Thank you. I would now like to turn the call over to Matt Shimao, Head of Investor Relations. Mr. Shimao, you may begin.
Ladies and gentlemen, welcome to Nokia's third quarter 2015 conference call. I'm Matt Shimao, Head of Nokia Investor Relations. Rajeev Suri, President and CEO of Nokia, and Timo Ihamuotila, EVP and Group CFO of Nokia, are here in Espoo with me today. During this call, we'll 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 74 through 89 of our 2014 annual report on Form 20-F, our interim report for Q3 2015 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 results reports 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.
Thank you, Matt, and thanks to all of you for joining. I would characterize Nokia's third quarter in two words, progress and performance. Progress in moving the Alcatel-Lucent transaction closer to completion, performance across all of our businesses, and particularly in Nokia Networks, allowing us to raise our full-year outlook for that part of Nokia. Before I go into these areas in greater detail, however, let me touch on some information we shared in a separate press release today. First, we have updated our synergy targets for the Alcatel-Lucent transaction. We previously said we would target approximately EUR 900 million of annual operating cost synergies to be achieved on a full-year basis in 2019. Our view today is that we can accelerate that work and deliver it one year earlier than originally planned.
Thus, we now target approximately EUR 900 million of annual operating cost synergies to be achieved on a full-year basis in 2018. We've had teams hard at work on integration planning, and while there is still plenty to do, I'm quite confident this is an achievable goal. It is also the right goal. Faster savings means that we will move rapidly to provide clarity to customers with questions about our future product portfolio, to employees who are uncertain about their future, and to investors who are counting on us to hit our synergy goals. Second, we announced our EUR 7 billion capital structure optimization program. Timo will provide more detail about this, but I think we have found an excellent balance of significant cash return to shareholders while still ensuring we have strategic flexibility for the future. Now, let me turn to the performance part.
On a Nokia level, we delivered non-IFRS diluted EPS of EUR 0.08, a decrease of 11% year-on-year as higher foreign exchange-related losses, net interest expenses, and tax expenses were only partially offset by our higher non-IFRS operating profit. I will focus my comments on Nokia Networks and Nokia Technologies, given the fact that we are now treating HERE as a discontinued operation. Timo will give a brief overview of HERE's results in his comments. Nokia Networks had, overall, a very good quarter. Net sales were down 2% on a reported basis and 11% on a constant currency basis, reflecting the broader industry trend. Growth only for growth's sake is not a strategy we want to pursue, although no one should take that as a lack of ambition to grow.
We absolutely have that ambition, and even if we know it will be challenging in the near term. We continue to work to balance between profitability and growth, and there have been a number of deals in recent months that we have walked away from as they simply have no prospect of ever meeting our requirements. That said, our pipeline remains strong and has increased year-on-year. Our win rate is also quite good, and we have maintained our guidance that we will deliver full-year growth in 2015 versus 2014. On the profitability side, Nokia Networks' performance was quite strong, with gross margin at 39.5% and operating margin at 13.6%. While some of the profitability was driven by currency fluctuations, I believe the underlying business performance was good given market conditions.
As we have pointed to a challenging competitive environment in previous quarters, I understand that you may be wondering what exactly is going on. Let me explain. You may be surprised to hear that our view about the competitive environment is unchanged from what we have said previously. Pricing pressure is intense, and as I just noted, some deals are so aggressive that winning them would just be another form of losing. In addition to the currency impact I already noted, our strong profitability in the context of these market conditions was driven by four factors. First, cost discipline and operational excellence. You may recall that earlier this year, I said that we would redouble our focus on costs to ensure we were in a strong position in a price-competitive market. The outcome of those efforts are apparent in our results for the quarter.
Our cost efforts are delivering extremely well, and in many areas are ahead of our internal plans. Total headcount came down over the course of the quarter. We drove significant product and services cost reductions, and operating expenses remained under tight control. Key operational metrics, inventory levels and on-time delivery, just to name two, were very strong in the quarter. Customer perceived value, the methodology we use to measure customer satisfaction, reached an all-time high at the end of the quarter, and we have increased the gap between the competitor below us and narrowed the gap to the one competitor ahead of us. We have talked in the past about the power of our disciplined operating model, and the results this quarter are testament to both that model and the resilient performance focus culture we have built.
Yes, the market is challenging. The people of Nokia have simply refused to take that as an excuse. Calm, methodical execution has been the order of the day. I'm personally proud of the entire Nokia team. Second, software sales, while down sequentially, were up modestly on a year-on-year basis. As I cautioned when we shared the Q2 results, software sales were uniquely high in that quarter. In Q3, we were back to a more normal but still good level. Third, strong performance by both mobile broadband and global services, each of which delivered operating margins above 13%. In global services, momentum continues in the services-led sales that I highlighted last quarter. Systems integration, in particular, delivered robust results in Q3, with sharp growth and profitability improvements compared to the previous year.
I'm not satisfied with the sales decline in mobile broadband, which was driven by lower radio sales but offset partially by double-digit growth in core versus one year ago. This will continue to be an area of focus for us, although I would note that Q3 2014 was particularly strong in network rollouts, making the year-on-year comparison quite tough. Fourth, strategic entry deals. You will recall that when I announced our second quarter results, I noted that we had been able to reduce the negative impact of strategic deals in that quarter and did not expect to see further significant easing in the second half of the year. While that statement remains true, I was pleased to see that these deals continue to perform well. There are always risks in this area, but our execution remains very good.
