Would now
like to turn the call over to Matt Schimmel, Head of Investor Relations. Mr. Schimmel, you may begin.
Ladies and gentlemen, welcome to Nokia's Q1 2015 conference call. I'm Matt Schmall, Head of Nokia Investor Relations Rajeev Suri, President and CEO of Nokia and Timo Ihamotsla, EVP and Group CFO of Nokia are here in Estelle 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 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 74 through 89 of our 2014 Annual Report on Form 20 F, our interim report for Q1 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 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.
Thank you, Matt, and thanks to all of you for joining. Nokia delivered strong year on year sales growth in the Q1 with weak Nokia Networks profitability compensated by very good performances from Nokia Technologies and Hair. I will come back to the results of the quarter, but would first like to take a moment to comment on 2 recent announcements, the proposed acquisition of Alpha dilution and the strategic review of hair. As I want to focus my time on these topics, I've asked Timo to cover most of the quarterly details related to Hair and Nokia Technologies. Let me start with Alcataloosent.
Given that Timo and I have talked with many of you when we announced the transaction and in the days since, I won't repeat the deal details or strategic rationale here. Rather, let me share some thoughts about what we have learned since the agreement. First, I've met with many customers over the last 2 weeks and every single one has expressed their support. They see it as a way to ensure 3 strong global competitors and not as a reduction in competition. They see it as a way to protect their investments of the past while enabling the needed innovation in future technologies and services.
They see the portfolio mix of the 2 companies as compelling and well suited to meeting their future requirements. 2nd, we've had initial conversations with key government officials in many countries. And while it is still early, the tone has been quite positive. So some reason for optimism. Additionally, as you may have seen a number of our competitors in both Europe and China have expressed support for the transaction.
3rd, we've heard concerns about execution risk. Given the issues associated with similar transactions in the past, that is a very fair concern. But I do believe that this time can be different. The transaction is not structured as a joint venture. It is an acquisition by Nokia with clarity in terms of leadership and governance.
This will allow us to move fast to avoid politics and to show that history does not have to repeat itself. Both companies, Nokia and Alcataloosin have been through significant recent transformation and restructurings and both have learned from those experiences. On the Nokia side, we have focused on creating a disciplined operating model that will serve us well as we proceed with integration planning and eventual integration the As we do so, we will ensure the integration planning work is separated from our day to day business operations in order to minimize the risk of any disruption. In addition, technology has changed. As the telecom world has transitioned away from customized hardware and motor software and as open interfaces have become more prevalent, the pain of disruptive and expensive swaps can be mitigated.
4th, we've also heard questions from some of you on the call today about why now. And in my view, the answer to that lies in the technology transitions that are underway and the progress that has been made at both Nokia and Alcatel Lucent that I just noted. We are now in a cycle between 4 gs and 5 gs and the timing of this deal will allow us to accelerate spending on 5 gs immediately upon closing. In addition, the combined portfolio will put the company in an excellent position as the transition to cloud accelerates. Finally, we have heard some concerns about the commitments we have proposed to make to the French government in order to ensure their support for the deal.
We believe those commitments France will France will make strong contributions to enhance the future of the combined company. Now let me turn to hair and the strategic review that we have announced. We embarked on that process in the context of 2 developments. The first is that location are becoming of even greater strategic importance to automotive companies and others. 2nd, it is clear that Nokia's portfolio will become increasingly networks focused once the Alcat and Lusin transaction closes.
In light of these two things, we wanted to take a step back and at least ask the question of whether owning hair still made sense. Following our review, we could choose to sell hair in full or in part or we could decide to keep it unchanged from today. No one should assume that there is a predetermined outcome. We are looking for the best solution for Nokia and its shareholders for here and its employees and customers. We're in no rush, under no pressure to sell and regardless of the option we choose, I have no doubt that the future of HERE is bright.
That, on to the quarter. We're at the group level, we delivered good results with sales of €3,200,000,000 up 20% year on year and non IFRS diluted EPS up 25%. Non IFRS operating profit of €265,000,000 or 8.3 percent of was down 13% year on year. Hill and Nokia Technologies both performed very well in the quarter, while good growth at Nokia Networks was offset by unsatisfactory profitability. Despite the slow start at Networks, however, I am confident that we remain on track to meet our targets for the full year.
And let me now turn to Networks in more detail. As I noted, Networks delivered good year on year growth in the quarter of 15%. When you exclude the currency impact, net sales were up by 5%, still a healthy number and the early signs are that we grew faster than the market in the quarter. Our mobile broadband and global services business units both grew with a particularly strong showing by the services team, which delivered year on year growth of 21%. Our business mix during the quarter was 52% mobile broadband versus 48% for global services.
For the same quarter 1 year ago, mobile broadband was at 54%, although on a sequential basis, the mix between segments has not changed. Within the segments, however, there were some mix shift in Q1. With more network implementation and less systems integration and services and more LTE and less core networking revenues in mobile broadband. These shifts were part of the reason for the Q1's weak profitability. On a regional basis, we saw year on year growth in 4 of our 6 regions, with particular strength in North America, Greater China and the Middle East and Africa.
