs, ensuring that activities have a clear link to the P&L, and instituting recovery efforts where things are lagging behind our goals. As I said earlier, our confidence remains high in our ability to deliver the cost savings that we have announced. With that, let me now hand the call over to Timo, and then we can turn to your questions. Timo, over to you.

Thank you, Rajeev. I will begin today by discussing the latest developments around the Alcatel-Lucent transaction. I will then comment on the financial performance of Nokia technologies, and Group common and other in Q3, before turning to my usual discussion on our cash performance in the quarter. And lastly, I will spend a few minutes covering our updated guidance for Q4.

Starting with the recent developments around the Alcatel-Lucent transaction, we received good news earlier this week when the [AMF] published an updated time table for the squeeze-out of the remaining Alcatel-Lucent securities, which is now scheduled to take place next week, on November 2. As you recall, on September 30, a legal action was filed before the Paris Court of Appeal for annulment of AMF clearance decision regarding the public buyout offer, delaying the squeeze-out of the remaining Alcatel-Lucent securities from the original time line.

Nokia has complied with all applicable laws and regulations in the process, and we are confident that the case will ultimately be ruled in the AMF's favor. Thus, we expect no material impact on the acquisition of the remaining outstanding Alcatel-Lucent securities. We are pleased with this outcome, which now enables us to begin process in the most of the areas that have been pending for the squeeze-out. First, regarding the starting of the share buybacks. As we communicated on our Q2 earnings call, this has been pending for the squeeze-out to complete. Consequently, we now intend to start the share repurchases in Q4.

Second, we will be able to begin the process of eliminating duplicate public company costs. Third, regarding the implementation of a more optimal legal entity structure and tax model. We have said earlier, that this will require us to have full ownership of Alcatel-Lucent. Nevertheless, we will have assessed our ability to share more detail with you, on our effective long-term non-IFRS tax rate at our Capital Markets in a couple of weeks time, and we plan on doing so.

Continuing with more detail on our planned share repurchases in the context of the Alcatel-Lucent transaction. Our intention was to reach the 95% squeeze-out threshold through the initial and subsequent public share exchange offers made in Q4 last year, and Q1 this year for all outstanding Alcatel-Lucent securities. However, in addition to using Nokia shares, we used approximately EUR560 million in cash to acquire Alcatel-Lucent, in order to reach the 95% threshold.

If the Alcatel-Lucent securities that were purchased in cash would have instead been exchanged for Nokia shares at 0.55 exchange ratio for Alcatel-Lucent shares, and for 0.704 ratio for the relevant Alcatel-Lucent convertible bonds, more Nokia shares would have been issued. Ultimately, instead of having approximately 6 billion Nokia shares outstanding at the end of the transaction, we now expect approximately 5.8 billion outstanding shares.

We consider the approximately EUR560 million in cash that was used to reach the 95% squeeze-out threshold as indirect share purchases, and thus part of the planned EUR1.5 billion share repurchase program. Therefore, under our capital structure optimization program, we have already completed the EUR[560] million of indirect share repurchases. We plan to proceed with EUR1 billion of share repurchases starting in Q4, and continuing through the end of 2017.

Moving then to my financial commentary on technologies. We began to record for revenue related to the expanded IPR licensing agreement with Samsung in Q3. Related to this agreement, we also recorded a nonrecurring catch-up payment which helped to boost the net sales of Nokia technologies significantly, both sequentially and year-on-year.

Q3 was also our first full quarter operations with Withings, and the business had a slightly dilutive impact on the operating profit of the overall technologies business in the quarter. We continue to expect Withings to generate approximately EUR50 million of net sales in the second half overall, with strong Q4 seasonality. Furthermore, we expect Withings to have a slight negative impact on the operating profit of Nokia technologies in the second half of 2016. While we continue to invest to grow our new product businesses, we will make sure to apply our structured business performance management processes to keep Nokia technologies OpEx at an appropriate level.

