Though its first-quarter profits were down, Nokia managed to beat expectations, but the company is looking at a bumpy road in the current quarter.
Earnings for the quarter ended March 31 fell to 344 million euros ($502 million) from 349 million euros in the prior year's quarter. Sales climbed 9 percent to 10.4 billion euros from 9.52 billion euros a year ago. Both results managed to exceed the forecasts of analysts, who were calling for earnings of 287 million euros and sales of 10.11 billion euros, according to the Wall Street Journal (subscription required).
Nokia also said today that it has signed its new pact with Microsoft ahead of schedule. Announced in February, the agreement calls for Nokia to outfit its new smartphones with Microsoft's Windows Phone operating system.
"On this front, I am pleased to report that we signed our definitive agreement with Microsoft and already our product design and engineering work is well under way," Nokia CEO Stephen Elop said in a statement.
Sales for the company's Devices and Service unit showed a 6 percent gain to 7.1 billion euros. For the quarter, Nokia shipped a total of 108.5 million handsets, a 1 percent gain from the prior year but a 12 percent drop from the fourth quarter. Of those, 24.2 million were smartphones, a gain in shipments of 13 percent from last year's first quarter but a drop of 14 percent from the fourth quarter.
The company also continues to shed market share across the world. Its slice of the overall mobile phone market fell to 29 percent in the first quarter, down from 33 percent a year ago. Nokia's first-quarter share of the smartphone market dropped to 26 percent, compared with 41 percent in the prior year.
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Nokia has cautioned that the current quarter is likely to prove challenging.
The company is forecasting second-quarter sales for its Devices & Services unit to be between 6.1 billion and 6.6 billion euros. It blamed the lower forecast on a variety of factors, including ongoing industry competition and its lack of sufficient dual-SIM phones. Though it's looking at shipping a variety of new products, most of those won't be out until the second half of the year. Nokia also acknowledged that supply chain problems stemming from the Japanese earthquake will affect its mobile device volume through the second quarter and into the third.
"Following a solid first quarter, we expect a more challenging second quarter," Elop said. "However, we are encouraged by our roadmap of mobile phones and Symbian smartphones, which we will ship through the balance of the year. We are fully focused on delivering the needed accountability, speed and results to positively drive our future financial performance."
The company is looking to trim expenses in its Devices & Services segment by 1 billion euros for the full year 2013. To achieve that goal, it plans to cut internal staff, reduce the use of outside consultants, and lower costs at its various facilities.
Under its newly signed arrangement with Microsoft, Nokia will receive payments in the "billions of dollars" from Microsoft, not just for services but as part of an exchange of each other's intellectual property, the two companies said. Microsoft, meanwhile, will receive ongoing royalties from Nokia for its use of Windows Phone. Those royalties will be "competitive," according to the companies, and will reflect the large number of phones that Nokia expects to ship.
With the agreement in place, both companies said they'll continue reaching out to third-party developers and other partners to get them on board the new "ecosystem." As an incentive, Windows Phone developer registration will be free for all Nokia developers. The two companies will also open a new Nokia-branded app store that can leverage Microsoft's Windows Marketplace. The goal is to create a single portal through which developers deploy apps for Windows Phone, Symbian, and Series 40 devices.
Nokia will provide its mapping, navigation, and other location-based services to the Windows Phone environment and offer its know-how in hardware design in an attempt to further develop Microsoft's mobile OS. Microsoft is bringing Bing search to Nokia devices and will contribute its knowledge in mobile advertising, social media, and other services to Nokia.
The two companies have already been collaborating on the development of new phones, while Nokia has been porting over key apps and services from its existing platforms over to Windows Phone. Nokia said the goal is to start shipping its new Windows Phone devices in volume next year.