Interestingly, profitability was not driven by regional mix in the way one might expect. Year-on-year sales were down in North America quite significantly, and while our Asia Pacific sales were flat within that region, the Japan market continues to be down. Despite the lower sales in these typically higher margin markets, we were able to deliver good profitability. To give a bit more color on the regions, Greater China was a standout performer in Q3, notching 27% annual growth, thanks largely to ongoing LTE rollouts. We believe we remain the largest non-Chinese network vendor. The common assumption is that the Chinese market will start to slow as we head into 2016. While that may prove to be true, we also see ongoing opportunity in China given the strength of our position in the market, which has been driven partly by our early investments in TD-LTE.
China Mobile has such an overwhelming lead in LTE subscribers that other operators may have to invest more if they are to catch up. It is also clear that the government is committed to shifting to an innovation-driven economy. That shift could spur ongoing investment, as demonstrated by the recent announcement of plans to invest a further EUR 22 billion in improving broadband access in rural areas. Thus, while expecting a decline is reasonable, there may be some countervailing trends as well. Middle East and Africa was another good performer, with sales up 6% versus last year. We continue to see this market as a source of good growth opportunities, although we will be selective in the face of Chinese competitors who are very aggressive in pricing and very effective in leveraging the political strength of China.
Asia Pacific, the team in the region has worked very hard to offset a declining market in Korea and Japan with growth in other areas. India is very strong, and we've also seen good year-on-year development in growth markets like Vietnam. Europe, net sales fell 11%, with declines in Russia, Germany, and France partially offset by growth in the U.K. North America was down 19% versus a strong year ago quarter, which had the benefit of a large LTE rollout with one customer. We have offset some of that impact by growth in services in North America and continue to see opportunity in the market. In fact, some of you may have seen AT&T's announcement yesterday about the addition of Nokia to their Domain 2.0 supplier program. All of us at Nokia are remarkably proud to support AT&T's network transformation toward a software-centric network.
I was encouraged by the performance of Latin America, which showed only a slight annual dip in net sales and a 9% sequential rise. That said, economic conditions in Brazil are concerning, and some customers continue to have some unique financial challenges. Overall, I think we remain well positioned in our networks business and see further opportunities once we come together with Alcatel-Lucent. To Nokia Technologies, which had a solid quarter. We continue to make investments in the business, although operating costs fell sequentially as we saw a large short-term drop in legal costs related to the procedural steps of a certain patent licensing case coming to an end.
We continue to be quite bullish about future licensing opportunities and new development projects, we see this quarter as a bit unique on the cost side and continue to point people to technologies OpEx being typically in the range of what we saw in Q2. The quarter was marked by the introduction of OZO, our innovative virtual reality camera for professional content creators. We've been very encouraged by the feedback from potential customers and content producers, and this gives us a solid foundation for the full launch in Q4. That is the part about performance. About progress. We made a great deal of progress on the Alcatel-Lucent front, some in the third quarter, some after the end of the quarter. Let me tick through some key points. We now received all the necessary regulatory approvals to proceed with the offer.
I'm extremely pleased with how quickly we were able to do this, particularly sorting through some complex issues in both France and China. We reached an agreement with China Huaxin to create a new joint venture combining Nokia China and Alcatel-Lucent Shanghai Bell. We announced our future structure, which is designed to ensure that our 5 planned business groups, Mobile Networks, Fixed Networks, Applications & Analytics, IP/Optical Networks, and Nokia Technologies, are all positioned for clear leadership in their respective market segments. We have focused on ensuring clear accountability across business groups and functions and are now moving into the next level of detail of that planning. We announced the new leaders for the combined company, an exceptional group with strong track records. From the Nokia side, we have the best of those who have driven our transformation in recent years.
From the Alcatel-Lucent side, we have business leaders who have shown they can compete and win in some very competitive segments. I'm both pleased and proud to have them all as part of my team. We have moved forward with our integration planning to the point that we were able to update our savings target, as I previously noted. We have announced that we will hold an extraordinary general meeting on December 2nd to ask for shareholder endorsement of the transaction. Finally, we now expect the closing of the initial exchange offer to take place in Q1 2016, our speed of execution has helped narrow the window from the first half of 2016. To sum up, we are moving quickly and purposefully in planning the future of Nokia.
I'm firmly convinced that we will have the right structure and right people to ensure Nokia is fighting fit for business the day the deal closes. With that, let me now hand the call over to Timo for some more details, and then we can turn to your questions. Timo, the floor is yours.
Thank you, Rajeev. I would like to start my remarks by providing an update on the sale of HERE before turning to my customary discussion on our cash performance. I will then say a few words regarding the redemption of Nokia's convertible bonds before closing with some comments on the planned capital structure optimization program and accelerated operating cost synergy targets. Turning to the sale of HERE. As you know, we announced the sale of HERE in early August to an automotive industry consortium at an enterprise value of EUR 2.8 billion. Given the pending transaction, we have treated HERE as a discontinued operation for the purposes of external reporting, and this is reflected in today's press release and related materials. In Q3, HERE continued to build on its momentum in recent quarters, delivering strong year-over-year top line growth. Both year-over-year and sequentially, HERE showed strong non-IFRS operating margin improvement.