Turning to the performance of Group common and other in Q3. The overall revenue that we report under Group common and other increased by approximately 41% year-on-year. The growth was primarily driven by Alcatel Submarine Networks which recorded the best quarter in recent years, thanks to a solid order book. As I have discussed earlier, we are continuing the strategic review of the ASN business. Despite the good top line performance of Group common and other, it's profitability declined year-on-year, but this was largely due to the absence of gains related to the sale of certain holdings in our NGP venture funds with benefited the year ago quarter.

Continuing then with our cash performance during the third quarter, on a sequential basis Nokia's gross cash decreased by approximately [EUR1.6 billion], with a quarter end balance of approximately [EUR9.4 billion]. Net cash and other liquid assets decreased by approximately [EUR1.5 billion] sequentially, with a quarter end balance of approximately EUR5.5 billion. On a sequential basis, the decrease in Nokia's net cash and other liquid assets in Q3, was almost entirely attributable to net cash outflows from financing activities that were approximately [EUR1.6 billion] for [area] related to the payment of the ordinary and special dividends, and to a lesser extent, the purchase of Alcatel-Lucent securities.

Nokia's adjusted net profit before changes in networking capital was EUR627 million in Q3. This was partially offset by net cash outflows of approximately EUR280 million related to working capital, approximately EUR70 million related to income taxes, and approximately EUR50 million related to net interest. Nokia had approximately EUR200 million of restructuring and associated cash outflows in Q3. Excluding this, net working capital resulted in a decrease in net cash of approximately EUR80 million, primary due to a decrease in short-term liabilities, partially offset by decreases in both receivables and inventories, partially offset by some smaller cash inflows.

Additionally, Nokia had cash outflows of approximately EUR200 million from investing activities in Q3, primary related to capital expenditures, as well as the acquisition of Gainspeed. Furthermore, foreign exchange rates had an approximately EUR30 million negative impact on Nokia's net cash in the quarter. And lastly, during Q3, the remaining unsettled Alcatel-Lucent convertible bonds were reclassified from interest-bearing liabilities to other liabilities, resulting in an approximately EUR40 million positive impact to net cash.

Continuing with a few words on our EUR1.2 billion cost savings target. We have continue to make good progress in executing on the plan. By end of Q3, we have [took] EUR640 million out of the total expected EUR1.2 billion restructuring and associated charges. As we announced last quarter, we expect the restructuring-related cash outflows to total approximately EUR1.65 billion overall. After Q3, approximately EUR1.37 billion of this balance remain to be paid.

Moving then to our guidance for the rest of the year. As Rajeev already indicated in his remarks, for our networks business, we continue to expect significant sequential net sales growth, and operating margin expansion in Q4. And on a year-on-year basis, we expect Q4 net sales in our networks business to decline at an approximately similar rate as in Q3. Our expectation (inaudible) for Q4 is based on a number of factors that we listed in our stock exchange release today, including our view that our total addressable market will decline in 2016, instead of being flattish. While our visibility is limited, we also believe that the primary addressable market in which Nokia competes will decline in low single-digits in 2017.

In the context of the current industry environment, I am pleased that our focus on efficiency and quality continues to serve us well. Early progress on our EUR1.2 billion cost saving program is helping us to manage through the incremental challenges in 2016. And today, we reiterated our guidance for 7% to 9% operating margin in our networks business for full-year of 2016. Looking forward, we will continue the strong execution of our cost savings program, while investing properly for the long-term.

Regarding our full-year guidance for the Group, we have today revised our guidance for Nokia's CapEx in the full year of 2016 to be approximately EUR550 million, which is EUR100 million less than our earlier guidance of approximately EUR650 million.

