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LONDON (Dow Jones) Sony Ericsson, the world's fourth largest mobile phone maker, Thursday saw third quarter net profit drop 10% to EUR267 million, but increased device shipments by 31%, after it extended its push into fast growth emerging markets.

The company, a joint venture between Ericsson and Sony - which over the last few quarters has been targeting markets such as Latin America and India through lower-end devices - saw mobile phone shipments grow to 25.9 million in the quarter from 19.8 million the previous year.

The London-headquartered company reported revenues for the three months ending Sept. 30, up 7% to EUR3.11 billion from EUR2.913 billion, but missed analyst forecasts on sales and volumes. Sony Ericsson said exceptional third-quarter results last year, resulting from strong demand for handsets such as the K800, may have also skewed growth rates during this period.

However, the average selling price of Sony Ericsson devices fell to EUR120 from EUR147 per handset, as the company began to target highly populated, emerging markets where disposable income is lower.

Faced with stiffer competition in its core business, where it makes high and mid-tier Walkman music and Cybershot camera phones, Sony Ericsson has been extending its operations to make cheaper, simpler handsets in order to take a greater share of the low-end market. Nokia's recent push into online music sales and Apple's iPhone are challenging Sony Ericsson's dominance in the Western music-phone market.

Sony Ericsson President and Chief Executive Miles Flint, who steps down Nov.1, said the results were anticipated, with the third quarter being a "transitional period" in which it broadened its portfolio. Flint added that, despite this, Sony Ericsson was likely to retain the highest average selling prices in the mobile phone market.

In an interview with Dow Jones Newsires and The Wall Street Journal, Flint said Sony Ericsson had seen significant progress in The Americas during the quarter, while Japan and Eastern Europe were more challenging.

Sony Ericsson has seen greater competitor intensity in the last year, with Apple launching its iPhone and other manufacturers ramping up competition, said Flint.

"I don't want to criticize innovation, but the thinking that (the iPhone) is generating in the industry might be greater than the share it will represent," said Flint.

"In an industry where innovation is the life blood, it has been a great stimulant for other handset makers," said Flint, when asked about the iPhone.

Flint added that he was confident Sony Ericsson would capitalize on the lucrative Christmas trading period through its broadening range of phones. In addition to shipping its latest W910 Walkman phone and K850 Cybershot camera phone to stores this month, the company also launched the K630, a new mobile internet phone.

Despite the "mixed-bag" of results, Nomura analyst Richard Windsor said that Sony Ericsson's profitability was excellent, with its 12.7% return on sales coming in far ahead of industry consensus.

"This is an excellent development for Sony Ericsson in our view as it has shown that it can keep margins high as it chips away at progressively lower market tiers," he said.

Sony Ericsson also reiterated previous forecasts that global handset market sales would top 1.1 billion units in 2007.

Sony Ericsson added that it had gained ground during the quarter, taking 1% market share year-on-year, giving it over 9% of the global mobile phone market. The company, alongside rivals Nokia and Samsung, have benefitted over the last few quarters from a poor performance by North American handset giant Motorola.

However, despite market leader Nokia earlier this month saying it intended to acquire navigation-software maker Navteq for $8.1 billion, Flint told Dow Jones Newswires that he had no such plans.

"We've never seen a business case for an acquisition that really fitted. Our preference has always been to do things organically with people," said Flint, who said the company would continue to partner with Swedish satellite navigation firm Wayfinder Systems.

Flint, who is credited with transforming the Sony Ericsson business, has decided to take a career break after 17 years at Sony and then Sony Ericsson. He will be replaced by Sony Corp veteran Hideki 'Dick' Komiyama on Nov. 1.

-By Daniel Thomas, Dow Jones Newswires; 44-20-7842-9264; dan.thomas@dowjones.com

(END) Dow Jones Newswires

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