The transaction is subject to customary closing conditions and regulatory approvals and remains on track to close in Q1 2016. Upon closing, we expect to receive net proceeds of slightly above EUR 2.5 billion. Additionally, we expect to book a gain on the sale and a related release of cumulative foreign exchange translation differences totaling approximately EUR 1 billion as a result of the transaction, which will be booked in discontinued operations. Turning to our cash performance during Q3. On a sequential basis, Nokia's gross cash increased by approximately EUR 270 million, with a quarter-ending balance of approximately EUR 6.9 billion. Net cash and other liquid assets increased by approximately EUR 290 million, with a quarter-ending balance of approximately EUR 4.1 billion. Working down the cash flow statement, the primary drivers of the movement in our net cash balance in Q3 were the following.
Nokia's continuing operations adjusted net profit before changes in networking capital was EUR 454 million in the third quarter, primarily driven by Nokia Networks. In Q3, Nokia's continuing operations had networking capital cash outflows of approximately EUR 40 million, which included approximately EUR 20 million of restructuring-related cash outflows at Nokia Networks. Excluding the restructuring-related cash outflows, Nokia's continuing operations had networking capital cash outflows of approximately EUR 20 million, primarily due to an increase in receivables and a decrease in short-term liabilities, partially offset by a decrease in inventories. Nokia's continuing operations had cash inflows of approximately EUR 90 million related to other financial income and expenses, primarily related to foreign exchange hedging and balance sheet-related items, and cash outflows of approximately EUR 60 million related to taxes. Completing the net cash from operations picture, discontinued operations had cash inflows of approximately EUR 40 million, primarily related to the strong operating performance of HERE.
From an investing cash flow perspective, cash outflows of approximately EUR 50 million related-
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Sure. Okay. We will continue from the networking capital section. In Q3, Nokia's continuing operations had networking capital cash outflows of approximately EUR 40 million, which included approximately EUR 20 million of restructuring-related cash outflows at Nokia Networks. Excluding the restructuring-related cash outflows, Nokia's continuing operations had networking capital cash outflows of approximately EUR 20 million, primarily due to an increase in receivables and a decrease in short-term liabilities, partially offset by a decrease in inventories. Nokia's continuing operations had cash inflows of approximately EUR 90 million related to other financial income and expenses, primarily related to foreign exchange hedging and balance sheet-related items, and cash outflows of approximately EUR 60 million related to taxes. Completing the net cash from operations picture, discontinued operations had cash inflows of approximately EUR 40 million, primarily related to the strong operating performance of HERE.
From an investing cash flow perspective, cash outflows of approximately EUR 50 million related to acquisitions of businesses, approximately EUR 60 million related to the foreign exchange impact on short-term loans receivable, and approximately EUR 60 million related to continuing operations capital expenditures. Finally, foreign exchange rate had an approximately EUR 30 million negative translation impact on net cash. Staying with balance sheet-related items, I wanted to highlight our decision to exercise the option to redeem the EUR 750 million 5% convertible bonds due in 2017. A redemption notice was sent to all holders of the convertible bonds on the 8th of October, giving them the option to convert their convertible bonds into Nokia shares by no later than the close of business on November 17th.
If all holders of the convertible bonds would convert at the current conversion price, the maximum number of Nokia shares to be issued would be approximately 314 million shares or 8.7% of Nokia's total number of shares outstanding. However, given that the average conversion price is EUR 2.39 per share, please note that our diluted share count has fully reflected this potential dilution impact already for several quarters. There should be no impact on your fully diluted share count numbers following the redemption. Turning to our announcement today regarding a new capital structure optimization program and updated operating cost synergies related to the Alcatel-Lucent transaction. Firstly, on capital structure.
Nokia's board of directors has conducted a thorough analysis of Nokia's potential long-term capital structure requirements and has today announced plans for a two-year, EUR 7 billion program to improve the efficiency of Nokia's capital structure and return excess capital to shareholders while maintaining Nokia's financial strength. Please note that the program is subject to the closing of the Alcatel-Lucent and HERE transactions, as well as the conversion of all Nokia and Alcatel-Lucent convertible bonds. The program focuses on two main components, shareholder distributions of approximately EUR 4 billion and de-leveraging of approximately EUR 3 billion. The full details of the program are listed in today's press release. As I have commented in the past, we are committed to effectively deploy capital to drive ongoing value creation.
I believe that this is well reflected in the new capital structure optimization program and is well aligned with the long-term interests of both Nokia and Alcatel-Lucent stakeholders. Longer term, we continue to target an investment credit rating, which would further affirm our competitive strength. Secondly, on the updated operating cost synergies. As you may recall, when we announced the planned transaction with Alcatel-Lucent in April, we targeted approximately EUR 900 million of operating cost synergies for the combined company to be achieved on a full year basis in 2019. This assumed the closing of the transaction in the first half of 2016. We now expect closing of the transaction to be in the first quarter of 2016 and have also accelerated our operating cost synergy target.
