By Tiernan Ray

Shares of Nokia (NOK) are down 70 cents, over 9%, at $6.80, after the company this morning reported Q1 revenue that topped analysts’ expectations, and profit in line with consensus,Revenue in the three months ended in March rose 20%, year over year, to €3.2 billion, yielding EPS of 5 euro cents.Analysts had been modeling €2.92 billion and 5 cents.

The company said its operating profit margin in its core network equipment business declined to 3.2% from 9.3%, citing a number of factors:Lower software sales, lower non-IFRS gross profit in the systems integration business line, the short-term impact of strategic entry deals, higher non-IFRS operating expenses due to foreign exchange impacts and increased investments in LTE, 5G and cloud core, and more challenging market conditions.CEO Rajeev Suri called the company’s profit in the network business “unsatisfactory,” adding “We expect some of these negative factors to ease, particularly in the second half of 2015.”Suri remarked upon the comapny’s announcement two weeks ago it will merge with competitor Alcatel-Lucent (ALU) in a €15.6 billion stock swap:The strategic logic of this proposed transaction is strong and we believe that it will provide long term benefits to shareholders of both Nokia and Alcatel-Lucent. We are moving fast on the necessary integration planning, and have already established a structure designed to minimize disruption to our ongoing business.

We will bring the same operational discipline to our integration activities that we have successfully applied to the earlier transformation at Nokia Networks.Nokia said it expects full-year sales for its network business to rise from last year’s results, and that it expects the operating profit margin to be at the mid-point of a “long term range” of 8% to 11%.On a brighter note, the company’s technology sales more than doubled, year over year, to €266 million.

Reviewing the results, Bernstein Research’s Pierre Farragu reiterates an Outperform rating, and writes that the slump in profit in networks, mostly from a lack of software content in its deals, should pass in time:We do not believe this mix shift should be viewed as a fundamental issue, although it is surprising. The mix shift looks temporary as the full year guide is barely modified (operating margin guided at the midpoint of the long-term range of 8-11% for full year 2015) and CEO comments point towards an improvement in the second half of the year. The only slight worry for us is the contrast of the result with management’s bullish tone and guidance on margins; it feels as though the management team did not see the mix shift coming. Ericsson (ERIC) similarly surprised investors last week – this calls investors back to the reality of wireless equipment, in which revenue mix and therefore gross margin will remain volatile.The deal with Alcatel is what may help margins, he opines:Nokia has a scale above critical mass in Wireless, but its #3 position means operating margins are likely limited, on a standalone basis, to the mid- to-high-single digit range in Equipment.

In maps and navigation, HERE is cornered to a small opportunity and against tough competitors but could represent a valuable strategic asset for technology groups or the car industry. IP licensing revenues has the potential to increase with the renegotiation of key contracts and with continued growth in wireless.

Most of the upside we see in the recent stock price lies in the potential benefits of a merger with Alcatel-Lucent.

J.P. Morgan‘s Rod Hall and Sandeep Deshpande, who do not formally cover the name, nevertheless offer up their view this morning. While gross profit in the networks business of 33.7% was well below their 37.5%, a result they describe as “very weak,” the technology business was strong:Technologies division sales of €266m (+78.5% QoQ; +103% YoY; +96% YoY at constant currency) were significantly above JPMe/consensus of €149m/€158.6m. The significant YoY growth and beat vs. expectations was driven primarily by one-off adjustments to accrued net sales (of ~€90m per our calculations) from existing agreements, revenue share related to previously divested IPR, and IPR divested in 1Q15.

However, underlying Technologies division sales were also 30%+ higher YoY and ~10% higher than consensus, per our calculations. Due to very strong 1Q sales, Technologies division EBIT of €193m/72.6% was 114% higher than consensus.