Sony Ericsson warns on Q1 as European markets slow

By Adam Cox

STOCKHOLM (Reuters) - Mobile phone maker Sony Ericsson warned on Wednesday first-quarter earnings could fall by more than half, adding to growing gloom in the handset sector and dealing co-parent Ericsson <ERICb.ST> a fresh blow.

A global economic slowdown is starting to crimp consumer spending, hurting the whole sector. Last week, chip maker Texas Instruments <TXN.N> cut its first-quarter forecasts, citing weaker demand for chips used in higher-priced 3G phones.

"It is natural in consumer electronics that when consumer uncertainty increases, they maybe postpone purchases or buy lower-end models," said Janne Rantanen, analyst at Swedish bank Carnegie.

Ericsson shares were down 7.3 percent at 5:17 a.m. EDT, hovering near a 4-1/2 year low and bringing losses in the last few months to around 60 percent. Nokia <NOK1V.HE> fell 3.4 percent. More than 67.6 million Ericsson shares traded in the first hour, over half the average daily volume this year.

"The market is proving to be challenging," said Sony Ericsson President Dick Komiyama.

Net income before tax at the venture, owned by Ericsson and Sony Corp <6758.T>, is set to be 150 million euros ($237.2 million) to 200 million euros in the first quarter.

That compares with 362 million in the year-earlier quarter, although Sony Ericsson said its gross margin would remain the same on the year-ago level, which was 30.3 percent.

"This is clearly a big profit warning with earnings pretty much half of what was expected," said an analyst who asked not to be identified.

Francois Duhen, analyst at CM-CIC Securities, said the weakness should last at least one or two more quarters -- "depending on your macro scenario with the U.S. recession spreading to Europe or not."

MOST EFFECT IN EUROPE

The fourth-largest cellphone maker behind Nokia, Samsung <005930.KS> and Motorola <MOT.N>, Sony Ericsson had been making steady progress and threatening to vault into the No. 3 slot. In the fourth quarter it beat profit forecasts and gained market share.

But Sony Ericsson said the market for more expensive phones -- its traditional stronghold -- had weakened.

"Slowing market growth of mid to high-end phones in markets where Sony Ericsson has a strong presence is affecting sales," the firm said, adding the effect was visible mostly in Europe, while it was also hit by some shortages of parts for popular mid-priced phones.

The company said it will continue to seek a bigger foothold in emerging markets in an effort to lower its reliance on Europe, where it has faced increasing competition from new music and cameraphones from Nokia and Samsung.

"For the last year, Sony Ericsson has been focused on expanding the breadth of its portfolio and developing its presence in new markets to lessen its historic reliance on the European high-end sector for growth," Komiyama said.

"This strategy will continue, and our objective remains to become a top three player globally by 2011."

"Worries voiced by Texas Instruments about the mobile phone market appear to be further validated. With the high mobile penetration in Europe the problem will focus on the longer replacement cycle," Glitnir bank said in a research note.

"Worries over the mobile market are not likely to go away in the next few months, due to which also Nokia's share may face pressure."

Glitnir said Nokia volumes may stay strong and margins were excellent thanks to its presence in China and India, but average selling prices for phones was clearly sliding.

Sony Ericsson said it now plans to ship approximately 22 million phones during the first quarter of 2008, roughly as many as in the year-ago quarter, with an average selling price at around 120 euros.

Ericsson said Sony Ericsson's weaker-than-expected performance would also hit sales and operating income at its Mobile Platforms unit by 200 million to 300 million Swedish crowns ($33.4-$50.1 million) due to lower sales to the venture.

Nokia declined to comment on the news from its rival.

(Additional reporting by Tarmo Virki and Sami Torma in Helsinki, and Victoria Klesty, Lina Osterberg, Veronica Ek, Niklas Pollard in Stockholm; Editing by Quentin Bryar)