Lastly on taxes, as you can see from our Q3 financials and tax guidance for the year, we currently have significantly higher non-IFRS tax expenses compared to cash taxes, thanks to our deferred tax assets and ability to utilize past losses to reduce cash taxes. We have today reiterated our guidance for the non-IFRS tax rate in full-year 2016 to be [above] 40%, and commented specifically that we expect our [non-IFRS] tax to be approximately 40% in Q4. So please use that 40% in Q4 in your modeling for accounting taxes.

In closing, I would like to give you a final reminder on our upcoming Capital Markets Day, which will take place in Barcelona on November 15. In less than three weeks from now, we are planning to close the registration for the event on November 8, so please register soon. I hope to see you in Barcelona. And with that, I'll hand over to Matt for Q&A.

Thank you, Timo. For the Q&A session, please limit yourself to one question only. Carrie, please go ahead.

(Operator Instructions)

Gareth Jenkins, UBS.

Yes, thanks for taking the question. I just wondered whether you could clarify the phasing of the cost restructuring plans, in terms of the EUR1.2 billion? Would be like the Alcatel-Lucent scheme, where you maybe saw some reinvestment in the middle, before taking costs lower in 2018. So we should expect maybe a bit more -- a bit less costs down in 2017 versus 2018? Thank you. And maybe, if you could just say how much you actually achieved already to date? Thank you.

Okay, thanks, Gareth. So why I don't I start with that. So first of all, what we had said in the beginning of the year was that for 2016, we would expect the majority of the EUR1.2 billion cost savings program, which is a net program. So we will fit all our investments into the envelope, so again this is a net program. We said that we would expect the majority of that to come through cost of goods sold during 2016, i.e. impacting gross margin. And then towards the latter part of the year, also a little bit in OpEx.

And we're very pleased with the gross margin performance, which has maintained or even improved slightly so far from the 2015. So clearly, our efforts there are very improved, and then we look at OpEx performance, we have actually been maybe a bit faster than we expected in the beginning of the year. So if you look at the first three quarters of the year, we're now down in our networks business, down in OpEx about EUR200 million. So that's where we are on the program, and we, of course, expect it to continue into 2017 and 2018.

Yes, Gareth, Rajeev, here. If I just add, yes, there are areas of investments, but I can't see a scenario where OpEx would increase from 2016 to 2017, and that would be acceptable for us, despite our areas of targeted investments.

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

Sandeep Deshpande, JPMorgan.

Yes, hi, Rajeev, just one question on the growth, and that is the main area of concern. I mean, one of the reasons to buy out Alcatel-Lucent was to grow in growth markets such as web-scale, enterprise, et cetera. Can you talk about some of those initiatives, and when, what time horizon you expect them to come to fruition, given the considerable pressure you're facing in the telco market?

Yes, thanks, Sandeep. So absolutely, the premise of the acquisition was the end-to-end scope, and the ability for taking that scope into new markets. So we have a number of areas. We've said we want to grow an independent software business. We're building a dedicated sales force to do that. As cable, it opens up a new market for us, not just to sell fixed [access] of cable, which is a disruptive portfolio that we bought from Gainspeed. But also following that beach head, we will be able to sell [IP and optic] products.

And then, we have new verticals, web-scale. Clearly, we're getting traction on web-scale with clearly some of the best web-scale players with optical. And then right behind optical, IP will be the opportunity. So web-scale is a clear area of focus, and there are some 20-plus web-scale players that we are targeting. And then, there are other verticals, there are four selective verticals that we have, and our order book is starting to improve in these verticals. And the verticals are transportation, utilities, public sector, and extra-large enterprises that use technology as a differentiation such as banks. And there we would use, software-defined networks and stuff like [Nuage] to enter as a beach head.

There are other areas even within in mobile. I see public safety as a reasonably sizeable category in itself, where essentially we take the same product set, and we are the disrupter, because that's what they need, [LTE], and then we can provide to public sector. And then, pipeline is fairly strong with public sector deals at the moment. And then you have private LTE networks, where some people want to develop private networks and we're working with some of our customers in the US to use their spectrum, and go and help those private LTE networks. And then, of course, there's the whole notion of co-routing, where we still have not moved towards market share that we have in edge routing and so on.

