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Troubled Nokia issues earnings warning

Nokia shipped 2 million Lumia units in the first quarter, but the company was thumped by weak demand in emerging markets.

Nokia headquarters
The accountants at Nokia's headquarters in Espoo, Finland, have some bad news to deliver.

Nokia said that its first-quarter results for its mobile phone and smart device unit will fall short of expectations largely due to weakness in emerging markets.

The company said in a statement that the Lumia launch has had a positive start, but it wasn't enough to save the quarter.

Nokia said that "competitive industry dynamics" in emerging markets such as India, China, Africa and the Middle East led to a shortfall. As a result, gross margins will be weak.

The company did say that it sold 2 million Lumia devices. CEO Stephen Elop noted:

Our disappointing devices and services first quarter 2012 financial results and outlook for the second quarter 2012 illustrates that our business continues to be in the midst of transition. Within our Smart Devices business unit, we have established early momentum with Lumia, and we are increasing our investments in Lumia to achieve market success.

The Nokia profit warning comes just as investors were becoming upbeat about the Lumia launch. Nokia brought the Lumia 900 to the U.S. with a good amount of buzz. Nokia also launched the Lumia in China.

Shares were hammered in premarket trading, with Nokia falling 17 percent.

Nokia shares after earnings warning April 11, 2012
Screenshot by ZDNet

On a conference call, Elop said he would refrain from preannouncing products, but was upbeat about Windows Phone.

In the past we said we are increasing investment in mobile space. The fruit of that work will become clear in the quarters ahead.

Elop added that the company was in "build mode" with Lumia, but the lower end of the market is giving Nokia trouble. Nokia has to cut prices on dumb and feature phones to compete.

By the numbers:

  • Nokia said that its devices and services net sales for the first quarter will be 4.2 billion euros ($5.5 billion). Mobile phone sales will be 2.3 billion euros with 71 million units. Smart device sales will be 1.7 billion euros with 12 million units.
  • Inventory in the first quarter was high relative to Nokia's 4- to 6-week range in the channel.
  • First-quarter operating margins will be negative 3 percent or so. Nokia had projected break-even, give or take 2 percent in either direction.
  • The second-quarter operating margin will mirror the first quarter. Nokia expects tough competition to continue in emerging markets as well as a weak economy in Europe. In addition, new product launches haven't kicked in fully.

This story originally appeared at ZDNet's Between the Lines under the headline "Nokia issues Q1 profit warning, moves 2 million Lumia units." Story updated at 6:10 a.m. PT with information from the conference call.