Hello and welcome to the Nokia Second 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. Sir, you may begin.

Ladies and gentlemen welcome to Nokia's second 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 Q2 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. Nokia’s second quarter results showed a sharp rebound from our weak Q1 with robust growth and improving profitability. When we announced our first quarter results, we said we expected meaningful progress over the course of the year and I can say that we delivered that progress in Q2 with good operational execution and momentum in the implementation of our strategy Nokia’s year-on-year revenue grew a strong 5% in the quarter in constant currency well ahead of a primary addressable market that we expect will grow slightly on a full year basis. As we tapped the opportunities to grow, we maintained our disciplined and enhanced profitability. Pleasingly, our 7.9% non-IFRS operating margin was up 160 basis points year-on-year and 910 basis points sequentially. The main area of disappointment in the quarter was our cash position, although our performance was not totally unexpected given large outflows for shareholder dividends, incentive payments and restructuring. Kristian and I will both talk about this subject in greater detail. Our Fixed Networks business is undergoing a transition and that caused some challenges as well. I will also come back to this near the close of my remarks. In addition to these issues, I would like to cover four other topics today, 5G both from Nokia and a market perspective, how the virtuous circle of investment that I've mentioned before is benefiting Nokia, progress and the execution of our strategy and an update on our 2019 expectations. Let me start with 5G, where we continue to win new deals and improve our product competitiveness. We now have 45 commercial 5G deals and are operational in nine live 5G networks. We also started to recognize 5G revenue in the second quarter including in North America and expect…

Thank you, Rajeev. Today I will take you through a number of topics including financial performance of Nokia Technologies and Group Common and Other, as well as group level results. I would then like to focus on our cash flow in Q2. And finally, I will breach - but touch upon our guidance. Starting with Nokia Technologies. Net sales in Q2 totaled €383 million, an increase of 6% year-on-year and 4% on a constant currency basis. This solid result primarily reflected higher onetime and recurring licensing net sales, partly offset by the sale of our Digital Health business in May 2018. In Q2 2019 we had €30 million of onetime by net sales compared to €10 million in Q2 2018. Adjusting for this recurring net sales increased 2% year-on-year. Recurring licensing net sales were up in Q2 as we signed an agreement with a new licensee as expected. Our annualized licensing run rate in Q2 was approximately €1.4 billion. From a profitability perspective operating margin in Nokia Technologies continued to show solid improvement, operating margin in Q2 was 85% compared to 81% in the year ago quarter. This improvement was primarily due to the absence of costs related to Digital Health which we divested as I said earlier last year. Moving to Group Common and Other in Q2. Net sales decreased 6% year-on-year on a constant currency basis, primarily driven by radio frequency systems which had a tough comparison as the year ago quarter benefited from a large customer rollout. This was partly offset by growth in ASN, as new projects started to ramp in the quarter. Group Common and Other operating loss worsened year-on-year, driven primarily by lower gross profit, as well as higher costs related to longer term IP investments needed to drive digitalization in the future. These…

Thank you, Kristian. For the Q&A session, please limit yourself to one question only as a courtesy to everyone else in the queue. Nicole, please go ahead.

Thank you. [Operator Instructions] Our first question comes from David Mulholland of UBS. Please go ahead.

Hi. Thanks for taking the question. So just firstly on gross margins, obviously good progress in Q2 compared to what we saw in Q1. I think at the time of Q1 you called out four different issues that had impacted the margin in the quarter. Can you possibly talk about how much of that has not been normalized? What still remains as a headwind and in that context how you see things in this softness is that both a top line and the margin comment in the Q3?

I think we did see strong performance in Q2 when it comes to operational execution. We also saw higher level of software sales in the - in the quarter when we started to recognize also 5G. In addition to that you know, clearly strong growth in routing and in the strategically important areas of software and enterprise. You know, yes software to some extent benefited from some timing benefits. And that might then have an impact to Q3. But that - you know, other than that I think it's more revenue base than margin based, when we talk about the seasonal pattern for the year.