India, in particular, was a standout performer both on the mobile broadband and global services sites. Overall, however, growth was not the issue for networks in Q1. The issue, as you've seen was profitability. We saw a non IFRS gross margin or operating margin in the quarter of 33.7% and 3.2% respectively. We have done an intensive analysis to ensure that we understand what happened during the quarter and more importantly, what we need to do to improve going forward.
In today's press release, we called out a number of drivers for the profit decline, and I would like to take the next few minutes to give you some additional color. First, software sales were down by approximately 5 percentage points from the same quarter 1 year ago. This was driven largely by lower core networking revenue and lower software sales in Japan and North America. We do not see any evidence that this decline represents a structural change in our market, but we continue to watch the situation closely and are taking actions to get software sales back on track. 2nd, strategic entry deals, particularly in China, had a more significant effect in Q1 of this year than the same quarter last year.
While we continue to require that such deals have the right long term profitability profile, the short term impact can be sizable. That said, we expect the situation to ease as we head towards the second half of the year. 3rd, as I think you will have seen from the results of other companies in our sector, market conditions are challenging. While we believe that with our lean cost structure and disciplined operating model, we are well positioned in this environment, there is evidence of a near term shift in market behavior. 4th, operating expenses.
As I'm sure you understand, a large portion of the OpEx increase reflected negative ForEx impacts. Some of the increase also reflected increased investment in growth technology areas, including 4 gs, 5 gs and CloudCore. Given the market environment that I just mentioned, we will continue to manage OpEx extremely prudently. Finally, Global Services, where we saw a 3 50 basis point decline in operating margin. This was a result of a mixed shift in the quarter, which was heavier than normal in network implementation and lighter in systems integration.
Systems integration had a challenging quarter, although it is a relatively small part of our overall services business. In particular, systems integration was impacted by significantly lower, very high margin business from 1 customer compared to the previous year. At the same time, our systems integration pipeline has continued to increase since the start of the year end. To give just one example, we won a very large new customer in Q1 that should benefit the business in quarters to come. Overall, I believe that our global service organization remains strong and its performance compares quite favorably to others in our sector.
So despite the slow start, we remain confident in our ability to deliver on our commitments for the full year. Let me just share a few other points that support that confidence. 1st, on the revenue side, our funnel of opportunities remains strong and our win rate remains high. 2nd, we are launching several margin improvement actions, including an expanded software upsell program and a sharper focus on earlier than planned recovery of entry and other low margin projects. 3rd, we continue to be very aggressive in driving cost and efficiency improvements to our Business Transformation Board.
We have active projects with clear targets and tracking mechanisms spanning a wide range of areas: discretionary and overhead spending improving cost of sales in both products and services and further R and D transformation, just to name a few. Finally, when we look at the strategic fee deals we have taken on, we see margins starting to improve as we head to the second half of the year, driven by contractual terms and ongoing cost and execution improvements. To sum up, we clearly cannot be satisfied with the Networks numbers we announced today, but feel there are good reasons to have confidence for the full year. The Networks team has shown that they can deliver consistently strong results and I know they are motivated to deliver better performance in the quarters to come. Then to Hoe.
Hoe delivered excellent results with significant improvement in both year on year sales and profitability. The automotive segment continues to go from strength to strength and shortly after the end of the quarter, I was particularly pleased to see that Jaguar Land Rover has decided to be the 1st carmaker to implement We look forward to seeing how that will be received by drivers this summer. This was a groundbreaking win for HIL and the team is working very hard to follow that up with more. Other notable activities in the quarter included Hill launching its map app for iPhone users making it available for free download from App Store. To date, the reception has been excellent with the app downloaded a combined 6,000,000 times for both iOS and Android and getting glowing reviews in the process.
Finally, on to Nokia Technologies, which also had a very strong quarter with sales and operating margin up sharply both year on year and sequentially. I am more confident than ever that licensing activities are tracking well and that there is a robust pipeline of potential new licensees. This is a business with a unique operating model, excellent assets and a world class team and work is progressing well. Costs were higher in technologies on a year on year basis due to investments in business infrastructure and new innovation, but roughly flat on a sequential basis. While we will continue to invest where we believe there are compelling opportunities, we're also taking steps to focus the work of the technologies team on projects that present the most interesting opportunities.
In short, more disciplined management of the licensing pipeline and a sharper strategic focus to future investments. Let me now hand the call over to Timo for some more details and then we can turn to your questions. So Timo, the floor is yours.
Okay. Thank you, Rashid. I would like to spend the next few minutes taking you through the performance of Nokia Technologies and HERE in the quarter before turning to foreign exchange movements, my customary discussion on cash performance and finally a few words on our outlook. Starting with Nokia Technologies. Net sales of €266,000,000 in the first quarter increased by 103% year on year.
We continue to make very good progress in our broader licensing activities and remain confident in the long term monetization opportunity for Nokia Technologies. However, it is important to reiterate that this can be an inherently lumpy business, particularly when viewed through a quarterly lens, and this was the case in Q1. Approximately 2 thirds of the year on year growth in Nokia Technologies net sales in Q1 related to nonrecurring adjustments to accrued net sales from existing agreements as well as revenue shares related to previously divested IPR and IPR divested during the quarter. Approximately 1 third of the growth related to higher significant licensee. While we did see underlying growth in Nokia Technologies' quarterly net sales run rate in the Q1, you should not simply extrapolate the whole Q1 net sales level going forward.
