Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Operator:]

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.

[Matt Shimao:]

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.

[Rajeev Suri:]

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

[Kristian Pullola:]

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.

[Matt Shimao:]

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

[Operator:]

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

[Alexander Duval:]

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.

[Rajeev Suri:]

Thank you, Alex. So let me start with IP Networks. So, yes, we have seen the growth from enterprise DXLE (34

[Kristian Pullola:]

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.

[Rajeev Suri:]

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.

[Operator:]

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

[Sandeep Deshpande:]

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?

[Rajeev Suri:]

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.

[Matt Shimao:]

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

[Operator:]

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

[Andrew M. Gardiner:]

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.

[Rajeev Suri:]

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.

[Matt Shimao:]

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

[Operator:]

The next question comes from Aleksander Peterc of Société Générale CIB. Please go ahead. Aleksander Peterc - Société Générale SA (UK) 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.

[Rajeev Suri:]

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.

[Matt Shimao:]

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

[Operator:]

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

[T. Michael Walkley:]

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?

[Rajeev Suri:]

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

[Matt Shimao:]

Thank you, Mike. Carey, next question please.

[Operator:]

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

[Richard Kramer:]

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.

[Kristian Pullola:]

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.

[Matt Shimao:]

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

[Operator:]

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

[David T. Mulholland:]

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

[Rajeev Suri:]

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.

[Kristian Pullola:]

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.

[Matt Shimao:]

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

[Operator:]

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

[Francois A. Meunier:]

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.

[Rajeev Suri:]

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

[Matt Shimao:]

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

[Operator:]

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

[Stuart Jeffrey:]

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.

[Kristian Pullola:]

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.

[Matt Shimao:]

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

[Stuart Jeffrey:]

Okay. (54

[Rajeev Suri:]

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

[Matt Shimao:]

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

[Operator:]

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

[Achal Sultania:]

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?

[Kristian Pullola:]

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.

[Matt Shimao:]

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

[Operator:]

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

[Pierre C. Ferragu:]

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

[Rajeev Suri:]

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.

[Matt Shimao:]

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

[Rajeev Suri:]

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.

[Matt Shimao:]

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.

[Operator:]

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