Nokia beats estimates and returns cash, Alcatel deal on track

By Jussi Rosendahl and Leila Abboud

HELSINKI/PARIS (Reuters) - Finnish network equipment maker Nokia reported stronger-than-expected quarterly profits as growth in China offset weaker demand in other key markets, and said it would return money to shareholders after acquiring Alcatel-Lucent.

The company said on Thursday it was on track to complete the proposed 15.6 billion euro ($17 billion) takeover of its French rival in the first quarter of next year after securing regulatory approvals, and also brought forward its 900 million euro cost-saving target for that deal by a year to 2018.

The tie-up will vault the new company into a stronger position to compete with Sweden's Ericsson and low-cost Chinese player Huawei, in a market for telecom network gear where little growth and tough competition are pressing down prices.

Alcatel also reported improving profitability, and shares in both companies rose 8.6 percent by 1304 GMT.

"These results demonstrate that both companies are in excellent shape ahead of the merger," wrote Bernstein Research analyst Pierre Ferragu, who has a "buy" rating on both stocks. "Fundamentals are very strong and set to deliver meaningful upside for shareholders."

Nokia said it plans to return excess capital following its divestments of the once-dominant phone business, as well as maps unit HERE, and promised to distribute 4 billion euros to shareholders in coming years through dividends and share buybacks.

"There was talk something like this could take place in connection with the Alcatel deal, but the scale of this programme is massive," said Pohjola Bank analyst Hannu Rauhala, who rates the stock "hold".

Analysts had been wary about Nokia's earnings after market leader Ericsson posted disappointing results, citing slowing demand in China.

But Nokia's third-quarter operating profit at the network unit came in at 391 million euros, or 13.6 percent of sales, significantly above an average forecast for a profit of 297 million euros and a margin of 10.2 percent, according to a Reuters poll.

CHINA ROLL-OUTS

"It seems China has not had a such a negative effect on Nokia as it did on Ericsson. But this could be just due to timing, with Ericsson's projects with Chinese operators coming to an end while Nokia's continue," Rauhala said.

Nokia chief executive Rajeev Suri told a conference call that the Chinese market will likely slow down next year.

"There are reasonable expectations to assume, maybe next year, that the market will slow down because the big network roll-out will slow," he said.

However, he added that operators such as China Unicom Hong Kong Ltd and China Telecom Corp Ltd had not invested as much in 4G networks as China Mobile Ltd.

"Others may catch up.... and then there is the broadband for rural access programme, which the country is talking about, plus the focus on an innovation-focused economy. So it's not a slam dunk that the market will decline."

Nokia lifted its full-year profitability forecast for the networks unit. It said the operating profit margin would be around or slightly below the high end of its long-term target range of 8 to 11 percent, against its earlier forecast of a margin around the mid-point of that range.

Alcatel-Lucent's adjusted operating income rose to 212 million euros for a margin of 6.2 percent, versus 5.2 percent a year ago. ($1 = 0.9147 euros)

(Additional reporting by Anna Ercanbrack; Editing by Edwina Gibbs, David Holmes and Adrian Croft)