Nokia Technologies net sales in Q1 included revenue from all of Technologies licensing negotiations, litigations and arbitrations to the extent that we believe is currently required, but this is not a forecast of the likely future outcome of ongoing licensing projects. Turning on to HERE, which delivered a strong top line growth and continued improvement in profitability.
As I have commented on
previous calls, we believe HEER has strong long term growth prospects and is capitalizing on the trends we see, particularly in the Automotive segment. This is really key to driving operating leverage and cash flow generation. In Q1, HEAR delivered year on year net sales growth of 20 5% or 17% on a constant currency basis. New vehicle licenses of 3 point 8 1,000,000 units in the Q1 of 2014 or 29% year on year growth. Here is non IFRS operating margin of 7.3%, up 2 50 basis points year on year, was primarily driven by operating leverage from the higher net sales, which more than offset higher non IFRS operating expenses.
Taking into account in Q1, its leading market position as well as positive industry trends, we have narrowed HEAR's 20 15 non IFRS operating margin outlook from between 7% 12% to between 9% 12%. Then turning on to foreign exchange. We have included a new table in our Q1 press release on page 28, which provides a quarterly analysis of our revenue and cost exposure by major currency. At a high level and as I commented last quarter, we are well balanced in terms of our net sales and cost exposures against the euro. In Q1, approximately 30% of our net sales and total costs were euro denominated.
Therefore, everything else being equal, a weakening euro relative to all our other currency exposures has a positive impact on our overall net sales, but negative on our operating costs, with the overall impact on our non IFRS operating profit being relatively small. In terms of the U. S. Dollar, approximately 35% of our net sales in Q1 were U. S.
Dollar denominated compared to about 30% in our costs. Turning back to our Q1 2015 year on year net sales growth of 20%. Approximately 9 percentage points of this growth resulted from foreign exchange movements, primarily due to the stronger dollar. Movements, primarily due to the stronger dollar. Sequentially, foreign exchange movements benefited Nokia's reported
net sales by approximately 5%,
driven by general euro weakness relative to our non euro denominated sales. Then turning on to our cash performance during Q1. On sequential basis, Nokia's gross cash declined by approximately €200,000,000 with a quarter ending balance of approximately €7,500,000 Net cash and other liquid assets declined by approximately €50,000,000 with a quarter ending balance of approximately €4,700,000,000 Looking at the primary drivers of the movements in our net cash balance in Q1. Nokia's adjusted net profit before changes in net working capital was 3 €68,000,000 in the Q1, primarily driven by Nokia Technologies and Nokia Networks. Nokia's net cash from operations was €199,000,000 outflow, primarily driven by cash outflows related to other financial income expense, and I will come back to this in a few moments.
In Q1, Nokia's continuing operations had net working capital cash outflows of approximately €100,000,000 which included approximately €50,000,000 of restructuring related cash outflows at Nokia Networks. Excluding this, cash outflows from networking capital was approximately €50,000,000 as the negative cash impact from decreases in short term liabilities was partially offset by the positive impact from a decrease in receivables. Continuing operations had cash inflows of approximately €30,000,000 related to net financial income and and approximately €100,000,000 related to taxes. Looking at the approximately €400,000,000 of outflows related to other financial income and expense in a bit more detail. Approximately half or around 2 €100,000,000 of the outflows related to foreign exchange hedging on forecasted cash flows and hedging of Nokia's non euro cash and cash equivalents.
The other half of the outflows mainly relate to the timing mismatch between foreign exchange cash flow impact on other non euro denominated balance sheet items such as trade payables and receivables as well as internal and external financial items other than cash and cash equivalents and the corresponding hedges for the net exposures. Assuming static FX rates compared to the end of Q1, we currently expect that approximately €200,000,000 of the Q1 cash outflows will be largely offset by benefits to Nokia's cash performance related to these items in the next two quarters, partially in other financial income and expense line and partially on other lines of operative cash flow. Discontinued operations had cash inflows related to net working capital and taxes totaling approximately €10,000,000 in Q1. From a financing cash flow perspective, outflows were primarily due to share buybacks, which totaled approximately €160,000,000 in Q1. During the Q1, we repurchased approximately 25,000,000 shares.
As I highlighted on our call on April 15, following the announcement of the proposed acquisition of Akselt Lucent, we have suspended our capital structure optimization program, including suspending the share repurchase program execution until the closing of the transaction. From an investing cash flow perspective, cash outflows of approximately €70,000,000 related to continuing operations capital expenditures and approximately €50,000,000 related to the acquisitions, which we completed in the quarter. Finally, foreign exchange rate had an on our venture fund investments. I think we have a unique long term corporate venturing business model and we have built a strong track record of growth stage investing through the Nokia Growth Partners and BlueRun Ventures entities. After the end of Q1, Nokia Growth Partners sold its holdings in ganji.com, a major online local services marketplace platform in China to 58.com.