We now target approximately EUR 900 million of annual operating cost synergies to be achieved on a full year basis in 2018 relative to the combined non-IFRS results of Nokia and Alcatel-Lucent in full year 2015. The associated restructuring costs are expected to be slightly higher than EUR 900 million, and the related cash outflow is expected to be approximately EUR 900 million. We expect the operating cost synergies to come from a wide range of initiatives impacting both operating expenses and cost of sales. The major components include streamlining of overlapping products and services, particularly within the planned Mobile Networks business group, rationalization of regional and sales organizations, rationalization of overhead, particularly within manufacturing, supply chain, real estate, and information technology, reduction of central functions and public company costs, and procurement efficiencies, given the combined company's expanded purchasing power.
The operating cost savings are expected to create a structural cost advantage and provide a strong foundation to enable the long-term R&D investments that are essential to achieve our strategic objectives, serve the changing needs of our customers, and lead the next wave of technological change in our industry. Just to summarize before I turn the call back to Matt. After the planned Alcatel-Lucent transaction closes, I think the new networks businesses and Nokia Technologies form a business portfolio which gives us a very solid foundation for our strategy execution. That, combined with today's announcement on faster implementation of planned operating cost synergies and on the new planned EUR 7 billion capital structure optimization program gives me confidence that we continue to have a very good opportunity for long-term shareholder value creation. 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. Stephanie, please go ahead.
Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. Please ensure you lift your handset if you're using a speakerphone before asking your question. We ask that you limit yourself to one question in the interest of time. Your first question comes from the line of Gareth Jenkins with UBS. Your line is open.
Thanks for taking the question. Just a quick one, I guess, on patent licensing. You said that the licensing case is coming to an end, and that's why you had lower OPEX and Nokia Technologies in the quarter. From that, can we assume that the Samsung arbitration is still going to complete in 2015? Maybe just a follow-up, Timo, on something you mentioned on the de-leveraging. I just wondered if you could give a sense of the net interest cost savings to you from that de-leveraging process. Thank you.
Okay, sure. Thanks, Gareth. On the Samsung front, as we have said in our earlier 20-F file this year, we continue to expect the Samsung arbitration to conclude during 2015. However, as we have also said that due to the nature of arbitration proceedings, there can't be an assurance to the timing of the very final decision. We also said, and this was the biggest driver of our decrease in Technologies OPEX, that the sequential decline in Technologies non-IFRS OPEX was primarily due to procedural steps of a certain patent licensing case coming to an end. In that sense, that's where we are on the issue. Regarding de-leveraging and the costs. We have said that we expect EUR 200 million of savings for the full year 2017.
We are redeeming the Nokia convertible bond already this year and of course, provided the transaction closes quicker, i.e., in the current planned timeline on Q1 2016, and that the Alu converts would convert. There is a possibility that some of this, or some of this will likely already come in during 2016. As said, we continue to keep the guidance as EUR 200 million for 2017 full year.
Thank you, Gareth.
Stephanie, we'll take the next question, please.
Your next question comes from the line of Kulbinder Garcha with Credit Suisse. Your line is open.
Thank you for my question. It's kind of quite broad. It's aimed at Rajeev and Timo. I guess I applaud the accelerated restructuring timeline and the capital return. Something tells me that both these should have been significantly large. Here's what I'm thinking, Timo, for you on the capital return side. You probably got EUR 6 billion-EUR 7 billion of pro forma net cash at closing, I think. Maybe I'm wrong. You're going to generate probably at least EUR 2 billion a year on my maths, and you're going to pay out EUR 4 billion over the next two years. You're going to probably end up at EUR 6 billion-EUR 7 billion again in two years' time. Are you telling us that's how much net cash the new Nokia Alcatel combined entity requires? Because I always thought it would be somewhat lower than that.
Just any thoughts around, is this the initial capital return that gets revised as you guys get more experience with the company, I guess? Then, Rajeev, the same thing for you on the restructuring side. The EUR 900 million to be brought earlier, I think is something that we kind of thought might happen, but I also would have thought there would have been scope to find more synergies as well. The same thing applies, I guess. Will we just hear as you get the experience of running this company and revising those potentially higher over time? Many thanks.
Yeah. Thanks, Kulbinder. First on the capital structure optimization. I first of all want to say that I think it is very good that as was the case after the Microsoft transaction, that our board is making these decisions, I would say quickly. Of course, we are basing this, as we have said today, to certain assumptions. I assuming that the HERE transaction closes, converts, and also that the Alcatel-Lucent transaction closes. In that sense, I think at this point in time, this capital structure optimization program strikes a very good balance with returns to shareholders on the de-leveraging of the company, on making sure that we have the needed investment capacity to be really competitive in this industry, and finally, on our long-term target to get to an investment credit rating.
Of course, if you look some years down the road, this is also a bit of a dynamic equation.
On the synergies we've accelerated it. I think it's a reflection of the fact that we're saying we can close early, but also the fact that our execution integration planning has been quite strong and robust. I won't comment on whether we can expand the synergies. At the moment, we've said we've accelerated to 2018. Naturally, as we get underway, we will continue to find more opportunities of deploying the full strength of the Nokia operational model onto the combined company.
Thank you, Kulbinder Garcha. Stephanie, we'll take our next question, please.
Certainly. Your next question comes from the line of Alexander Peterc with Exane BNP. Your line is open.
