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Sony Ericsson Provides Relief

A faint sigh of relief was heard Friday morning in the handset world as Sony Ericsson Mobile Communications announced third quarter results that, while still not pretty, were better than expected.

The handset vendor reported revenues of €2.8 billion ($3.75 billion) and a net loss of €25 million ($33.5 million), slightly better than analysts had anticipated on both counts.

The device maker also sold more handsets than expected –- 25.7 million -– to hang on to its 8 percent market share, but the average selling price (ASP) per device was down to €109 ($146) from €116 ($155.50) in the previous quarter.

The news followed Thursday's earnings release from Nokia Corp. (NYSE: NOK), which sold 117.8 million devices at an ASP of €72 ($96.57) during the quarter for a 38 percent market share, and provided encouragement for the fourth quarter by predicting the device market is still on course to sell 1.26 billion units this year. (See Nokia Reports Q3.)

That outlook means all the major handset vendors can expect a significant hike in unit sales (the usual seasonal trend) in the final three months of this year.

Some analysts are concerned about Sony Ericsson's profitability trends, though. The team at Dresdner Kleinwort believes the "deterioration in gross margin," to 22 percent from 23 percent in the second quarter and 31 percent a year ago, "and the rapid decline in ASP" are concerns. "The company's outlook comments suggest further falls in ASP as low cost phones in emerging markets dominates growth," stated the Dresdner team in a research note.

And Jeff Kvaal at Barclays Capital (formerly Lehman Brothers) is concerned that Sony Ericsson is facing "stiff competition in the mid- to high-end phone segment from vendors such as Apple Inc. (Nasdaq: AAPL) and BlackBerry , and increasingly Nokia."

In his emailed research note, Kvall also expressed concern about Sony Ericsson's gross margins. "The challenge, in our view, is Sony Ericsson's ability to materially improve its gross margins while continuing to address the price sensitive low tier market. We consider a sustainable improvement in [gross margin] critical in order to sustain profitability over the longer term."

In the meantime, the better-than-expected third quarter numbers means the hit on parent Ericsson AB (Nasdaq: ERIC) will also be reduced when it announces its third quarter results on Oct. 20. Ericsson's share price rose 3.5 percent to €49.40 on the Helsinki exchange.

— Ray Le Maistre, International News Editor, Light Reading

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