Thank you, David. Nicole, next question please.

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

Hi, thanks. Just when we talked about the 200 million of revenues that you couldn't execute in Q1, can you help us give some color around that, how much of that we’ve already seen in Q2, how much we expect to see in the second half? And relating to that, like most of those issues around customer acceptances are they now behind us, given that you've started to see 5G deliveries taking place and you talk about 5G acceptances probably accelerating in the second half? Thank you.

I think you know, we started to recognize 5G revenue in the quarter. I think we can say that approximately half of that 200 is done and the rest is to come, which means that customer acceptances started to come in. And also the 5G software is now in general availability, which means that you know custom teams can deploy and sell that in the normal course. So I think this is a good starting place from where to move into the second half.

Thank you, Achal. Nicole, we'll take our next question please.

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

Yeah. Hi, good afternoon. Rajeev maybe a question just on what you're seeing around some European operators in particular around continuity of supply concerns from one of your major competitors. Your Swedish competitor seems rather skeptical of dealing with these companies - these operators given they want firm commitments and they think that these operators are looking for free options. How do you see it? Do you want to engage with these operators? Would you like to - how you're going to go forward with dealing with these companies? And would you commit resource behind it without any upfront kind of spend from those guys?

Thanks, Robert. So if an operator in Europe or elsewhere because of whatever concern wants to go to another vendor for 5G and of course this is all non-standalone, right, So all non-standalone 5G builds are taking place which means you need a 4G layer. And if that means it's a wholesale swap, we would not like to do that. So we have other technology alternatives. The favourite one I have is you know, introduce a thin layer of Nokia 4G LTE and use that as the base connection layer to go to 5G. There are other opportunities if your spectrum is delayed, well you might as well look at standalone architecture which is coming next year as a way to go to 5G because swaps are not helpful for anyone. In the very corner cases sort of you know exceptional circumstances where there is a case where you know a full swap needs to take place, of course, we would need proper firm commitments and it will have to make sense over the mid to long-term. Otherwise our pricing discipline and the culture we have does not allow us to go down that track.

Thank you, Rob. Nicole, next question please.

Our next question comes from Paul Silverstein of Cowen. Please go ahead.

I appreciate you taking the question. With respect to the exceptional routing strength you saw in the quarter, you mentioned share gain, you also mentioned it was related to 5G rollout. What is that given the secular nature routing where you're not talking about a growth market, what is your outlook for the sustainability of strong growth there?

Thanks, Paul. In routing we are benefiting for a couple, maybe three things. Number one, we have technology leadership, right? We are the only ones shipping 16 nanometer product. This next generation FP4, like I said we have 100 new projects of which some 70 are new footprint for us, 40 of them we are taking new share where we didn't sort of have it. We expanded our share and 30 of them is completely displacing a competitor. So it's doing well in the marketplace primarily due to technology leadership. Then this end-to-end 5G, this thing I mentioned that you - if you're an operator or in fact an enterprise you want to first upgrade your transport layer and then go and spend the money on radio. You don't want to have two CapEx peaks the same time. So that's been - benefiting us in routing. And of course, we’re also getting a benefit from the enterprise business. I think we have an opportunity to continue this technology leadership for a while. You have to remember though that at some point we're going to have a tough compare because we've had growth now for a number of quarters and Q4 last year was very strong.

Thank you, Paul. Nicole, next question please.

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

Thanks very much. Rajeev, I'd like to focus on your comment on China where you mentioned the clear preference for local vendors and obviously you have a JV there. Given the trade tensions should we expect that the Chinese government would exercise its option to exit that JV with Nokia? And how do you think about the China market going forward since the volumes there are so critical to the overall industry and obviously profitability is much lower than you would find in some other market? Thanks.

