Nokia beats estimates and returns cash, Alcatel deal on track

[October 29, 2015]  By Jussi Rosendahl and Leila Abboud

HELSINKI/PARIS (Reuters) - Nokia, the world's No.3 network equipment maker, on Thursday reported stronger-than-expected profits as growth in China offset weaker demand in North America and Europe, and announced a new plan to return money to shareholders.

The Finnish company also said it was on track to complete its proposed 15.6 billion euro ($17 billion) Alcatel-Lucent takeover in the first quarter of next year after securing regulatory approvals, and brought forward its 900 million euro cost-saving target for that deal by a year to 2018.

The tie-up will vault the new company into a stronger position to compete with Sweden's Ericsson  and low-cost Chinese player Huawei [HWT.UL], in a market for telecom network gear that has little growth and tough competition pressing down prices.

Nokia shares jumped 9 percent in morning trading, while Alcatel-Lucent rose 8 percent.

"These results demonstrate that both companies are in excellent shape ahead of the merger," wrote Bernstein Research analyst Pierre Ferragu, who has a "buy" rating on both stocks. "Fundamentals are very strong and set to deliver meaningful upside for shareholders."

Nokia also said it would return excess capital following its divestments of the once-dominant phone business, as well as maps unit HERE, and promised to distribute 4 billion euros to shareholders in coming years through dividends and share buybacks.

"There was talk something like this could take place in connection with the Alcatel deal, but the scale of this program is massive," said Pohjola Bank analyst Hannu Rauhala, who rates the stock "hold".

Analysts had been wary about Nokia's earnings after Ericsson posted disappointing results, citing slowing demand in China.

But Nokia's third-quarter operating profit at the network unit came in at 391 million euros, or 13.6 percent of sales, significantly above an average forecast for a profit of 297 million euros and a margin of 10.2 percent, according to a Reuters poll.

"It seems China has not had a such a negative effect on Nokia as it did on Ericsson. But this could be just due to timing, with Ericsson's projects with Chinese operators coming to an end while Nokia's continue," Rauhala said.

Nokia also lifted its full-year profitability forecast for the networks unit. It said the operating profit margin would be around or slightly below the high end of its long-term target range of 8 to 11 percent, against its earlier forecast of a margin around the midpoint of that range.

Alcatel-Lucent showed progress on profitability, helped by cost cuts and sales on track at the networking division, which makes products that help telecom operators carry data traffic.

Adjusted operating income rose to 212 million euros for a margin of 6.2 percent, versus 5.2 percent a year ago.

(Additional reporting by Anna Ercanbrack; Editing by Edwina Gibbs and David Holmes)

[© 2015 Thomson Reuters. All rights reserved.]

Copyright 2015 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.