At this time, I would like to welcome everyone to the Nokia conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Matt Shimao, head of investor relations. Thank you. Mr. Shimao, you may begin your conference.
Hello and thank you for joining us for today's conference call. I'm Matt Shimao, head of Nokia investor relations. Stephen Elop, President and CEO of Nokia, and Timo Ihamuotila, 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 these in more detail on pages 13 through 47 of our 2011 20-F and in our press release issued today. With that, Stephen, over to you.
Thank you for joining us today for an update on Nokia's first quarter 2012 outlook and our perspective as we start the second quarter of 2012. As I have shared previously, we are in the heart of Nokia's transition, and while we're confident in our new strategy, we are experiencing challenges which are impacting our Q1 and Q2 outlook. The good news: our data indicates that Lumia devices are gaining market share with our distribution partners, and more importantly, with consumers. In the 42 markets where we have introduced Lumia, the consumer satisfaction is very high. In the first quarter 2012, we sold more than 2 million Lumia devices. Furthermore, we have seen sequential growth in Lumia device activations every month since we started selling Lumia devices in November 2011.
As we bring the broader Lumia portfolio into China and the United States, we expect that growth in Lumia device activations will continue. At T-Mobile USA, our sales of the Lumia 710 have exceeded expectations. Also in the United States, AT&T has just started selling the Lumia 900 as their hero smartphone, and we are very pleased with the initial response. In China, our partners are engaging in broad retail training programs, allocating premium retail shelf space to Lumia, and investing in marketing campaigns. China Telecom, the first operator to bring Lumia to the region, is reporting a positive response from consumers. At the same time, we are pleased with the momentum around the Windows Phone ecosystem. We are continuing to attract developers who rapidly are expanding the number of applications on Lumia devices today. Today, we have more than 80,000 applications in the marketplace.
Earlier in Q1, we increased our focus on Lumia retail sales execution and continued to refine our marketing campaigns. As a result, we saw a positive shift in Nokia brand preference among smartphone consumers for the first time in years. Yet, while we are making progress with our Lumia efforts, the company as a whole is still in transition. Most notably, during the first quarter 2012, competitive industry dynamics negatively affected our net sales in the mobile phones and smart devices business units, particularly in India, the Middle East, and Africa, and China. Additionally, we experienced in the first quarter declines in our gross margin percentage, particularly in our smart devices business unit. Thus, due to a lower-than-expected net sales and gross margin percentage, we are lowering our outlook. We now expect that our Non-IFRS devices and services operating margin in the first quarter 2012 will be approximately negative 3%.
We also expect our Non-IFRS devices and services operating margin in the second quarter 2012 to be similar to or below the first quarter 2012 level. We recognize the greater-than-previously-foreseen challenges, and we are taking action. First, we are working to fuel our progress in the smart devices business by increasing our investment in Lumia to bring more products to more consumers in more markets. Second, we are addressing our mobile phones business by taking tactical pricing actions in the near term and by bringing new products to market that address some of our competitive challenges already in the second quarter. Third, we will accelerate our planned cost reductions, and we will pursue additional significant structural actions if and when necessary.
Fourth, we will continue to increase the clock speed of our company by reinforcing that employees need to move with urgency, take accountability for their focus areas, and respond aggressively to the needs of consumers and partners. While it is the case that we are in the midst of a difficult transition, I am confident that our strategy is the right one and will, over the longer term, improve Nokia's financial performance and increase shareholder value. I will now turn it over to Matt for Q&A.
Thank you, Stephen. For the Q&A session, please limit yourself to one question only since we intend to end this call at the top of the hour. Operator, please go ahead.
At this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Gareth Jenkins of UBS.
Yeah, sorry. I wonder if we could just do two very, very quick ones. Firstly, Stephen, I just wondered how you feel on cost savings given what you're seeing in terms of margin progress. And secondly, I wondered if you could give us any help with regard to revenues in Q2. It just would be helpful to understand whether revenues will be down significantly, which is why margins are continuing under pressure, or is it just that there's so much pricing action in the market right now that you're actually just discounting so unit volumes and revenues are okay but you're taking the hit on margins? Thank you.
Great. Thanks for the questions, Gareth. I'll take the first one in terms of cost savings and our approach there. First of all, as you know, over the last year, we announced a series of restructuring moves to generate savings relative to our previous operating expense run rates. We are on track for those, and indeed, what we're saying today is that we're accelerating that, picking up the pace of those as well. I think it's also important to note the comment I made that we will consider additional structural changes if and when necessary. Those types of changes would clearly be oriented towards both increasing focus on particular products or markets or whatever the case may be, as well as making sure that we're continuing to be very aggressive on the cost side of the equation.