Hi. Thanks for taking the question. I was just wondering, as Alu issued today an updated guidance with reduced expectations for core networking, which is partly but not entirely offset by a better performance in access. With this in mind, do you still think it was better to buy all of Alu and not just the wireless access business? That seems to have a little bit of a better momentum here. Aren't you worried of a potentially protracted core networking weakness that could compromise the new group's overall performance? If this is stock by momentum or on the contrary, just having a really easy base to compare yourself to once the new entity is formed. Thanks.
Thank you, Alexander. As we always said, this deal is more about scope than scale.
We're already seeing, due to the expanded portfolio, that our relevance and even access to most of the converged operators is increasing. That's what we expected, and we're already seeing that happen. AT&T Domain 2.0 announcement is just one example of that. If you step back and say, we've said that the mobile infrastructure and services market is flat or flattish, but we also said that the combined portfolio allows us to address a much larger market, but also a market that's growing at something like 3.5% CAGR long term. That means that this growth is driven primarily by the IP/Optical Networks group and Applications & Analytics.
Finally, I think the fact that we have this combined portfolio is the only reason we'll be able to target new markets such as cloud players, web-scale players, but also extra large enterprises, and this would happen only due to the combined portfolio we have. No doubt in my mind that this scope rather than scale is more relevant and the combined company is the right portfolio.
Thank you, Alex Peterc. Stephanie, next question, please.
Certainly. Your next question comes from the line of Kai Korschelt with Merrill Lynch. Your line is open.
Yeah, thanks for letting me ask the question. I just had a quick question on the comment you made on the pipeline, which I think you said is up. Should we interpret it as that you have decent visibility that 2016 will not be a down year on a constant currency basis? The second question was just really on the higher level industry. If I add together yours and Alcatel's and Ericsson's constant FX numbers, clearly the industry seems to be declining, low single digits. Does that not make you more aggressive on the deal synergies, potentially, if the industry continues to stay in that sort of low single digits decline? Should we look at your synergy target as sort of dependent on what's happening on the top line? Or is the synergy now the synergy number, and it's sort of independent of how things are shaping up?
Thank you.
Thanks, Kai. Let me just give some reflections and some color on the market for next year. While it could be that the market could decline, it's probably less relevant for us because that would be only for a part of the segments we're in, because we're looking at a combined portfolio. From a regional dynamic point of view, I think the markets that will be healthy next year will be Middle East and Africa, North America, India as the primary ones. I think also Latin America is stabilizing, notwithstanding the earlier comments that I made. With regard to what we've seen in Q3 on constant currency basis for all the periods, naturally we are going to continue with this continuous improvement cost structure that we already have in place.
We said it at the Q1 call, we've continued with that, and you've seen the results come through in Q3 more robustly and to some extent in Q2. That is not going away. That for us is extremely important in our operation model and the high-performance culture, that we'll continue to find these areas of more and more efficiency driven by automation and driven by new techniques and quality and so on and so forth. That applies to the whole company as well. That is why I say that we will apply the full strength of the operational model to the combined company. You must keep one thing in mind for Q3, of course, that China is a big part of the market, there is a bit of an aberration that if you include China, the market is different than when you include it.
Maybe a quick comment on the synergy numbers. The synergy number is the EUR 900 million, what we are targeting for the combined entity for the full year 2018. However, as part of this continuous cost optimization program, which Rajeev mentioned as well, actually during Q3, we announced, this is now separate for the Nokia Networks business, a savings program which will save EUR 50 million for the full year 2016 already, and we also announced the related restructuring cost as well as the related cash charge. We are continuously doing this work, and this is just an example of that.
Thank you, Kai. Stephanie, next question, please.
Your next question comes from the line of Andrew Gardiner with Barclays. Your line is open.
Good afternoon. Thank you. Just to follow up, Rajeev, on what you were just talking about there regarding China. You mentioned it as an aberration in the quarter. Certainly, you guys saw very strong trends quarter-on-quarter. Alcatel looks like it was up as well, yet Ericsson was down quite significantly. I know there's timing issues and differences within the country in terms of the timing of the rollout, but could you just speak to your visibility in terms of where we are in terms of 4G deployments in China? What's likely to happen as we hit the end of the year, and how are you starting to think about next year in that country? Thank you.
Thanks, Andrew. When I said aberration, I just meant to say that, of course, we've seen big market growth in the market size in China, and that, of course, sort of plays into a different mix in the total market where the foreign vendors don't get enough of share beyond a certain number. Your question then being about what I see China going forward. We've seen China being robust for us for the past few quarters. I think it's down to our competitiveness, also down to the fact that we invested more in TD-LTE early on because we really figured this will be a meaningful technology, and that just made us more competitive in the marketplace. We are number one non-Chinese vendor. Apart from that, we have been able to get a new customer that we didn't have.
China Telecom is not a customer we had in the past. We got a new customer in the scope of the last few quarters, but we also expanded market share with that customer as well, alongside doing well with the others. We haven't seen a difference in Q3 from that perspective. Having said that, I think, as I said, there are reasonable expectations to assume maybe next year that the market will slow down because the big network rollouts will, of course, slow. There are some countervailing forces as well, because Unicom and Telecom have not invested enough on LTE relative to Mobile. China Mobile has got a lot of market share right now. Of course, the others may catch up. There is the broadband for rural access program that the country's talking about, plus the focus on the innovation-focused economy.
