Nokia’s Raised Target Fails to Convince Investors Seeking More

Nokia Oyj’s raised earnings target failed to convince investors seeking support for a stock that had gained about 25 percent in six months, underlining the challenge faced by Chief Executive Officer Rajeev Suri.

Adjusted operating profit at the wireless-network unit, which makes up about 90 percent of Nokia’s sales, is targeted at 8 percent to 11 percent of revenue long term, the Espoo, Finland-based company said today. Analysts on average predict 10.8 percent for 2015 and 10.6 percent for 2016, according to Nordea Bank AB. The stock fell the most in almost five months.

Suri, who took over in May after Nokia sold its money-losing mobile-phone unit to Microsoft Corp. for about $7.5 billion, is seeking to match investor expectations for profit gains as demand from phone carriers rises. He started reviving earnings with job cuts in his previous role as head of the network unit and is focusing on more profitable contracts amid competition from Ericsson AB and Huawei Technologies Co.

“Nokia is being too modest on their margin guidance,” said Hannu Rauhala, an analyst at Pohjola Bank in Helsinki. “I was expecting 11 to 12 percent next year.”

Nokia shares fell as much as 6.3 percent, the most since June 18, and lost 4.2 percent to 6.37 euros at 2:47 p.m. in Helsinki, giving the company a market value of 23.9 billion euros ($29.7 billion). The stock has more than doubled since the deal with Microsoft was announced in September last year.

Sales Recovery

Nokia’s previous margin goal for the long term -- a period it doesn’t define -- was 5 percent to 10 percent. The company had already projected that measure to be slightly above 11 percent for 2014. For next year, Nokia predicted the network division’s margin will meet the new target, signaling it may decline from this year.

“The margin range in networks should be seen as a bit bearish by some as the upper end already is priced into the estimates,” Sami Sarkamies, an analyst at Nordea in Helsinki, said in a note to clients.

Revenue at the networks division will expand next year, Nokia forecast. The company also projected rising sales for its maps and patents divisions for 2015.

Ericsson, the biggest maker of wireless networks, reported an operating margin of 6.7 percent for the latest quarter. The Stockholm-based company said yesterday it plans to cut 9 billion kronor ($1.2 billion) of costs with a program that includes headcount reductions, sending its stock up 3.2 percent.

“Ericsson yesterday seemed to have more ambition when they talked about future opportunities and how they would reach them,” Rauhala said.

Job Cuts

Suri eliminated more than 25,000 jobs at the network unit to bring the business back from losses. Nokia said last month it won a $970 million order from China Mobile Ltd. to provide fourth-generation phone-network equipment, software and services through 2015. Sales last quarter got a boost in North America, where Nokia benefited from Sprint Corp. building out a 4G network.

The Finnish manufacturer is also counting on its two other businesses to drive sales and lift margins. Its digital-map unit provides data to Inc., Microsoft, Yahoo! Inc. and four out of five car-navigation systems. Nokia’s research and development division, which collects fees for licensing the company’s patents, boosted operating profit 17 percent to 98 million euros last quarter.

The company’s main opportunity to return to consumer products is through licensing its brand, Suri said today at the company’s investor meeting in London. Nokia, once the world’s largest mobile-phone manufacturer, has also made products including televisions and computers in the past.

“We’re not looking at direct consumer entry in handsets, per se,” Suri said. “Brand licensing continues to be the operative word.”

Before it's here, it's on the Bloomberg Terminal.