June 27 (Bloomberg) -- Sony Ericsson Mobile Communications Ltd., the smallest of the world's top five mobile-phone makers, said declining sales of higher-priced handsets and delays to new products wiped out second-quarter earnings.

Sony Ericsson, the London-based venture owned by Sony Corp. and Ericsson AB, will break even before taxes in the quarter after margins and shipments fell, according to a statement today.

Ericsson fell the most in three months in Stockholm trading and dragged down shares of Nokia Oyj, the largest mobile-phone company. Sony Ericsson, which said for the second time this year that profit would fall, lost its ranking as the fourth-biggest handset maker to LG Electronics Co. in 2008 as higher living costs prompted European consumers to buy cheaper models, Gartner Inc. said last month.

``To hear that they will only break even in the quarter is pretty shocking,'' said Sal. Oppenheim Jr. & Cie analyst Nicolas von Stackelberg in Frankfurt, who rates Ericsson ``buy.'' ``They didn't come out with new products in the quarter and they participated in price cuts, which killed their margins.''

The company said it will ship about 24 million phones in the quarter at an average selling price of about 115 euros ($181). The gross margin will fall both from the preceding three months and from the year-earlier period. Pretax profit a year earlier was 327 million euros, with net income of 220 million euros.

Cheaper Models

Sony Ericsson has suffered as consumers opt for cheaper models and rivals including Nokia and Apple Inc. introduce more expensive phones. Some of the ``handful'' of new handsets Sony Ericsson had planned to sell early in the quarter only started shipping at the end of the period, spokesman Aldo Liguori said.

The company focused on upgrading existing models rather than new products, Liguori said. Most of the handsets introduced cater to the mid-end of the price range for phones, he said.

Ericsson declined 7.6 percent to 60.80 kronor in Stockholm trading. The company has increasingly relied on Sony Ericsson's earnings and dividends to lift its profit. Ericsson Chief Executive Officer Carl-Henric Svanberg is chairman at Sony Ericsson. Nokia fell 4.5 percent to 15.38 euros in Helsinki.

Sony Ericsson said March 19 first-quarter earnings and sales would fall because of slower handset sales, higher research costs and a component shortage. Average prices declined to 121 euros per phone in the first quarter, when the company shipped 22.3 million units, fewer than LG of South Korea.

``This seems to be similar problems as the ones they had in the first quarter,'' Robert Jacobsen, an analyst at Jyske Bank in Silkeborg, Denmark, said by telephone.

Nokia Outlook

Nokia, based in Espoo, Finland, cut its outlook in April for the global handset market, saying it will fall in euro terms because of the dollar's decline and slowdowns in the U.S. and Europe. The company reiterated that unit sales will rise about 10 percent from the 1.14 billion models sold in 2007.

Deutsche Bank AG and Oppenheimer & Co. this month cut their projections for mobile-phone industry shipments this year, citing a global economic slowdown. Shipments worldwide will increase 6.1 percent to 1.22 billion phones in 2008, Deutsche Bank said, lower than a previous prediction for 8.1 percent growth. Oppenheimer cut its 2008 shipment estimate by 3.9 percent to 1.23 billion.

Research In Motion Ltd. forecast earnings on June 25 that missed analysts' estimates as the company spends more on marketing and development to fend off competition. Apple is set to ship a newer version of its year-old iPhone, a handset that doubles as a music player and mobile Internet browser.

`Moderating Demand'

Sony Ericsson's earnings in the quarter were ``affected by moderating demand of mid-to-high end mobile phones, in combination with a delay of new products shipped during the quarter,'' Sony Ericsson said. The company is scheduled to release earnings for the quarter on July 18.

``It's still a reasonably strong company so I'm not worried yet,'' said Richard Windsor, an analyst at Nomura in London, who advises investors buy Nokia shares. Windsor said he had expected Sony Ericsson to ship 23 million phones in the second quarter.

Sony Ericsson was formed in October 2001 as a venture between Japan's Sony Corp. and Sweden's Ericsson. The companies combined their handset operations after failing to entice consumers with their separate lines. The cooperation has allowed the manufacturer to market its phones with the help of popular Sony brands including Cybershot cameras and the Walkman.

To contact the reporter responsible for this story: Benedikt Kammel in Stockholm at bkammel@bloomberg.net

Last Updated: June 27, 2008 11:42 EDT