Saying it sees signs of stability in the slumping handset market, Nokia reported a 90 percent drop in its first-quarter profit, falling far below analysts’ expectation.

The Finnish mobile phone giant said net profit for the first three months of 2009 fell to $161.2 million from $1.6 billion in the same quarter last year. Analysts expected $403 million.

Sales fell to $12.2 billion from $16.7 billion a year earlier. Analysts projected sales of $12.94.

Nokia sold 92.3 mobile device units, down 19 percent from a year ago and 18 percent from the most recent quarter. Units sold were buoyed by good first-quarter sales in China.

Industrywide volumes was 255 million, beating analysts’ expectations by roughly 10 million, providing a bright spot. 

“The industry volumes were not as bad as people thought and Nokia said it expects those numbers to be flat or up in the second quarter, so perhaps the industry has finally hit a trough,” said Matthew Thornton, telecom equipment analyst with Avian Securities.

Investors  agrees. Nokia shares jumped 7.9 percent to $14.93 in afternoon trading in Helsinki. (Has Nokia Hit Bottom?)

CEO Olli-Pekka Kallasvuo sees major easing of the industry’s high inventory levels that have been choking off new orders in both the handset and components sectors of the market.

“Challenging industry conditions will continue in Q2 however the vast majority of the inventory de-stocking appears to be behind us,” he said. (Nokia to Shed 1,700 Jobs)

He warned that the good news on inventory does not necessarily translate into a signal that user demand has finally stopped sputtering. (Nokia Takes Jarring Profit Fall)

“While there are now signs of stability in the market, the global economy remains weak and we are planning our business accordingly,” Mr. Kallasvuo said.

Nokia left unchanged its projection that industry device volumes will decline 10 percent from 2008 levels. However it expects the decline to be greater in the first half of 2009 than the second.

The company estimated its market share at 37 percent, down from 39 percent in the first quarter of 2008 and unchanged from the fourth quarter of 2008.

Nokia was able to hold its leadership distance in the face of stiff competition due mainly to the popularity of the 5800 XpressMusic, its first mass-market, touch-screen phone.