By Tarmo Virki, European Technology Correspondent
HELSINKI (Reuters) - Nokia said it expected its struggling cellphone business to remain profitable in the third quarter, bringing some relief to investors after it lost its lead in the smartphone market to rival Apple.
Nokia, the world's largest phone maker by volume, has failed to come up with an attractive smartphone offering to compete with Apple's iPhone and a wide array of smartphones using Google's Android software.
Nokia reported a second-quarter underlying operating profit of 391 million euros ($555.1 million), above all analysts' forecasts, which ranged from a loss of 35 million to profit of 285 million in a Reuters poll, boosted by royalty revenues of 430 million euros in the quarter.
Nokia had forecast a 150 million royalty boost in April, and analysts said most of the remaining 280 million likely came from settling a legal dispute with Apple.
The report was a rare spot of good news for Nokia, pushing its shares up 2.9 percent to 4.20 euros by 1235 GMT. They briefly rose as high as 4.396.
The share price had halved since February when it unveiled a shift to Microsoft software, as investors worried that the company would lose so much market share before the new phones come out that it might never make up lost ground.
Nokia's quarterly phone sales volume dropped 20 percent from a year ago, missing analysts' forecasts, and losing market share at a time when the overall market grew around 10 percent.
However, analysts said they had expected worse. Many said the company's outlook for its phone business to be "slightly above breakeven" in the current quarter was comforting.
"It is a glimmer of hope in an overall very gloomy picture," said Angus Campbell, head of sales at Capital Spreads.
"The guidance for the third quarter was a relief. It seems it will not be as bad as was feared," said Hannu Rauhala, analyst at Pohjola Bank.
LOSING SMARTPHONE CROWN
Nokia said it sold 16.7 million smartphones in the quarter, falling behind Apple's sales of 20.3 million iPhones.
The Finnish company created the smartphone market in 1996 with its first Communicator model, but has failed in recent years to find an answer to the success of the iPhone and Research In Motion's BlackBerry.
Nokia Chief Executive Stephen Elop has been pinning turnaround hopes on new smartphones using Microsoft software, but these will only come to market later this year.
"The path to recovery for Nokia is going to be a long one. Deterioration in Nokia's smartphone performance shows that time is of the essence in rebuilding a coherent portfolio of Windows Phone 7 products in 2012," said CCS analyst Geoff Blaber. (Additional reporting by Joanne Frearson and Georgina Prodhan in LONDON, Terhi Kinnunen and Ritsuko Ando in HELSINKI; Editing by Will Waterman)
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