Mobile phone maker Sony Ericsson pinned its hopes on further growth in the smartphone segment on Friday as it posted a second consecutive quarterly profit, driven by sales of the more expensive gadgets.

Sony Ericsson, owned jointly by Ericsson and Sony Corp and which is the world's fifth-biggest handset maker, has cut costs and revamped its portfolio with more phones such as the Xperia X10 offering PC-like functions and links to social networking sites.

After a dismal 2009 when consumers cut back on gadgets like new phones, the outlook for the industry has started to improve and Sony Ericsson returned to profit this year after reporting seven straight quarterly losses. Yet further growth will depend on more success in the smartphone segment.

However, competition here -- especially from Apple Inc's iPhone -- is intense.

Nokia Oyj, the world's biggest handset maker, issued a profit warning in June saying its smartphones were struggling against the iPhone, while BlackBerry maker Research in Motion has reported disappointing quarterly shipments.

We believe the challenging market conditions will continue in the second half of the year, company president Bert Nordberg said in a conference call.

However, we believe the smartphone sector of the market will grow more than 10 percent in volume this year and see good ... opportunity for Sony Ericsson to target this area of the market.

Nordberg said Sony Ericsson would broaden its smartphone portfolio in the second half of the year with cheaper offerings.

Greger Johansson, analyst at research firm Redeye, said: I think Sony Ericsson can continue with its positive momentum and raise volumes in the third and fourth quarters.

They have the platform, with strong parents, to recover market share, but all their major competitors are focusing on the smartphone market.

TURN-ROUND SITUATION

Second-quarter pretax profit rose to 31 million euros ($39.7 million) versus a forecast 16.5 million in a Reuters poll. The company lost 283 million euros in the same quarter in 2009.

The improvement was partly due to success in newly launched smartphones, which pushed up the average selling price (ASP) to 160 euros against a forecast of 134 euros.

Erik Penser analyst Per Lindtorp said the report was strong. At the same time, Sony Ericsson is in a turn-around situation when things can change quickly, he said.

Sony Ericsson launched the Xperia X10 and Vivaz smartphones in the first quarter and the Xperia X10 mini; its Xperia X10 mini pro started shipping at the end of the second quarter.

Nordberg said new portfolio offerings had been well received by operators and the company was in a good position to grow.

Despite that, it stuck by a more cautious forecast than analysts and its competitors. Sony Ericsson maintains a forecast of slight growth in units in the global handset market in 2010, it said in a statement.

Earlier this month, analysts forecast global handset sales volume would rise 11.6 percent this year, helped by increasing smartphone sales. In April, growth was seen at 10.8 percent for 2010.

Nokia, which reports second-quarter results on July 22, expects industry mobile device volume to be up approximately 10 percent in 2010 versus 2009.

(Editing by Samia Nakhoul and David Holmes)

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