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UPDATE 2-Nokia sees life for remaining business after Microsoft phones sale

Tuesday, 29 Oct 2013 | 9:56 AM ET

(Adds further details, comments from analysts)

HELSINKI, Oct 29 (Reuters) - Nokia predicted a more profitable future for its NSN networks equipment and software unit on Tuesday, raising hopes for growth in what will be the Finnish firm's main business after its former flagship phones division is sold to Microsoft in the new year.

Third-quarter results also showed slow but steady growth in Lumia smartphone sales, although analysts said Microsoft will still face a tough time in pushing its way into the competitive consumer devices market with the Nokia deal, which is due to close some time in the first quarter.

Sales of Lumia smartphones jumped 19 percent quarter-on-quarter to 8.8 million units, thanks to the launch of more models and what the company said was strong demand particularly for the Lumia 520, while sales of basic phones rose 4 percent from the previous quarter to 55.8 million units.

However the phone division's operating margin was a negative 1.6 percent in the last quarter.

"I still think it is not obvious they are going to turn that side around," said Greger Johansson, analyst at research firm Redeye.

Shares in Nokia rose 6 percent to the year's high of 5.35 euros after the company forecast NSN's profit margin would improve in the fourth quarter to around 12 percent, plus or minus 4 percentage points, from 8.4 percent in the third quarter and 9.3 percent a year ago, thanks to its cost-cutting programme.

Stripping out the business being sold to Microsoft, Nokia said its underlying group operating margin in the third quarter would have been 11.5 percent, 7.7 percentage points higher than the actual underlying margin.

NSN's third-quarter core operating profit fell 33 percent from a year ago to 218 million euros ($301 million) on sales down 24 percent at 5.2 billion euros, below the average profit forecast of 228 million given in a Reuters poll, as the impact of earlier cost cuts waned and major contracts were completed.

But Nokia said it expects NSN's sales to show "solid" growth in the final three months of the year after what had been a seasonally weak third quarter.

Mika Heikkila, fund manager at asset management company Taaleritehdas, said investors had also expected a worse result after weaker than expected results from Swedish network equipment rival Ericsson last week.

"There were fears, after Ericsson's results, about how they would give the outlook," he said. "I think this report will calm things down. It gives more information on how they will be going forward, it shows Nokia is coming back."

NSN, which will account for around 90 percent of the group's sales after Microsoft completes its acquisition of the handset business, sells a range of mobile broadband equipment, software and services to network operators and has transformed itself over the past year from an unprofitable venture into a source of cash.

Had the Microsoft deal already been completed Nokia said it would have ended the third quarter with net cash of 7.5 billion euros, instead of an actual 2.4 billion euros, with NSN contributing 1.5 billion.

In August it acquired Siemens' share of the NSN joint venture, ahead of its agreement to sell the devices unit to Microsoft for 3.8 billion euros ($5.2 billion).

"The profit in networks now is already pretty decent. If they could get some speed on sales, they can generate some growth, and that could be a very interesting investment case," said Redeye's Johansson. ($1=0.7254 euros)

(Reporting by Helsinki Newsroom; Editing by David Holmes and Greg Mahlich)

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