Nokia and Motorola -- who together dominated the mobile industry just a few years ago -- have been hurt by Apple's iPhone and Blackberry-maker Research in Motion eating a major share of this fatter margin business.
Both firms have responded by shrinking their phone portfolios: Nokia has halved its smartphone launch plans for 2010, and Motorola co-chief executive Sanjay Jha is betting that Android smartphones will turn around the company.
Motorola turned to a small quarterly profit in the holiday sales-fueled fourth quarter versus a deep loss a year earlier, helped by sales of 2 million smartphones in the quarter.
The U.S. firm's new models include a Droid phone, based on Google Inc Android software, which was marketed heavily by top U.S. mobile service Verizon Wireless.
Shares in Motorola fell 37 cents at $7.03 in early trade.
Nokia said its market share in smartphones rose to 40 percent from 35 percent in the previous quarter, as it rolled out models like the N97 mini, flagship music phone X6, and a Linux-software based N900.
NOKIA BEATS FORECASTS
Nokia said the cellphone market returned to growth, up 8 percent from a year ago.
In the fourth quarter the demand environment for handsets ended up being better than we anticipated and we took advantage of this upside, Nokia Chief Executive Olli-Pekka Kallasvuo told investors.
Nokia's underlying fourth-quarter earnings per share of 0.25 euros beat all expectations in a Reuters poll, which ranged from 0.15 to 0.24 euros. The stock was up 13 percent to 10.20 euros by 1354 GMT.
These are really mind-blowing results, said analyst Thomas Langer from WestLB.
However, I think there is definitely a risk one gets over excited -- the challenges in the smartphone markets will become obvious to everybody, and we think the competition will intensify throughout the year, Langer said.
Nokia said revenues from smartphones jumped 26 percent from the previous quarter to 3.9 billion euros. Average smartphone prices dipped to 186 euros from 190 euros in the third quarter as the firm tries to win back customers with simpler, cheaper smartphones.
The results cap a tough year for the cellphone makers, which have been hammered as consumers cut spending in the recession.
Nokia Chief Financial Officer Timo Ihamuotila told Reuters TV there was still reason for cautiousness.
Regarding (the) economy we are not out of the woods yet... consumer confidence is still fragile, he said.
Last week, Sony Ericsson <6758.T> warned a recovery in the cellphone market could be slower than many expected as it reported its seventh straight quarterly operating loss.
Samsung Electronics <005930.KS>, the world's second-biggest mobile phone maker, is expected to report higher mobile phone shipments but lower margins than in the previous quarter. Higher marketing costs likely weighed, and uncertainties remain as to how it will compete with smartphone leaders.
(Additional reporting by Brett Young, Terhi Kinnunen and Eva Lamppu in Helsinki; editing by Elaine Hardcastle)