Nokia's fortunes brighten on heavy network spending

By Sakari Suoninen and Jussi Rosendahl

HELSINKI (Reuters) - Nokia surprised investors with strong quarterly earnings and raised its full-year profit margin forecast as network operators install more powerful systems to cope with surging mobile data traffic.

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."

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)