Sony Ericsson Warns on Profit as Demand Slows

Mobile phone maker Sony Ericsson warned on Friday it would make no profit in the second quarter due to weaker demand for its more expensive phones, sending shares in co-parent Ericsson down more than 11 percent.

Woman on Cell phone.
Woman on Cell phone.

Only last week, Sony Ericsson's global marketing head James Marshall told Reuters the projections for the second quarter looked strong.

Sony Ericsson, which is owned by Ericsson and Sony, said in a statement profits had been affected by moderating demand for mid- to high-end phones and product delays.

It said the market was "challenging." The news drove shares in co-parent Ericsson down 7.8 percent to 60.70 crowns, having sunk as low as 58.50 crowns.

"Sony Ericsson is feeling the effects of a dependence on mature markets which are being impacted by the global economic downturn," said Geoff Blaber, analyst at CCS Insight.

Analysts were braced for weaker market conditions after a dismal first quarter for the firm and continued signs that consumers are being hit by an international credit crisis, high oil prices and general economic anxiety.

But Friday's news suggested conditions were worse than thought, although they said the weakness appeared to have more to do with Sony Ericsson specifically than all handset makers.

"The problems seem not to be related to the whole market, not to the sector as such," said Evli analyst Mikko Ervasti.

Sony Ericsson said it plans to ship about 24 million phones during the quarter at an estimated average selling price of 115 euros.

One analyst said this average price was disappointing.

"Gross margin is expected to decline both year over year and sequentially. Net income before taxes is estimated to be about breakeven," the firm said.

A Sony Ericsson spokesman, asked to quantify the effect on margins or give a view on the second half of this year, declined to comment.

European Reliance

Sony Ericsson's strategy has been to go deeper into emerging markets and Dick Komiyama, who was appointed as president last year to replace the popular Miles Flint, has made no significant change to that overall direction.

But analysts say the shift has not been fast enough and that the firm is too exposed to European markets.

"Unlike the other top five handset vendors, Sony Ericsson is highly dependent on Western Europe with only a limited presence in high growth, emerging markets. Competing with the scale and distribution footprint of Nokia and Samsung is becoming increasingly difficult," CCS Insight's Blaber said.

Cellphone sales in Western Europe in the first quarter fell 16.4 percent from a year earlier, according to Gartner.

It was the first time sales had fallen on an annual basis since the research firm began tracking them.

The news is a fresh blow to mobile network maker Ericsson, which has struggled since the third quarter of last year.

It had a better-than-expected first quarter but its shares are still down more than 50 percent in the past nine months.

Only a year ago, Sony Ericsson results were considered an added bonus for the flagship Swedish firm.

Down in Rankings

This marks the second successive quarter in which Sony Ericsson has had to warn investors on results.

The firm had been riding high in recent years, climbing up the sector rankings and closing in on the No. 3 spot.

But it dropped to fifth place in the first quarter, ceding the No. 4 spot to South Korea's LG Electronics.

Nokia, whose shares sank as much as 5.3 percent, is the clear world leader in mobile phones, followed by Samsung Electronics and Motorola.

Sony Ericsson second-quarter results are due on July 18.

In the first quarter, Sony Ericsson posted a pretax profit of 193 million euros, 47 percent down year-on-year.

It blamed falling demand for its more expensive camera and music handsets.