Under the terms of the transaction, both Nokia Growth Partners and Blundenbrand Ventures will receive a combination of 58.com shares and cash, valuing Nokia's indirect holdings at approximately €200,000,000 We expect to record benefits from the transaction when cash distributions are made. The final amount and timing of the benefits will, of course, depend on the value and date at which the venture funds liquidate the shares and is expected to have a positive impact on our EPS accordingly. At the end of the Q1, the fair value of our venture fund investments was approximately €1,000,000,000 as compared to approximately €800,000,000 at the end of 2014. This amount is included in available for sale investments under non current assets in Nokia's balance sheet. Overall, I believe that both Nokia Growth Partners and Blooran Ventures will continue to serve as sources of value creation for Nokia shareholders.
Finally, I'd like to spend a few moments on our guidance. 1st, Nokia 1st for Nokia Networks, we have upgraded updated our full year non IFRS operating margin and now expect it to be around the midpoint of our long term 8% to 11% margin range. This update reflects the weaker Q1 performance as well as our expectations for the rest of the year. More specifically, we expect some of the negative factors that impacted Q1 profitability to ease, particularly in the second half of twenty fifteen. For the longer term, on a stand alone basis, Nokia Networks Non IFRS operating margin guidance continues to be 8% to 11%.
And for the new combined entity without a dilucent, we have said that we expect to achieve approximately €900,000,000 of cost synergies in 2019. For here, we are encouraged with the in the upward revision to the full year outlook. For Nokia Technologies, the quarter was impacted by some nonrecurring items. However, we did see underlying growth in the quarterly net sales run rate and we have a robust pipeline going forward. Thus overall, we think we are well positioned to achieve our targets for 2015.
And with that, I'll hand it over to Matt for Q and A.
Thank you, Timo. Stephanie, please go ahead.
Your first question comes from the line of Derek Jenkins with UBS. Your line is open.
Thanks. Just one question on China, if I may. I think there's been a clear impact in the quarter on margins from the ramp at China Telecom and China Unicom on the FDLTE spectrum. And I just wondered whether we're at the maximum point of pain in terms of recognizing OpEx, but not necessarily recognizing revenue given that those licenses were really only issued in the middle of the quarter? Thank you.
Yes. So in China thanks, Gareth. There are 3 operators, of course, and they all have different schedule with different intensity of deployment. So what we've said is that the impact of strategic entries and notably some in China require an upfront component of cost And that's why it has seen its impact in the quarter. And overall, if I step back from the equation and say, how do I look at the second half of the year, not just China, but overall as a business, I see the impact of strategic entries to ease in the second half of the year.
Thank you, Gareth. Stephanie, we'll take our next question, please.
Your next question comes from the line of Kaldender Giraj with Credit
Thank you for the question. And for Rajeev, I guess, I understand the explanations you're giving on the lower margins in Networks. But my basic question Rajeev is that for the last 2 years you've given quite a clear message on how you run the business in terms of its predictability, in terms of the new forecast forward all the contracts you allocate them to the P and L. Therefore, we wouldn't typically see the variability. So my question is just that visibility you have into your business each quarter.
What Enes and have managed to do is not have the volatility of your peers, whereas today we're seeing that. So just on that visibility you have into it, I guess, I appreciate your perspective on perhaps what went wrong and why this wouldn't be repeated in terms of ability to anticipate this volatility quarter to
quarter? Thanks.
Thanks, Pulvinder. So I've always been saying that there are 4 broad drivers in the business. 1 is the competitive dynamics. 2nd is business mix. The third is regional mix.
And 4th is something that we fully impact, which is operational excellence. So again so again today. The business mix, yes, we've seen lower software, lower core and lower margin and the sort of cost upfront that I commented on. Fundamentally, I mean, this is a and the sort of cost upfront that I commented on. Fundamentally, I mean, this is a project business.
And typically, in some quarters, the activity is actually determines if it's really close to the end of the quarter. And those are acceptances, which then drive your revenue and also software revenue. So in terms of acceptances, notably on higher NI and lower SI and software revenue, we've seen that impact at the tail end of the quarter. Again, as I've said, I look at a lot of these things easing in the second half of
the year. If I may add quickly. So of course, we are absolutely not pleased with Q1, but we of course need to recognize that Q1 is seasonally the weakest quarter in this business. And last year, I. E.
2014, we had some, I call them, abnormally high software sales during the quarter, which maybe sort of changed those dynamics for 2014 a bit. Yeah.
Thank you, CoBender. Stephanie, we'll take our next question.
Your next question comes from the line of Andrew Gardiner with Barclays. Your line is open.
Good afternoon. Thank you. You've
both given us a better sense as
to the moving parts within the different units. But I'm just wondering if you can help with how you're seeing the group as a whole after the Q1. And just for example, if I take your guidance for networks, midpoint of the range, 9.5 percent margins, that's roughly EUR 120,000,000 reduction in networks profit for the full year relative to prior market expectations. And then conversely on here, your upgrade to guidance is worth about €20,000,000 and then Technologies was about €100,000,000 ahead of the normal run rate in Q1. So if I take those moving parts together, then I'm not seeing much change in terms of the full year profit expectations.
