UPDATE 3-Sony Ericsson Q3 loss narrows, sees market stabilising

* Cost cuts, better gross margin boost result

* Says market to contract a bit less than pvs f'cst

* Says has signed loan facilities of 455 mln euros

* Ericsson stock up 2.0 pct, outperforms bourse

(Recasts lead, adds company comment)

By Simon Johnson

STOCKHOLM, Oct 16 (Reuters) - Mobile phone maker Sony Ericsson posted a smaller than expected third-quarter pretax loss on Friday as its turnaround plan gained traction and the company said it saw market conditions stabilising in the year ahead.

The global handset market has been slammed by the recession and Sony Ericsson expects the market to have contracted around 10 percent by year-end, an even more pessimistic view than the 7 percent forecast by market leader Nokia (NOK1V.HE). [ID:nLF596616]

However, Sony Ericsson's outlook for this year was a little better than it had previously given while next year should benefit from a recovery in the global economy.

"If no big macro economic changes come our way, then we see a stabilisation in the market (next year)," global sales head Anders Runevad said on a conference call.

The company, owned by Sweden's Ericsson (ERICb.ST) and Japan's Sony Corp (6758.T), posted a better-than-expected third-quarter pretax loss of 199 million euros ($297 million) boosted by cost cuts and improving margins.

Chief Financial Officer Ulf Lilja said the rise in the gross margin to 16 percent from 12 percent in the third quarter was due to cheaper materials costs, a better product mix and currency effects.

He said margins should continue to improve.

"On the gross margin level we have had the last couple of quarters it is not possible to make break even, so yes, we work very hard to continue to raise the margins," Lilja said.

The result helped boost joint-parent Ericsson's share price by 2.0 percent to 72.60 crowns at 1504 GMT.

"Expectations that they (Sony Ericsson) will make big losses next year have to be revised to show that they maybe won't make any money, but that at least they will break even," Martin Nilsson, analyst at Handelsbanken Capital Markets, said.

SMARTPHONES

Sony Ericsson, known for its phones focusing on music and imaging, has missed out on recent mobile phone trends such as full keyboards, Internet browsing and navigation.

It has lacked a strong smartphone offering to rival Apple's (AAPL.O) iPhone and Research in Motion's (RIM.TO) BlackBerry and its market share has shrunk to around 5 percent.

The company has slashed costs and new CEO Bert Nordberg said it would broaden its offering, including new products in the high-margin smartphone segment.

"We are planning to widen the portfolio and we are planning to move upwards in the smartphone segment and ... in the coming quarters release products according to that," Nordberg said.

Nordberg also said that Sony Ericsson would review its strategy of offering phones based on different operating systems and platforms in the next couple of quarters. This could further reduce costs.

Whether the company can return to the level of margins it enjoyed previously -- in the 20 percent region -- depends on the success of the new offerings.

"Sony Ericsson's results show the need for a stronger portfolio," IDC analyst Francisco Jeronimo said, adding that the need for deeper cost cuts could jeopardize product development.

Big losses in recent quarters have lead to speculation Sony Ericsson's parents might want to cut their ties with the firm.

However, the phone makers said Sony and Ericsson's guarantee of 350 million euros of a 455 million euro loan facility Sony Ericsson signed in the quarter was a sign that the two were committed to their joint venture.