We are, as we've demonstrated over the last year, very focused on that. We will continue to have that focus.
Yeah, Gareth. And Timo here. Regarding the Q2 revenue, we are not giving any revenue guidance at this point. As we have said earlier, we are operating with poor visibility. For example, it's difficult to estimate the trajectories of Symbian and Lumia at this point, so we are only giving operating margin guidance on non-IFRS basis for the second quarter.
Thank you, Gareth. Operator, next question, please.
Your next question comes from the line of Stuart Jeffrey of Nomura.
Hey there. Thanks very much, everyone. Question on the Lumia products. You say you're going to accelerate your investments there. I guess I'm a little bit confused by that. I thought you were putting a lot of focus on Lumia already. So could you explain what it is that you're accelerating rather than what we thought was full steam ahead beforehand already?
Yeah. Thanks for the question. I think it's worth noting where some of the specific pressures are coming or have been coming, particularly in Q1 and Q2. And what we highlighted is that the pressures in Q1 are in the low-end full-touch space. In other words, the very low end of the smartphone market, the high end of the feature phone market. And clearly, that had impact on both the high end of mobile phones and the low end of smartphones, which, of course, today is Symbian. What you have seen us do is take the first step in terms of really pushing down the prices of Windows Phone devices with the recently announced Lumia 610.
One example of the type of things that we are working on doing is accelerating the rate at which we can push the price points of Windows Phone devices down market because that will be part of our strategy to compete in those lower ends. So there's steps we're taking to undertake that.
Thank you, Stuart. Operator, next question, please.
Your next question comes from the line of Kulbinder Garcha. Of Credit Suisse.
Thanks. Just a clarification on the question. I guess on the lower level of warranty charges this quarter, what benefit did that give to margins? I mean, what would have the margin been without that? And then going into the next quarter, I guess, can you just explain? I would have thought that at least with the new lineup of Asha phones, the rising impact of Lumia, and the continued decline of Symbian, that would have generated at least some improvement in margins. So just why margins are going down in Q2, I guess, is my broader question?
Yeah. Okay. Timo here. Hey, thanks, Kulbinder Garcha. So first of all, on the warranty cost, so we actually called and we have to remember now that these numbers are preliminary, and we called this out because we expect this Q1 non-recurring benefit from warranty cost. And without that benefit, our operating loss would have been worse, and we really wanted to be transparent on that fact. This benefit is material, and that's why we are calling it out at this stage, but I'm not comfortable quantifying it more at this point. And then what comes to the Q2 margin guidance. So the key drivers for our Q2 guidance are the competitive industry dynamics, what we are seeing both in our mobile phones and our smart devices business. There are also the ramp-up timing and consumer demand related to our new products and the macroeconomic environment.
I also want to point out that we are not expecting to see a similar non-recurring benefit from the warranty as we are expecting to see on the Q1 margin.
I guess, Timo, what I'm getting, guys, is that with the gross margin you produced in smart devices of 16%, it sounds like, is there no benefit from Lumia, or is Lumia being priced so aggressively that it isn't significant in the numbers today?
So regarding that 16%, we can say that the Lumia number is higher than that 16%, and Symbian number is lower than that 16%.
Okay. Thanks, Kulbinder Garcha. Operator, next question, please.
Your next question comes from the line of Mike Walkley of Canaccord Genuity.
Great. Thank you. Just a question on the mobile phone division. I know you've been investing in that division, but given falling prices of smartphones, is maybe the mobile phone market now smaller than you thought, and is that a division you need to resize, or could you just expand on the weakness in that division if you expect similar level of units in the Q2 timeframe? Thank you.
Thanks, Mike. So the way I prefer to think about this is not about the size of the business unit or what have you, but as the size of the market opportunity across certain price bands. The price bands at which the mobile phones business unit is focused, we see as a continuing, very healthy segment. Now, to address the needs of consumers in that segment, the dynamics are changing. People are looking to move from feature phones to smarter phones to smartphones and so forth. And so the mission for the mobile phones business unit has to be to successfully address those range of particularly very low price points and do it in such a way that makes sense in the context of consumer demand. So if you're asking the question, are feature phones as we know it declining? Yes. But is the opportunity there? Yes.
Mobile phones, their mission is to address that.
So maybe a quick comment. We said that we are looking to take tactical pricing actions during the second quarter in our mobile phones business, and we also said that we are bringing new products to the market during the second quarter on mobile phones.
Okay. Thank you, Mike. Operator, next question, please.
