Hello and welcome to the Nokia First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Please sir you may begin.

Ladies and gentlemen welcome to Nokia's first quarter 2019 conference call. I'm Matt Shimao, Head of Nokia Investor Relations; Rajeev Suri, President and CEO of Nokia; and Kristian Pullola, CFO of Nokia are here in Espoo with me today. During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia and it's 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 60 through 75 of our 2018 annual report on Form 20-F, our financial report for Q1 issued today, as well as our other filings with the U.S. 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 financial report with tables available on our website includes a detailed explanation of the content of the non-IFRS information and a reconciliation between the non-IFRS and the reported information. With that Rajeev over to you.

Thanks Matt and thanks to all of you for joining today. Q1 was a weak quarter for Nokia as we expected. When we spoke last time, we pointed to a soft first talk and a particularly weak first quarter followed by a robust second half. We continue to stand by that view. In terms of the quarter, we understand the underlying drivers of our performance and believe that they will largely mitigate over the course of the year. As a result we are holding our fully 2019 guidance. I recognize that given the fourth quarter outcome, many of you may be skeptical that we can deliver on those commitments. All that if we do, it will be at the cost of our 2020 performance. I do not think see things that way and would like to focus my remarks today on how we expect things to develop and the risks that we see. As I do that I want to make three key points. First, many of our businesses are performing very well and have momentum moving forward. Second, we have a clear understanding of what did not go well in Q1 and have confidence that things will improve as the year progresses. Third, while we do see certain risks increasing, there are opportunities as well. Let me dive into more detail on each, starting with the easy part. Many of our businesses are performing well and are positioned well for the future. Consider the following; IP routing is in superb condition with clear product leadership and is benefiting from the virtual circle of investment that I've talked about before as customers prepare their network for 5G. IP Routing grew by 12% in constant currency in the first quarter far outpacing the market. That is the second consecutive quarter of…

Thank you, Rajeev. Today, I will take you through a number of topics including the financial performance of Nokia Technologies and Group Common and Other as well as group level results. I would like to then focus on our cash flow in Q1 some key items for Q2 and some of the actions we are taking to improve our cash performance and balance sheet. And finally, I'll briefly touch upon our guidance. By now, I'm sure you are all familiar with our new reporting structure. As part of this, we are now providing additional disclosure with amounts related to licensing. And Nokia Bell Labs allocated 80% to Networks and 15% to Nokia Services. This ratio is in accordance with their value contribution and we are providing this information to improve comparability with our peers. On this basis, our Networks' operating margin in Q1 2019 would have been negative 1% instead of the negative 6.4% reported. And Nokia Software operating margins would have been positive 5% instead of the negative 1.3% reported. You can find this disclosure on page 6 of our Q1 earnings release. Moving to Nokia Technologies. Net sales in Q1 totaled €370 million, an increase of 1% year-on-year, primarily related to higher onetime catch-up net sales related to a new license agreement and the sale of certain patents. Net sales at constant currency were flat year-on-year. In Q1 2019, we had €40 million one-time net sales compared to €10 million in Q1 2018. On a recurring basis, net sales declined 4% year-on-year. From a profitability perspective, operating margin was up solidly on a year-on-year basis with Q1 at 82% compared to 75% in the year-ago quarter. This improvement was primarily due to the absence of costs related to Digital Health, which we divested last year. As Rajeev mentioned,…

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Sandeep Deshpande of JPMorgan. Please go ahead.

Thanks for letting me on. Rajeev, I have a quick question. I mean, do you have -- we are in the early stage of the 5G transition. I mean, if you go back to the 4G transition and you were in charge at time as well, the initial part there was a lot of price – there was considerable price war in the market, but then eventually in the 4G market you did come up on top. Do you see this as a similar situation, which is causing margin -- impacted the margin? Or is this early part of 5G different from how it was in 4G? And then when you look at your overall gross margin, how would you classify, how much of that is coming from any price situation and how much from your company specific things such as a software upgrade et cetera? Thanks.

