Nokia Oyj

Nokia Oyj

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Nokia Oyj (NOKIA.PA) Q3 2005 Earnings Call Transcript

Published at 2005-11-07 17:00:00
Operator
Thank you for participating in Nokia’s third quarter 2005 Earnings Conference Call. My name is Judith and I will be your conference facilitator today. At this time I would like to welcome everyone to Nokia’s third quarter 2005 Earnings Conference Call with our host Ms. Ulla James Vice President of Investor Relation, all lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time simple press “*” then the number “1” on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question you may do so by pressing the “&” key. As a reminder if you are on the speaker phone please pick up your handset before presenting your question. I would now like to turn the call over to our host Ms. Ulla James, Ms. James you may begin. [Ulla James: Thank you Judith. Ladies and gentlemen welcome to Nokia’s third quarter 2005 conference call, I am Ulla James Vice President, Investor Relation. Jorma Ollila, Chairman and CEO of Nokia and Rick Simonson CFO of Nokia are present here today. One housekeeping matter before we kick off, Nokia 2005 capital market days will be held in New York City on December 1st and 2nd at Hilton, New York. The event will begin next today on the first with senior executive presentation and demo. Followed by cocktails and dinner with Nokia management. Day 2 will follow up with a full day concurrent presentation. The invitation for the capital market days will be going out later today and will contain registration details and hotel reservation information. For further information please contact Nokia investor relations. Looking forward to seeing you in New York. During the call we will be making forward-looking statement regarding presentations and financial performance of Nokia and the mobile communication industry. These statement are predictions that involve risk and uncertainties, actual results may therefore differ materially from the result 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 11 to 22 in our 2004 Form 20-F and also in our press release we issued today. I will end as soon as the call in approximately one hour. To view the supporting slides while listening to the call please log on to www.nokia.com/investor. For your convenience a replay of the call will be available beginning two yours after the call ends till Tuesday noon. The call will also be archived on our website. With that it is my pleasure to pack the call over to your modular. Jorma please go ahead. [Jorma Ollila: Ladies and gentlemen, Nokia continued to show great progress in the third quarter. During the quarter we shipped a record 66.6 million mobile devices, representing year on year growth of 29% and sequential growth of 9%. Nokia also shipped it’s one billionth mobile phone during this quarter. According to our market estimates our third quarter device market share reached over 33% up strongly year on year and sequentially stable. Nokia continued to show strong revenue growth. Revenue grew an 18% year on year to EUR 8.4 billion. Third quarter operating profit grew 19% year on year and diluted EPS grew 33s%. This was Nokia’s highest quarter in EPS growth in almost five years. Third quarter operating cash flow grew a 140% sequentially to EUR 1.2 billion. During the quarter we bought back almost 100 million shares over double what we bought back in the second quarter. Finally I am very happy to see that, we continued to show great improvement in our product portfolio. It is up to me to remember a time in recent history when we had a better reception for our new product. During the third quarter the mobile device industry reached an important landmark as the number of global subscriptions exceeded 2 billion representing 31% cellular penetration. The third quarter mobile device market at 199 million units were stronger than expected. With year on year volume growth of 25% and sequential growth of 9%, on a sequential basis the North American market was up slightly. Latin America was down sequentially from the very strong seasonal second quarter but still up above the 30% year on year. The China area market was up sequentially from a weaker seasonal second quarter. The Apex market was up 11% sequentially. The year on year growth in Apex was driven by over 40% growth in both India and South East Asia pacific markets. The market in EMEA was up 16% sequentially and 30% year on year. All regions of EMEA grew sequentially but the strong year on year growth was driven mostly by Middle East and Africa, which grew almost 60%. According to our estimates Middle East and Africa now represent over a quarter of the total EMEA market. The wideband CDMA market was up over 40% sequentially with 12 million units shipped globally. We estimate that wideband CDMA market this year will be slightly below 60 million units. Our third quarter mobile device market share increased year on year by 33%. Sequentially our share was stable. Year on year we grew share more significantly in China on Apex, our progress in China continue to be excellent. Our share in China grew 12% points year on year. Nokia has strengthened it’s market share position globally and is number one in all of EMEA, number one China and number one in Apex. Most importantly Nokia continues to be number one in the fastest growing markets of the world. We are number one in India, number one in Russia, number one in Middle East and Africa and number one in South East Asia Pacific. Sequentially we grew share most notably in Apex and China. Our share was down sequentially in Latin and North America. In Latin America our shell out share down significantly less than our sale invent share. Year on year market share development in EMEA was strong. While sequential share in the region was stable. In northern, western Europe our share was up sequentially. With well over 2 million units shipped in the third quarter Nokia continues to be number one in the wideband CDMA market. Nokia now has a very strong Wideband CDMA product portfolio led by the Nokia 6630, 6680 and N70. The Nokia 6680 is the world’s number one selling