Ericsson Stumbles Into 2003

Wireless infrastructure market leader LM Ericsson (Nasdaq: ERICY) today reported a fourth-quarter and full-year 2002 loss. Worse still, it also gave indications that 2003 could be an annus horribilis for the Swedish vendor (see Ericsson Reports Q4).

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
Orders, net 30.7 39.9 -23% 128.4 201.8 -36%
- Systems 28.5 34.2 -17% 115.3 183.3 -37%
- Other operations 4.7 7.4 -37% 22.7 27.4 -17%
Sales 36.7 58.5 -37% 145.8 210.8 -31%
- Systems 33.2 50.1 -34% 132.0 188.7 -30%
- Other operations 6.0 10.2 -41% 23.5 31.8 -26%
Source: Ericsson
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.

futureisbright 12/5/2012 | 12:43:09 AM
re: Ericsson Stumbles Into 2003 Do I infer correctly that Ericsson predicts that 2003 UMTS sales will be less than 2002??

If E/// has 40% market share, $1.4B makes it a $3.5B market in 2002

If global wireless market reduces 30%, and E/// maintains market share, than E/// sales will be 30% less in 2003 compared to 2002. They are not predicting market share loss, are they?

If then, UMTS represent 10% of 2003 sales, than E/// will sell 22% less in 2003 than in 2002
spc_rayella 12/5/2012 | 12:42:59 AM
re: Ericsson Stumbles Into 2003 well, you've introduced an interesting metric there in terms of the size of the market overall. Down by 30 percent?

As I understand it the consensus (and it appears to be a cautious one) is that mobile infrastructure sales may be down by about 10 percent in total for the year, not 30 percent. If 10 percent is right, and Ericsson is accurate in its predictions, then there will be little increase in the worth of the booked sales of WCDMA kit it would be fair to say.

The predicted 30% drop is for the first quarter compared with Q4 2002, a time when a quarter-on-quarter decrease is expected. Again it seems Ericsson may be extra cautious here.

Whichever way you cut it, it's not good news for anyone.

Unstrung Ray
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