Thanks, Richard. To the first question, at this point we don't see an indication that you know a JV exit or a potential loss - such things happen would be related in any way to the trade tensions. On the second point, how do we see the China market, given the low profit share of the market we don't think just having that volume is necessarily advantageous from a scale perspective. So we're not going to - you know, if we take a less position at market it doesn't impact our ability to make gross margins globally. So we'll be prudent in that market. We will adjust in areas where we have strengths where you know, where we can play a larger role in China. So think about transport, optical, routing for web scale players, for enterprise players, private wireless, for railways and energy companies, et cetera. And then perhaps also in the Core business where our joint venture actually helps us get an advantage. And in radio where price erosion tends to be the highest, we will limit our participation in terms of what we think is prudent.

Thank you, Richard. Nicole, we're ready for our next question please.

Our next question comes from Sandeep Deshpande of JPMorgan. Please go ahead.

Hi. Thanks for letting me on. Just a quick question. When we look at your revenue growth in the quarter, I mean, you've got good revenue growth in Wireless and extremely strong revenue growth in Optical and in Routing, at the same time your gross margin is down year-on-year, which seems to indicate that your gross margin in wireless may have declined year-on-year. Can we understand what is exactly happening there and even the kind of strength you're seeing in these Routing and Optical businesses, do you need to do more restructuring in terms of the gross margin in your Core wireless business or there is something else which is impacting the mix in the gross margin?

Thanks, Sandeep. So there were two reasons. First, services mix, you know, as is typical in early stages of a cycle we see a greater proportion of network deployment services which carry lower gross margin. Second, the 4G to 5G transition. So that's also what's the case you know, in the early cycle of 4G, it will be natural for 5G gross margin to be lower at the beginning, but to expand over time with scale due to improved other cost and of course, as well as the scale overall. Yes we are cutting costs. If you remember our 700 million cost savings program, part of that is cost of sales in an area such as global services, which will help us overtime.

Thank you, Sandeep. Nicole, next question please.

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

Hi. Good afternoon. Thanks for taking the question. One again on the margin front, sort of two parts, first on the gross margin. Just to clarify on one of the earlier responses, you know, earlier in the year you had spoken quite clearly of sequential improvement from the low point in first quarter and second quarter again, and then again in the fourth quarter, I just want to make sure that that's still what you're effectively saying that we will - we'll see a further uptick in gross margin in the third and then again in the fourth quarter. And then on the OpEx front with the cost saving plan, it looks like you did a particularly good job in the second quarter, a lot of cost did come out. If I sort of sustain that kind of OpEx through the back half of the year, it looks like you might even be slightly ahead of the plan for the 2019 goal of about 150 million of cost saving. Is that - is that correct and so should we see if a steadier trend of OpEx through the back half of the year? Thank you.

I think on your own your first point, it is fair to say that there is a reason why we - why would we think that the second half will be stronger than the first half, as we discussed 90 days ago. It is fair to say that now with the strong performance in the second quarter we are no longer in a position to say that we will have sequential improvements throughout the year. Yes, Q4 will be particularly strong as earlier, but you know the transition from 2 to 3 is may be different than what we - what we anticipated earlier. You know, some of that this top line, you know, maybe some of that this is also margin and thus goes back to your question. I think when it comes to the cost side you know, we are tracking well on the plan. You know, we'll continue to have head down and execute on that and then we'll see where we come out at the end of the year.

And of course, one should not expect that Q3 is going to be anything like Q1.

Okay. Thank you, Andrew. Nicole, next question please.

Our next question comes from Alexander Duval of Goldman Sachs. Please go ahead.

Yes. Hi, everyone. Alex Duval, Goldman Sachs. Wondered if you could talk a bit about your latest thoughts on the strength of your product offering in wireless relative to your peers. First of all it looks like you've now navigated the software issues that needed to be resolved. I wondered if you could just clarify on that. And secondly, in parallel how confident are you on chipset development being on track from a road map perspective for 5G?

