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HELSINKI (Reuters) - Nokia Oyj warned operating profit margins at its key phone unit would slip through the rest of the year, taking the shine off higher-than-expected first-quarter earnings on Thursday.
The company signed a final agreement to start using Microsoft Corp software, enabling it to slash annual costs by 1 billion euros ($1.5 billion). Yet it faces an awkward transition in which profitability is getting squeezed.
Nokia's key phone unit reported an operating profit margin of 9.8 percent for January-March, well ahead of analysts forecast of 8.6 percent, but the group said for the full year the margin would fall to within a 6 to 9 percent range.
Analysts on average had expected the margin to drop to 8.5 percent.
"Finalization of the agreement with Microsoft means Nokia can now focus on execution, but margin guidance underlines that difficult times lie ahead as it transitions the portfolio," said analyst Geoff Blaber at CCS Insight.
Nokia's underlying earnings per share fell to 0.13 euros in the three months through March from 0.14 a year earlier, beating analysts' average forecast for 0.10.
Market share fell to 29 percent from 33 percent as nimbler Asian rivals ate into Nokia's dominant position in cheaper phones and it continued to lose out in more expensive smartphones to Apple Inc and others.
While Nokia's position slipped in the quarter, Apple scored record sales, overtaking the Finnish firm as the largest cellphone maker by revenue, research firm Strategy Analytics said.
To turn around its smartphone fortunes, Nokia's new Chief Executive Stephen Elop in February unveiled a deal to start using Microsoft software instead of its own Symbian platform.
Uncertainty over the Microsoft deal, including how much cost cuts it would yield, has helped drive Nokia shares down around 30 percent since the deal was unveiled.
Part of the savings will come from job cuts, talks on which will start next week, but Nokia said laid off staff would remain on the payroll through this year.
Shares in Nokia were 0.6 percent lower at 5.90 euro by 1430 GMT in Oslo, compared with a 0.7 percent fall in the STOXX Europe 600 Technology Index. The shares, which had initially risen following the results, are now worth less than a tenth of their record high of 65 euros set in 2000.
"It's a bit of a no-score draw really. You've got a solid set of numbers but guidance is bad," said Richard Windsor, technology specialist at Nomura. "You've got a little bit of relief going on today but it probably doesn't have legs in it."
Nokia forecast second-quarter sales at its phone unit would fall to between 6.1 and 6.6 billion euros, well below analysts' average forecast of 6.9 billion, partly due to component shortages stemming from the March earthquake in Japan.
Despite its bargaining power analysts say Nokia is likely to be among the phone makers worst hit by the disruption to supplies from last month's devastating Japanese earthquake.
It makes 450 million phones a year, which means quick and big changes in component supply are difficult.
"We are anticipating the supply situation in Japan will become more visible, more concrete, less an issue as we move into the Q3 with still some impact. But the Q2 is the most difficult," Elop told analysts on a conference call.
Nokia's smaller rival Sony Ericsson said this week there were shortages of displays, batteries, camera modules and some printed circuit boards.
Nokia's telecom network gear arm Nokia Siemens Networks reported a surprise profit for the quarter and said Chinese regulators had approved its $975 million acquisition of Motorola Solutions' gear business, clearing the last major hurdle for the deal to go through.
The deal, which Nokia Siemens expects to close on April 29, will make the venture the second-largest globally and give it better access to the North American market.
Additional reporting by Terhi Kinnunen in Helsinki, Georgina Prodhan in London and Mia Shanley and Simon Johnson in Stockholm; Editing by David Holmes and Jon Loades-Carter