Matt Shimao - Nokia Oyj Rajeev Suri - Nokia Oyj Kristian Pullola - Nokia Oyj.

Alexander Duval - Goldman Sachs International Sandeep Deshpande - JPMorgan Securities Plc Andrew M. Gardiner - Barclays Capital Securities Ltd. Aleksander Peterc - Société Générale SA (UK) T. Michael Walkley - Canaccord Genuity, Inc. Richard Kramer - Arete Research Services LLP David T. Mulholland - UBS Ltd. Francois A. Meunier - Morgan Stanley & Co.

International Plc Stuart Jeffrey - Natixis (United Kingdom) Achal Sultania - Credit Suisse Securities (Europe) Ltd. Pierre C. Ferragu - Sanford C. Bernstein & Co. LLC.

Hello, and welcome to the Nokia Q3 2017 Earnings Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I'd now like to turn the conference over to Mr. Matt Shimao, Head of Investor Relations. Sir, you may begin..

Ladies and gentlemen, welcome to Nokia's third quarter 2017 conference call. I'm Matt Shimao, Head of Nokia Investor Relations. Rajeev Suri, President and CEO of Nokia; and Kristian Pullola, CFO of Nokia, are here in Espoo with me, today.

During this call, we'll be making forward-looking statements regarding the future business and financial performance of Nokia, and 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've identified such risks in more detail on pages 67 through 85 of our 2016 Annual Report on Form 20-F, our financial report for Q3 2017 and January through September 2017 issued today, as well as our other filings with the U.S. Securities and Exchange Commission.

Please note that our results release, the complete interim report with tables, and the presentation on our website, include non-IFRS results information in addition to the reported results information.

Our complete financial report with tables, available on our website, includes a detailed explanation of the content of the non-IFRS information, and a reconciliation between the non-IFRS information and the reported information. With that, Rajeev, over to you..

Thank you, Matt, and thanks to all of you for joining Nokia's Q3 financial results call. Nokia's third quarter was balanced between good performance in many areas and momentum in executing on our strategy on the one hand and market concerns and some challenges unique to Nokia on the other.

It is these issues that I would like to focus on today starting with some areas where we delivered strong results. Non-IFRS earnings per share were an excellent €0.09 versus €0.04 one year ago. Year-on-year group level performance was good as well, with gross margin at 42.7%, up 270 basis points and operating margin of 12.1%, up 280 basis points.

Results from patent licensing was stellar, driving absolute operating profit in Nokia Technologies up 73% from one year ago. Networks saw an improved gross margin of 38.6%, up 110 basis points from the same quarter in 2016.

Revenue grew on a constant currency basis in IP Routing, excluding video, by about 4% year-on-year and rose in Global Services by 2%. Year-on-year revenue was also up in the Middle East and Africa and in Asia Pacific, and within Asia Pacific, our India market had another very solid quarter with sales rising by double-digits year-on-year.

Operating margin in Global Services landed at 8.1%, an increase of 530 basis points from one year ago and operating margin in IP Networks and Applications was 10.7%, up 230 basis points from a year ago. Our cross-selling efforts progressed further, as we successfully brought more former Alcatel-Lucent products to more of Nokia's global customer base.

We have been able to bring products ranging from Fixed, IP Routing, Optical, business support system software and more into customers like Idea Cellular in India and Three UK.

Pleasingly, this development was not limited to any single region and we saw good cross-selling wins in the quarter in the U.S., China and India, where we signed an optical deal with Idea Cellular along with wins in several other countries.

We also saw developing opportunities to expand sales of Fixed Networks products to customers in Japan and South Korea. In a related development, we also saw a doubling in the multi business group opportunity share of our deal pipeline from 16% to 32%, a good proof point of how customers are responding favorably to the scope of our portfolio.

Perhaps the most important development in Q3 was that the execution of our strategy remained well on track. In terms of expanding our customer base to new segments, we saw momentum across the board. To ensure that we have the necessary laser-like focus, we have split our enterprise sales organization into two groups.

One focused on webscale and extra-large enterprises that use technology as a competitive advantage and the other focused on our target vertical markets of transportation, energy and the public sector. For the sake of simplicity, I will call the first group webscale XLE and the second one, Enterprise.

In both, year-to-date orders were up by double digit percentages from one year ago. Sales are up as well in the double-digits for webscale XLE and mid-single digits for Enterprise when you exclude the former Alcatel-Lucent third party integration business that we are currently winding down.

On the webscale XLE side, we have added 27 new customers so far this year, including Xiaomi and the China Pacific Insurance Company, the first large enterprise win for our new launch (5:48) business in China.

This is a critical footprint to gain given the longer term migration of traffic and large backbone networks from telecom operators to Internet players. Interest in our products and services is very high in this segment and we expect that to grow even more as our FP4 based routing products come to market.

On the Enterprise side, we have added more than 40 new customers this year, with particular strength in the public sector and utilities in North America.

Customer wins in Q3 include the supply of a critical communications network to Northern California Water and Power Utility PCWA, a public safety network for California, and the modernization of a nationwide private LTE network in Finland for industrial and public safety services.

Year-to-date orders in Enterprise are up by double-digits, with growth in all three priority segments; transportation, energy and the public sector. Within the public sector, we continue to see more decisions being made in the transition of public safety networks to 4G LTE in countries around the world.

While these deals can take considerable time to come to fruition, we have a growing pipeline of potential future opportunities including in Saudi Arabia, where 5 of 11 regions have issued LTE tenders, and in Tunisia, where there are ongoing tenders.

