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Ericsson Bets on the Black

Network behemoth LM Ericsson (Nasdaq: ERICY) claims to be on track to achieve profitability by the end of 2003 following second-quarter results that revealed a respectable cut in pretax losses to SEK200 million (US$24.2 million), compared with a year-ago loss of SEK3.1 billion ($375 million) (see Ericsson Cuts Q2 Loss).

Despite reporting its eleventh straight quarterly loss, CEO and president Carl-Henric Svanberg remains bullish on plans to plug the huge leaks in the Swedish vendor’s operation.

The company has cut operating expenses by more than half over the previous eight quarters, from SEK88 billion ($10.7 billion) in 2001's first quarter to a current level of SEK42 billion ($5.1 billion). Svanberg expects this to fall to SEK38 billion ($4.6 billion) by the fourth quarter of 2003, before hitting a target of SEK33 billion ($4 billion) by the second quarter next year.

“It is obvious to all that we will reach that goal of profitability,” he states defiantly. "We can conclude that we have the financial crisis now behind us. We are on steady ground.”

Analysts are surprised at the strength of Ericsson’s turnaround. “This is a good result, ahead of expectations, and we expect sentiment towards the shares to strengthen further over the next few weeks,” comments Richard Windsor at Nomura Holdings Inc.

Some analysts are already predicting the vendor will hit profitability next quarter. “I expect many analysts to calculate a pretax profit for Q3,” says Haakan Wranne of Fischer Partners Fondkommission AB. “They will reach profitability one quarter earlier than expected.”

Ericsson itself isn’t ruling out such a possibility. “The restructuring is going very well, so we are extremely confident about our cost cutting,” admits deputy CEO Per-Arne Sandström. “Let’s see over the coming half year when and how that happens.”

Looking ahead, Svanberg concurs with Nokia Corp. (NYSE: NOK) CEO Jorma Ollila that the market will remain weak in the near term (see Nokia Charge Nips Profits). “The mobile systems market could very well decline more than 10 percent in dollar terms this year, but we do see signs of stabilization,” he says.

Unlike Ollila, however, the Ericsson head man refuses to speculate on the possibilities of a flattening in demand during 2004. “We have not really tried to guess accurately where the market is going next year. We have some positive signs, but we have some negative signs, too.”

Ericsson shares soared as a result of its earnings report, up 18.6 percent to SEK12.1 ($1.50) per share at time of press.

The vendor’s ambitious pledge contrasts with a doom-ridden statement from rival Lucent Technologies Inc. (NYSE: LU) earlier this week that it is pushing back its target for profitability yet again (see Lucent Warns: No Profit in '03).

— Justin Springham, Senior Editor, Europe, Unstrung

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