wideband CDMA phone. We believe that our global market share will grow in the fourth quarter driven by gains in all geographic regions and in wideband CDMA. Overall Nokia and industry channel inventory remain within normal range. Nokia third quarter devised ASP of EUR 102 was down 3% sequentially and 6% year on year. ASP decline continues to be driven by high growth in emerging markets. However the sequential ASP trend benefited from our success in China, Apex and Europe, Malaysia and Africa. Nokia continues to have the most diverse product portfolio in the world. In the entry level the Nokia 1100 family continues to be our top selling products family selling over 15 million units in the third quarter alone. In the mid range the highly successful 6230i was our fourth best seller in volume and our best seller in revenue. In fact the Nokia 6230 family has sold closely to 22 million units cumulatively. Making it the best selling midrange phone in history. The Nokia 6230i is expected to hit record monthly volumes in Q4. In the smart phone 3G segments, the 6630 and 6680 were not in the top ten for volume but we number 3 and 8 in revenue. The 6680 was also one of our top three products in profits contribution. In terms of other Q3 products highlights entry-level firms using Nokia’s new robust engine are ramping up well. The Nokia 1600 and the Nokia 6030 have already reached millions in volume and Nokia 1110 stopped it’s volume ramp up in September. The Nokia 6101 the mass-market family cell phone has been very well received, after only starting shipments in the second quarter it was already one of our top ten firms in revenue in Q3. The 6101 has been very popular in most regions. Especially in the US and Latin America, and demand has outstripped supply. The Stainless steel Nokia 8800 with it’s sleek design has become the must have premium products among the fashion and style enthusiast. Despite selling in comparatively lower volumes, given it’s premium segmentation, in Q3 it was one of our top 20 phone in revenue and top 5 in profit contribution. The smart phone market is one of the fastest growing and highest value segment in the device market. Nokia continues to be number one in smart phones with over 50% market share. In the third quarter smart phones made up 11% of our device volume but were 26% of our revenue. One of our first smart phones the 6600 surpassed the 10 million mark in cumulative shipment in the third quarter making it the beset selling smart phones in history. Also in the third quarter Nokia began shipping the blackberry connect enabled Nokia 9300 enterprise smart phones, and Nokia 9500 communicators to over 30 operators and distributors in Europe, Middle East and Africa, Asia Pacific as well as the United States including (1134) in the US. The third quarter infrastructure market reflects the abnormal seasonality and Nokia network revenue holds about 1 6 billion Euro was sequentially down accordingly. Network revenue was down year on year in China, EMEA and North America. Revenue was up year on year in Apex and Latin America. Network revenue was down sequentially in Latin America and China and EMEA while up sequentially in Apex and North America. Wideband CDMA sales where approximately 20% of total network sales in the third quarter. In the third quarter Nokia won a $125 million managed services and GSM/EDGE network expansion deal with Bharti Tele-ventures in India. We also announced we would establish a global network operation center in India by the end of the year reflecting the importance of our growing services business. In 3G wideband CDMA at the end of September there were $34.5 million 3G wideband CDMA subscribers globally. And the 88 networks in operation with Nokia supplying nearly half of these. And Rick will now cover the key financials in a bit more detail. [Rick Simonson: Thank you Jorma. Ladies and genetlemen the third quarter results in our record device volumes speak highly for Nokia’s execution capability as Jorma said year on year sales growth was 18% driven by strong performance in mobile phones and multimedia. The mobile device market continues to robust and demand for Nokia products continues to be extremely strong especially going into Q4. As earlier predicted Nokia gross margin trended down to 33.7%, the decline was a result of lower gross margins in mobile phones, multimedia and networks. Lower growth margin in mobile phones was driven primarily by a higher mix of entry-level products, gross margins in multimedia was down due to normal product life cycle related pricing reduction. Networks gross margin declined largely due to the combined effects of the very competitive markets, our investments in building presence in the growing network services market and our ongoing push into new growth markets. During the quarter we managed our cost well, and apex decreased over 300 basis points sequentially as a percentage of sales. The decrease was a result of the combined effect of lower research and development in marketing both in absolute terms and also as a percentage of sales. Even excluding the EUR 87 million positive effect of one-time items, the third quarter apex would have been down sequentially by over 200 basis points. Third quarter operating profit was up 19% year on year in diluted EPS grew 33%. Let us take a look at the special one-time items. In third quarter we recorded the following one-time gains, a EUR 61 million gain from the divestiture of Tetra business, 42 million of which was booking networks and 19 million in multimedia. Both for booking and other operating income for the respective business groups. Secondly EUR 8 million gain from real estate sales, the gain was booked in common groups and other operating income and lastly EUR 18 million gain in networks from the sale of minority investment. The gain was booked in networks and other operating income. The total impact of these items was a positive EUR 87 million in operating profits. Reported operating profit was 13.7% in Q3. Without the gain it would have been 12.6%. The impact of the gain on the EPS was positive $1.5. Let me now say a few words about the Telsim operator in Turkey. As it