NOK

Business Context and Reporting Period

This Form 20-F covers Nokia Corporation for the fiscal year ended December 31, 2005. Nokia is the world's largest manufacturer of mobile devices and a leader in mobile network equipment, solutions, and services. The company operates through four primary business groups: Mobile Phones, Multimedia, Enterprise Solutions, and Networks. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).

Key Financial Metrics (2005)

Note: USD conversions are based on the rate of 1.1842 USD per EUR as of December 31, 2005.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 16% to EUR 34.2 billion from EUR 29.4 billion in 2004. At constant currency, sales grew 20%.
• Profitability: Operating profit increased 7% to EUR 4.6 billion. However, the operating margin declined to 13.6% from 14.7% in 2004, primarily due to a higher proportion of lower-priced entry-level devices in emerging markets and intense price competition.
• Segment Performance:
  • Mobile Phones: Sales grew 12% to EUR 20.8 billion, but operating profit declined 5% to EUR 3.6 billion due to margin compression.
  • Multimedia: Sales surged 63% to EUR 6.0 billion, and operating profit increased 378% to EUR 836 million, driven by strong demand for 3G/WCDMA devices and the Nokia Nseries.
  • Networks: Sales grew 2% to EUR 6.6 billion, while operating profit declined 3% to EUR 855 million due to investments in lower-margin services and aggressive market entry.
  • Enterprise Solutions: Sales grew 3% to EUR 861 million, but the operating loss widened to EUR 258 million.
• Share Buybacks: The company repurchased 315 million shares in 2005 for EUR 4.3 billion, significantly reducing the number of outstanding shares.

Guidance, Outlook, and Risks

• Outlook: Nokia expects the global mobile device market volume to grow more than 10% in 2006, with the majority of growth coming from emerging markets. The company anticipates a decline in industry average selling prices (ASPs).
• Targets: Management aims to lower the overall R&D expense to net sales ratio to 9%-10% by the end of 2006. Specific targets include 8% for the mobile device business and 14% for the infrastructure business.
• Subsequent Events:
  • Announced a preliminary agreement with SANYO Electric Co., Ltd. to form a new global company for their respective CDMA mobile phone businesses.
  • Acquired Intellisync Corporation for approximately EUR 368 million to enhance enterprise mobility solutions.
  • Expected to receive a settlement payment of approximately EUR 285 million from the sale of Telsim assets in the first half of 2006.
• Risks: Key risks include intense competition leading to price erosion, dependence on a limited number of suppliers for components, foreign exchange fluctuations (particularly the USD and Chinese Yuan), and the complexity of managing intellectual property rights in a converging industry.

Investor Verification Checklist

• Margin Sustainability: Verify the ability to maintain profitability amidst declining ASPs and the shift toward lower-priced devices in emerging markets.
• 3G/WCDMA Adoption: Monitor the actual uptake of 3G devices and services, which is critical for the Multimedia segment's continued growth.
• CDMA Joint Venture: Track the progress and regulatory approval of the SANYO CDMA joint venture, which could impact the Mobile Phones segment's cost structure and market reach.
• Networks Services Mix: Assess the impact of the growing proportion of lower-margin services within the Networks business on overall segment profitability.
• Intellectual Property Litigation: Review ongoing litigation regarding patent infringement (e.g., InterDigital, Qualcomm) and potential royalty obligations.