Nokia Predicts Higher Margin as Life Without Phones Looms

Nokia Oyj (NOK1V) forecast rising profit margins at the network unit that will become its main business after the mobile-phone division it struggled to turn around is sold to Microsoft Corp. (MSFT) The stock jumped.

Operating profit, excluding some costs, will be as high as 16 percent of sales at the network unit this quarter, Espoo, Finland-based Nokia said today. That compares with 8.4 percent last quarter and shows that job cuts are helping to revive the once-faltering division, called Nokia Solutions and Networks.

Nokia, which will get more than 90 percent of sales from NSN after the handset-division sale to Microsoft, has cut more than 21,000 jobs to rejuvenate the business. The next challenge is to jump-start sales -- Nokia today posted the lowest revenue in 14 years -- as carriers curb spending and larger Ericsson AB (ERICB) and Huawei Technologies Co. snap up contracts.

“The NSN margin guidance is certainly what’s pushing the shares up,” said Sami Sarkamies, an analyst at Nordea Bank AB in Helsinki. “But with the unit’s sales so far below expectations, management may need to make the trade-off and sacrifice some profitability to boost revenue. NSN needs to do much more to lift sales.”

Photographer: Henrik Kettunen/Bloomberg

A sign stands outside the headquarters of Nokia Oyj in Espoo. Close

A sign stands outside the headquarters of Nokia Oyj in Espoo.

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Photographer: Henrik Kettunen/Bloomberg

A sign stands outside the headquarters of Nokia Oyj in Espoo.

Nokia shares rose 7 percent to close at 5.35 euros in Helsinki. They had added 71 percent this year through yesterday, boosted by the Microsoft deal announced Sept. 2. Microsoft fell 0.1 percent in New York and is up 33 percent this year.

Network Focus

Sales at NSN, which Nokia fully took over from Siemens AG (SIE) last quarter, fell 26 percent to 2.59 billion euros ($3.6 billion), missing the 2.73 billion euros estimated by Sarkamies. The unit’s operating profit, excluding some items, was 218 million euros. Sarkamies estimated 240 million euros.

This quarter, adjusted operating profit at the network unit will be 12 percent of sales, plus or minus 4 percentage points, Nokia forecast. Sarkamies estimated about 10 percent.

Because the handset unit will cease to be part of Nokia, its performance has little effect on the company’s share price, according to Sarkamies. Nokia’s value is now mainly tied to NSN as well as what Nokia decides to do with its cash, said the analyst. Nokia ended the quarter with 9.1 billion euros in gross cash and is set to receive 5.44 billion euros as part of the Microsoft deal, expected to be completed in the first quarter.

Industry Drop

NSN, whose customers are wireless carriers such as Vodafone Group Plc (VOD), sells antennas and base stations that transmit calls and allow mobile-phone and tablet users to surf the Internet. NSN, run by Rajeev Suri, also competes with Ericsson and Huawei for contracts to service the equipment.

“As we approach 2014 the restructuring program is successfully coming to an end,” Suri said on a conference call. NSN will turn its sights on “strengthening our top-line performance.”

Sweden’s Ericsson and France’s Alcatel-Lucent SA have also cut jobs as China’s Huawei has won more business. Ericsson, the largest maker of wireless networks, said a year ago it would reduce 1,550 jobs in Sweden to make up for weak demand and last week reported a 2.9 percent drop in third-quarter sales.

Huawei, China’s largest maker of phone equipment, said in February it is targeting a 9 percent increase in revenue this year for its division that designs and builds wireless networks. The unit had sales of $25.7 billion in 2012.

To fight back, Nokia is considering a tie-up with Alcatel-Lucent’s wireless-equipment unit, a person familiar with the plan said last month. Unprofitable Alcatel-Lucent, which is slashing 10,000 jobs to accelerate a cost-cut plan, is scheduled to report earnings Oct. 31. Its shares rose as much as 5.9 percent in Paris.

Three Vendors

Asked about a potential combination with Alcatel-Lucent, Suri today said “it would not be wise to rule out something” that could add value to shareholders. He declined to comment directly on Alcatel-Lucent.

“Market forces have determined there are three strong global vendors in mobile infrastructure and NSN is clearly one of them,” he said. “Operators are looking for strong, long-term business partnerships with companies that have a competitive portfolio in areas aligned with their priorities.”

Nokia’s third-quarter net loss shrank to 91 million euros from 959 million euros a year earlier. Analysts projected a 171.5 million-euro loss, the average of estimates compiled by Bloomberg. Total revenue fell 22 percent to 5.66 billion euros, the lowest quarterly sales since 1999 and trailing the average analyst estimate of 5.87 billion euros.

Windows Smartphones

Nokia agreed to sell its mobile devices to Microsoft after struggling to regain relevance in smartphones following Apple Inc.’s iPhone introduction in 2007. Once the world’s largest smartphone maker with a market share topping 50 percent, Nokia now ranks outside the top five with about 3 percent share.

Revenue at Nokia’s mobile-phone business fell 19 percent to 2.9 billion euros and its adjusted operating loss narrowed to 47 million euros. Nokia sold 8.8 million Lumia smartphones, which run Microsoft software, compared with 7.4 million in the previous quarter. It sold 55.8 million basic mobile phones.

This month, Nokia introduced its first tablet and two smartphones with six-inch displays. The products will help Microsoft expand the Windows mobile-device lineup to better challenge Apple and Samsung Electronics Co.’s dominance of the tablet and smartphone markets. Samsung and Apple combined sold more than 120 million smartphones last quarter.

The Nokia handset business is headed by Stephen Elop, who stepped down as the company’s chief executive officer last month to move to Microsoft along with the division. Chairman Risto Siilasmaa is running Nokia on an interim basis as the company looks for a new CEO.

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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