Ericsson Spirals Downward
LM Ericsson (Nasdaq: ERICY) today reported its eighth straight quarter in the red by posting a net loss of SEK4.31 billion (US$517 million) for the first three months of 2003 (see Ericsson Posts Bigger Loss).
Well, at least it's consistent.
Sales at the equipment giant have plunged 30 percent year-on-year to SEK25.9 billion ($3.1 billion). Its mobile networks division has been particularly affected by carrier cuts in capital expenditure, where a 31 percent fall in sales was reported. Such news is faint surprise in light of recent Gotterdammerungish predictions from the company’s management (see Ericsson: Market Still Waning).
On a positive note, the company’s overall Networks Systems division (incorporating fixed and mobile) saw some improvement during the quarter, with its operating loss shrinking from SEK2.8 billion ($336 million) a year ago to a mere SEK2.1 billion ($252 million).
Much of today’s focus, however, centered on the actions of the new CEO and president, Carl-Henric Svanberg (see Ericsson Replaces CEO). The new headman is only three weeks into his tenure and has the big job ahead of him of returning the company to profit by 2003, with the help of a restructured management team (see Ericsson CEO Names New Team). He sets sail on his voyage with little experience of the technology sector, instead hailing from lock company Assa Abloy [ed. note: yes, locks].
Svanberg claims to be fully aware of the scale of the job ahead of him. In a conference call with analysts he spoke of “a clear and strong crisis awareness” that exists throughout the organization. “A market leader should have market-leading profitability with clear cost advantages, but we have yet to achieve operational excellence,” he admits. “We are determined to drive this company to strong profitable development irrespective of a further weakening in the market.”
His attempts to restore the Swedish giant to its glory days are backed by a full bore restructuring program that aims to implement operating expense reductions of SEK5 billion ($600 million) and sales expenses of SEK8 billion ($960 million). As a result, the company’s workforce will fall to 47,000 next year from a current total of 61,000. 3,700 staff have already been axed in the first quarter of 2003, and 52,000 staff are expected to make up the payroll by year end. Half of the new job cuts will be in Sweden. The company expects the scheme to be completed by the third quarter of 2004. Three years ago Ericsson employed more than 105,000 worldwide (!).
Svanberg states that the SEK11 billion ($1.2 billion) of restructuring charges will have a “relatively quick payback” and that the company has “sufficient liquidity to carry us through.”
The market seems impressed with Ericsson’s efforts to fight the industry downturn thus far. Lehman Brothers analyst Tim Luke describes the first-quarter results as “solid and better than our forecasts and consensus.” In a research note he praises the company’s restructuring efforts to reduce operating costs and the cost of goods sold.
Looking forward, Svanberg believes that the mobile systems market could decline by a further 10 percent this year, in line with Nokia Corp.'s (NYSE: NOK) recent prediction (see Finns Flummoxed, Flopping ). “There will be no dramatic improvement,” he predicts. “Continued weak systems demand is the likely implication for the near term, as mobile operators continue to reduce capital expenditures.”
Despite the Q1 loss, Ericsson remains the clear leader in the wireless infrastructure market (based on total contracts won). According to the Unstrung Insider, Ericsson enjoys a 29 percent market share, almost double that of second place Nokia (15%). Ericsson is keen to point out that sales of W-CDMA infrastructure -- the next generation of high-speed networks required to make 3G services a reality -- currently makes up 12 percent of total mobile network sales, and claims that the technology will contribute to a third of sales by 2005.
Its contract wins may be impressive, but Unstrung Insider's latest report takes a less positive view of Ericsson's financial wellbeing. Financial Healthcheck: Top 10 Wireless Equipment Vendors gives Ericsson only a mid-table ranking in terms of its efforts to prepare for a future industry recovery. Author Gabriel Brown awards first place status to arch rival Nokia.
— Justin Springham, Senior Editor, Europe, Unstrung