It's not a slam dunk that the market will decline in China. It could.
Thank you, Andrew. Stephanie, next question, please.
Your next question comes from the line of Mark Sue with RBC Capital Markets. Your line is open.
Thank you. As you focus on the continuous operational improvements and drive towards your structural cost advantage with scale and efficiency, perhaps you can discuss the concurrent migration to do more in software. You're doing a lot of software already. The carriers want to be more flexible in terms of their software model. Ericsson has been on a multi-year journey towards more software. How might Nokia take some lessons learned and accelerate the pace towards more software?
Thanks, Mark. We're also on this multi-year journey on software, in terms of if you think about the number of people that do software in our R&D, it's a great 90%. We're very focused software development, software quality, but also on new pricing schemes, in software that'll be relevant for the industry going forward. Now, if you look at our portfolio, in the future, of course, that'll be driven more by Applications & Analytics and by Mobile Networks, particularly the converged core part of that business. There is a lot of focus on software. We'll also look at new approaches such as software as a service, which we can only do with the new portfolio that we have. It's a meaningful part of our mobile broadband business, and the focus will only grow on software.
Ultimately, we're going to be a software and services company because that's where the value is.
Thank you, Mark. Stephanie, next question, please.
Your next question comes from the line of Robert Sanders with Deutsche Bank. Your line is open.
Yeah. Hi, guys. Just more of a process question. Let's say you close the deal in Q1. I was just wondering if you'd give your early thoughts on when you think you'll begin to lay out pro forma targets for the combined entity, by division. Is that something we can expect before April, May, or is it going to be a bit later than that? Thank you.
Hey, Timo here. Thanks, Robert, for the question. I think this is really too early to answer at this point in time. How this will work out is that likely after the first closing, we will consolidate Alcatel-Lucent to Nokia. Alcatel-Lucent will also, unless we would get to 95 right away, continue to report its own numbers and really getting into full pro forma. Of course, the faster we get into a full control situation, the faster we will get there. Of course, then in the meantime, we will look at how we will start reporting these four different business groups separately and which line items, and then how do we set the targets. It's too early to talk about that at the moment in more detail.
Okay. Thanks for your question, Robert. Stephanie, next question, please.
Your next question comes from the line of Sandeep Deshpande with J.P. Morgan. Your line is open.
Yeah. Hi. My question is again, Rajeev, regarding China. You've had a very strong quarter in China. Does this strong third quarter in China impact your normal seasonality into the fourth quarter? Given the strength that you're seeing, you've seen this significant strength in China because of the work you've done in China. If you've seen over the last few years, a few years ago, you had seen significant strength in Korea and Japan. Do those countries come back on LTE Advanced or anything in the next couple of years? Is what you said about India, Middle East, and Latin America being the drivers over the next couple of years?
Yeah. Let me go with Japan and Korea first. Yeah, I think we've seen a big burst of coverage there, right? If you think of population coverage in Japan and Korea, it's 98%-100% in LTE, the big coverage build has happened. The next phase that we would be looking forward to is, of course, carrier aggregation, LTE Advanced, which is not a big coverage build, it's more software business. Then you'll see small cells coming in as well. It'll be one of the first markets that'll do that. I don't see next year in terms of Japan and Korea being sort of returning to strength as a market. I think it will be soft for a while, Japan and Korea.
However, I can't say it because there can be countervailing forces that one or the other party wants to do greater aggression in the marketplace, and that spurs the market, and we can't predict that. Now I think on China, the question was, it's going to be more to what will we see in Q4. I won't necessarily guide to what we'll see in Q4, I will say that we've not seen any contract phasing or anything like that in Q3, which was special. It's been normal for us for the last few quarters as the LTE network deployment has continued.
Yeah. Maybe to add to this regarding China, we actually spoke after Q1 about the strategic entry deals. As we discussed earlier, the margin levels of the strategic entry deals, they were, I would say more healthy already Q2, and they have stayed in a fairly healthy level now Q3 as well. That's also an important point regarding China for us.
Just trigger a thought, Timo. If you think about the 4G network coverage by population, we've reached 83% in China. The penetration of 4G, i.e. the 4G connections, is only about 17%. One would say there is more coverage to happen, but also perhaps more capacity to happen.
Thank you, Sandeep. Stephanie, next question, please.
Your next question comes from the line of François Meunier with Morgan Stanley. Your line is open.
Yes. Question is about seasonality on the margin. I think everyone's been surprised by the weakness in Q1 this year and then a pretty steep recovery. By the way, well done on OPEX this quarter. That's quite amazing. How shall we be concerned about next year regarding this seasonality? That's the first question. The second question is the target for the EUR 900 million cost saving for the merged entity. Is this number net of any accounting differences between Nokia and Alcatel? Thank you.
Okay. Thanks, François. Accounting differences. Okay. On the first question, we are really not giving any margin guidance for 2016 at this point in time. We increased our full year operating margin guidance for the Networks business to be at or slightly below the high end of our 8% to 11% range. In that sense, from that, you can at least get a feel on how we see Q4 playing out, maybe mentioning a couple of things. Operating leverage would be slightly higher going into Q4. On the other hand, we had an FX tailwind on Q3, and that kind of thing, of course, is difficult to estimate. That's really what I can say on that topic. On the accounting differences, I wonder if you would be thinking about R&D capitalization. I can't really think of anything else which-
Let's take it offline.
would be there, but maybe, yeah, we can take that offline. Clearly, the EUR 900 is a net operating synergy number which we target to achieve for the full year 2018.