As you know, our Fixed Networks business is also targeting cable operators, leveraging the capabilities from our acquisition of Gainspeed. In fact, we landed our first customer for Gainspeed-based products, WOW! in the U.S., and we're in trials with almost a dozen customers for this new technology, including some of the industry's largest players.

One of the many benefits of expanding into cable is that it opens the doors to additional IP routing and optical sales as well.

The only note that I would add about our work to expand in new customer segments is that, even with strong growth, it will take some more time to offset the declines in our large traditional business with communication service providers. We're also tracking well in developing a strong standalone software business, another key pillar of our strategy.

While our software-focused Applications & Analytics business group saw sales that were down in the quarter by about 2% on a constant currency basis, that was largely driven by timing shifts in North America.

But pleasingly, orders were up for A&A in Q3 compared to last year, making that five consecutive orders (sic) [quarters] (8:12) of year-on-year order growth. We're also seeing good traction with the former Comptel portfolio as we bring those products to a new set of customers, leveraging Nokia's strong global channel and deep customer relationships.

So, all-in-all, not a bad list of achievements in Q3, some strong results in key areas and good progress against our strategy. On the other hand, we faced challenges in our Networks business, partly reflecting market conditions and partly driven by some issues specific to our Mobile Networks business.

These issues impacted us in the quarter and created some future headwinds as well. And I want to give you a frank perspective on where we currently stand, starting with market conditions.

Our current view is that we will see a full year 2017 decline, compared to 2016, in our primary addressable market of approximately 4% to 5% on a constant currency basis, a tighter range from our earlier view of minus 3% to minus 5%. When we look into 2018, we think conditions will continue to be difficult.

Our current view is that our primary addressable market is expected to be down in the range of 2% to 5% for full year 2018, compared to 2017, on a constant currency basis. This of course begs the question of what is going on. And there are three main drivers as I see it. First, the sector is in the midst of multiple technology transitions.

4G to 5G is the most obvious, but also copper to fiber, physical to virtual, 100G to 400G, from terabit to petabit-class routers, and more. These transitions slow spending and increase uncertainty related to timing.

In Mobile, for example, while we see ongoing investments in advanced 4G evolutions, we believe significant new spending will only come when the base of 5G accelerates. As I said last quarter, however, we believe that 5G will come faster than originally expected, starting in 2019. As that happens, Nokia is well positioned.

It is important to remember that, unlike earlier technologies, 5G solutions require much more than radio. Cloud core, IP routing, transport of many kinds, fixed wireless access, software defined networking, software orchestration, and more, are all essential. And Nokia is one of the very few companies that is able to meet all those needs.

Second, competition remains robust. While we do not see any widespread worsening in competitive intensity, we do see a change in China. The early positioning for 5G is well underway in that country, and the cost of gaining or even maintaining footprint is significant.

We are working to address the situation with our deal discipline, as we want to ensure the right long-term footprint, but not at any cost. Third, operator consolidation and M&A activity are creating some near-term headwinds.

This is largely a North America issue, and you saw that reflected in our sales decline in this region in Q3, as some customer spending slowed. In addition, as I've said before, we also see some M&A-related risk in India, even though our business in this market again performed well in the third quarter.

We continue to believe that consolidation is a long-term positive for the market. It is also clear that investments cannot be postponed indefinitely, as networks will increasingly come under strain due to constantly increasing traffic.

Overall, competitive pressure among operators will also force others to respond in time, particularly in the United States and India, where there are strong and aggressive challengers. So that covers the market situation. Next up, issues unique to our Mobile Networks business.

When we spoke last quarter, I noted that our R&D team in Mobile Networks has faced an extraordinarily high workload.

We have been working to integrate products towards a single world market portfolio, deliver on advanced feature commitments made by the former Alcatel-Lucent, address an overall increase in feature requirements given competitive pressures, and accelerate 5G roadmaps.

With this pressure, we have seen some issues with the time it has taken to converge a limited set of products, and that has unfortunately impacted a small number of customers. We're having to change out more products, with more repeat site visits than originally planned.

As a result, Mobile Networks has experienced both revenue pressure and an increase in expected network equipment swap costs. Kristian will go more into these added costs in his remarks. The product migration challenges have also caused some near-term deal delays in some of our other Networks businesses, particularly Applications & Analytics.

That is the bad news. The good news, however, is that we are moving fast to get back on track. We are already seeing improved performance with some key customers, and a meaningful uptick in customer satisfaction scores. Field deployments of our new AirScale products were ramping up in all our geographies, including with key North American customers.

This is an activity that will result in our latest 5G-ready AirScale products in wide use with considerable future up-sell opportunities. Marc Rouanne, who took over as President of Mobile Networks in April, has moved fast to renew his leadership team, and has made significant organizational changes in order to increase speed, agility, and quality.

In addition, where necessary, we are increasing investment to ensure product leadership. I want to be clear, however, that this extra investment does not impact our €1.2 billion cost savings plan in full year 2018. We are committed to that plan, albeit at a slightly higher price tag than previously expected.

And we see opportunities to target further savings in cost of goods sold. Before handing the call over to Kristian, let me just give a bit more detail on several additional topics. Some important developments in our IP and Optical Networks business, progress in Global Services, a brief word on cash and an update on Nokia Technologies.

First, IP and Optical Networks, where good progress is underway with our FP4 based products. Work is on schedule. Early customer trials are proceeding very well.

The first FP4 based product, the 7750 SR1 service router is expected to be released in mid December and we see excellent customer interest in the massive capacity FP4 based products that will start rolling out in the first half of 2018.

Of course, as you know, getting new products fully operational in large complex networks, particularly with communication service providers, takes time in order to complete all the needed testing. Thus we expect FP4 based sales to ramp up gradually during the first half of next year.

