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 The Finnish company sold its once-dominant phone business to
Microsoft in April, leaving it more reliant on a mobile network
equipment business that shrank by 8 percent in the April-to-June
quarter.
Much of the decline was due to foreign currency fluctuations and
divestments and Nokia said it expected network sales to return to
growth in the second half of the year after a period in which the
company sought to exit unprofitable contracts.
The company raised its profitability estimate for networks, saying
its operating margin this year would be at or slightly above the
high end of a long-term target of 5 to 10 percent. It had previously
said the margin would be towards the higher end of that range.
"This was a very strong report in every aspect," said Inderes
analyst Mikael Rautanen, who rates Nokia shares a "buy". "Networks
profitability was above all expectations and, as a cherry on top,
they raised the network unit's full-year profitability guidance."
Nokia shares jumped 7.7 percent to 6.16 euros by 1013 GMT and hit
their highest since March 2011.
Nokia's numbers follow similar positive surprises from its bigger
rivals, Sweden's Ericsson and China's Huawei, as network operators
upgrade their capacity to improve video and other services on
customer smartphones.
Second-quarter operating profit in networks, which now account for
almost 90 percent of Nokia's business, was 281 million euros ($378
million), down 14 percent year on year but well above the
197-million-euro average forecast in a Reuters poll of analysts.
The operating margin for Networks was 11 percent, compared with the
7.7 percent forecast in the poll.
The quarter was the first with Chief Executive Rajeev Suri at the
helm after he was promoted in April from head of networks.
[ID:nL6N0NL0SL]
"DEAL MOMENTUM"
Suri said Nokia had gained an edge over rivals with a strong focus
on mobile broadband systems and tight cost controls.
"I like to be slim and lean... In mobile broadband we have scale in
all technologies that are relevant. That's how I look at scale,
going deeper in the business you're in rather than broad,", he said
in a telephone interview.
He said Nokia was especially well positioned to win Asian business,
while "in Europe, we have significant deal momentum that we think
will play into new network deployment projects we expect to have in
the second half (of the year)".
"In North America, we are between projects at the moment in roll-out
and expect it to accelerate in the coming quarters."
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Some analysts, however, said the share reaction was too strong given
that much of the stock's value was based on Nokia's extensive patent
portfolio as well as its strong cash position.
"If Nokia's profitability outlook does not carry on in the long-term
... and next year they again hit the middle of the target range,
then this reaction is oversized," said Nordea analyst Sami Sarkamies,
who had a "sell" rating on the stock.
Jari Honko, portfolio manager at Alandsbanken, said the report did
not offer much regarding Nokia's other units - navigation business
HERE and the Technology division, which includes patents.
"Here and Technology units remain as question marks. They were not
able to report any growth," said Honko.
Nokia's net cash position at the end of June was 6.5 billion euros,
up from 2.1 billion at the end of March, before the cellphone unit
sale closed, the company said.
Nokia has said it planned to return $3.1 billion to shareholders,
but has not revealed what it plans to do with the rest of the money.
During Suri's tenure, Nokia has bought a couple of smaller
companies, but he has stressed opportunities for organic growth,
reducing expectations of an imminent large acquisition.
Struggling rival Alcatel-Lucent has been tipped as a possible target
that could boost Nokia's position in the United States.
"That speculation has maybe been dampened for the time being, but in
the long run, it's probably on the table," said Inderes' Rautanen.
"Nokia has good preconditions to consolidate due to its strong
financial position. The markets will be dominated by few players."
($1 = 0.7431 Euros)
(Editing by Jason Neely and Tom Pfeiffer)
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