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Sony Ericsson issues stark profit warning

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David Meyer ZDNet.co.uk

Published: 19 Mar 2008 14:39 GMT

Sony Ericsson has issued a profit warning a month ahead of its first-quarter results, blaming a "challenging" mid-to-high-end handset market in Europe.

The warning comes little more than a week after chipmaker Texas Instruments said it was lowering its quarterly outlook due to a decline in demand from phone manufacturers for high-end and 3G chips.

"Slowing market growth of mid-to-high-end phones in markets where Sony Ericsson has a strong presence is affecting sales," read Wednesday's statement from Sony Ericsson. "In addition, certain component shortages for popular mid-priced phones have contributed to modest unit sales growth in the first quarter."

The manufacturer now plans to ship around 22 million handsets during the first quarter of 2008 at an average selling price of €120 (£95). Net income before tax (NIBT) for the quarter is expected to be between €150m-€200m (£118m-£157m). The first quarter of 2007 saw Sony Ericsson take in €362m (£285m) before tax, so the revised forecasts for this year could mean as much as a 58 percent year-on-year drop in pre-tax profit.

However, Sony Ericsson expects gross margin to remain "relatively stable" for the first quarter of 2008 when compared with the same quarter in 2007, which saw a gross margin of 30.3 percent.

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"The market is proving to be challenging. This has been more pronounced in the mid-to-high-end replacement sector of the market in Europe, where Sony Ericsson has stronger-than-average market share," said Sony Ericsson president Dick Komiyama on Wednesday.

Sony Ericsson also said that increasing research and development costs had contributed to its revised forecast. "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," said Komiyama. "This strategy will continue, and our objective remains to become a top-three player globally by 2011."

The manufacturer is currently in the number-four spot, lagging behind Samsung, Motorola and the market leader Nokia. In terms of sales, Nokia has been described by analysts as being "as big as Samsung, Motorola, Sony Ericsson and LG added together".

At the time of writing, Ericsson, one of Sony Ericsson's parent companies, had seen a 7.5 percent drop in its share price since the Frankfurt Stock Exchange opened. Sony, the other parent company, had seen its share price rise 2.4 percent since the New York Stock Exchange opened on Wednesday, although that was in line with a general stabilising trend in share prices after the turmoil of the previous few days.

Sony Ericsson will issue its formal results for the first quarter on 23 April.