Nokia Forecast Fails to Convince Investors After Stock’s Ascent

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Nokia Oyj stuck to a forecast for weakening profitability, underscoring the challenges for Chief Executive Officer Rajeev Suri to revive the Finnish network maker amid competition from Ericsson AB and Huawei Technologies Co.

The adjusted operating margin at the network division, Nokia’s biggest business, will probably shrink this year, the company said Thursday. Fourth-quarter adjusted earnings were 9 cents (10 U.S. cents) a share, missing the 9.5-cent average of analysts’ estimates compiled by Bloomberg.

Shares of Nokia fell as much as 5.9 percent from an almost four-year high as the forecast signaled the biggest increases in profitability are now done. Suri has boosted margins by cutting jobs and focusing on more lucrative equipment and service contracts since taking over last May.

“It’s difficult to see the share price going up without a significant earnings beat,” said Sebastien Sztabowicz, an analyst at Kepler Cheuvreux in Paris. After the recent gains, Nokia’s valuation is about 40 percent higher than that of larger Ericsson, he said.

The adjusted operating margin at Nokia’s network division, accounting for about 90 percent of sales, expanded to 12.2 percent last year from 9.7 percent in 2013. The Espoo, Finland-based company reiterated that the margin for 2015 will be within its long-term target of 8 percent to 11 percent.

Shares of Nokia fell 4.6 percent to 6.83 euros at 11:14 a.m. in Helsinki. They closed at the highest level in since February 2011 yesterday.

Ericsson, Huawei

Nokia also said network sales and margins will drop this quarter from the previous three months, a seasonal effect after companies typically ramp up spending at the end of the year.

With the sale of its mobile-phone business to Microsoft Corp. last year, providing network equipment and services to carriers has become Nokia’s mainstay business.

Sweden’s Ericsson is the world’s largest maker of wireless networks, and its seeking to expand in areas such as cloud-computing services for wireless carriers to bore deeper into its clients’ operations.

China’s Huawei is working toward a goal announced in April of achieving $70 billion in sales by 2018. Its sales increased about 20 percent to at least 287 billion yuan ($46 billion) last year, from 239 billion yuan in 2013, Chief Financial Officer Cathy Meng said Jan. 13.

American Sales

Nokia’s fourth-quarter net income was 443 million euros after a loss of 26 million euros a year earlier. The profit was Nokia’s second consecutive quarterly net income from continuing operations, after more than 5 billion euros of losses over the previous three years as its handset business lost ground to Apple Inc. and Samsung Electronics Co.

Sales rose 9.4 percent to 3.8 billion euros, beating the 3.74 billion-euro average estimate.

Revenue at the network unit increased 8 percent in the last three months of 2014. Sales in North America jumped 95 percent, helped by a contract with Sprint Corp., and sales in Europe gained 4 percent.

Ericsson this week reported a 1 percent increase in sales after customers in North America, its largest market and a region in which Nokia is trying to grow, curbed spending on projects.

Patents, Tablet

Nokia also boosted sales in the two other divisions it’s counting on to increase revenue and profitability on its path to lifting its debt rating from junk status. The company’s digital-map business provides data to Amazon.com Inc., Microsoft, Yahoo! Inc. and four out of five car-navigation systems. Nokia’s research and development unit collects fees for licensing the company’s patents.

Operating margin at the R&D unit shrank to 52 percent from 67 percent, and Nokia said the division’s costs will grow “meaningfully” this year as it boosts spending on licensing activities and growth opportunities. The unit unveiled a tablet computer in November and Nokia said today early reception has been “remarkably favorable.”

Higher spending at the R&D unit may reduce estimates for Nokia’s 2015 operating profit by about 2 percent, said Sami Sarkamies, an analyst at Nordea in Helsinki.

Nokia plans to pay a dividend of 14 cents a share for 2014, up from 11 cents a year earlier.