There's optical, and then there's a potential of cross-sell. So that is why, what we try to do about next year, we're saying primary addressable market. The primary addressable market is the market that we serve today, without much of this diversification. It's the market we serve today, that we say will be low single-digit down. But then, there is the total addressable market which has the adjacency into the new areas on top of that. And I believe it will take us some time to build traction in these markets. We are getting traction, but it's been -- it will take a bit longer. And it would not surprise me, that we would be talking in 2018 of the total addressable market that could clearly be stronger for us to play in.

Thank you, Sandeep. Carrie, let's take our next question, please?

Alexander Peterc, Societe Generale.

Hi, thanks for taking my question. I would just like to follow up on this question of diversification. Would you simply diversify with internal development efforts in these new areas in web-scale and enterprise, which would mean potentially higher R&D going forward? Are will you also seek to grow inorganically through targeted acquisitions? Thanks.

So it's a mix, Alex, thanks for the question. But in cable, we made a small bolt-on acquisition to enter that space. It's a very disruptive portfolio. So I think we'll make acquisitions, if we would get an insertion point in the market. We are very disciplined about an insertion point, we don't want a [me too] product line, to go into a new market. So we saw a very disruptive product line, we bought it, and now we're working on that. That's one example of that.

The other, let's take public safety, essentially it's just a go-to-market strengthening, because we have the product set. It's LTE. LTE is going to be the disruptive product line that public safety is now going to be driven by, rather than TETRA and TETRA [four]. So it's a mix, but I think when you talk about internal development, it mostly is really on go-to-market. So I would say go-to-market, cable, software, that's kind of the area where we have to reinvest internally, if you like.

If I may, continue here. So when we, for example, look at Gainspeed, we have to put this investment into proportion. We're not talking about hundreds of millions of R&D coming in through that acquisition, and we are talking about a couple of tens of millions of R&D. And as Rajeev said, we will well keep this investments into our cost savings envelope. We will continue to drive down costs under our -- EUR1.2 billion program, 2015 compared to 2018 on COGS and OpEx going forward relentlessly. So that's very clear, we will fit these investments into that envelope.

Maybe just add one more, if I may that --so again back to the primary addressable market. We've been prudent in sizing it with the visibility we have for next year. There are some swing factors, and I'll just lay out about four swing factors that we see in the market, that could be more positive, compared to the market we see at the moment. Take China [FTE] LTE, there's a possibility that China mobiles will get the FTE spectrum. Let's say in the middle of the year, that would drive a possible upside for the market, which we had not yet assumed.

There is North America, could get a bit more resilient by public safety, FirstNet and other operators targeting public safety, and also the 600 megahertz spectrum award. Then there is Latin America, has a very sizable wholesale project, wholesale access which is Red Compartida in Mexico, and if that came to a decision, that would drive further opportunities of growth. There's the new India thing, where new spectrum has just been awarded, and also Reliance JIO has entered. We already have momentum in the market, could there be more momentum in the market, and could there be solid acceleration of LTE like -- a bit of subset of what China did, those are all possibilities also in the primary addressable market.

Thanks for your question, Alex. Carrie, let's take our next one, please?

Andrew Gardiner, Barclays.

Thanks very much. Just I have one around the cost savings, as we look into fourth-quarter. Rajeev, you've already mentioned the aim or intent to be at the higher end of the 7% to 9% range. That's still a reasonably wide range of outcomes for fourth-quarter. I'm wondering what you consider sort of the major swing factors there?

Is it sort of market conditions, or is it more an issue in terms of the timing of your -- of the cost savings as these are coming through? And I suppose, as related to those cost savings, as we look into 2017, I recall previously you guys have been saying that you expected the bulk of the EUR1.2 billion to come in 2017, in order to get to the full-year 2018 target. You're clearly back-end loaded next year, but is that still a reasonable assumption in terms of the phasing? Thank you.

