July 27, 2017 / 5:27 AM / in 5 months

Nokia profits surge after Apple deal and network gains

HELSINKI (Reuters) - Network equipment maker Nokia reported a jump in profit on Thursday thanks to a patent deal with Apple and gains in market share though it warned the network business could slow by more than expected this year.

A Nokia logo is seen at the company's headquarters in Espoo, Finland, May 5, 2017. REUTERS/Ints Kalnins

Nokia’s shares rose 5.5 percent by 0820 GMT after it posted second-quarter operating profit of 574 million euros ($674 million), up 73 percent from a year ago and well above analysts’ average forecast of 447 million euros in a Reuters poll.

“We are actually taking some share in the market ... early signs look quite promising in terms of market share development,” Nokia Chief Executive Rajeev Suri told a conference call.

Telecom equipment suppliers have struggled in recent years amid weak demand from telecom companies, but Nokia said it had won markets thanks to its broader product portfolio following its 2016 acquisition of rival Alcatel-Lucent.

Nokia’s profit growth is in stark contrast to loss-making Swedish rival Ericsson, which stunned investors this year by announcing $1.7 billion in provisions, writedowns and restructuring costs.

Demand for the current generation of faster 4G mobile broadband equipment has peaked, so equipment vendors are now waiting for telecoms firms to upgrade to next-generation 5G equipment, which Suri said would become “meaningful” in 2019.

Nokia bought Alcatel-Lucent in a $15.6 billion deal which gave it a larger fixed-line network business and made it less dependent on mobile broadband. The deal also helped it launch new router products aimed at internet giants.

Another major rival, China’s Huawei, which is also a major phone manufacturer, reported a 15 percent rise in its half-year sales on Thursday, but it did not break down profits for its networks business.

Huawei has previously signaled it would scale back its aggressive price competition to strengthen overall profits.

CHALLENGING MARKET

Nokia echoed Ericsson’s recent remarks by saying the network market would be more challenging in the full year than earlier forecast, citing uncertainty related to some projects.

“We now expect a decline in the market in the range of 3-5 percent, versus our earlier view of a low-single digit decline,” Suri said.

Nokia’s network business, which accounts for nearly 90 percent of its sales, is set to decline in 2017 in line with the market trend. However, Nokia reiterated its full-year operating margin forecast of 8 percent to 10 percent for the business.

“Weakening of the general market outlook is a clear minus. But Nokia’s profitability shows they are able to deliver good results in weak markets,” said Inderes analyst Mikael Rautanen, who has an “accumulate” rating on the stock.

Nokia’s second-quarter network sales fell 5 percent from a year earlier but total sales only decreased 1 percent to 5.63 billion euros, helped by a boost in licensing royalties thanks to a deal with Apple to settling a patent dispute.

Suri said Nokia was stepping up spending on research and development, saying he saw a bigger 5G market taking shape than the company had envisioned as recently as last year.

“We think that 5G will likely last longer and be deeper than first thought,” Suri said. “5G trials will accelerate in 2018 and, in 2019, we can expect to see meaningful deployment in the U.S., China and potentially other markets like Japan.”

Once the world’s biggest mobile phone maker, Nokia was caught out by the rise of smartphones and ended up selling the handset business to Microsoft in 2014, leaving it with the networks business and a portfolio of technology patents.

Reporting by Jussi Rosendahl; editing by Eric Auchard and David Clarke

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