Thanks, Alex. So we were a few weeks delayed and that's why we couldn't get that revenue recognition in Q1. Now it has got general availability. We’re getting customer acceptances. An important indicator is we have nine live commercial networks. Our conversion rate is fantastic, you know, 4G to 5G with the 45 deals we have. And then you know, because these networks are non-standalone architecture it really does matter how good your 4G layer is. That gives us the ability to use that install base to sort of convert you know all the customers to 5G. And so this RootMetrics example I gave in my prepared remarks, it's really important, it's the second time we won you know the best network performance across all of these 125 markets. And so there is still some work to do, but it's you know, it's not in the area of stability of the network or network performance generally, perhaps in some features which have to come later in the year. But we will be there for the most important features that the customers need, such as dynamic, spectrum sharing, et cetera. That will be on time. We already have it in parts of the network between 4G and 5G, that will be on time when the customers need it. On the chipset development on 5G, again, it's on track for both radio and baseband. You remember that Brief Shock [ph] is a family of products and they're starting to come out during ‘19 and ‘20 and they will also give us broader cost advantages when they scale and get roll down [ph].

Thank you, Alex. Nicole, next question please.

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

Good afternoon. And thank you for taking my question. I'm just wondering if you could comment a little bit on gross margin development from Q1 into Q2 in networks, on product and on services separately. It's my impression that service has improved more than product and with that in mind could you also comment on any pricing pressure you seen in your product categories networks? Thanks.

Maybe I'll start and maybe Rajeev you want to talk about the pricing. So you know, we did see an improvement in the execution of services, on the other hand as we discussed there was also you know more services content which then had a – had a kind of negative business mix impact. The fact that we started to recognize revenue for 5G also meant that there was a more normal software content in the networks margin, then clearly the strong growth of optical benefited from a business mix point of view. So in that sense you had some puts and takes and an overall kind of strong performance both on the product, as well as on the services side.

And on pricing, Aleksander, we are - more change in competitive intensity. So it's neutral, a bit concerned that there is stock of you know, those wanting to take some strategic contracts and that could drive some competitive pressure, haven't seen it yet, but you know, that is possible. We're on the alert and of course we have to reinforce our pricing discipline at a time like that and be very clear that that will hold. China, we will see it being aggressive as I said earlier, but nothing meaningful of change yet on price.

Thank you, Alex. Nicole, next question please.

Our next question comes from Stefan Slowinski of Exane BNP Paribas. Please go ahead.

Yes, hi. Thanks for taking my question. Just to come back on the - the cash position and cash flow, you've typically had a healthy net cash position and we've seen that fall to about €0.5 billion. I understand you expect improvements in the second half of the year. But how important is it for you as a company to remain in a net cash position? Or would you be okay if you went into a net debt position? Thank you.

I think a strong balance sheet is important for the company. That's why the cash is - and cash and cash flow is a focus area during the second half. As I said in my prepared remarks you know, we do see the levers to pull to get to the slightly positive free cash flow for the full year. It is about reversing the temporary headwinds that we had you know mainly in receivables. It is about getting the reduction of inventory related to 5G to start happening during the second half and then continue to work that as we go into 2020. And you know, by doing that we'll come out at the end of the year at a better net cash position than the 500 million that we hold at the moment.

Thank you, Stefan. Nicole, next question please.

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

Yeah. Thanks for taking my question. One of your U.S. competitors AP [ph] decided to embark into a kind of vertical integration with the acquisition of Acacia. Is this something that could make sense for Nokia to integrate basically [ph] from suppliers or do you think it could be a competitive advantage in the long-term in IP and optics?

Thanks, Sebastien. So if you just take that comment at a higher level, we believe in custom silicone as a way to go because we think we can have a better cost of the product, we could put an acceleration and innovate. So that is true for mobile networks, with reef shock [ph] family of chipsets, its true for FP4. In terms of Routing, it's true for PSE-3 in the Optical business. Then when it comes to your specific question on vertical integration, we also see IP an optical come closer together, right. We see the need for photonics in that optical layer and we have competencies there and we see that also important with long-term. The benefit we have is that we have both IP and optical, right. So that can be an end-to-end play. That will become increasingly important. So I'm pleased that that's getting recognized in the sector.