Second, Global Services, and I'm particularly pleased with how the GS team is maintaining extreme discipline; discipline in what deals we choose to take, discipline in execution, discipline in focusing on higher value professional services and discipline in the application of artificial intelligence, pervasive automation and machine learning, all of which help to build lower cost for us and our customers and improve quality.

To give just one example, we recently deployed a cloud-based tool to improve the efficiency of network planning activities, and with that, reduced the time of a key process from weeks to a few hours.

With developments like this, I think it is safe to say that while others are struggling in services, and managed-services in particular, we have some powerful differentiators and are moving to an even further level of performance improvements. Third, a brief comment on our cash situation.

In short, I am not pleased with how we ended the quarter and we will redouble our efforts in the months ahead. We have shown in the past that we know how to manage our cash effectively. And I am confident we can improve our performance in this critical area.

Finally, Nokia Technologies, where the story is one of refocusing on the incubation side and superb results in patent licensing. First, the incubation side. We've always said that we would take a fail-fast approach to incubation (16:08) and if programs did not meet our expectations, we would take swift action.

Shortly after the end of the quarter, we did just that by significantly scaling that work in digital media. We're stopping development of future versions of the OZO camera and limiting our digital media activities to high margin technology licensing opportunities, including those for virtual reality ready 360 degree OZO Audio.

Technology licensing is all about engaging with other companies and using our know-how to help them build our innovations into their products. We already have one such customer for OZO Audio, HMD Global and we see additional opportunities to expand further in the future.

In the third quarter, we also re-evaluated the speed at which we would progress in digital health. As a result, we have taken an impairment charge related to our purchase of Withings and Kristian will cover this topic in a bit more detail.

But we still believe that we have the technology and brand necessary to make headway in what remains an interesting area of potential growth for Nokia. We have a milestone-based investment plan for digital health and we will adjust spending to opportunity at every step as we proceed. Now to the superb results in patent licensing.

As you will recall, we laid out the strategy of a patent licensing where we would first seek deals with Samsung and Apple, the industry's largest smartphone players. After that, we would pursue fair and reasonable agreements with growing Chinese manufacturers.

Then we would move on to focus on new entrants in countries like India and follow that with agreements in new segments. We are methodically and successfully progressing through each of these areas. Agreements with Samsung and Apple are in place.

We received a favorable arbitration decision related to LG in Q3 and following that decision we managed to agree to a license with LG for a longer term than what was in the arbitration decision. Progress is being made in China, where we announced a deal with Xiaomi in Q3.

We are now engaged in productive discussions with other companies in the country and I remain confident that more progress is still to come. We have worked effectively with a partner in India to have agreements with multiple leading players in that country and we are making early progress in engaging with automotive companies.

We're also now pursuing multiple licensing deals in parallel. In the past, the team would typically focus on one major deal and then sequentially move on to the next. With our expanded approach, we have reached three large deals in this year alone; Apple, Xiaomi and LG, and we will continue to work this way in the future.

With a very good headway that we are making, we have approximately doubled our recurring licensing revenue from the €578 million we reported in 2014. I'm particularly pleased that in 2017 the growth in this business has helped to offset the decline on the Networks side.

We have excellent momentum in patent licensing, a strong team, and considerable opportunity to further develop the business in 2018 and beyond. Early progress in brand licensing is also good as HMD continues with its fast ramp up of products and distribution.

HMD is seeing outstanding Net Promoter Scores for its new smartphones, which gives me confidence about the longer term potential of our deal with them. In summary, we continue to see promising opportunities in all three areas of patent, technology, and brand licensing.

Just to close, you will have noted in our earnings release today that our board plans to propose a €0.19 per share dividend for 2017, up from €0.17 in 2016. I certainly see that as a clear endorsement of the progress we are making. With that, I will hand the call over to Kristian.

Kristian?.

Thank you, Rajeev. I have three main topics that I want to cover today. First, the LG arbitration on Nokia Technologies. Second, cash and capital structure. And third, updates on our guidance. So let me get right to it. Starting with LG.

Following the favorable arbitration award that we received in September, we reached an agreement with LG on a longer license than the one covered by the arbitration. We are very pleased with the outcome, which is a clear evidence of the strength of our patent portfolio and our patent licensing team.

Primarily due to the settled arbitration, Nokia Technologies year-on-year net sales grew by 37% in Q3, with nonrecurring catch up net sales of approximately €180 million. We expect payments from LG to start this quarter and to receive the catch up amount in conjunction with the first payment.

As I have emphasized in prior quarters, we have a systematic and disciplined approach to pursuing growth. Our strong governance and structured investment process is designed to ensure we align our investments with our opportunities. Take the example of digital media, where we are now significantly scaling back our investment.

There is no doubt that virtual reality will break through over time. However, we see this market developing much lower than earlier expected and thus we have decided to sharpen the focus of Nokia Technologies on areas where we have stronger prospects.

On digital health, following the third quarter result, we risk adjusted our long term cash flow projections for the business for impairment testing purposes and as a result, recorded a non-cash impairment charge of approximately €140 million, reducing the goodwill related to digital health to zero.

The impairment charge was excluded from our non-IFRS results. We remain confident on our potential in digital health, based on the combination of our technology assets, innovation capabilities and the Nokia brand.

Going forward, Nokia Technologies aims to have a larger impact on consumers and the medical community through a more focused and more disciplined digital health business. Continuing next with a few words on the performance of Group Common and Other in Q3. The overall revenue that we report in this area decreased by approximately 15% year-on-year.

