Ericsson: Market Still Waning

The outgoing CEO and president of LM Ericsson (Nasdaq: ERICY), Kurt Hellström, says demand for wireless network infrastructure will continue to weaken.

“We do not yet see any signs that the market is turning around,” he told the company’s annual general meeting (AGM) in Stockholm yesterday.

Hellström says the market’s woes are not due to weak demand for mobile communication services or because of problems with 3G technology. Instead, he blames the sector's bankers and investors.

“The financial markets are very nervous about operators’ balance sheets following the 3G license auctions and the many acquisitions that were made [during the bubble]... Even in countries where operators have sound balance sheets, they are infected by the financial caution and are being forced to reduce their investments.”

Like the rest of the industry, Ericsson has responded to the slowdown by slashing jobs, expecting a headcount of 60,000 by the end of 2003, down from 107,000 in March 2001.

To date, research operations have largely been spared the broadaxe. “Without research and development we have no business [and] would quickly be reduced to a second- or even third-tier player,” says Hellström.

This sentiment is echoed by incoming CEO Carl-Henric Svanberg, who says Ericsson’s future lies with technological leadership. Ominously, however, he also says, “We need to further develop our processes and improve internal efficiency,” which likely signals another round of downsizing, given Svanberg’s reputation as a ruthless cost-cutter (see Ericsson Replaces CEO).

The key aim for Svanberg, who introduced his new corporate management team at the AGM (see Ericsson CEO Names New Team), is to return the business to profitability by the end of this year.

According to data to be published next week by Unstrung Insider, Unstrung’s paid subscription research service, Ericsson looks just about on track to achieve this aim after five straight quarters of operating losses at its mobile systems division.

Table 1: Performance of Ericsson�s Mobile Systems Division by Quarter
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02
Revenue 4,374 5,088 4,406 5,198 3,544 3,752 3,331 3,564
Operating profit (loss) 232 90 14 (172) (338) (103) (154) (35)
Source: Company data, Unstrung Insider

The light at the end of the tunnel is the ramp-up in revenues from UMTS infrastructure. Hellström says that of the 27,000 UMTS base stations already delivered worldwide, Ericsson has shipped more than 10,000.

— Gabriel Brown, Research Analyst, Unstrung

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