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By Sakari Suoninen and Jussi Rosendahl
HELSINKI (Reuters) - Finnish telecoms gear maker Nokia on Thursday announced a stronger-than-expected quarterly profit margin in its core networks unit helped by cost cuts and said its full-year expectations had improved.
Nokia sold its once-dominant phone business to Microsoft in April. After the deal, almost 90 percent of Nokia's sales come from its network unit.
The April-June quarter marked the first for Chief Executive Rajeev Suri, who was promoted in April from his previous role as networks unit chief. The company posted a second-quarter operating profit for the networks business of 281 million euros (222 million pound), down 14 percent year on year but well above the 197 million euros forecast on average by analysts in a Reuters poll.
"This was a very strong report in every aspect," Inderes analyst Mikael Rautanen said.
"Networks profitability was above all expectations, and as a cherry on top, they raised the network unit's full-year profitability guidance."
Network gear makers have benefited from network capacity upgrades in developed markets as operators cope with a surge in mobile data traffic.
On Friday, Nokia's larger rival Ericsson posted stronger-than-expected results on strong sales in North America, where Nokia has traditionally been weak.
Nokia repeated that it expected network sales to return to growth in the second half of the year. In the April-June period, network sales fell 8 percent.
Nokia Networks' sales declined year on year due to foreign currency fluctuations and divestments.
Operating margin for the unit was 11 percent, compared with 7.7 percent forecast in the Reuters poll of analysts.
"Our expectations for the full year 2014 have improved and we now expect full-year underlying profitability for Networks to be at, or slightly above, our long-term target range of 5 to 10 percent," CEO Rajeev Suri said in a statement.
Nokia's group earnings per share in the quarter were 0.06 euro, ahead of the market expectation of 0.04 euro.
Nokia's net cash position at the end of June was 6.5 billion euros, up from 2.1 billion at the end of March, before the cellphone unit sale had closed, it said.
Nokia, however, faces challenges from rivals such as Ericsson and China's Huawei, which has triggered talk that Nokia might seek to buy a big rival. Nokia has said it planned to return $3.1 billion euros to shareholders, but has not revealed what it plans to do with the rest of the money.
During Suri's tenure, Nokia has bought a couple of smaller companies and he has stressed opportunities for organic growth, reducing expectations of an imminent big purchase.
Struggling rival Alcatel-Lucent, which would boost the company's position in the United States, has been tipped as a possible Nokia target. "That speculation has maybe been dampened for the time being, but in the long run, it's probably on the table," Inderes' Rautanen said. "Nokia has good preconditions to consolidate due to its strong financial position. The markets will be dominated by few players."
(Editing by Jason Neely)