Sony Ericsson's results Thursday showed a welcome improvement in margins, but were below expectations on volumes and revenue.
Phone shipments were up 31% over the year to 25.9m with an average sale price of EUR120, down from EUR147. This led to revenue growth of 7% to EUR3.11 billion. Operating income dropped 8% to EUR393 million.
Compared to Q2 07, shipments were up 4%, but average sale price fell 4% resulting in flat sales. However, operating income improved 25% over Q2.
Outgoing President Miles Flint said the quarter had "seen Sony Ericsson continue to generate significant year-on-year volume growth with a portfolio of products spread across the widest variety of price points in the company's history." He re-stated his market guidance of more than 1.1 billion shipments for 2007.
After the very strong run of the last few quarters, this is disappointing stuff from Sony Ericsson.
The trend in shipment volumes had been rising since mid-2006 as the company pushed progressively into emerging markets with aspirational (rather than simply cheap) products. The main concern during that period was that the average sale price and - more importantly - profit per phone was falling.
Now the company has flipped the concerns with margins improving but sales growth proving more challenging.
The shipment growth has slowed because of two main factors. First there has been growing channel inventory in China as local vendors have priced aggressively during the last couple of quarters. This is likely to affect several vendors. Second Sony Ericsson's portfolio is ageing, especially at the high end. The effects of this have been felt mostly in Japan and Western Europe. The launches it did during May and June of this year should fix that but those products are only just coming onto the market now.
The recovery in operating margin is welcome. The company has been on a drive to reduce its underlying costs but this is only just beginning to be felt, with gross margin improving slightly to 30.7% from Q2 07 when it was 29.6%. The bigger effect in the short-term has come from lower sales and marketing costs, which again is tied to the timing of product launches.
These results should be a blip - Sony Ericsson is still doing well and, as the new phones come through, should have a stronger portfolio. We continue to expect improvement in Q4 on volumes, revenues and hopefully profits, but our earlier prediction that Sony Ericsson could overtake the troubled Motorola by the end of this year now looks a bit too optimistic.
Martin Garner is mobile practice leader at Ovum