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UBS Investment Research Nokia
Here we go again…
Following negative pre-announcement we downgrade from Buy to Neutral We believe the main issue behind Nokia’s profit warning has been increased pricing pressure in the high-end due to lack of competitive product. We believe investors will be unwilling to put faith in the execution on new devices. We downgrade to Neutral and will revisit when visibility emerges on new products. Do risks still remain on lowered expectations? To reach low-end of FY margin guidance, Nokia requires >34% GM or c.460bps seq improvement in Q4 which appears challenging. To achieve our 2010E revenue we estimate new high-end devices will need to contribute c.€1.3bn in H2 or >4m units. Given the magnitude of improvement required, lack of reassurance on new products, and increased competition, we believe downside risks still exist. Has value now emerged? On a one-year reverse DCF, current price implies 0% rev growth in perpetuity at 4m of incremental volumes. Alternatively, overall volumes will have to be significantly better than expected.

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Nokia 17 June 2010

Table 2: Nokia Devices – volumes (m) by category
Volumes (m) N series E series X series C series 5000 series Other smartphones Converged Devices FY '09 18.9 18.5 0.0 0.0 17.2 13.2 67.8 Q1 '10 2.9 6.3 1.0 0.0 7.9 3.4 21.5 Q2 '10E 1.5 6.9 1.7 3.2 9.2 3.2 25.7 Q3 '10E 1.4 6.9 2 6.0 8.6 2.8 27.7 Q4 '10E 2.1 7.8 2.2 6.8 6.8 3.0 28.7 FY '10E 7.9 27.9 6.9 16.0 32.5 12.4 103.6

Mid-end Low-end (€30-50) ULC (sub-€30) Mobile Devices Source: UBS estimates

115.0 54.7 194.4 364.0

27.0 12.9 46.4 86.3

24.5 14.0 52.8 91.3

24.0 14.7 55.3 94.0

23.0 12.9 64.7 100.6

98.5 54.6 219.1 372.2

Table 3: Nokia Devices – revenues (€m) by category
Revenues (€m) N series E series X series C series 5000 series Other smartphones Converged Devices FY '09 5,548 2,860 0 0 2,893 1,476 12,777 Q1 '10 895 891 250 0 963 340 3,339 Q2 '10E 427 937 396 332 1,005 294 3,392 Q3 '10E 363 893 435 586 893 242 3,412 Q4 '10E 541 1,000 453 614 681 246 3,535 FY '10E 2,225 3,721 1,534 1,533 3,541 1,123 13,677

