By Ritsuko Ando
HELSINKI (Reuters) - Nokia (HEX:NOK1V) has reported a steep fall in sales at its network equipment division, raising concerns about growth prospects for what will be its primary operation after selling its former flagship phone business to Microsoft (NSQ:MSFT).
The Nokia Solutions and Networks (NSN) division's fourth-quarter sales fell 22 percent from a year earlier to 3.1 billion euros as it failed to make up for the completion of large-scale Asian projects and withdrawal from some low-margin businesses earlier in the year.
Meanwhile sales in the Devices and Services division which it is selling to Microsoft for 5.4 billion euros fell 29 percent to around 2.6 billion euros as it struggled with
"competitive industry dynamics".
Nokia's shares were down 10 percent at 5.15 euros by 1600 GMT, a gain of more than 70 percent since the Microsoft deal was announced in September, and analysts said much of the sell-off was due to worries about NSN, which will account for around 90 percent of Nokia's sales after the Microsoft deal is completed later this quarter.
Analysts had on average forecast sales of 3.2 billion euros, according to a Reuters poll.
"The fourth quarter was slightly disappointing," said Inderes analyst Mikael Rautanen. "Minus 22 percent was a heavier decline than was expected."
The unit turned profitable in 2012 after slashing costs and shedding unprofitable business but analysts say management now needs to concentrate on winning more work as high research and development costs mean bigger players have an advantage.
"They have cut costs and made profits for several quarters, but it's important that sales stabilise and grow in the second half of this year." said Greger Johansson at research firm Redeye.
Nokia duly said it would make an aggressive push this year to gain market share against industry leader Ericsson (ERICb.ST) as well as Chinese rival Huawei (HWT.UL), and is aiming for year-on-year sales growth in the second half.
NSN's chief executive Rajeev Suri said it would be helped by recent deals with carriers such as Sprint (S.N) in the United States and China Mobile .
"We are not satisfied with our top line results," he told analysts on a conference call, saying the company would be more "assertive" in winning deals.
However, analysts expect such sales growth will come at the expense of margins. NSN's operating margin last year rose to 9.7 percent from 5.7 percent in 2012.
The margin in the first quarter was likely to fall to around 5 percent, the company said, but it expects the year result to be at the higher end of its long-term range of 5-10 percent.
JP Morgan said it found the year forecast reassuring and kept an "overweight" rating on Nokia's shares but Nordea reiterated a "sell" recommendation, saying the company's forecast of 600 million euros in patent income for 2014 was much lower than he expected.
However, the overall results showed the group in stronger financial health without the phone business, which reported an adjusted operating loss of 191 million euros in the fourth quarter.
"The Microsoft deal looks only better and better for Nokia. If they still had that business in their books, their share price would be below two euros," said Mika Heikkila, portfolio manager at Taaleritehdas Asset Management.
Shipments of Lumia smartphones, which run on Windows Phone software, fell to 8.2 million devices in the last three months, from 8.8 million in the previous quarter, showing they failed to win over consumers in the crucial holiday season, and Nokia said the average sales price for its phones fell.
That shows the difficulties Microsoft will face in breaking into a market which apart from Apple is now dominated by phones running on Google's (GOOG.O) Android operating system.
Nokia's former chief executive Stephen Elop made the controversial decision to adopt Windows Phone in an attempt to recover from a late start in smartphones. But a limited marketing budget and an initial lack of popular apps made it hard for Nokia's smartphones to catch up.
It launched a wide range of handsets last year, winning positive reviews from critics, but by then investors were growing increasingly concerned about the company's finances.
Completion of the Microsoft sale is expected to return Nokia to an investment-grade credit rating while still allowing it to return some of the cash proceeds to shareholders.
Nokia last year suspended its annual dividend for the first time in its 148-year history in an attempt to preserve cash.
But it said on Thursday that the board was still deliberating on the company's corporate and capital structure and on how much of the Microsoft cash would be paid out to shareholders.
"Investors are left cold here. Not a word about the new strategy, the dividend decision is due to come later and the NSN result was short of expectations," said Alandsbanken fund manager Jari Honko.
(Additional reporting by Jussi Rosendahl in Helsinki, Sven Nordenstam and Olof Swahnberg in Stockholm; Editing by Greg Mahlich)