Sony Ericsson profits fall, but plan in place

Sony Ericsson's results for Q1 08 are in line with the profit warning it gave in March, showing a steep drop in operating profitability.


Handset shipments were 22.3 million, which is growth over the year of just 2%. Revenue was €2.7 billion, a drop of 8% from a year ago, and operating income was €181 million, down 48% on Q1 07. Net income before tax was 193 million, down 47%.


CEO Dick Komiyama reiterated his remarks at the time of the profit warning that market demand had softened for the company's mid and high-end devices in mature markets in Q1, and that growth in Asia Pacific has led to a mix shift. The company launched two new phones - the G502, its lowest-priced HSDPA device, and the Z780, a mid-range clamshell for the US market.


He also emphasised that Sony Ericsson is in the process of broadening its portfolio and will see the results of that come through from Q2.


This has been a tough quarter for Sony Ericsson and it has experienced the slowdown that the market dreads earlier than any other vendor.


As we said at the time of the profit warning, most of the issues behind these results are company-specific, although it is clear that softening market conditions could affect all vendors during the rest of 2008.


The shipment volumes, average sale price (€121, down from €134 a year ago) and revenues are as expected. The volumes were affected by lower demand caused by inventory build up in the channels around Christmas, plus strong competition from other vendors high-end offerings (Nokia N95 8GB, LG Viewty, iPhone and others) as well as component shortages on two of its best selling models. The revenues were hit further by currency movements.


Roughly half of the drop in profits came from a shortfall in handset sales, with the other half being accounted for by a rise in R&D expenditure to support the new product launches announced during the quarter. Worryingly, the company also said that it is seeing some inflation in component costs, and will be looking to improve its operating efficiency to compensate this.


The other really worrying factor in these results is the slip in profitability, dropping from a healthy average operating profit per phone of around €15 during 2007 to EUR8.1 in Q1 - from being one of the highest to the lowest of the profitable vendors in the market.


Sony Ericsson's strategy is good, broadening the device portfolio and the geographic spread of its business with a strong focus on the US market during 2008. It must now execute on that flawlessly.


Martin Garner, principal associate analyst, mobile