Sony Ericsson Preps Investors for Gloomy Q2

Sony Ericsson, the world’s fifth-largest maker of mobile phones, warned Friday that its second-quarter profit and sales figures would miss forecasts due to a combination of lower demand for higher-profit handsets and product delays.

The company — a joint venture between consumer electronics giant Sony and communications gear maker Ericsson — cited moderating demand for mid- and high-end handsets as well as difficulty in getting new products to market during the quarter as planned.

Sony Ericsson, which will formally report earnings on July 18, said it expects to present a break-even quarter. In the year-ago quarter, the company had net income of US$346 million.

The company expects to report that it shipped 24 million phones during the June quarter, with an average selling price of $181. Gross margin is also expected to be down both year-over-year and from the first quarter.

A Downward Trend

Sony Ericsson had long been the fourth-ranked handset maker, but it lost that spot to LG Electronics during the first quarter, according to data from Gartner.

In April, the company reported a weaker-than-expected first quarter, with profit down 48 percent compared with the year earlier.

The company is essentially being squeezed, facing additional competition at the high-end, where devices such as Research In Motion’s BlackBerry and Apple’s iPhone are overshadowing Sony Ericsson’s offerings. It is also facing increased demand in some markets for bargain-priced, low-end phones, which offer far lower profit margins.

“Sony Ericsson is a good company, but I think they are missing the boat on what customers are looking for,” telecom industry analyst Jeff Kagan told the E-Commerce Times. “There are two handset groups, one [is] the ordinary phone, and the other the more advanced handset that does everything we are currently hearing about. The ordinary telephone handset is the part of the market that is slowing. The more advanced handsets are growing [in market share]. Sony Ericsson has to move rapidly into the more advanced handset market as well as the basic phone market they are currently in.”

While much of the industry buzz over the past 12 months has been focused on Apple, others players such as Samsung, which has drawn attention with its Instinct handset, have also created a stir.

“When was the last time we heard of a killer handset coming from Sony Ericsson?” Kagan asked. “That buzz is something Sony Ericsson is missing right now. They can recover, but not on the same path they are currently on.”

A Strong Market

Despite concerns that the U.S.’s economic weakness may be spreading, worldwide demand for handsets remains robust, thanks to a combination of surging growth in emerging markets for bargain-priced phones and greater adoption of smartphones in more mature markets such as North America, said Gartner Research Vice President Carolina Milanesi.

Global sales were up 14 percent in the fourth quarter, Gartner reported, but it warned that some markets were beginning to show signs of consumer reticence, Milanesi told the E-Commerce Times. For instance, sales in Western Europe were down in the first quarter, the first drop Gartner has recorded there in seven years.

“The high-end had been where the growth was, but if the economy weakens, phone makers may want to focus on that mid-tier,” she added, noting that Apple’s recently announced 3G iPhone has a lower sale price and that RIM is having success with more modest BlackBerry models.

Samsung maintained its momentum in the first quarter of 2008, with sales reaching 42.4 million units. The South Korean vendor not only held on to its No. 2 position worldwide, but it also widened the gap from third-placed Motorola as its market share grew to 14.4 percent. Samsung is reacting quickly to the focus on touchscreen devices. “Samsung’s choice to be a quick follower has paid off so far, but it needs to focus on diversifying its designs and strengthening its lower-end portfolio to increase sales in emerging markets,” said Milanesi.

Sony Ericsson’s market share fell to 7.5 percent from 8.4 percent, with LG the biggest beneficiary, growing its take of the worldwide market from 6.2 percent to 8 percent.

In many ways, Milanesi added, Sony Ericsson’s woes mirror those of No. 3 Motorola, which has also failed to bring to market a product that has captured consumer interest and generated significant market buzz. “In the mid-market especially, a company needs to find ways to make itself stand out from the crowd.”

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