The performance was driven by both Alcatel Submarine Networks and Radio Frequency Systems, with the decline in ASN largely due to timing of projects. We are continuing the strategic reviews of both businesses. Turning then to our cash performance in the third quarter.

On a sequential basis, Nokia's net cash and other liquid assets decreased by approximately €1.2 billion with a quarter end balance of approximately €2.7 billion.

Approximately, €370 million of the cash outflows in the quarter related to shareholder distributions, €180 million related to a non-recurring cash tax payment we discussed last quarter and €130 million to restructuring and associated cash outflows.

In Q3, Nokia's operating activity has resulted in a decrease in net cash of approximately €430 million, excluding the items mentioned earlier. This was primarily due to increase in net working capital, driven by an expansion of receivables and to a lesser extent higher inventories.

The expansion of our receivables was clearly the main driver of our net working capital change in the quarter and was primarily due to a temporary reduction in the sale of receivables, the settled LG arbitration as we haven't been paid yet for the outcome, higher accrued receivables and higher overdue receivables.

Thus, while this requires more focus in the future, it is worth noting that the bulk of our Q3 receivables expansion should naturally reverse soon. Year-to-date the build up of inventories has clearly been the main driver of our overall net working capital increase.

This was primarily due to our decision to ensure sufficient flexibility to deliver higher levels of equipment sales and network equipment swaps, which did not materialize as expected. In Q4, inventories are typically a source of cash, primarily due to industry seasonality.

Looking at our cash performance so far in 2017, I am not satisfied with this situation. Excluding the non-recurring puts and takes, which I highlighted last quarter, we continue to target Nokia's free cash flow for the full year 2017 to be slightly positive. Getting there, however, will be a stretch.

Cash is clearly a topic that received significant attention from me and I'm fully committed to driving increased focus and better performance going forward. The share repurchases under our capital structure optimization program continued to progress.

Since reporting Q2, we have executed approximately €240 million of share buybacks, cumulatively reaching approximately €870 million of the overall planned €1 billion. We plan to resume share repurchases after our quarterly earnings and should complete the program by year end.

As a result, our €7 billion capital structure optimization program is approaching completion. In addition to approximately €4 billion of shareholder returns and approximately €3 billion de-leveraging, we have further optimized Nokia's debt structure by issuing new low coupon bonds and redeeming legacy high coupon Nokia and Lucent notes.

Through these actions, as well as, our targeted dividend for 2017, I am confident that we will have a capital structure that is both strong and efficient. As emphasized at our CMD last year, the annual dividend is our principal method of distributing earnings to shareholders.

And our planned dividend for 2017 is consistent with our target to deliver earnings based growing dividend. Continuing next with an update on taxes. Favorable regional profit mix benefited our P&L tax rate again in the third quarter, with our non-IFRS tax rate coming in lower than expected at 15%.

Given the unexpectedly low tax rate so far in 2017, we have today lowered our guidance for Nokia's non-IFRS tax rate for the full year to be approximately 20%. Turning finally to our €1.2 billion cost savings target and update on our key guidance items.

To ensure product leadership and competitiveness and to accelerate 5G, we are increasing our reinvestment into R&D. As we do this, we are driving additional cost savings in other areas.

The net of that is that we today reiterated our target for €1.2 billion cost savings in the full year 2018, and we have also increased our estimate charges and cash outflows by €200 million and €100 million, respectively.

The €100 million difference between the additional charges and the cash outflows is being approximately half of the additional charges relate to U.S. pension curtailments, which are paid out from the assets of our pension plans, with no impact on Nokia's net cash.

Next to our network equipment swap outs, where we increased our guidance from €900 million to €1.4 billion and extended the program into 2019. As we have highlighted in previous quarters, our R&D workload in Mobile Networks has been high in recent quarters.

It has taken extended time to convert a limited set of products, and as a result, we are having to swap out more products, as Rajeev said. We are now fully in the deployment phase of our swaps program. And this has provided us more insight, which is also factored into our revised estimates. For example, the number of site visits required.

While we are not pleased with this situation, we are making progress. Our swaps program is designed to improve our R&D efficiency, maintain our footprint with key customers, and create up-sell opportunities.

Executing on our swap out plans, keeping our cost savings momentum, and having the right controls in place to ensure strong and disciplined execution, are clear priorities for me.

Regarding CapEx, we have today raised our guidance for full year 2017 CapEx from €500 million to €600 million, reflecting investments that we believe will lead to increased operational efficiency in areas such as site consolidation. Moving then to the guidance for our Networks business for the full year 2017.

While we continue to expect net sales to decline in line with our primary market, we expect the market conditions for the full year to be slightly more challenging than earlier anticipated. We are now guiding for approximately a 4% to 5% year-on-year decline in our primary market, versus a 3% to 5% decline previously.

As a reminder, our outlook is provided assuming constant foreign exchange rates. We have today also provided some new updated commentary on the drivers for our Networks business. These include, extending the uncertainty related to the timing of completions and acceptances of certain projects through the first half of 2018.

Robust competition in China, which is expected to adversely affect the fourth quarter of 2017 in particular, as well as uncertainty related to potential M&A by our customers. Regarding Networks operating margin, we have reiterated our guidance range of 8% to 10% in full year 2017. Finally, on our market commentary for 2018.

As Rajeev discussed in his remarks, on a constant currency basis, we expect a decline of approximately 2% to 5% in our primary market compared to 2017. Putting this into operational context, we do see a potential for an improved industry environment in 2018, which could stabilize significantly compared to 2017.

However, as a data-driven company, we should also be prepared properly for another challenging year, with the right mindset and operational discipline. Regarding guidance for our Networks business, we intend to give this along with our Q4 earnings.