Yeah. Thanks, Sandeep. So I would say that it’s not widespread any competitive intensity. I think what we’re -- we're not seeing that as much right now. What we're seeing are potential signs of that coming through. So to be clear that we haven't seen it yet, there’s potential side of that coming through. I would again say that it's in just certain accounts and maybe even certain countries like -- and so I think our response needs to be a nuanced regional strategy. So we're not taking an approach that's similar everywhere. For example, in China we need to be far more prudent because there we expect more aggression, we expect free-of-charge deployments et cetera, so there we'll be super prudent and focus on the commercial phase. But again then there is the second aspect of security related concerns, to which there may be some replacements of competitors and so on. Long-term that's an opportunity. And again here we don't think it requires full-scale swaps, because Nokia's come up with a few solutions that we can avoid that, i.e. just put a thin layer of LTE just swap that think layer of LTE and then use that to connect to 5G on non-standalone architecture. So I guess in the early days of 4G, it was more aggressive because there were also big modernization contracts started by one particular competitor. I don't see it the same way. I will come back and address gross margin, I'm sure the question will come up in terms of what is going to change for Nokia going forward.

Thank you, Sandeep. Nicole, we’ll take our next question please.

Our next question comes from Andrew Gardiner of Barclays. Please go ahead.

Good afternoon, gentlemen. Thanks for taking the question. Rajeev you sort of foreshadowed my question. I mean, the unchanged 2019 outlook, margin outlook does imply steep ramp of gross margin as we move from first quarter through second quarter and into the back half for the year. I can understand what you're saying about the increase -- a return to some of the software releases and improving mix should help, but at the same time you're highlighting some of these competitive pressures. So after that weak first quarter and still holding the desire to meet your full year targets, how do you balance those competing factors? Do you need to seed market share in order to improve margins? Or are the mechanical things that should come through that are giving you that confidence in the ramp over the course of the year?

Okay. Thanks, Andrew. So let me take some time on this one. This is an important question. So first off it is fair for you to expect us to drive the sequential improvement in gross margin every quarter for the remainder of 2019, and let me explain the drivers. First, of course, is 5G growth that will drive improved scale, which will provide us with improved leverage, right? And there are two distinct parts to this. Number one, we expect 5G deployments to accelerate meaningfully in the second half and we have visibility to where those countries are where those contracts will be. Two, also as we highlighted, we delivered approximately €200 million of 5G hardware in Q1 that we were unable to recognize revenue on. And we expect that to be captured in full by the end of the year. So that's the first point, 5G growth. The second is product mix. And that will improve, one, because within Mobile Access, we expect a higher mix of software sales, following a Q1 during, which we did not have any software releases, not 4G, not 5G. 4G because of the compatibility with 5G and 5G because of what I've mentioned, revenue recognition. And two, if you move beyond Mobile Access for a minute, there are also several drivers of improvement. Number one, improved scale in Fixed Networks, which was down a lot in Q1; FP4 product cycle in IP Routing, structural cost benefit we have there; third, PSE-3 cycle in Optical that's coming later in the year. And then on the third big point in Services, which is within Mobile Access as I mentioned the particular challenges we are seeing are limited to a couple of services contracts where we had cost overruns and I'm confident that we can drive significant improvement in our execution in the remainder of the year. Plus we also expect cost reductions in Services, which is part of cost of sales and hence will improve gross margin. And more broadly speaking, we're focused on improving our overall product costs. Obviously we're in a new technology transition and as we progress through the 5G technology cycle, I can assure you that we've already taken the necessary actions such as more sharp chipsets, system on chip products et cetera to start in 2019 and later in 2020.

Thank you, Andrew. Nicole, we’ll take our next question please.

Thank you. Our next question comes from Richard Kramer of Arete Research. Please go ahead.

Thanks very much. Rajeev there's been a lot of attention paid on some high profile new deals like Rakuten, which are obviously using some new models. And you've seen some moves from some of your rivals from capturing a price premium in the market to now trying to be a price leader. So there seems to be a lot of evidence behind the notion of price aggression that you mentioned. I guess my question given all the execution challenges you face and not to add to them is whether you're confident that your second restructuring is going to be sufficient to bring Nokia to the cost structure it needs longer term, maybe even beyond the 2020 guidance? Or are we simply on a wheel, a hamster wheel as it is of needing constant cost reductions to sustain those margins, which I guess with the execution challenges right now are very hard to get to in the near-term? Thanks.

