Ericsson Invests Ahead of Itself

LM Ericsson (Nasdaq: ERICY) has pumped further life into its handset joint venture with Sony Corp. ahead of its fourth quarter and full year 2002 results announcement next Monday, February 3 (see Sony Ericsson Gets €300M).

The partners are each injecting €150 million into Sony Ericsson Mobile Communications to keep the business going during the coming year. It consistently lost market share during the first three quarters of 2002 (see Nokia Extends Handset Lead), but showed encouraging signs during the fourth quarter of last year when its market share rose from just under 5 percent in the third quarter to just more than 6 percent.

However, it is a sign of straitened times that the partners invested much less than allowed. Under the terms of their agreement, both Ericsson and Sony could have invested a maximum of €500 million, and analysts were expecting each to put at least €200 million into the pot.

Analysts continue to view the business as a burden to its owners. But as the telecom equipment team at Lehman Brothers notes, "there is little prospect of significant disposal proceeds being achieved in the event of a sale."

The best hope for the vendor is that it can continue to increase its share and play a significant role in winning orders from mobile operators that need to promote the use of data services. A strong showing in dual-band GSM/WCDMA handsets for 3G players would help a great deal, though Sony Ericsson is already trailing archrivals Motorola Inc. (NYSE: MOT) and Nokia Corp. (NYSE: NOK) in this respect.

On this, and other matters, the folk at Ericsson are keeping schtum. "We're in the quiet period before our results," whispers an Ericsson spokeswoman.

There may not be too much to shout about next Monday, either, according to analyst forecasts. Although Ericsson picked up some valuable mobile network infrastructure business in the final quarter of the 2002 (see, for example, Ericsson Wins in Indonesia and Ericsson Adds to Unicom Deal), the Lehman team notes that the margin on this business is getting ever tighter. In addition, the outlook for the first half of 2003 "remains weak," with year-on-year infrastructure sales likely to be down by between 10 percent and 15 percent, according to Lehman forecasts.

Despite the gloomy outlook, the Lehman team remains "positive on the strategic positioning of wireless infrastructure leader Ericsson, given its overall leadership in its core market." The table below, from the November 2002 Wireless Oracle report -- "Survival of the Slimmest: Competitive Positioning in GSM and UMTS Infrastructure Markets" -- illustrates Ericsson's dominance.

Table 1: Wireless Network Equipment Revenues per Quarter ($M)
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02
Ericsson 4,108 4,779 4,137 4,881 3,328 3,524 3,128
Nokia 2,046 1,919 1,879 1,980 1,453 1,492 1,564
Siemens 1,316 1,265 1,569 1,475 1,378 1,233 est. 1,200
Nortel 1,545 1,616 1,349 1,204 1,136 1,123 940
Alcatel NA NA NA 759* 759* 759* 759*
Source: Company data, Wireless Oracle
* = averaged from annual figure
NA = not available

While it is particularly strong in the market for GSM, GPRS and WCDMA/UMTS network kit, it also has ambitions in the CDMA business, in which it is currently a minnow. Wireless Oracle research analyst Gabriel Brown notes in his December report -- "The 'X' Factor: Competitive Positioning in the CDMA Infrastructure Market" -- that to achieve its goal of being a top-three CDMA player it would have to make a major acquisition from either Lucent Technologies Inc. (NYSE: LU), Motorola Inc. (NYSE: MOT), or Nortel Networks Corp. (NYSE/Toronto: NT). However, Brown does not believe that such a move is imminent, contending that "consolidation will not happen until the industry is on a more stable footing, i.e. when suppliers are profitable at the operating level and have manageable debt."

As this article went to press, Ericsson's share price was up slightly at $8.38 on Nasdaq, having hit a high of $10 during January. Keep an eye on its movements Monday once the results are made public.

— Ray Le Maistre, European Editor, Unstrung Editor’s note: Neither Light Reading nor Unstrung is affiliated with Oracle Corporation.
(Nor with the Oracle of Bacon at Virginia.)

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