Nokia (NYSE:NOK) reported stronger sales in North America in the first quarter, and in its networks business overall. However, the underlying profit of the company's networks business fell, and investors grew worried about drooping margins.
Nokia CEO Rajeev Suri also sought to tamp down worries from investors about the company's $16.6 billion deal to buy smaller rival Alcatel-Lucent (NYSE: ALU).
In the first quarter Nokia said that total net sales grew by around 20 percent year-over-year to $3.57 billion (€3.2 billion). The vendor's total net income was around $198 million, compared with a loss of around $267 million a year ago. Nokia benefited from one-off gains at its licensing unit, letting the company beat a median analyst forecast of a profit of $185.6 million, according to a poll by financial data provider SME Direkt that was cited by the Wall Street Journal.
Sales in Nokia's networks unit, which made up 83.6 percent of the company's revenue in the first quarter, grew 15 percent year-over-year to around $2.99 billion. Sales grew in four of six of Nokia's regions for its network gear unit. However, the division's non-IFRS operating margin fell sharply to 3.2 percent from 9.3 percent.
Suri said the networks unit's "unsatisfactory" profitability was a result of higher expenses and more revenue coming from lower-margin hardware sales instead of more profitable software and services agreements, according to the WSJ.
Analysts at Nordea Bank had expected the unit's margin to be 8.6 percent. "The miss is concerning," Mikko Ervasti, an analyst at Evli Bank Oyj in Helsinki, told Bloomberg. "The focus will be on how they plan to reach their margin guidance."
Nokia's full-year guidance for margins in its networks unit had been 8 to 11 percent. The company now expects to hit the mid-point of that range for the year. "Market analysts had been expecting [Nokia's full-year] operating profit margin to hit the top of the guidance range or even be above it," Mikael Rautanen, an analyst with research company Inderes in Helsinki, told the Journal.
North America was a bright spot for Nokia again in the first quarter. Nokia Networks net sales in North America increased 47 percent from a year ago, primarily driven by higher net sales in global services, as Nokia benefited from the acquisition of SAC Wireless.
Suri also sought to assure investors about the Alcatel-Lucent deal. Odey Asset Management, Alcatel-Lucent's second-largest shareholder with a 5 percent stake, said in a letter to investors that it would not tender its shares in the Nokia takeover because the deal's price was too low, according to the Financial Times.
"We've met many investors in the last couple weeks, and there's very strong, good feedback," Suri said on an earnings conference call, according to Reuters. He declined to say whether the terms of the deal would be changed, adding only that both boards had already approved them.
"Fundamentally this is a good deal with attractive upside in long-term and upfront," he said. The companies expect the deal to close in the first half of 2016.
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