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UPDATE 6-Nokia Q2 profits drop, CEO wants exit talk to stop

* Q2 core EPS falls to 0.11 euros, in line with expectations

* Spokeswoman declines to say if CEO has board support

* CEO says talk of his going must end one way or the other

* Volatile shares gain 3.3 pct, outpace tech sector

(Updates shares)

By Tarmo Virki, European technology correspondent

HELSINKI, July 22 (Reuters) - Nokia NOK1V.HE reported a sharp drop in second-quarter profits on Thursday and forecast a weak third quarter, increasing the pressure on embattled chief executive Olli-Pekka Kallasvuo.

The firm, which makes every third mobile phone sold in the world, was rocked by two profit warnings and a management shake-up in the second quarter alone as it struggles to keep pace with smartphone rivals Apple AAPL.O and Google GOOG.O.

The Finnish company has lacked a hit smartphone model since its 2006 launch of the N95, and has lost out in the top end of the market to Apple’s iPhone.

Now Nokia is looking for a replacement for Kallasvuo, who has spent more than half of his life at the company, industry sources told Reuters earlier this week. Kallasvuo may be ousted as soon as this month, the Wall Street Journal reported.

Kallasvuo, a 57-year old former company lawyer and chief financial officer who married a Nokia lawyer, told CNBC television that talk of his going was hurting the company and had to stop. [ID:nWLA9017]

“There has been a lot of speculation on my position, on myself, during the last couple of weeks and that is not good for Nokia and must be brought to an end one way or another,” he said.

Kallasvuo declined to comment after the result on whether he still enjoys board support. [ID:nHEL009779]

“I might have it, I might have it not. Its a ‘no comment’,” Kallasvuo told Finnish broadcaster YLE.

Chairman Jorma Ollila, who has worked closely together with Kallasvuo since the 1980s, was not available to comment.

At the annual shareholder meeting in May Ollila strongly backed management’s strategy, but did not expressly support the chief executive. [ID:nLDE64602C]

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on Q2 smartphone market share, double click on r.reuters.com/xux88m

For more analyst views see [ID:nLDE66L0ZG]

For management comments at analyst call [ID:nLDE66L1AJ]

For smartphone market statistics [ID:nLDE66L0TP]

For story on Nokia Siemens [ID:nSAT008682] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“The topic of management change is more important for the share price than results at the moment,” said WestLB analyst Thomas Langer.

Shares in Nokia closed 2.6 percent higher in Helsinki at 7.17 euros, helped by wider recovery in the technology sector, with the Stoxx 600 European technology index .SX8P up 1.8 percent. In the U.S. Nokia shares NOK.N were 5.0 percent higher at 1536 GMT.

Analysts said investor sentiment toward Nokia stock had improved somewhat since the stock hit a 12-year low on July 7.

“Markets are starting to increasingly believe in the value call. The bottom has been reached,” said Swedbank’s Jari Honko.

Nokia shares trade at 10 times expected 2011 earnings, according to Thomson Reuters data, a steep discount to the average of its major global peers.

Its dividend of 0.40 euros for the last fiscal year also implies an historical yield of 5.5 percent -- a rarity in the technology sector, where many peers pay out nothing at all.

Nokia shares have dropped around 20 percent this year, strongly lagging the technology index, which is up 7 percent.

HIGH-END CHALLENGE CONTINUES

Nokia’s underlying second-quarter earnings per share fell 27 percent from a year ago to 0.11 euros, in line with market expectations.

It had already warned on June 16 that phone sales and profits in the quarter would be weaker than earlier forecast, with the Finnish firm forced to slash prices to battle against Apple’s iPhone and smartphones using Google’s software. [ID:nLDE65F1F5]

Kallasvuo, called just OPK in the company, said Nokia believes the Nokia N8, its first phone using new Symbian software, will have a user experience superior to that of any smartphone Nokia has created.

“OPK is saying that N8 is going to deliver the best user experience that you’ve ever seen on Symbian. Well, that’s great, but what about the best experience versus your competitors? That’s what matters and we just don’t think that it’s going to be enough,” said Gartner analyst Carolina Milanesi.

Nokia said the underlying operating margin at its key cellphone unit dropped to 9.5 percent in the second quarter despite massive cost cuts and warned it could fall further in the third quarter.

The company has cut thousands of jobs and aims to slash annual costs at the phone unit by 1 billion euros this year.

“What is slightly concerning is the Q3 margin guidance ... Now it all becomes about the fourth quarter. The competition is getting stronger,” said Kulbinder Garcha at Credit Suisse.

The N8, expected to reach the market by the end of this quarter, will go into battle in the seasonally all-important fourth quarter against the new iPhone 4 and Google Android-based phones from Samsung 005930.KS and Sony Ericsson 6758.TERICb.ST.

Helped by a wide array of simple models, Nokia has been able to stop the slide of its overall smartphone market share, but has lost ground among the pricier phones with fatter margins. (Reporting by Tarmo Virki and Terhi Kinnunen, Georgina Prodhan and Ian Smith in London and Stockholm newsroom; Editing by Michael Shields and Samia Nakhoul)

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