Mid-end Low-end (€30-50) ULC (sub-€30) Mobile Devices

7,602 2,587 4,889 15,078

1,709 559 1,058 3,326

1,507 595 1,180 3,282

1,429 611 1,211 3,251

1,355 526 1,389 3,270

6,001 2,291 4,838 13,130

Total Devices & Services % change Source: UBS estimates

27,855 -21%

6,665 8%

6,674 1%

6,663 -4%

6,805 -17%

26,807 -4%

High-end competition continues to increase: With Nokia continuing to take time in launching a competitive high-end smartphone (it’s been three years since the launch of the original iPhone), its competitors have continued rapid development of their platforms. Apple is about to start shipping the iPhone 4 that addresses several of the complaints levelled at the iPhone and Android is seeing continuing strong traction among vendors. We believe the competitive bar is continually being raised, making it more difficult for Nokia to compete at the high end of the market and raising the execution
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risk. Below we highlight the numerous Android device launches from competitors while only one Symbian^3 device has so far been announced and Symbian^4 devices not expected until early 2011 at the earliest.
Table 4: List of recent/upcoming Android launches
Vendor HTC HTC HTC/T-Mobile HTC/Sprint HTC Motorola Motorola Motorola Motorola Motorola Samsung Sony Ericsson Sony Ericsson Sony Ericsson LG LG Google Acer Acer Acer Acer Huawei Huawei Huawei Huawei Dell Dell Kyocera TCL Garmin Asus ZTE ZTE ZTE ZTE Source: Company data Model Legend Desire T-mobile my touch 3G slide sprint Evo 4g Wildfire XT 720/ MOTOROI Backflip Devour Cliq XT / Quech i1 Beam I8520 Xperia X10 Xperia X10 mini Xperia X10 mini pro GT540 (Europe) Ally/Aloha Nexus One Liquid E (upgraded A1) A10 E110 E400 U8800 U8300 U8110 U8100 Aero Smoke Zio M6000 Vodafone 845 A50 Blade Racer Mercury Smooth $529 500 $500 Price $700 $879 Announced Feb-10 Feb-10 May'10 May'10 May'10 Jan-10 Jan-10 Feb-10 Feb-10 Mar'10 Feb-10 Nov-09 Feb-10 Feb-10 Jan-10 Apr-10 Jan-10 Feb-10 Apr-10 Feb-10 Feb-10 Feb-10 Feb-10 Feb-10 Feb-10 May'10 Apr'10 Mar'10 Apr'10 Apr'10 May'10 May'10 May'10 May'10 Launch date Apr-10 Apr-10 Q2'10 June'10 Q3'10 Jan-10 Q1 '10 Mar-10 Q2 '10 Q2 '10 na Q1 '10 Q2'10 Q2'10 Apr-10 May-10 Jan-10 na Mid-2010 Mar-10 Apr-10 Q3 '10 Q2 '10 Q2 '10 Q2 '10 Q2' 10 Q2 '11 Q2' 10 May-10 Q2'10 Q3'10 Q3'10 Q3'10 Aug'10

Sensitivity scenarios on 2011E EPS: If we vary the inputs to our Nokia model to look at the potential downside and upside to 2011E EPS it is clear that with current execution risks there is significant potential downside to 2011. Similarly while the absolute blue-sky scenario suggests significant upside we believe the balance of probability on achieving a combination of market share growth, significant margin improvement and benign ASP decline is rather low.

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Table 5: Scenario analysis for Nokia 2011E EPS
Bear Market units % growth Nokia units % share Nokia ASP % change D&S Revenues Gross margin Opex D&S EBIT D&S EBIT margin EPS Multiple Share Price Source: UBS estimates 1,464 5.0% 469 32.0% 54 -8.0% 26,015 30.0% 5,700 2,104 8.1% 0.39 12 4.7 Base 1,519 8.9% 509 33.5% 54 -8.0% 28,188 30.5% 5,632 2,965 10.5% 0.57 12 6.8 Bull 1,520 9.0% 532 35.0% 56 -5.0% 30,372 32.0% 5,888 3,831 12.6% 0.75 12 8.9

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Nokia 17 June 2010

Forecast Changes
As shown in the tables below, we have lowered our near-term forecasts in Devices & Services significantly to reflect the new guidance.
Chart 3: Nokia – UBS divisional forecast changes
2010E 28,056 904 12,378 -112 41,226 0.6 New 2011E 28,186 1,000 12,007 -41 41,152 -0.2 2012E 28,526 1,070 12,247 -42 41,801 1.6 2010E 28,999 904 12,378 -113 42,168 2.9 Old 2011E 29,944 1,000 12,007 -43 42,907 1.8 2012E 30,873 1,070 12,247 -44 44,146 2.9 2010E -3.3 0.0 0.0 -2.2 Change % 2011E -5.9 0.0 0.0 -4.1 2012E -7.6 0.0 0.0 -5.3

Devices & services Navteq NSN Other Total Net Sales % change

Devices & services ex specifics margin % Navteq ex PPA margin % NS Networks ex specifics/PPA margin % Other elims EBIT pre specs/PPA margin %