I just want to make sure I'm understanding your guidance correctly, if there's any other moving parts you can point
to? Timo here. Thanks, Andrew, for the question. So of course, I can't take stance on where you started to move from regarding your getting to 9.5 mentioned was the NGP. You mentioned was the NGP, where we said that we expect to have some positive impact from that to EPS, but we did not quantify exactly when that would come.
Thank you, Andrew. Stephanie, next question please.
Your next question comes from the line of Alexander Peter with Exane PNB Paribas. Your line is open.
Hi. Thanks for the question. I'd just like you
to elaborate a little
bit on the networks gross margin situation. You've got 600 basis points contraction year on year, which is quite a lot. And you do say that you have some currency benefit there. So could you quantify that for us? And also if you could tell us how much of your gross margin contraction is attributable to lower capacity sales I.
E. Software? In other words what's out of the mix? And what is down to the footprint acquisition that you also have flagged? Thank you so much.
Okay. Thanks, Alex. Maybe I'll start and you can maybe Rajiv talk a bit more about the software. So basically FX as such when we look at the gross margin is not a big driver because on absolute gross margin, it is more of a driver. But on the actual percentage point, it is not that big.
So clearly, the biggest of the drivers what you mentioned is the software sales part, which we actually described as 5% on year over year.
And we did say that a year ago, we had this somewhat abnormal situation with higher software sales. But again, we see core networks coming to more sort of normalized levels during the year and also see that software will come to normalized levels. And we see also on this point we've made about system integration coming to more normalized levels and so on. So those are drivers that we're executing.
Thank you, Alex. Stephanie, next question please.
Your next question comes from the line of Pierre Ferragu with Bernstein. Your line is
Thanks a lot for taking my question. Rajeev, you mentioned a couple of times the change in competitive dynamics, which didn't really tell you with recent comments from some of your competitors. So I was just wondering if you've seen in the quarter like some sort of increase in pricing pressure around this? And is that something that you just saw in the quarter and impacted your number for this quarter? Because that sounds like a very, very quick turnout usually deals are negotiated on a long period of time and impact the P and L only a bit later?
And then maybe on your comments about efficiency throughout the year and how to think about OpEx in Networks to your run rate quarterly run rate is €815,000,000 this quarter. Is it reasonable to expect that this number is going to come down a bit during the year? Or should we consider that as a reasonable run rate for the full year? Thank you.
Yes. So I think Pierre thanks for that. I'd like to always point out when we see a change in trend with regard to competitive intensity, which you have to give it a period of observation to know that it's not just tactical, but it is a bit of a trend. And so at this point in time, based on what I see, I think it's worth pointing out that the competitive intensity has increased. And now there are reasons for it.
There are some markets that offer significant large footprint for the long term and so they are hotly contested and China is an example of that. And of course, they do offer long term footprint opportunities. And then there are other things that have changed competitive intensity like perhaps one of the reasons is that we have seen growth in the last three quarters if I include the current 1Q1 and there's a competitive response to some of that as well. Finally, I think when you look at overall, there are challenging market conditions when it comes to CapEx because there are markets that are more slow and there are other markets that have momentum. So I think Middle East and Africa, Southern Europe, China, India have momentum, recognizing that China is somewhat dilutive at this point in time.
At the same time, North America, Asia Pacific, Europe and Eastern Europe are don't have enough momentum. And particularly in APAC countries like Indonesia, Korea, Thailand, Japan, which have been somewhat more robust in the past. And Europe is characterized by both the macroeconomic situation, particularly in Eastern Europe, but also generally. And the fact that this consolidation in the operator landscape is underway and it's really happening. And that does mean that it puts pauses in terms of CapEx spend.
So there are fewer deals to go for and the competitive intensity increases. So I'm not sure if this is a structural trend yet, but it's worth pointing out that this has changed.
Yes. And maybe I'll comment on the OpEx side here. So we had $99,000,000 up about 14%, 15% year on year OpEx in Northern North and Nokia Networks. And we do not expect similar kind of uptick rate to continue during the year. We actually expect this, call it, uptick in OpEx year on year basis to ease towards the latter part of the year.
Thank you, Pierre. Stephanie, next question please.
Your next question comes from the line of Mark Xu with RBC Capital Markets. Your line is open.
Thank you. The working presumption was that the consolidation in the network equipment space would improve profits over the longer term. However, we're moving the other way. And with the change in trend and 3 dominant players to remain, can we still get to the €900,000,000 And if so, will that actually hamper Nokia's ability to grow market share in the future? Does it have to be 1 or the other?
Maybe I'll take the €900,000,000 question and you can discuss a little bit about the market situation. So no, we expect no change in our ability to execute the €900,000,000 planned cost reductions. In our ability to execute the €900,000,000 planned cost reductions in the Alcatel Lucent plant transaction. We are actually confident that we can execute it. As we have discussed during the last weeks or so, we have a very robust and detailed model through which we have worked where we expect the synergy benefits to come on the cost side, and we think that that's a very prudent analysis and very executable.
Yes. On the market conditions, the consolidation and weather, of course, we have seen this being more rational over the last couple of years. And this year, there have been some markets that offer this long term footprint that has driven the intensity. But apart from that, there are markets on balance that generally it's slow start to the year from a CapEx standpoint. And therefore, there's been more competitive intensity to go after those smaller deals, sort of lesser amount of deals and more players are active on that.