It is worth noting that, simply due to how currency is moved in early 2017, our year-on-year net sales compare on a reported basis is going to be tougher in the first half of 2018 than in the second half of 2018, assuming that FX rates stay constant from here.

Our intention is to continue to provide constant currency information on Nokia's net sales in addition to reported information. In conclusion, our guidance reflects the tough conditions we face.

I'm confident that our strong governance, cost discipline, and tightened focus on cash will help us weather through these headwinds, while enabling us to invest properly for the long term. With that, over to Matt for Q&A..

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

The first question will come from Alex Duval of Goldman Sachs. Please go ahead..

Yes. Hi, everyone. Many thanks for the question. It looks like; firstly, in Networks, some of the subsegments actually did better if we look, aside from wireless. So I just wondered if you could talk a little bit about what's driving areas like IP Networks? Specifically, you did mention a little bit around the new product.

But if we have some more color in terms of the way customers are reacting, both on the webscale and the telco verticals? Second of all, if you could give a bit more clarity on the wireless side.

Can you quantify a little bit how much of the weakness that you've talked about is to do with engineers having too much to do, due to new requests of 4.9G and so forth, versus market weakness or share shifts? And finally on the patent side of things, I wondered if you could help us understand a bit better how we should think about the new run rate, because if I look at sort of consensus numbers and strip out some of the catch ups in non-patents areas, it looks like the doubling in your underlying run rate that you cited would suggest some upside to the underlying number that people are looking at for revenues in patents this year.

So is that a fair assumption that it's quite a meaningful uplift? Could you maybe quantify that and should we expect some decent drop through to profit next year? Many thanks..

Thank you, Alex. So let me start with IP Networks. So, yes, we have seen the growth from enterprise DXLE (34:19) webscale compensate somewhat the declines on the CSP side. So, as I said, we saw 4% growth in IP Routing, if you exclude video.

It is fair to say that with the launch of FP4 even if the product will start to be available from later this year and we'll see gradual ramp ups, as I said, at the beginning of new year.

But the fact if you have a new product, you start talking to customers about it both on the webscale side as well as on the telco side, you start to get traction because of that. So we're seeing some of that as well. The whole preparedness for FP4 is going really well.

We're talking to a number of customers both on the telco side as well as the webscale side. I think there is a great degree of interest. It's been seen as a real good product ahead of its competition. So I think good things will come out of it. But again, as I said, gradual ramp up in 2018.

Then you talked about wireless weakness and what happened there in Q3. A couple of things. I think, one, we have seen this M&A related uncertainty on the operator side impact the business. As operators get into dialog on M&A, they'll start to put some pause on spending. And that's kind of hard to predict at the beginning of the year.

Sometimes this happens with short notice. So we've seen that impact. And yes, we have seen the impact with our own R&D workload. I want to take the opportunity of just putting this whole thing in context, this network equipment swaps on migration. First of all, we're talking about network equipment swaps related purely to the portfolio migration.

That's where that spend has gone up. We have four broad phases when we made these portfolio decisions. The first is decide. We made a decision and we involved some customers. We made a decision on what the world market product would be. Second, we communicate that to customers and then we agree that in contracts and we put that in place.

Those two things we've been talking about in the last few quarters. Third, we start to develop. And this is I think where we've had some impact given three issues. One, the future parity that was required on the new AirScale platform with regard to what has been promised in Alcatel-Lucent in the former company.

Second, the global feature requirements have grown and due to sort of competition. Third, 5G has accelerated.

When you put all these things together, of course, there's more pressure on the R&D workload and this I've been talking about for the whole year, right, sort of I think from Q4 results, Q1, Q2, and we've seen some of this risk manifest itself in the third quarter.

Having said that we now feel more confident because we are on the deployed phase and that's the fourth phase. The full deployment, you move from having your products ready to full deployment and that makes me feel more confident that we are going into the right zone.

Also gives us some confidence that this €1.4 billion swap cost that we are talking about will be contained to that number because we are now in full deployment mode, and we have better insight and predictability. Last, by being with this new AirScale product, two things happened. One, we create conditions for up-sell. And second, it is 5G-ready.

We create conditions for being in 5G. And then I will say that we still believe the swaps are NPV positive when factoring in the R&D efficiencies that we get as well as the upsell opportunities. So even though we're not happy about the additional cost, I think we have more insight and predictability now that we're in the deploy phase.

I would also say that when the products have been rolling out, the customer, they're actually giving us fantastic feedback on the new AirScale product because that's giving about 20% to 30% higher throughput in congested traffic conditions and this is great for customers because the network experience from that product is simply awesome and stellar better to (38:20) competition, better than our previous generation..

And then maybe to close on patent licensing, so we did give two ways data for you to come to the run rate. We said that we have approximately doubled the 2014 revenues of €578 million and then we also said that out of the quarterly revenues of Nokia Technologies of €483 million, €9 million is product and €180 million is non-recurring.

So if you do the math there, you'll be at the number which is a bit low of €300 million. And both of these give you the range run rate, which is somewhere in €1.15 billion and €1.2 billion on an annual basis and this is of course all margin. So it's a good business..

So, yes, a meaningful uplift. Thank you, Alex for your three questions. For future, let's try to get more people able to ask questions, so please limit yourself to one question only. Carey, we're ready for our next question..

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

Yeah. Thanks for letting me on. Rajeev, I'm trying to understand that you're seeing the sales decline in the third quarter which is much more significant than the market is seeing.

Do you expect that to ease off in the next few quarters? And then secondly in terms of your guidance for 2018, does that have a margin impact on Nokia revenue margin in 2018, sorry?.