Your next question comes from the line of Simon Schafer of Goldman Sachs.
Yes. Thanks so much. I wanted to just ask a broader question in terms of strategy when you think about, I guess, some of the aspirations to capture or even buy more share. So I was wondering as to whether you, in your own strategy, encapsulate some sort of, I guess, bottom end of gross margin that you're willing to accept when you talk about more aggressive pricing tactics well into the second quarter. Thank you.
I don't think it's anything as specific as there's a particular bottom level or what have you. It's nothing as precise as that. What we have to assess market by market is the conditions from a competitive perspective, what's happening. We have certain competitors who are being very, very aggressive in certain markets as we go through this transition, in part to disrupt us, and that's understandable. So we have to fight particularly hard in those markets, particularly in the context of new products coming to those markets and wanting to make sure that channels are still comfortably open, that we still have mindshare in sales situations, and so forth. So we look at it very specifically market to market and product line by product line in order to address that.
Yeah. That's exactly correct. So we need to invest on certain markets, and the U.S. would be a typical market like that. At the moment, on other markets, we really need to optimize for the absolute gross margin, and it really is the sum of that equation.
Thank you, Simon. Operator, next question, please.
Your next question comes from the line of Pierre Ferragu of Bernstein.
Hi, Stephen. A quick question on your mobile phone business. What sort of competitive dynamics you've seen today that led you to organize this call that you were not seeing about three months ago? Is that more about other feature phone manufacturers putting more competitive pressure on you than you were expecting, or is that actually low-end smartphones putting actual pressure on the overall mobile phone market? And also in terms of the macro environment, you see putting pressure on your business. How much of that can you give us some color in terms of regions? Is that mostly Europe, or do you see that beyond Europe?
Okay. Good, Pierre. Good to hear from you, and thank you. First of all, as it relates to the competitive pressures, in your question, you captured a couple of these. It's actually when we look at it in quite a bit of detail, obviously, we're seeing a couple of things going on. One is the rate at which low-end Android devices are coming to market at lower and lower prices, quite often with a changing operator environment. For example, in China, where the Chinese operators are really turning up the degree of rate plan subsidy work that they're doing and so forth in conjunction with very low-end Android devices. That's something that has, I think, surprised everyone by the rate at which it's being taken off, including the operators themselves.
I mean, they've tried a number of things in the past to try and stimulate this type of activity, and they're doing it more so now than we've ever seen in the past. So that's one example of the competitive dynamics that is more problematic than we were talking about previously. Another example of competitive dynamics is what I mentioned a few minutes ago in terms of certain competitors who have products in particular price points with particular capabilities. We referenced, for example, low-end full-touch. And here, I'm not talking smartphone. I'm talking high-end feature phone, where certain of our competitors are being really, really aggressive right now because we don't have a product offering that perfectly matches that opportunity today. So that's something that clearly competitors have been taking advantage of.
And then the third thing I would add to this is white-box Chinese manufacturers continuing to push low-cost devices into markets. Now, related to macroeconomic and so forth, I want to be really clear that the principal focus of our discussion and the numbers and the accountability and everything is about what we sell and our sales performance and so forth. So I'm not on this call to say this is a big macro thing. Not at all. I don't want to leave you with that impression. But it is the case that we see signals in, for example, India, which is obviously a very large market for us that suggests there's a macro thing going on. Southern Europe is also exhibiting some of that. So there are some examples, but I don't want to leave you with the impression that that's the dominant factor.
Thanks, Pierre. Operator, next question, please.
Your next question comes from the line of Mark Sue of RBC Capital Markets.
Thank you, Steve. It seems you have to double down on your investments in Lumia and also discount more than anticipated. Does that mean investors should not expect any profits this year? And when you say significant structural actions, if and when necessary, does zero earnings for the year imply that would be necessary? And just longer term, Steve, if these competitive dynamics don't alleviate, does it make harder for Nokia to actually drive some earnings growth in 2013?
So thanks for the questions. We're not in the position today where we're providing forward guidance on earnings for the year and so forth. The most important thing that we're looking at when we consider things like structural changes, doubling down, shifting investment, and so forth, is that we recognize that with this third ecosystem effort, with the work we're doing around Lumia, we have to really break through, continue to build the momentum. You saw the momentum from Q4 to Q1. Clearly, that's going to build as we go into Q2 with the U.S. just starting in force, with China just starting, and so forth. And as well, you look later in the year, and you see a pretty significant catalyst in terms of the overall ecosystem opportunity that comes with Windows 8, with presumably a next version of Lumia products, and so forth.