Thank you, François. Stephanie, we'll take our next question, and can you please limit yourself to one question only because we still have many people in the queue?
Your next question comes from the line of Alexander Duval with Goldman Sachs. Your line is open.
Yes, many thanks. Alex Duval from Goldman Sachs. Just one quick question. I wondered if you could expand a little on the U.S. as a region. You did see some declines in network revenues in the quarter in that region, but I wondered if you could help us think about the conclusions we can draw maybe as we look forward to the next quarter. You did actually talk about 2016, seeing strength there. Maybe just to expand a little on that would be very helpful. Many thanks.
Of course, we had a difficult compare because last year we had a big network deployment with one U.S. customer that commenced in earnest in Q3 last year, and we didn't see that same thing happen this year. That's why our numbers are down in terms of net sales. What do I see about the market in North America? I see this as a healthy market next year. Investments have been a little bit volatile during the course of this year in terms of the market size. Next year, this will be returning to a healthy level. Now, of course, for us, we're not a fringe player with just T-Mobile and Sprint. We've become a far more relevant player in the U.S., with all of the big operators, sort of all five operators that we have in our mix, particularly the big two.
For us, the game is quite different next year.
Thank you, Alex. Stephanie, next question, please.
Your next question comes from the line of Avi Silver with CLSA. Your line is open.
Yes. Hi, good morning. Follow-up question on share repurchases, maybe for Timo. If there's a large cash payment related to Samsung or if cash flow is stronger for the company where at the end of the day you have excess cash, would you prioritize share repurchases or some type of increase or special dividend? I realize this would be a board decision, but they would obviously seek your input. Would love to know how you think about the balance between the two. Thank you.
Yeah. I have to answer the question. First of all, the capital structure optimization program, we said, call it is conditional to HERE closing, Alcatel-Lucent closing, we said Q1 in this case, then also the converts converting. We didn't say anything about Samsung or any other possible such events. In that sense, that we have not factored in at this point in time, given where we are on the process. Then regarding my own view on the matter, I would prefer share repurchases to any further special dividend in such situation. As you said, correct, this is really a board decision.
Thank you, Avi. Stephanie, next question, please.
Your next question comes from the line of Pierre Ferragu with Bernstein. Your line is open.
Hi. Thank you for taking my question. Rajeev, I'd like to come back to the comments you made at the beginning of the call on competitive pressure. I'm still trying to figure out what's happening here because we haven't seen much traces of big deals like big deal announcements or the usual news flow we see in the industry is not that intense, at least in official news. It also seems like most large LTE rollouts Has been awarded. What I'm wondering is where in the world, in terms of geographies, and on what kind of deals do you feel the pressure? Is that for large roll-outs? In that case, is there that much left over? Is that on smaller follow-on or different deals that you see this pressure? Any additional color to help us reconcile all that would be very helpful.
Yeah. Thank you, Pierre. I think you pointed to an important point when you were sort of asking the question, and that's probably precisely the answer, that we are not seeing that many big deals in the marketplace. What happens in a situation like that is that, people start to price aggressively for deals don't merit that strategic rationale, because people are going after less deals. That's what we've seen, this year. Now, I am a believer in the long run that consolidation will help. It always has. If you go back to the previous round when consolidation happened in the sector, us doing Motorola, Ericsson doing Nortel, we saw robust growth margins come up. Long run, I'm a believer in that. Tactically, at this point in time, the competitive intensity has not changed from what I said in the first quarter.
It is sporadic from region to region, so there's no particular theme I can point to, Pierre, on regions as such.
Thank you, Pierre. Stephanie, we'll take our next question, please.
Your next question comes from the line of Tim Long with BMO Capital Markets. Your line is open.
Thank you. I want to go back to the Technologies group. Could you talk a little bit about kind of new deals in the pipeline? I'm just curious, were there any customers added in the quarter? What's it going to take to start to see some more deals announced? Will a resolution with Samsung, could that help? Or just talk to us a little bit about timing of seeing some of the unlicensed people becoming licensees. Thank you.
Yeah. Thanks for the question, Tim. Maybe I'll start. We had four small new licensees come in during the quarter. Of course we are building programs in other areas than handset SEPs as well. LG we licensed during Q2, so there wasn't really any, call it, a big licensing announcement this quarter. As we have said, we have prepared now a team which can go after different cases simultaneously, so that is good. Also, as we have said, often from the start of the negotiation into some kind of outcome, it can easily take 18 to 24 months. First negotiation, then you need to decide how you move forward. Do you go to arbitration? Is there a legal means to move forward, and so forth. Rest assured that we are not sort of sitting still on HERE when we look at the pipeline.
Thank you, Tim. Stephanie, next question, please.
Your next question comes from the line of Richard Kramer with Arete. Your line is open.
