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Sony Ericsson Records €42m

A Sony Ericsson Xperia phone

A Sony Ericsson Xperia phone. The company has refocused on higher-margin smartphones after losing handset market share. Photograph: Manu Fernandez/AP

Mobile phone maker Sony Ericsson’s woes continued as it reported a second-quarter pre-tax loss of €42m (£36.8m), after the 11 March earthquake and tsunami in Japan weighed on its earnings more than expected.

The company sold 7.6m phones in the quarter, compared with forecasts for 8m-11m, as earthquake-related supply chain constraints cut sales by 1.5m phones. Revenues shrank by 32% year on year to €1.19bn, the 14th of the past 15 quarters in which sales fell.

Yet chief executive Bert Nordberg said on Friday that most of the hit was felt in the early part of the quarter, and that the effect would be tiny in the third quarter. “There might be some minor spillover. In our planning, this is behind us,” he told Reuters.

Smartphone prices have generally started to fall to below €200 (£175), though the average price for Sony Ericsson’s was €156, a year-on-year drop of €4 (2.5%) but a sequential rise of €15 as it brings in its Experia line running on Google’s popular Android mobile operating system.

Nordberg said demand for smartphones, which made up more than 70% of sales in the quarter, remained healthy and was hitting the sale of mid-range feature phones, a market he said he was “nearly willing to call … collapsing”.

Håkan Wranne, analyst at Swedbank Markets, said: “The product portfolio looks pretty good now ahead of the second half, and if they manage to increase volumes by a couple of million units, they should be back to making profits for the rest of the year – not large profits, but a bit above zero, where we have thought they would be.”

Carolina Milanesi, smartphone analyst at the research group Gartner, said: “Sony Ericsson is operating in the most competitive part of the market – one that is limited in size where buyers are looking for true differentiation.”

While the company has had success with its new Xperia line, it faces serious competition from other Android handset makers such as China’s ZTE at the low end, and Samsung and HTC at the upper end. Google announced with its second-quarter results on Thursday night that it is being used on 130m devices. Nordberg said Sony Ericsson has 11% of the Android market by sales and value.

But the company faces serious challenges if it cannot find a route to profit. In the second quarter it had a cash outflow of €224m, forcing it to borrow €165m from external sources: its borrowings now stand at €769m compared to cash of €516m.

Since the introduction of Apple’s iPhone in mid-2007, Sony Ericsson’s cash position has deteriorated substantially: at the time it had €2.1bn in the bank and no debt. There is speculation that it will have to get a cash injection from its joint owners, the Swedish company Ericsson and Japanese electronics group Sony.

Sony Ericsson was formed in 2001 and thrived after its breakthrough with Walkman music phones and Cyber-shot camera phones, before losing out to leaner rivals at the cheaper end, and Apple’s iPhone at the high end. Its share of handset sales has dropped below 3% from more than 9% at its height.

The company has slashed costs, including cutting about 4,000 jobs, and refocused on higher-margin smartphones that link to social networking sites such as Facebook. The share of smartphones in its sales rose to more than 70% from 40% at the end of 2010.

“Smartphone volume was reassuring but Sony Ericsson still faces a considerable task in rebuilding and sustaining profit margins. Sony Ericsson is not alone in finding the smartphone transition a challenging one,” said CCS Insight analyst Geoff Blaber.

Motorola Mobility has shifted its focus to smartphones, while Sony Ericsson’s bigger rivals Nokia and LG Electronics could both report second-quarter losses due to their slow move into the high end of the market.


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