Do I see this as a defining trend? 1 quarter should not necessarily define a trend. However, we have seen that this has changed. Now going back to our transaction at Alcatalyucent, this is why I think it is different and it makes a lot of sense in strategic rationale because that is more about scope than about scale. I absolutely believe that the winning providers of the future will be stronger full scope providers with the necessary scale in the individual businesses that they operate in.
And that transactional opportunity gives us that platform. And with the operating model that we have, I think it allows to benefit much more over the longer term.
Thank you, Mark. Stephanie, we'll take our next question please.
Your next question comes from the line of Sandeep Deshpande with JPMorgan. Your line is open.
Yes, hi. My question is regarding that one off which occurred because of the acquisition of new customers. You identified 5% was because of 5% was because of the lack of software in the Q1. How would you place this additional cost of acquiring these new customers? And secondly, also I have a question on your IPR that even excluding the one off associated with some past deals that you have recognized in the quarter, you saw upside year on year because of some volume increases or something with your existing customers.
Could you please give some details on that?
Thanks, Sandeep. So allow me here to step back a little bit and give a more elaborate response because, of course, has come in multiple ways. So I think it merits a better response as to why do I feel confident about the remainder of
the year. So first of all
and I'll bucket this into 2. What are the structural things and what are the actions we're taking? 1, our funnel of sales opportunities remain strong. We have a high win rate. That matters.
2nd, I see the impact of strategic entry deals to ease in the second half, most of which you take these deals, you take the cost somewhat upfront, right? So I see that easing. I see momentum in some regions overall improving the mix for us in a way that more core networks will be there in the mix relative to radio. I see systems integration coming back to normalized levels, also software coming back to more normalized levels. Then what are the actions we're taking?
We're taking sales acceleration actions, particularly software sales, expanded software upsell program with the top 100 customers with a sharper focus on earlier on recovery of some of these entry and other low margin projects. Then you recall the programs that we have. That's not changed, but we'll accelerate them. We have had programs for cost through our Business Transformation Board, reducing discretionary spending, overhead spending, improving cost of sales in both products and services and some of the R and D efficiency programs. Then headcount control, that's something we will do as well.
And then there are these smarter transformation programs we spoke about, which is all about eliminating waste from lean and kaizen, automation and tools, but also driving a higher share of global delivery, I. E. Remote delivery to improve margins relative to on-site delivery. So that's kind of the actions that I we will take and some of the trends that I'll be changing.
And maybe a quick comment, Sandeep, on the 5 software. So we that's of course the year over year delta. And that delta has elements of being abnormally high last year as well as elements of being abnormally low this year. So it's not like everything would be sort of from, call it, normal level to down. So I think that's just an important thing to note.
Then on IPR, I mean, the year on year and sequential increase in Nokia Technologies net sales include revenue from all of Technologies, licensing negotiations, litigations and arbitrations to the extent that we believe is currently required, but they are not a forecast of the likely future outcome of ongoing licensing projects. Now when you look at these numbers sequentially and you look at the sequential increase from the €149,000,000 to the €266,000,000 we said that about 80% of that would be classified as nonrecurring and about 20% would be classified as recurring. So that leads to a number between $20,000,000 $25,000,000 which we have kind of like described as recurring.
Thank you, Sandeep. Stephanie, next question please.
Your next question comes from the line of Andrew Humphrey with Morgan Stanley. Your line
is open.
Hello, actually, it's Francois. In terms of the R and D spending, I am very, very, very surprised about you indicating more spending on 4 gs and 5 gs. I think we discussed this intensively last year, especially at the Analyst Day that actually you had the right budget and everything for the future. So what has changed basically since the Analyst Day? Did you have any pressure from your customers to spend more?
What has changed basically? Thank you.
Thanks, Francois. Of course, it's a dynamic market. So number 1, I believe the industry requires more investments in LTE, particularly in driving LTE advanced carrier aggregation, 3 carrier aggregation and so on, 5 gs and cloud. And some of these LTE are driven by competitive feature requirements. Now I can sit there and just wait to lose competitiveness or can take action and say we want to be actually at the forefront of competitiveness and we want to meet and get ahead of some of the customer needs.
So that's what's driving those investments. And again, as we explained before, there are headwinds from ForEx that negatively impact both OpEx and cost of sales. And as we said, there are tailwinds to revenue. So there's also that thing that you have to keep in perspective.
But again, as we discussed earlier today, so this year on year increase in OpEx, so if we call that a pressure, then that pressure we clearly expect to ease towards the latter part of the year. Okay.
Thank you, Francois. Stephanie, next question please.
Your next question comes from the line of Richard Kramer with Arete Research. Your line is open.
Thanks very much. Rajeev, since you mentioned you'd gone and spoken to a number of customers, what are they telling you about their installed bases of relative Nokia and Alcatel Lucent equipment? And what has that told you about how you might be able to reduce costs and roadmaps? And one other simple question maybe for Timo, Within technologies, it seems like the time is running fairly short in which you might want to conclude a larger brand licensing deal. You feel that's something that might contribute materially to income in 2015?
Or is that something you're going to take your time doing and sort of feel your way into the market as you were with the N1 tablet? Thank you.
