Ahead of its Q1 2012 earnings results, Nokia has lowered its first quarter 2012 financial outlook — the company expects its Devices and Services operating margin to be approximately negative three percent, compared to previous expectations of a break-even quarter. Specifically, Nokia noted that "competitive market dynamics" negatively affected sales in the mobile phone and smart device business units. As to where the company underperformed, Nokia said it had particular trouble in the Middle East, India, Africa, and China. The company is currently estimating Q1 mobile device sales of 71 million units, with 12 million units sold from its smart devices division.

While the Lumia is gaining traction, Nokia is fighting off a number of challenges

Nokia apparently doesn't see a light at the end of the tunnel yet, either: it's expecting Q2 2012 performance to be "similar to or below" its performance in the first quarter, which means Nokia is expecting to post yet another loss next quarter. As for some good news, Nokia revealed that the company sold two million Lumia phones in Q1, at an average selling price of approximately €220. Nokia CEO Stephen Elop said that while the company's struggling performance points to the continued challenge of transitioning, but feels Nokia has "established early momentum with Lumia.

Nokia's hosted a conference call to address this performance, and Elop reiterated the Lumia line is "gaining traction with consumers" — Lumia is in 42 markets with high consumer satisfaction, and Elop noted that the performance of the Lumia 710 at T-Mobile has "exceeded expectations." As for the Lumia 900, which just launched, Elop said that he was "very pleased with the initial response." Marketing efforts continue to be adjusted, and Elop noted that the company saw "a positive shift in Nokia brand preference among smartphone consumers for the first time in years."

Elop also gave some specific examples of its competitive market dynamics: he cited the rate at which low-end Android devices come to market at lower and lower price points as a major challenge. He also noted that competitors have "particular products at particular price points" in which Nokia isn't competing — for example, he noted high-end, touchscreen feature phones are being heavily promoted and that Nokia doesn't have a competitive response at this time. Lastly, he noted white-label Chinese manufacturers continuing to push low-cost devices into the market.

Elop: "We are in the heart of Nokia's transition."

As for how the company plans to pull out of this spiral, Nokia and Elop gave several examples of the actions it will undertake to get back on track. Nokia's planning to increase investments in Lumia by bringing more products to more markets, and plans to fight back in the mobile phone market by aggressively cutting prices and bringing new competitive products to market in the second quarter. Lastly, Elop said that Nokia will accelerate planned cost reductions and may pursue more significant restructuring actions if necessary — this sounds like a continuation of Nokia's plans to move manufacturing out of Europe and Mexico.

Nokia's announcing its full Q1 2012 financials on April 19th, so we should hear even more on its transition to Windows Phone and the challenges that go along with it next week.