By Simon Johnson
STOCKHOLM (Reuters) - Mobile phone maker Sony Ericsson will focus entirely on the booming smartphone market, going head to head with rivals like Apple and underlining the importance of a tie-up with Sony amid reports the electronics giant is preparing a buyout.
The company said on Friday it would shift all its production to smartphones during 2012 as it reported a swing back to profit of 31 million euros, just higher than forecasts. It said it expected more margin pressure, partly due to a global slowdown.
"If the consumer confidence problem continues it will hurt the mobile industry," CEO Bert Nordberg said in an interview.
Last week, a source with direct knowledge of the matter told Reuters Sony was in talks to buy Ericsson's 50 percent stake in the joint venture. In the Reuters interview, Nordberg declined to comment.
Analysts believe the world's ninth largest handset maker can only succeed in attracting avid gadget users away from its rivals by being fully integrated into Sony's wide portfolio of devices and getting access to the Japanese electronic giant's entertainment assets, like PlayStation and music catalogues.
Smartphones currently account for around 80 percent of all Sony Ericsson's sales and the company said its share of the global Android-based smartphone market during the quarter was approximately 12 percent in volume and 11 percent in value.
"Speculation persists that Sony will buy out the JV," said Geoff Blaber from CCS Insight.
"This is arguably the most desirable endgame for a company that needs full access to Sony content and services."
Controlling Sony Ericsson would help Sony recoup ground in the battle against Apple Inc and Samsung Electronics, where it has been hampered by a disjointed strategy regarding mobile gadgets and online content.
For Ericsson, a sale would insulate its profit and loss account from the volatility Sony Ericsson has brought and allow it to focus resources on loss-making chip venture ST-Ericsson.
A Reuters poll put the price of Ericsson's 50 percent stake in Sony Ericsson at around $1.5 billion.
TOUGH ROAD AHEAD
The road ahead will be tough for Sony Ericsson as it shifts fully to smartphones. The segment is expected to see 50 percent against 14 percent growth in the market overall and all handset makers are desperate for a bigger slice of the pie.
Sony Ericsson will also have to go head-to-head with Apple, whose new iPhone caused queues at stores across the globe on Friday after going on sale.
In sharp contrast to Apple's roaring success, Sony Ericsson has been losing money for a while, although its recent focus on smartphones based on Google's Android platform has pulled the company back into the black.
Third quarter pretax profit at the company was 31 million euros ($42 million), just higher than the mean forecast of 27 million euros in a Reuters poll and a swing back from a loss of 42 million in the previous quarter.
The venture sold 9.5 million phones in the quarter, ahead of analysts' average forecast of 8.8 million, helping revenues to rise 33 percent from previous quarter to 1.59 billion euros, when average forecast stood at 1.38 billion.
Apple is expected to have sold about 20 million phones in the quarter, according to a Reuters poll.
Sony Ericsson's sales jumped in Asia, and the firm said its new models were particularly well received in Japan.
"On the sales side it's actually a pretty strong quarter ... On the earnings side it's not that strong, and the company will have to work on that side going forward to lift the operating margin," said Sydbank analyst Morten Imsgaard.
The company repeated its goal for an operating margin of 10 percent against 2 percent in the third quarter, indicating that after years of restructuring, more remains to be done.
Furthermore, Sony Ericsson said it expected continued pressure on margins due to the rapid decline in profits on feature phones and the tough competitive environment, while the global slowdown is likely to add to difficulties.
Despite the gloomier outlook, analysts have changed their fourth-quarter cellphone sales forecasts only slightly, with a Reuters poll finding expectations of a historically normal 12 percent quarter-on-quarter rise.
When asked how the crisis might affect the holiday sales-fueled fourth quarter, Nordberg said: "I am not confident at all. Its very hard to predict."
($1 = 0.730 Euros)
(Addition reporting by Olof Swahnberg, Tarmo Virki and Johannes Hellstrom; Editing by Hans-Juergen Peters and Sophie Walker)