Thanks, Richard. So let me start with the road map question. So I would characterize the discussion with the discussions with operators as being quite pragmatic. We've talked about these open interfaces and the fact that there is the SIPRI interface between the radio frequency and the baseband unit in a base station. There will be similar open interfaces in IMS, VoLTE and many of those core network platforms.
And I think the reception is positive to that kind of thinking. It's positive to the fact that operators don't want large scale swaps when it's not necessary and particularly because technology has evolved to a point. So what I expected has played out well in the discussions. But it's, of course, early days because we're not at the point that we've made any portfolio decisions and that will only happen towards closing. But remarkably positive discussion so far.
Okay. And then regarding the brand licensing. So clearly, as you say, we have SD the brand licensing business model on the market with the N1 tablet and this is really a learning exercise for us. And I want to remind that we invested over $20,000,000,000 into brand marketing during the time when we were in the devices business. So this is really a brand which is vacuum which we think it's a vacuum, which we need to try to fill with a very smart business model, I.
E. A licensing and pre business model, which is capital light and follows the licensing business model of the other businesses in our Technologies unit. Now then what comes to 2015 as this licensing business unit or brand licensing business is different from IPR Licensing in Technologies because it does not have in the same way these kind of lumpy dynamics necessarily or at least how we understand it currently. And for that to be a meaningful contributor to bottom line, we of course need to ramp up a lot of volume because business model is really volume based. And in that sense, I would say that it would be unrealistic to expect that that would have significant impact on Nokia's 2015 numbers.
On the other hand, I think it's a very interesting business opportunity long term for the Technologies business unit, particularly when latter part of 2016, the brand does not have any of these limitations anymore and we can also consider licensing it for smartphones.
Thank you, Richard. Stephanie, next question please.
Your next question comes from the line of Johannes Schaller with Deutsche Bank. Your line is open.
Yeah. Hi, there. Thanks for taking my question. I was just wondering with the increase from Microsoft in Technologies, is it fair to assume that Microsoft currently accounts for roughly pretty close to 1 third of your Technologies revenues? And maybe in that context, what would happen if one of your smartphone licensees decides to exit the smartphone business?
Can you maybe give us a bit of detail of how such a deal would then work? How the contracts are currently structured? Would the licensing revenue drop off pretty quickly? Or would that phase out over a longer period of time? That would be great to understand.
Thank you.
So thanks for the question, Johannes. So first on the Microsoft. So the example that I gave earlier in the call, I. E. Comparing the 149 to 266 I.
E. The sequential example. Microsoft was already in those numbers. When we were talking about the year on year example, then in that comparison, Microsoft plays a role just to be very clear on that. We have not discussed exactly in a while kind of like what was the Microsoft delta.
We just went through that in the actual Microsoft transaction, but what was the new license. So in that sense, I can't give you more color there than if we look at any of these licensing deals, so they take different forms. Some have a fixed payment and fixed annual schedule and some are more based on volumes and percentual numbers on those volumes and then there's mix in between. So I really cannot give you one answer to what will happen if suddenly somebody would decide to exit the handset business. So it really depends on the contract structure.
But I just want to remind that typically these contracts are fairly long in nature. So people generally don't want to make short term licensing contracts because, of course, you utilize a technology in your devices for long term or whatever consumer electronics or other devices you would be making. And in that sense, it doesn't make sense to try to negotiate this for a short period.
Thank you, Johannes. Stephanie, next question please.
Your next question comes from the line of Vincent Malley with ODDO. Your line is open.
Yes, good morning. Question on the rationale of R and D acceleration in 5 gs cloud, ahead of Alcatalysson merger. How do you know that it's not overlapping Alcatelis and R and D to be sure to have a full synergies?
Thanks, Vincent. So, of course, we are competitors at this point and we continue to behave like that. So 5 gs, if you think about the complementarity, we are stronger in 5 gs or in radio overall. So it kind of would make sense for us to be beneficiary of the fact that we are driving more the investments in that space. Cloud, again, I step back and say, is it complementary?
Yes, we have a lot of should continue to do well in both areas, don't know what they will do, but if they continue to do well in those areas, it's a completely complementary telco cloud core portfolio.
Yes. But clearly, I mean, as was said earlier, we continue to be competitors on the market. And it is, of course, natural that both companies will need to continue to invest in areas to stay competitive on the market the transaction closes. I think it's typical in these kind of situations and is unavoidable. And of course, that is then some of the cost that can be taken out when the transaction closes.
Thank you, Vincent. Stephanie, next question please.
Your next question comes from the line of Tim Long with BMO Capital. Your line is open.
Thank you. Just a 2 parter back on the Technologies business. First, could you just give us a sense you talked about some good visibility into new licensees. So could you just give us a sense, were there any new licensees added in the quarter? And how does that look the rest of the year?
And then have you gotten a chance yet to give a look at what adding Alcatel Lucent? They had their own programs where they were trying to increase their monetization of patents. Do you have a view of what you'll be able to do with the combined portfolios? Will be pretty additive to what Nokia is currently doing? Thank you.
