Sony Ericsson, world's sixth largest cell phone maker, stunned investors with a 61% drop in first-quarter profits. Profit for the three months ending March 31 was Euro 32 million ($41 million), down from Euro 82 million in the same period last year.

Units shipped in the quarter reached 9.4 million, a 7% increase compared to the same period last year. Sales for the quarter were Euro 1,289 million, representing a year on year decrease of 4%. Income before taxes was Euro 70 million and net income was Euro 32 million, which represent year on year decreases of Euro 27 million and Euro 50 million respectively.

In line with expectation, market growth was moderate during the quarter. As a result of more normal seasonality the market declined sequentially. The Western European market declined slightly and witnessed a shift to pre-paid products, while general inventory build up in the sales channels during Q4 spilling over into the first quarter created a more competitive market environment than a year ago.

Sony Ericsson's decrease in average selling price (ASP) was partly due to the general market conditions outlined above, but also because the product line-up was mature and few new products were launched during the period. The company continued investment in product portfolio and brand development, while maintaining gross margins.

"The exciting and innovative products we announced during the first quarter have been well received and will give us a stronger portfolio during the rest of the year," said Miles Flint, President of Sony Ericsson. "We believe there is good growth potential in the market, both from new subscribers and from consumers who are upgrading their mobile phones, so the increased investments we are making now will build our brand and strengthen our product portfolio so we can continue to excite consumers."

During the quarter Sony Ericsson announced a large number of new products including two new 3G UMTS phones, the company's first 2 megapixel auto focus camera phones and a new Walkman branded music phone as well as several other phones and accessories that will roll out during Q2 and Q3. Sony Ericsson started shipping the T290 and K300, the S710 in the United States plus the A1404S for KDDI and the NTT DoCoMo premini-II in Japan. The company also activated a major global sports sponsorship deal with the Women's Tennis Association Tour during the period, which was renamed the Sony Ericsson WTA Tour.

Ericsson shares fell 2.9 percent to 20.20 kronor ($2.82) in afternoon trading on the Stockholm stock exchange.