Thanks, Andrew, let me start, and Timo will fill in. Of course, I said above the mid-point of the range, if we execute well. And some of the conditions are -- the market, we saw in Q3 that some markets went softer. Africa, where currencies get trapped based on purchase orders. Because if you can't -- if they want to buy in local currencies, that's not a position we want to subscribe to. There's a thing in Latin America, where we saw some CapEx [stopped]. So there was a market consideration. I think it's fair to say, like Timo said, there on the cost side, we are tracking faster on the synergy side. There's, of course, the areas in the software, and you tend to in Q4 to get software pull-ins that happen, because operators [run big soft] budgets. Those are some of the factors. But again I said, if we execute well, above the midpoint of 7% to 9%.

Yes, and on the longer term cost savings, again, I mean, you had said about [bulk ] 2017. I think we have said that we would again, expect a majority in 2016 to come through COGS, because we can fast implement in areas like driving common supplier base, and these kind of things. And then clearly, headcount actions take longer to execute. Now again, I am pleased with how the headcount actions have started to come through already earlier. And as I said, we are also in OpEx now EUR200 million lower during the first nine months of 2016 compared to 2015. So I think it's fair to say, that a bit more has happened already this year than we originally expected, which can have a bit of an impact into 2017 and 2018. But again, we expect strong cost performance to continue going forward as well, both to 2017 and 2018.

Thank you, Andrew. Next question, please?

Kai Korschelt, Bank of America Merrill Lynch.

Yes, thanks, gentlemen. I wanted to actually steer the conversation to something slightly less -- so one of your major competitors in wireless, there's obviously been some change in terms of management. And I'm just wondering, if you're also starting to see, generally speaking a change in the competitive behavior in the industry, because some of your competitors have been fairly aggressive over the last 12, 18 months? So I'm just wondering if there's any evidence around the pricing side, or potentially even around market share, where maybe you are now in a better position to potentially get them -- a higher share of [deals] going forward, just because of the, I guess, turmoil that we are seeing. Thank you.

Indeed, we see market share as an opportunity. Our customers are quite conservative buyers, they look for the long-term, so they look for weakness in the sector, and strength in players like us, is always an opportunity. I think in terms of pricing environment, no, we haven't seen any significant change since when we spoke about it in Q1 last year.

I have to say, that one thing that's important to recognize when you compare with some of the peers, is that for us end-to-end is now a significant competitive advantage. Maybe this is less understood, but we are getting a lot more strategic mindshare. And as we are driving our pricing practices to the rest of the businesses that we acquired from Alcatel-Lucent, it is becoming clearer that areas like fixed and IP and optical and cloud and application analytics and software, they're less exposed to standards, first of all. So there is more opportunity for differentiation, and there's better opportunity for better pricing. So typically, price erosion characteristics in these other businesses are very different from the mobile infrastructure business.

Now mobile is more standard-driven, but from a technology point of view, we've always gained pride in the fact, that we have the highest performing networks at capacity conditions. And I think this is valued by customers as well. So I guess, what I'm trying to say, is that we are now exposed to markets with lower characteristics of price erosion, with more opportunity for differentiation. And while in mobile, we're not chasing the best features in the world, we are chasing the best high-performance networks that operators will buy at scale and at capacity, because that is a condition that is again and again very important for our customers. And end-to-end is a much more appreciated advantage now, coming through our customer perceived value scores, coming through our customer experience surveys. And I've had many customers say that, you're performing extremely well on your integration, and your portfolio end-to-end is a solid competitive advantage.

Thank you, Kai. Carrie, next question, please?

Francois Meunier, Morgan Stanley.

