Nokia posted better-than-expected profits in the quarter ended March 31, with net income falling by just 1% year on year to EUR344m (USD502m), as the firm signed a final agreement to team up with Microsoft in the smartphone market. Sales in Q1 were up 9.2% to EUR10.4bn (USD15.2bn), also beating expectations, causing shares in the firm to rise by nearly 3%. However, Nokia CEO Stephen Elop warned that Nokia expects "a more challenging second quarter", with the natural disasters in Japan expected to impact sales until Q3 this year, and possibly longer.

Investors have welcomed the partnership with Microsoft, but are still concerned over the Finnish manufacturer's performance in the smartphone space. Revenues in Nokia's devices and services division dropped 17%, with the company simultaneously losing out to cheaper Asian handsets manufacturers as well as smartphone competitors. Taiwanese rival HTCrecently toppled Nokia in market value, while overall Nokia's market share has dropped to 29% this quarter, from 33%, although it still remains the biggest manufacturer globally. Operating margin in its core devices business also fell from 12.5% in Q1 last year to 9.8% in 2011.

Nokia hopes that the move to adopt Microsoft's Windows Phone platform  will turn around its smartphone fortunes, where currently both companies lag behind Apple and Google. But as it shifts away from its once-dominant Symbian platform, recently overtaken by Android as the most popular operating system, analysts expect Nokia to fare worse. Nokia itself has cautioned that its market share is likely to slip still further before positive effects of its deal with Microsoft begin to take hold. Investors are concerned that Nokia may drop Symbian altogether, but the manufacturer launched two Symbian-powered models earlier this month, albeit to mixed reception.

"In the first quarter, we shifted from defining our strategy to executing our strategy. 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," said Nokia CEO Stephen Elop.

By contrast, Apple reported this week that its profits had nearly doubled after record sales of the iPhone 4, with revenues for Q1 2011 reaching USD24.67bn. Nokia shifted 108.5m mobile phones in the quarter, almost six times the 18.65m sold by Apple, but Strategy Analytics says Apple's is now the largest handset manufacturer in terms of revenue because of the higher price it charges for its devices.