Thanks, Richard. So yes we expect this to be the restructuring round of not requiring more round after this. From the Rakuten, I mean, of course, we're a primary vendor there, we have key position there. So the network architecture that we see in Rakuten, I don't see that replicating across the world, because one it's still a close ecosystem; and second it's greenfield operator, so they can do it because they don't have to carry any legacy features 4G, 3G, et cetera. So it's an isolated set up. We're following that closely because we're involved. It's better to be involved than not. It's a decent contact for us. Longer term there'll be other meaningful initiatives, which is Open RAN. ORAN will start to happen, et cetera. And I think that's a good thing for the industry, because then we can stop doing swaps with each other, because you can open interfaces and change and mix supplies more readily. On the final point on price pressure. Again, we haven't seen a lot of evidence of this. I'm just pointing to particular possibilities of risks here. And I know that China will be aggressive in particular, so we will take a more nuanced regional strategy always with the right long-term profitability profile.

Great. Thank you, Richard. Nicole, next question please?

Our next question comes from Mike Walkley of Canaccord Genuity. Please go ahead.

Great. Thanks. Q1 consistent with the slower start to 2019, you still have a strong conviction on a stronger second half. Can you just update us on what regions you have the strongest visibility to support your stronger second half outlook? And if there's any consolidation risk to that outlook? Thank you.

Thanks, Mike. So in terms of the business product areas like I mentioned, more scale in Fixed Network, we have visibility to that happening; the SB4 product cycle, which is receiving a lot of warm reception by a number of customers; the PSE-3 in Optical, which is coming later this year. Then visibility from a regional standpoint, North America, I mean, that obviously – we have visibility to early launches if that happened, more will accelerate. Korea, I mean, the launches have happened and the acceleration has somewhat already underway. Japan will come next. Spectrum has been awarded and now 5G rollouts will start in earnest, as vendor decisions will get made -- to be made. And then there is China, which will happen sort of in Q3 timeframe in terms of the central procurement round one tendering decisions in Australia. That's underway from a 5G standpoint including fixed wireless access. Middle Eastern countries, we've already signed those contracts, as part of our 36 commercial 5G contracts. And then you have Nordic countries, and perhaps a couple of countries in Europe, like, the U.K., Italy, more notably. And then there'll be -- the rest of that will start to happen more in 2020. But this is the 2019 activity list if you like, from the 36 5G commercial contracts that we have which are growing by the day.

Thanks for your question, Mike. And, Nicole, we'll go to our next question, please?

Our next question comes from David Mulholland of UBS. Please go ahead.

Hi. Thanks. Just one question on the Technologies division. Obviously, you've pointed to the recurring revenue base of now about €1.4 billion. I just wonder if you can comment on whether you think there're still opportunities to grow from here, given you've taken way kind of the divisional guide for 2020, but in the past you've been targeting, I think, close to €1.7 billion. And if I can squeeze one quick clarification, on the €200 million hardware sales that you're talking about, can you clarify whether you've taken the cost or not from a COGS perspective or whether it's missing from both revenue and COGS?

Thank you. Maybe I can start just on the on the latter one. So we are talking about 5G deliveries in general in North America, including hardware and software. And the costs have not been taken. The cost will be booked when revenues are recognized.

Correct. And, David, on the tech, I think, yes, we see opportunities to grow from here on. As we said before, there is still more in China, the automotive licensing, which is very much underway. There are more IoT verticals as consumer broadcast. So, yes, we see the opportunity grow. I think perhaps what's even more important is that we see this business lasting for a very long time. It is a recurring revenue business. And given the patents that we're innovating with including the new 5G patents that we've gone with, I mean we see this as an opportunity for decades. And I want to make this clear, this isn't a few years or even 10 years, its way beyond.

Thank you, David. And, Nicole, we'll take our next question.

Our next question comes from Achal Sultania of Credit Suisse. Please go ahead.

Hi. Good afternoon everyone. Just another clarification on the Technologies business. I think last year you were mentioning already €350 million run rate every quarter. And now we've seen OPPO deal signed last quarter, we have another new licensee coming in this quarter and still the run rate is 1.4. So I'm just surprised like, is something else dragging the revenue run rate down, like, any contract which is expired? Or there's been any renegotiation which has led to lower value?

Yes. I think, your thinking is correct. We have some new licensees that have added to the run rate and then we have some renewals that have reduced it. I think the key thing is that, as of now we are at the €1.4 billion level. And what -- as Rajeev said, we're going to keep it there and improve it and its there for the long term.

Thank you, Achal. Nicole, next question, please.

Our next question comes from Robert Sanders of Deutsche Bank. Please go ahead.

