By Ritsuko Ando
HELSINKI (Reuters) - Nokia said strong sales of Lumia smartphones helped its mobile phone business achieve underlying profitability in the fourth quarter, raising hopes the struggling handset maker may be past the worst.
The Finnish company, which has been losing market share to Samsung and Apple, said the better-than-expected result was also helped by cost cuts, a stronger-than-expected performance from its Nokia Siemens Networks unit and 50 million euros ($65.2 million) in patent royalties.
The surprise announcement lifted the shares to nine-month highs and eased pressure on Chief Executive Stephen Elop, who has been trying to prove his February 2011 decision to switch to Microsoft Windows software was the right one.
Elop was seen to be running out of time after saying that the transition would take two years. Success of the high-end Lumia smartphones has been considered crucial for the company's survival, and investors had said Elop would need to quit or change strategy if sales did not pick up by early 2013.
"We're very pleased with the Lumia response," Elop told analysts, although he added that sales of the latest 920 models, which use the new Windows Phone 8 software, had been constrained by a shortage of supplies.
Nokia estimated fourth-quarter operating margin in its mobile phone business was between break-even to 2 percent. It previously forecast the margin to be around minus 6 percent.
Official results, including more details on its profit and cash position, are due on January 24.
Fourth-quarter net sales in devices and services were about 3.9 billion euros ($5.09 billion), Nokia said. It sold a total of 86.3 million devices. Smartphones accounted for 6.6 million units, of which 4.4 million were the Windows-based Lumia handsets.
Nokia shares rose 10.8 percent to 3.32 euros as some investors cheered the rare positive announcement from Nokia and traders scrambled to cover their short positions.
Nokia had 17 percent of shares out on loan, according to Markit data, making it one of the most "shorted" stocks in Europe.
STILL NEED EVIDENCE
The company said that conditions remained tough despite the stronger-than-expected fourth quarter, and forecast its margin to be around minus 2 percent in the first quarter of this year.
"We continue to operate in a competitive environment with limited visibility," Elop said.
Some analysts were skeptical about the success of the Lumia strategy. Nokia would not say how many of the Lumias it sold were the newest models rather than the heavily discounted ones launched earlier.
Many also noted Lumias sold in the fourth quarter still make up a small portion of global smartphone sales in the same period, estimated at over 200 million.
"4.4 million Lumias sold is not yet a promise of a turnaround," said Inderes analyst Mikael Rautanen, who had just downgraded the shares to "sell" on Tuesday.
Bernstein analyst Pierre Ferragu said he was still negative about the shares, rating them "underperform".
"Last year, in order to sustain Lumia volumes, Nokia had to cut prices very rapidly, driving gross margins close to zero. We believe this will repeat this year," he said.
Redeye analyst Greger Johansson said it was too early to call it a turnaround.
"They will have to prove a lot more until you can say that," he said. "I'm not still convinced that they are going to manage to succeed with those new smartphones. They have to sell a lot more in volumes until you can say that."
($1 = 0.7667 euros)
(Additional reporting by Terhi Kinnunen and Sudip Kar-Gupta; Editing by David Goodman and Sophie Walker)