Thank you, Sebastien. Nicole, 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 you could maybe update us on how your views have evolved on the timing of 5G rollouts globally and specifically I'm seeking are the prospects of China possibly slipping in time and AT&T commenting just yesterday that they would have national coverage complete by the first half of ‘20 which seems fast and even Japan and Korea updates as well. It sounds like Korea has moved nicely, appreciate how things have moved. Thank you.

Thanks, Simon. So I'll try to give you a quick round-the-world trip on this. So first let's start with North America. So we'll see the – the operators [ph] who have launched we'll do more. The experience is good. They want to expand for more coverage. Whether operators that have done millimeter wave, hotspot deployment they will expand those as well. We see the demand for low band build. That's the only way to get national coverage. So at this point you make about AT&T or other. So there will be low band build and you know a high band build which is this millimeter wave. There is no big band except for Sprint, but that mid band will become available in the next couple of years. And so that will be - if you like the third wave. And so that's US. And then you look at Korea. The experience is very good. Some 1.5 million subscribers that have been put on, the operators are trying to price 5G at a premium. They in fact are pricing - in relative to 4G, good network performance, good experience and they are going to just expand nationwide coverage. So Korea is going to do that as we speak. They're going to start building and expanding. Then you have Japan. The deadline is first quarter 2020. We've seen developments in the market, awards are taking place. So that will start to begin in the second half in earnest. China, I don't think we'll get delayed, it will happen around Q3. Some of the trials, large scale trials are already happening. And then this next phase of tendering will begin. So Q3, Q4 onwards that will accelerate. Then you have the Middle Eastern market, Saudi Arabia, UAE, Qatar and they are also going to be thoroughly lead markets. We see that momentum building up from end of ’19, going into 2020. Then the Nordics and with Nordics especially Finland where the consumption of data use is the highest in the world, it's very high and the need for 5G is there. And given the pricing that operators have for 5G or even in 4G, it's one that can be accretive. So going to 5G will expand their revenues potentially. So they will do that. And then we see the next – the left of Nordics. Then we are looking at U.K. and Italy where the options that they can place. Germany will come next. So next year is going to be a - we'll move from lead markets expanding to do more coverage and capacity and the new markets coming on.

Thank you, Simon. Hope those helpful. Nicole, next question please.

Our next question comes from Amit Harchandani of Citigroup. Please go ahead.

Good afternoon, all. Amit Harchandani from Citi and thanks for taking my question. I just wanted to go back to the revised market outlook in the press release today. Could you maybe just help us better understand the drivers of this improved outlook across the various segments, is it the only mobile, is it also to do with the other segments that you operate in? And on that note when you talk about growth continuing into 2020, do you see growth accelerating into 2020? Thank you.

I think it is clear that we've seen kind of strength in the market in the first half which gives us confidence that the full year will be stronger than the earlier flattish expectations that we - expectations that we had. You know, some of that is on the back of positive 5G responds in markets, such as Korea and U.S. And then you know as Rajeev said, the whole 5G cycle is accelerating going into 2020 and with that there will be - there will be growth. In India and of course you know, how much the growth potential accelerates or not depends a bit on how strong ‘19 ends up - ends up being because again, I think the 5G cycle doesn't look at the calendar years now. There is momentum, and you know some of that will be deployed at - you know on this side of the year end and then some of that will continue going into 2020.

Thank you, Amit. Nicole, next question please.

Our next question is a follow up from David Mulholland of UBS. Please go ahead.

Hi. Thanks for taking. Just wanted to follow up on the kind of Q1 to Q2 progress. I think in Q1 on gross margins you call that service cost and contracts for cost that overrun, has that fully resolved itself now or is that still a bit of a drag in Q2 on the underlying margins?

