July 24 (Bloomberg) -- Nokia Oyj, the Finnish network-equipment maker that sold its mobile-phone business to Microsoft Corp., boosted its profitability forecast after earnings beat estimates on rising sales in China. The stock jumped.
Operating profit at the network division, its largest unit, will be at or slightly above the high end of its target range of 5 percent to 10 percent this year, Nokia said today. It previously projected the margin to be toward the high end of that range. Second-quarter earnings of 6 euro cents a share beat the 4.5 cents analysts projected on average.
Chief Executive Officer Rajeev Suri, who took the top job in May after the handset-unit sale to Microsoft for about $7.5 billion, is benefiting from contracts to upgrade the networks of carriers including China Mobile Ltd. and China Telecom Corp. Suri is seeking to focus on more lucrative network orders to boost margins and lift Nokia’s debt rating from junk status.
“It was a good set of numbers and the networks margin was clearly above expectations,” said Sami Sarkamies, an analyst at Nordea Bank AB in Helsinki. “There have been a lot of cost cuts as they exited business a year ago so we’ll see how sustainable the margin improvement is beyond 2014.”
The operating margin at the network unit, which accounts for about 90 percent of Espoo, Finland-based Nokia’s sales, was 11 percent in the three months through June, compared with 11.8 percent a year earlier. Sarkamies had projected 8.2 percent for the quarter and 8.7 percent for this year.
The shares rose 7.2 percent to 6.13 euros at 1:07 p.m. in Helsinki, the highest level in more than three years, giving Nokia a market value of 23 billion euros ($31 billion).
Sales in China jumped 18 percent as carriers upgraded their networks to cope with rising smartphone use. Nokia’s total network revenue fell 8 percent on declines in Europe and North America. Network sales will probably rise in the second half, Nokia reiterated.
“China is robust this year because all the customers are doing big network deployments,” Suri said in a phone interview. “We know coverage is not just a couple-quarter phenomena, it does last a while and it takes time to roll these out with proper coverage, and then comes capacity.”
A few strategic network-deployment projects will be booked before the end of the year, weighing on margins initially, Suri said. The longer-term profile of such deals is more profitable, he said.
To expand beyond equipment, Nokia is also vying with larger Ericsson AB and Huawei Technologies Co. for contracts to maintain and run networks. Services sales fell 19 percent after Nokia exited some contracts and countries, while equipment revenue gained 6 percent.
Total sales fell 7 percent to 2.94 billion euros, compared with the 2.92 billion-euro average estimate.
Sweden’s Ericsson, the biggest maker of wireless networks, reported second-quarter revenue that topped estimates as sales in North America slipped 1 percent after a 23 percent tumble in the first three months of the year. Its gross margin rose to 36.4 percent, surpassing estimates, boosted by an increased share of mobile-broadband capacity projects.
Microsoft completed its purchase of Nokia’s unprofitable phone business in April. Last week, the software maker said it plans to cut 18,000 jobs, with 12,500 of the reductions related to Nokia.
Nokia ended the second quarter with 6.5 billion euros in net cash, up from 2.1 billion euros at the end of March, helped by the proceeds from Microsoft.
Nokia also said it hired Ramzi Haidamus as the head of its technologies unit, which licenses the company’s patents. Haidamus, who worked 17 years at Dolby Laboratories, replaces Henry Tirri, who is stepping down and will remain an adviser to Suri. Haidamus starts Sept. 3.
To contact the reporter on this story: Adam Ewing in Stockholm at firstname.lastname@example.org
To contact the editors responsible for this story: Kenneth Wong at email@example.com Ville Heiskanen, Robert Valpuesta