Yeah. Sandeep, thanks for the question. So I think first on the third quarter, we believe actually that the market for the whole year will be in this minus 4% to minus 5% range that we've now narrowed. I think about next year, we haven't guided Nokia numbers for next year. We will do that in conjunction with our Q4 results.

But, I want to put into operational context again. So we see the potential for an improved industry environment in 2018. So we are closer to minus 2%. It will start to be towards an improved environment.

But what we also want to do in the typical Nokia way is to prepare ourselves for a possible another challenging year if that is close to minus 5% because then we want to prepare ourselves with the right operational discipline, the focus on profitability, deal discipline, quality, all those things that matter..

Thank you, Sandeep. Carey, next question, please..

The next question will come from Andrew Gardiner of Barclays. Please go ahead..

Good afternoon. Thanks for taking the question. I was interested in diving a little bit deeper into what's happening in China. We certainly heard from your competitor last week that they were looking to or had in fact regained some market share in China and that's affecting their margins. You guys are clearly flagging that this morning in your release.

Can you just give us a bit more detail as to what's happening in this early phase of sort of the 5G prep and the type of pricing activity and sort of margin implications that you're seeing.

In many respects, it feels a little bit like the bad old days of giving equipment away to make sure you've got footprint and hoping that at some future the margin comes through. Can you just give us some reassurance that it's not sort of a return to those bad old days? Thanks very much..

Thanks, Andrew. First, because you've asked the latter part of the question, I also want to talk globally, right. So when you look at the global competitive intensity and we are very data driven about this. We look at it from multiple ways every quarter, every month.

So in most markets the environment has remained broadly consistent over the past two years. So, overall, at a global level the competitive intensity has not worsened, it's not improved, it's sort of neutral. And then when it comes to China what is happening there with the 4G expansion tenders is that that is creating conditions for moving to 5G.

And that is why we have seen a little bit more robust competition in China as people want to position for 5G. We have always seen this in China when there is a potential move to the next generation. It is not new, but it is also unique and contained to China.

So I would be careful not to extrapolate that outside of China because, again, we're data-driven, we look at the global market. So, yes, we have seen that in China. We've also decided that, you know what, we will – because even maintaining footprint can cost. So what we've decided is that we will only go for what we think is right.

So we will apply the deal discipline there. And so, yeah, it's unique. It's something we've seen before and I don't believe that this is something that will become more of a global phenomenon as the move to 5G takes place, because in other markets your installed base is much more sticky and matters a lot..

Thank you, Andrew. Carey, next, question, please..

The next question comes from Aleksander Peterc of Société Générale CIB. Please go ahead..

Yes. Hi. Thanks for taking my question. I just wanted to delve a little bit on one of your uncertainty element that you flagged. That is the timing of completion and acceptances of certain projects that you now extend into the first half of 2018.

So just wondering if any of that are coming through already and can be observed in your revenue and margins or is it more of a risk going into Q4 and why you're extending that into 2018? Thanks..

Thanks, Aleks. And that has to do with the extensive R&D workload would relate to migration, those four points I talked about. And so that has a risk with those customers where there is the element of network equipment swaps related to the portfolio migration.

And so it's contend to less than a handful of customers, but we see a risk that it could last until first half of 2018 simply because this is a multi-quarter activity. And the good part is that we are now in full deployment mode and that of course is helpful. And, of course, some of that has already hit us in Q3..

Thank you Aleksander. Carey, we're ready for our next question please..

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

Great. Thank you. Rajeev, just on a higher level, with your end-to-end portfolio seemingly well-suited for 5G and you're talking about strong customer scores.

Can you just update us kind of your dialog with operators given you seem well suited with the end-to-end portfolio for 5G and how is the conversations maybe changing with some of your competitors getting more aggressive on price trying to gain a footprint ahead of 5G?.

Yeah, thanks. Thanks for the question. We are seeing momentum in our cross-sell efforts.

We have already some specific examples that we've seen recently like the BSNL IP routing and BSS software deal, the Three UK hyper network datacenter deal, the Three UK cloud native core network deal, (45:38) deal which had elements of the former Alcatel-Lucent portfolio, the DT and Denmark managed services (45:41) deal where we sold software components like the (45:48), so these are publicly quota (45:50) deals that we have, so we are seeing benefit from that already.

Now 5G is much more end-to-end than any other technology we've seen in Mobile before, way more end to end.

It just simply is not about radio and this is why it's actually, we could be a likely strong beneficiary from the move to 5G and sort of (46:11) some of the price competition because you need to have transport, you need to have backhaul, you need to have front haul which becomes even more important than before. You need to have routing.

You need to have orchestration. You need that whole end-to-end portfolio. So it's even more relevant for 5G. In fact, investments will start to happen more in the IP of backhaul side before you even get to 5G. And, of course, I didn't mention core cloud and the related services.

So for me (46:38) full throttle on benefiting from the end-to-end and customers acknowledged this. Customers are already acknowledging this through the cross-sell activity we have, but also in the strategic agenda and the conversations we have with them..

Thank you, Mike. Carey, next question please..

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

Hi. Thanks very much. I wonder Rajeev and Kristian if you could look into 2018 and help us understand some of the puts and takes on margins. You've maintained your margin guidance for 2017.

You obviously have both, some exceptional costs, but a lot of cost savings coming through and it does seem like you're seeing higher growth now or faster growth in some of the areas with higher gross margin.

So, can you talk through how you see Networks margins for next year if you're ready to talk about that at all and what should we expect in terms of profitability and free cash flow for next year? Thanks..