I think we had improved service execution in the in the second quarter. However, as I said at the same time deployment services was a bigger portion of the overall mix and that then had a negative margin impact. But when it comes to services execution you know, the team has responded really well. And we do see - we did see improvement in Q2 and as Rajeev said in one of his answers you know, services is also one of the areas where cost reductions related to cost of sales are expected to come from.

Okay. And can I just clarify just on the Q3 gross margin trend because there is been a couple of mixed comments. I think it's been clear that top line you expect growth will slow there, but in gross margins will we stay at a similar level, is there room for some improvement or could it soften a little bit from where we are in Q2 or just overall its not a big movement in the context of what we've seen so far?

So we are - we are no longer in the business of giving quarterly gross margin guidance. But the only thing I will say is that the earlier comment that we made 90 days ago about seeing sequential improvements throughout the year is something we can no longer repeat, that's a result of the strong performance seen in the second quarter.

Okay. Hope that helps - that was helpful David. And Nicole, my understanding is that we have a one final follow up question in the queue, is that right?

That is correct. Our next question comes from Richard Kramer of Arete Research. Please go ahead.

Yeah. Thanks very much. Just given the extensive restructuring Rajeev and Kristian that you guys have gone through, could you give us a sense of the roadmap going forward for ASN and RFS and whether they are now fully part of the family and would stay there? And. Rajeev, if you want to give us a better sense of the roadmap forward for the fixed businesses, it's obviously very strategic for a lot of operators and you have a lot of customer commitments. I know you were trying to break into the cable market with that business with LightSpeed. Can you give us a sense of whether we should expect further restructuring or structural changes in the group or we can sort of rest easy that, this is the structure we can look forward to in 2020 and beyond?

Yeah. Thanks, Richard. So for now I think we have - we have said that we will be holding on to at ASN. So I think we should assume that - by large the structure is - is going to remain for the foreseeable future. On Fixed Access, as we move from copper to fiber, this is what we think right now, we think the operators spend on 5G and so they're not yet spending fully on the fiber builds EG [ph] in Europe. But I see a possible acceleration of 5G – sorry a fiber as the next growth driver, meaning fiber to the X [ph] fiber to the most economical point. So we see that possibly happening if the operators find the right business case and I think there is a potential for that to happen. Most importantly I think the single growth driver I would say Nokia has in the Fixed Access business is Fixed Wireless, right. So by that I mean you know, the customer premises equipment, the antenna business that we have there. We've got three meaningful deals now that are public. Dahlia, Rain [ph] Optus and we're seeing some fairly significant interest and traction in the market. So I think it's going through copper to fiber to fixed wireless access, should that move the fiber and fixed wireless access not take place then they'll have to put more copper. i.e., more vectoring and 25 gig and [indiscernible] and et cetera, et cetera.

And the ASN, RFS?

And ASN, RFS like I said I think we are going to keep that in that structure.

Thank you, Richard and thank you everyone for your question today. I'd now like to turn the call back to Rajeev.

Thank you, everyone for the questions. Thank you Matt and Kristian. To briefly summarize, I'm largely pleased with where Nokia landed in Q2. It was a strong quarter from both a sales and profitability perspective. Many of our businesses performed very well, gaining share and improving the competitiveness of their products and services. Yes, our cash performance was a challenge in the quarter, but as Kristian and I showed earlier, we have measures in place to shop on our execution and we expect a meaningful improvement in the second half. While we faced some risks, have plenty of hard work to do and need to execute superbly in the second half, we are making considerable progress and continue to see a path to meet the commitments we made for the year. With that Matt, back over to you.

Thanks. Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today we have made a number of forward-looking statements that involve risks and uncertainties, actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external such as general, economic and industry conditions, as well as internal operating factors. We have identified these in more detail on pages 60 through 75 of our 2018 annual report on Form 20-F, our financial report for Q2 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.