Nokia Forecasts Shrinking Profit Margins on Networks Slump

Jan 23, 2014 11:52 am ET

(Updates with closing share price in fifth paragraph.)

Jan. 23 (Bloomberg) -- Nokia Oyj predicted shrinking profit margins for its network-equipment business, signaling the company is ready to sacrifice earnings to revive sales after handing its mobile-phone division to Microsoft Corp. The stock plunged.

Operating profit at the network unit, excluding some costs, will drop to 1 percent to 9 percent of sales this quarter from 11.2 percent during the previous three months, Espoo, Finland- based Nokia said today. Sami Sarkamies, an analyst at Nordea Bank AB in Helsinki, had estimated 7.6 percent.

The forecast suggests that the company, through its Nokia Solutions and Networks unit, is going more aggressively after rivals Ericsson AB and Alcatel-Lucent SA to win orders to build networks for wireless carriers. By focusing on base stations and antennas, Nokia is betting on a business that’s also facing rivalry from China’s Huawei Technologies Co. even as carriers in regions such as Europe curb spending amid waning sales.

“The big question is, how do they plan to grow NSN’s margins from the first quarter while aggressively going after sales,” Sarkamies said.

Nokia shares fell 10.7 percent to 5.11 euros in Helsinki. Through yesterday, they had almost doubled since the deal with Microsoft was announced in September. Shares of Sweden’s Ericsson and France’s Alcatel-Lucent also declined.

Patent Licenses

Nokia, whose history includes radical leaps from industries such as rubber boots and toilet paper to cables, computers and mobile phones, is once again facing a fresh start without a business it used to rely on. In addition to networks, Nokia has a digital-maps business and a unit that licenses its patents.

Nokia said NSN’s full-year profit margin will be “toward the higher end” of a range of 5 percent to 10 percent, citing efforts to drive sales growth and “competitive industry dynamics.” Sarkamies projected 7.6 percent. Nokia has cut more than 21,000 jobs at NSN, which it fully took over from Siemens AG last year, and has sold other assets to revive profitability.

Fourth-quarter sales at NSN dropped 22 percent to 3.1 billion euros ($4.2 billion), partly because it avoided some less-profitable contracts and made divestments. Its operating profit, excluding some items, fell to 349 million euros, or 11.2 percent of sales, from 576 million euros a year earlier. Kulbinder Garcha, an analyst at Credit Suisse Group AG in New York, estimated a margin of 12.7 percent.

Weighing Margins

NSN is working on projects that weigh down margins “in the short term,” though which have “the right long-term profitability profile,” Rajeev Suri, head of the division, said on a conference call with reporters. NSN is targeting sales growth in the second half of 2014, helped by orders in China, Europe and the U.S., he said.

Nokia’s net loss was 25 million euros, after a profit of 193 million euros a year earlier. Sales, excluding the mobile- phone division, fell 21 percent to 3.48 billion euros.

Revenue at the handset business plunged 29 percent to 2.63 billion euros. Nokia agreed to sell the division after struggling to regain relevance in smartphones following Apple Inc.’s iPhone introduction in 2007. The phone division is headed by Stephen Elop, who stepped down as Nokia’s chief executive officer to move to Microsoft along with the unit.

Nokia projected that income from licensing patents will rise to an annual run rate of about 600 million euros during 2014 from about 500 million euros now. Analysts on average projected a larger gain in the patent revenue, Mikko Ervasti, an analyst at Evli Bank in Helsinki, said in a note to clients after the earnings release.

Map Sales

Fourth-quarter sales at the maps division fell 9 percent to 254 million euros.

Nokia ended the quarter with 9 billion euros in gross cash and is set to receive 5.44 billion euros as part of the Microsoft deal. Nokia repeated that it expects to complete the transaction in the first quarter, and said it plans to decide on a dividend payment after the deal is done.

Chairman Risto Siilasmaa, evaluating candidates to succeed Elop as CEO, needs to balance shareholder demand for cash rewards with the company’s growth ambitions. Too generous a payout would risk leaving Nokia with insufficient funds for investments and takeovers as it builds a future without the mobile-phone business that made it famous.

In October, activist Daniel Loeb’s Third Point LLC disclosed a stake in Nokia and predicted the company is likely to pay a special dividend or do a stock buyback after the Microsoft deal. Loeb also expressed confidence in Nokia’s remaining businesses.

Suri is among applicants for the CEO job, people familiar with the matter told Bloomberg News this month. Chief Financial Officer Timo Ihamuotila has also been considered, said one of the people.

--Editors: Ville Heiskanen, Kenneth Wong, Mark Beech