Yes, I've got two questions. The first one is about the extraordinary performance in gross margin this quarter, because revenue was down double-digits, and gross margin is actually up. And if you're digging into the results, and [your] broadband it's up as well. So there is no real positive mix effects. So Rajeev, what is your secret to a gross margin so strong, while one of your competitors is really struggling on that point? That the first question.

The second question, maybe you started to answer already. But I think you're talking about the primary market evolution being negative for next year, and investing a bit more in adjacent market like cloud and (inaudible). Like what is the size of the investment in those two markets, in terms of R&D and SG&A? And of course, the [top] of the envelope for OpEx, or is it something which comes on top of what you've already explained in terms of cost saving?

Thanks, Francois. So first, the gross margin point, so what I just explained to Kai's question, about the opportunity for more differentiation in some of the other businesses, above mobile. And then, also the less price erosion explains part of the question, on the gross margin performance. And second, I want to repeat this, because I think that our disciplined operating model, and this relentless focus we have on cost control, but also constant industrialization of best practices.

The ones that we used in the transformation of Nokia Siemens Networks, we are religiously applying it now to the rest of the Company. And the things that we find that are good in Alcatel-Lucent, we're applying into the Nokia side of the equation. Because we have a platform to industrialize these things, and we have a culture to allow for people to say, well, if there is money on the table, I'm eager to go and get it. So things like centralized pricing, this industry needs that approach, best companies do that.

And then, also the approach of how we do design for cost, design for quality, design for serviceability, and we reduce our products and services costs on an ongoing basis. One of the examples of reduction of services cost is, a methodology we have that's called regional services profitability drive, so we use that. And then, of course, our ongoing performance management processes. We spent a week as a management teams, sitting together and reviewing the hell out of everything in the business, in a very granular way. We're not bored with that, we love it. And of course, then to the structured approach, to integration synergy capture. I don't have my leadership team focused on integration and transformation.

I have a separate meeting structure where I do that. Separate meeting structure for performance management, separate meeting structure for strategy initiatives, and a separate meeting structure for [reviews]. So it's a very detailed approach. And the reason we do this, because we think it has become a competitive advantage. And the culture in the Company has embraced this as a competitive advantage. So I think this for us, is a cultural strength. It's very nuanced, it's in the detail, and to me it's a secret sauce. And why I like it, because it's not easy to replicate it, it's so hard to understand this.

Maybe I will comment on the second question, which was regarding the investments. So again, these investments what we are talking about will fit into the cost envelope we have communicated to the market. We are not expecting, we are not expecting to it come -- for those come on top. And again, as Rajeev also spoke earlier about -- so we're not talking something massive here. We are trying to, and will do this in a smart way. So, there is clear, this continued it with the Gainspeed in the cable market, we think it makes sense to go after it. And as I said OpEx from tens of millions to go after that opportunity. Rajeev spoke about public safety. This is again a clear inflection point, where we can go with our current offering into that market, when it moves it to LTE, not really additional R&D investment, some additional investment into sales and marketing. So this is what we mean and talk about here, we tried to be very thoughtful on how we do this.

In fact, because we are fortunate, let's take even the vertical enterprise, and let's take the web-scale. It's the product line of IP and optics that we are now decisively moving to its next-generation evolution to go and target the web-scale and enterprise. So it's that approach. Again, it's little bit of go-to-market but not that much additional R&D.

But what Timo makes a very important point, that this insertion point. If we don't see the right insertion point, there's no point going after a market. We have to see the right insertion point, the discontinuity. We got to have the compelling competitive advantage, it's got to be unique. And then we'll go in and we will do it properly. But we also have the conditions to change priority choices and course correct as we go on, if the market were to weaken for instance. We have levers on costs, we have adjustments on priority choices. So again, very disciplined approach, re-use of capital wherever possible, approach to entering the markets.

Thank you, Francois. Carrie, next question, please?

Avi Silver, CLSA.

