Finland's Nokia on Thursday reported quarterly profits clearly below market forecasts at its main telecom network equipment business after earlier this month announcing a plan to take over smaller French rival Alcatel-Lucent.
Overall revenue held up well to come in slightly ahead of forecasts, but Nokia said profits dropped due to lower software sales, higher research and development costs and challenging conditions in Europe and Latin America.
Nokia expected some of the negative factors to ease in the second half of the year.
However, it signalled a more cautious stance on full-year networks profitability, saying it expects non-IFRS operating margins around the midpoint of its earlier goal of 8 to 11 per cent. Analysts in Reuters poll had been expecting a full-year margins of 11 per cent.
The network unit, where Nokia competes mobile leader Sweden's Ericsson and low-cost powerhouse China's Huawei, saw its core operating profit fall 61 per cent for a year ago to €85 million ($94 million), or 3.2 per cent of sales.
Analysts in a Reuters poll had on average expected a profit of €226 million and a margin of 8.7 per cent.
Nokia, once the world's largest maker of mobile phones, last year sold its former flagship phone business to Microsoft, leaving it with the network equipment unit, navigation business and a smartphone patent portfolio.
The patent unit doubled its quarterly profit to €193 million, compared to €86 million expected by analysts.
The takeover of Alcatel-Lucent is aimed at achieving scale to better compete with Ericsson and Huawei, as well as wring out cost savings of €900 million by 2019, amid weak growth prospects for the industry.
Nokia's shares have fallen more than 11 per cent since the Alcatel deal was made public, as many analysts see risks in integrating the companies and expect difficulties of cutting costs.
The stock remains up just 5 per cent this year, against a 16 per cent gain in the 25-component STOXX Europe tech index of which it is a member.
($1 = €0.9008)