Okay. So first on the overall Technologies, really the situation is that the year on year and sequential increases in Nokia Technologies net sales include revenue from all of the Technologies licensing negotiations, litigations and arbitrations to the extent that we believe is currently required. But again, remind, they are not the forecast of the likely future outcome of ongoing licensing a broad IP portfolio, or a broad IP portfolio. Of course, there is to our understanding because we have of course not been able to really look deeply into the portfolio, has been slightly in different areas. We, of course, have had a lot more investment in the handset related IPR.
So that's a difference in the portfolios. Now the way we think about it and this is what we have said during the last couple of weeks as well is that we think we have a unique structural operating model where we have some IPR in the Technologies unit and that is simply something what people need to license if they want to do certain businesses in the consumer electronics and particularly in the mobile handset space. And then we have some IVR in Nokia Networks, which has been generated during the again, this requires more restructuring, is that the and again this requires more restructuring is that our portfolio likely would end up being merged into the Technologies business, so that the business more sorry, end up being merged into the Networks business, so that the business model in Technologies stays intact. And that way we can then see what in the end would be the optimal utilization of the combined company 5B. And of course, the utilization possibilities are licensing or then maybe selling some IP depending on how that would pan out.
I would also make another very important point that for longer term, this new company would be investing €4,000,000,000 to €5,000,000,000 into R and D annually. And of course, the machinery which will create new IPR will also be significantly enhanced.
Thank you, Tim. Stephanie, we'll take our last question for today please.
Certainly. Your last question comes from the line of Ehud Gautam with Citigroup. Your line is open.
Thanks very much guys. Thanks for getting me in. So I want to make this a good one. Timo, a couple of clarifications and then a broader question for Rajeev. First of all, IPR, Timo, I was always under the understanding
and other companies do this
as well that it's collected in dollars. And so it would have had an FX would have a bigger impact in translation to euros, but clearly that's probably not the case. So if you can just let us know how is IPR stated in contracts? The second clarification is networks IPR seemed to drop $25,000,000 this quarter and that you didn't call out, but certainly has an impact on your margin in networks. Give us a sense as to why that happened and how much more IPRs there in networks that could fall off as the year goes on?
So what kind of headwind are you facing on the margin side there versus could you get some of that back and can that actually help restore some of the networks margin as we go through the year? The broader question, Rajeev, is I'm still trying to square the circle on how your funnel can remain strong and yet the market conditions seem to be more challenging now than they seem to be in January and even a couple of weeks ago when you announced the Ocatel purchase. And trying to understand who the price aggressor is because it's clearly not the guy you're purchasing, so it must come out of China. And why they would suddenly be doing this after a couple of years of seeming having a more calm outlook on the pricing environment? Thank you.
Okay. Thanks, Edward. So maybe I'll start with the IPR. So actually in our case and maybe you can look at this as a long term well, I don't know. No, no.
I'd say many majority of our IPR is in euros. And I think that is because when we negotiated much of this at the time, we were in a position time. So you have to remember that a lot a big part of our IPR, which is contributing to current revenues, has been negotiated before this plan change or happening change in the business model. So we have actually fairly little FX impact on top line at the moment in our IPR revenues. And then regarding Networks IPR, so yes, we called out in Q4 that €25,000,000 in Networks and that of course is a sequential change towards Q1 and not year on year change and that's why we have not been discussing that earlier in the call.
And Networks has And Networks has generated a, as I said, significant IPR pool, which is which sits in our Networks business. And of course, we look to opportunities to continue to monetize that portfolio as well. But of course, majority of that is there for Networks cross licensing purposes, but there can be further monetization opportunities.
I'll just say a couple of things quickly. So one, just on IPR still on Nokia Technologies, I want to just say that the sales funnel is strong. We have a robust pipeline. There's a strong discipline on driving that. I've been reviewing this with Ramzi Haidamus who runs the unit.
And clearly, we have a capacity to run multiple cases in parallel compared to the old Nokia. And we need to run it in a balance of negotiations, litigation, arbitration. So that I just wanted to add. Then Erhu, on your question on sales funnel being strong, yes, market conditions of volatility in terms of CapEx. Our win rate is stronger.
Our portfolio has got stronger. That's allowed for a more healthier sales funnel including our qualification of criteria. The ones we go after is stronger than before. In terms of the aggressor might be, I think I'd not want to go there.
Thank you, Ehud, for your question. And actually with that, I'd like to turn the call back over to Rajeev for some closing remarks.
So thanks, Amit. Thanks, Timo for your comments and thanks again to all of you for joining. We've had a lot of discussion today about Q1 performance, but I wanted to reiterate our strong belief that the purchase of Alkerdilution offers the best direction for Nokia to ensure long term growth as well as to create long term value. I said when we announced the transaction that I firmly believed it was the right deal with the right logic at the right time. Everything I've heard since then has strengthened that view.
The second comment is simply to acknowledge that while we are displeased with Network's financial results in Q1, I am confident that we have built an organization and culture that is resilient and strong. In more challenging times, the exceptional execution capabilities of the Networks team will be even more important as we implement detailed plans to deliver on our financial targets for the full year. Of course, we also need to maintain the momentum in both technologies in with optimism, with a strong desire to meet our commitments and with a team that has a strong aversion to missing goals. We 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 0.20 F, our interim report for Q1, 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.