HELSINKI, FINLAND: Nokia is set to boost its ailing phone portfolio by radically realigning its smartphone strategy, but investors will wait for hard evidence of a turnaround before buying back into the battered stock.

Nokia, which historically has flooded the market with models little different from each other, last week unveiled a massive cut in its smartphone portfolio in a bid to reduce costs while refocusing its attempts to tackle the mounting challenges presented by Apple's iPhone and RIM's Blackberry.

Jo Harlow, who was appointed head of the new smartphone unit in October - after Nokia reported a sharp fall in smartphone market share - faces a daunting task: to beat other smartphone makers in a price battle, while simultaneously growing margins.

Analysts said smartphones play a key role in Nokia's investment case, but only once the smartphone turnaround starts to boost sales and profits.

"Investors' confidence will be fully restored only the day Nokia shows sustained positive momentum in operating margin, topline and EPS," said Bernstein analyst Pierre Ferragu.

They will also need convincing that a firm that has missed some key trends of the cellphone industry over the last years -- Nokia was late with slim phones and late with touch screens -- has the capacity to not only play catch-up with but also steal a march on its rivals in terms of smartphone innovation.

"Sometimes investors begin changing their minds simply based on product announcements if the models are compelling enough, but Nokia will probably have to show some fundamentally new hardware or software concepts," said Tero Kuittinen, analyst at MKM Partners.

"Some vital part of Nokia's product planning went off rails about four years ago and the company is still reeling."

Falling share, surging market

The stock market recovery also passed Nokia by, mostly due to its weak smartphone offering, but the firm also reported its worst ever quarterly result in July-September when it booked a 908 million euros hit from its ailing network gear arm.

Nokia shares have dropped 23 percent since the start of the year, while the DJ Stoxx European technology index, in which it is the biggest constituent, has risen 16 percent.

In the midst of October business revamp Nokia also replaced its head of design, naming Marko Ahtisaari - son of Nobel Peace Prize winner Martti Ahtisaari - to run its design team.

The smartphone market has exploded since Apple introduced the iPhone in mid-2007, and it is expected to surge also next year, helped by a wave of cheaper models using free software platforms like Google's Android and Nokia's Symbian.

"I think we are moving more and more towards a market where aside from price there is little difference in what consumers want," said Gartner analyst Carolina Milanesi.

"Simplifying the portfolio will help consumers make sense of the portfolio, but more importantly will lower costs for Nokia and maximise economies of scale."

Smartphone sales will grow some 20 percent or more even this year, when recession has crimped consumer spending on more simple cellphone models and hit Nokia, Motorola and Sony Ericsson.

In the midst of recession Nokia has slashed annual costs by around 1 billion euros ($1.5 billion) at its phone operations. It has already cut hundreds of jobs as it needs fewer engineers to work on a smaller portfolio.

Nokia's smartphone market share fell to 35 percent in September quarter from 41 percent in the previous quarter. In the third quarter Apple created more profits from 7.4 million iPhones than Nokia from 108.5 million phones.

Make or break

"The company must ... pull a rabbit out of their hat by executing against plan and coming from behind to beat the competition in one fell swoop," JP Morgan analysts said in a note.

Nokia plans that in 12 months from now almost all of its smartphones would have a touch screen, a full keyboard or both, compared with fewer than half now. It will also renew the clunky user interface on its touch screen smartphones in mid-2010.

Analysts said Nokia has to be very careful with cutting its portfolio as it increases risks of failure and could open up opportunities for rivals.

This Christmas season Sony Ericsson has experienced what too narrow a smartphone offering can mean -- both its models have had software problems in the key UK market, an issue bound to hurt its Christmas quarter performance.

"Next year is "the 'make or break' year where Nokia needs to show that, with its new apps and services, it's genuinely closing the gap with Apple and the iPhone and also Google's growing mobile presence," said Bengt Nordstrom, chief executive of Swedish telecoms consultancy Northstream.