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Network gear maker Nokia tops market expectations

A photo illustration of a man silhouetted against a Nokia logo in the central Bosnian town of Zenica January 23, 2014. REUTERS/Dado Ruvic

By Jussi Rosendahl

HELSINKI (Reuters) - Nokia (NOK1V.HE) delivered quarterly profits well above expectations on Thursday, six months after selling its struggling handset business to Microsoft (MSFT.O) in a 5.6 billion euros ($7.1 billion) deal that transformed it into a pure play network equipment maker.

The Finnish company reported strong earnings from its core network gear unit and lifted the outlook for the business following large network roll-outs in North America and China.

Despite concerns over lower-margin deals in China, Nokia's network unit showed a core operating profit margin of 13.5 percent, up from 11.0 percent in the second quarter and topping analysts' average forecast of 9.9 percent in a Reuters poll.

Chief Executive Rajeev Suri said the unit saw growth in several regions and booked plenty of high-margin mobile broadband deals, but added it also benefited from one-off factors.

"There was some catch-up in sales in the third quarter with regard to some component shortages we had in the early part of the year," he told Reuters.

Nokia, which ranks third in the global network-equipment market after Ericsson (ERICb.ST) and Huawei Technologies Co Ltd (HWT.UL), said it now expects the network unit's full-year core operating margin to be slightly above 11 percent.

That compares with its previous forecast of at or slightly above the higher end of its long-term target range of 5 percent to 10 percent.

Shares in the company rose 2.8 percent to 6.69 euros by 1406 GMT (10.06 a.m. EDT) after hitting 6.94 euros earlier on Thursday.

Nokia's stock is up more than 130 percent since Microsoft announced in September 2013 that it would acquire Nokia's once-dominant phone business, which had failed to recover from a late start in smartphones.

Nokia said on Thursday it had written down 1.2 billion euros of goodwill from HERE, its small navigation technology unit. But it retained a positive outlook for the business, which sold map data licenses for the embedded navigation systems of 3.2 million new cars in the quarter, showing zero operating profit.


Suri took over as CEO in April after heading the networks unit, which had been a joint venture with Siemens (SIEGn.DE) until 2013. Suri led the turnaround at the troubled business, divesting non-core activities and cutting thousands of jobs.

Analysts said network gear makers have seen a good year with telecom operators investing in 4G roll-outs, but that the cycle could change quickly.

"Nokia's profitability is developing better than those of its rivals ... That is due to the comprehensive savings program that Suri has carried out in the past," said Mikael Rautanen, analyst at Inderes Equity Research, who had a buy-rating on the stock.

"But one should still remember that these type of (network) projects come in cycles, so the profitability improvement is not permanent."

Danske Capital fund manager Juha Varis, however, noted that Nokia has reported higher-than-forecast profitability through the year.

He added the network unit's long-term target range, operating margin of 5-10 percent, looked rather low and said the company should clarify its view of market dynamics.

"They have been clearly too cautious on their guidance ... Perhaps they could lift the long-term target range somewhat, the margin hasn't been around 5 percent for some time," Varis said.

Nokia closed the Microsoft deal in April, leaving it with the network equipment unit, navigation technology business and a smartphone patent portfolio.

Nokia's total underlying operating profit for the July-September period rose 32 percent from the previous quarter to 457 million euros ($578 million). Analysts had expected an operating profit of 359 million euros.

(Editing by Stephen Coates and Vincent Baby)