You see a lot of things that build. So when we consider the need for structural changes or what have you, what I'm really heavily focused on is making sure that we have to have the right levels of investment to break through in the areas where we need to break through. Now, again, when we talk about what those structural changes might be, we have to make decisions about, are we concentrating on certain markets? Are we emphasizing certain product opportunities over others? Do we sell off certain non-core assets along the way? Those are the types of things that we'll consider, all optimized around really driving the long-term health of the company.
Great. Thank you, Mark. Operator, next question, please.
Your next question comes from the line of Sandy Deshpande of J.P. Morgan.
Yeah. Hi. Thanks for taking me on. If you look at what's happened this quarter as well as in some past quarters last year, I mean, Nokia has not been able to come up with devices which are what the consumer wants. For instance, you're talking about the low-end touch devices. What are you doing within the organization to make sure that in the future, Nokia is on this bleeding edge, whether in the mobile phone business or the smartphone business, to be able to make these transitions at the right time so that these disappointments don't occur?
Thanks for your question. Clearly, what we're very focused on is changing both the engineering patterns and practices, how we interact with consumers, the clock speed at which we're operating. You're seeing the results of that right now. Just over a year ago, we announced a strategy change. Since that time, we've got now a full line of Lumia products in place from the 900 down to the 610, with lots more still ahead. You've seen us on the mobile phone side address the Dual SIM hole that was in our portfolio. Clearly, we have other work ongoing where you'll see some of the benefit of that in Q2 as new products come out to address some of the specific problems that I've identified.
So it does take time to turn around the product portfolio and so forth, but what you see us doing is very aggressively going after that, and not just going after it casually. To have the Lumia 900, for example, in the United States for the first time in Nokia history, win the Best of Show at the Consumer Electronics Show was a big moment. When you see the innovation we brought to market with the 808 PureView, winning the Best in Show at Mobile World Congress, it was another example. So we're clearly establishing this pattern of delivering great products, driving our net promoter score, our consumer satisfaction score is higher, and from that, we drive sales. So we have some things clearly that we are catching up on and having to deal with historically, but I'm very pleased with the progress we're making on that.
Now, we have to convert that into field execution, into good sales, into effective marketing, and ultimately into financial results.
Thanks, Sandy. Operator, next question, please.
Your next question comes from the line of Alexander Peterc of Exane BNP Paribas.
Hi. Thanks for taking my question. Just a housekeeping one, if you could go into a little bit more detail on what is going on on the cash front. Is it still the negative operating working capital in Devices and Services that is the cause partially for the reduction in your net cash? And then just to get an idea on what's going on in smartphones, really, was the biggest surprise in the quarter the gross margin in the Lumia devices or the Symbian devices? What was the biggest surprise for you guys? Thanks a lot.
Thanks for the question. So first, on the cash and cash flow side, so again, I want to highlight that these numbers are preliminary. But when we look at the cash situation, so we are expecting now to end first quarter with a net cash position of about EUR 4.9 billion. And then when we look at the cash flow dynamics, yes, we had negative working capital developments in the devices and services area, and we expect that most of these are non-recurring. And as I've said earlier, we usually or longer term, we have a balance or a similar dynamics between our operating profit and our cash flow from operations. But from quarter to quarter, this relationship can break.
This quarter, we had, as we pointed out in our release, somewhat less sales than expected in markets where the cash cycle is short, and that is impacting our cash flow for this quarter.
Okay. Yeah. And.
Second part about the smartphone Symbian versus Lumia.
Yeah. So I think actually we gave as much color already as we can on that question. So again, as I said, the Lumia gross margins on the smartphones business unit were somewhat higher than this 16% and Symbian somewhat lower.
I think we can say as well, though, that Symbian gross margin decreased substantially on a sequential basis. We saw indeed that the majority of the decline was coming from the Symbian side relative to what we were expecting.
Yeah. That is correct.
Thank you. Operator, next question, please.
Your next question comes from the line of Kai Korschelt of Deutsche Bank.
Yeah. Thanks for taking my question. The first one is just on the incentives on the Lumia sales that you're providing, they seem to have increased over the last couple of months. So I'm just wondering if the OPEX savings targets are still valid on the same sort of trajectory and from a phasing perspective. And then my second question was just on the new products in the mobile phone business. Can you maybe give a bit more color on what these new products are, whether you think they should stabilize market share in one or two quarters, and then maybe if it's maybe not time to pursue a different OS strategy in the low-end given that Android is starting to attack the high-end of that mobile phone market now as well? Thank you.