has been publicly disclosed the Turkish government has announced it’s intention to sell Telsim to the highest bidder in an auction scheduled in December. As also previously reported Nokia has reached agreement with the government of settlement of all financial claims subject to the successful completion of the sale. As of now we do not have any Telsim one time items indicated in our plans, estimates nor any form of guidance. And I do not see any currently and in year models either. Given the uncertainty of this type of auction I think this is the proper approach. A few brief comments on currency the third quarter reported year on year sales growth as 18%, on constant currency sales growth was 23%. On a sequentially basis currency impact on sales growth was negligible. Going forward our current first quarter plan is based on a EUR-US dollar range of 1.2174. Looking at the balance sheet in cash flow items inventory increase is expected sequentially in the third quarter in anticipation of the strong holiday selling season. Accounts receivables were down sequentially due to sales area mix. The relative share in Latin America was down from the second quarter. Operating cash flow was EUR 1.2 billion in the third quarter up more than double from the EUR 510 million in the second quarter. Capital expenditure EUR 166 million flat with the second quarter. For the full year we continued to estimate CapEx will be approximately EUR 600 million pretty much of offshoot level. Gain was a –82% and our cash flow limited assets which is EUR 11 billion. Down sliding from the second quarter, as a lot of sizable share buyback in this quarter. During the quarter we did repurchase 99.6 million of Nokia shares for a total of EUR 1.3 billion. Both the number of shares and the value of our buyback was more than twice that we bought back in the previous quarter. During the third quarter we employed so called 10-D 51 Safe Harbor for our buybacks. This allowed us using automated trading rhythm to buy back shares in an unincumbent manner, it’s material extend the repurchase period end of the quarter. We intended for the 10-D 51 for the fourth quarter buybacks as well. As a reminder our current buyback program authorized by the last AGM is for 10% of the stock or maximum EUR 5 billion. Today we repurchased 140 million shares for a value of EUR1.8 billion. Our intention is to execute as much as possible in the buyback program, which ends in March 2006. With that I would like to turn it over to Jorma. Jorma please. [Jorma Ollila: Thank you Rick. I would like to cover the fourth quarter market and as well as Nokia outlook. We have once again break that mobile device industry 2005 volume outlook and we now expect the overall mobile device market to reach approximately 780 million units. The fourth quarter industry volumes are expected to reflect the usual holiday seasonality and grow compared with the third quarter of 2005. We feel very good about our position in the fourth quarter in the fast emerging markets we are leveraging our leading position number one brand, excellent quality, well thought logistics. And a renewed entry-level officering. In the developed market we are capitalizing on the momentum of vastly improved product portfolio from the entry-level to 3G. Nokia’s mobile device volume growth is expected to exceed the overall market growth in the fourth quarter, with the market which are expected to increase both year on year and sequentially. Nokia’s device average selling price are expected to decline somewhat sequentially. In the fourth quarter the mobile device volumes from lower APS regions especially Latin and North America are expected to represent significantly higher proportion of our overall device volumes sequentially. We expect to be overall infrastructure market in 2005 to be slight to moderately up as compared with 2004 in Europe itself. Given that a significant part of operating the current investment is taking place in markets where our network business has not historically had a presence such as Africa. We expect our fourth quarter network sales to be down year on year after an exceptionally high level of Q4 sales level last year. Before we take you into the Q&A, I would like to close with a few comments about our product portfolio. Nokia is a product company and our success starts with our products. I am very proud of the in roads we have made over the last year. So far this year we have launched 44 products. The products we have launched increasing showcase our strength in leadership, in design, compact color screen camera etc. We have also increased overall specification and continue to strengthen our technology leadership. Well for instance 3G, Wifi, voice over IP etc. We are also addressing three new areas of growth. We are executing strong in the imaging and we have also launched, now dedicated imagining devices and enterprise product. In the fourth quarter we start shipping 11 new products including three of the very popular slider phones the Nokia 6111, 6270 and mass-market wideband CDMA 6280. In addition in the last few weeks alone we have launched a blue tooth compact and products for a variety of segments. Nokia 2652, the new entry level clam shell phone shipping already in this quarter, the Nokia 3250 twister music phone with dedicated music keys capacity for up to 760 songs integrate to mega pixel camera expected to ship in Q1. Last week we introduced the Nokia E series for enterprise, starting with three great new handsets Nokia v60, v61 and v70 all with excellent certification including wideband CDMA Wifi and voice over IP and worldwide availability in Q1. Yesterday we added three new phones to our highly successful custom production, the Nokia 7360, 6070, 370 and 7380 all with the great features designer material and yet again shipping in Q1. And we are not done yet, we have small new products announcement coming to. [Ulla James: Thank you Jorma. We are now to continue with the cases, in order for us to remember I will new industry on occasion in order for us to vehicle to remember and now with the questions properly please limit yourself to one questions only, operator please go ahead.