Yeah. Hi. Thanks for taking my question. I guess my question was on the China business. Clearly, it's going to be the biggest 5G market in the world and yet you seem to be revisiting whether you want to be in this market in a major way. Is your strategy to sort of bring the share down to the single digits and participate selectively? Or is it just that in the short term, you're going to be avoiding getting involved in trials, where you're going to have to get equipment away and then you're look at look to come back and maintain your sort of mid-teens to high-teens share in the long term? Thank you.

Thanks, Robert. Look, I think there's going to be a free-of-charge large pre-commercial trial phase where one is expected to preoccupy some territory. It's going to be costly. And then they will be a -- the actual commercial round later in the year, Q3. With all of the operators, it's also likely to require some up front losses to be crystallized, given that it's going to be aggressive without any commitments. And then you have to bank on those revenue coming downstream. So both from a short-term point of view, as well as from a long-term point of view, we need to be careful and somewhat selective in how much we want to play in that game. Yes, it will be the largest market by volume, but it's certainly not by value. And we can play a nuanced regional strategy as we have played before. If you recall the Nokia Siemens Networks they used to quite a good effect. Having said that, we see opportunity on private wireless with enterprises there, straight on companies. We're lucky to have a joint venture that helps us there. We see opportunities on the IP and Optics side. We see opportunities on Fixed Network still. So we can still differentiate our play, where we see more healthy long-term margin profile.

Thank you, Rob. Nicole, next question, please.

Our next question comes from Sebastien Sztabowicz of Kepler Cheuvreux. Please go ahead.

Yeah. Hello. Thanks for taking my question. Do you see any opportunity in business within the $20 billion Rural Digital Opportunity Fund that's been launched by the U.S. government? And if yes, when do you expect that this opportunity could materialize in terms of revenue contribution?

Thanks, Sebastien. But I'm not sure I got the question. Was this on a public 5G network or...

It is on the $20 billion – yes.

Go ahead.

Yes, exactly the rural deployment of broadband in the U.S.

Yes, certainly, we see opportunity there as well. I mean all things North America. All things 4G and 5G, we see opportunity. Beyond that, we also see industrial private wireless with utilities and transportation as opportunity. So, yes, we do.

And I guess it's fair to say that this is not only a U.S. phenomena. I think we see these government-backed rural opportunities also in other places around the world. There will be linkages between 5G licensees and the operators need to put, kind of, more capacity in work in rural areas. And some of that will be able to be done with fixed wireless access solutions and other parts of the portfolio that we have.

And we've seen this in the Universal Service Fund and marketing and retail, as Kristin said. We've seen it in Saudi Arabia. We've seen it in India and other parts. And absolutely.

Thank you, Sebastien. Nicole, next question, please.

Our next question comes from Tal Liani of Bank of America. Please go ahead.

Hi, guys. I would like to focus on the gross margin. It's a major declining in gross margin and I'm wondering if you can break it down. I try to add back the $200 million to revenues. And even if I add it at 90% margin, just to see what's the impact on gross margin is, still the gross margin is only 34.5% versus 39.5% that we expected. So I'm wondering, what drives such a sharp decline in gross margin? And if you can break it down to the pieces or quantify? And then how long does it take you to go back to the 39%? I understand it's going to improve second half, but how long does it take you to go back to the 39%? Thanks.

Yeah. Thanks. So I think Rajeev already talked about the right side of the improvement where will it come from. Let me kind of talk about what happened and maybe also remind you, we said going into the year that we expected a soft first half and a robust second half and a particularly weak Q1. From a broad perspective, as we have highlighted in the past, it is typical that in the early parts of the technology cycle, product costs are relatively high and then you improve them as you work through -- as the technology matters. In addition to that, we did experience several challenges in Q1. First, as you correctly pointed out, we where unable to recognize approximately €200 million of 5G deliveries in North America. Secondly, we had a negative product mix. On the one hand, we did see lower mix of software sales due to the absence of software release also for 4G in the quarter. In mobile access, we were also negatively impacted by having a higher proportion of network deployments services in the business mix. And then thirdly, in Services within Mobile Access, we were impacted by some cost overruns and some underperformance in two large programs -- projects driven by near-term 5G delays. But as Rajeev said, we are confident that we can drive focus and significant improvement in our execution in Services going forward. So I think that's it. Then in a way, how quickly things will come back, there you need to look at what we've said: first half soft; second half robust. So I think much more of this margin improvement is second half.