So I think, Richard, we will be very disciplined today and we will provide guidance on Nokia specific items in conjunction with our Q4 results. We talked about the market today what we expect that could happen in the market, 2% to 5%. Then there are of course Nokia-specific activities that we are driving.

As Rajeev also talked in his prepared remarks, we have the cross-selling opportunities. We have the recovery in IP Routing, based on the product portfolio refresh that we are doing. We are driving, through A&A, a vendor-agnostic software business. We see growth in those adjacencies, and we are also making progress in our patent licensing business.

So those are all of the items through which we will then fight in the market in 2018 and then the margin implications, we'll talk more about in conjunction with Q4..

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

The next question will come from David Mulholland of UBS. Please go ahead..

Hi. And thanks for taking the question and just to follow-on on the outlook into 2018. Obviously you mentioned there's a lot of areas you're looking to drive the business cross-selling. There's all the new products coming through as well.

Not to try and labor the point (49:03), but is there any reason why we shouldn't expect you to potentially be outperforming the market in 2018? I know it's a bit early to comment. But, for all the drivers you're talking about on the outlook, it seems like most of the negatives are market drivers.

And then there's quite a few company-specific ones that could potentially drive a slightly better performance, or is that – are we missing something in that thought process?.

Thanks, David. I think I'll say what I said before, that, yes, we've said minus 2% to minus 5%. We see the potential for an improved industry environment. But we also want to prepare ourselves for another challenging year, should it be close to the minus 5%. I think Kristian's points around those opportunities could drive offset for us in 2018.

And again, we are seeing progress in those adjacencies already now, as I said in my prepared remarks, but we'll talk about it in conjunction with the Q4 results..

Yes. And I think it's good also to keep in mind that maybe some of the headwinds that we are highlighting here, that drive the market numbers negative for next year, are also impacting markets where our market share is stronger. So that might actually create some high level headwinds on those market numbers.

So I think we'll come back to it in Q4 timeline..

Okay. Thank you, David. Carey, next question please..

The next question comes from Francois Meunier of Morgan Stanley. Please go ahead..

Hello, guys. I understand Rajeev, you're very confident that you can source like the engineering issues associated with transferring those Alcatel and maybe Lucent platform to Nokia. But – I don't know if Marc Rouanne is on the call.

But that would be great if someone could explain, what are those engineering issues, because if we roll back to the announcement of the merger, or the acquisition of Alcatel, the plan was not to do any swap out. So, what has changed in the past three months? Okay.

Because three months ago, we didn't know about this, and what has changed in the past 15 months? And if you could be really specific on the engineering issues, if it's a hardware issue, if it's a software issue; if it's a software issue, what it is? And what are the ex-Alcatel guys doing to make that transition easier? Thank you..

Thanks, Francois. No, Marc is not on the call. But it's those – number one, we did say there will be network equipment swaps. We said we will mitigate to the extent possible by using open Sipri (51:53), which is this open interface between the radio unit and the baseband unit.

And that way we would avoid swapping out a lot of radio units, but you would still have to swap out the baseband, you still have to do some swaps. So we said there will be swaps, but they will be mitigated by the use of technology, which we have done.

But the things that we have in our Mobile Networks portfolio, I think it isn't about a particular hardware issue or software per se, it is just the feature requirements, in particular customers with former Alcatel-Lucent footprint, have been greater than we've originally expected.

So the feature requirements that we have to provide parity to in the new AirScale product has just been greater. So it's really a crunching of those features and getting that in the new products, which takes extra time and effort.

And then the second thing is, at the same time as that has happened, there have been feature creep in the market due to competitive pressures. So other markets have required new features and just normal world market product. And then, as things would happen sometimes, that 5G also got accelerated from 2020 to 2019 (53:00).

So it's really about getting the quality right.

When you ship the software, I think the good news is that the software is now shipped, i.e., the software release is now available, the AirScale hardware is now available, and it is now moving into this full deployment phase, which is all about site work and getting the Global Services team to focus on implementation. So the heavy lifting is over.

It's down to a few projects, less than a handful, and we're in the deployment phase..

Great. Thank you, Francois. Carey, next question please..

The next question comes from Stuart Jeffrey of Natixis. Please go ahead..

Hi, thank you. You spoke about 2018 improving perhaps as we get towards the back end of the year.

I was wondering if you could talk about what you see as the drivers for that, and whether 5G is an important part? And given that there's been this footprint chase in China because of the prospect of 5G, why would it not make sense for that sort of price competition to accelerate more broadly across the globe in advance of 5G? Thanks..

Okay. Maybe, Stuart, so on a reported basis, so if you're referring to my prepared remarks where I said that the first half will be a tougher compare on a reported basis than the second half. I was just commenting on what foreign exchange rates will do to our results in 2018.

I think, when we give our guidance, it's on a constant currency basis and there, we haven't made a distinction between, will the first half be easier than the other half. I'm just purely stating the fact that currency fluctuations will have to our 2018 numbers..

So did you want to ask a follow-up Stuart, then?.

Okay. (54:55) on the network swaps, I understand that feature creep and things like that have made life difficult. But I'm a bit confused that the increase in costs from €900 million to €1.4 billion because site visits, I don't understand how that accelerates on the back of feature creep.

So could you just perhaps explain, is this all site visits that's adding that cost or is there something else that I'm not....

Yeah. Thanks, Stuart. I think it's the fact that the software therefore was delayed.

You go from the decide phase to the communicate and agree phase and then as you get into developed phase, this feature creep and the competitiveness requirements required more, which means that the software took longer to get out there, which means that you have bit more swap to do of the previous stuff that you were shipping simply because you knew software was not ready and so that's the reason.

