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By Jussi Rosendahl and Eric Auchard

HELSINKI/LONDON (Reuters) - Nokia posted a big drop in profits at its mainstay network equipment business as operators particularly in North America held off spending, but sees momentum building later this year as the market for next-generation 5G networks takes off.

Shares in the Finnish company fell 7 percent as it reported first-quarter operating profit at its network business tumbled 87 percent, and said that the business would likely remain soft over the current three months.

"We expect an atypical seasonal trend, with softness in the first half of the year, offset by a very dynamic second half," Chief Executive Rajeev Suri told reporters.

"We are confident we can outperform a strengthening (network) market and meet our full year guidance," he added.

The industry, including Sweden's Ericsson and China's Huawei [HWT.UL] and ZTE has struggled for years after demand for the current generation of 4G mobile broadband equipment peaked.

Suri said he believed that the battered industry would bounce back as commercial roll-outs of 5G networks start to kick in later in 2018 in North America, followed by large-scale rollouts in a variety of regions in 2019, also including China, Japan, South Korea, the Nordics and the Middle East.

"Although there are some skeptics, we see 5G coming fast and coming big," Suri told reporters.

He added that a U.S. ban on exports to China's ZTE over alleged Iran sanctions violations could play to Nokia's long-term advantage, while adding that it was too early to evaluate the impact.

Nokia forecast the global network market to fall 1-3 percent this year, a slight improvement from its previous forecast of a fall of 2-4 percent, and added its own sales would outperform the wider telecom equipment market.

 

PATENT BUSINESS PAYS OFF

"We are at the very bottom of the pothole, right between technology cycles," said Mikael Rautanen, analyst at Inderes Equity Research, with a 'buy' rating on the stock.

"The short term looks weak, but … longer term, this report actually strengthened my confidence for them," he said.

Rautanen said Nokia looked better positioned to benefit from the 5G era than arch-rival Ericsson, thanks to the Finnish firm's 2016 acquisition of Alcatel-Lucent, which broadened its portfolio.

Loss-making Ericsson has been going through broad restructuring and last week stirred recovery hopes by beating market expectations on the back of cost savings.

"Nokia has an important competitive advantage as we're going to 5G, but it remains to be seen how it will be realized," Rautanen said.

Nokia's first-quarter group earnings before interest and taxes (EBIT) fell 30 percent from a year ago to 239 million euros ($291 million), well below analysts' average forecast of 369 million euros in a Reuters poll.

While the networks business made up 88 percent of Nokia's sales, a clear majority of the bottom line was generated in its highly-profitable patent licensing business.

Nokia has recently struck licensing deals with all major handset makers including Apple, Huawei, Samsung Electronics, LG and Xiaomi.

Nokia's patent portfolio stems from when it was the world's largest handset maker. It failed to compete in touchscreen smartphones and sold the phone business to Microsoft in 2014, leaving it with the networks and patents.

Lately, Nokia struck a licensing deal with a new company HMD Global, which has brought the Nokia brand back to the smartphone market. ($1 = 0.8214 euros)