Yes, thank you for taking my question, and also a best of luck to Timo and Kristian. Can you walk us through what specifically changed in your order book between July and today, that gives more pause in the revenue outlook? And given that change, what does that tell us about your visibility in your various product segments? And just a quick follow-up on the buyback, was it always your intention to include the squeeze-out as part of the buyback program? It just seems like a reductions in the program, at the time when the share price is hitting new lows? Thank you.

Thanks, Avi. Let me start with the order book. So when we looked at the market in the beginning of the year, we though it would be flattish. Then, of course, we wanted to give it a little bit of time to evaluate the market. When we looked at Q2, we felt the order book had gotten strong. And we said now we need a few more weeks, potentially the whole of the third quarter to examine what the market will look like and land. We didn't see that in Q3, in terms of the strong order book.

What changed was the macroeconomic environment in Eastern Europe, in Russia Ukraine, in Africa with the fall of currencies. And also operators wanting us to supply in local currency which is a big risk. And of course, that reduces their ability to finance their CapEx. And then, of course Latin America suddenly went into a CapEx squeeze situation, given what's happening in Brazil, and in the rest of the markets. And again, that market is driven so largely and disproportionately by one country, Brazil, of course, it makes an impact. So we saw some of those things. And then it became clear that the market will be more declining this year, rather than growing.

And yes, in terms of visibility, our best visibility for the [primary investment] market next year is, what I said it is low single-digit. But again, we continue to watch and be careful. We'll be even more wiser when we get to Capital Markets Day, but that is the visibility at the minute.

Yes, Avi, on the buybacks, I think we're very clear on our communications, when we said that we expected to use equity to acquire the Alcatel-Lucent shares and securities to get above 95%. And now if I look at the overall situation, we used a bit short of EUR600 million to acquire those securities, and then we are now using about another EUR600 million to get the squeeze-out. So again, we would have an opportunity to use equity on the squeeze-out as well, which we are not doing. So altogether, we are using [EUR1.2 billion] more. And I think we were quite clear that, in all this at least partly, would be part of the buyback program, or that's how we look at it.

So that's the reason for the [EUR1 billion]. There is no other change in any parameters, or any thinking. And another thing I want to say, is that we are clearly not on autopilot on how we think about it, because you're kind of referred to the share price, which I totally understand. The way we think about buybacks is that, when we can execute, we will look at both -- kind of like the expected path on execution, as well as then where the share is, when we make our decisions on how we execute. And naturally, for next year then Board will look at the distribution decisions, and we will make a proposal on that to the AGM.

Thank you, Avi. Carrie, next question, please?

Richard Kramer, Arete Research.

Thanks very much. Given that you've made some very clear comments on cost savings being a net number, and that this sort of new [meme] of reinvestment is within your spending plans, my question is really for Timo, on the future capital structure. As you exit, and if we look at the pending restructuring outflows, this buyback and the dividend that you are committed to for next year, which seems largely covered by the cash generation, do you -- would you be exiting Nokia where it's in a position to run its business with a much lower net cash balance? Or in other words, what's the point of leaving effectively EUR5 billion-plus of capital not employed on the balance sheet?

And maybe a quick one for Rajeev to think about, or even talk about at the Capital Markets Day, given the state of your principal rivals and all the areas you've laid out, and all the uncertainty we all face in forecasting the market, are you confident that Nokia can grow faster than the market next year, i.e. do you see sufficient chances for you to take share in a range of areas, that you can outgrow the market, whatever they market growth might turn out to be? Thanks.

Okay. So thanks, Richard. Why don't I start here, so on the lower net cash balance. So first of all, if we look at the, let's call it sort of extraordinary outflows and what we have discussed about that. We said today that we have little short of [EUR1.4 billion] to go out still in restructuring as currently planned. Then we have also said, that we have the expected swap costs on top of that. And then, of course, have the dividend. So we have still I would say, room to go down a bit on the overall capital structure.