Thanks very much. Alcatel had itself tied up in knots for years in China with the Alcatel Shanghai Bell joint venture in terms of trapped cash and minority profit leakage. You mentioned that you're going to inject Nokia China into the Huaxin JV or Huaxin JV coming up. What do you expect you will be paid, if anything, for the contribution of what's a fairly sizable portion of your networks business? Can you give us any sense of the profitability of that business since, I assume like Alcatel Shanghai Bell, half of that profitability will be paid back to the JV partners? Thanks.
Okay. Why don't I start here, Richard? Timo here. When we look at the NSB compared to ASB, we announced an MoU on the topic. A very important component of that MoU is first, that all transactions which would happen in the new construct will happen on fair market values. Second, we are not grandfathering any previous operating model. This will be a new setup which will be negotiated, and we will move forward with that. I think those two components are very important. Again, all asset transfer will happen on fair market values. Second, we are not grandfathering any previous setup.
I will add that, Richard, this JV will allow us to position ourselves better for areas such as converged core, IP, security, and the broader core networking space. I think that's going to be a benefit to us being the only sort of foreign JV in the country.
Thank you, Richard. Stephanie, next question, please.
Your next question comes from the line of John Dworsky with Handelsbanken. Your line is open.
Thank you. I wonder if you could elaborate a little bit more on the situation in Western Europe, if you expect that to continue into next year in relation to the mergers and the hesitation related to that.
Yeah. Thanks, John. Yes, consolidation, I believe, will continue. We've seen some good signs of consolidation. Of course, we've also seen a step back in one market. Overall, I think consolidation has to happen in Europe and will continue. It brings some near-term uncertainty in terms of CapEx, but ultimately it is good for the market long term. How do I see Europe? Again, I'll give you some data points. The 4G network coverage by population in Europe is 68%. When you compare that with China, 83%, North America, U.S., 98%, Japan and Korea, about 99%, 100%. There is more room to grow the LTE coverage. If you look at the connections, again, in Europe, it's about 13% in Europe. The actual penetration of 4G, again, more room to grow that piece as well.
I think the issue, though, is one of regulation, because regulation does make it less pro-investment, it's changing potentially with the Digital Single Market policy, we're not there yet. All of this is reflected ultimately in if you take revenue as a proxy with the operators and you take ARPU, it is about one third of the U.S. and it's about half of Japan and Korea. That tells you that given the lack of pro-investment, you're not monetizing data traffic enough by the operators. It's a mixed question. I think there'll be some stress in the marketplace. It's more a business question than a technology question, there is a countervailing trend that you need to do more LTE coverage and you need to do more capacity as well.
Thank you, John. Stephanie, next question, please.
Your next question comes from the line of Simon Leopold with Raymond James. Your line is open.
Thank you very much for taking my question. I wanted to see if you could talk a little bit about your philosophy on your product pricing. What I am trying to get at is that I believe Nokia has a reputation for pricing discipline. I think this has been evident in your operating margins, whereas Alcatel-Lucent, at least by reputation, has been much more aggressive on pricing its products. I want to get an understanding of post-deal, how you think about applying your philosophies in the past and if you consider what I have described reasonable. Thank you.
Thanks, Simon. Without a doubt, we will expand our pricing ballroom approach, our limits of authority decision-making bodies, the formal structure that we put in place for pricing. I think pricing is a big lever in this marketplace. A focus on it right from the CEO is absolutely important. I expect my four presidents in networks to be hands-on in that. I expect to continue to be hands-on in that space as well. That will be expanded. We are already looking at how we will do that. That will happen from day one.
Stephanie, I think we have time. Oh, thank you, Simon. Stephanie, I think we have time for one last question for today.
Certainly. Your last question comes from the line of Fredrik Lissell with Danske Bank. Your line is open.
Yes, thank you for taking the question. Just a final one. Can you talk about the business mix in networks in Q3? If you had a good software quarter again in Q3 that helped margin, or was it sort of a seasonally normal situation in terms of software sales in the quarter? Thank you.
Software sales, as we said, was elevated in Q2, but more at a normal level in Q3. Good, but normal. Between mobile broadband and global services, we had 55% mobile broadband and 45% global services. Those were the numbers.
Great. With that, I'd like to turn the call back over to Rajeev for closing remarks.
Thank you, Matt. Thanks again to all of you for joining. I would like to close with a couple of thoughts. First, we are proceeding quickly in finalizing how Nokia will operate once the deal with Alcatel-Lucent closes, which we currently expect to happen in the first quarter of next year, ahead of our originally anticipated timetable. The nominated leaders are already putting their team plans in place. We are firmly committed to ensuring a flawless transition to Nokia's new operating model once the deal closes. We continue to plan with urgency and purpose. Second, our result shows that we have built a resilient and strong organization and culture with a lean cost structure and excellent execution capabilities.
As the closing of the Alcatel-Lucent deal approaches, we believe this puts us in good stead to take the next step as a company to be the vendor of choice for our customers. To meet the competition head on and win. Overall, it was a good quarter. We are squarely focused on delivering our full-year results. With that, thank you very much for your time and attention. Matt, back to you.
Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external, such as general economic and industry conditions, as well as internal operating factors. We have identified these in more detail on pages 74 through 89 of our 2014 annual report on Form 20-F, our interim report for Q3 2015 issued today, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you.
This concludes today's conference call. You may now disconnect.