First, the bad news: The vendor has limited expectations for sales of 3G network equipment in 2003. The company also places emphasis on the CDMA equipment sector, where it is currently a minnow.
Next, the not-quite-so-bad news: Ericsson's fourth quarter loss before taxes was 2.2 billion Swedish kronor (US$256 million), an improvement on the SKr 5.1 billion loss in the same quarter of 2001, and on the smaller loss of SKr 3.9 billion in 2002's third quarter. The full-year 2002 loss was SKr 14.5 billion (US$1.69 billion), again not as depressing as 2001's SKr 21.1 billion – so at least the losses are not deepening.
Shares of Ericsson trading on Nasdaq fell .82 (-10.09%) to $7.31 today.
In the key mobile network systems division, sales and orders were all down compared with the previous year (see table below). However, the fourth quarter systems sales, at SKr 33.2 billion, were an improvement on the third quarter's SKr 30.6 billion.
Table 1: Ericsson Q4 and Full Year 2002 Orders and Sales (Swedish Kronor, billions)
|Q4 2002||Q4 2001||Change||Full year 2002||Full year 2001||Change|
|- Other operations||4.7||7.4||-37%||22.7||27.4||-17%|
|- Other operations||6.0||10.2||-41%||23.5||31.8||-26%|
NB: Orders = signed contracts, not yet invoiced;
Sales = invoiced and monies received
Surprisingly, Ericsson reported an operating loss of SKr 300 million (US$35 million) on this line of business, due primarily to SKr 700 million (US$81.7 million) of customer financing charges. Analysts had been expecting that figure to be in the black because of reduced costs and sequentially increased sales.
Nomura International communications equipment analyst Richard Windsor says the losses were higher than expected, and that the broad mix of technologies Ericsson covers – GSM, CDMA, TDMA, and PDC (Japan) – leave it with high fixed costs that are hurting margins. "It is worrying that higher sales in the quarter led to lower margins," states Windsor in a research note.
He believes additional pressure in the form of price cuts in the U.S. came from Ericsson's archrival Nokia Corp. (NYSE: NOK), which reported its latest financials last week (see Nokia Posts Solid 4Q). The U.S. is Ericsson's leading market for mobile systems (in terms of sales and orders), followed by China and Italy.
Windsor concludes that further cost-cutting and the stabilization of orders and sales will see Ericsson reach breakeven during 2003.
Ericsson, however, is wary of beating its drum too vigorously. The company still regards the entire mobile market as largely unpredictable, resulting in guidance for the first quarter of 2003 (sales down by 30 percent on the previous quarter) that the wireless equipment analysts at Lehman Brothers describe tactfully as "cautious."
Capital expenditure cuts and postponed rollout plans are major contributors to the uncertainty in the industry (see Orange Shackled by FT and O2 Passes the Buck). As a result of such uncertainty, Ericsson expects sales of next-generation wideband CDMA (WCDMA, or 3G) equipment to account for just 10 percent to 15 percent of all mobile system sales in 2003, an estimation the analysts from Lehman describe circumspectly as "modest." In 2002, WCDMA equipment accounted for 9 percent (SKr 11.88 billion, or US$1.39 billion) of total mobile system sales.
While Ericsson believes it has won 40 percent of all WCDMA sales, it knows it is lagging badly in the CDMA and CDMA2000 markets. A spokeswoman says the Swedes have just 5 percent of the market at present, which puts Ericsson way behind the likes of Lucent Technologies Inc. (NYSE: LU), Motorola Inc. (NYSE: MOT), and Nortel Networks Corp. (NYSE/Toronto: NT), according to the estimates in November's Wireless Oracle, "The 'X' Factor: Competitive Positioning in the CDMA Infrastructure Market."
The spokeswoman says Ericsson aims to be a bigger player in CDMA because of the current size of the market in China (see When Figures Don't Match). The potential for further CDMA2000 equipment deals, dependent on the conditions of the 3G licenses that could be awarded at any time, is also enormous (see What's Up With Chinese 3G?). Contracts worth billions of dollars hang on decisions still to be made by the Chinese government.
— Ray Le Maistre, European Editor, Unstrung Editor’s note: Neither Light Reading nor Unstrung is affiliated with Oracle Corporation.