2,830 10.1 215 23.7 194 1.6 -215 3,024 7.3

2,965 10.5 244 24.4 303 2.5 -217 3,294 8.0

3,143 11.0 285 26.6 367 3.0 -218 3,576 8.6

3,546 12.2 215 23.7 194 1.6 -217 3,739 8.9

4,047 13.5 244 24.4 303 2.5 -221 4,374 10.2

4,327 14.0 285 26.6 367 3.0 -223 4,756 10.8

-20.2 0.0 0.0

-26.8 0.0 0.0

-27.4 0.0 0.0

-19.1

-24.7

-24.8

Source: UBS estimates

Chart 4: Nokia – UBS forecast changes
2010E 41,226 12,936 31.4 3,849 3,024 7.3 1,846 964 0.49 0.32 3,949 -590 -136 3,003 7.3 3,690 New 2011E 41,152 12,954 31.5 4,117 3,294 8.0 2,188 1,291 0.57 0.31 4,061 -700 -171 2,846 6.9 3,134 2012E 41,801 13,087 31.3 4,427 3,576 8.6 2,520 1,857 0.71 0.32 4,403 -711 -164 2,913 7.0 2,771 2010E 42,168 13,718 32.5 4,602 3738.6 8.9 2,561 1,493 0.64 0.41 4,760 -604 -136 3,614 8.6 4,301 Old 2011E 42,907 14,238 33.2 5,269 4373.7 10.2 3,268 2,090 0.79 0.43 5,243 -729 -173 3,714 8.7 4,273 2012E 44,146 14,586 33.0 5,705 4756.3 10.8 3,900 2,878 1.01 0.46 5,644 -750 -169 3,750 8.5 4,520 2010E -2.2 -5.7 -16.4 -19.1 -27.9 -35.4 -22.4 -22.4 -17.0 -2.3 -0.1 -16.9 -14.2 Change % 2011E -4.1 -9.0 -21.9 -24.7 -33.0 -38.2 -28.2 -28.2 -22.5 -4.1 -1.6 -23.4 -26.6 2012E -5.3 -10.3 -22.4 -24.8 -35.4 -35.5 -29.7 -29.7 -22.0 -5.3 -2.7 -22.3 -38.7

Total Net Sales Gross profit margin % EBITDA pre specifics EBIT pre specifics/PPA margin % PBT pre specifics Net profit ex specifics EPS - diluted pre specifics ex PPA DPS - proposed not paid (/share) Cashflow from ops Capex Capitalised devpt additions FCF - Nokia margin % Net cash (debt)

Source: UBS estimates

Below we highlight our forecast changes against Nokia’s guidance.

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Table 6: UBS forecast changes vs. Nokia guidance changes
Q2 - Old Guidance Industry unit growth Nokia unit market share Nokia value market share D&S revenues D&S EBIT margin €6.7 - 7.2bn 9% to 12% €6.82bn 10.7% low-end/slightly below prior guidance low-end/slightly below prior guidance €6.62bn 8.5% 11% to 13% UBS-e 13.3% 35.0% Q2 - New Guidance UBS-e 13.3% 33.6% 2010 - Old Guidance c.10% flat UBS-e 10.4% 34.3% Guidance c.10% flat 2010 - New UBS-e 10.4% 33.5% 390bps decrease €28.1bn low-end/below prior guidance 10.1%

Slight increase 320bps decrease Slight decrease €29.0bn 12.2%

Source: Company, UBS estimates

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Valuation
After a 10% drop in the share price on the day, and significant under performance over the past year, the natural tendency for analysts is to be positively biased and highlight the deep value the shares now represent. While it is indeed the case that on DCF-based metrics the stock looks attractive, but we believe that it lacks short-term momentum and investors will not be willing to put faith in the execution or success of promised new high-end devices in H2. As the company works through its product transition and potentially management change, we believe the stock is likely to keep drifting lower in the short-term. As a result, we downgrade our rating to Neutral from Buy and will revisit when there is greater visibility on the new products. With the European markets trading on 11.6x 2010E P/E and 9.6x 2011E we believe there is much better value (with structural growth and good yield) elsewhere in the market and indeed in our own sector. We continue to prefer telecom equipment over semis and highlight our preference for Ericsson and Alcatel-Lucent in the short-term – both beneficiaries of a late cycle capex pickup and mix improvement. As such we have lowered our DCF-based fair value to €8.8 (long-term assumptions laid out below) but disconnect our price target from this fair value given the lack of short-term momentum and increased execution risks. Our new price target of €7.2 is based on 6.0x EV/EBITDA. This compares to the sector currently trading on 7.7x with Nokia’s execution risks and arguably lower growth profile warranting this discount. In our DCF, we have lowered our terminal margin assumption for Devices to 9% from 13% previously.
Table 7: DCF assumptions
Revenue growth % Fade start Devices NSN (50%) Navteq Source: UBS estimates 2016 2016 2016 Length 10 10 10 Last -20.6% -17.9% 1.5% End expl. -1.6% 0.0% 5.0% Target 2% 0% 3% EBIT margin % Last 12.5% -3.5% 18.5% End expl. 11.0% 3.0% 28.0% Target 9% 5% 15% Capex/sales % Last 0.9% 1.2% 6.3% End expl. 1.4% 1.8% 6.3% Target 1.5% 1.0% 6.0% WACC 8% 8% 8% Tax rate -25% -25% -28%

What is implied at these levels?