Thank you, Tom for the call. Next question please.

Our next question comes from Aleksander Peterc of Societe Generale. Please go ahead.

Yes. Thanks for taking my question. I'd just like you to come back a little bit from the €200 million of revenue that you weren't able to recognize this quarter. Can you reassure us on the fact that there is virtually no risk that this will not be recognized in 2019? And also, if this was supposed to be first quarter revenue, how come it may take you until the end of the year to get it recognized? Are there also any risks attached to that like additional cost overruns? Can this occur again in the future quarters, as you know? Just put a bit of color on that. Thank you.

I think maybe I can start and Rajeev please chip in. I think what we are saying is that things are improving quickly. There will be some improvement already in the second quarter, but the full benefit of the €200 million will come through in the second half. I don't think we are saying by the end of the year, we are saying during the second half. We do feel confident that we will be able recognize this revenue. And when it comes to additional costs that's not the topic here. It's more -- it takes some time to mature the software to the stage that it needs general availability as well as the customer commitments that we made and then we'll hit the recognition milestone.

I'll just add to that Alex is that we see cost reduction in Services and cost of sales happening in the remainder of the year, particularly in the second half. And then as I said, more operational scale in Fixed Networks is going to help and as people [054:24] [indiscernible] cycle and PSE-3 optical product cycle as well. Like we said, Enterprise was only up about some 5% and it'll be up -- overall we expect it to be profitable in the remainder of the year.

Nichol, next question please.

Our next question comes from Simon Leopold of Raymond James. Please go ahead.

Thanks for taking the question. I wanted to see if we could maybe double click on the competitive environment. I appreciate you don't like to name names, but I think a lot of subtle suggestions here. I want to make sure I understand and maybe some things to clarify. Specifically, Erickson's not seeing these kind of margin pressures which suggests maybe this is reflective of the geographic mix. And it also sounds like you're implying renewed pricing pressure in the Chinese market. I'm wondering if we should interpret this as China's revenge on Huawei backlash. And lastly, and this competitive question is we hear a lot of concern about Samsung's growing position. Maybe if you could help the folks put this in context? Thank you.

Yes. There were quite a few questions there Simon. So I think first, if I remember right, one of our competitors has also pointed to some competitive intensity. And again, this is a risk that we see. We're not seeing it right now. This is a risk that we see, because a few competitors are seeking to be a little bit more aggressive. And number two, there are the security concerns which require some swaps. And to mitigate full-scale swaps, we have come up with a technology approach to do it with a light LTE layer and then connect that to a non-standalone architecture for 5G. China and this thing about the -- is that a reaction? No. We saw it similarly in 4G. I think the only difference is volume-wise China is going to be much bigger in five years in industrial policy. And of course we'll play. We expect to play, but we need to be very sensible about how we play. There's no point playing just for top line and volume. That is not the business we're in. And so we'll have to balance that with what is the right margin profile. Other than that, there's nothing specific on competitive intensity. It's a risk that we see potentially.

Thank you, Simon. And this we'll close our Q&A session for today. Thank you for your questions today. I will now like to turn the call back to Rajeev.

Thank you, Matt, and Kristian and thanks all for your questions. I'd like to close with a few key thoughts. Q1 was weak as we had expected, but we have continued reason for optimism as the year progresses. We understand the developments that impacted the first quarter and they are expected to ease over the remainder of 2019. 5G is in its early stages, the ecosystem has not yet mature and Nokia is facing some near-term challenges of our own. But overall, we see things improving quickly and surely. We have a portfolio that is unique for the 5G era. As I noted in my remarks, more than half of our 5G wins include elements of our portfolio that at least one of our competitors simply does not have. We're also seeing real evidence of what I call the virtual circle of investment and that is growth in IP and Optical as operators modernized their transport capability in advance of 5G. Our strategy is also paying off as see good progress in licensing, in software and in our expansion in the Enterprise segment. Still plenty of work to do in all areas, but momentum is with us. Yes, there are risks that I shared earlier, but overall, we remain confident in our ability to deliver in 2019 and have an even better 2020. With that, thank you very much for your time and attention. And I'll now hand it back over to Matt.

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 page 60 through 75 of our 2018 annual report on Form 20-F, our financial report for Q1 issued today as well as our other filings with the U.S. Securities and Exchange Commission. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.