NOKIA’S EARNINGS fell less than expected in the first quarter and the company signed a final agreement to start using Microsoft software, sending its shares higher yesterday.

Gains however were capped by the company’s forecast for profits to fall in coming quarters, due in part to Japan’s earthquake which hit component supplies across the technology sector.

Nokia’s market share fell to 29 per cent from 33 per cent as nimbler Asian rivals ate into its dominant position in cheaper phones and it continued to lose out in more expensive smartphones to Apple and others.

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.

Nokia said the deal enabled it to cut annual costs by about €1 billion. Labour union officials said they expected Nokia to start lay-off talks next week.

“Finalisation of the agreement with Microsoft means Nokia can now focus on execution,” said analyst Geoff Blaber at CCS Insight, “but margin guidance underlines that difficult times lie ahead as it transitions the portfolio.”

Nokia’s key phone unit reported an operating profit margin of 9.8 per cent for January-March, well ahead of analysts forecast of 8.6 per cent, but said for the full year the margin would fall to within a 6 to 9 per cent range.

“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, global 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, well below analysts’ average forecast of €6.9 billion, partly due to component shortages stemming from the March earthquake in Japan.

“We expect these factors and their negative impact on our mobile devices volumes to continue not only during the second quarter 2011 but also through the third quarter 2011 at least,” Nokia said.

Despite its bargaining power, analysts say Nokia is likely to be among the phonemakers worst hit by the disruption to supplies from the devastating Japanese earthquake.

It makes 450 million phones a year, which means quick and big changes in component supply are difficult. – (Reuters)