Sony Ericsson counts cost of Japanese disaster

HELSINKI/STOCKHOLM Fri Jul 15, 2011 12:14pm BST

A man takes a picture using the Sony Ericsson C903 Cyber-shot mobile phone during the Mobile World Congress in Barcelona February 15, 2009. REUTERS/Gustau Nacarino

A man takes a picture using the Sony Ericsson C903 Cyber-shot mobile phone during the Mobile World Congress in Barcelona February 15, 2009.

Credit: Reuters/Gustau Nacarino

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HELSINKI/STOCKHOLM (Reuters) - Mobile phone maker Sony Ericsson forecast an upturn in the second half, as it posted a first quarterly loss since 2009 due to a parts shortage stemming from the March 11 earthquake and tsunami in Japan.

Chief Executive Bert Nordberg said on Friday most of the hit was felt in the early part of the quarter, and that this would be negligible in the third quarter.

"There might be some minor spillover. In our planning this is behind us," he told Reuters.

Sony Ericsson, owned 50-50 by Sweden's Ericsson (ERICb.ST) and Japanese group Sony (6758.T), made a pretax loss of 42 million euros (37 million pounds).

It had recorded five consecutive quarters of profit since its last loss in the final three months of 2009.

The 42 million loss was at the low end of analysts' estimates, which ranged from a 68 million loss to a 77 million profit.

Sony Ericsson sold 7.6 million phones in the second quarter, compared with forecasts for 8-11 million, as earthquake-related supply chain constraints cut sales of mostly expensive models by 1.5 million phones, or some 400 million euros.

"Volumes were lower than even we thought, and we were below consensus," said Hakan Wranne, analyst at Swedbank Markets.

"The product portfolio looks pretty good ahead of the second half, and if they manage to increase volume by a couple of million units they should be making profits for the rest of the year -- not large profits, but a bit above zero where we thought they would be," Wranne said.

Sony Ericsson's forecast for a better second half was based on new smartphone models and an easing supply chain shortage.

Nordberg said it was still his ambition to report better results for 2011. To do that, second-half operating profit would have to grow 73 percent to 176 million euros.

Nordberg said demand for smartphones, whose prices have started to fall to below 200 euros, remained healthy and was hitting the sale of mid-range mobile phones, a market he said he was "nearly willing to call ... collapsing."

Many analysts have forecast a slowdown in the smartphone market, but Nordberg said: "We still see very, very strong demand in the smartphone market."

The venture continued to bleed cash due to component constraints, and borrowed 165 million euros to balance its finances. Cash flow from operating activities was 577 million euros negative in the first half.

"It's quite a lot, but the explanation is understandable as it was quite an extraordinary quarter," said Hannu Rauhala, analyst at Pohjola Bank. "However, this cannot last for long."

Continuing cash outflows raise the possibility its parents might need to inject cash: the latest 165 million euros was raised externally.

CHANGING DIRECTION

The firm, formed in 2001, has been losing out to leaner rivals at the cheaper end. Its share of handset sales has dropped below 3 percent from more than 9 percent at its height, and it is now ranked ninth globally.

Sony Ericsson has slashed costs, including cutting around 4,000 jobs, and refocused on higher-margin smartphones that link to social networking sites such as Facebook.

Its smartphone sales grew from the previous quarter, and the share of smartphones in its sales rose to more than 70 percent from 40 percent at the end of 2010.

"Smartphone volume was reassuring but Sony Ericsson still faces a considerable task in rebuilding and sustaining profit margins," CCS Insight analyst Geoff Blaber said.

"Sony Ericsson is not alone in finding the smartphone transition a challenging one."

Motorola Mobility (MMI.N) has shifted its focus to smartphones, while Sony Ericsson's bigger rivals Nokia (NOK1V.HE) and LG Electronics (066570.KS) could report second-quarter losses after being slow to move into high-end handsets.

"In many ways Sony Ericsson is going through the transition Motorola went through last year, but without the kind of support Verizon gave Motorola in the U.S.," said Gartner analyst Caolina Milanesi.

Ericsson shares were down 1 percent at 89 crowns by 11:30 a.m. British time.

($1 = 0.706 Euros)

(Additional reporting by Patrick Lannin and Mia Shanley in Stockholm, Editing by David Holmes, Dan Lalor and David Hulmes)

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