Ericsson Puts on Brave Face

Knowing what they were to unveil today, Ericsson AB's (Nasdaq: ERICY) board members must have winced when they saw Nokia Corp.'s (NYSE: NOK) results yesterday (see Nokia's Q3 Sunshine and Nokia Reports Q3).

While its Finnish rival more than tripled its profit compared with a year ago, the Swedish giant notched up a third-quarter loss of 5.6 billion Swedish kronor (US$597 million), compared with SK4.3 billion ($458 million) in the same quarter a year ago. The second-quarter loss was SK3.5 billion ($373 million) (see Ericsson Posts $380M 2Q Loss).

Ericsson's handset business had another shocking quarter, too. But the company's top dogs put on a brave smile and said all the right things.

The firm's share price climbed about 15 percent on the Stockholm exchange to SK5.7 ($0.61) after CFO Sten Fornell said the infrastructure systems line of business would improve financially in the coming quarter because of reduced costs. Although the price headed in the right direction, the share price is still down by about 85 percent this year.

The company still cut its outlook for the systems market in 2002. Ericsson believes it will decline by 20 percent from the $53 billion it was worth in 2001, having previously said it would fall by "more than 15 percent." But it expects the market to shrink less in 2003, when revenues from 3G systems will make up for declining sales in mature markets such as TDMA. In addition, the company still expects to return to profit some time in 2003, following further cost cutting.

Ericsson had 107,000 on staff at the beginning of 2001 and has just over 71,000 now. It aims to have fewer than 60,000 by the close of 2003.

Although Ericsson reported a sharp drop in sales, at SK33.5 billion ($3.58 billion), down 29 percent from SK47 billion ($5 billion) in the same quarter a year ago, these were largely in line with grim analyst expectations, said equipment specialists at Lehman Brothers and Nomura International. And in a research note, Nomura communications equipment analyst Richard Windsor said Ericsson's outlook "does not take a revival of competition in the mobile market into account, and can be considered as a worst case scenario." Despite this slightly optimistic appraisal, Windsor notes that "with no let up in sight to the problems in mobile infrastructure, cash outflows and corporate governance issues," the stock remains highly volatile. He adds that "Nokia remains a much more attractive investment."

Another reason for the negative comparison with Nokia is the continuing woe of Ericsson's joint venture handset business Sony Ericsson Mobile Communications, which is limping along with a market share of just above 5 percent (see Nokia Extends Handset Share). It sold 5 million phones in its third quarter, while Nokia claims it shifted 37 million (see Nokia Gets EDGEy), leaving it with a loss for the quarter of SK500 million ($53.4 million). Lehman's analysts believe "the outlook for the business remains fragile."

But Ericsson's CEO and president Kurt Hellstrom is desperately trying to talk up the business. The handset venture has until recently been camped in the high end of the market, but recent launches of lower priced phones is leading to increasing sales, says the vendor (see Sony Ericsson Races Santa). Now Hellstrom says problems have been ironed out, that sales will rise in the coming period, and that the joint venture is aiming for what would be a remarkable 10 percent market share some time in 2003. That kind of share would give it the sales volumes to hit financial break-even. It'll be interesting to see what happens if 2003 fails to live up to Kurt's optimistic expectations.

— Ray Le Maistre, European Editor, Unstrung
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