Martin Garner
Sony Ericsson's Q1 08 profit warning
Last week Sony Ericsson issued a profit warning, saying that its volumes, revenue and profit will be down on expectations for Q1 2008.Shipments are forecast to be around 22m, while net income before tax is projected to reach €150-200m, compared to €362m in the year ago quarter. Profit will also be affected by higher research costs supporting the broad range announced in February.Sony Ericsson cited, 'Slowing market growth of mid-to-high-end phones in markets where Sony Ericsson has a strong presence', as well as component shortages, but said that its gross margin would remain relatively stable.CEO Dick Komiyama said Sony Ericsson will continue with its strategy of broadening its portfolio and geographic spread.Comment: Most players in the handset market saw their share prices hit last week by this news, as it appeared to reinforce the earlier announcement from Telecom Italia. Warnings like this are always a mix of vendor-specific and market issues. Our industry checks show that most of this is Sony Ericsson specific and that the market pessimism may be overdone.Sony Ericsson expects to ship 22m phones this quarter, where normal seasonality would suggest volumes of 26-27m. At an ASP of €120, this means a revenue shortfall of €500-600m. Sony Ericsson's profit per phone has been running at €15, so the profit shortfall from lower phone sales should be around €75m, although it may be higher because the demand was weakest for higher end (more profitable) phones. In turn this means that a similar sized impact on the profit must come from other factors, including the higher R&D costs.Sony Ericsson has been over-dependent on the K800/K850, which have been hero products. The softer demand came in Europe and, to a much lesser extent, in Asian markets. And we understand that it was felt most in December 2007. As far as we can tell, Sony Ericsson's high-end devices faced acute pressure at the end of last year from:
- the iPhone
- LG's Viewty
- Nokia's N95 8GB
- some aggressive pricing tactics in certain markets.