And then some associated and then, of course, the services activity because of some swaps (55:51) proceeding. And so now you need double site visits in some places that was not there earlier.

And then finally, I will say that the true visibility and insight you get when you are fully in the deployment mode and now that we're fully in the deployment mode, we've got much greater visibility and insight on the back of the delays. And so at one level we feel confident that it will be contained at this.

But also we needed to get into the deployment phase to get that (56:22) visibility as well..

Thank you, Stuart. Carey, next question, please..

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

Hi. Good afternoon. Just a question on the China comments that you made. I think like you highlighting this impact Rajeev on specifically for Q4 and like we've heard similar comments from your competition last week talking about Q4 impact.

Like usually when these things happen because these are usually longer-term contracts, it doesn't just – is confined to one quarter, it's usually a much longer duration impact.

So I'm just trying to understand what exactly is, with these China contracts, what is so unique that it will be done very, very quickly within one quarter and then business returns to normal next year?.

Yeah. I think we emphasized the fact that the impact will be in Q4, but we also, as Rajeev said in the prepared remarks, that is one factor for the overall guidance also for 2018. So it's not only a Q4 comment, it's also one of the things that we have taken into account when coming up with the 2% to 5% market guidance for 2018..

Thank you, Achal. Looks like we are not able to get to the queue, but we can take our last question for today Carey..

Okay. Our last question will come from Pierre Ferragu of Bernstein. Please go ahead..

Hi. Thanks for taking my question. Rajeev, so you say that you don't expect like revenues to improve, to rebound in your call (58:18) business before 5G get started in 2019.

Could you tell us first, this initial business, 2019 5G, what does that look like? Is that like a large scale rollout? Where in the world do you see these initial rollouts playing? And then of course before 5G, I remember you guys talking about a very large number of 4.5G contracts you had secured, if I remember correctly it was several hundred.

What happened to that business? It looks like the weakness in the markets that you see today still continues to be a bit of a surprise. You were probably slightly more optimistic 6 months or 12 months ago about 2018.

So can you maybe give us a bit of a flavor of what disappointed on these 4.5G opportunity and all these opportunities that we heard about that 4G would still be a network in which a lot of investments would be required? Thanks..

Thank you, Pierre. So we've not commented on our own revenues for 2018. We've commented just on the market, minus 2% to minus 5%. And as Kristian said, we have some offsets of our own. I believe the 5G cycle will start in 2019, and that is because chipsets and devices will start to be available and there is a willingness from operators to go there.

It will happen in lead markets. We are talking about U.S. We're talking about China, Japan and South Korea. And they could also be potentially some in Europe, but largely in these four lead markets. I believe when 5G will come, it offers couple of new opportunities for operators that have not been there. Number one, fixed wireless access.

The second one we know which is enhanced mobile broadband experience, 1 gig speeds driven by HD video and driven by AR/VR and so on.

The third one is interesting, which is industrial IoT based on network slicing that they can give to different enterprises and different verticals and that is – that actually could offer them a meaningful increase in their own ARPUs and enterprise business opportunity over the longer term.

And then I believe when 5G comes, it will be trialed in 2018 and then launch is starting to happen somewhere in the second half of 2019. They will be smallish, but they will be actually starting to really happen moving towards more nationwide builds in the low band, in the mid band and high band spectrum..

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

Thanks, Matt, and Kristian. And thanks again to all of you for joining. As I noted in my remarks, we had a number of areas where we performed well in the quarter and some like patent licensing where we performed extremely well. But we also recognize that we face challenges in terms of market conditions as well as some issues unique to Nokia.

To succeed in this environment, we need to double down on Nokia's core strengths, strengths that have helped us succeed in the past and can do so again.

The first of these is our disciplined operational model, strict pricing control, disciplined execution, strong operational governance, ongoing cost focused transformation, improved quality and increased automation are all critical. And all are things that we know how to do and to do well.

We have the right systems and controls in place and are tightening them even more given market conditions. The second is our ability to execute effectively on our strategy.

We are making strong progress and expanding to new customer segments to webscale, public sector, transportation, energy and extra large companies that use technology as a competitive advantage. We are moving well into cable. Our software business is tracking to plan and our licensing machine is at full tilt.

The third strength is innovation where we have momentum. Our FP4 based routing products are a leap ahead of others with massive capacity increases and embedded security powered by the FP4 chipset that is up to six times more powerful than currently shipping network processors.

Our 5G ready AirScale Radio Access solution helps lower costs, similar to others in the industry, but sets a new standard for performance and flexibility. Artificial intelligence is ensuring that our Global Services team can do more and do so faster and more efficiently.

Fixed Networks announced the cable industry's first virtualized distributed access architecture, which gives customers a choice in the technology they use in their different markets rather than being forced down a single path.

In Applications & Analytics, we have just launched a supercharge monetization portfolio with machine learning capabilities that is designed to allow customers to ditch their outdated software for modern cloud native tools meant for the demanding world of 5G and IoT.

And, of course, Nokia Bell Labs is working hard on delivering the game changing innovations that we are starting to bring to market to ensure Nokia's technology leadership in the years to come.

In summary, some challenges in the market and some unique to Nokia, but underlying it all we remain strong and focused and our commitment to create value for our shareholders is undiminished. With that, thank you for your time and attention. I will now hand it back to Matt..

Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today we have made a number of forward-looking statements that involve risk 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 67 through 85 of our 2016 Annual Report on Form 20-F, our interim report for Q3 2017 and January through September 2017 issued today, as well as our other filings with the U.S. Securities and Exchange Commission. Thank you..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..