* Nokia shares rise over 7 percent to year's high
* Outlook for NSN's profit margin stronger than expected
* Lumia sales rise to 8.8 mln units, still lags far behind
Samsung and Apple
(Adds latest industry rankings estimates in paragraph 4)
By Ritsuko Ando
HELSINKI, Oct 29 Nokia predicted a
more profitable future for its NSN networks equipment business
on Tuesday, raising hopes for growth in what will be the Finnish
firm's main business after its former flagship phones division
is sold to Microsoft for $5.2 billion in the new year.
The third-quarter results also showed growth in Lumia
smartphone sales, although analysts said Microsoft will still
face a tough time in pushing its way into the competitive
consumer devices market with the Nokia deal, which is due to
close some time in the first quarter.
Sales of Lumia smartphones rose 19 percent
quarter-on-quarter to 8.8 million units, thanks to the launch of
more models and what the company said was strong demand,
particularly for the Lumia 520.
It was still a distant third in the smartphone race,
however, with total sales of nearly 15 million including its
Asha range of devices, while Apple sold over 33.8 iPhones in the
same quarter. Market leader Samsung Electronics is
variously estimated to have shipped between 85 and 88.4 million
smartphones in the period, according to new reports this week
from analysts Juniper Research and Strategy Analytics.
"We continue to see competitive challenge at the higher-end
of the market, both in terms of pricing and required marketing
support," Nokia's finance chief Timo Ihamuotila told investors
on a conference call, saying such concerns were what drove it to
sell the handset business to Microsoft.
Greger Johansson, analyst at research firm Redeye, said
Microsoft will be taking over a business that is still
struggling to increase sales volumes and profitability. The
phone division's operating margin was a negative 1.6 percent in
the last quarter.
"I still think it is not obvious they are going to turn that
side around," he said.
Stripping out the business being sold to Microsoft, Nokia
said its underlying group operating margin in the third quarter
would have been 11.5 percent, 7.7 percentage points higher than
the actual underlying margin.
The phone division's operating margin was running at a loss
of 1.6 percent.
Shares in Nokia rose over 7 percent to mark the year's high
of 5.42 euros, a rise of 85 percent so far this year.
Inge Heydorn, fund manager at Sentat Asset Management, said
investors were impressed by Nokia's forecast for NSN's profit
margin to improve in the fourth quarter to around 12 percent,
plus or minus 4 percentage points, from 8.4 percent in the third
"The share reaction is justified with the superb margin
forecast," he said.
The unit's core operating profit fell 33 percent in the
third quarter from a year ago to 218 million euros ($301
million), on sales down 24 percent at 5.2 billion euros. This
was below the average profit forecast of 228 million given in a
Reuters poll, as the impact of earlier cost cuts waned and major
contracts were completed.
But Nokia said it expects NSN's sales to show "solid" growth
in the final three months of the year, helped by stronger
spending by European telecoms carriers on high-speed LTE
wireless broadband networks.
"We think LTE will accelerate in Europe starting from Q4
this year," Rajeev Suri, the head of NSN, told investors on a
Investors said the outlook vindicated Nokia for its decision
in early September to sell the handsets business.
"They are beginning to have a direction, and the Microsoft
deal looks like a smart move from a shareholder's point of
view," said Mika Heikkila, fund manager at asset management
He also said the outlook soothed fears of an industry-wide
slowdown. Swedish network equipment rival Ericsson
reported weaker than expected results last week.
"I think this report will calm things down. It gives more
information on how they will be going forward, it shows Nokia is
coming back," he said.
NSN, which will account for around 90 percent of the group's
sales after Microsoft completes its acquisition of the handset
business, sells a range of mobile broadband equipment to network
operators and has transformed itself over the past year from an
unprofitable venture into a source of cash.
It has been cutting costs and turning down low-margin
contracts to focus instead on more profitable deals to help
build high-speed wireless broadband networks.
Had the Microsoft deal already been completed Nokia said it
would have ended the third quarter with net cash of 7.5 billion
euros, instead of an actual 2.4 billion euros, with NSN
contributing 1.5 billion.
Nokia said it was still considering how to use the cash it
will receive from Microsoft. Billionaire investor Daniel Loeb
recently took a position in Nokia, saying he expected a
"meaningful portion of the excess" be returned to shareholders.
Sources familiar with the matter have said Nokia's board is
also considering a possible acquisition of ailing rival
Alcatel-Lucent's wireless business. Nokia declined to
comment on a possible deal.
While analysts said the latest results showed Nokia might be
capable of a deal at least some investors remain wary.
"I'm always scared if somebody goes to buy a French
company," said Heikkila. "They still have protectionism, and
companies are not allowed to dismantle structures the way they
(Additional reporting by Jussi Rosendahl, Simon Johnson and
Olof Swahnberg; Editing by Greg Mahlich)