And we also want to be in a position to reach our investment grade rating target, which as I've said is not a primary target, but nevertheless something where we really want to be in a position that we can access capital markets, with very clean documentation. And that's what we are looking at as well. So again, I don't think there is change in thinking. And we have said that long-term, we think, that the combined portfolio of Alcatel-Lucent and Nokia will give us earnings volatility diversification. And that should by definition, also mean to a position where Nokia could manage with [tighter] capital structure. So that is our long-term plan, and we continue to execute diligently on that plan.

And thanks, Richard, on the question on market share. We should at least keep our market share in the primary addressable market. There are some opportunities to grow on top of that, in the adjacencies if you like, in the new areas, and there might be select opportunities to grow share as well. But we want to at least be able to keep the share in the primary addressable market. One of the things we don't want to do, is to chase down some of those deals in Africa or Eastern Europe where financing conditions are prevalent or we have to do business in local currencies creating a trapped cash situation or further risk on the balance sheet, and then, or beat low pricing.

We're also doing unique things like prolong the life of LTE, with 4.5G Pro and 4.9G that we recently launched at CTIA. It's is getting traction, one customer is buying it, Globe already now, other customers are in trial phase. And we are converting a lot of customers, because it is not just prolonging for the sake of it, 4.9G gives you 1 gigabit speeds, gives you low latency, less than 10 milliseconds for it. It's an evolution to 5G. The more we are able to drive that in the market, the more 4G will evolve to 5G, both on the core side as well as on the radio side.

Okay. Thank you, Richard, and thank you all for your questions today. We are reaching the end of our time for today. So this will conclude the Q&A session. And with that, I'd like to turn the call now to Timo for some personal remarks before Rajeev's closing remarks.

Okay. Thank you Matt. As this will be my last earnings call at Nokia, I would like to close with a few personal remarks as Matt said. So I've been at Nokia since the 1990, and the past seven years as the CFO. And after more than 15 consecutive years with Nokia, and as I said quite a few as CFO, I feel it is now time for me to take a new challenge in a new company. And even if there is never an optimal time for a change like this, I leave Nokia knowing that the Company is well-equipped to tackle the challenges of the future, and create shareholder value. The selection of Kristian Pullola as Nokia's next CFO will ensure a smooth transition, and I've worked closely with Kristian for many years, and I am very pleased to see him taking over the role.

Now my time at Nokia has been a one-of-a-kind experience, and I have enjoyed working with you, our investors, and analysts. I truly appreciate that through the good and the bad, I have been able to maintain good professional relationships with the investor community, and I hope that our paths will cross again in the future. And finally, I would want to take the opportunity to thank the whole Nokia team, and in particular the CFO organization for my fantastic 15, 20 years at the Company. Nokia has been a very important part of my life for a long time, and I will certainly continue to follow the Company closely as a shareholder. So thank you.

Thanks, Matt, and thanks, Timo, and thanks again to all of you for joining. I'd like to close with a few words on the quarter. Yes, market conditions are not easy. You've seen that in our top line performance, and in the results of the competition. But it is not our style to put our heads in the sand, and be in denial about what is going on in our market. We prefer to see things as they are, not as we might like them to be, and then take swift action to respond in real-time.

Operational discipline, industrialization of best practices, extreme vigilance of market development, these and the other things that I've talked about today put us in a strong position to face whatever conditions come our way. Should they get worse, we have our hands on the right levers, should they get better, I believe we will disproportionately benefit. In summary, we remain on track, and we are not the slightest bit complacent. With that, thank you very much for your time and your questions, and your attention, and I look forward to seeing you all at our Capital Markets Day in November in Barcelona. 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 risk and uncertainties. Actual results may differ materially from the results currently expected. Factors that could cause such differences can be both external, such as general economic and industry conditions, as well as internal operating factors. We have identified these in more detail on pages 69 through 87 of our 2015 annual report on Form 20-F, our report for Q3 2016 issued today, as well as our other filings with the US Securities and Exchange Commission. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a fantastic day.