Following the 10% move today following the pre-announcement we have conducted a one year DCF (eliminating any explicit forecasting error beyond 2010) analysis based on our 2010 forecasts to see both what is implied at the current level and provide a sensitivity to various assumptions for terminal EBIT margins and revenue growth. The analysis just looks at the Devices and Services business, taking the value for NSN at €1.9bn (0.3x EV/Sales) and Navteq at €2.5bn (2.7x EV/Sales). This shows that the current share price implies 0% revenue growth in perpetuity at 6% below the MRA. Definition Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.

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Nokia 17 June 2010

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Limited: Gareth Jenkins; Anuj Krishan. UBS Securities LLC: Maynard J. Um.

Company Disclosures
Company Name 6c, 8, 16 Alcatel-Lucent 15, 16 Ericsson 4, 5, 6a, 6b, 6c, 7, 15, 16 Nokia Reuters ALUA.PA ERICb.ST NOK1V.HE 12-mo rating Short-term rating Neutral Buy Neutral Buy Buy (UR) N/A Price €2.24 SKr86.70 €7.22 Price date 16 Jun 2010 16 Jun 2010 16 Jun 2010

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 4. 5. 6a. 6b. 6c. 7. 8. 15. 16. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. UBS AG, its affiliates or subsidiaries has issued a warrant the value of which is based on one or more of the financial instruments of this company. UBS Securities LLC makes a market in the securities and/or ADRs of this company.

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Nokia 17 June 2010

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

Alcatel-Lucent (€)
Price Target (€) 15.0 Stock Price (€)

10.0

5.0

0.0 01-Apr-05 01-Apr-06 01-Apr-07 01-Apr-08 01-Apr-09 01-Jan-06 01-Jan-07 01-Jan-08 01-Jan-09 01-Jan-10
01-Jan-10

Buy 2 Neutral 2 Buy Neutral No Rating Short-term Buy Short-term Sell

Source: UBS; as of 16 Jun 2010

Ericsson (SKr)
Price Target (SKr) 200 150 100 50 0 01-Jan-06 01-Jan-07 01-Jan-08 01-Jan-09 01-Apr-05 01-Apr-06 01-Apr-07 01-Apr-08 01-Apr-09 01-Apr-10 01-Oct-05 01-Oct-06 01-Oct-07 01-Oct-08 01-Oct-09 01-Jul-05 01-Jul-06 01-Jul-07 01-Jul-08 01-Jul-09 Stock Price (SKr)

Buy 2 Neutral 2 Neutral Sell No Rating Short-term Buy

Source: UBS; as of 16 Jun 2010

01-Apr-10

01-Jul-05

01-Jul-06

01-Jul-07

01-Jul-08

01-Oct-05

01-Oct-06

01-Oct-07

01-Oct-08

01-Jul-09

01-Oct-09

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Nokia 17 June 2010

Nokia (€)
Price Target (€) 40.0 30.0 20.0 10.0 0.0 01-Apr-05 01-Apr-06 01-Apr-07 01-Apr-08 01-Apr-09 01-Jan-06 01-Jan-07 01-Jan-08 01-Jan-09 01-Jan-10 01-Apr-10 01-Jul-05 01-Jul-06 01-Jul-07 01-Jul-08 01-Oct-05 01-Oct-06 01-Oct-07 01-Oct-08 01-Jul-09 01-Oct-09 Stock Price (€)

Buy 1 Buy 2 Neutral 2 Buy Neutral No Rating Short-term Buy

Source: UBS; as of 16 Jun 2010 Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%.

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Nokia 17 June 2010

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