Thanks for your question. So relative to the incentives and the work we're doing and how that relates to our OpEx trajectory, our anticipated OpEx trajectory is steeper down than we had originally planned when we first announced those savings during the course of last year. We've talked about accelerating the rate of OpEx decline, and that contemplates incentives and other sales and marketing activities that we have underway. So there's not a negative impact in the context of what we've guided in the past. Now, with respect to operating systems and so forth and new products and what have you, I don't want to say a lot right now because I don't want to pre-announce products when we've got other products in market, so I want to be very careful there.
I do want to just emphasize again that in the past, we've said that clearly we are increasing the investment in the mobile phone space. We have done that. That's apparent in the financials, and the fruit of that work will become apparent in the quarters ahead.
Thank you. Operator, next question, please.
Your next question comes from the line of Andrew Gardiner of Morgan Stanley.
Hi. It's Andrew here, actually. Just a question on really the low-end smartphone market and if you could kind of be more detailed in terms of what you're seeing in the different geographies and where the materiality of the impact is. In particular, China, where we know there have been a lot of low-priced smartphone launches recently, is that not something that you have seen previously? Has it been more aggressive than you anticipated? And is there any sign of that letting up at any point?
So China is really, I think, the most notable example here. And the reason we highlight China is for many years, China was essentially an open distribution market where the pricing was set in the open market. The operators had little role or participation in that. What they have begun to do is structure certain deals and rate plans ultimately very similar to what you see in markets like the United States, except they're done quite differently in China because the US model is not something that's supported by the government in China. So they have to do something quite unique. They've started to do this more and more, and the result of that is that there's quite a volume of low-end smartphone devices coming in.
For example, the classic example is the CNY 1,000 device running Android that, combined with a rate plan subsidy, becomes a very attractive offer for the consumer and also has incremental profit opportunity for the retailer. So it's really changing the dynamics. We have highlighted this in calls before, but the rate at which this is happening is accelerating beyond what we expected. And at this point, if you look at the devices that are in that program, I think at this point, they are virtually all, if not entirely all, Chinese-manufactured devices as well at those price points in those programs sponsored by the Chinese operators. So there's trends going on there that I think everyone's trying to understand completely in terms of how that plays out.
The other thing I would say when you get into China and so forth is, and we've highlighted this before in terms of some of our short-term portfolio challenges, some of which we've just addressed, but the Chinese market has three very distinct radio protocols. We have products comfortably, for one, that being China Unicom's WCDMA. And we've just introduced for the first time in some number of years CDMA products. And we do have some products in TD-SCDMA, the China Mobile standard, but they're at higher price points, and all the action has shifted to low-priced smartphones. So we're at a near-term disadvantage there.
Thank you, Andrew. Operator, we have time for one last question today.
Your final question comes from the line of Adnaan Ahmad of Arete Research.
Hi. Thanks for taking my question. Just wanted to ask about the dynamics of the Lumia ASP going forward. And you talk about tactical actions, but shall we expect an improvement from second half, or you just don't know at this point?
Well, as it relates to Lumia, we are clearly in a build cycle. As we go into Q2, we're going from two products to four. So we've broadened out the range from a higher-priced Hero device, the 900, down to a lower-priced Lumia 610. So we've broadened that, and that will sweep across a number of all of the markets virtually. In addition to that, we're opening up a number of new and substantial markets, the most notable of that being the United States where we began sales with AT&T this week, and obviously, China as well, beginning with China Telecom as a CDMA operator. But clearly, we have plans to broaden that across other operators as well. So there's a number of different elements that are kicking into play where clearly, we're anticipating continued significant growth in the Lumia activation rate.
Then Timo here, just a clarifying comment. So we are saying that we are taking tactical pricing actions in our mobile phones business unit, and we are saying that we are increasing investments in Lumia to bring more products to more consumers in more markets. So the tactical pricing actions really was mentioned more in context of mobile phones.
That's right. Okay. Well, thank you all for participating today. Clearly, we'll have more of an opportunity to talk next week when the formal earnings are released. In summary, today's news illustrates that, again, we are in the heart of our transition. And while we've shared the impact of some of our short-term challenges, we remain very confident about our long-term strategy. We're very excited about what we're seeing with Lumia. We're very excited about the progress we're making in the United States, a market where we haven't been present in a substantial way for a number of years. So we're really seeing some of the early signs of things that demonstrate our strategy is beginning to work. So I look forward to speaking with you next week when we provide the full first-quarter results. Thank 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 risk and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause 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 13 through 47 in our 2011 20-F and in our press release issued today. Thank you.
Thank you again for participating in today's conference call. You may now disconnect.